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UNIVERSITY OF SOUTH AFRICA (UNISA)

GRADUATE SCHOOL OF BUSINESS LEADERSHIP (SBL)


Strategy Dynamics and International Business (MBL923P)

INDIVIDUAL ASSIGNMENT ONE


ON
Case: Starbucks, in 2009: The Coffee Goes Gold

Student Name
Daniel Desalegne Berhanu

Student
No.
77890434

Email address
dancomet2000@gmail.com

May 2015

ADDIS ABABA

Contents
1. Executive summary...................................................................................................................................3
2. Introduction.............................................................................................................................................4
2.1 Over view of competitive advantage..................................................................................................4
2.2 Competitive strategies, path to competitive advantage......................................................................4
2.3 Sources of competitive advantage.........................................................................................................5
2.4 The contribution of value chain analysis to competitive advantage.................................................6
3. Discussion of competitive advantage of Starbucks...............................................................................6
3.1 Generic Strategies of Starbucks...........................................................................................................6
3.2 Value chain............................................................................................................................................7
3.3 Resource and capabilities of Starbucks .............................................................................................8
3.4 Starbucks core competence: ...............................................................................................................9
3.5 Financial Performance Analysis of Starbucks: .................................................................................9
3.6 VRIO Analyses of Starbucks: ...........................................................................................................10
3.7 Industry Life Cycle and Market Share Concentration: ..................................................................12
4. Recommendations: ................................................................................................................................13
5. References List: ......................................................................................................................................15
6. Appendices : ............................................................................................................................................16

1. Executive summary
The value chain, and VRIO analyses plays the vital important role in
improving the competitive strength of the company. The core competence of
Starbucks has been its ability to effectively leverage their cornerstone product differentiation
strategies by offering a premium product mix of high quality beverages and snacks. Starbucks
brand equity is built on selling the finest quality coffee and related products, and by providing
each customer a unique Starbucks Experience, which is derived from supreme customer
service, clean and well-maintained stores that reflect the culture of the communities in which
they operate, thereby building a high degree of customer loyalty with a cult following. Its other
core competence is its human resource management's values-based approach for building very
strong internal and external relationships with suppliers, which drives the successful deployment
of its business strategy of organic expansion into international markets, horizontal integration
through smart acquisitions and alliances that maintains their long-term strategic objective being
the most recognized and respected brands in the world.
The analysis of the competitive advantage of Starbuck Corporation comprises three
main sections in addition to the

executive summary. The main body of this

assignment starts with introduction where the purpose and short elaboration of
competitive advantage were included. In the next sub topics up to the point where
the main discussion starts consists of theoretical concepts concerning the
competitive advantages.
At the bottom line, recommendations were forwarded as to sustain and regain the
competitive advantages of the Starbucks Corporation.

2. Introduction
Strategies are just about building a unique and sustainable competitive advantage
against competitors in the market place.

Effective strategies emanate from the

profound understanding and analysis of the internal resource status and external
competitive environment. It is a matter of identifying actual and potential sources
of business profit advantage in the external environment and matching the internal
resource strength with the critical success factors in the environment to come up
with superior competitive advantage that cannot be matched by rivals now and in
the future. Therefore strategies differ by types and levels of business, by the types
of industries and their maturity level and by the scope and types of markets.
The purpose of this paper is to explain how the source of competitive advantage of
Starbucks Corporation has changed overtime and to recommend with regards to
sustaining competitive advantage. The material used to analyze, Starbucks source
of internal and external competitive advantage Consists of the companys annual
reports, it fact sheet and other information found on the company internet site,
other information is obtained from outside source such as Fortune Magazine.

2.1. Over view of competitive advantage


A complete understanding of sources of competitive advantage requires the analysis of a firms
internal strengths and weaknesses well. The importance of integrating internal analyzes with
environmental analyses can be seen when evaluating the sources of competitive advantage of many
firms. These firms, and many others, have all gained competitive advantages-despite the
unattractive, high threat, low opportunity environments in which they operate. Even the most
careful and complete analysis of these firms competitive environments cannot explain their
success. Such explanations must also include these firms internal attributes, their strengths and
weaknesses, as sources of competitive advantage.
2.2 Competitive strategies, path to competitive advantage
Striving to be the industrys overall low cost provider is a powerful competitive approach in
marketing with many price- sensitive buyers. A company achieves low cost leadership when it
becomes the industrys low-cost provider rather than just being one of perhaps several
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competitors with comparatively low costs. A low cost provider, strategic target is to have lower
costs than rivals, on products of comparable Quality . in striving for a cost advantage over rivals.
A low cost advantage over rivals has enormous competitive power, sometimes enabling a
company to achieve faster rates of growth (by using price cuts to draw customers away from
rivals) and frequently helping to boost a companys profitability. (Thompson, et al. 2012 page
185)
. The essence of best cost provider strategy is giving customer value for the money by satisfying
buyer desires for appealing features /performance/quality service and charging a lower price for
these attributes compared to rivals with similar caliber product offerings.

