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  • 1.0 INTRODUCTION Name : Starbucks Corporation (NASDAQ: SBUX) Headquarters : Seattle, Washington, U.S. Employees : 176,000 in 2008 Revenue for 2008 : US$10.383 billion CEO : 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 the world, with 16,120 stores in 49 countries, including around 11,000 in the United States, followed by nearly 1,000 in Canada and more than 800 in Japan. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, snacks, and items such as mugs and coffee beans. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. Starbucks’ Italian style coffee, espresso beverages, teas, pastries and confections had made Starbucks one of the greatest retailing stories of recent history and world’s biggest specialty coffee chain. In 2003, Starbucks made the fortune 500. Strategic Management PMS 3393 1
  • 1.1 BACKGROUND OF THE COMPANY 1.1.1 Era before Howard Schultz In 1971, three academics, English Teacher Jerry Baldwin, History Teacher Zel Siegel and writer Gordon Bowker opened Starbucks Coffee, Tea and Spice in Touristy Pikes Place Market in Seattle. The three were inspired by entrepreneur Alfred Peet (whom they knew personally) to sell high-quality coffee beans and equipment. The store did not offer fresh brewed coffee by the cup, but tasting samples were sometimes available. Siegel will wore a grocers apron, scooped out beans for customers while the other two kept their day jobs but came by at lunch or after work to help out. The store was an immediate success, with sales exceeding expectations, partly because of interest stirred by the favorable article in Seattle Times. Starbucks ordered its coffee-bean from Alfred Peet but later on the three partners bought their own used roaster setting up roasting operations in a nearby ramshackle building and developed their own blends and flavors. By the year 1980s the company had four Starbucks Stores in Seattle area and had been profitable every year. Later on, Siegel left the company and Jerry Baldwin took over day-to-day management of the company. Gordon Bowker remained as an owner 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 kitchen equipment and coffeemakers decided to pay Starbucks a visit. He was curious about why Starbucks was selling so many of his company products. He was impressed with the company management and the quality products the make. Schultz asked Baldwin whether there was any way he could fit into Starbucks and it took long time to decide his request. He tried many times till one day he was given a job of heading marketing and overseeing the retail stores. Strategic Management PMS 3393 2
  • 1.1.2 Era with Howard Schultz Howard Schultz spent most of his working hours in the four stores learning the retail aspects of the company business; Schultz was overflowing with ideas for the company. His biggest inspiration and vision for Starbucks future came during 1983 when the company sent him for an international house wares show to Milan, Italy. There he spotted an espresso bar and went to take a coffee. He was impressed with the coffeehouse services and decided to stay at Milan for a week to explore all coffee bars and learned as much as he could about the Italian passion 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 of Italian coffee bar culture. He shared his idea with Baldwin and it took nearly a year to convince Jerry Baldwin to let him test an espresso bar. In April 1984, the first espresso bar was opened and it was a successful too. Yet Baldwin felt something is wrong. After Schultz failed to convince Baldwin for the expansion of business, he left Starbucks in 1985. Schultz started the “Il Giornale” coffee bar chain in 1985 and the coffeehouse was very successful. In 1987 Starbucks owner Jerry Baldwin and Bowker decide to sell the whole Starbucks chain to Schultz's Il Giornale, which rebranded the Il Giornale outlets as Starbucks and quickly began to expand. Starbucks opened it’s first locations outside Seattle at Waterfront Station in Vancouver, British Columbia, and Chicago, Illinois, that same 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 of 900 new stores outside of the United States. Strategic Management PMS 3393 3
  • 2.0 STARBUCKS’ VISION, OBJECTIVES AND MISSION 2.1 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
  •  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
  • 2.3.1 Analyzing the Mission Statement Component Starbucks mission statement is needed to be analyzed to see the total number of mission component it has. NO COMPONENT YES/NO 1. Customers Yes 2. Products or services Yes 3. Markets Yes 4. Technology No 5. Concern for survival, profitability and growth Yes 6. Philosophy Yes 7. Self-Concept Yes 8. Concern for public image Yes 9. Concern for employees No This is a good mission statement. This mission statement lacks of 2 components: Technology and Concern for employees. The company must evaluate whether it is technologically advanced and even though the company’s vision is concern to employee, it still have to add it in mission statement. 2.3.2 Proposed Mission Statement Strategic Management PMS 3393 6
