History

 Starbucks was founded in 1971 by Gordon Bowker, Jerry Baldwin, and Zev Siegl, who joined
forces to open a coffee shop in Seattle, Washington.
 By 1972, with the success of the first store, they opened a second store in University Village,
Washington.
 Its wholesale business, which sold coffee primarily to local restaurants, changed its name to
Caravali out of concern that the Starbucks’ name would become tarnished by retailers who sold
the coffee after its shelf life has expired.
 In the next 10 years, the business expanded to five stores and hired Howard Schultz to manage
retail sales and marketing.
 By 1993 the company ventured into the East Coast market in Washington, D.C., and entered into
a venture with Barnes & Noble to sell its coffee at the bookseller’s stores. At this point, the
company had licensed 12 stores and was operating 260 company-owned facilities with revenues
reaching $176.5 million and net earnings at $8.3 million.
 Starbucks opened 200 new stores outside of the United States during 2000, 150 of which were
in the Asia-Pacific region, and opened its first stores in Dubai and Hong Kong, and its 100th
stores in both Japan and the United Kingdom.
 The following year, Starbucks opened a store in Zurich, Switzerland, marking its first venture into
continental Europe.
 Starbucks experienced its first setback in 2002 when its Japanese operation posted a $3.9
million loss, despite a 15 percent increase in revenues and 108 new store openings, and the first
low performance locations were closed. But not discouraged by this, international expansion
continued as Starbucks opened its first store in Turkey and acquired 129 Seattle’s Best Coffee
coffeehouses, as well as certain wholesale distribution rights.
 In the following two years, its long-term U.S. expansion goal was set at 50 percent and Starbucks
announced it will eventually open 15,000 domestic outlets, and 30,000 worldwide. However,
then the worldwide economic recession hit in 2007 and simultaneously McDonald’s entered the
coffee business big time. Starbucks closed 600 underperforming stores in the United States in
2008 and plans to open only about 200 new stores in 2009.

EFA

CFA

PRIORITY MATRIX

TOWS MATRIX

The TOWS Matrix (TOWS is just another way of saying SWOT) illustrates how the external opportunities
and threats facing a particular corporation can be matched with that company’s internal strengths and
weaknesses to result in four sets of possible strategic alternatives. In this case study, we will focus on
how the external opportunities and threats Starbucks facing can be matched with its internal strengths
and weaknesses to result in four sets of possible strategic alternatives. These outcomes or alternatives
forces strategic managers to create various kinds of growth as well as retrenchment strategies. It can be
used to generate corporate as well as business strategies.
 The rivalry among exiting competitors is high.
Starbucks is competing against major competitors
such as McDonalds, Dunkin Donuts, Peet’s Coffee
and Tea, Krispy Kreme Doughnuts (KKD) and
Caribou Coffee. In addition to that, the company
has to compete with countless smaller coffee
shops and cafes

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 can be utilized to evaluate the major internal strengths and
weaknesses in functional areas of Starbucks company to make new strategies.

Key Internal Factors Weight Rating (1-4) Weighed Score

Strengths
Market share 0.15 4 0.60
Product line and 0.10 4 0.40
variety
Supply chain 0.05 3 0.15
management
Customer service 0.10 3 0.30
Product quality 0.10 4 0.40
Online presence 0.05 2 0.10
Accessibility 0.05 4 0.20
Financial position 0.10 4 0.40
Weaknesses
High prices 0.15 4 0.60
Environmental 0.10 2 0.20
concerns of waste
water
Large product 0.05 2 0.10
diversification leads to
brand confusion
TOTAL 1.00 3.45

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 enterhe 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

Key External Factors Weight Rating (1-4) Weighed Score

Opportunities
Expansion to emerging 0.15 3 0.45
Markets i.e., China,
Pakistan etc.
High growth potential 0.15 4 0.60
in new markets
High growth potential 0.05 3 0.15
of flavored coffee in US
market
Threats
High bargaining power 0.15 4 0.60
of coffee bean
suppliers
Trademark 0.15 4 0.60
Infringement in new
markets
Increased local 0.10 2 0.20
competition
Price sensitive 0.15 3 0.45
customers
Saturated markets in 0.10 1 0.10
developed countries
TOTAL 1.00 3.15
The EFE Matrix has resulted in a final score of 3.15, which scores above then average score of 2.5
meaning that with its current strategic orientation Starbucks is marginally able 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.