External Environmental Analysis of Starbucks and the Coffee Industry. Harold Brown. Strategic Management MGMT Dr. Nwabueze

Transcription

1 External Analysis of Starbucks 1 RUNNING HEAD: STARBUCKS External Environmental Analysis of Starbucks and the Coffee Industry Harold Brown Strategic Management MGMT 4340 Dr. Nwabueze March 3, 2011

2 External Analysis of Starbucks 2 Contents Executive Summary Company History Background Table 1: Starbucks Revenue Trends Purpose of This Study External Analysis Diagram 1: The Components of a Coffee Firm s Macroenvironment General Environmental Analysis Demographic Segment Table 2: Tracking Measures of Coffee Demographics Economic Segment Political/Legal Segment Socio-Cultural Segment Technological Segment Global Segment Driving Forces Diagram 2: Effect of Driving Forces on the Coffee Industry Industry Analysis Description of the Industry Industry Dominant Economic Features Diagram 3: Coffee Industry Dominant Economic Features Market Size Market Growth Rate Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio Table 4: Global Hot Drink Data for Coffee Industry Table 6: U.S. Hot Drink Data for Coffee Industry United States Hot Drinks Market Volume Industry Trends Five Forces Analysis Diagram 3: Five Competitive Forces in the Coffee Industry Threat of New Entrants... 32

3 External Analysis of Starbucks Power of Suppliers Power of Buyers Power of Substitutes Intensity of Rivalry Summary of Industry Analysis Competition Analysis Industry Competitors Table 7: Direct Competitors to Starbucks Diagram 4: Strategic Group Map of Coffee Industry Rivals Anticipated Strategic Moves Summary of Competitive Analysis Key Success Factors Diagram 5: Key Success Factors for Survival in the Coffee Industry Internal Analysis Organizational Analysis Diagram 6: Organizational Analysis Framework Model of Starbucks Corporate Mission Products and Services Leadership Organizational Culture Structure Strategy Diagram 7: Five Generic Competitive Strategies Summary of Organizational Analysis Analysis of Firm Resources Tangible Resources Intangible Resources Capabilities Core Competencies and Sustainable Advantages Summary of Firms Resources Financial Analysis Valuation Analysis... 58

4 External Analysis of Starbucks 4 Table 8: Valuation Analysis of Starbucks Growth Analysis Table 9: Growth Analysis Ratios for Starbucks Profitability Analysis Table 10: Profitability Ratio Analysis for Starbucks Financial Strength Analysis Table 11: Starbucks Balance Sheet Management Efficiency Analysis Summary of Financial Analysis SWOT Analysis Diagram 9: SWOT Matrix for Starbucks Strengths Weaknesses Opportunities Threats Recommendations Recommendation 1 (External) Recommendation 2 (Internal) Conclusion References... 75

5 External Analysis of Starbucks Executive Summary Starbucks is the global leader of the coffee industry in bringing new and innovative products to market in convenient and easily accessible locations. This paper will provide a detailed analysis of the coffee industry and the external environment which it operates in as well as a comprehensive internal analysis aimed at specific evaluation of Starbucks and its performance. Although Starbucks started from the humble beginnings of three friends that liked high quality, premium roasted coffee it has since turned into a leader in the coffee industry. This is due largely through the efforts and vision of Howard Schultz. His success and leadership of the industry has been compared to what Ray Kroc did to McDonald s and the fast food industry. Today Starbucks serves as a model that many other successful rivals try to emulate or improve on. Starbucks is powered by their continual product innovation, customer service aptitude, ability to expand globally, and successfully select locations. Coffee and/or tea are consumed globally by most of the population. This coupled with the forces that drive change in the industry result in a net positive force that makes the industry attractive to businesses. An analysis utilizing Porter s five-forces model outlining competitive pressures will show that the coffee industry is able to provide for attractive profits by firms in the industry. The overall competitive pressures are moderate and firms can be successful but they will have to be efficient and effective in the strategies that they undertake or they risk being removed from the industry by consumers. Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a high priced, high quality product with a wide breadth of product offerings. They are the only firm in this position. Most other firms offer moderate or few product offerings at a lower price

6 External Analysis of Starbucks 6 point. Starbucks has been able to build its brand image and market power while in this position which has yielded annual profits. As Starbucks is in the strategic group position of power, the expected moves of rivals are all designed to keep up with Starbucks. No firms have been able to successfully produce new products that meet market demand in as convenient locations as Starbucks has been able to offer. Starbucks also enjoys critical know how and experience in the key success factors that the coffee industry demands of successful firms. Starbucks keenly utilizes technology to enhance customer experience, selects convenient locations, innovates products that are in demand and profitable, and continually looks to conquer new markets and market share ahead of rivals. The Starbucks mission is to nurture the human spirit of everyone around the globe by offering the finest coffee, tea, and food products in a friendly and inviting atmosphere that serves as a home away from home. Starbucks does this through a decentralized leadership style that emphasizes lower level decision making and information sharing to promote product innovation and customer service. The customer service is a key component to the organizational culture of rewarding and treating employees as partners in the business. The structure of Starbucks is one of geographical business units that allow Starbucks to enter into any market and achieve the think local, act local expansion strategy. Starbucks is able to leverage its resources, tangible and intangible, to create competitive capabilities and core competencies that allow for strategy execution. Starbucks achieves this by utilizing its human capital and expertise to constantly strive for excellence in product innovation. Furthermore, Starbucks is able to internally fund strategic initiatives from free cash flow

7 External Analysis of Starbucks 7 produced from sound financial performance. Starbucks s financial ratios have increased over the last three years due partially to a recovered general economy and partially to the return of Howard Schultz to the leadership position in the company. These financial ratio increases have positioned Starbucks in a greater financial situation. The SWOT analysis of Starbucks will reveal that the strength of Starbucks lies within their strong financial performance based on their retail store operations. The weakness of Starbucks is an over reliance on a saturated U.S. market with a declining market share as a result from intensified rivalry in the marketplace. This weakness can be overcome by utilizing Starbucks s strong finances to realize the present opportunities to expand into emerging markets. To realize the present opportunities Starbucks will need to implement and execute two critical objectives. The first is to continue to be an industry leader in product innovation. This will serve to further differentiate Starbucks from rivals and will also open new customer bases for the new products. The second objective will be to expand globally into emerging economic markets using a franchising approach. Starbucks will be able to create revenue streams via franchise fees while the markets mature and retail revenues increase. By implementing both of these strategic objectives Starbucks will continue to be the leader in the coffee industry and further enhance its brand power and market position.

8 External Analysis of Starbucks 8 External Environmental Analysis of Starbucks and the Coffee Industry Company History Starbucks begin doing business in 1971 when three partners teamed up to create a specialty coffee roasting company in the Pikes Peak Market area in Seattle, Washington. The company was originally called Starbucks Coffee, Tea, and Spice and was founded by Jerry Baldwin, Zev Siegel, and Gordon Bowker for a startup fee of $9,050 (Thompson, Jr. & Strickland, 1999). The Starbucks name is said to be derived from the coffee- loving First Mate in Herman Melville s Moby Dick. The logo is that of a twin-tailed siren from Greek mythology lore (Starbucks, 2011). The siren, in the Homeric view, was a creature that was known to live in the seas and enchant passing sailors with their song, much like the alluring call of morning coffee fixes (Homer, 1942). Both the logo and the Pikes Peak shop carried out a nautical theme that the partners felt embraced the tradition of the early coffee trade and the romantic nature of the high seas. While all three shared a love for gourmet coffees and teas, none of the partners had much of a business background. Baldwin and Siegel were English and History teachers respectively and Bowker was a creative writer (Thompson, Jr. & Strickland, 1999). The inspiration for the business was a small coffee shop located in Berkley, California named Peet s Coffee and Tea. The business was managed and named after its Dutch immigrant proprietor Alfred Peet. Peet s would have a huge impact on the initial iteration of the Starbucks business model. Peet s started in 1966 and specialized in dark roasting coffee in the European style to bring out the full flavors of the coffee bean and teaching its loyal customer base proper techniques on how to grind and properly brew coffee. The partners had all spend considerable time in Peet s both buying product and also listening to Peet pass his expert knowledge in the benefits of bean quality and the importance of roasting to all who would listen (Thompson, Jr. &

9 External Analysis of Starbucks 9 Strickland, 1999). Peet s model was one the Starbucks would emulate in the Pikes Peak location. Starbucks would only offer whole bean coffee along with other coffee related products to its customers and not serve fresh brewed, ready to drink beverages. Initially, Starbucks would buy all of its beans from Peet s for resale to the public before buying its own roaster from a store in Holland (Thompson, Jr. & Strickland, 1999). In the beginning only Siegel was a paid employee of the company and would work the shop as the resident retail expert, while Baldwin and Bowker kept their day jobs and helped out as time would allow. Baldwin served as the bookkeeper and constantly strived to increase his knowledge of all things coffee, and Bowker s responsibilities were centered on being the magic, mystery, and romance man (Thompson, Jr. & Strickland, 1999). Starbucks would expand in the Seattle area and have four locations by the early 1980 s and never once have a non-profitable year. The strain of running the business would eventually lead to burnout with Siegel and Bowker devoted most of his focus on other outside business enterprises. Baldwin would eventually take over as CEO and manage the day-to-day functions of the company (Thompson, Jr. & Strickland, 1999). In 1981 Howard Schultz would make his first visit to Starbucks (cite). Schultz was the vice president and general manager for the US division of Hammarplast which manufactured high-end kitchen equipment and housewares (Starbucks, 2011). Schultz had noticed that Starbucks was ordering more of a certain drip coffee maker than other large clients like Macy s (Thompson, Jr. & Strickland, 1999). Schultz was immediately smitten by Starbucks operations and business culture. One author has compared this meeting and the way it changed an entire industry and corporation with that between Ray Kroc and McDonald s (Garza, 2010). Schultz was determined to work for Starbucks, and after a long negotiating process and much doubt with

