STRATEGY ANALYSIS: STARBUCKS

STRATEGY ANALYSIS: STARBUCKS Executive Summary Starbucks is the world largest coffee house industry. Starbucks bring new and innovative products to the market in very suitable and accessible location. This report emphasize on a critical analysis of coffee industry and internal and external environment of Starbucks. In addition this report also emphasize internal analysis, core competencies, BCG matrix, Ansoff matrix CSF of Starbucks. Eventually after the evaluation of Starbucks and its performance this report will outline a few strategic choices for the future. Overview of Starbucks Starbucks Corporation is a global coffeehouse chain based in Seattle, United States. They are considered to be the largest coffee house chain in the world. Starbucks has got more 16,000 stores in 49 countries. Starbucks sells drip brewed coffee, espresso beans, hot drinks, cold drinks and snacks etc. In addition, via the entertainment division and Hear music Starbucks sells music, books etc. In fact many of the products of the company are seasonal. Moreover branded ice cream and coffee are also available in grocery stores. Furthermore Italian style coffee, express beverage, teas, and confection had made largest retailing stores of recent history and coffee chain biggest speciality (www.starbucks.com) PESTLE Analysis PESTLE analysis is nothing but the significant tool which facilitates marketing strategies of the organisations. This tool enable the organisations to understand the external environment where they operate at present and in the future (Kotler & Armstrong, 2009). According to Lauren (2007) PESTLE stands for Political, Economical, Social, Technological, Legal, and Environmental. The critical analysis of PESTLE of Starbucks is give below. Political factors Political environment comprises taxation policy, deregulation, government stability, international stability & tariff etc (Kotler & Armstrong, 2009). Starbucks will need to high prices for coffee when the farmers are imposed high taxation for producing

coffee bean. This fluctuation will eventually affect consumers. In addition to this deregulation also affect Starbucks. Farmers struggle to produce because of deregulation and many struggle to make living. The earnings of farmers have been dropped due to the deregulation. While the issue of international trade and tariff is considered, this affect the star bucks primarily while exporting and importing goods. Starbucks faces efficiency loss while another country intrude a tariff. Moreover stability of government also have an effect on the Starbucks. Changes in government eventually lead to taxation and legislation. Furthermore Starbucks need to consider the international stability as it affect the sales of Starbucks. For instance after 9/11 economic downtime has affected the world market (Caliendo, 2010) Economic factors An increase in interest rates cause declining in sales of Starbucks and their supplier while low interest rate making positive effect. In addition, sales may be falling if the development is low in the Starbuck's country location. The incomes of the customers tend to drop in the adverse period of growth and left with very less disposable income. This also cause loss in consumer confidence. Moreover, inflation is nothing but the condition of enhancing prices. Business costs of Starbucks can be increased due to inflation. Besides, pricing from competitors can be able to begin a price war for Starbucks which can direct profits and margins of profit as they are trying to increase or maintaining their market share. Furthermore exchange rate affect Starbucks while deal with international trade. Starbucks are enabled to gain more for their if the currency value drops in the country of coffee supplier (Allison, 2009) Social factors As Starbucks recognise what types of population they are required target their products, demographics of populations are considered as the very important factor for Starbucks. According to the research of (Bell, 2005) the percentage of age groups who drink coffee need to be targeted between 35-55. Starbucks need to consider 18-25 since they consume very less amount of coffee and motivate them to drink Starbucks coffee. The next factor is income distribution which Starbcuks necessarily observe since this convince the perfect place to target their marketing. Coffee is considered to be more luxurious item therefore it need to be targeted to those people with the most amount of disposable income to pay out. Next factor is attitude of people towards work. Starbucks will not wish locate to the region or area where the attitude of people towards the work is very poor as it would be very difficult for recruitment and training and turnover of staff will be high. In addition, standard of education and skills have to considered while deciding the new location and need to make sure there are people