  • Establish Starbucks as the premier purveyor1 of the finest coffee in the world and also to be established as the most employee valued company while maintaining our 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 ANALYSIS 1 Purveyor means provider Strategic Management PMS 3393 7
  • 3.1 External analysis 3.1.1 PEST Analysis Political Globalization today has changed worldwide trend of doing business. Companies find it difficult to survive by relying solely on domestic market. The borders between various countries are getting invisible. Companies are nowadays creating business in various countries without boundaries. Advertisements are all over the world for many products. Company strategists find it not an easy task to expand the business beyond borders. The basic need for globalization is to learn the different cultures of the country they plan to start business. Taking all aspects including tax rates, law and legislation is important in globalization. Economic People 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 of products is becoming more important. Since the world is facing crisis, people are looking forward for cheap and quality products. Price is becoming priority to customers. Increase in the inflation rates and increase in unemployment is also a factor for demand in lower priced products. Social, Cultural, Demographic and Environmental According to these analyses, it creates different type of consumer and consequently needs for different products, different services, and different strategies. In the view of social, employees should have benefits. Consequently, after retirement for the group of baby boomer, there must be an allocation of funds for the retiree to support there families in life long. Provide Strategic Management PMS 3393 8
  • BARGAINING POWER OF SUPPLIERS POTENTIAL ENTRY OF NEW COMPETITORS BARGAINING POWER OF CONSUMERS POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCT RIVALRY AMONG COMPETING FIRMS benefits such as Medicare and Medicaid retirement beneficial. Next, products are produced in globally must convenience and attractive to be used by any customers. A cultural connection is created, among customers because producing the products with quality flexible price for the rich and middle class family. People are also looking forward for free chemical products. This means that the product is free from chemical or additional flavor mix and it is made from natural products. Technological Mass communication and high technology are creating patterns of diverse cultures worldwide. Revolutionary technological changes and discoveries are having a dramatic impact on organization. Internet is the world information spread machines that have covered an interaction from one user to another user. In contrast, advertising through have brought high achievement into marketing strategy. For example, advertising products into facebook so that the users can consume on their products .Online purchasing, this option it will create less hassle to customer for purchasing the products which they needed. Advancement of the technology can cause the life cycle of the product changed and increased in the distributing of the products. High technology of the Machineries can increased the supply of the products while achieve a better profits for the organization. 3.1.2 Porters five Forces Strategic Management PMS 3393 9
  • The Radial Diagram above is Porter’s Five-force model. It helps the Company’s strategists to evaluate the industry growth, market development and organization Strategy accompanied with the good intuitive judgment. The big corporation firm such as Starbucks needs a systematic and effective external-audit system because external forces among foreign countries vary so greatly. The analysis of the Competitive can be divided into Porter’s Five-Forces. The five forces are as follows: 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