10 External Analysis of Starbucks 10 the Starbucks partners, Schultz was hired as head of marketing (Thompson, Jr. & Strickland, 1999). After spending adequate time learning the coffee retail business, Schultz traveled to an international housewares expo in Milan, Italy in During this trip Schultz would visit many of the local espresso bars in the city and marvel at the business model and the simple perfection of the café latte (Thompson, Jr. & Strickland, 1999). Upon his arrival back in Seattle, Schultz felt he had a sure fire way to grow Starbucks by changing the format to an espresso bar that also sold coffee and housewares. Instead of approval and adulation, the Starbucks partners shot down the idea holding firm that they were a coffee retailer and not a restaurant or bar of any type. Schultz would take the next year to convince Baldwin on the merits of serving Italian-style coffee beverages inside of Starbucks. In 1984 Baldwin accepted, and the sixth store to open up, in downtown Seattle, would have 300 square feet of space to serve coffee. The experiment was a success and this location outperformed all of the other stores (Thompson, Jr. & Strickland, 1999). Even though Schultz could, and would, provide daily figures quantifying the validity of his argument, Baldwin was not willing to except the change in format and ultimately ruled against Schultz. In 1985, at the age of 33, Schultz decided to leave Starbucks to create his own company and business format (Ramsey, 1987). The first step would be to raise capital. Schultz connected with a corporate lawyer named Scott Greenberg who had experience in raising capital for new ventures. Schultz made presentations to 242 potential investors, most of which passed at the opportunity citing concerns that coffee consumption was on the decline or that they did not believe that consumers would be willing to pay $1.50 for a coffee beverage (Thompson, Jr. & Strickland, 1999). After raising $1.65 million dollars from 30 different investors, one of which was Starbucks, Schultz was

11 External Analysis of Starbucks 11 nearly ready. The next step would be to hire Dave Olsen who had over 10 years experience in owning and operating a coffee bar named Café Allegro (Thompson, Jr. & Strickland, 1999). Il Giornale opened two stores in Seattle in 1986, and one store in Vancouver, British Columbia in 1987 to test the expansion capabilities of the business model outside of Seattle (Ramsey, 1987). Also in 1987, the remaining partners of Starbucks had decided that they were done with the company and wanted to divest themselves and sell off the business. Schultz saw the opportunity and made a successful bid. Starbucks Coffee, Tea, and Spice and Il Giornale would become one business and be named Starbucks Corporation with Schultz as the CEO and president (Starbucks, 2011). Beginning in 1987, Schultz unveiled an aggressive 5-year plan to open 125 stores in new, large downtown markets with projected revenues in 1992 at $60 million dollars (Thompson, Jr. & Strickland, 1999). The next market outside of Seattle would be Chicago with Portland, Los Angeles, and San Francisco coming right after. Starbucks would open 150 stores, outperforming the 125 store projection, in the five years even though many of the years in this period Starbucks reported losses (Thompson, Jr. & Strickland, 1999). Schultz firmly believed that Starbucks had to be a great place to work in order to provide the atmosphere and service that he envisioned. During this 5-year period, Schultz launched a number of initiatives to accomplish this objective. In 1988 Starbucks decided it would offer all employees that worked more than 20 hours per week the same benefits that full-time employees received (Starbucks, 2011). This later came to include full coverage to terminally ill employees no longer able to work until government benefits took over or the death occurred. Starting in 1991, Starbucks began offering employee stock options to all employees, and in 1995 would be expanded to include employee stock purchase programs (Thompson, Jr. & Strickland, 1999).

12 External Analysis of Starbucks 12 The next major step forward for Starbucks was the initial public offering (IPO) held in June The success of the IPO enabled Starbucks to unveil an even more aggressive expansion plan. Starbucks would target a large, demographically favorable region that would fit into existing company operations capabilities, and this target area would serve as a hub that would spawn many more satellite locations feeding off of the hub (Thompson, Jr. & Strickland, 1999). The strategy was a success allowing for: 677 locations open in 1995, 3,501 locations open in 2000, and 16, 858 locations open in 2010 (Starbucks, 2011) Background Starbucks continues to change and innovate in the coffee industry. Over the last five years Starbucks has continued to be successful firm in spite of pressures from economic realities and competitors. Starbucks succeeds on three main fronts: financially, strategically, and competitively. Table 1 on page 10 expresses the revenues and the percent change in revenues as compared to the previous year for the last five full years: Table 1: Starbucks Revenue Trends Year Total Revenues Change in Revenues 2006 $7.8 Billion 22% 2007 $9.4 Billion 21% 2008 $10.4 Billion 10% 2009 $9.8 Billion -6%

13 External Analysis of Starbucks $10.7 Billion 10% Source: Starbucks, 2011 With the exception of 2009, Starbucks has outperformed the previous year with at least a 10% increase in total revenues. Starbucks was affected, like most of the global economy, by the 2009 economic slowdown and posted a decrease in revenues by 6%. The revenues did increase for 2010 and the total revenues of $10.7 Billion dollars is an all-time high (Starbucks, 2011). Over the last five years Starbucks has continued its strategy of aggressive expansion in metropolitan US markets as well as rapid growth into international markets. As of 2010, the total store locations are up to 16,858 with 11,131 domestic and 5,727 stores internationally. In 2006 Starbucks had 12,440 total stores; this is over a 4,400 location net increase in a five year period (Starbucks, 2011). Starbucks also continues to market and grow the Starbucks card through cross promotions and in-store marketing. In the first quarter of 2006, Starbucks card new card sales and card reloads amounted to $333,500,000, while in the first quarter of 2011 card revenues accounted for $703,000,000 in sales (Starbucks, 2011). One of the latest strategic moves that Starbucks has undertaken is a Memorandum of Understanding (MoU) with Tata Coffee Limited from India. This MoU will give Starbucks a foot into the proverbial door of the India coffee market, both to purchase Arabica beans and to serve coffee beverages to the Indian market through retail outlets and restaurant and hotel collaboration (Starbucks, 2011). Competitively, Starbucks continues to innovate and bring to market new product offerings each quarter. This includes products like flavored VIA ready brew coffee, hot artesian sandwiches, hot breakfast options, and Vivanno smoothies (Starbucks, 2011). Starbucks also continues to be an employee friendly company as evidenced by selection as a top company to

14 External Analysis of Starbucks 14 work for by Fortune for the last five years (Fortune, 2011). Keeping a committed and enthusiastic staff has allowed Starbucks to maintain a relatively low turnover rate and maintain high levels of customer service (Thompson, Jr. & Strickland, 1999). Starbucks also continues to search out new opportunities to expand brand awareness. In January 2011, Starbucks announced a cross promotion with Courtesy Products to place and stock Starbucks single serve coffee in over 500,000 luxury and premium hotels (Starbucks, 2011) Purpose of This Study The purpose of this study is to engage in an external analysis of the coffee industry to examine how the external market affects Starbucks Corporation and to answer seven critical questions on the coffee industry and the competitive environment that Starbucks works in (Gamble & Thompson, Jr., 2011). These questions are: 1. What are the industry s economic characteristics? 2. What are the types and relative strength of the economic forces that industry members face? 3. What are the industry driving forces and how do these driving forces act on the industry? 4. What positions in the market do rivals occupy? 5. What strategic moves are rivals willing and able to make? 6. What are the Key Success Factors for successful competition? 7. Does the industry offer good prospects for profitability? The answer for these questions will lead into future work of an internal analysis of Starbucks as an organization and also allow for the author to make strategic recommendations to Starbucks on the coffee industry. The information for this study will come from academic and financial

15 External Analysis of Starbucks 15 resources including company websites, financial analysis websites, news releases, academic journals, and government filed reports External Analysis The external analysis is divided into two main components. These components are the general environmental analysis and the industry analysis. Collectively these are the external analysis and through exploration and examination can explain the competitive environment of the industry where the company operates in an attempt to make profits. The external analysis always focuses on the industry and not the individual firm. Diagram 1 on page 16 shows the two major components that comprise the external environment of the coffee industry. The Macroenvironment is the focus of the general environmental analysis and is comprised of the outer five segments. The inner ring is considered to be the industry analysis and consists of Porter s Five Forces which act individually and collectively on the company.

