Starbucks case-study


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Starbucks case-study

  1. 1. 1.0 INTRODUCTIONName : Starbucks Corporation (NASDAQ: SBUX)Headquarters : Seattle, Washington, U.S.Employees : 176,000 in 2008Revenue for 2008 : US$10.383 billionCEO : Howard Schultz (Founder of Starbucks coffeehouse)Starbucks Corporation is an international coffeehouse chain based in Seattle,Washington, United States. Starbucks is the largest coffeehouse company in theworld, with 16,120 stores in 49 countries, including around 11,000 in the UnitedStates, followed by nearly 1,000 in Canada and more than 800 in Japan.Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot andcold drinks, snacks, and items such as mugs and coffee beans. Through theStarbucks Entertainment division and Hear Music brand, the company alsomarkets books, music, and film. Many of the companys products are seasonal orspecific to the locality of the store. Starbucks-brand ice cream and coffee arealso offered at grocery stores. Starbucks’ Italian style coffee, espressobeverages, teas, pastries and confections had made Starbucks one of thegreatest retailing stories of recent history and world’s biggest specialty coffeechain. In 2003, Starbucks made the fortune 500. Strategic Management PMS 3393 1
  2. 2. 1.1 BACKGROUND OF THE COMPANY1.1.1 Era before Howard SchultzIn 1971, three academics, English Teacher Jerry Baldwin, History Teacher ZelSiegel and writer Gordon Bowker opened Starbucks Coffee, Tea and Spice inTouristy Pikes Place Market in Seattle. The three were inspired by entrepreneurAlfred Peet (whom they knew personally) to sell high-quality coffee beans andequipment. The store did not offer fresh brewed coffee by the cup, but tastingsamples were sometimes available. Siegel will wore a grocers apron, scoopedout beans for customers while the other two kept their day jobs but came by atlunch or after work to help out. The store was an immediate success, with salesexceeding expectations, partly because of interest stirred by the favorable articlein Seattle Times. Starbucks ordered its coffee-bean from Alfred Peet but later onthe three partners bought their own used roaster setting up roasting operations ina nearby ramshackle building and developed their own blends and flavors. By theyear 1980s the company had four Starbucks Stores in Seattle area and had beenprofitable every year. Later on, Siegel left the company and Jerry Baldwin tookover day-to-day management of the company. Gordon Bowker remained as anowner but devoted most of his time in his Design Firm. In 1981, Howard Schultz,the vice president of U.S operations for Swedish Maker of stylish kitchenequipment and coffeemakers decided to pay Starbucks a visit. He was curiousabout why Starbucks was selling so many of his company products. He wasimpressed with the company management and the quality products the make.Schultz asked Baldwin whether there was any way he could fit into Starbucksand it took long time to decide his request. He tried many times till one day hewas given a job of heading marketing and overseeing the retail stores. Strategic Management PMS 3393 2
  3. 3. 1.1.2 Era with Howard SchultzHoward Schultz spent most of his working hours in the four stores learning theretail aspects of the company business; Schultz was overflowing with ideas forthe company. His biggest inspiration and vision for Starbucks future came during1983 when the company sent him for an international house wares show toMilan, Italy. There he spotted an espresso bar and went to take a coffee. He wasimpressed with the coffeehouse services and decided to stay at Milan for a weekto explore all coffee bars and learned as much as he could about the Italianpassion for coffee drinks. He made a decision to serve fresh brewed coffee,espressos, and cappuccinos in its stores and try to create an American version ofItalian coffee bar culture. He shared his idea with Baldwin and it took nearly ayear to convince Jerry Baldwin to let him test an espresso bar. In April 1984, thefirst espresso bar was opened and it was a successful too. Yet Baldwin feltsomething is wrong. After Schultz failed to convince Baldwin for the expansion ofbusiness, he left Starbucks in 1985. Schultz started the “Il Giornale” coffee barchain in 1985 and the coffeehouse was very successful. In 1987 Starbucksowner Jerry Baldwin and Bowker decide to sell the whole Starbucks chain toSchultzs Il Giornale, which rebranded the Il Giornale outlets as Starbucks andquickly began to expand. Starbucks opened it’s first locations outside Seattle atWaterfront Station in Vancouver, British Columbia, and Chicago, Illinois, thatsame year. At the time of its initial public offering on the stock market in 1992,Starbucks had grown to 165 outlets. In 2009 The Company plans to open a net of900 new stores outside of the United States. Strategic Management PMS 3393 3
  4. 4. 2.0 STARBUCKS’ VISION, OBJECTIVES AND MISSION2.1 Vision Statement Starbucks vision statement is; ” To establish Starbucks as the most recognized and respected brand in the world and become a national company with values and guiding principles that employee could be proud of “ The vision statement clearly describes the dream or the future of the company that is to be the worlds most well known coffeehouse and also to be the most appreciated and positively graded brand by all levels of people around the world. The company also focuses its vision to employee satisfactions, so that the employees will be happy.2.2 Objectives of Starbucks  Is to Grow by making employees feel valued Starbucks approach the employee with good compensation and comprehensive benefits package. The company beliefs that sharing the company’s success with the people who made happen will help them think and acts like an owner of the company.  Is to Recognize that every dollar earned passes through employees’ hands Starbucks will always appreciate the employee as the revenue which is increasing every year is by the efficient and hardworking employees. This drastic increase in profit is not recognized without the support of the employees who attracts the customers to a long term relationships with the coffeehouse. Strategic Management PMS 3393 4
