Strategic Management Starbucks Case Analysis Dr. Anthony J. Kos Ashley Hice 1
Contents Industry Analysis... 3 Industry Characteristics... 3 Driving Forces... 4 Key Success Factors... 5 Competitive Analysis: Porter s Five Forces Model... 6 Rivalry Among Competitors... 6 Potential New Entrants... 6 Threat of Substitutes... 7 Supplier Power... 7 Buyer Power... 7 Internal Analysis... 8 Strengths... 8 Weaknesses... 9 Opportunities... 9 Threats... 9 VRIO Framework... 10 Strategic Cost Analysis (Value Chain)... 11 Primary and Secondary Activities... 11 Compare Value Chain with Competitors... 15 Strategic Cost & Financial Statement Analysis... 16 Key Statistics & Ratios... 16 Competitive Strength Assessment... 17 Porter s Generic Strategies... 17 Issues and Recommendations... 18 Issue One with Recommendation... 18 Issue Two with Recommendation... 18 Works Cited... 20 2
Industry Analysis Industry Characteristics The United States coffee market is estimated at 30-32 billion dollars, which makes it a very large market in the U.S. culture (scaaaevent.org). Coffee is something universal that everyone can enjoy. In fact 83% of adults report drinking coffee according to the National Coffee Association s survey. Coffee is considered an affordable luxury with many brands of beans and numerous coffee shops. The market size is massive and is segmented into growers, roasters, and retailers. Vertical integration is a dominant characteristic. Starbucks is fully vertically integrated from sourcing; being hands on with growing the beans, to roasting the beans, and being a retail store to sell the beans and beverages. Another dominant characteristic is the ease of entrance not only for new competition to arise, but also for globalization into new markets around the world. Starbucks has done a great job entering new markets and successfully operating within them. The number of rivals is also important, however name recognition plays a large role in this industry. Coffee is something people enjoy, and expect to get exactly what they want. Names in the industry that are not well known tend to not do well. In addition to these dominant characteristics, different licensing agreements may play a big role in a coffee shop s success. Starbucks has entered into numerous licensing agreements and is able to sell many other products than what is offered in their coffee shop locations. A coffee shop should strive to be a relaxing place to unwind and enjoy a cup of coffee; the atmosphere is a big part of the coffee shop experience. Starbucks has figured 3
that out and mastered it. All of these characteristics listed are vital to business in the coffee industry. Driving Forces According to our book, driving forces are defined as, external and major underlying causes of change to an industry and competitive conditions. Three driving forces in the coffee industry have been identified. First driving force, increased globalization, is important to Starbucks but also to companies who wish to compete on the same level as them. Starbucks has expanded internationally and is thriving, people know what Starbucks is internationally. Growing coffee beans is done primarily in other counties, in foreign markets to produce high quality beans. Having a well-recognized name such as Starbucks is important to begin to enter into foreign markets. A company can open and operate within the foreign market or enter into a licensing agreement with a local company. Second driving force in the industry is diffusion of technical know-how across companies and countries. Starbucks has an extensive knowledge on the growing of coffee beans, roasting, and retailing. Having extensive knowledge of all areas of the industry sets them apart and is a large reason why they are in the top of the industry. The basis of the company from the start was to fully know about different beans and what makes the coffee taste so good. Starbucks employees are highly trained with 24 hours of training on history and every aspect of drink preparation. This is the same in 4
the foreign markets Starbucks enters into either operating the store or entering through licensing. The third driving force I found was the change of concerns, attitudes, and lifestyles. Everyone s lives are so busy and caffeine is a great way to keep on the go. The emergence of new ways to get caffeine to stay awake is growing with different forms of energy drinks and supplements. Encouraging consumers to drink coffee while on the go, or to come into a coffee shop to take a minute to themselves is key. Key Success Factors Key success factors are factors that can affect a member of the industry s capability to survive and prosper in the marketplace. They are very important in differentiating between competitors and all firms in the industry. Since the coffee industry is segmented into growing, roasting, and retailing, I chose one a key success factor of each segment. As for growing, the right climate and external conditions is key to a successful harvest of beans. Having experienced and knowledgeable people roasting the beans is also a key success factor. Knowing how to make the bean taste the best it possible can without any waste of resources is very important. Lastly pertaining to the retail segment, atmosphere of a coffee shop is a key to success. Having a homey feel is relaxing and inviting and will assist with generating revenue. 5