16 External Analysis of Starbucks 16 Diagram 1: The Components of a Coffee Firm s Macroenvironment Source: Gamble & Thompson, Jr., General Environmental Analysis The general environmental analysis consists of the outer ring of the Macroenvironment and the five main segments. The segments are comprised of: general economic conditions (economic), legislative and regulations (political/legal), societal values and lifestyle (sociocultural), technology (technological), and population demographics (demographic) (Gamble & Thompson, Jr., 2011). The general environmental analysis has also been referred to as a PEST or PESTEL analysis (Oxford University Press, 2007) Demographic Segment The demographic segment of the coffee industry is involved with the population segments and characteristics of the consumers that purchase product from firms in the industry. These characteristics include age, race, gender, income, and education. These characteristics

17 External Analysis of Starbucks 17 affect the tastes and buying habits of the industry s consumer base. Coffee drinkers over age 59 have different preferences than the ages demographic. Also, the amount of coffee consumed and the times of day for consumption vary with demographic characteristics (National Coffee Association of the USA, Inc., 2008). The coffee industry will continue to innovate product offerings in an attempt to gain large demographic market shares of the different classes of consumers. This will be done by changing the preferences of targeted demographics like increasing gourmet coffee consumption in mature customers or by expanding into untapped coffee markets like Chinese tea drinkers. The coffee industry demographics segment can be visualized by table 2 on page 17. Table 2: Tracking Measures of Coffee Demographics By Type of Coffee Daily, weekly, annual 50-year trending By Age Daily, weekly, annual By coffee type Total, Traditional, Gourmet By Region Total, Traditional, Gourmet By Time of Day By coffee type Driver and Barriers Consumer attitudes By age Health messages Key Driver Analysis Coffee Origins/Certifications Country associations Certification awareness Additives and Flavorings Breakout of additives by type and by age

18 External Analysis of Starbucks 18 By age By location and share of cups By Location In-home vs. out-of-home By age Consumer flavor preferences, added and pre-flavored Consumer Profiles Demographics, traditional vs.gourmet drinkers Gourmet drinkers over time Non-drinkers By share of cups Source: NCA Market Research Economic Segment The economic segment is characterized by the general economic conditions in the noncontrollable environment that the coffee industry operates in. The most notable factor is the recent global economic recession of 2008 and The recession affected both businesses with rising operational costs and lower profit margins, and consumers of the products that have seen product prices rise while wages remain the same and unemployment levels increase (Bureau of Labor Statistics, 2011). The outlook is improving and as confidence grows, the global economy will improve (World Bank, 2010). The coffee industry competes on two levels, the undifferentiated traditional coffee offering and gourmet, Italian-style coffee beverages. By offering both lower cost coffee options to fringe customers and higher cost options to more affluent clientele, the coffee industry will attempt to serve coffee to all that want or need it. In 2008 during the economic crisis as consumers were making severe spending cutbacks, coffee drinkers in the US still drank the same amount of coffee, 3.3 cups per day on average, but simply opted for the lower cost options (Moreno, 2008).

19 External Analysis of Starbucks Political/Legal Segment The coffee industry faces many types of political and legal pressures in the Macroenvironment. Coffee firms import coffee beans from a variety of countries, each with their own respective customs and tariff regulations. On an international scale, these firms must gain expertise on how to import beans from each different country and keep detailed tabs on political upheavals, changes to policies, and be fearful of foreign government seizing company assets. On the legal front, firms must file for all necessary forms and permits to be authorized to do business. This includes tax forms, business entity applications, legal contracts, store and factory leases, etc. The local and federal governments will also dictate certain laws and regulations onto the businesses. These include labor laws, food handling regulations, and business practices restrictions as in the arena of marketing and advertising Socio-Cultural Segment The socio-cultural element focuses on how the consumers exert forces on the industry and how the firms do business. As the consumer outcry for fair practices have grown and evolved, so to have many of the firms operating practices (Northey, 2007). Starbucks implemented a C.A.F.E. program to address concerns about the social responsibility of the industry to perpetuate sustainability of coffee bean growers. The C.A.F.E. program looks establish quality criteria and share responsibility throughout the supply chain (ICO, 2011). Other firms use third party certifications in an effort to be more social responsible and will label their product as a badge of honor. These social responsible accepted labels include the Fair-trade Certificate, The Rainforest Alliance certification, and the Organic certification (ICO, 2011).

20 External Analysis of Starbucks 20 As consumers become increasing more educated and health conscious, the industry must constantly monitor the environment and adapt product offerings to meet demand. Although companies like Starbucks initially resisted using anything other than whole-milk in coffee beverage preparation, they eventually gave in to pressure and adopted 2% milk as the standard and also offer non-fat milk as well (Thompson, Jr. & Strickland, 1999). The next big issue on the consumer health watch radar is sugar intake (Wall Street Journal, 2009). Given this pressure, industry producers will need to either reduce sugar levels in beverages and food offerings, or come up with new product that will satisfy the consumer both nutritiously and flavor-wise Technological Segment The technological area of the Macroenvironment is a major factor in the coffee industry. The main influences in this portion of the environment are technology as it relates to customer interaction to the business, product innovation and product service, and customer ambience. Customers interact with the industry in a number of ways. Technological improvements allow for firms to directly market new product offerings to consumers by way of text messages, s, and social network sites (Buckstein, 2010). Technology is readily available to all firms in the industry for relatively lower cost than traditional advertising. Industry firm Dunkin Donuts has experimented with on-counter digital billboards that advertise messages to drive customers back to the store for same day purchases (Steel, 2008). Product innovation is another important aspect of the technology segment. Firms must strive to keep pace with customer tastes and rivals. Technology allows for changes to product mix to compete in new market segments like Starbuck s VIA ready brew offering (Starbucks, 2011). Technology also improves the way firms can produce product through new machines and

21 External Analysis of Starbucks 21 more efficient processes which will lead to improved service to the end consumer. The companies that stay on the cutting edge with process and equipment, like bean roasters and brewing machines, will have an advantage. The industry is also influenced to utilize technology to improve the overall customer experience. This includes the use of Wi-Fi internet capability services as a draw to customers that can utilize the technology for business or personal purposes (Oliviera, 2011). Keeping customers in store for longer periods of time will result in more sales Global Segment The global segment of the Macroenvironment centers on the prospects of coffee firms operating on a global scale. The coffee comes from various parts of the world and in varying types and qualities. The most popular coffee types are Arabica, Robusta, or Liberica bean and are grown primarily in Africa, Central America, and South America (ICO, 2011). The global segment also refers to the quantity of coffee drinkers across the globe. On a global scale, the demographic characteristics will vary as well. The coffee industry sees this as an opportunity to increase market share as it has previously in the US market. The prime example of this is Starbucks introducing gourmet, Italian-style coffee beverages to the domestic populace (Thompson, Jr. & Strickland, 1999). The coffee industry has recently made headway into converting tea drinkers in the United Kingdom to gourmet coffee offerings (Bell, 2005). Multinational coffee houses like Gloria Jeans and Starbucks have targeted Russia and its growing capitalist economy for retail store expansion (Reuters, 2008). Furthermore, coffee giant Starbucks has set its sights on the one billion plus Chinese tea drinkers, and looks to change preferences to gourmet coffee beverages (Adamy, 2006).

22 External Analysis of Starbucks Summary of General Environmental Analysis The coffee industry will continue to look for and find ways to increase to demographic that it services. This will be done with continued product innovation and increased product offerings to fit the consumer s demand. The industry will also continue to expand globally into new markets to attract a larger number of customers. The stabilization and improvement of the global economic condition will lead to an increase of gourmet beverage consumption among fringe consumers. Also, the competing firms must continue to be ever vigilant and monitor the global political landscape that affects coffee trade viability, retail markets, and sustainability efforts in social responsibility to all users of the value chain Driving Forces Driving forces are defined as change agents that have the biggest influence in reshaping the industry landscape and altering competitive conditions (Gamble & Thompson, Jr., 2011). There are three components to the analysis of industry driving forces. The first is to identify what the three to four most influencing forces are. These are referred to as the industry s determinant driving forces. The second step is to assess how the determinant driving forces individually and collectively act upon the industry. The final step is to determine strategy changes that the industry will need to make in order to counterbalance the effect of the determinant driving forces (Gamble & Thompson, Jr., 2011). The first step is to identify the four major industry driving forces. There are thirteen forces that are generally believed to affect any given industry, however on average only three to four will be able to be considered as determinant driving forces (Gamble & Thompson, Jr., 2011). The four determinant driving forces for the coffee industry are: product innovation,

23 External Analysis of Starbucks 23 changing societal concerns, attitudes and lifestyles, growing buyer preference for differentiated products, and increasing globalization. The first driving force is product innovation. The industry must continuously strive to innovate new product offerings for two reasons: to continue to attract new customers that do not buy from the current product mix and to offer differentiated products from rival firms. The industry needs to listen to its customer base as they are one half of the product innovation equation. The customers know what they want and will sound off by making current items popular and successful or by giving in-store or online feedback as to what products and services they would like. Overall this driving force has a positive effect on the industry as it forces firms to lead follow or get out of the way. The successful firm will be one that is able to continuously bring new, successful products to market. The second driving force is changing societal concerns, attitudes, and lifestyles. As discussed previously, societal changes related to the coffee industry center on two major topics. These are the trends that consumers are increasingly demanding healthy alternatives to full-fat, high-sugar coffee drinks, and the growing concern on the addictive properties of coffee and how long term coffee consumption may affect health (Laitala, Kaprio, & Silventoinen, 2008). The coffee industry has responded over the years as consumers have demanded healthy alternatives. In most coffee houses the customer will be able to choose between whole milk and non-fat milk, with or without whipped cream, and caffeine or decaf. Recent studies have shown that moderate coffee consumption can have health benefits like reducing the risks of common ailments like: men s prostate cancer, stroke, Alzheimer's, dementia, Parkinson's, endometrial cancer, colon cancer and gallstones (Washington Post, 2009). This driving force acts on the industry in a positive manner as it forces firms to bring new, desirable products to market which will result in

24 External Analysis of Starbucks 24 additional sales and revenues. Also, the industry can now choose from multiple studies to show that their product is actually beneficial. These studies would not have been done if not for this driving force and concerns on how coffee affects the consumers. The third driving force is growing buyer preference for differentiated products. This force acts on the industry to require firms to continually stay in touch with buyer demand. If every coffeehouse offered the same product mix then consumers would simply go to the closest store for their purchases. By differentiating products, customers will travel to a certain firm or even a certain location of that firm to get their favorite products. Differentiation is a business strategy to give firms a competitive advantage (Gamble & Thompson, Jr., 2011). In this aspect differentiation of product is required to be an industry leader. This driving force acts upon the industry in a negative way. Firms must have considerable industry expertise and know how to develop new products. Also, large amounts of capital will be required to develop, design, market, and produce new products in the industry. The final determinant driving force is globalization. Globalization as a force acts to open new markets and new consumers to firms in the industry. Once firms have adequately reached a critical mass in a country or region, they must seek new opportunities to continue to grow their business. The face and definition of how companies will act as globalization evolves is subject to debate, but firms will need to continue to grow across the globe to increase revenue production (Laudicina, 2010). Firms in the coffee industry will view increased globalization as a way to increase market share by changing consumer preferences (Bell, 2005) or by expanding into new untapped markets (Adamy, 2006). This force acts on the industry in a strong positive manner as continued increases in globalization allow for continued increases in opportunities by way of market expansion.