  5. 5.  Use the pays, benefits and opportunities for personal development to help gain employee loyalty and become difficult to imitate. Paying scale and fringe benefit package allowed it to attract motivated people with above average skills and good work habits and also to make the employee to be loyal with Starbucks.2.3 Mission Statement Starbucks Mission Statement is; “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” The six principles are: 1. Provide a great work environment and treat each other with respect and dignity. 2. Embrace diversity as an essential component in the way we do business. 3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee. 4. Develop enthusiastically satisfied customers all of the time 5. Contribute positively to our communities and our environment 6. Recognize that profitability is essential to our future success. Strategic Management PMS 3393 5
  6. 6. 2.3.1 Analyzing the Mission Statement ComponentStarbucks mission statement is needed to be analyzed to see the total number ofmission component it has.NO COMPONENT YES/NO1. Customers Yes2. Products or services Yes3. Markets Yes4. Technology No5. Concern for survival, profitability and growth Yes6. Philosophy Yes7. Self-Concept Yes8. Concern for public image Yes9. Concern for employees NoThis is a good mission statement. This mission statement lacks of 2 components:Technology and Concern for employees. The company must evaluate whether itis technologically advanced and even though the company’s vision is concern toemployee, it still have to add it in mission statement.2.3.2 Proposed Mission Statement Strategic Management PMS 3393 6
  7. 7. Establish Starbucks as the premier purveyor1 of the finest coffee in the world andalso to be established as the most employee valued company while maintainingour uncompromising principles as we grow together with technological advances.The six principles are: 1. Provide a great work environment and treat each other with respect and dignity. 2. Embrace diversity as an essential component in the way we do business. 3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee. 4. Develop enthusiastically satisfied customers all of the time 5. Contribute positively to our communities and our environment 6. Recognize that profitability is essential to our future success. 3.0 SITUATIONAL ANALYSIS1 Purveyor means provider Strategic Management PMS 3393 7
  8. 8. 3.1 External analysis3.1.1 PEST AnalysisPoliticalGlobalization today has changed worldwide trend of doing business. Companiesfind it difficult to survive by relying solely on domestic market. The bordersbetween various countries are getting invisible. Companies are nowadayscreating business in various countries without boundaries. Advertisements are allover the world for many products. Company strategists find it not an easy task toexpand the business beyond borders. The basic need for globalization is to learnthe different cultures of the country they plan to start business. Taking all aspectsincluding tax rates, law and legislation is important in globalization.EconomicPeople are nowadays looking for more income to continue their luxurious life.The number of two income households is getting increased all over the world.People are looking forward for products which reduce their time to be spent on.Improved customer service, immediate availability, trouble free operation ofproducts is becoming more important. Since the world is facing crisis, people arelooking forward for cheap and quality products. Price is becoming priority tocustomers. Increase in the inflation rates and increase in unemployment is also afactor for demand in lower priced products.Social, Cultural, Demographic and EnvironmentalAccording to these analyses, it creates different type of consumer andconsequently needs for different products, different services, and differentstrategies. In the view of social, employees should have benefits.Consequently, after retirement for the group of baby boomer, there must be anallocation of funds for the retiree to support there families in life long. Provide Strategic Management PMS 3393 8
  9. 9. benefits such as Medicare and Medicaid retirement beneficial. Next, products areproduced in globally must convenience and attractive to be used by anycustomers. A cultural connection is created, among customers becauseproducing the products with quality flexible price for the rich and middle classfamily. People are also looking forward for free chemical products. This meansthat the product is free from chemical or additional flavor mix and it is made fromnatural products.TechnologicalMass communication and high technology are creating patterns of diversecultures worldwide. Revolutionary technological changes and discoveries arehaving a dramatic impact on organization. Internet is the world informationspread machines that have covered an interaction from one user to another user.In contrast, advertising through have brought high achievement into marketingstrategy. For example, advertising products into facebook so that the users canconsume on their products .Online purchasing, this option it will create lesshassle to customer for purchasing the products which they needed.Advancement of the technology can cause the life cycle of the product changedand increased in the distributing of the products. High technology of theMachineries can increased the supply of the products while achieve a betterprofits for the organization. POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCT BARGAINING BARGAINING POWER OF RIVALRY AMONG POWER OF SUPPLIERS COMPETING FIRMS CONSUMERS3.1.2 Porters five Forces Strategic Management PMS 3393 POTENTIAL ENTRY 9 OF NEW COMPETITORS
