Analysis of Current Situation

The analysis of the current situation is meant to provide a context for any strategic analysis and
should be understood first. It provides an insight into the internal composition as well as the external
position of the company. The current situation analysis culminates in distinct strengths/weaknesses
and opportunities/threats which are important key consideration when compiling the strategic
alternatives in the solution analysis

Internal Analysis

The internal analysis is meant to provide a review of Starbucks’ organizational strengths

And weaknesses. By analyzing the internal composition of the company, the reader will gain a better
understanding of the company’s background, product categories, basic competencies ,and strategic
coordination. The analysis culminates in an Internal Factor Evaluation Matrix( IFE Matrix)
which summarizes and evaluates distinct strengths and weaknesses according totheir importance to
Starbucks’ overall business strategy

Company Background Analysis

Ownership and Control Starbucks was founded as a privately-owned company by the company’s current
CEO Mr. Schulz in 1971. In 1992, the company went public in order to further improve its financial position
to better tackle and expand into overseas markets. The company is controlled by Mr. Schulz who serves
as the chairman of the board, president, and CEO. The organization is managerially-controlled because
share ownership is widely dispersed. About 75 percent of shares are held by institutional and mutual fund
owners and only three percent is held by insiders.

Vision, Mission, and Principles

It is Starbucks mission

to inspire and nurture the human spirit; one person, one cup, and one neighborhood at a time.”

Starbucks regards human dignity and a warm and comfortable atmosphere as the highest value to its
customers, employees, and partners. The company allows customers to personalize their beverage
according to their needs, for example by adding milk content, syrup, and even temperature. According to
its vision statement and principles, Starbucks not only calls its employees “partners” and treats them with
respect and dignity, but it also treats its suppliers ethically, applying fair trade and fair sourcing principles
as well as providing financial support.
FLOW OF GOODS

Purchasing at Starbucks involves company agents who are choosing bean producers( farmers)
predominantly in Africa, Latin America, and Asia. Coffee beans are selected under the highest standards
of quality and the goal is to establish long-term strategic partnerships with high-performing suppliers. The
beans are then exported by export agents, imported by brokers, tested on quality, roasted, and eventually
packaged before they are being sent off to Starbucks stores around the world. Sales can take three distinct
ways: beans are sold either directly through stores without intermediaries (retailing), to specialty retailers
such as restaurants, or via the internet (direct response). In terms of marketing activities, Starbuck sis
relying mostly on word-of-mouth which is facilitated by the high-quality image of the company.

PRODUCT PORTFOLIO

Starbucks coffee comes in two forms: one is already processed coffee comprising Starbucks VIA®, K-cup®
Packs, Verismo System Pods, Pods, Portions, and Filter Packs. The other is by profile like blonde roast,
medium roast, dark roast, flavored roast, and seasonal favorites. Starbucks' major income source is from
selling beverages: it sells hot and iced coffee which makes up the lion’s share of sales (75% of total
revenues in 2010). Starbucks beverage portfolio consists of brewed coffees like Seattles Best Coffee and
Torre fazione Italia Coffee. Other product lines are non-coffee blended beverages like Viva no Smoothies,
Tazo Tea, and Ethos Water. Starbucks sells single-serve coffee (VIA instant coffee and K-cups) through
strategic partnerships, and those product lines have also been expanded abroad with success. Thus,
Starbucks channel development segment includes whole bean and ground coffees, as well as branded
products which are sold worldwide through channels such as grocery stores, warehouse clubs, retailers,
and convenient stores. On the other hand, sales of beverages have been decreasing in 2010 as compared
to the previous year, which is mainly due to the addition of various products lines to the existing portfolio.
Recently, Starbucks has added various product lines to its portfolio, which primarily consist of
merchandise items such as home espresso machines, coffee brewers and grinders, coffee mugs and
accessories. Music, packaged goods, books, and gift items are the newest contribution to Starbucks’
rapidly expanding product portfolio. Apart from selling beverages and merchandise, the company also
sells various food products that frequently accompany the coffee experience: sandwiches, baked pastries,
salads, oatmeal yogurt, parfaits and fruit cups. Moreover, in an effort to increase evening sales (people
do not tend to drink coffee in the evening), Starbucks added beverages such as beer and wines as well as
evening snacks like cheese plates and flatbread to the menu in 26 stores in States. .According to the
product portfolio, products can be roughly divided into four major categories: beverages, foods, packaged
and single-serve coffee (whole bean coffee), and coffee-making equipment and other merchandise. In
order to determine which product categories are the most profitable and fastest-growing ones, the BCG
matrix will be applied