(Thompson, et al.

2012 page 206)


Differentiation strategies are attractive whenever buyers needs and preferences are too divers to
be fully satisfied by a standardized product offering. Successful product differentiation requires a
care full study of buyers need and behavior to learn what buyers consider important, what they
think has value, and what they are willing to pay for. (Thompson, et al. 2012 page 193)
2. 3 Sources of competitive advantage
Resource-based theory is based on the assumption that firms are fundamentally heterogeneous
regarding their resources and internal competencies. It deals with the problem of how firms can
exploit their internal resource base and capabilities to obtain sustained competitive advantages
(Barney, 1991; Hamel & Prahalad, 1994).
According to Barney (1991), a firm is argued to have a competitive advantage when it is
implementing a value creating strategy which a current or potential competitor is not
implementing at the same time. Moreover, a firm is argued to have a sustained competitive
advantage when it is implementing a value creating strategy which a current or potential
competitor is not implementing at the same time and when these other firms are unable to
duplicate the benefits of this strategy (Barney, 1991). However, in order for a resource to have
the potential of being a sustained competitive advantage, it must contain the following four
attributes: Firstly, it must be valuable, in the sense that it exploits opportunities and/or neutralizes
threats in a firms environment, secondly, it must be rare among firms current and potential
competition; thirdly, it must be imperfectly imitable and fourthly, there cannot be any

strategically equivalent substitutes for this resource that are valuable but neither rare or
imperfectly imitable (Barney, 1991).
Hamel & Prahalad (1994) focus on core competencies and argue that a firms sustained
competitive advantage is to be found in its core competencies. In order for a competence to be a
core competence, three criteria have to be met: the competence has to 1) provide access to more
than one market, 2) give a significant contribution to the end product/products and 3) be difficult
for competitors to imitate (Hamel & Prahalad, 1994). Accordingly, if a company possesses a core
competence and understands how to take advantage of it, it can lead to sustained competitive
advantages.
2.4 The contribution of value chain analysis to competitive advantage
Every firms business consists of a collection of activities undertaken in the course of designing,
producing marketing, delivering, and supporting its product or service. All the various activities
that a company performs internally combine to form value chain. The combined cost of all the
various, activities in a companys value chain define the companys internal cost structure.
Further, the cost of each activity contributes to weather the companys overall cost position
relative to rivals is favorable or unfavorable. But a companys own internal costs are insufficient
to assess whether its costs are competitive with those rivals. Cost and price difference among
competing companies can have their origins in activities performed by suppliers or by
distribution allies involved in getting the product to the final customer or end user of the product,
in which case the companys entire value chain system becomes relevant. (Thompson, et al. 2012
page 157)
3. Discussion of competitive advantage of Starbucks
3.1 Generic Strategies of Starbucks
If the primary determinant of a firm's profitability is the attractiveness of the industry in which it
operates, an important secondary determinant is its position within that industry. Even though an
industry may have below-average profitability, a firm that is optimally positioned can generate
superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's
strengths ultimately fall into one of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope, three generic strategies result: cost
leadership, differentiation, and focus. These strategies are applied at the business unit level. They
are called generic strategies because they are not firm or industry dependent.
According to Michael Porter Starbucks has been its ability to effectively leverage their
cornerstone product differentiation strategies by offering a premium product mix of high quality
beverages and snacks.
3.2. Value chain
Value chain analysis involves the analysis of costs incurred by set of activities between the
suppliers and

customers. Hence, this will lead to having the competitive advantage as a

result of reduced costs.( Robert M. Grant 2011, page 239).


The firm creates value by performing a series of activities that porter identified as the value
chain. In addition to the firm's own value - creating activities the firm operates in a value system
of vertical activities including those upstream and downstream channel members.
To achieve a competitive advance, the firm must perform one or more value creating activities in
a way that creates more overall value than do competitors superior value is created through lower
costs or superior benefits to the consumer (differentiation). As shown in Figure 1.