  10. 10. The Radial Diagram above is Porter’s Five-force model. It helps the Company’sstrategists to evaluate the industry growth, market development and organizationStrategy accompanied with the good intuitive judgment. The big corporation firmsuch as Starbucks needs a systematic and effective external-audit systembecause external forces among foreign countries vary so greatly. The analysis ofthe Competitive can be divided into Porter’s Five-Forces. The five forces are asfollows: 1. Potential entry of new competitors 2. Potential development of substitute products 3. Bargaining power of suppliers 4. Rivalry among competing firms 5. Bargaining power of consumer Strategic Management PMS 3393 10
  11. 11. Potential entry for new competitors shows a balance between differentfirms competing in a market. It also refers whenever a new partner enter into amarket, they may become threat for one and opportunity for other competingpartners. As all the new entries and existing firms are competing with each otherso the new entry will definitely make an effect on every one transacting in themarket. Starbucks new competitor is the McDonalds’ “McCafe”. There is a greatdeal of risk of entry by potential competitors due to the low start up costs.McDonalds is able to add specialty coffee to their existing services to tap into thespecialty coffee market. There is potential of $125,000 per year in revenue to bemade by each store if they are able to successfully enter the specialty coffeemarket. A potential development of substitute products also develops anenvironment of competition in the market among the competing partners. As allfirms want to compete in term of quality and substitute will lasts for longer in themarket if the quality of the substitute will be greater than the existing alternate.Nowadays coffees are being canned or bottled. The option to buy bottled coffeeis also inexpensive compared to coffee in a mug at the Starbucks store. With thefocus on time management, canned product is the ultimate choice. Other factors also have a major impact on the substitutes. Collectivebargaining power of supplier is if vendors are less in the market and theorganizations that have to purchase from those vendors is high. The demand forthose suppliers will be more as the firms have to purchase from that lesssuppliers. The bargaining power of supplier affects the intensity of competition inan industry. It is best to have a mutual agreement between the supplier and thebuyer. Starbucks have gone through this situation when the world coffee beanprice increased by the suppliers in 2001. Starbucks have no choice but to buy atexpensive price from the suppliers. Strategic Management PMS 3393 11
  12. 12. Later on, Starbucks decided to prepare an agreement document regardingto purchase coffee beans at a fixed price. There is more bargaining power forsuppliers of technological innovations such as automated coffee machines, latteand espresso machines, etc because there are not as many suppliers for suchequipment as there are for coffee beans. Starbucks may pursue a backwardstrategy to gain control or ownership of suppliers. The rivalry among the competing firms is the most powerful of the 5competitive forces. Starbucks primary competitors were restaurants, specialtycoffee shops, doughnut shop, supermarket and all other stores selling hot andcold coffees. In 2003, there was 14000 specialty coffee outlets in U.S itself.Starbucks also faced competition from nationwide coffee manufactures thatdistributed their coffee through supermarkets pricing them cheaper comparedwith Starbucks. Anyway, Starbucks feels that their excellence services and thehigh quality of their coffee is the biggest strength of them. Other than thisStarbucks may lower their prices or add more features in their stores and mayalso increase their advertising all around the world. Last but not least is the bargaining power of consumer. When customerare concentrated or large or buy in volume, they bargaining power represent amajor force affecting the intensity of competition in an industry. This may arisewhen the consumers can inexpensively switch to competing brands. Customersdid not really have bargaining power when it came to premium coffee such asStarbucks. The sheer scale of Starbucks’ business reduces the bargaining powerof any single group of buyers.Porter’s Five Forces Table Strategic Management PMS 3393 12