BCG Matrix
 The BCG matrix shows that the beverage category (including all over-the-counter coffee products) is the
cash cow of Starbucks. In fact, 76 percent of total sales (2010) have been generated from selling
beverages. However, sales of beverages have been declining one percent from 2008. The rising stars on
the horizon are food products which made up 19percent of total sales in 2010 (2% up from
2008). Successful adaptations of the food offering (e.g. hot breakfasts and salads) have spurred sales
in this category. Packaged coffee products and single-serve coffees portray a positive growth trend (1%
up from 2008), however only made up about four percent of total sales in 2010. Sales in this category are
expected to goup as Starbucks VIA instant coffee and K-cups are bound to make a successful entry in to
emerging markets in 2011. The most underperforming category is coffee-producing equipment and other
merchandise. While total sales accounted for only two percent in2010, this category is also on the
downgrade as sales have been declining two percent from2008. With the rise of single-serve coffee
products, conventional coffee machines have become rather obsolete and unfashionable.

Starbucks is catering its products to three different customer groups: kids and teens, young adults, and
adults (25-40 years).The company’s primary market comprises men and women between 25 and 40 years.
They account for almost half (49%) of its total business sales. This age group perceives Starbucks as a
status symbol. For them, beverages and Starbucks merchandise is hip and contemporary and perfectly
relates with their relatively high income, professional career, and urban lifestyle. The long-term
experience with Starbucks turns this age group into frequent visitors and loyal customers. Young adults
comprise the age group of 18 to 24 year old customers. About 40 percent of total sales can be contributed
to this group.
 Starbucks positions itself as a place where college students can hang out, work on their assignments, and
meet people. Wi-Fi access , contemporary store design, and “cool” music help to retain young adults and
eventually turn them into regular customers. Beverages and food products are perceived as cool and
merchandise as hip and must-have. Although Starbucks is not catering directly to kids (high calorie and
caffeine products), about two percent of sales can be attributed to customers age 13 to 17. While kids
usually accompany their parents (passiveness), teens use Starbucks as a place to hang out with friends.
They usually order non-caffeine beverages and foods because of how it tastes.

Acquisitions and Alliances

Since its foundation in 1971, Starbucks has acquired or formed alliances with a number of companies. The
most prominent acquisitions of Starbucks include the purchase of Tazo Tea Company in 1999, which
allowed Starbucks to add various tea products to its portfolio, the Seattle Coffee Company in 2003, which
further expanded Starbucks’ presence in the US coffee market and also opened the way into the
wholesale sector, and the Coffee Equipment Company in 2008, which granted Starbucks the right to use
the innovative Clover Brewing System .Key alliances include the partnership with Target, which allowed
Starbucks to sell its coffee in highly frequented cafés in Target Stores, the Green Mountain Coffee
Roasters, providing Starbucks with access to the fast-growing single-serve coffee market, and Tata Coffee
of india, which will lead to Starbucks gaining a threshold in the aspiring Indian coffee market and also
providing the company with access to high-quality Arabian coffee beans. Acquisitions and alliance can
therefore be seen as important measures to diversify the product portfolio (e.g. Tazo Tea), gaining market
share (e.g. Seattle Coffee Company),penetrating new segments (e.g. Green Mountain Coffee Roasters),
gaining access to intellectual property (e.g. Coffee Equipment Company), and expanding into new
markets(e.g. Tata)

INTERNAL CHARACTERISTICS ANALYSIS

Resources, Skills, and Attributes

Starbucks expects its staffs to excel in customer relationship management. Employees are strongly
committed and motivated to share their coffee knowledge, product expertise, and service with
customers. In the recruitment process, the company makes sure that barist as have the ability to build
relationships, work in teams, and portray interpersonal (communication) skills. Next to offering qualified
customer service, Starbucks is showing social, ethical, and environmental stewardship. Participation in
environmental programs, the company has been criticized by environmental experts for pouring millions
of gallons of water down the drain at its coffee stores.