Figure 1 Porter's Value Chain Analysis Source of Info: (Datamonitor, 2010; Grant, 2010; Starbucks,
2011; Woodward, 2011)

Primary activities
Inbound logistics Sourcing coffee from diverse coffee beans producers with whom they have
great relationships and built up efficient supply chain management system.
Operations They have operation in many countries with their stores being modeled on
company operated stores and licensed stores.
Outbound logistics Most of its product mix are sold in-store and some through large box
retailers. Payment around source through point of sale, prepaid Starbucks Cards and mobile
payments.
Marketing and Sales Traditionally, investment in marketing activities have not be significant
and relied mainly on the growing reputation of premium quality product mix and superior
customer services to give the Starbucks Experience to drive customers to their stores and
products.
Service - Starbucks has a reputation for providing supreme level of customer services to their
consumers.
Support activities
Firm infrastructure - They have well designed, aesthetically pleasing stores. They have efficient
level of finance, accounting and legal departments to support the firms infrastructure.
Human Resource Management Great benefits, employee empowerment and amazing corporate
culture makes Starbucks drive efficient management of human capital.
Technology development Investments in innovative technologies like the well like mobile app.

Procurement Starbucks procures its products from a diverse group of supplier and has fixed
contracts with some of the suppliers.
3.3 Resource and capabilities of Starbucks Corporation
It is important to distinguish between the resources and capabilities of the firm: Resources are
the productive assets owned by the firm; capabilities are what the firm can do .Individual
resources do not confer competitive advantage; they must work together to create organizational
capability. (Grant 2011). Figure 2 as shown the relationships among resource, capabilities and
competitive advantage of Starbucks Corporation.

Figure 2 capabilities (Grant, 2010)

3.4 Starbucks core competence:


The core competence of Starbucks has been its ability to effectively leverage their cornerstone
product differentiation strategies by offering a premium product mix of high quality beverages
and snacks. Starbucks brand equity is built on selling the finest quality coffee and related
products, and by providing each customer a unique Starbucks Experience, which is derived
from supreme customer service, clean and well-maintained stores that reflect the culture of the
communities in which they operate, thereby building a high degree of customer loyalty with a
cult following. Its other core competence is its human resource management's values-based
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approach for building very strong internal and external relationships with suppliers, which drives
the successful deployment of its business strategy of organic expansion into international
markets, horizontal integration through smart acquisitions and alliances that maintains their longterm strategic objective being the most recognized and respected brands in the world.
3.5 Starbucks Financial Performance Analysis:
Looking at a six year period ratio & growth analysis of Starbuckss financials from 2008 to 2013, we can
see that the revenue growth of the company has experience a drop of -5.9% during the 2008/09 recession
but from then on, Starbucks posted a healthy revenue growth of from FY2010 to FY2013 with posting a
great growth of 13.7% in FY2012 and currently posted revenues $14.9 billion for FY2013. The operating
income margins have increase substantially from 4.9% in FY2008 to a high of 15% in FY2012. Starbucks
posted an operating loss in FY2013 and this resulted in a operating margin of -2.2% for that year and the
main reason for that is due to a litigation charge of $2.8 billion to Kraft Foods for terminating an
agreement with them. This charge is treated as extraordinary event and therefore should be discounted
from the overall healthy operational performance of Starbucks. Starbucks ROE and ROA have been
impressive with 29.2% and 17.8% respectively for FY2012. Looking at Starbucks efficiency ratios,
Starbucks has gained significant operational efficiency with impressive asset and inventory turnover
ratios with a low of 1.51 and 5.4 respectively for FY2013. But it's interesting to note that the companys
cash conversion cycle has increase to high 54.7 in FY2013, which is where Starbucks should concentrate
on to reduce to attain higher efficiency. Starbucks boasts good financial health with low debt/leverage
with a debt/equity ratio of 0.29 for FY2013 and maintains decent current and quick ratios. A detailed
financial ratio and growth calculations are given in Appendix 1.

3.6 Starbucks VRIO Analyses:


The VRIO framework is used to analyze in detail the competitive position of Starbucks
Corporation and its strategic positioning.
Resources and Capabilities of Starbucks corporation

Prime and Strategic Locations:

Value?

Yes

Rare?

yes

Costly to

Exploited

Competitive

Imitate?

Implication

no

yes

Temporary

In high-traffic, high-visibility locations near a variety of

Competitive

settings, including downtown and suburban retail centres,

Advantage

office buildings, university campuses, and in select rural


and off-highway locations across the world.