  13. 13. Porters Details Industry five profitability ForcesRivalry Among Competing Firm There is intense competition in the coffee market amongst established coffee shops that are fighting to get customers. There are local coffee shops offering specials to lure potential HIGH customers in. Restaurants are opening earlier LOW and closing later to accommodate customers on the go. With the 85% North American customers taking their coffee to go, convenience is a major factorPotential of new competitors There is a great deal of risk of entry by potential competitors due to the low start up costs. McDonalds is able to add specialty coffee to HIGH their existing services to tap into the specialty LOW coffee market. There is potential of $125,000 per year in revenue to be made by each store if they are able to successfully enter the specialty coffee market.Potential development of Water is a substitute which is healthy for us andsubstitute products HIGH it is free. The option to buy bottled water is also LOW inexpensive compared to coffee. With the focus on healthier living, water is the ultimate choice.Bargaining power of suppliers There is more bargaining power for suppliers of technological innovations such as automated coffee machines, latte and HIGH LOW espresso machines, etc because there are not as many suppliers for such equipment as there are for coffee beansBargaining power of consumers Customers did not really have bargaining power HIGH when it came to premium coffee such as LOW Starbucks. The sheer scale of Starbucks’ business reduces the bargaining power of any single group of buyers.3.1.3 Competitive Profile Matrix Starbucks Caribou coffee Gloria Jean’s coffee Strategic Management PMS 3393 13
  14. 14. CRITICAL WEIGHT RATING WT RATING WT RATING WTSUCCESS FACTOR (WT) SCORE SCORE SCOREAdvertising 0.10 4 0.40 4 0.40 3 0.30Product Quality 0.20 4 0.80 3 0.60 2 0.40Price 0.05 2 0.10 3 0.15 3 0.15CompetitivenessManagement 0.08 3 0.24 2 0.16 3 0.24Financial position 0.05 3 0.15 3 0.15 2 0.10Customer loyalty 0.10 3 0.30 2 0.20 2 0.20Global expansion 0.15 4 0.60 2 0.30 2 0.30Employee benefits 0.10 4 0.40 2 0.20 2 0.20Customer Service 0.17 3 0.51 2 0.34 2 0.34TOTAL 1.00 3.50 2.50 2.23 Starbucks shown highest score and the second highest were Caribou Coffee and Gloria Jean’s coffee shows the lowest Score. The competitive profile matrix (CPM) weighs product quality. The product quality (0.20) and is the most important item on the list of critical success factors. Starbucks score on this factor as the highest in comparison to their two chief competitors, Caribou and Gloria and reflecting a distinctive competitive advantage in the market. Customer service 0.17, Employee benefits 0.10 and global expansion 0.15 replicates a high level of importance on the CPM. The advertising weight, 0.10, on CPM does not reflect a high level in ranking the critical success factors, but does release valuable information in comparison to their competitors on the CPM. Starbucks rates and scores the lowest on the price competitiveness factor. 3.1.4 External Factor Evaluation Matrix (EFE) Strategic Management PMS 3393 14
  15. 15. Key External FactorsOpportunities Weigh Rating Weighted t ScoreGlobalization makes it easy to enter 0.15 4 0.60international marketPeople are looking for cheap internet 0.10 3 0.30connections.Express foods are getting famous to reduce 0.10 2 0.20time to be spent.Demand for non-chemical and healthy 0.10 3 0.30products.ThreatsIncrease in the inflation rates creates a 0.15 3 0.45demand in lower priced products.Many companies are pricing their products 0.20 3 0.60cheaper to impress customers.Increase in hypermarkets and economical 0.10 2 0.20supermarkets 1.00 2.55Weight of TWSO=0.6+0.3+0.2+0.30 =1.40/0.45 = 3.11Weight of TWST=0.45+0.60+0.20 =1.25/0.452 = 2.78External Evaluation Matrix comprises of 2 lists. Both are important for thecompany. It’s identified as the opportunities and threats of the company. Thefactors are rated from 1 till 4, where 1 is the lowest and 4 is the highest. Thehighest weight is assigned to the most important factors or several very importantfactors. The most important factors maybe a threat or an opportunity. In thiscase, it is an opportunity. Strategic Management PMS 3393 15
  16. 16. Based on the key external factors, the most critical factors are that manycompanies are pricing their products cheaper to impress customers. Increase inthe inflation rates creates a demand in lower priced products comes along as themost critical threats to the company. Anyway, there are still opportunities to increase the growth of thecompany. It is known that the factors which carries most weight is the factor thatmost to be address. Globalization makes it easy to enter international market is agood opportunity for Starbucks. Since the total weighted score is 2.78 generallyStarbucks is not so effective in addressing its CFS which exists in its currentenvironment. It needs to upgrade its effectiveness. However, this is subject to further analysis of individual weighted score ofopportunities (TWSO) and weighted score of threats (TWST). Based on thecalculation, as shown in the table above, is more effective in addressing theOpportunities .Still, Starbucks must find the way to reduce the threats to focus onthe future challenges.3.2 THE INTERNAL ANALYSIS3.2.1 Financial AnalysisA) Projected Income Statement Fiscal Years 2003-2005 Strategic Management PMS 3393 16
  17. 17. Oct 2 % Oct 3 % Sept 3 % Diff. Diff. 2005 2004 2003 between between 2005 2004 and and In dollar’ 000, except per share amounts 2004 2003Net revenue: Retail $5391927 $4457378 $3449624 21 29 Specialty 977373 836869 625898 17 34Total net revenue $6369300 100 5294247 100 4075522 100 20 30Operating expenses:Store operating expenses 2165911 34 1790168 34 1379574 34 21 30Other operating 197024 3 171648 3 141346 4 15 21Depreciation andamortization expenses 340169 5 289182 6 244671 6 18 18General andadministrative 357114 6 304293 6 244550 6 17 24 development Income from equity 76745 1 59071 1 36903 1 30 60venture Operating income 780615 12 606587 12 420850 10 29 44 Gain on sale of - - - - - - - -investment Net earnings $494467 8 $388973 7 $265355 7 27 47Net earning per share-diluted $0.61 0 $0.49 0 $0.34 0 24 44 Analysis summary The Total net revenue for the Starbucks shows steadily increased from 2003 until 2005.The big increase from 2003 to 2004 could be due to the major customer demand and customer royalty for the product. Total net revenue can be divided into retail and specialty. Retail is meant by selling food beverage directly Strategic Management PMS 3393 17