In addition, Starbucks offers more than 30 different blends of coffee and its single-origin premium Arabica
coffee fulfills the highest standards in premium coffee making. Farmers are selected according the highest
quality standards, and only the best beans are processed into Starbucks coffee. The Starbucks Roast® is a
special roasting technique which not only provides the coffee with a distinct, dark color but also
contributes to achieving a unique and highly recognized flavor. Starbucks has further enhanced its
brewing skills by acquiring the Clover® Brewing System of the Coffee Equipment Company, and the
strategic partnership with Green Mountain Coffee (maker of the K-cups) has opened the way into the fast-
growing single-serve coffee market. The company’s brand power and recognition are strong, and
Starbucks is generally perceived as a high-quality and trendy coffee store. Nonetheless, one study of
Starbucks’ brand awareness revealed that people have difficulties connecting the logo (portraying a
mermaid)to coffee and that the actual coffee experience is not as attractive as the spiritual atmosphere
of the stores.

In recent years, Starbucks has been aggressively extending its product portfolio by adding different foods,
drinks, and merchandise products to the store shelves. Next to the fact that sales of merchandise and
other coffee-making equipment have been declining over the past years (from 4% in 2008 to 2% in 2010),
overloading store shelves with merchandises canal so have a negative effect on brand identity. Especially
the sales of food products could reduce the consumption of coffee, which, after all, is Starbucks’ cash cow.

Organization Howard Schulz serves as the chairman of the board, president, and CEO of Starbucks.
Starbucks’ overseas markets are divided into regions (Asia Pacific, Europe, Middle East, North- and South
America). However, regions are not headed by their own regional headquarters but individual stores
(whether licensed or not) report directly to the international headquarter which oversees all operations.
This centralized control over stores allows Starbucks to implement far-reaching decisions in a prompt and
accurate manner. The downturn of centralized control is that it might complicate the implementation of
regional strategies that are necessary to respond to local consumer needs. Especially for companies that
seek rapid overseas expansion, knowing the local market and its needs is imperative for establishing a
long-lasting presence. Therefore, Starbucks prefers to penetrate new markets by means of prominent,
local retailers who dispose of in-depth market knowledge and access. Licensees, as the company claims,
provide improved, and at times the only access to desirable retail space.

Hence, it comes as no surprise that 63 percent of international stores are licensed, while about 60percent
of US-based stores are company-owned. Starbucks maintains a high level of control over licensed stores
by imposing company guidelines such as operating standards, store development procedures, and training
classes for employees. This high level of controls necessary to preserve the global image of Starbucks and
to thwart intellectual property theft. The organizational structure within a store is vertically organized.
The store manager, who reports to the district manager, and who is represented by the assistant store
manager, is giving orders to the shift supervisor who is responsible for the baristas. The baristas are the
face of Starbucks as they are in direct contact with customers. Their dedication towards creating a friendly
and carefree atmosphere is very important for the image that Starbucks is trying to display to customers.

Internal Factor Evaluation Matrix

The Internal Factor Evaluation (IFE) Matrix will be utilized to evaluate the major internalstrengths and
weaknesses in functional areas of Starbucks
External Analysis

The external analysis will unravel potential opportunities and threats that exist in the environment to
which Starbucks is exposed. It provides an insight into the global coffee market and will give the reader
an impression on how competitive the industry is. The analysis culminates in an External Factor Evaluation
Matrix (EFE Matrix) which summarizes and evaluates distinct opportunities and threats according to their
importance to Starbucks’ overall business strategy

Macro-Environmental Analysis
In order to gauge the impact of the macro environment on Starbucks’ business, the PESTEL analysis will
be utilized. Emphasis will be paid to emerging markets, most particularly China and India since those two
countries are expected to be the growth markets in terms of coffee consumption in the future. Political
Environment The political influence on coffee markets is generally not as pronounced as it is with other
markets. Coffee is generally perceived as a beverage that is harmless to the consumer’s health and thus
is not subject to extensive political debate. In China, the government is rigorously promoting the
establishment of a coffee culture. Having endured the collapse of the tea bubble in 2008, Chinese tea
farmers in the Yunnan Province (China’s major coffee production area) switched from growing tea leaves
to sowing coffee seeds.