who have adequate skills for successful operation of the business. Furthermore Starbucks can utilize the information about health consciousness as good heath and foodstuffs related to healthy lifestyle is significant in the current market (Bell, 2005). Technological factors Star bucks always give priority for IT development. It is necessary for Star bucks for upgrading the software soon to carry on with the competition. In addition in the current rapid changing market Starbucks need to develop the technology for coffee making machines to serve the customers quicker. Moreover as research and development influence the business Star bucks need to focus on it. Starbucks is having the resources and budget to occupy a cutting edge research and development department. Furthermore Starbucks need to invest heavily in the technology as the rate of change in the existing market is very high in order to stand in their developing market (Allison, 2009) Legal factors It is significant for Star bucks to know the trade and product restrictions in the different countries where they operate and make sure that they do not breach any laws. Besides, the employment law of the country differ one to another. Some may be having minimum wages and limited hours. Therefore it is crucial Star bucks to consider this. The next factor is health and safety regulations which affect the running of business. It is good for Star Bucks to maintain the brand image by applying high standard of health and safety al through the organisation. Furthermore Starbucks need to tolerate all types of planning regulations while making a new store or altering since definite areas of land can be secured (Bell, 2005) Environmental factors This is one amongst the significant factor to be considered for Starbucks. There are lots of wastes made by Starbucks customers. This need to be considered and create biologically degradable as soon as possible. The next factor to be considered is planning permission. Starbucks will not get planning permission for an area which may damage the environment. Furthermore Starbucks must take into account disposal of their waste since there are very strict laws almost every countries for ensuring the trading of the company in their country. It must be disposed efficient way (Brian, 2010). SWOT Analysis of Starbucks

Diversification of the product Well developed brand, trademarks, and patents Company doesn't have franchise but only retail stores globally Offer great location to attract the consumers Well motivated staff Keep best relations with the suppliers Brand is very strong and financially sound Worldwide stores Weaknesses Focusing on expansion is too much and internal focus is very limited Prices of the products are very expensive Cross functional management Large numbers of competitors in developing market Self cannibalization Size of the stores Opportunities Opportunity to expand into retail operations Setting up of new channels of distribution Launching of new products Expansion of brands Up-and-coming global markets Continuous local expansion and supremacy of segment Technological development Threats Fierce competition from restaurants, coffee shops, supermarkets etc Dissemination of US market instability of coffee's price in growing countries Depressing exposure from badly treated farmers in supplying countries

Customers' preference to healthy products rather caffeine products Estrangement of local market Political problems and cultural problems in many countries (Brian C, 2010) Industry and competitor analysis Coffee has been considered as the second largest used drink after water all over the world. In fact the people in United States substitute coffee for alcohol. People think of coffee shops as great place to meet and chat. Coffee is nothing but an affordable luxury. In 1994 coffee beans products had been the second most traded commodity after oil. (www.blogs.indews.com, 2009) While analysing the competitors of coffee industry it can be said that there are two types of competitors such as coffee shops and restaurants and national wide coffee manufacture. The future goal of competitors are growing larger and gaining competitive advantage over Starbucks. Product, distribution, operations, R&D, financial strength are the capabilities of competitors of Starbucks. There are several competitor in the coffee beverage industry such as Dunkin Donuts, Cafe nero,biggby Coffee, McDonald, and Caribou etc. (www.blogs.indews.com, 2009). Marketing Segmentation of Starbucks Marketing segmentation is nothing but has been considered as the significant tool employed to facilitate business for targeting its products in a best manner at the appropriate consumers. It is just to identify the particular requirements of the customer groups and subsequently utilizing those awareness into offering products and services which fulfil the needs of the customers (Ian and Chris, 2009). According to (Kotler & Armstrong, 2009) there are various bases of segmentations, they are demographic, psychographic, behavioural, and demographic segmentations. Demographic, psychographic and lifestyle of customers are focused by Starbucks. In demographic segment such as age, sex, education. Starbucks target chiefly 18-30 years old and however Starbucks fulfil every customers' needs. Starbucks provide non coffee beverages to the children who don't drink coffee. Psychographic segments are on the basis of interest, opinion and activities of customers (Garza, 2010). Starbucks is extremely focusing on charity and arts, and striving hard to