  18. 18. to customer and specialty means customer royalty. The sale for 2004-2005periods is less then 10% from 2003 to 2004 which is 20%.Another significant observation from the statement is the operating income. It isshown that from 2003 to 2005 the income is increased. It could be because ofthe performance of the company is going concern. Operating income from 2003to 2004 is increased by 44%.This drastic increase is because of the purchase ofSeattles Best Coffee and Torrefazione Italia from AFC Enterprises, bringing thetotal number of Starbucks-operated locations worldwide to more than 6,400.While the shareholder is important to any company, the net earnings per shareare equivalently important to the shareholders. As observed, the net earnings ofshare diluted of the company increased from $0.34 in 2003 to $0.49 in 2004,reaching $0.61 by 2005. This is because of the company performance inachieving target. The net earnings per share increased by 44% from 2003 to2004 and increased by 24% from 2004 to 2005.B) Projected Balance Sheet Fiscal years 2003-2005 Strategic Management PMS 3393 18
  19. 19. In millions, except Oct 2 Different Oct 3 Different Sept 30 For per Share Items 2005 Between 2004 Between2004 2003 2004 and2003 and2005 % % Current assets $1209334 (11) $1350895 46 $924029 Current liability 1226996 64 746259 23 608703 Working Capital (17662) 604636 80 335767 Total assets 3514065 4 3386541 22 2776112 Long-term debt(including current portion) 3618 17 4353 (14) 5076 Shareholders equity $2090634 (15) $2470211 19 $2068689Analysis summaryAs observed in the above table current assets increased for 2003-2004 by 46%.Itcould be because of company activations and reloads on Starbucks Cards, butfor the year 2004-2005 is dropped by 11% because of the advertising StarbuckcoffeeBesides, the shareholder Equity increased due to the increases in net earning forthe company. While the shareholder equity decreased for about 15% incomparison of 2004-2005. However shareholder equity increased by $2090634in 2005 it’s because of the stability net earning.Long term debt shown in the table dropped 14% from 2003 to 2004 previously itwas known company’s net earning increases, thus it could mean that the Strategic Management PMS 3393 19
  20. 20. company has extra earnings to pay off debt. Since this is a long term debt, the amount is tremendously big and by reducing it by 14% within a year shown that the development new shops really has a big impact on the company’s performance.C) Financial Ratio 1. Liquidity ratios 2005 2004 Strategic Management PMS 3393 20
  21. 21. Current ratio = $1209334 = $1350895 $1226996 $746259 = 0.99 x = 1.81 x The Current ratio is another test of a companys financial strength. It calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. Liquidity can be measured through current ratios and quick ratio. An acceptable current ratio varies by industry. The more liquid the current assets are, the smaller the current ratio can be without cause for concern. For most industrial companies, 1.5 is an acceptable current ratio and Starbucks current ratio is 0.99x for the year 2005 compared to 1.81 x for the year 2004. This can be considered as a decline and should be seriously concerned and still enough to cover up current liability or short-term debt.2. Leverage Ratio 2005 2004 Long term = $3618 = $4353 Debt-to-total-assets ratio $2090634 $2470211 = 0.0017 = 0.0018 The Debt-to-total-assets ratio Shows the proportion of a companys assets which are financed through debt. If the ratio is less than one, most of the companys assets are financed through equity. If the ratio is greater than one, most of the companys assets are financed through debt. Companies with high ratios are said to be "highly leveraged," and could be in danger if creditors start to demand repayment of debt and for Starbucks, the ratio is very low at both years. The ratio is 0.0017 at 2005 and 0.0018 for the year Strategic Management PMS 3393 21
  22. 22. 2004 respectively and the ratio drop slightly. This means that most of the Starbucks assets are financed through equity and is safe if creditors start to demand repayment of debt.3. Activity Ratio 2005 2004 Fixed assets turnover = $6369300 = $5294247 $2304731 $2035646 = 2.76x = 2.6x 2005 2004 Total assets turnover = $6369300 = $5294247 $3514065 $3386541 = 1.81x = 1.56x Activity ratios show how effectively a firm’s assets are being managed. Activity analysis, together with the leverage ratios are the key factors in determining profitability. Fixed Asset turnover ratio is one of the measures of activity. Another activity measure is the Total Asset turnover ratio. Based on the above tables, Starbucks has a bigger asset turnover which means that the company is using its assets more efficiently than other competitors in the industry. Company’s “no- inventory” policy has significant effects on its superiority. In both ratios , there is a slide increase which shows the company’s efficiency on using assets has increased too.4. Profitability Ratios 2005 2004 Strategic Management PMS 3393 22