25 External Analysis of Starbucks 25 The collective push of the driving forces is in a positive direction. The lone negative push comes from firms in the industry that are not creative or innovative and are relegated to follower or generic low cost provider status in the industry. Diagram 2 shows the net affect that the determinant driving forces have on the coffee industry: Diagram 2: Effect of Driving Forces on the Coffee Industry Positive Driving Forces Negative Driving Forces Globalization Product Differentiation Societal Concerns Coffee Industry, 2011 Product Innovation Source: Harold Brown, Industry Analysis In the United States, approximately 150 million consumers purchase and drink coffee beverages with 89% opting to brew coffee at home rather than purchase premade products from retailers and coffee houses (Gamble & Thompson, Jr., 2011). The average coffee drinker consumes 3.3 cups of coffee per day (Moreno, 2008). The amount of coffee that is consumed has lead way to an increase in firms offering prepackaged coffee in retail locations and large super market chains. The prepackaged coffee producers include lower cost options like Folgers and Maxwell House, store brand alternatives like Archer Farms (Target) or Café Ole (HEB), and premium brands like Starbucks and Seattle s Best. Since the 1990 s, when Howard Schultz

26 External Analysis of Starbucks 26 brought the idea and concept of an Italian Espresso bar to the United States, specialty coffee sales have grown to 20% of industry revenues. The specialty coffee market has grown to over $13.5 billion at an average annual growth rate of 32% between 2000 and 2007 (Gamble & Thompson, Jr., 2011) Description of the Industry The coffee industry is comprised of three main segments. The first segment is the coffee and tea roasting and manufacturing segment. The second segment is the ground and instant coffee segment through retail and supermarket locations. The final segment is the coffee house espresso bar and quick service food establishment segment Industry Dominant Economic Features The dominant economic features of the coffee industry are characterized by ten general economic characteristics. The predominant characteristics are market size and market growth rate. Diagram 3 on page 27 outlines all ten dominant economic features.

27 External Analysis of Starbucks 27 Diagram 3: Coffee Industry Dominant Economic Features Coffee Industry Market size Number of rivals Scope of rivalry Number of buyers Differentiation Product innovation Demand-Supply Technological change Vertical integration Economies of scale Learning curves Source: Gamble and Thompson, Market Size The coffee industry is a sub-section of the hot drinks industry as defined by Datamonitor, which also includes the tea industry as well (Datamonitor, 2010). The global hot drinks market size was $81,432 million dollars for 2009 with a global volume of 5,374 million kilogram output. The United States share of the hot drinks market for 2009 was $10,834 million dollars and 794 million kilograms (Datamonitor, 2010). Coffee accounts for 54.2% of total global hot drink consumption, while the United States has a 68.7% of hot drinks as coffee. Europe is the leading consumers of hot drinks at 44.6% of total consumption, while Americans gulp down 14.2% of the world s hot drinks (Datamonitor, 2010).

28 External Analysis of Starbucks Market Growth Rate The market growth rate for the hot drink industry still shows expected increases. Over the last five years both the global market and US market have grown at a fairly consistent clip each year (Datamonitor, 2010). The growth prospects are centered around firms being able to innovate new products and for firms to expand globally and capture new emerging markets. The following tables (tables 3-7, on pages 28 to 29) show the trends in the growth rate of industry revenues and industry production: Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio09 Global Hot Drinks Market Value Year $ in Millions % Growth , , % , % , % , % CAGR % source: Datamonitor Table 4: Global Hot Drink Data for Coffee Industry Global Hot Drinks Market Volume Year Million Kilograms % Growth , , % , % , % , %

29 External Analysis of Starbucks 29 CAGR % Source: Datamonitor Table 5: U.S. Hot Drink Data for Coffee Industry United States Hot Drinks Market Value Year $ in Millions % Growth , , % , % , % , % CAGR % source: Datamonitor Table 6: U.S. Hot Drink Data for Coffee Industry United States Hot Drinks Market Volume Year Million Kilograms % Growth % % % % CAGR % source: Datamonitor

30 External Analysis of Starbucks Industry Trends The industry trends refer to the remaining eight dominant economic features of the industry. The number of rivals characteristic focuses on whether the industry is fragmented into many small companies or if it is dominated by a few large companies (Gamble & Thompson, Jr., 2011). The global landscape is much different than the US landscape as far as industry rivals. The global market is considered to be fragmented with the top three firms having only 22.9% of the total market, while the US market is considered to be trending towards consolidation with the top three firms having 59.4% of the market volume (Datamonitor, 2010). The scope of rivalry among competitors is global with the top market holding companies. These companies offer products to all countries and regions throughout the world. The main distribution channel both globally and in the US are the hypermarket and supermarket chains (Datamonitor, 2010). The key buyers in the hot drinks market are the retailers of hot drinks products. These include the specialty coffee houses, the hyper and supermarkets, and restaurant chains. The primary buyers are the hyper and supermarkets which account of 80.4% of the market (Datamonitor, 2010). With such a large share of the market resting with a few large market chains, the number of buyers should be considered as consolidated. On the other side of the equation are the suppliers. These are the growers of tea leaves, coffee beans, and cocoa beans. Demand has continued to steadily increase over the last five years and prices have not fallen, therefore there is not a surplus of capacity pushing prices and profits down. Product innovation is key economic characteristic as does the pace of technological change. Being a leader in product innovation will lead to stronger brand power and increased customer satisfaction. Giving the customers what they want will also lead to increased revenues. The firms that keep up with improvements in technology can utilize these new efficiencies to

31 External Analysis of Starbucks 31 improve portions of the supply chain and reduce drag to the value chain. Some firms are experimenting with direct digital advertisement in stores, Wi-Fi enabled environments, social networking as a marketing medium, and even mobile apps for handheld devices that will make ordering and purchasing of product faster and more convenient (Starbucks, 2011). Two other economic characteristics play a considerable role. The economies of scale that the large multinational firms possess act as a barrier of entry to new entrants. These large firms enjoy a cost advantage over small firms and also possess an advantage in supply chain activities (Datamonitor, 2010). Certain large retail firms enjoy a significant advantage in learning and experience curve effects. One firm, Starbucks, has a competitive advantage over rivals based on their considerable ability to select, design, and market new locations in key demographic areas (Thompson, Jr. & Strickland, 1999) Five Forces Analysis One of the widely held assessment tools of an industry s competitive forces is the fiveforces model of competition created by Michael Porter (Gamble & Thompson, Jr., 2011). These five forces are: the competitive force of buyer bargaining power, the competitive force of substitute product, the competitive force of supplier bargaining power the competitive force of potential new entrants, and the competitive force of rivalry among sellers (Porter, 1980). Diagram 3 on page 32 illustrates the five competitive forces in the coffee industry model.

32 External Analysis of Starbucks 32 Diagram 3: Five Competitive Forces in the Coffee Industry Substitutes WEAK Suppliers MODERATE Rivalry among Competing Sellers STRONG Buyers MODERATE New Entrants MODERATE Source: Harold Brown, Threat of New Entrants According to Datamonitor s 2010 Hot Drinks industry report, the threat of new entrants into the coffee industry is an average force. This is based on negligible switching costs for consumers to purchase new product or lower priced product from competitors and easy access to pre-existing distribution channels and suppliers, with very little regulation, act to strengthen the forces and make the industry attractive to potential entrants. These forces are offset by brand loyalty of established firms that also enjoy economies of scale that will be hard for new firms to initially compete with. Also, established firms have high product innovation that will make it hard for new firms to differentiate themselves. As these forces oppose each other, the net result is threat of new entrants is moderate (Datamonitor, 2010).

33 External Analysis of Starbucks Power of Suppliers The major suppliers to the industry are countries from Africa, South America, and Asia. This is due to the fact that tea leaves and coffee beans must be grown in a certain climate. As such, many of these supplying regions are lower economic countries. This coupled with the amount of independent growers and undifferentiated quality of the product weakens the power of the suppliers. Coffee beans are a commodity product and coffee prices are dictated by supply and demand. The power of suppliers is also deemed to be moderate (Datamonitor, 2010) Power of Buyers The large hyper and supermarkets account for 80.4% of coffee and tea purchased in the United States. These large chains have considerable price negotiating power as a buyer based on the quantity of product they buy and the ability to shelve competing brands. Some product differentiation exists based on brand power, quality, and taste which forces retailers to stock the product choices that consumers are looking for even if it is more costly. In this aspect buyer s power is reduced. The net power of the buyers is considered to be moderate (Datamonitor, 2010) Power of Substitutes The hot drinks consumption patterns of most countries are dictated by culture and customs. This phenomenon greatly reduces the pressures form substitute products. Some consumers may opt for caffeine intake from soft drinks or energy drinks, but the sheer number of coffee and tea drinkers globally will minimize the financial impact on consumers changing to substitutes. The threat of substitutes is considered to be very weak in this industry (Datamonitor, 2010).