become socially and environmentally responsible firm. Starbucks is not only aiming to target wealthy and generous people but also the people who wish to enjoy the creative and entertaining side of life. Starbucks is selling lifestyle customer as well as employees. A style and atmosphere has been made by Starbucks which has concentrated on definite new chic and appeal into coffee and made it as the happiest drink today. Heavy traffic with pedestrian are a few of the places particularly targeted by Starbucks. the products of Starbucks target different group of people. The various markets of Starbucks are Gourmet Coffee, Round trip coffee, image, skinny platform and bottled coffee. For instance fhe gourmet coffee target the people who want something more than just coffee and age level between 18-35 while the skinny platform target the people who are healthy conscious (www.starbucks.com). Porter s Five Forces analysis of Starbucks 1. The threat of substitution In addition to the Starbucks coffee and tea, for instance- Smithies, soft drinks, water beer, and other caffeine content drink like Red bull. Other ready to eat foods in addition to pastries, muffins, doughnuts, etc of Starbucks. For example burgers, sandwiches, sushi, and snacks. The places comprised of tea houses, cafes, fast food places bar and pubs which make available relax and enjoy (Garza, 2010) 2. Threat of New Entry As far as the coffee industry is concerned the entry barrier for coffee industry is very low for the expensive coffee like Starbucks. The possible entrant could be any well established company where they do not have any problem with the capital. The significant threat of new entrants at present encompasses fast food chains like Subway, McDonald and Dunkin Donuts etc (Allison, 2009) 3. Competitive Rivalry The coffee chains like Cafe Nero, Coffee Been & Tea leaf, Gloria Jean's coffee and other coffee houses.

Privately owned coffee houses Minor Coffee providers which comprised of McDonald, Dunkin Donut, and etc, (Adamy, 2006 4. Bargaining power of suppliers The suppliers of coffee bean does not have the bargaining power of supplier owing to the significance of the business of Starbucks to any kind of individual customers. In fact huge percentage of any individual sales of supplier goes to Starbucks account. Starbucks is enabled by this to command the price of coffee bean sales. As there several alternative sources, the plastic and paper products suppliers like napkins, lids ect has got the very less bargaining power. Moreover there has been a contract made by Starbucks with suppliers providing them no bargaining power efficiently (Global Data, 2010). The suppliers of technological advancements like automatic coffee machines, espresso machines, has got significantly more bargaining power as there are not much suppliers for supplying technologically advanced machines (Garza, 2010) 5. The Bargaining Power of Buyers There was no bargaining power in the past for buyers when they come to premium coffee like Starbucks. The complete starbucks' business minimize the buyers bargaining power. However buyers has got somewhat more bargaining power than they were having in the past due the new entrants and competitors like McDonald who has been claiming to make available premium roast coffee with reasonable price and quality (Associated press, 2008). Positioning of Starbucks The company needs to determine what position it has to absorb in their target market segmentation after determining the target market. Positioning of product is the way the product is determined by customers on significance features such as price, quality, product class and application etc (Kotler and Armstrong, 2009). In the coffee industry Starbucks has been positioned as a premium product. Starbucks has done this by making high quality standard, introducing innovative products and giving outstanding service. Schultz ((CEO) was keen about quality

control and therefore they were monitoring every step of coffee production. Starbucks roast coffee in their own plants after bringing dark roast, whole bean coffee from Kenya, Ethiopia and Costa Rica. Starbucks carry out Total Quality Management where all people in the company are continuously involved in enhancing product quality (Fortune, 2011). The figure below shows the positioning of Starbucks. High Starbucks Price Low High Low Quality Generic Strategy of Starbucks There are three generic strategies defined by Michael Porter, they are cost leadership, Differentiation and Focus. (Gamble, 2011). Cost leadership refers to following cost reduction throughout the area of company. Whereas the differentiation comprise something which is professed by industry as being exceptional or unique while