Tap into customers convince factor

10

Yes

Global Brand Recognition & Equity

Yes

Yes

Yes

Competitive
Advantage

The most recognized brand in the coffeehouse segment and


is ranked 91st in the best global brands of 2013

Effectively

leverages

its

rich

brand

equity

by

merchandizing products, licensing its brand.


Aesthetic Appeal and Concepts of its Stores

Yes

Yes

Yes

Yes

Competitive
Advantage

Their stores are visually appealing and have a cool


factor attached to them.

Provide free wifi, great music, great service, warm


atmosphere and provide an environment of community
meeting spot, which forms a wider part of the Starbucks
Experience.

Concept of the stores as being a third place besides home


and work.

Designed to reflect the unique character of the


neighborhood they serve in and environmentally friendly.

Large Size and Strong Global Presence

Yes

Yes

Yes

Yes

Competitive
Advantage

Operation in 60 countries and largest coffee/snack retailer


Economies of scale through superior distribution channels
and supplier relationships

Lower input costs

Human Resource Management and Company Culture

Employees provided great benefits like stock option,

Yes

Yes

Yes

Yes

Competitive
Advantage

retirement accounts and well taken care of

Knowledge based employees creating a healthy corporate


culture

Ranked 91st in the 100 best places to work for by Fortune


Magazine

Great human capital management couple with great


corporate culture translates into supreme customer service

11

Leveraging Technology and Mobile Outlets

Yes

yes

no

yes

Temporary

Starbucks Apps on IOS and Android

Competitive

Investment in Technology

Advantage

Customer Loyalty and Cult Status

They have a cult following status among consumers

Loyalty-based programs like Starbucks Rewards and

Yes

Yes

Yes

Yes

Competitive
Advantage

Starbucks Card drive loyalty.

Starbucks Card is a value card program that provides


convenience, support gifting, and increases the frequency
of store visits by cardholders

Good Corporate Social Responsibility Image

Yes

yes

no

yes

Temporary

Their stores are community friendly, focused on recycling

Competitive

and reducing waste.

Advantage

They build goodwill among communities they operate in

Strong Social Responsibility Initiatives undertaken

3.7 Industry Life Cycle and Market Share Concentration:


This industry is in a mature stage with a medium level concentration. Starbucks and Dunkin Brands
make up more than 60% of the market share (Appendix 1), giving them considerable market power in
determining industry trends. Industry Structure is given in Appendix 3. Example "In 2010, the coffee
shop market grew to 1.2 million, but UK industry is at a mature growth stage (Kotler, 2003) where
growth is evident but slower than the previous years (Mintel, 2011b). Mintel forecasts positive
growth till 2015, but UK is expected to face another round of recession (Mintel, 2011b) hence, a
slower growth till 2012". As shown in figures

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Coffee
Retailing

Figure 2 Industry Life Cycle: Coffee Retailing Market (Grant, 2010)

4. Recommendations:
Starbucks biggest growth is in its International segment. The emerging markets of

Brazil, India, China, South Africa and Mexico with a growing middle-class population
continue to offer significant opportunities to add new stores and serve more customers.
Starbucks has already made significant inroads into the Chinese market but there still is
a lot of untapped potential growth in these markets. Starbucks should grow in these
emerging markets by winning locally Starbucks must remain relevant to the customer
in order to grow in these markets, and its management teams should have the freedom
to operate within their overall framework to tailor store format, introduce local product
mix and price points to the needs, lifestyles and tastes of each individual

market/community.
Under Starbucks international strategy, it should transfer its core competencies and
capabilities country to country and then gradually build profit drivers in several

countries as it continues its global expansion in an organic way.


Starbucks has great growth opportunities in Tea and Fresh Juice products mix. They

should build up these products along the same line of their core coffee products.
Also as consumer tastes and lifestyle shift towards more snacks and beverages options,
Starbucks should tailor its menus and expands to give healthier product offerings in its

mix.
Coffee beans are a significant input into Starbucks value chain and there have been
wide fluctuations in the market prices of high quality coffee beans. Starbucks could
mitigate this price volatility risky by implementing an effective hedging strategy like
future contracts to lock in their estimated quantity inputs at a low swing price so that
the future costs can be managed to a greater extent.

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Starbucks growth strategy in the saturated U.S. market should focus on getting

additional penetration into untapped rural markets.


Another growth sector is its packaged coffee packets and iced beverage products.
Starbucks should build better relationships with big box retailers to get premium shelf

space and increase the efficiency of this distribution channel.