In 2010, Starbucks inked a Memorandum of Understanding (MOU) agreement with Yunnan Academy of
Agricultural Science (YAAS) and People’s Government of Pu’er City to support local farmers in the
promotion of responsible coffee-growing practices and the development of localized coffee. Moreover,
the company, with support of the government, will introduce Starbucks Coffee and Farmer Equity (CAFÉ)
Practices in China.

This MOA will provide Starbucks with the opportunity to gain a permanent foothold in the Chinese coffee
market. A possible threat to Starbucks is the unpredictability of government decisions. Since China is a
one-party dictatorship, analysts warn that a new regime could close the marketplace and even
nationalized properties overnight.

However, since China has entered the WTO in 2001, foreign investment has been welcomed with open
arms. India is on the verge of becoming the second biggest country in terms of coffee consumption.
Starbucks arrives to India at a time when the government is trying to attract more foreign retail
investment, but is slow in loosening restrictions.

Stringent limitations on foreign ownership have inhibited many international companies from setting up
their branches. Unlike those companies, Starbucks seems to have a less difficult time in gaining a foot hold
in the highly profitable Indian coffee market. It can retain 100 percent of owner ship of its outlets with
the requirement that a part of its products come from Indian producers which, essentially, will not be
problem since the Arabica coffee beans will be sourced from Indian farmers anyways

The joint venture with conglomerate Tata Group will further help Starbucks to circumvent possible
political bottlenecks.

Economic Environment

The financial crisis of 2008 has left its hefty mark on many, mostly western companies. AlsoStarbucks
suffered from the global downturn and profit plummeted to an all-time low inSeptember 2008 ($316
million). Increasing (fixed) costs forced the company to shut-down600 unprofitable stores (net opening of
stores in 2009: -474).

But also declining revenuesadded to the slump in profits; in the U.S., sales went down seven percent from
2008 During the crisis years, disposable income of the U.S. stagnated and then fell a fewpercentage points
until it gained pace again in 2010.
 Price-sensitive customers went frompricier Starbucks stores to competitors which were able to offer
coffee at a lower price.Surprisingly, revenue growth was mostly positive in emerging markets, in particular
in China and India. This observation goes hand in hand with the fact that the disposable income ofthe
latter countries continued to rise during crises years.

The economic situation of developed countries can be highly volatile, especially duringcrises. The recent
financial crisis has shown that emerging markets remain relativelyunscathed by economic turmoil in
developed markets. Strong economic growth, politicalstability, and rising living standards make emerging
markets less prone to crises. ForStarbucks, investing in growth markets such as China and India
is important to hedge againstvolatile sales in already established, mostly western markets.

Social Environment

The coffee culture experienced an upswing in the early 1960 (see appendix 6). Coffee ishistorically
produced in Latin America, Central Africa, and South Asia. However, most of itsproduction was exported
to western countries, particularly to the United States where itbecame in vogue following the Second
World War. Aggressively promoted by the Pan-

American Coffee Bureau in 1952, the “coffee break” became an inherent part of the

American workplace.

Nowadays, the coffee culture has shifted from self-made coffee tosingle-serve coffee. While coffee has
become an established beverage in western societies, ithas only just begun to make an appearance
in developing countries, particularly in countrieswhere it is produced. Especially in Asian countries, which
have been known forpredominantly consuming tea, drinking coffee has become a social status.In India, it
became cool to drink coffee due to the influence of western cultures andfashionable international brands,
such as Starbucks. Moreover, coffee houses have becomean alter

native sanctuary and social hangout or India’s youth in a culture that has generally shun bar-going,
particularly for young women.

Growing disposable income, urbanization,and coffee drinking becoming a fashion have spurred the
expansion of the domestic coffeemarket in India. The customer base generally comprises young age
groups (15 –30 yearsold), and the company who is able to offer good coffee at an affordable price will
have acompetitive edge over competitors. lso in China, the coffee culture has just recently experienced
an upsurge. While coffee wasdisdained as a capitalist product under Mao, it reemerged on the streets of
Shanghai in thelate 1980s.

57

Although coffee is produced in the rural regions of Yunnan, consumptionprimarily rests on the

developing demand among eastern China’s growing urban middle

class. However, China does not have the kind of pervasive coffee culture that is found inmany parts of the
West. While young urbanites patronize cafes as an outward sign of theirengagement with global trends
(status symbol), their coffee-drinking is less a habit and moreabout seeking a certain kind of experience.