  • Potential entry for new competitors shows a balance between different firms competing in a market. It also refers whenever a new partner enter into a market, they may become threat for one and opportunity for other competing partners. As all the new entries and existing firms are competing with each other so the new entry will definitely make an effect on every one transacting in the market. Starbucks new competitor is the McDonalds’ “McCafe”. 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 their existing services to tap into the specialty 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. A potential development of substitute products also develops an environment of competition in the market among the competing partners. As all firms want to compete in term of quality and substitute will lasts for longer in the market 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 coffee is also inexpensive compared to coffee in a mug at the Starbucks store. With the focus on time management, canned product is the ultimate choice. Other factors also have a major impact on the substitutes. Collective bargaining power of supplier is if vendors are less in the market and the organizations that have to purchase from those vendors is high. The demand for those suppliers will be more as the firms have to purchase from that less suppliers. The bargaining power of supplier affects the intensity of competition in an industry. It is best to have a mutual agreement between the supplier and the buyer. Starbucks have gone through this situation when the world coffee bean price increased by the suppliers in 2001. Starbucks have no choice but to buy at expensive price from the suppliers. Strategic Management PMS 3393 11
  • Later on, Starbucks decided to prepare an agreement document regarding to purchase coffee beans at a fixed price. There is more bargaining power for suppliers of technological innovations such as automated coffee machines, latte and espresso machines, etc because there are not as many suppliers for such equipment as there are for coffee beans. Starbucks may pursue a backward strategy to gain control or ownership of suppliers. The rivalry among the competing firms is the most powerful of the 5 competitive forces. Starbucks primary competitors were restaurants, specialty coffee shops, doughnut shop, supermarket and all other stores selling hot and cold coffees. In 2003, there was 14000 specialty coffee outlets in U.S itself. Starbucks also faced competition from nationwide coffee manufactures that distributed their coffee through supermarkets pricing them cheaper compared with Starbucks. Anyway, Starbucks feels that their excellence services and the high quality of their coffee is the biggest strength of them. Other than this Starbucks may lower their prices or add more features in their stores and may also increase their advertising all around the world. Last but not least is the bargaining power of consumer. When customer are concentrated or large or buy in volume, they bargaining power represent a major force affecting the intensity of competition in an industry. This may arise when the consumers can inexpensively switch to competing brands. Customers did not really have bargaining power when it came to premium coffee such as Starbucks. The sheer scale of Starbucks’ business reduces the bargaining power of any single group of buyers. Porter’s Five Forces Table Strategic Management PMS 3393 12
  • Porters five Forces Details Industry profitability Rivalry Among Competing Firm HIGH 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 customers in. Restaurants are opening earlier and closing later to accommodate customers on the go. With the 85% North American customers taking their coffee to go, convenience is a major factor LOW Potential of new competitors HIGH 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 their existing services to tap into the specialty 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. LOW Potential development of substitute products HIGH Water is a substitute which is healthy for us and it is free. The option to buy bottled water is also inexpensive compared to coffee. With the focus on healthier living, water is the ultimate choice. LOW Bargaining power of suppliers HIGH There is more bargaining power for suppliers of technological innovations such as automated coffee machines, latte and espresso machines, etc because there are not as many suppliers for such equipment as there are for coffee beans LOW Bargaining power of consumers HIGH Customers did not really have bargaining power when it came to premium coffee such as Starbucks. The sheer scale of Starbucks’ business reduces the bargaining power of any single group of buyers. LOW 3.1.3 Competitive Profile Matrix Starbucks Caribou coffee Gloria Jean’s coffee Strategic Management PMS 3393 13
  • CRITICAL SUCCESS FACTOR WEIGHT (WT) RATING WT SCORE RATING WT SCORE RATING WT SCORE Advertising 0.10 4 0.40 4 0.40 3 0.30 Product Quality 0.20 4 0.80 3 0.60 2 0.40 Price Competitiveness 0.05 2 0.10 3 0.15 3 0.15 Management 0.08 3 0.24 2 0.16 3 0.24 Financial position 0.05 3 0.15 3 0.15 2 0.10 Customer loyalty 0.10 3 0.30 2 0.20 2 0.20 Global expansion 0.15 4 0.60 2 0.30 2 0.30 Employee benefits 0.10 4 0.40 2 0.20 2 0.20 Customer Service 0.17 3 0.51 2 0.34 2 0.34 TOTAL 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
