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Strategic Management

Report

A Strategic Pathfinder for STARBUCKS

Version 1.0

S T A R B U C K S I N C.

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Fachhochschule Osnabrück Faculty of Business Management and Social Sciences

Master in International Business and Management

Strategic Management Report – A Strategic Pathfinder

for STARBUCKS

Assignment for the module Strategic Management

Summer Semester 2014

Lecturer: Mrs. Kaur-Lahrmann

Authors: Elin Lee (598736)

Marina Ristic (637822)

Maximilian Franke (634580)

Submission date: 6th

of June 2014

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DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be

accurate and reliable at the time of publishing. In consideration of human and / or mechanical errors, either

during the process of compiling the report or production, the author accepts no liability whatsoever for any

damage resulting from errors, inaccuracies or omissions affecting any part of the publication.

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Table of Content

Executive Summary ................................................................................................................................. 3

1. Introduction ..................................................................................................................................... 5

2. Problem Definition .......................................................................................................................... 6

3. Report Objective .............................................................................................................................. 6

4. Report Framework .......................................................................................................................... 6

5. Theoretical Framework ................................................................................................................... 7

6. Analysis of Current Situation ......................................................................................................... 14

6.1. Internal Analysis ........................................................................................................................ 14

6.1.1. Company Background Analysis.............................................................................................. 14

6.1.2. Internal Characteristics Analysis ............................................................................................ 19

6.1.3. Strategy Analysis ................................................................................................................... 21

6.1.4. Financial Performance Analysis ............................................................................................. 28

6.1.5. Internal Factor Evaluation Matrix.......................................................................................... 30

6.2. External Analysis ........................................................................................................................ 32

6.2.1. Macro-Environmental Analysis ............................................................................................. 32

6.2.2. Industry Analysis .................................................................................................................... 37

6.2.3. External Factor Evaluation Matrix ......................................................................................... 39

7. Assessment Analysis (Fulcrum) ..................................................................................................... 41

7.1. Current Performance Assessment ............................................................................................. 41

7.2. Expected Performance Assessment .......................................................................................... 44

7.3. Developing Strategic Focus ....................................................................................................... 47

8. Solution Analysis ............................................................................................................................ 50

8.1. Strategic Alternatives ................................................................................................................ 50

8.2. Goals and Evaluation Criteria .................................................................................................... 51

8.3. Strategy Selection ...................................................................................................................... 53

9. Recommendations......................................................................................................................... 59

Appendices ............................................................................................................................................ 63

Bibliography ........................................................................................................................................... 69

Declaration ............................................................................................................................................ 73

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Executive Summary

Starbucks is a global company operating in the coffee retail market since 1972. The

company, which has positioned itself as a seller of premium coffee products, has greatly

expanded its market position and presence in the past two decades. Today, the company is

serving coffee enthusiasts in 64 countries and has grown to become the world’s largest

coffee house company. Starbucks seemingly undisputed market leadership position can be

attributed to the company’s clever product diversification and market expansion strategies.

In response to changing consumer needs and demand, Starbucks has evolved from a mere

seller of coffee products to full-fledged chain “restaurant”, offering not only coffee products

but also other beverages, foods, and merchandise. Moreover, stagnating market growth in

developed economies has prompted the company to move into emerging economies with

high growth potential. Countries like China, India, and Brazil have been portraying increasing

consumption rates of coffee products for years and are likely to surpass coffee consumption

in developed countries by 2020.

Despite a positive market outlook, Starbucks is in need of strategic counseling as the

company faces not to be underestimated challenges in the short- to medium-term. Those

challenges emanate from established competitors like McDonalds and Dunkin’ Donuts who

defy Starbuck’s market leadership position by driving aggressive low-pricing strategies in

established and emerging markets. Moreover, new trends in the coffee industry have

opened up new segments with high growth potentials. Starbucks remains unsure how tackle

new segments and what impact trends could have on its product portfolio.

This report is meant to be a strategic pathfinder that aims at illuminating different strategic

alternatives in the light of the many opportunities and threats that lie ahead. The report will

also give advice on how to utilize internal strengths to capitalize on opportunities and how

to minimize weaknesses to avoid threats.

The internal position of Starbucks is strong, indicating that the company excels in utilizing

strengths to create competitive advantages. Core strengths of the company are its excellent

brand image, customer service, supply chain management, and financial position. With the

help of the latter capabilities, Starbucks is able to retain its market leadership position,

improve the ability to open new stores at top-sites, and mitigate volatilities in global coffee

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bean prices. One major weakness is that continuous adaptations and additions to the

product portfolio have resulted in various products lines becoming unprofitable

(overextension). The external position of Starbucks is balanced, indicating that the company

is only marginally able to respond to external forces. Since the economic downturn in

2008/2009, customers have grown more price-sensitive and low switching costs in the

industry have made them more prone to move to competing brands. Moreover, saturated

markets at home have increased the competitive pressure on Starbucks. Having missed the

first-mover advantage in the single-serve coffee segment, Starbucks has to quarrel with a

number of competitors.