  23. 23. Gross Profit Margin = $6369300-2605212 = $5294247-2191440 $6369300 $5294247 = 0.59 (59%) = 0.58 (58%)Profitability ratios measure and explain the ability of the firm to generate income.Gross profit margin has increased. This shows that the company has a greatermargin to cover the operating expenses and yield a profit. 2005 2004 Net Profit Margin = $494467 = $388973 $6369300 $5294247 = 0.078 (7.8%) = 0.073 (7.3%)There is a small increase in the profit after tax. This shows that the company’sprofit has increased. Yet, the percentage of profit compared with the sales issmall which is 7.8% from total sales is the net income of year 2005. 2005 2004 Return on Total Asset( ROA) = $494467 = $388973 $3514065 $3386541 = 0.14 (14%) = 0.12(12%)The ratio is considered an indicator of how effectively a company is using itsassets to generate earnings before contractual obligations must be paid. Thegreater a companys earnings in proportion to its assets, the more effectively thatcompany is said to be using its assets. Starbucks ROA ratio shows that in year2005 the efficiency of using assets to generate earning has increased from 12%to 14%. 2005 2004 Return on equity ( ROE) = $494467 = $388973 Strategic Management PMS 3393 23
  24. 24. $2090634 $2470211 = 0.24 (24%) = 0.16 (16%)Return on equity measures a corporations profitability by revealing howmuch profit a company generates with the money shareholders haveinvested. The ROE is useful for comparing the profitability of a company to thatof other. Starbucks shows a drastic increase from 16% to 24% for the year 2005.This shows that the company is generating a good profit from the shareholdersmoney. This will, increase the shareholders amount in future.EPS Year 2005 2004 Earning per share $0.61 $0.49The earnings per share are a good measure of profitability. When compared withEPS of similar companies, it gives a view of the comparative earnings orearnings power of the firm. EPS ratio calculated for a number of years indicateswhether or not the earning power of the company has increased. Starbucks EPShas increased and thus showing that the earning power has increased.3.2.2 Internal Factor Evaluation Matrix Strategic Management PMS 3393 24
  25. 25. Key Internal Factors Weight Rating Weighted ScoreStrengths 1. Huge market expansion to China, 0.21 4 0.84 Brazil, India and Russia 2. Provide a great work environment 0.10 4 0.40 3. Apply the highest standards of 0.10 3 0.30 excellence in services. 4. Starbucks has monopolistic 0.10 3 0.30 advantages over its competitors. 5. Purchased Ethos healthy water for 0.12 4 0.48 8 million and also does not use chemical flavor for coffee. 6. Launching the sales of 0.08 3 0.24 Frappuccino in Japan and Taiwan.Weaknesses 1. Price of coffee is high at Starbucks 0.10 2 0.20 2. less marketing and advertising its 0.07 2 0.14 product 3. Starbucks products are not 0.12 2 0.24 available at supermarketTOTAL 1.00 3.14TOTAL WEIGHTED SCORE FOR STRENGHT / TOTAL SCORE FOR STRENGHTTWSS: 0.84+0.40+0.30+0.30+0.48+0.24 /0.21+0.10+0.10+0.10+0.12+0.08: 2.56/0.71: 3.60TOTAL WEIGHTED SCORE FOR WEAKNESS / TOTAL SCORE FOR WEAKNESSTWSW: 0.20+0.14+0.24 / 0.10+0.07+0.12 Strategic Management PMS 3393 25
  26. 26. : 0.58/0.28: 2.00 Internal Factor Evaluation (IFE) Matrix is a summary step in conducting aninternal strategic-management audit. This strategy-formulation tool summarizesand evaluates the major strengths and weaknesses in the functional areas ofbusiness, and it’s also provides a basis for identifying and evaluating relationshipamong those area. Based on key Internal Factor, the most advantage factor isStarbucks company is expanding its market to china, Brazil and Russia. Theseare very big markets and will definitely increase its growth.The strategic of Starbucks services provided, quality of coffees and managementof the company makes strength became as very important factor. It is becauseStarbucks provide a great work environment and treat each other with respectand dignity. Besides of that, other than that, Starbucks Purchase Ethos healthywater for 8 million and also does not use chemical flavor for coffee. This is also agreat strength to it as its coffee’s are free from chemical flavors and it blends andmix the real hazelnuts to the coffee. Since the total weighted score is 3.14 generally Starbucks is effective inaddressing its CFS which exists in its current environment. But still, its weaknessis also high. 2.00 is very high, this means that Starbucks is still weak inidentifying its weakness. Since Starbucks has its own strength to increase the growth of the company,there is also has weaknesses. The prices of coffees sold at Starbucks are highercompared with other stores. This is a major strength for other competitors.Other than that, Starbucks does not interest in marketing its products throughadvertisings a lot. It focuses on its quality coffee which has the power to attractcustomers. Anyway, this is subject to further analysis of individual weighted score ofstrength (TWSS) and weighted score of weakness (TWSW). Based on the Strategic Management PMS 3393 26
  27. 27. calculation, as shown in the table above, is more effective in addressing theStrength, still, Starbucks must find the way to overcome weaknesses to focus onthe future challenges. . Strategic Management PMS 3393 27
  28. 28. 3.3 TOWS Analysis STRENGTHS WEAKNESSES S1. W1 Huge market expansion to China, Price of coffee is high at Brazil, India and Russia Starbucks S2. W2 Provide a great work environment S3. less marketing and Apply the highest standards of advertising its product excellence in services. W3 S4. Starbucks products are Starbucks has monopolistic advantages not available at over its competitors. S5 supermarket Purchased Ethos healthy water for 8 million and also does not use chemical flavor for coffee. S6 Launching the sales of Frappuccino in Japan and TaiwanOPPORTUNITIES SO Strategies WO StrategiesO1. S1,S3,O1,O2,O3 W1,W2,O1,O3Globalization makes it easy to enterinternational market Do advertisements about the FREE Reduce the price and Advertise theO2. internet connections and the excellent products all over the places.People are looking for cheap internet service they provide.connections W1,W3,O3O3. S5,O4Express foods are getting famous to Do R&D to sell products atreduce time to be spent Starbucks shall increase the healthy supermarkets without reducing theO4. products into market as the demand quality with cheap priceDemand for non-chemical and for it is high.healthy products Strategic Management PMS 3393 28