  • Weight of TWSO=0.6+0.3+0.2+0.30 =1.40/0.45 = 3.11 Weight of TWST=0.45+0.60+0.20 =1.25/0.452 = 2.78 External Evaluation Matrix comprises of 2 lists. Both are important for the company. It’s identified as the opportunities and threats of the company. The factors are rated from 1 till 4, where 1 is the lowest and 4 is the highest. The highest weight is assigned to the most important factors or several very important factors. The most important factors maybe a threat or an opportunity. In this case, it is an opportunity. Strategic Management PMS 3393 Key External Factors Opportunities Weigh t Rating Weighted Score Globalization makes it easy to enter international market 0.15 4 0.60 People are looking for cheap internet connections. 0.10 3 0.30 Express foods are getting famous to reduce time to be spent. 0.10 2 0.20 Demand for non-chemical and healthy products. 0.10 3 0.30 Threats Increase in the inflation rates creates a demand in lower priced products. 0.15 3 0.45 Many companies are pricing their products cheaper to impress customers. 0.20 3 0.60 Increase in hypermarkets and economical supermarkets 0.10 2 0.20 1.00 2.55 15
  • Based on the key external factors, the most critical factors are that many companies are pricing their products cheaper to impress customers. Increase in the inflation rates creates a demand in lower priced products comes along as the most critical threats to the company. Anyway, there are still opportunities to increase the growth of the company. It is known that the factors which carries most weight is the factor that most to be address. Globalization makes it easy to enter international market is a good opportunity for Starbucks. Since the total weighted score is 2.78 generally Starbucks is not so effective in addressing its CFS which exists in its current environment. It needs to upgrade its effectiveness. However, this is subject to further analysis of individual weighted score of opportunities (TWSO) and weighted score of threats (TWST). Based on the calculation, as shown in the table above, is more effective in addressing the Opportunities .Still, Starbucks must find the way to reduce the threats to focus on the future challenges. 3.2 THE INTERNAL ANALYSIS 3.2.1 Financial Analysis A) Projected Income Statement Fiscal Years 2003-2005 Strategic Management PMS 3393 16
  • Oct 2 2005 % Oct 3 2004 % Sept 3 2003 % Diff. between 2005 and 2004 Diff. between 2004 and 2003In dollar’ 000, except per share amounts Net revenue: Retail $5391927 $4457378 $3449624 21 29 Specialty 977373 836869 625898 17 34 Total net revenue $6369300 100 5294247 100 4075522 100 20 30 Operating expenses: Store operating expenses 2165911 34 1790168 34 1379574 34 21 30 Other operating 197024 3 171648 3 141346 4 15 21 Depreciation and amortization expenses 340169 5 289182 6 244671 6 18 18 24 60 General and administrative development Income from equity venture 357114 76745 6 1 304293 59071 6 1 244550 36903 6 1 17 30 Operating income 780615 12 606587 12 420850 10 29 44 Gain on sale of investment - - - - - - - - Net earnings $494467 8 $388973 7 $265355 7 27 47 Net 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
  • to customer and specialty means customer royalty. The sale for 2004-2005 periods is less then 10% from 2003 to 2004 which is 20%. Another significant observation from the statement is the operating income. It is shown that from 2003 to 2005 the income is increased. It could be because of the performance of the company is going concern. Operating income from 2003 to 2004 is increased by 44%.This drastic increase is because of the purchase of Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises, bringing the total number of Starbucks-operated locations worldwide to more than 6,400. While the shareholder is important to any company, the net earnings per share are equivalently important to the shareholders. As observed, the net earnings of share 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 in achieving target. The net earnings per share increased by 44% from 2003 to 2004 and increased by 24% from 2004 to 2005. B) Projected Balance Sheet Fiscal years 2003-2005 Strategic Management PMS 3393 18
  • In millions, except For per Share Items Oct 2 2005 Different Between 2004 and2005 % Oct 3 2004 Different Between2004 and2003 % Sept 30 2003 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 $2068689 Analysis summary As observed in the above table current assets increased for 2003-2004 by 46%.It could be because of company activations and reloads on Starbucks Cards, but for the year 2004-2005 is dropped by 11% because of the advertising Starbuck coffee Besides, the shareholder Equity increased due to the increases in net earning for the company. While the shareholder equity decreased for about 15% in comparison of 2004-2005. However shareholder equity increased by $2090634 in 2005 it’s because of the stability net earning. Long term debt shown in the table dropped 14% from 2003 to 2004 previously it was known company’s net earning increases, thus it could mean that the Strategic Management PMS 3393 19