Technological Environment

The technological environment surrounding coffee consumption has changed over the years.While typical
coffee was originally grounded at roasteries, in grocery stores, or at homeusing burr grinder, blade
grinder, or mortars, and then brewed by means of coffeepercolators or automatic coffeemakers,
nowadays instant coffee and single-serve coffee,which is se

rved in small capsules (or “pods”), is usually brewed in special

machines at home.Coffee capsules and instant coffee packs have revolutionized the technological
landscape ofcoffee making equipment. In the old days, coffee making was a rather time-consuming
andarduous task which required skill, practice, and the right equipment. Nowadays, people canget a good
cup of coffee by simply pouring instant coffee into a cup of boiled water, or by

putting a capsule into a machine. In today’s fast

-moving world, this easy and uncomplicatedway of making coffee has become the norm. Making coffee
the old-fashioned way hasbecome more of a trend among true coffee connoisseurs.This change in
technological environment has promoted Starbucks to move into the single-serve coffee market by
introducing the VIA instant coffee and K-cup lines. The first-moveradvantage, however, was reserved for
Nestlé which introduced its Nespresso line in theearly 2000s. Nonetheless, the fast-growing instant coffee
market, which displays annualgrowth rates of seven to ten percent, is certainly big enough to host
a number of players

Environmental Environment

Environmental stewardship has become a priority for coffee makers, and producing “green”

and fair coffee is an important attribute for improving the brand image among consumersand
environmentalists. The production of coffee has a distinct impact on forests,biodiversity, and water usage
and companies like Starbucks actively try to reduce theirenvironmental footprint. Another big question is
whether the profits of big coffee chains aretrickling down to the people who actually grow the beans.
Traditionally, complexities withinthe supply chain have meant that the 100 million people growing coffee
around the worldhave been excluded from the huge profit making potential of coffee. On average, third
worldcoffee farmers receive a paltry of ten percent of the eventual retail price.

Along with thenegative effect this has on the living conditions of farmers, the drive for increased
outputhas had a knock-on effect on the environment as well, with monocropping and sun growncoffee
now being the norm.
 It must also be taken into consideration that most coffeegrowing regions are home to delicate
ecosystems, which increases the potential for seriousdamage. Governments around the world have been
urging coffee producers to adopt fairtrade and environmentally-friendly practices. However, the
implementation and executionof fair trade norms is not practiced thoroughly by governments, particularly
in developingcountries. Fortunately, companies have taken the implementation of such norms into
theirown hands and established their own responsibility guidelines. Starbucks, for example,carries out
ethical sourcing practices and drives an environmental responsibility program tosupport local farmers and
protect the environment

LEGAL ENVIRONMENT

It is essential to understand the intellectual property right laws and licensing issues whenentering
emerging market. For Starbucks it is important to make use of intellectual propertyprotection laws
because the technology which the company uses (e.g. Starbucks Roast®) is

an essential component of the company’s competitive advantage.

Especially in China, western companies have frequently experienced infringements on theirintellectual

property rights. Intellectual property which has not been thoroughly protected

has often been copied by direct, mostly local competitors. Upon first entering the Chinesemarket in 1999,
Starbucks has managed to secure all of its major trademarks within fouryears.

Some local companies have overstepped legal boundaries in their effort to mimic

Starbucks’

popular and successful branding strategy, and have consequently been sued by Starbucks with success.

Just like in China, India’s intellectual property legislation covers every significant aspect of

the protection of intellectual property if the property is registered in a prompt and propermanner.

Potential shortcomings of the IP legislation in India are bureaucratic delay in theenforcement of IP laws,
backlog of cases at both the civil and criminal courts, and lack oftransparency, particularly at local level.
Also the large number of small players infringing onIP rights puts a financial burden on the government,
which can result in court cases beingdropped without clear reasons.