Competitive Analysis: Porter s Five Forces Model Rivalry Among Competitors The rivalry among competitors is moderate to high. The switching costs to buyers are low since there are many other coffee options, and the prices of Starbucks are the highest. The increase of competition from direct competitors is rising from Dunkin Donuts with the coupons being sent to households and promotions on social media. McDonalds is also gaining recognition from the industry with their McCafe products. As stated earlier coffee is something that consumers are particular about and know exactly what they want, therefore coffee can be considered differentiated. The fixed costs associated with Starbucks are high, as well as the exit barriers because of the cost of assets and resources they have acquired. Potential New Entrants There is a low threat of entry in this industry because the entry barriers are very high. The cost advantages from suppliers when buying large quantities are an economy of scale, and Starbucks is its own supplier of beans. They are fully integrated also. Starbucks has such a large following being at the top of the industry that they also have strong network effects on people. They are part of an environmental friendly culture that makes them current and cool to the younger crowd also. Starbucks has a lot of money to spend on advertisements that new entries cannot compete with. 6
Threat of Substitutes The threat of substitutes is high in this industry due to many different options of coffee. There are coffee shops that have a variation of hours and are open 24/7 such as Dunkin Donuts. You can buy coffee at so many different locations that substitutes are easily accessible. The price of Starbucks is also a lot higher than those of the possible substitutes, and there is a low switching cost between brands because of these factors. Supplier Power The bargaining power is low due to the fact that Starbucks is its own supplier of beans also since they are directly involved with the farmers who plant and harvest the beans. Starbucks makes sure that they take care of the farmers, and their employees to ensure they are paid well and not taken advantage of. Buyer Power The bargaining power of Starbucks is low to moderate for several reasons. The seller s products are differentiated due to quality of beans and forms of roasting. As a buyer, they can switch coffee brands at any time with low switching costs and are informed of the quality and prices of Starbucks and their competition. 7
Internal Analysis Strengths A well-established, well-known brand name. In the coffee industry being well known is important since coffee drinkers have a specific taste they desire and know exactly what they are looking for. Well-trained, highly knowledgeable staff and management. Employees are highly trained in all aspects of the value chain activities. Store employees are trained for 24 hours on history of the company, how to make the perfect beverage, they know all about the different beans and roasting processes, and are capable of answering all customers questions. Starbucks joint ventures. The Starbucks brand name is in numerous locations besides their retail locations due to joint ventures. They are able to expand their product offerings and generate higher revenue. Eco-friendly practices. Starbucks practices being eco-friendly using recycled materials for their paper products, conserving energy and water, and climate control. This is important to the new go green movement and lifestyle that is becoming popular in our culture and in others. Starbucks employees give back to the community and participate in community service showcasing they are not just a money hungry corporation. Offers a wide variety of products. Starbucks offers numerous beverages and pastries. In addition they offer other products externally through joint ventures. 8
Weaknesses High prices due to high quality beans, and they continue to rise. Which causes problems for price sensitive customers. Customer base is narrow and could be widened because of prices. Prices are higher than the competition: Dunking Donuts, and McDonalds. Increasing number of competition. There are many coffee shops to choose from, and numerous of different sources of caffeine products. Many locations do not offer drive-thru services. Also Starbucks doesn t offer coupons or discounts for any products. Opportunities Creating a third place that offers customers a relaxing home like environment while they are on the go. Starbucks started this relaxing coffee house experience, which has spread into a culture. Expanding in emerging economies since Starbucks has such a prominent brand name, people are aware of what the company is all about. Co-branding and joint ventures with other companies to expand product offerings. Selling whole beans in grocery stores like their competition Dunkin Donuts. Threats The variation in price of coffee beans in the foreign countries that supplies Starbucks their beans will cause them to increase their prices also. 9