focus strategy refers to targeting specific group, market, or segment of product line provided (Porter, 1998). Strategy of Starbuck seem to fit with differentiation today, but indeed Starbucks has utilized generic strategy of focus with an giving importance on differentiation within the specific target segment of customer. A company which concentrate on the differentiation strategy will have strong potentials of marketing. The advertising budget of Starbucks only 4% of their total costs incurred. In addition, Starbucks does not have R&D development which the company must have who focus who focus generic strategy of differentiation. These all ensure that Starbuck used Focus generic strategy. According to Porter Focus strategy comprise a mixture of the features of the differentiation strategy directed towards particular segment of customers. The target of Starbucks was wealthy, educated, customers who prefer quality. This makes it clear that Starbucks emphasis on generic strategy of Focus (Caliendo, 2010). Core competencies of Starbucks Core competencies are nothing but the potentials which are significant for a business to attain competitive advantage (Isobel and Robin, 2008).Core competencies of Starbucks are their human resources, company culture,tangible resources such as Coffee beans and intangible resources such as perception and reputation of quality of beans ect. Starbucks always cherish their employees and this shows through employee benefits. In addition Starbuck often implement training programme for employees. Whereas Starbucks has got the entire ownership of the Narino Superemo bean which is highest quality of coffee bean in the world. Moreover Starbuck is being considered as the largest coffee house chain in the world. All these are the core competencies of Starbucks (Brian, 2010). Physical resources of Starbucks Physical resources of Starbuck are considered to be the store they have, vehicle they have for transporting goods and all other resources which used to run the business and to gain competitive advantage. Starbucks has got more 8000 stores throughout the world (www.starbucks.com) BCG Matrix of Starbucks

HIGH MEDIUM LOW HIGH Backward, Forward, or Horizontal Integration Market Penetration Market Development Product Development Market Penetration Market Development Product Development Divestiture MEDIUM STARS QUESTION MARKS Product Development Diversification Retrenchment Divestiture Retrenchment Divestiture Liquidation LOW The BCG matrix facilitate a multidivisional organisation for managing the portfolio of business by investigating the associate share of market position. In addition this matrix increases the efforts of a company to devise strategies (Luther, 2011). In the BCG matrix Starbucks are gauged for identifying the strategic position of the company. Long run opportunities for development and profitability are identified in division quadrant II while high industry growth rate and high market share are associated to star division. Whereas cash cows division refers to high relative market share position in a low growth industry. Last but not least Dogs division has very low market share in a slow or no market growth industry (Luther, 2011). The income statement of Starbucks reveals that net revenue has been increased between 2010-2011. It determines the high sales growth position. Therefore it can be concluded that Starbucks is identified in Star position. The long run opportunities of Starbucks for development and profitability signified in this division, while there is high market share and industry growth rate in this division. This will consider backward, forward, horizontal integration, market penetration, and market development (Kanji, 2006).

Ansoff Matrix analysis of Starbucks This matrix represents the product and options of market available for an organisation. According to Gamble (2011) Ansoff matrix is referred as the market option matrix which comprise scrutinizing the choices available to an organisation from the wide range of prospective. This matrix represents choices of introducing new products, moving into new markets as well as investigation of probabilities of leaving from definite markets and shift to dissimilar market (Gamble, 2011). The Ansoff matrix analysis of Starbucks is given below in a table. Present Product New Product Present Market Market Penetration: Hotels, Grocery Stores, Schools, Businesses, Industries Cafeteria and Airlines. Product Development: Salads and New bold Fresh lunch Program. Examples: Fiesta Chicken Salad, and Fruit and Cheese Platter. New Market Market Development: Opening Stores all over the world. India, Brazil, Russia and making the first Starbucks logo in Cairo Egypt Diversification: Music CDs, Clothing, Coffee Mugs, and Chocolate. Critical Success Factor of Starbucks There are certain critical factor for Starbucks in order to be successful in the industry. First of all Starbucks needs to assure that purchasing high quality coffees and teas for their stores. The quality of products can be considered as critical to Starbucks' success. Subsequently managing domestic growth with international growth is considered as critical to the success. In addition, it can be a CSF for