34 External Analysis of Starbucks Intensity of Rivalry Rivalry intensification has increased due to the continual introduction of new products into the market, and moves to differentiate products based on selection, service, and quality (Gamble & Thompson, Jr., 2011). As the economic downturn affect high-end coffee establishments and sales growth became consistent but slow, the rivalry further intensified (Moreno, 2008). Finally, the ability for consumers to switch products and firms with no barrier has forced the competing companies in the industry to stress brand image and quality to steal rival s market share. The intensity of rivalry is very high in the coffee industry Summary of Industry Analysis As a general guideline, the stronger the collective amount of pressure the industry feels from the five forces, the lower the expected profits will be industry wide (Gamble & Thompson, Jr., 2011). The coffee industry faces very strong pressures from the intensity of rivals but relatively weak pressures from the threat of substitute products. The other three forces are characterized as moderate. Overall, the collective impact of the five forces is moderate. Firms that operate in the industry efficiently and effectively can make above average profits, but new or inefficient firms will struggle or be forced out by the five forces Competition Analysis Competition in the coffee industry can be broken down into two different categories, direct and indirect competition. The direct competition would include firms that manufacture and product hot drinks (Datamonitor, 2010). These firms will be retailers of ready-to-drink coffee and tea products, quick service restaurants, and supermarkets. Also, in this category are the large multinational companies that produce ground coffees and instant coffees (Datamonitor,

35 External Analysis of Starbucks ). The indirect competitors are comprised of energy drinks, caffeinated soft drinks, and energy shots Industry Competitors Competitive strategy will aim to position rival companies into strategic groups. These strategic groups consist of industry members that have similar goals and positions in the competitive industry (Gamble & Thompson, Jr., 2011). These groups are placed on a strategic group map for analysis on how industry firms are positioned. Firms in the coffee industry will be mapped based on price and quality of their products versus product line breadth. The size of the circle representing each firm on the strategic group map is symbolic proportional to the size of the firm s share of total group revenues (Gamble & Thompson, Jr., 2011). The major direct competitors in the coffee industry are listed in the following table. The firms are broken down by breadth of products offered to the market, industry related sales, and percentage of sales relative to rivals. The data listed in table 7 are used in constructing the strategic group map (diagram 4, page 36). Table 7: Direct Competitors to Starbucks Firm Product line Breadth Revenues (2010) in Millions % of Total Group Revenues Starbucks High 10,707 27% Dunkin Donuts Moderate 5,500 14% McDonald's Moderate 2,400 6% Green Mountain Coffee Roasters Low 803 2% Kraft Foods, Inc. Low 3,100 8% Nestle S.A. Low 17,700 44% Source: Harold Brown 2011

36 External Analysis of Starbucks 36 Diagram 4: Strategic Group Map of Coffee Industry High Pri ce /Q ua lit y of P Kraft Green Mountain Nestle McD s Dunkin Donuts Starbucks Low Few Products Product Line Breadth Source: Harold Brown 2011 Many Products Rivals Anticipated Strategic Moves Starbucks will focus on strategic moves as outlined previously by expanding into global locations like China and Russia, utilize cross-platform marketing with companies in the Indian Hotel market to increase brand awareness, and further incorporate new technology into customer experience. One of Starbuck s stiffest rivals is Dunkin Donuts. Following in Starbuck s footsteps, Dunkin Donuts will look to expand globally, especially in the Asian markets. Dunkin Donuts has set a goal of 100 locations in 10 years in Shanghai alone. The expansion will also include

37 External Analysis of Starbucks 37 parts of the United States that have yet to become saturated with Dunkin Donuts yet. Many of the older stores will be getting face lifts to incorporate a new design theme that will enable better use of new, advanced equipment and technology to enhance the customer experience (Dunkin Donuts, 2011) McDonald s will continue its 2009 strategy of competing against Starbucks through expansion of McCafe locations into more stores both domestically and internationally. McDonald s has a cost advantage over Starbucks in the sense that they can go into existing McDonald s for one-third of the price that it would cost Starbucks to open a new location (Liu, 2009). McDonald s will also need to counter the new aggressiveness of Dunkin Donuts, which shares a similar market position based on product offerings and price. One way McDonald s could improve their strategic position would be to sell their coffee prepackaged in stores and supermarkets. Both Starbucks and Dunkin Donuts offer this option, as do large food conglomerates like Kraft and Nestle. This is currently the subject of a Facebook campaign (Facebook, 2011) Summary of Competitive Analysis The main question to answer here is whether the coffee industry offers good prospects for attractive profits. The industry will not offer the same attractiveness for all competing firms and the analysis will be focused on one firm (Gamble & Thompson, Jr., 2011). For the purposes of this paper the firm to focus on will be Starbucks. The above sections have answered the major points in addressing this question. The coffee industry is in a slow growth phase which will intensify competitive pressures. Competition will continue to grow stronger as firms look to

38 External Analysis of Starbucks 38 expand globally to discover new markets and new customers, develop new products to bring to market to satisfy consumer demand, and further differentiate products and quality. The determinant driving forces of the coffee industry all play favorably well to Starbucks. Starbucks has long sought out global markets and continues to expand each year. Also, Starbucks utilizes technology extremely well as evidenced by their heavy use of internet capabilities, social network marketing, Starbucks rechargeable payment cards, and even new mobile apps to speed ease and ability of payment and ordering. Starbucks is also an industry leader in both product innovation and product offerings. Most other firms take a follower position and simply copy successful Starbucks products at lower prices. This positions Starbucks well in the industry. The strategic group map shows Starbucks as the leader in both price/quality of product offerings as well as the breadth of products offered. The white space on the map is possible openings for new firms or areas where existing firms can move into. These would be a high priced, low breadth offering positions, or a low cost, high breadth offering position Key Success Factors An industry s key success factors (KSFs) are those factors that affect industry member s ability to successfully compete in the market place. The KSFs are strategy elements, product features, competitive capabilities, or other intangible assets that deeply affect future success. These factors are extremely important to all firms in the industry and failure to devote proper attention will increase the risk of a firms exit from the industry (Gamble & Thompson, Jr., 2011). The coffee industry faces six common KSFs (as displayed in diagram 5, page 39) that are applicable to the success of each competing firm (Gamble & Thompson, Jr., 2011).

39 External Analysis of Starbucks 39 Diagram 5: Key Success Factors for Survival in the Coffee Industry Technology KSFs Service KSFs Distribution KSFs Marketing KSFs Skills and Capability KSFs Other KSFs Internet use for marketing Mobile communication apps Quality control know how Customer service ability Strong network of distributors/suppliers Internet and retail store sales capabilities Breadth of product line Well known and respected brand name Product innovation capabilities Courteous, personilized customer service Convenient locations Ability to capture new market segments Source: Harold Brown, 2011 As previously discussed in prior sections, product innovation, breadth of product line, brand power, and the ability to put product into convenient locations for the consumers are the key success factors for the coffee industry. The firms that can do these KSFs well will compete at the highest level and have an advantage over all other firms in the industry Internal Analysis The internal analysis is where the strategic analysis changes from an evaluation of the coffee industry as a whole (external analysis) to a focused evaluation specifically aimed at Starbucks and their organization. The internal analysis evaluates Starbuck s collection of

40 External Analysis of Starbucks 40 valuable resources and capabilities, its cost position in relation to rival firms, and its competitive strength in the market (Gamble & Thompson, Jr., 2011). The internal analysis of Starbucks will consist of an organizational analysis utilizing a modified 7S framework, an analysis of Starbuck s resources, a financial analysis of Starbuck s financial performance, and a SWOT analysis of Starbucks Organizational Analysis The primary purpose of organizational analysis is to analyze the current state of the entire organization s operational and structural framework (uslegal.com, 2011). For the purpose of this report, the McKinsey 7S framework model will be modified to cover six elements instead of seven. This type of framework modeling is one of the most common methods to conduct an organizational analysis. The McKinsey 7S was developed in the early 1980s by Tom Peters and Robert Waterman, and the basic premise of the model is that there are seven internal aspects of an organization that need to be in sync with each other if success is to be reached ( 2011). The six internal aspects involved with the organizational analysis of Starbucks are the corporate mission, the products and services, leadership, organizational culture, structure, and strategy. The framework can best be used to determine how to implement a chosen strategy since this organizational analysis serves to answer the question of where is the company going? ( 2011). The visual representation of the Starbucks framework consists of six interconnected elements. The organizational culture element is in the center of the framework because this is the central culture and values of Starbucks and why the company was founded. All other elements rely on the organizational culture for definition

41 External Analysis of Starbucks 41 ( 2011). Diagram 6 on page 41 is a model of the full organizational analysis framework of Starbucks. Diagram 6: Organizational Analysis Framework Model of Starbucks Strategy Structure Organizational Culture Corporate Missionure Leadership Products and Services Source: Harold Brown, Corporate Mission The corporate mission of Starbucks, along with their vision statement and business model reside are key factors in determining where Starbucks wants to go as an organization (Gamble & Thompson, Jr., 2011). The corporate mission statement of Starbucks is based on their present business scope and purpose, unlike the vision statement which outlays the future strategic course, and answers for the public who they are, what they do, and why they do it (Gamble & Thompson, Jr., 2011).