From their 10-Ks, we can see that Starbucks invest very little in advertising and
marketing initiatives. It would be recommended that Starbucks make significant
investments in advertising and marketing initiatives in the face of increased

competition in the market.


Further build and retain customer loyalty, by building on beta concept of on-the-go

home delivery.
Their mobile apps business drove 10% of the sales in the US, so it would be
recommended for further building to stream lining ease of use and payment process
which would help drive more customers, decrease wait time in stores and increase
efficiency. Integrating Starbucks loyalty program with the mobile application would
also be recommended

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References:
1. David Walters(2006) Effectiveness and efficiency: the role of demand
chain

management,

The

International

Journal

of

Logistics

Management ,Vol. 17 No.1(0957-4093) pp75-94

2. Mas Bambang Baroto1, Muhammad Madi Bin Abdullah & Hooi Lai Wan
(2012) Hybrid Strategy: A New Strategy for Competitive Advantage,
International Journal of Business and Management; Vol. 7, No. 20(ISSN
1833-3850/October)pp 120-133

3. Robert M. Grant(2011) Corporate Strategy Analysis 7th Edition ,Text


and Cases Edition, United Kingdom ,John Wiley & sons Ltd.

4. Thompson et al(2012) Crafting and executing Strategy ,Concepts and


cases 18th Edition ,New York, McGrawHill Companies, Inc.

5. AAKER, D. A. 2005. Strategic market management, Wiley, c2005


6. BAINES, P., FILL, C. & PAGE, K. 2008. Marketing, Oxford, Oxford
University Press

7. BARNEY, J. B. 1995. Looking inside for competitive advantage.


Academy of Management Executive 9.

8. PORTER, M. E. 2004. Competitive advantage, New York ; London, Free.


9. Starbucks 2013 10-K Form for FY ended on September 29th, 2013
10.

IBIS World: The Coffee & Snack Shop Industry in the US Report,

October 2013

11.

Global Data: Starbucks Corporation Research Report, March

2013

12.

http://www.starbucks.com/about-us/company-

information/mission-statement

13.
14.

http://www.starbucks.com/responsibility/sourcing/coffee
http://interbrand.com/en/best-global-brands/2013/Starbucks
15

15.

http://www.starbucks.com/coffeehouse/store-design

16.

http://www.starbucks.com/responsibility/community

Appendices
Appendix 1: Starbucks Corporations Financials Starbucks Corporation's
Financials for Fiscal Year ending September of each year (All USD figures in millions)
Key Ratio's/Accounts

FY 2008

FY
2009

FY
2010

FY
2011

FY
2012

FY
2013

Profitability Ratio's
Revenue

10,383

9,775

10,707

11,700

13,300

14,892

19.2

55.8

58.4

57.7

56.3

57.1

504

562

1,419

1,729

1,997

-325

4.9

5.7

13.3

14.8

15

-2.2

316

391

946

1,246

1,384

8.8

10.7

10.4

0.06

Return on Equity (ROE) %

13.2

14.1

28.14

30.9

29.2

0.17

Return on Assets (ROA) %

5.73

16

18.1

17.8

0.08

Earnings Per Share (EPS)

0.43

0.52

1.24

1.62

1.79

0.01

Asset Turnover

1.89

1.74

1.79

1.7

1.71

1.51

Inventory Turnover

12.1

6.4

7.4

6.6

5.3

5.4

3.5

3.5

4.3

4.9

5.3

10.9

11.2

9.8

10.75

12

12.8

Days Inventory

30.11

57.3

49.4

55.6

69.3

67.3

Payable Period

15.6

25

22.5

30.3

29.4

25.4

Cash Conversion Cycle

25.4

43.5

36.7

36.1

52

54.7

Gross Margin %
Operating Income (USD Millions)
Operating Income Margin %
Net Income (USD Millions)
Net Margin %

Efficiency Ratio's

Fixed Asset Turnover


Days Sales Outstanding

16

Liquidity & Financial Health Ratio's


Current Ratio

0.8

1.3

1.55

1.83

1.9

1.02

Quick Ratio

0.3

0.6

1.17

1.14

0.71

Debt/Equity

0.22

0.18

0.15

0.13

0.11

0.29

Financial Leverage

2.28

1.83

1.74

1.68

1.61

2.57

10.3

-5.9

9.5

9.3

13.7

12

Year on Year Growth %


Revenue Growth %

17