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130909-23

Course BUSI1271: Global Strategy: Analysis & Pr Course School/Level BU/PG


Coursework individual case analysis Assessment Weight 60.00%
Tutor WE Hearne Submission Deadline 09/01/2008

Case study to be provided

Coursework is receipted on the understanding that it is the student's own work and that it has not,
in whole or part, been presented elsewhere for assessment. Where material has been used from
other sources it has been properly acknowledged in accordance with the University's Regulations
regarding Cheating and Plagiarism.

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STARBUCKS
Courtesy: www.wickipedia.com

INTRODUCTION:

More than 500 billion cups of coffee are served worldwide each year. This suggests
that after water coffee is the most consumed liquid in the world. In order to serve
these many consumers around the world many coffee bars have been established.
Many multinational companies emerged by establishing coffee bars through out the
world considering the demand of the coffee. Starbucks is one of the dominant players
in this type on multinational companies which serve coffee around the world.

Coffee is the world’s second most valuable commodity exported by developing


countries. The turnover made by the global coffee industry annually is $600 billion
annually. In such a big global market star bucks is one of the top 100 coffee sellers in
the world and largest seller for America. Among the coffee manufacturers star bucks
lead the way as the leading retailer of speciality coffee in North America. As
described above star bucks corporation is a multinational coffee company based in
United States named after the first mate in the novel by Moby-dick. Starbucks is the
largest coffee house in the world today. It started a whole bean selling shop in Seattle
later turned into coffee selling shop and gradually progressed to become the largest
chain of coffee bars in North America and in the later years it expanded globally.
Presently it owned over 8505 company owned and 6506 licensed stores in 42
countries a total of 1501 stores world wide and opening 3 stores per day around the
world. Here we are going to discuss the strategies of star bucks which lead them to
develop as a global company.

HISTORY:

Starbucks originated in Seattle as a whole bean selling store in 1971 which was
established by jerry Baldwin, zevsiegl and Gordon bowker named after the first mate
in Moby dick. The business has grown into 5 stores by 1982. In April 1985 the
company has opened their first coffee bar it had immediate success which encouraged
them to establish three more stores. In 1987 the management has changed the
company ahs been purchased by Schultz he concentrated on the growth of the firm
though it generated losses for the first few years he stuck on his conviction not to
sacrifice long-term integrity for short term profits. In 1991 sales had a tremendous rise
from there it was no looking back for Starbucks it continued to expand its business
aggressively and in no longer time it became the largest chain of coffee selling stores
in North America. The first step of Starbucks into global market took place in 1996
when it established its outlet in Tokyo gradually it’s expanded its stores in Asia and
entered into UK in 1998 and created a good impact in the local coffee market. In
April 2003, Starbucks purchased Seattle's Best Coffee and Torrefazione Italia from
AFC Enterprises, bringing the total number of Starbucks-operated locations
worldwide to more than 6,400. On September 14, 2006, rival Dietrich Coffee
announced that it would sell most of its company-owned retail stores to Starbucks.
This sale includes the company owned locations of the Oregon-based Coffee People
chain. Starbucks representatives have been quoted as saying they will convert the
Dietrich Coffee and Coffee People locations to Starbucks stores. Starbucks started
serving a variety of beverages including brewed coffee, hot chocolate, espresso, teas,
and Frappuccinos. Also available are bottled beverages including Odwalla, Ethos
water, San Pellegrino, Izze soda, and Horizon Organic Milk which helped them to
increase the variety in their menu offering large number of flavours to the consumers .

EXTERNAL ANLYSIS:

So far we have seen the history of the company now we are going to focus on the
external analysis of the firm. As mentioned above Starbucks is a dominant player in
the coffee market of the world and leader of the coffee market in North America. In
order to examine in detail about the firm externally five forces analysis is performed
which is displayed below.

FIVE FORCES ANALYISIS:

Threat of new entrants:


New entrants to an industry bring new capacity, the desire to gain market share, and
often substantial resources. As a result, prices could be bid down or incumbents' costs
inflated hence reduce profitability. Moreover, the threat of entry into an industry
depends on the barriers to entry. If barriers are high and/or the new comer can expect
sharp retaliation from entrenched competitors, the threat of entry is low.

For Starbucks the threat for new entrants in North America which is their base is a
little bit low as it is very popular and has good reputation but it can be affected if any
new entrant comes with good quality and larger variety than Starbucks. Regarding the
global market the firm has a huge threat from the new entrants and the existing
players as the other companies like Best coffee, Costa etc have huge impact on
Starbucks.

Power of buyers:
The power of buyers in case of coffee industry is high as large number of coffee shops
are available and many multinational companies and in the business. For Starbucks its
base country is North America and it has very less competition so the power of buyers
is comparatively less. So Starbucks concentrated in increasing its popularity and
provide good quality of coffee to the customers so all star bucks want to serve is not
just coffee but provide an experience to the customers and make them regular
customers.
Coming to the case of international market the power of buyers is high because of the
competition in the market. In Asian countries most people are tea drinkers and for the
coffee drinkers the local coffee sellers offer coffee at lower prices and lock the
customers so Starbucks targeted the people working in the corporate offices by
establishing cafes in the offices and the younger generation who get generally
attracted to the new fashion as the elder people are generally tea drinkers they
concentrated more on younger generation, in order to attract customers who prefer the
local shops as the prices are low Starbucks serves the best quality coffee.