42 External Analysis of Starbucks 42 The Starbucks mission statement is concise and clear and does a good job of answering who they are, what they do, and why they do it. The Starbucks mission statement is: Our mission: to inspire and nurture the human spirit one person, one cup and one neighborhood at a time. - ( 2011) Starbucks achieves to deliver on their mission through execution of five core principles: Our Coffee, Our Partners, Our Customers, Our Stores, Our Neighborhood, and Our Shareholders ( 2011) The Our Coffee principle refers to how strongly Starbucks feels about the quality of coffee that they serve their customers. This is a two-sided equation that involves not only quality to the end consumer, but also to purchase the coffee beans in an ethical manner that will improve the lives of the farmers that grow them ( 2011). The Our Partners principle refers to how important Starbucks views their employees as a critical resource and asset to its operations. By treating the employees as partners both the company and employees win ( 2011). The Our Customers principle is made possible by the Our Partners principle. Starbucks is guaranteeing a perfect cup of coffee to their customers, which can only be delivered by willing engagement of the staff ( 2011). The Our Stores principle seeks to establish the Starbucks third place experience where the customers will feel a human connection and a sense of belonging ( 2011). The third place experience is how Starbucks attempts to establish itself as the third place that its customers enjoy coffee and also come to relax in a gratifying environment (Rice, 2009). The Our Neighborhood principle sets the tone for Starbucks to act as a world leader and set the standard and be a good neighbor and act in a positive manner (

43 External Analysis of Starbucks ). Starbucks utilizes the Our Shareholder principle to hold itself accountable to enrich the lives of everyone that it touches ( 2011). This is based on the Stakeholder Theory that explains that organizations are not just responsible to the shareholders of the firm, but to all of the groups that it interacts with, like employees, customers, suppliers, investors, and governments (Freeman, 1984) Products and Services The products and services that Starbucks offers is critically important to Starbucks achieving differentiation in the market by way of constant product innovation (Kelly, 2006). Starbucks currently offers more than just high quality gourmet coffee. Other products that Starbucks offers are ready-to drink cold beverages, food items, and retail merchandise (Starbucks, 2011). The primary focus of Starbucks is still high quality gourmet coffee and tea products. These products include espresso drinks, brewed coffee drinks, blended coffee with ice drinks (Frappuccino), and Tazo tea drinks (Starbucks, 2011). Images 1 through 4 on pages 43 and 44 illustrate Starbucks coffees, Frappuccino, and tea offerings. Image 1 Image 2

44 External Analysis of Starbucks 44 Image 3 Image 4 Starbucks now offers multiple ready-to-drink cold beverages like the espresso Double Shot, bottled Frappuccino, and bottled coffee. Images 5 through 6 on page 45 depict these Starbucks product offerings (Starbucks, 2011). These products are sold at Starbucks locations as well as outside retailers like grocery stores, convenience stores, and concession counters. Starbucks has also been successful in putting their own brand of ground coffee inside the big box retail grocers. This coffee is bagged as ground or in whole bean form for the consumers that will brew their own coffee at home or at work (Starbucks, 2011). The grocers now carry the VIA ready brew product as well. VIA ready brew is instant coffee that just needs hot water added to be able to enjoy the same renowned Starbucks taste virtually anywhere (Starbucks, 2010). Images 7 through 9 on page 45 display the grocery coffee offerings from Starbucks.

45 External Analysis of Starbucks 45 Image 5 Image 6 Image 7 Image 8 Image 9 Starbucks offers a wide range of food products as well as just the beverage service. These food items are breakfast sandwiches and oatmeal, lunch sandwiches, and sweets. These Sweets are a variety of cakes, cookies, and cupcakes (Starbucks, 2011). Images 10 through 15 on page 46 show a sample of the food items that Starbucks offers.

46 External Analysis of Starbucks 46 Image 10 Image 11 Image 12 Image 13 Image 14 Image 15

47 External Analysis of Starbucks 47 The primary service that Starbucks offers is its customer service to its customer base. Starbucks prides itself on its customer service and is dedicated to ensuring that each customer enjoys each trip to Starbucks (Starbucks, 2011). Starbucks lists customer service as a key principle in its corporate mission statement ( 2011). This service is paramount and as such, Starbucks recruits and hires high quality workers that fit into their corporate culture. The staff is considered partners in the organization based on how critical their job is to fulfilling exceptional customer service and allowing Starbucks to deliver its promise of quality coffee in its mission statement ( 2011). Other services that Starbucks offer are third place experience atmosphere and onsite coffee service. The third place experience is what Starbucks refers to as the third location that consumers will relax and enjoy drinking coffee beverages (Rice, 2009). This is accomplished by expert location selection, warm and inviting décor, comfortable resting areas, and friendly customer service (Rice, 2009). Starbucks also offers free Wi-Fi to everyone at its store locations to entice customers to stay longer and work or surf the web while they enjoy their products (Starbucks, 2011). Starbucks also offers companies the option of having brewed coffee service in their break rooms (Starbucks, 2011). This allows employees the option of staying on site to increase productivity by not having to leave to get their coffee Leadership Leadership is defined by using a three prong test that requires the authoritative position or office of a leader, the capacity of the individual to lead, and the actual act of leading (Merriam- Webster, 2011). The undeniable leader of Starbucks is Howard Schultz, who after an eight year hiatus returned to the CEO position and Chairman of the Board at Starbucks. Starbucks was

48 External Analysis of Starbucks 48 experiencing an economic downturn and underperforming financially. Schultz came back into the picture to save Starbucks and guide it back to a successful path (Stacy Finz, 2011). Schultz would shoulder most of the blame for the downturn since he insisted on personal accountability as a fundamental leadership value (Caliendo, 2010). Schultz would close down over 600 locations, invest in retraining each barista, and change business plans (Stacy Finz, 2011). Under Schultz s leadership Starbucks rebounded and began showing positive increases and trends in its financial performance. The leader of any organization is tasked with not only forming strategy but also with execution. As CEO and chairman, Schultz is in charge of making sure that Starbucks has a good strategic plan, staying on top of what is happening, and using pressure and corrective actions to achieve performance (Gamble & Thompson, Jr., 2011). Although Schultz maintains the positions of Chief Executive Officer, President, and Chairman of Starbucks Corporation, he is not alone in the leadership of the company. Other key executives are Cliff Burrows who is the President of Starbucks Coffee U.S., John Culver who is President of Starbucks Coffee International, Arthur Rubinfeld who is President of Global Development, Annie Young-Scrivner who is the Chief Marketing Officer, and Troy Alstead who is the Chief Financial Officer and Chief Administrative Officer (Starbucks, 2011). In the author s opinion, Starbucks may have a talented team of executives, but they failed to properly plan a strategy that fit Starbuck s situation. The rapid expansion strategy, combined with failure to adequately adapt to the economic downturn placed Starbucks in a perilous position, one in which drove Schultz out of his pseudo retirement to retake the leadership mantle (Associated Press, 2008). Schultz was able to turn the company back around with calculated strategic moves, but the team as a whole must be viewed as a weakness. Without Schultz and his

49 External Analysis of Starbucks 49 leadership capabilities, Starbucks may have turned into a disaster. It does not appear that there is a feasible succession plan in place at the moment and the future of Starbucks rest in the capable hands of Howard Schultz. Overall this is a dangerous position to occupy; one Apple knows all too well, that as goes Schultz goes Starbucks Organizational Culture A firm s organizational culture is both unique to the company and at the same time of critical intrinsic importance for the firm to be able to deliver and execute its chosen strategy. Organizational culture is defined as a company s internal work climate that is shaped by the core values, beliefs, business principles, traditions, work practices, and operating style (Gamble & Thompson, Jr., 2011). The culture of the company influences how the company conducts business and makes decisions and in a simpler viewpoint is the makeup of the firm s organizational DNA (Reid & Hubbell, 2005). Organizational culture can be divided into three broad categories: unhealthy, highperformance, and adaptive. Unhealthy corporate culture has one or more counterproductive traits that negatively impact the work climate and company performance (Kotter & Heskett, 1992). High-performance cultures are dominated by positive traits where a can-do attitude prevails in a results driven environment (Gamble & Thompson, Jr., 2011). Starbucks has an adaptive corporate culture with positive traits of internal entrepreneurship, supportive managers and employees at all levels, and a proactive approach to identify issues, evaluate options, and implement workable solutions quickly (Gamble & Thompson, Jr., 2011). This is important to Starbucks because the rivalry among competing sellers in the market has intensified with the economic recession and super-saturated U.S. coffee

50 External Analysis of Starbucks 50 market (Datamonitor, 2010). Starbucks is a leader in the coffee industry due to its ability to differentiate through product innovation. This places the competition in an inferior position as follower and lower cost provider. Starbucks succeeds because of its adaptive culture Structure There are two main types of organizational structure that most business falls under. The first is a departmental organizational structure which is appropriate for most single line of business firms. The second is a divisional organizational structure, also referred to as geographical organizational structure, that is adopted by diversified companies (Gamble & Thompson, Jr., 2011). Starbucks utilizes a divisional organizational structure, meaning that it employs dedicated people, using dedicated machines, in dedicated markets. Case in point, Starbucks has a president of its coffee division for both the U.S. market and for the international market (Starbucks, 2011). The other key facet of Starbuck s organizational structure is that they decentralize decision making. This means that Starbucks pushes down decision making to the lowest organizational level capable of making a timely, informed, competent decision (Gamble & Thompson, Jr., 2011). The danger of decentralized decision making is that the company must maintain adequate control over the actions of employees so that the business is not put in risk. Starbucks is able to maintain this control by treating employees as partners and making sure that they are treated well and taken care of ( 2011).

51 External Analysis of Starbucks Strategy A company s competitive strategy deals exclusively with the specifics of management s game plan for competing successfully through efforts to make customers happy, offensive and defensive moves to counter rivals maneuvers, its responses to prevailing market conditions, and its approach to securing a competitive advantage over rivals (Gamble & Thompson, Jr., 2011). There are considered to be five generic competitive strategies that firms can utilize to achieve their competitive strategies which are illustrated on diagram 7. Diagram 7: Five Generic Competitive Strategies Overall Low-Cost Provider Strategy Broad Differentiation Strategy Best Cost Provider Strategy Focused Low-Cost Provider Strategy Focused Differentiation Strategy Source: Harold Brown, 2011 The low-cost provider strategies entail a firm to strive to utilize lower overall costs to attract consumers and underprice rivals while a differentiation strategy requires firms to offer unique or valuable attributes in its products to entice consumers to choose their brand (Gamble & Thompson, Jr., 2011). The distinction between broad and focused strategy centers on how large or narrow the market niche of the firm intends to be in choosing target demographic segments.