  29. 29. ST Strategies WT StrategiesTHREATST1. S2,S3,S4,T1,T2 W1,W2,T1,T2Increase in the inflation rates Starbucks needs to change its Create new complementary productscreates a demand in lower market strategy by reducing the which contain good quality and lowerpriced products. price to compete with the price to attract more customers.T2. competitors.Many companies are pricing W3,T3their products cheaper toimpress customers. Starbucks needs to analyze the wayT3. to reduce the risks of selling its coffeeIncrease in hypermarkets and products at supermarkets aseconomical supermarkets customers are demanding for it.3.4 Space Matrix Strategic Management PMS 3393 29
  30. 30. FINANCIAL STRENGTHS RATING A Starbucks asset is financed through equity and is safe if creditorsstart to demand repayment of debt. Long term debt-to-equity ratio is only 0.0017. 5 Starbucks Return on Asset ratio shows that in year 2005, theefficiency of using assets to generate earning has increased from 12% to 14%. 4 Starbucks net income increased to $494.5 million in the year 2005compared with $388.9 million in 2004. There is an increase of 21.3% in the 4income of Starbucks. 13INDUSTRY STRENGTHS RATING Starbucks Coffee Liqueur was the top selling new spirit product,grossed sales over $8million annually. 4 Starbucks agreed to serve Starbucks Coffee in all United flights. 3 “Starbucks Everywhere” approach has increased foot traffic for all thestores in area. This makes customers easy to fine Starbucks all the places in 5town. 12 +6 = best +1= worstENVIRONMENTAL STABILITY Strategic Management PMS 3393 30
  31. 31. RATING Starbucks products prices are high compared with competing coffeehouses. They price their products several dollars below then Starbucks price. -4 Demand for Starbucks products to be supplied in supermarketsincrease. But, doing that will put Starbucks business in risk as customers don’t know -2the way to brew the coffee. Increase in world coffee bean price in 2001, forced Starbucks toincrease its beverages and coffee sold at retail. -3 -9COMPETITIVE ADVANTAGES RATING Starbucks coffee and beverages are high in quality brewed by welltrained employees. -1 Starbucks teamed up with T-mobile WI-Fi service to provide internetaccess to all over Starbucks Coffeehouse -1 There are 16,120 Starbucks coffeehouses worldwide and plan to openanother 1800 stores. -2 Starbucks is a customer oriented Coffeehouse. -2 -6 -1 = best -6= worstCONCLUSION Strategic Management PMS 3393 31
  32. 32. FS Average is 13/3 = 4.3 IS Average is 12/3 = 4.0 ES Average is -9/3 = - 3.0 CA Average is -6/4 = - 1.5 Directional Vector Coordinates: X- axis: 4.0 + (-1.5) = 2.5 Y- axis: 4.3 + (-3.0) = 1.3 SPACE MATRIX FS +6 - CONSERVATIVE AGGRESSIVE +5 - +4 - +3 - +2 - +1 - (2.5, 1.3) CA IS I I I I I I I I I I I I -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 -1 - -2 - -3 - DEFENSIVE -4 - COMPETITIVE -5 - -6 - ES Starbucks must pursue a strategy that is Aggressive. The strategies that include in aggressive strategies is backward integration, forward integration, horizontal integration, market penetration, market development, product development and diversification which include related and unrelated diversification.3.5 BCG Matrix Strategic Management PMS 3393 32
  33. 33. HIGH MEDIUM LOW HIGH  Backward, Forward, or  Market Penetration Horizontal Integration  Market Development  Market Penetration  Product Development  Market Development  Divestiture  Product Development STARS QUESTION MARKS II I MEDIUM STARBUCKS  Product Development  Retrenchment  Diversification  Divestiture  Retrenchment  Liquidation  Divestiture CASH COWS DOGS III IV LOWSUMMARYThe Boston Consulting Group (BCG) matrix is enhancing a multidivisional firm’sefforts to formulate strategies. This matrix allows a multidivisional organization tomanage its portfolio of businesses by examining the relative market shareposition and the industry growth rate each division relative to all other divisions inthe organization. Starbucks are measured to identify the stores strategic positionin the Boston Consulting Matrix. The BCG matrix, were included 4 divisionswhich is Question Marks, Star, Cash Cows, and Dogs. In division quadrant I,shows low relatives market position, high growth industry. Firms cash needs arehigh and cash generation is low.This division decides to strengthen on pursuing an intensive strategy. Divisionquadrant II, identifies best long-run opportunities for growth and profitability. Star Strategic Management PMS 3393 33