Cultural values in other countries may not match Starbucks. This will cause a problem in their mission statement and code of ethics. Not having the same values and ethics as the foreign markets they are operating in could cause issues in operating. VRIO Framework The first step in this test is to determine if the company is valuable. Starbucks has created a third place mentality that makes customers feel like home, makes them enjoy their time in the coffee shop. This was the goal from the start and they successfully executed this. In addition, the numerous licensing agreements that widen their customer base to not only being able to enjoy Starbucks products while physically there. Their name recognition across the country and internationally is outstanding. Their employees are trained so well to know exactly what they are serving and how to make the perfect beverage for the customers. All of these capabilities make Starbucks valuable. The next question to address is the concept of Starbucks being rare, what does it have that rivals lack. Starbucks is the biggest and most well know coffee corporation globally. The atmosphere is also unique, the upscale cozy environment that welcomes customers as soon as they walk in the door. The direct competition has yet to out-do Starbucks on that. The next question is can what Starbucks does be easily copied or not. Gaining the global recognition that Starbucks has achieved cannot be done in short term. It would take a long time and a lot of resources to do so, monetary and nonmonetary. The 10
knowledge that Starbucks has from the start-up of the company and all the training that the employees and management do would take a long time to copy also. What can be copied is the atmosphere of Starbucks; other stores could copy their business model and renovate their stores. In addition, the specialty coffees that are made are also made other places, and could be copied directly. The last question in the VRIO Framework that needs answered is does Starbucks have a sustainable competitive advantage or not. One of their biggest assets is the extensive employee training that is done. No other company takes the time to train the employees on history of the company, the right kind of beans and the process they go through, and every aspect of the beverage making process. Their global presence also brings them sustainable competitive advantage since competition can t compete with the name recognition and awareness Starbucks has created. Strategic Cost Analysis (Value Chain) Primary and Secondary Activities Starbucks participates in two different categories of the value chain analysis: primary and support/secondary activities. The primary activities are those that create value the most. They require the support/secondary activities that help the performance of the primary activities. The primary activities are comprised of Supply Chain Management, Operations, Distribution, Sales and Marketing, and Service. The support/secondary activities include Product R&D, Technology, and Systems Development, Human Resource Management, and General Administration. The value 11
chain has a focus on creating value to customers and is an accurate tool to examine how a company delivers it. Primary Activities: Supply Chain Management o Storing: to ensure the quality of Starbucks coffee any remaining product left on the shelves after three months is disposed of, however if the package was opened then it gets disposed of in seven days. o Inspection: All coffee beans are inspected using trial and error testing to ensure the quality that matches the Starbucks brand. Operations o Quality assurance and Input from suppliers: Starbucks commits to only using green coffee beans while using ethical practices to ensure the treatment and money paid to the farmers are sufficient. o Environmental protection: Starbucks practices corporate social responsibility and operates ethically in the interactions with bean farmers, with the customers buying their products, being involved with helping communities, recycling and using only recycled materials in their operations. Distribution o Packaging: Upon roasting the beans at Starbucks are vacuum-sealed to ensure the upmost fresh product. 12
o Establishing and maintaining a network of dealers and distributors: According to the case Starbucks has obtained a network of many farmers and their beans growing in 70 countries. The farmers don t just grow the beans, but they have a direct relationship with personnel of Starbucks who go to the farms and communicate to ensure everyone is happy and things are going as planned. It is important to the company to maintain positive relationships with the farmers and the customers. Sales & Marketing o Marketing research: Starbucks knows their customers well through extensive research that they have done. They are constantly keeping up with their customers such as the creation of the Consumer Products Group. They are aware what products sell and how their customers purchase their products. o Advertising and promotions: Starbucks uses minimal advertising normally, however they increase when they feel it s needed. For example in 2008 when McDonalds started the McCafe product line. o Recruitment, training, and hiring: The employees at Starbucks are highly trained with 24 hours in their first two to four weeks of working with the company. Service o Technical assistance: Starbucks provides customer service by telephone or their website. 13
o Buyer inquiries and complaints: To ensure the highest satisfaction of Starbucks employees and customers the service department can be called, emailed, or sent mail. Secondary Activities: Product R&D o Equipment design: Starbucks uses a computerized roaster after all recipes have been thoroughly tested. o Computer software: The testing that Starbucks uses are through specific computer software. Human resource management o Development of knowledge based skills: Starbucks employees are highly trained as well as the management team. The farmers that grow the beans are well trained and the roasting process is top of the line. o Compensation of all types of personnel: Employees of Starbucks are treated well. They are paid very well; the full time and part time employees are offered health benefits, also a stock option plan, and a stock purchase plan. General administration o Forming strategic alliances and collaborating with strategic partners: Starbucks is partnered with Conservation International Center for Environmental Leadership that enables Coffee and Farmer Equity 14