52 External Analysis of Starbucks 52 The best-cost provider strategy is hybrid approach that utilizes product differentiation while maintaining a low cost position (Wyld, 2010). Of the five generic competitive strategies, Starbucks uses the broad differentiation strategy. This strategy allows for Starbucks to not focus on position in the market due to cost structure or segmentation, but due to consumer preference by way of product innovation and brand power (Grant, 2009). This allows Starbucks to reach as many potential consumers as possible with a wide range of product mix Summary of Organizational Analysis The organizational analysis aims to answer the question where are we going as an organization by evaluating key characteristics of the organization: corporate mission, products and services, leadership, organizational culture, structure, and strategy. The answer where are we going is based on how the firm sets itself up for strategy execution by leveraging the strength built into its organization. The quality of a company is judged by the symbiotic fit between its strategy and organizational structure, yet consideration is also placed on whether the firm s strategy and structure meet the demands of the external environment (Hannan, 2011). As the speed of technological change continues to grow faster and faster, and many firms seek to operate across diverse global environments, the symbiotic fit between strategy and structure become more difficult to achieve (Hannan, 2011). The Starbucks mission is to nurture the human spirit of everyone around the globe by offering the finest coffee, tea, and food products in a friendly and inviting atmosphere that serves as a home away from home. Starbucks does this through a decentralized leadership style that emphasizes lower level decision making and information sharing to promote product innovation

53 External Analysis of Starbucks 53 and customer service. The customer service is a key component to the organizational culture of rewarding and treating employees as partners in the business. The structure of Starbucks is one of geographical business units that allow Starbucks to enter into any market and achieve the think local, act local expansion strategy. Diagram 8 shows the major components of strategy execution needed for Starbucks to implement and execute its strategy. These components tie directly into how Starbucks must implement and execute its broad differentiation based strategy (Gamble & Thompson, Jr., 2011). Since there is no exact combination of strategy executing components, these six major components are specific to Starbucks and its chosen strategy (Gamble & Thompson, Jr., 2011). Diagram 8: The Six Components of Strategy Execution for Starbucks Build an organization capable of successful strategy execution Exerting strong leadership to drive executution Allowcate ample resources to critical activities Instilling corporate culture that promotes good strategy execution Action Agenda for Implementing and Executing Strategy Install systems that enable company personnel to carry out strategic roles Institute policies and procedures that facilite strategy execution Source: Harold Brown, 2011

54 External Analysis of Starbucks 54 The first component is building an organization capable of executing strategy which is accomplished staffing the organization and structuring the organization and work effort (Gamble & Thompson, Jr., 2011). Starbucks is able to hire the right people and, because of the high degree of staff competence, can push down decision making to lower levels with its decentralized leadership style (Kiviat, 2006). The second component is allocation of resources to strategy critical activities means that Starbucks must identify and obtain funding and assets needed to implement and execute strategic initiatives (Gamble & Thompson, Jr., 2011). Starbucks has the strength financial with a healthy surplus of free cash flow to fund its initiatives (Starbucks Corp, 2010). The other side of the equation is in the monitoring of allocated resources to evaluate which underperforming activities require a withdrawal of resources for the company to redistribute. Starbucks took this approach in 2008 as it closed over 600 retail stores, 5% of its locations, in an effort to boost financial performance (The Seattle Times, 2008). The third component is instituting strategy-supportive policies and procedures that facilitate strategy execution by providing guidance on how to do certain activities, enforce needed consistency, and promote an environment that encourages good strategy execution (Gamble & Thompson, Jr., 2011). At Starbucks, consistency in every brewed cup of coffee is of extreme importance and no other firm can match this capability (Cuozzo, 2008). Consistent coffee brewing and service enforces the Starbucks mission statement by allowing for excellent service and quality of product. The fourth component is installing information and operational systems that allow for Starbucks to communicate information throughout the organization to increase quality of

55 External Analysis of Starbucks 55 decisions and efficiency in value-chain activities (Gamble & Thompson, Jr., 2011). Starbucks relies on frontline employees and consumers to drive product innovation, which further enhances brand power (My Starbucks Idea, 2011). Starbucks information systems allow for this level of idea sharing and feedback. Also, the Starbucks operating system allows for Starbucks to recruit, train, and places the right employees in the right fitting locations and positions, which in turn drives service and reinforces the corporate mission and culture (Starbucks, 2011). The fifth component is instilling corporate culture that promotes superior strategy execution. The company s culture is important because it directs the firm s actions and approaches to doing business (Gamble & Thompson, Jr., 2011). Starbucks has a positive highly adaptive culture which allows for it to stay in a leadership position in the industry. The sixth component is the leadership of the strategy-execution process which requires senior managers to be diligent and adept at finding problems and issues, learning what obstacles are in the way, and then clearing the way for superior strategy execution (Gamble & Thompson, Jr., 2011). Until Howard Schultz returned as CEO in 2008, it has been argued that the leadership of Starbucks failed to execute the right strategy, and even that Starbucks had lost its soul (Williams, 2007). Starbucks is now on the right road to superior strategy execution with Schultz back at the leadership position of the organization Analysis of Firm Resources The analysis of a firm s resources seeks to answer the question what are the company s competitively important resources and capabilities (Gamble & Thompson, Jr., 2011). The firm resources analysis is composed of four elements. These elements are the tangible resources, intangible resources, capabilities, and core competencies and sustainable advantage. Many

56 External Analysis of Starbucks 56 companies pursue a resource-based strategy which attempts to exploit company resources in a manner that offers value to customers in ways rivals are unable to match (Gamble & Thompson, Jr., 2011) Tangible Resources Tangible resources are defined as any tangible good that helps the company operate, such as property or rent, machinery used in production, supplies for the final product, transportation, and overhead such as internet or electricity (Thornton, 2011). Starbucks possesses physical assets including retail location and warehouse property, coffee roasting facilities and machineries, inventory, brewing machines, and transportation equipment. All of these tangible assets are critical for Starbucks to perform its operations. Starbucks also maintains a large amount of cash and cash equivalents on its balance sheet (GlobalData, 2010) Intangible Resources Intangible resources are intangible assets that the company possesses such as brand image, goodwill or patents, or any intellectual property that the company can exploit to generate revenues or aid in achieving operational and financial objectives (Thornton, 2011). Starbucks capitalizes on intangible resources like brand power and image as a high quality provider to attain objectives. Starbucks also utilizes its immense human capital and expertise in product innovation, location selection, and marketing ability to stand out as the premier coffee brand Capabilities Management needs to consider competitive capabilities when crafting strategy. These types of capabilities include skills and specialized expertise, valuable physical assets, valuable

57 External Analysis of Starbucks 57 human assets, and competitively valuable alliances (Gamble & Thompson, Jr., 2011). Planning strategy around company capabilities helps to ensure a better fitting strategy to the company s situation and gives a better chance for successful implementation (Gamble & Thompson, Jr., 2011). Starbucks has a skill set in creating and introducing innovative products in to the market. These skills give Starbucks a competitive capability since they are able to position themselves as innovation leaders, and not copycat followers, and thus build brand power, differentiate themselves further from rivals, and improve financial performance. Starbucks can then use the free cash flow physical assets from its financial performance to fund and drive strategic initiatives. Without these physical assets, Starbucks would not be able to aggressively expand in the market or have funding to further product research and development. Starbucks can also count their collective human assets and intellectual capital as a competitive capability. The financial trends show that Starbucks is a better performing company with Howard Schultz leading the firm (Datamonitor, 2010). Starbucks also has a quality team of product designers, marketers, real estate agents, and strategy crafters that enable Starbucks to operate in the effective and efficient manner that they do Core Competencies and Sustainable Advantages Core competencies are defined as a proficiently performed internal activity that is central to a firm s strategy and competitiveness (Gamble & Thompson, Jr., 2011). The core competency is an activity that the firm performs better than other internal activities and leads to sustainable advantages. To be a sustainable advantage, the core competency must be hard to imitate or copy by rivals (Gamble & Thompson, Jr., 2011).

58 External Analysis of Starbucks 58 For Starbucks, its core competency is knowledge-based and resides in the intellectual capital of the management of the company, most notably Howard Schultz, accessed over years of defining and leading the industry. Starbucks stands out as a leader based on how it operates and is consistently able to produce new and innovative products that consumers desire. The innovation drives revenues and is not easy to match by rivals either because of capital funding required or lack of expertise. Starbucks essentially created the gourmet coffee house scene in America and has remained the leader ever since (Thompson, Jr. & Strickland, 1999) Summary of Firms Resources Starbucks is able to utilize both its tangible assets and intangible assets to create core competencies and competitive capabilities which have led to sustainable advantages in the industry. This has been done primarily with human capital and expertise which has fueled revenue growth for new strategic initiatives Financial Analysis The financial analysis of Starbucks will consist of five segments: the valuation analysis, growth analysis, profitability analysis, financial strength analysis, and management efficiency analysis. Each segment of the financial analysis of Starbucks will utilize key ratios of financial performance to evaluate and identify trends in performance Valuation Analysis For the valuation analysis, leverage ratios and other important measures of financial performance will be evaluated. Valuation analysis looks to answer the question what is something worth and is done to evaluate the potential merits of an investment or to objectively

59 External Analysis of Starbucks 59 assess the value of a business (investopedia, 2011). Table 8 lists the leverage ratios and other financial measures used to evaluate the valuation of Starbucks. Table 8: Valuation Analysis of Starbucks Market Valuation USD (mil) Price-Earnings Ratio Price/Sales 2.41 Market Cap 27,005 Source: OneSource Information Services, Inc., 2011 The price-earnings ratio is calculated by dividing the current price by the diluted earnings per share from continued operations (OneSource, 2011). A p-e ratio above 20 indicates strong investor confidence in a firm s outlook and earnings growth (Gamble & Thompson, Jr., 2011). Starbucks has a p-e ratio of which indicates strong investor confidence and growth in the future of Starbucks. The price per sales ratio is the current price divided by sales per share. Starbucks has a solid 2.41 sales per share ratio (OneSource, 2011). The market cap value is calculated by multiplying the current share price by the number of outstanding shares in the market and is used to quantify the size of a firm; in this case the market cap value of Starbucks is $27 billion dollars Growth Analysis The growth analysis looks to evaluate the trends in areas like revenues, operating income, and assets to establish trends of growth or retraction. The growth analysis for Starbucks utilizes the current year end numbers and compares them to 1-year, -year, and 5-year figures for trend evaluation. Table 9 on page 60 shows the growth ratios for Starbucks.