Industry Analysis

The spider diagram depicted above shows the competitive rivalry in the global coffeeindustry. The forces
that exceed a score of three can be defined as potential threats thatneed to be considered by
Starbucks.Threat of Established Rivals (HIGH)The rivalry among exiting competitors is high. Starbucks is
competing against majorcompetitors such as McDonalds, Dunkin Donuts, Costa, or Caribou Coffee. In
addition tothat, the company has to compete with countless smaller coffee shops and cafes.
Thecompetitive advantage that competitors have over Starbucks is that they offer their (coffee)products
at a cheaper price. In appendix 8, a price comparison on the basis of two popularbeverages (hot black
coffee and iced mocha) between Starbucks, Dunkin Donuts, andMcDonalds can be found. Despite the fact
that only two products have been compared, itbecomes obvious that Starbucks is the pricier stores of the
three. The coffee war isparticularly acute in emerging markets. While Starbucks targets the upper income
levelChinese with beverages costing up to RMB30 (about US$5)

, Nestlé’s Nescafé

instant coffee,for example, can cost as little as RMB1.5 (about US$0.10) per package.

Other competitors,such as McDonalds and Dunkin Donuts, pursue similar pricing strategies with which
not somuch the high income segments are targeted but rather the rising middle income class(urbanites).
Competitors are also aggressively expanding their presence in emerging market.British coffee chain Costa
Coffee entered China in 2006 and currently has over 250 storeswith the objective to increase the number
to 500 stores by 2016

accounting for 8.9 percentmarket share of the coffee retail market.

McDonalds can currently boast of 1,500 outlets inChina. Small competitors such as Taiwanese 85 Degrees
and Hong Kong-based Pacific Coffeeare also planning on making a market entry into China soon

Starbucks’

current marketshare of 66 percent of the total coffee retail sector in China is therefore crumbling.Threat
of New Entrants (LOW)The threat of new entrants to the industry to compete with Starbucks is low
because thecoffee market is highly saturated with established players. Moreover, a substantial amountof
financial resources associated with buildings and properties are required in order to enter

he industry.

In developing markets, the threat of new entrant is marginally higher becausefast market growth and
poor execution of intellectual property rights allow small coffeestartups to gain a foothold in the
market.Bargaining Power of Buyers (HIGH)The bargaining power of customer is high because there are no
or relatively small switchingcosts for customers. Monetary switching costs, such as transportation and the
actual cost ofcoffee are low because customer can essentially buy a coffee at every gas station
orsupermarket. In fact, customers can switch to competitors with ease and Starbucks must becareful to
not lose customers to cheaper competitors. On the other hand, non-monetary, oremotional switching
costs are high because other brands might not meet customerexpectations.Threat of Substitutes
(MEDIUM)The threat of substitute products is medium. Typical substitute products for coffee are
tea, juices, soft drinks, water and energy drinks. Pubs and bars can be seen as alternativelocations to
meet people and spend time outside of university or work. Nonetheless, theStarbucks atmosphere is
unique and hard to replicate by bars and pubs.Bargaining Power of Suppliers (HIGH)The bargaining power
of supplier is high. The law of supply and demand states that whendemand exceeds supply, producers are
able to offer higher prices. This is the case with

today’s coffee market. The demand for coffee is high and the supply limited because coffee

can only be produced in certain geographical areas. Moreover, fair trade laws have obligedcoffee
companies to pay farmers adequate prices for their outputs. All this increases thebargaining power of
suppliers

The EFE Matrix has resulted in a final score of 2.7, which scores slightly above the averagescore of 2.5
meaning that with its current strategic orientation Starbucks is only

marginallyable to respond to external factors.

TWOS MATRIX
SO –

 Market the brand heavily in the less penetrated areas. Use the global brand image to extend
presence in emerging economies.

 Extend the product mix while maintaining the focus on product quality.

 Partner the other well-known brands in the Asian markets to penetrate the market faster. Mutual
benefit for both from each other’s capabilities.

WO –

 Release medium priced products to attract middle class customers in larger numbers and increase
sales in the Asian countries.

ST –

 Focus on marketing and advertising to attract and retain more and more customers and reduce
competitive pressure.

 Marketing to the millennial generation to capitalize on changing demographic trends.

 Advertising the quality of products to differentiate from competing brands and reduce the
challenge due to imitation.

 Marketing the ethical image of the business to reduce competitive pressure

WT –

 Release a range of low cost products to minimize the cost challenge from the competing brands.
 Marketing the quality of its premium products to minimize the threat arising from imitation by
the other brands that sell it cheaper.