Despite heavy challenges in the external environment, the analysis has shown that Starbucks

is well-positioned to confront expected changes in the industry. The company is advised to

continue key strategies on corporate level: aggressive expansion strategy in emerging

markets, product development/positioning strategies for niche markets, retrenchment

strategies for unprofitable product lines, and alliances for reputable yet slow-growing

product lines. Whilst the latter strategies are enough to maintain and defend current

markets shares, the company must undertake additional strategic changes to achieve a

sustainable market leader position in the short – to medium-term. Here it is important to

increase marketing spending to raise awareness among customers, retain the premium-

pricing strategy to boost brand image, establish trend-scouting facilities to foresee emerging

consumer needs, and hedge against volatilities in the market prices of coffee beans by

employing forward contracts or similar hedging strategies.

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1. Introduction

Being the world’s largest coffee company both in terms of sales and market share, Starbucks

Coffee Company (hereinafter referred to as “Starbucks”) has managed to position itself as a

distinguished and successful provider of high-quality coffee products, attracting millions of

customers worldwide. The company, which was founded in Seattle in 1971 as a mere roaster

and retailer of whole bean and ground coffee, tea, and spices, first entered the market as a

seller of brewed coffee in 1985, when Howard Schulz, former employee and current CEO,

realized the huge potential of selling brewed specialty coffee. Following the opening of

eleven stores in the Seattle area, Starbucks began its expansion first in the north-western

United States and then across the rest of the country. Global expansion did not take place

until Starbucks’ initial public offering (IPO) in 1992, which further highlighted Mr. Schulz’s

intention to turn Starbucks into a truly global company. Its first international store opened in

Tokyo in 1996, followed by Singapore and the Philippines. In the early 2000s, Starbucks

expanded into other important key markets, covering most Asian countries and also moving

into the European, Australian, and Latin-American market. Today (2011), the company has

16,635 stores in 50 countries of which 8,832 are wholly-owned stores and 7,803 licensed

stores. By forming alliances with major coffee producers and retailers as well as acquiring

emerging competitors, Starbucks has managed to extend and eventually consolidate its

market position in recent years. The company is also following hot trends in the coffee

market, such as single-serve coffee or the delivery of ready-to-be-served coffee to luxury

hotel rooms. Moreover, Starbucks has realized that emerging markets, most prominently

China, have huge untapped potentials that need to be exploited if the company wants to

gain and maintain a competitive edge over competitors. The aggressive expansion strategy

that Starbucks is currently pursuing in China can thus be understood as a clear message to

competitors that it will not render the number one spot in the global coffee market without

a fight. In fact, Starbucks’ future could not look any brighter. With third quarter (2011) sales

figures exceeding the five percent threshold in both the USA and internationally, and new

shops opening in China almost on a daily basis, the company seems have chosen the correct

strategic path for the upcoming years. In the words of Starbucks’ CEO Howard Schulz,

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“Starbucks has never been healthier, more connected to customers and partners, or better

positioned to go after tremendous business opportunities that lie ahead.”1

2. Problem Definition

Despite the current success and seemingly undisputed market position of Starbucks, the

company faces not to be underestimated challenges in the short- to medium-term. Analysts

are reminded that direct competitors, such as Dunkin Brands and McDonald’s are aiming to

gain and attract customers globally who otherwise may go to the pricier Starbucks stores.2

Moreover, the company remains unsure as to what impact its growth strategy in emerging

market will have on corporate performance – whether perceived opportunities are really

sustainable or actually short-winded. Saturated home markets and the rising importance of

niche markets pose further challenges for the company. Facing uncertainty, Mr. Schultz is in

need of a clear strategic plan for the short-to medium-term.

3. Report Objective

This report aims at helping Mr. Schultz to better illuminate and pinpoint the different

strategic paths that branch out in front of the company. In a sense, this report is meant to be

a strategic pathfinder with the objective to help Starbucks better assess its current strategic

position and – if necessary – propose a new strategic approach in the light of the many

opportunities, threats, strengths and weaknesses that surround the company.

4. Report Framework

The framework of this report reflects the phases a comprehensive strategic analysis (see

appendix 1).3 In the first phase, the current situation of the Starbucks is analyzed by means

of highlighting strengths and weaknesses (internal analysis) and opportunities and threats

(external analysis) that have an impact on the company’s current strategic performance –

both on corporate and competitive level. The effectiveness of the current strategy is

determined by considering past and current financial ratios (financial analysis). In the second

1 Cf. Reed, M., Brunson, R. (2011): p. 175

2 Cf. Reed, M., Brunson, R. (2011): p. 175

3 Cf. Boardman, A., Vining, A. (1999): p. 3

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phase, the current performance of Starbucks is summarized and judged based on whether or

not it fulfills corporate expectations. Depending on the outcome, a rationale for action is

raised and broad strategic directions are formulated. In the third phase, several reasonable

and mutually-exclusive strategic alternatives are generated. Those alternatives are analyzed

based on the goals and objectives of the company. The most attractive strategic alternative

(or alternatives) is determined by the degree of impact it will have on Starbucks’

performance goals and value chain. The last phase consists of the recommendation. Here,

the proposed strategy (or strategies) is justified.