  34. 34. division is high relative market share and high industry growth rate. In convince of substantial investment to maintain or strengthen their dominant positions. Next in quadrant III, Cash Cows with high relative market share position but compete in a low growth industry ,while this division will be managed to maintain strong position for as long as possible. Finally, in quadrant IV Dogs have low relative market share position and compete in a slow or no market growth industry. This divisional are weak into internal and external position and often liquidated, divested or trimmed down the retrenchment. Retrenchment can be best strategy to pursue because many dogs bounced back, after strenuous asset and cost reduction, to become viable, profitable divisions. In contrast, the highest scored is 3.5, and it determinant that relative share position is HIGH. Besides that, Starbucks Income Statements shows the Net Revenue were consecutively increased between the years 2003 until 2005. The revenues on the year 2003 is $4075,000, while $2191,000 in year 2004, $6369,000 in year 2005. Moreover, the industry sales growth rate between year 2004 and 2005is 56.3%.It determinant HIGH position of industry sales growth rate. In conclusion, Starbucks were identified in STAR division. This division represents the Starbucks long-run opportunities for the growth and profitability. While, this division is in high relative market share and industry growth rate and subsequently they received substantial investment. The divisions are forward, backward, and horizontal integration, market penetration, market development and product development are will be considered. 4.0 MAJOR ISSUES4.1 Corporate Level Strategic Management PMS 3393 34
  35. 35.  Starbucks’ coffees price much expensive than other market competitor product, it is because Starbucks’ purchased only high quality coffee beans, This will increase the quality of the product as well as the price of the product. As Starbucks have many competitors, this will be an advantage of the competitors. People are also nowadays looking forward for cheap products. Even though Starbucks has its own customer who spends their money to get the quality coffee, it still has to look for the other people who are running to the next store.4.2 Functional Level  Starbucks have poor marketing strategy on advertising. They prefer to build the brand by promoting the drinks cup-by-cup with customers. In this way, the advertisement ends until they drink the coffee, while some groups of people willing to support the advertisement for timing just to taste the drink for free. The chances to attract valuable customers are very low. Therefore, it also affects gross profit of Starbucks, the study does not show drastic increased between year 2004 and 2005. The percentages of the profit increased from 58% in year 2004 to 59% in year 2005. This would because of lack of marketing strategy in advertising. The company spent total of $87.7 million on advertising in fiscal 2005, up from $49.6 million in fiscal 2003. It show Starbucks does not emphasize on funding the money into advertisement. Strategic Management PMS 3393 35
  36. 36.  Starbucks does not emphasize in distributing their products to supermarkets. They are very concern on quality of the coffee; if the coffees were packaged into plastic bags the mixing of the beans will not be as accurate. It will cause the taste of the coffee will be different and the coffee beans would not be fresh as grinded beans. In addition, the organization did not show a proper guideline to mix the coffee to customer. Therefore, the packaging coffee in supermarket did not have same taste as coffee which mixed in the Starbucks. Customer’s satisfaction on the coffee will badly affect and as well as demand of the Starbucks coffee. Strategic Management PMS 3393 36
  37. 37. 5.0 RECOMMENDATION5.1 CORPORATE LEVELReduce their price by producing a new product of coffee using cheaper beans ormay come out with special discounts promotions to increase the sales.Starbucks’ coffee is world’s preeminent global brand. Starbucks’ should decreaseprice of the coffee to face competition from nationwide coffee manufactures.They also can do promotion or promote packages of coffee set to impresscustomers, such as McDonald promoting their product. If the challenge was metsuccessfully, in all likelihood company’s best years lay on the strategic roadahead.5.2 BUSINESS LEVELLarge companies like Starbucks can effectively pursue Focus-Based Strategy inconjunction with differentiation or cost leadership based strategy. Being a lowercost store will increase the difference between Starbucks and other stores. Atpresent, Starbucks competitors are attempting to specialize in the coffeebusiness, therefore Starbucks must pursue focus strategy to increase itsstrength.5.3 FUNCTIONAL LEVELAdvertisement can develop through internet that services convinced for users toaccess, give the brochures, do road shows, so that public come to know moreabout Starbucks details. Market penetration and market development will help toincrease the sales and reduce the weakness in Starbucks. Distribute packagingof Starbucks instant coffee will definitely increase the sales as it is a demandfrom customers. Strategic Management PMS 3393 37
  38. 38. Introducing accurate mixing level of the coffee in a tea bag style will increase thesales at supermarkets. Packing it together with the guidelines on mixing coffeebeans and sugars with milk to result same taste of coffee will never reduce thequality of the coffee. Providing proper steps to customer will make a better qualityof coffee indeed.. Strategic Management PMS 3393 38
  39. 39. 6.0 CONCLUSIONStarbucks success is achieved through a few factors.  Outstanding Quality of the coffee brewed  Excellent service provided at the stores  Fast growth of new stores all around the worldThese factors not only have increased the sales but also the reputation amongthe coffee lovers. Starbucks encounters aggressive competition in all areas of itsbusiness activity. The market for each of their business segments arecharacterized by vigorous competition among major corporations with longestablished positions and a large number of new and rapidly growing firms.Anyway, as Starbucks have a good financial capacity with good strategies; it canovercome all the competitors to shine high as the first class coffee purveyor. Strategic Management PMS 3393 39
  40. 40. Strategic Management PMS 3393 40