Power of suppliers:
The basic coffee supply for Starbucks Coffee includes coffee beans, cups and lids,
dairy products, pastries, straws, napkins, sugar and many other customer service items
with the Starbucks Coffee logo. Hence, there are two major types of products that
need to be purchased: fixed assets purchased before the store opening, and operational
items which are continuously purchased on a daily basis.

Starbucks always buys the finest quality of coffee beans which is more available in
Arab countries it always bids high to get the contracts so the power of suppliers is
comparatively high.

Threat of substitutes:
The major threats for coffee industry are the soft drinks, tea and the energy drinks.
Starbucks tried to reduce the threats by introducing a new beverage named
frappucccino and cold sweetened coffee drink in collaboration with Pepsi and it
introduced Starbucks coffee ice-cream in 50-50 partnership with dreyer’s grand ice
cream. The firm is still trying hard to eliminate threat from the tea it has succeeded a
lot but still needs to fight.

Threat from rivalries:


In North America the threat for Starbucks from their rivals is low as they have
purchased all the major players in the coffee market. In the European countries it has
huge amount of competition from Costa and many other coffee companies in Asian
countries it has competition from companies like best coffee, Nescafe etc. Starbucks
in order to reduce these threats tries to choose best partners in the places who can
compete against these companies and it establishes large number of outlets to capture
the whole market.

By viewing all the above analysis it can be understood that Starbucks has good
external features and can continue its good progress eliminating the threats.

INTERNAL ANALYSIS:
Now we are going to discuss on the strategies followed by the Starbucks. The main
goal of Schultz is “establish Starbucks as the premier buyer of finest coffee in the
world while maintaining uncompromising principles as we grow” in order to achieve
this he followed a clear and simple strategy that is blanket an area completely, even if
the stores cannibalize one another’s business. They follow this principle believing that
Starbucks everywhere approach cuts down on delivery and management costs,
shortens customer lines at individual stores and increases foot traffic for all the stores
in an area and by clustering Starbucks can quickly dominate a local market. And
Starbucks never under prices its coffee to position themselves so as not undercut
pricing structure in the marketplace and it never eliminates or hurts the competition.

Starbucks followed clear strategies in every department which helped them to develop
as multinational firm. Here are their strategies in detail

Expansion strategy:

The strategy of expansion for Starbucks is always to select an area which is loaded
with heavy traffic and establish a hub for chain of shops. In order to do so they select
majorly big cities and enter into the local market by establishing at a time a large
number of shops. Besides the stand alone stores Starbucks also setups cafes and carts
in hospitals, office buildings, supermarkets, shopping centres. Starbucks also deals
with airlines and signs agreements with airlines and airports for promotion of their
business. In 1995 firm has 12 mangers to deal with its business outside North
America presently they have 180 experienced managers this group of managers is
responsible for developing new business, financing and planning stores, managing
operations and logistics, merchandising and training and developing Starbucks
international business. For international expansion the firm observes carefully the
local market and finds local business partners it tests the country with a handful of
stores in trendy districts if it is success then they stat opening stores in large numbers.
While signing partnerships the firm looks for partners with similar philosophies to
them, who have good multiunit experience, financial resources to expand the
Starbucks concept rapidly and with good knowledge in local retail market. Starbucks
has an Environmental Committee which looks for ways to reduce, reuse, and recycle
waste, as well as contribute to local community environmental efforts. There was also
a Green Team, consisting of store managers from all regions. The company had
donated almost $200,000 to literacy improvement efforts, using the profits from store
sales of Oprah's Book Club selections. Starbucks stores participated regularly in local
charitable projects of one kind or another, donating drinks, books, and proceeds from
store-opening benefits. The company's annual report listed nearly 100 community
organizations which Starbucks and its employees had supported in 1997 alone.
Employees were encouraged to recommend and apply for grants from the Starbucks
Foundation to benefit local community literacy organizations.

In the way of international expansion Starbucks has followed different strategies for
different countries in different cases for example in 2002 when Starbucks planned to
launch its business in primrose, a London suburb critics were raised by the local
committee that noise and disruption from deliveries to the store in the primrose would
ruin the pleasantness of the village as the protests were strong the firm decided to step
back. In another case when Starbucks entered Beijing they established a store in the
Forbidden City, the world’s largest imperial palace and store is located in one of the
most ancient buildings the international media raised comments that the store ruins
the ancient and historical constructions but as the comments are only from the
international media and not from the local people so the firms decided to stay. This
suggests that the firm is acting according to the situation and following clear
strategies.