guidelines. Starbucks is also been involved in numerous of acquisitions and joint ventures. o General management: The employees are highly trained and the management is required to be trained even better. Management of Starbucks are required to attend 8 to 12 weeks of training courses dealing with coffee knowledge, the policies and procedures that guide the company, the operations and information systems, and general ethical management of the employees. Compare Value Chain with Competitors Starbucks pays special attention to personalize their value chain activities so the competition cannot compare to them. The have expanded their product offerings outside their retail stores to increase revenue. They also increase revenue by having a wide distribution channel and tend to different segments in the market. They focus on brand awareness, knowledgeable staff they keep focus on long-term growth and sustainability. Their direct competitors Dunkin Donuts and McDonalds, who don t have the specialization and the intergraded system that Starbucks does. Starbucks is unlike its competition because of their differentiation strategies. Starbucks has beans growing in 70 countries and they are the primary roaster of the beans they use and they are at the top of the industry with 17,400 store locations globally in over 55 countries. Starbucks coffee purchasing strategies, expansion strategy, and sourcing practices sets them apart 15
from competition to continue to be a global leader in the industry and have a sustainable competitive advantage. Strategic Cost & Financial Statement Analysis Key Statistics & Ratios For Period Ending 9/30/12 Starbucks Total Revenue $13,299,500,000 Cot of Revenue $6,382,300,000 Gross Profit $7,486,200,000 Operating Income $1,997,400 Earnings Before Interest & Tax $2,091,800,000 Net Income $1,383,800,000 Key Ratios Liquidity: Current 190% Quick 134% Cash 92% Profitability: Gross Margin 56% Operating Margin 15% Pre-Tax Margin 15% Profit Margin 10% Pre-Tax ROE 40% After Tax ROE 27% http://www.nasdaq.com/symbol/sbux/financials?query=ratios 16
Competitive Strength Assessment Competitive Strength Assessment Rating Scale 1= Very Weak; 10= Very Strong Starbucks Dunkin Donuts McDonalds Key Success Weighted Weighted Weighted Factors Weight Rating Score Rating Score Rating Score Quality of product 0.25 10 2.5 8 2 8 2 Brand Awareness 0.10 10 1 8.8 6.6 Production 0.15 10 1.5 7 1.05 6.9 Tech Skills & Knowledge 0.15 10 1.5 6.9 4.6 Atmosphere 0.10 10 1 5.5 1.1 Financial Resources 0.10 10 1 7.7 7.7 Cost 0.05 6.3 9.45 9.45 Customer Service 0.10 10 1 8.8 6.6 Sum of Weights 1.00 Overall 9.8 7.2 5.95 Porter s Generic Strategies Starbucks is the leading brand in the industry because of its focused differentiation strategy it practices. They can outcompete their rivals and meet the needs of consumers in their niche market. Customers of Starbucks enjoy the experience including the product, employees, and atmosphere of the retail locations. The joint ventures, partnerships, and acquisitions allow Starbucks to stay at the top and lead the industry. 17
Issues and Recommendations Issue One with Recommendation The first issue I found was that Starbucks is one of the highest prices of coffee out of all its competitors and they don t offer coupons or discounts like the competition does. Dunkin Donuts has coupons sent to homes in the mail, which I use there all the time. Many price sensitive consumers haven t been to Starbucks because of the price, they don t want to try something that costs so much if they wont end up liking it. I know I just recently tried Starbucks and the reason I didn t buy it before was I didn t want to buy a pricy cup of coffee if I didn t like it. Starbucks does have a mobile app but this excludes those that are not a Starbucks regular and that isn t interested in coming all the time, but is occasional coffee drinkers. With the revenue that Starbucks makes each year enabling direct marketing to homes with coupons wont be hurting their budget. Issue Two with Recommendation Starbucks does very minimal advertising. According to the case they spend the bare minimum on advertising every year with an exception of 2008, when they were trying to combat McDonalds with the launch of their new McCafe products. According to an article on Advertising Age, Starbucks doesn t advertise because they don t want to go mainstream and that they are afraid of diluting the differentiation of the brand. If Starbucks were to advertise on TV they would be able to open up to a more broad range of customers, and allow people who don t know what they are all about know. They are more than a big corporate coffee shop like someone may 18
assume. They do things for the community, also the environment. By positioning the TV ads on the right channels such as Food Network, or ABC and CBS, in prime time spots it can shine a positive light on Starbucks and still reach an audience they would like to capture. 19
Works Cited 1. http://adage.com/article/news/starbucks-warms-idea-advertising/122180/ 2. http://www.nasdaq.com/symbol/sbux/financials?query=ratios 3. National Coffee Association 4. http://www.scaaevent.org/pdf/press%20kit/2012/facts%20and%20figures. pdf/edgar/data/1116132/000114420412047660/v319486_10k.htm#trf 5. http://www.statista.com/topics/1248/coffee-market/ 20