5. Theoretical Framework

Backing the comprehensive strategic analysis will be a multitude of strategic management

tools and methods which have been deemed relevant for solving the problem at hand. The

relevance and applicability of the tools will be explained in this chapter to avoid lengthy

explanations in the main body of this report.

BCG MATRIX

The BCG Matrix was applied in order to explore the growth potential of Starbucks’ four

major product categories. The matrix divides product categories into four segments based

on their market share (x-axis) and market growth (y-axis). Since it was impossible to find

accurate and up-to-date market share figures for Starbucks’ product categories, the matrix

was modified according to what sales growth categories portray (y-axis) and how profitable

they are (x-axis). Consequently, categories were allocated to four distinct portfolio

segments:

1. Stars: product categories which display high sales growth and substantially

contribute to overall profits.

2. Question marks: product categories which display high sales growth, however only

contribute little to overall profits.

3. Cash cows: product categories which display low sales growth but still contribute

substantially to overall profits.

4. Dogs: product categories which display low sales growth and contribute little (or

nothing) to overall profits.

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PRODUCT-CUSTOMER ANALYSIS

The Product-Customer Analysis was applied to highlight the relationship between Starbucks’

different product categories and customer groups. The analysis highlights which customer

groups prefer which product categories, and what they value most in each product category.

For Starbucks, this information can be important if the company has to decide which product

lines to develop or discard.

PORTER’S GENERIC STRATEGIES

Porter’s Generic Strategies were used as a means of evaluating Starbucks’ current strategic

stance on competitive level. This model describes how Starbuck pursues competitive

advantages across its market scope. With Porter’s Generic Strategies, competitive advantage

is defined either by offering lower costs than competitors or by differentiating product

offerings to an extent that allows the company to command higher prices. Those strategies

are applied either in a wide market context (industry-wide) or in a narrow market context

(focus on selected markets). Consequently, four distinct business strategies can be

determined:

1. Overall cost-leadership: the company offers lower prices than competitors to a wide

selection of customer groups.

2. Differentiation: the company offers distinct and unique product categories which

cannot be emulated by competitors at a higher price and to a wide selection of

customer groups.

3. Cost focus: the company offers lower prices than competitors in niche markets.

4. Differentiation focus: the company offers distinct and unique product categories

which cannot be emulated by competitors at a higher price in niche markets.

INTERNAL FACTOR EVAULATION MATRIX (IFE)

The IFE Matrix was used to evaluate major strengths and weaknesses in functional areas of

Starbucks and determine whether or not the company has a strong or weak internal

position. The IFE Matrix can be compiled using the following four steps:4

4 Cf. Maxi-Pedia (2014a): Online publication

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1. Compile key internal factors: key internal factors are the strengths and weaknesses

that can be complied from the internal analysis of Starbucks.

2. Assign weights: assign weights that range from 0.00 to 1.00 to each factor. The

weights should be assigned according to each factor’s importance to Starbucks’

overall business strategy.

3. Assign ratings: assign ratings on a scale from 1 to 4. A rating of 1 represents a major

weakness, a rating of 2 represents a minor weakness, a rating of 3 represents a minor

strength, and a rating of 4 represents a major strength.

4. Multiply and sum: multiply the weights with the ratings and sum all products to

reach the final score.

The average score is 2.5. A score exceeding the average indicates a strong internal position.

A score that is under the average indicates a weak internal position.

PESTEL ANALYSIS

The PESTEL analysis was applied to evaluate the macro environment to which Starbucks is

exposed. It helps the company to better determine external factors that might have an

influence on the company’s performance in the global coffee market. Originally, the PESTEL

analysis has been designed to evaluate macro-environmental influences on industries in

certain countries. However, since Starbucks is operating in a global environment, the PESTEL

analysis was fine-tuned to determine the macro-environmental influences on the coffee

industry within a global context. The analysis evaluates six macro-environmental variables:

1. Political Environment: are there any governmental regulations that would inhibit

Starbucks in the global coffee market?

2. Economic Environment: has the recent economic crisis had any effect on disposable

income of customers?

3. Social Environment: how has the social attitude towards coffee changed over the

years? How far developed is the coffee culture?

4. Technological Environment: what key technological changes in the production and

consumption of coffee have taken place over the years?

5. Ecological Environment: how important is environmental stewardship in the

industry?