Acquiring raw materials:

Starbucks main aim is always providing best quality of coffee to the customers for
this they purchase high quality Arabica coffee beans. Generally Americans get
Robusta a low blend coffee but in order to provide good taste the firm uses fine
quality. The firm bids high to avoid other companies from getting the beans. The
roasting of coffee bean is also a fine art they roast the beans in a powerful gas-fired
drum roaster and the colour of the bean is also tested agtron blood-cell analyzer and
whole batch is discarded if sample is not perfect. So this specifies that Starbucks has a
clear strategy for acquiring its raw materials and the quality is material purchased.

Employee satisfaction:

Not only providing good quality to customers Starbucks policy towards employees is
laid-back and supportive. The employees are allowed to suggest for the success of the
firm and encouraged to think them selves as partners in the business. The
management believes happy employees are key to competitiveness and growth. The
management offers benefits to the all the employees the benefits are generally medical
insurance, paid holidays, paid vacation, employee assistance program etc. The firm
believes that these benefits encourage employees to be more attentive to customers.
The training provided to the employees is also very high standard and compulsory it
organises training program almost every 6 months. The employees who prepare
coffee are called “baristas” they are well trained when establishing an outlet in any
other country the baristas are sent to Seattle and trained there for 2 months. This
shows that the firm acts for the interests of the employees which is a good strategy.

Customer experience:

According to Schultz “we’re not just selling a cup of coffee, we are providing an
experience”. This suggests that customer satisfaction is given high importance. In
order to do so they serve coffee with great taste and quality. Not only quality the
treatment of customer is excellent and the variety of beverages served is good.
Frappucccino, Odwalla, Ethos water, San Pellegrino, Izze soda, and Horizon Organic
Milk are they variety of beverages served in the outlets. Loyal customers patronized a
Starbucks store 15 to 20 times a month, spending perhaps $50 monthly. Some
customers were Starbucks fanatics, coming in daily. Baristas became familiar with
regular customers, learning their names and their favourite drinks. So the consumer
satisfaction is given high importance which is a good strategy.

In order to analyse in deed internally swot analysis is performed which is displayed


below

SWOT ANALYSIS:
Strengths:
The main strength for Starbucks is their quality maintenance; they always maintain
good quality in the coffee they serve. The employee satisfactions, serving large
variety of beverages, their expansion strategies are their main strengths. The
organization has strong ethical values with their mission being “Starbucks is
committed to a role of environmental leadership in all facets of the business.

Weaknesses:
The main weakness of Starbucks is not a success in the international market
particularly in Asian countries as it could not attract the tea drinkers in particular.
Though the quality of the coffee is high the prices are high. Though their strategy of
blanketing an area with large number of shops capture the whole market one shop is
acquiring the business of the other. They are always known for launching new
beverages but they may falter one in time.

Opportunities:
The opportunities of Starbucks are very high as they have already started growing in
international market they have many opportunities to expand more and have a good
chance to become top player in coffee market. New products can be marketted in their
in their cafes. The company is good at building partnerships it could build more
partnerships with other beverage companies and launch new products whole over the
world.

Threats:
The major threats for the firm are the criticisms raised on it. Some of the methods
Starbucks has used to expand and maintain their dominant market position, such as
buying out competitors' leases, acquiring independent coffee shops and converting
them into Starbucks stores, and clustering several locations in a small geographical
area (i.e., saturating the market), have been labeled anti-competitive by critics. Labour
disputes are high. Similarly here are other disputes like wastage of water, pollution etc
all these disputes could cause a big problem to the firm in future. No one knows when
a man’s taste changes if a new beverage is introduced by any other company which is
liked by many people as people always look for new tastes they may leave coffee so
this can turndown the Starbucks business upside down.

CONCLUSION:
Starbucks is one of the dominant player in world coffee market and it is growing day
by day to become more dominant. It is growing at healthy rate and needs to continue
its progress. It was the only company with anything close to national market
coverage. Its longer range objective was to become the most recognized and respected
brand of coffee in the world. The company's efforts to greatly increase its sphere of
strategic interest via its joint ventures with Pepsi and Dreyer's, its move to sell coffee
in supermarkets, and the possibility of marketing fruit-juice drinks and candy under
the Starbucks label represented an ongoing drive on Schultz's part to continually
reinvent the way Starbucks did business. The company had to challenge the status
quo, be innovative, take risks, and alter its vision of expanding. Management can
progress by answering themselves the questions like what could Starbucks do to make
its stores an even more elegant "third place" that welcomed, rewarded, and surprised
customers? What new products and new experiences could the company provide that
would uniquely belong to or be associated with Starbucks? What could coffee be
besides being hot or liquid? How could Starbucks reach people who were not coffee
drinkers? What strategic paths should Starbucks pursue to achieve its objective of
becoming the most recognized and respected brand of coffee in the world? Continuing
its good progress and achieving all these objectives avoiding the critics Starbucks can
excel as top player in the world coffee market.

REFRENCES:
1. Dess/Lumpkin/Eisner - Strategic Management text and cases
2. www.wikipedia.com
3. STRATEGIC ANALYSIS FOR BEST COFFEE CHINA
Linda Qin
Bachelor of Economics,
Guangdong University of Foreign Studies, 1996
4. Starbucks case study
Student resources
The McGraw-Hill Companies