Starbucks that managing the appropriate mix of company owned stores, and partnership and joint ventures. Furthermore there need to be someone on the top to monitor the global expansion of Starbucks on monthly basis (Associated press, 2008) Future Strategic Options After analysing the internal and external factors of Starbucks, it can be generated two possible strategic options for the future. The options are diversification and mergers. Diversification: A business begins to use new products or offer new services if a business get diversified (Lauren, 2007). As there are two kinds of diversification such as related or unrelated diversification, Starbucks can implement related diversification. There has been as successful history of product diversification in the short term in Starbucks such as Coffee beverages, Sweets, Tea, Books and Music. The introduction of new product can be included Starbucks express and prepaid Starbucks card and store changes like providing high Wifi. Merger: A merger is nothing but merging of one company asset with another. If a deal is ok for both sides then it can be viewed as merger (Gorton, 2009). The future strategic decision of Starbucks is to merge with current present internet cafes. Starbucks will acquire premises, and customers as well as facilities and expertise. In processing establishing Starbucks' internet facilities this facility can be employed. REFERENCES Adamy, J. (2006, November 29). Different Brew: Eyeing a Billion Tea Drinkers, Starbucks Pours It On in China; Its Big Challenge: Creating A New Taste for Coffee, And Charging Top Prices; Wooing the 'Little Emperors'. Wall Street Journal, p. A1. Allison, M. (2009, June 17). Laceration HAzard Prompts Starbucks to Recall Coffee Grinders. The Seattle Times. Associated Press. (2008, December 4). Economy Brews Some Trouble For Starbucks. Retrieved January 3, 2012, from www.msnbc.msn.com: http://www.msnbc.msn.com/id/28057609/ns/business-consumer_news/ Bell, D. (2005, October 20). Lattes Lure Brits to Coffee; Tea Sales Fall as Starbucks Draws the Young; Fighting Back With New Tea Flavors, Travel Cup. Wall Street Journal, p. B1.

Brian, C. (2010). S&P Ups Starbucks Corps. Credit Rating. Retrieved Jan 4, 2012, from www.mysmarttrends.com: http://www.mysmartrend.com/newsbriefs/news-watch/sp-ups-starbucks-corps-credit-rating-sbux Bureau of Labor Statistics. (2011). REGIONAL AND STATE UNEMPLOYMENT 2010 ANNUAL AVERAGES. Washington, D.C.: Department of Labor. Caliendo, H. (2010, October 5). Leadership and Accountability: Howard Schultz, CEO of Starbucks. Retrieved Jan 4, 2012, from www.hr.toolbox.com: http://hr.toolbox.com/blogs/360-degree-feedback/leadership-andaccountability-howard-schultz-ceo-of-starbucks-41680 Carson, J. B., Tesluck, P. E., & Marrone, J. A. (2007). Shared leadership in teams: An investigation of antecedent conditions and performance. Academy of Management Learning & Education, 50(5), 1217-1234. Dess, G. (2007). Strategic Management: Creating Competitive Advantages, Sidney: McGraw-Hill Fortune. (2011). 100 Best Companies to Work For. Retrieved March 4, 2011, from CNNMoney.com: http://money.cnn.com/magazines/fortune/bestcompanies/2010/full_list/ Gamble, J. E., & Thompson, Jr., A. A. (2011). Essentials of Strategic Management. New York: McGraw-Hill Irvin. Garza, G. (2010). The History of Starbucks. Retrieved March 4, 2011, from Catalogs.com: http://www.catalogs.com/info/food/the-history-ofstarbucks.html GlobalData. (2010). Starbucks Corporation - Financial and Strategic Analysis Review. Global Data. Grant, R. M. (2009). Differentiation Strategy. In R. M. Grant, Contemporary Strategy (pp. 272-293). Blackwell Publishing. Gorton, G. B., Kahl, M. & Rosen, R. J. (2009). Eat or Be Eaten: A Theory of Mergers and Firm Size. The Journal of Finance, 64(3), 1291-1344 Hannan, M. T. (2011). Organizational Analysis. Encyclopedia Britannica. o.asp Ian & Chris, (2009). The strategic management of organizations. Prentice Hall publications. London. Isobel Doole and Robin Lowe (2008), International marketing strategy: analysis, development and implementation, 5 th edition, Cengage Learning EMEA.

Laurie.J.Mullins, (2007), management and organizational behavior- the organizational setting, 8th edition. Lindemann, J. (2007). Brand Valuation, New York: Interbrand. Luther, (2011). The marketing plan: how to prepare and implement?. 4 th edition. Library of congress cataloguing publication data, New York. Kotler and Armstrong, (2009), Management and Organisational Behaviour. 8 th ed. Prentice Hall, Essex. Kanji, G. (2006). Can Total Quality Management Help Innovation? Journals Oxford Ltd, 7 (1), 3-9. o Starbucks corporation (2012): http://www.starbucks.com/ accessed on 5th jan 2012