60 External Analysis of Starbucks 60 Table 9: Growth Analysis Ratios for Starbucks Annual 1 Year 3 Year 5 Year Year End Growth Growth Growth 3-Oct-10 Total Revenue 10, % 4.39% 10.95% Operating Income 1, % 10.43% 12.71% Basic EPS Excl Extraord Items % 12.29% 15.20% Cash from Operating Activities 1, % 8.60% 13.06% Free Cash Flow 1, % 71.44% 35.22% Total Assets 6, % 6.12% 12.69% Total Liabilities 2, % -3.95% 13.75% Total Long Term Debt % -0.04% % Source: OneSource Information Service, 2011 The key growth ratios are total revenue, operating income, and free cash flow. Total revenue represents all revenue from the company s operating activities, or day-to-day business activities, with a higher number being typically better (OneSource, 2011). The revenue has grown during the five year period with a drop in the three year point. This is when Howard Schultz returned as CEO and the one-year growth is now on par with the five-year growth after a 50% drop in the three-year period. Operating income is essentially the amount of money left over after summing the total revenue with the total operating expenses (OneSource, 2011). The higher the number here the better, and after a dip in the three-year growth, Schultz boosted the one-year growth to a very high 152% increase. The free cash flow refers to how much money that Starbucks has, free and clear of any obligations, to fund capital expenditures, acquisitions, or new strategic initiatives (Gamble & Thompson, Jr., 2011). The three-year period growth was the highest at 71%, but this is largely due to Schultz coming back as CEO and shedding underperforming stores and their respective liabilities. Still, having over $1.2 billion in free cash flow is a very strong position for Starbucks to occupy and gives them ample funding for new strategic initiatives.

61 External Analysis of Starbucks Profitability Analysis The profitability analysis focuses on the profitability ratios. These ratios are utilized to show the different margins that Starbucks is achieving based on the sales versus the expenses that it incurs. The main margin ratios are the gross margin, the operating margin, and the net profit margin. Table 10 shows the profitability margins for Starbucks for the last five years for comparison. For each of the margins listed in the table, the higher the percentage the better. This means that Starbucks is retaining more per dollar sold and less is spent on operating costs and expenses. All of the trends are moving upward after slowdowns caused percentage drops in 2008 and 2009 before Schultz returned Starbucks to the desired profitability track. Table 10: Profitability Ratio Analysis for Starbucks 3-Oct Sep Sep Sep-07 1-Oct-06 Profitability Ratios Gross Margin 25.19% 20.71% 19.19% 23.34% 24.66% Operating Margin 13.26% 5.75% 4.85% 11.20% 11.48% Pretax Margin 13.42% 5.73% 4.39% 11.22% 11.64% Net Profit Margin 8.83% 4.00% 3.04% 7.15% 7.47% Source: OneSource Information Services, Financial Strength Analysis To measure the financial strength of Starbucks, five financial objectives are evaluated. The five financial objectives to be evaluated are five year trends in total revenue, annual increases in earnings per share, percent returns on shareholder equity, bond and credit ratings, and internal cash flows (OneSource, 2011). The total revenue trends and internal cash flow position has been analyzed as part of the growth analysis in section of this report.

62 External Analysis of Starbucks 62 The annual increase in earnings per share (EPS) can be viewed in table XX on page XX. The EPS growth took a slight dip during the three-year period, but EPS increased greatly at the one-year point with a 140% increase. This shows that Starbucks is back on track for earnings after the economic downturn and CEO change. The credit rating of Starbucks has also rebounded over the past few years. In 2010 the S&P upgraded Starbucks from a BBB rating to a BBB+ rating (Brian, 2010). In 2011 Morningstar further upgraded Starbucks to an A- rating, much of which was based on debt reduction and financial performance improvement (Morningstar Corporate Credit Rating, 2010). Each of the criteria used to evaluate the financial strength of Starbucks show positive trends from total revenue increases to improved credit ratings. These positive trends indicate that Starbucks is in a strong financial position. Starbucks has grown both total current assets and total assets each of the last five years while simultaneously reducing both total current liabilities and total liabilities. This leads to a strong balance sheet for Starbucks that has grown stronger ach of the last five years. Table 11 is a representation of the Starbucks balance sheet for the last five years. Table 11: Starbucks Balance Sheet UpdateType/Date 03-Oct Updated Normal 03-Oct Sep Updated Normal 27-Sep Sep Updated Normal 28-Sep Sep Updated Normal 30-Sep Oct Updated Normal 01-Oct Filed Currency USD USD USD USD USD Exchange Rate Auditor Deloitte & Touche LLP Deloitte & Touche LLP Deloitte & Touche LLP Auditor Opinion Unqualified Unqualified Unqualified Deloitte & Touche LLP Unqualified with Deloitte & Touche LLP Unqualified with

63 External Analysis of Starbucks 63 Explanation Explanation Cash & Equivalents 1, Short Term Investments Cash and Short Term Investments 1, Accounts Receivable - Trade, Gross Provision for Doubtful Accounts Trade Accounts Receivable Net Total Receivables, Net Inventories - Finished Goods Inventories - Raw Materials Inventories Other Total Inventory Prepaid Expenses Deferred Income Tax - Current Asset Other Current Assets, Total Total Current Assets 2, , , , ,529.8 Buildings 3, , , , ,545.6 Land/Improvements Machinery/Equipment 1, , , , ,504.7 Construction in Progress Property/Plant/Equipment Gross 5, , , , ,257.7 Accumulated Depreciation -3, , , , ,969.8 Property/Plant/Equipment Net 2, , , , ,287.9 Goodwill, Net Intangibles Gross Accumulated Intangible Amortization Intangibles, Net LT Investment - Affiliate Companies LT Investments Other Long Term Investments Other Long Term Assets Other Long Term Assets, Total Total Assets 6, , , , ,428.9 Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Portion - Long Term Debt/Capital Leases Customer Advances Income Taxes Payable Other Current Liabilities

64 External Analysis of Starbucks 64 Other Current liabilities, Total Total Current Liabilities 1, , , , ,935.6 Long Term Debt Total Long Term Debt Total Debt , , Minority Interest Reserves Other Long Term Liabilities Other Liabilities, Total Total Liabilities 2, , , , ,200.4 Common Stock Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) 3, , , , ,151.1 Other Comprehensive Income Other Equity, Total Total Equity 3, , , , ,228.5 Total Liabilities & Shareholders Equity 6, , , , ,428.9 Source: OneSource Information Services, Management Efficiency Analysis The management efficiency analysis looks to answer the other side of the balanced score card, the strategic side, where the financial strength analysis answers the financial objective side of the balanced scorecard. The strategic objectives side of the balanced scorecard addresses questions regarding whether Starbucks is meeting the strategy that it has set in place. Items like whether Starbucks is retaining the desired number of customers, introducing the desired number of new products into the market, or achieving customer satisfaction rates that it deems appropriate (Gamble & Thompson, Jr., 2011).

65 External Analysis of Starbucks Summary of Financial Analysis Starbucks has been able to weather the economic downturn of 2008, partly due to the general economy improving and largely due to the return of Howard Schultz as CEO, and has begun increasing performance across the board in terms of financial ratio trends (Finz, 2011). With trends across the board improving on a yearly basis, investor confidence in the performance of Starbucks, and a strong balance sheet, the continued financial strength growth of Starbucks should continue unabated SWOT Analysis SWOT analysis is a powerful, albeit simple, tool for evaluating a firm s resource strengths, its competitive deficiencies, the opportunities that exist in the market, and the external threats to the organization s future well-being (Gamble & Thompson, Jr., 2011). SWOT stands for Strength, Weakness, Opportunities, and Threats and is represented in a graphical format utilizing a 4 by matrix (Marketingteacher.com, 2011). The strengths and weaknesses of the firm come from an internal origin, while the opportunities and threats are based in the firm s external competitive environment (Datamonitor, 2010). Diagram 9 on page 66 shows the SWOT matrix for Starbucks.

66 External Analysis of Starbucks 66 Diagram 9: SWOT Matrix for Starbucks Source: Harold Brown, Strengths The strengths of Starbucks come from an internal origin and are designated as helpful to Starbucks reaching its target objectives. Starbucks must leverage these strengths to overcome their weaknesses and realize potential opportunities. Starbucks maintains a wide product and brand offerings to its consumer base. This is what leads to Starbucks brand strength, which is considered to be the core strength of the company (Datamonitor, 2010). Starbucks has a reputation globally as the brand that offers the highest quality of coffee along with a superior customer service experience (Datamonitor, 2010). Starbucks also maintains strengths in its store operations and its sound financial performance. Starbucks sells its products through retail stores and licensed locations which allow for strong financial performance. With the 17,000 plus retail locations, Starbucks has been