  • 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
  • Current ratio = $1209334 = $1350895 $1226996 $746259 = 0.99 x = 1.81 x The Current ratio is another test of a company's 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 Debt-to-total-assets ratio = $3618 = $4353 $2090634 $2470211 = 0.0017 = 0.0018 The Debt-to-total-assets ratio Shows the proportion of a company's assets which are financed through debt. If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's 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
  • 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
  • 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 greater margin 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’s profit has increased. Yet, the percentage of profit compared with the sales is small 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 its assets to generate earnings before contractual obligations must be paid. The greater a company's earnings in proportion to its assets, the more effectively that company is said to be using its assets. Starbucks ROA ratio shows that in year 2005 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
  • $2090634 $2470211 = 0.24 (24%) = 0.16 (16%) Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The ROE is useful for comparing the profitability of a company to that of 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 shareholders money. This will, increase the shareholders amount in future. EPS Year 2005 2004 Earning per share $0.61 $0.49 The earnings per share are a good measure of profitability. When compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased. Starbucks EPS has increased and thus showing that the earning power has increased. 3.2.2 Internal Factor Evaluation Matrix Strategic Management PMS 3393 24
  • Key Internal Factors Weight Rating Weighted Score Strengths 1. Huge market expansion to China, Brazil, India and Russia 0.21 4 0.84 2. Provide a great work environment 0.10 4 0.40 3. Apply the highest standards of excellence in services. 0.10 3 0.30 4. Starbucks has monopolistic advantages over its competitors. 0.10 3 0.30 5. Purchased Ethos healthy water for 8 million and also does not use chemical flavor for coffee. 0.12 4 0.48 6. Launching the sales of Frappuccino in Japan and Taiwan. 0.08 3 0.24 Weaknesses 1. Price of coffee is high at Starbucks 0.10 2 0.20 2. less marketing and advertising its product 0.07 2 0.14 3. Starbucks products are not available at supermarket 0.12 2 0.24 TOTAL 1.00 3.14 TOTAL WEIGHTED SCORE FOR STRENGHT / TOTAL SCORE FOR STRENGHT TWSS: 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 : 3.60 TOTAL WEIGHTED SCORE FOR WEAKNESS / TOTAL SCORE FOR WEAKNESS TWSW: 0.20+0.14+0.24 / 0.10+0.07+0.12 : 0.58/0.28 Strategic Management PMS 3393 25
  • : 2.00 Internal Factor Evaluation (IFE) Matrix is a summary step in conducting an internal strategic-management audit. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of business, and it’s also provides a basis for identifying and evaluating relationship among those area. Based on key Internal Factor, the most advantage factor is Starbucks' company is expanding its market to china, Brazil and Russia. These are very big markets and will definitely increase its growth. The strategic of Starbucks' services provided, quality of coffees and management of the company makes strength became as very important factor. It is because Starbucks' provide a great work environment and treat each other with respect and dignity. Besides of that, other than that, Starbucks Purchase Ethos healthy water for 8 million and also does not use chemical flavor for coffee. This is also a great strength to it as its coffee’s are free from chemical flavors and it blends and mix the real hazelnuts to the coffee. Since the total weighted score is 3.14 generally Starbucks is effective in addressing its CFS which exists in its current environment. But still, its weakness is also high. 2.00 is very high, this means that Starbucks is still weak in identifying 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 higher compared with other stores. This is a major strength for other competitors. Other than that, Starbucks does not interest in marketing its products through advertisings a lot. It focuses on its quality coffee which has the power to attract customers. Anyway, this is subject to further analysis of individual weighted score of strength (TWSS) and weighted score of weakness (TWSW). Based on the calculation, as shown in the table above, is more effective in addressing the Strategic Management PMS 3393 26
  • Strength, still, Starbucks' must find the way to overcome weaknesses to focus on the future challenges. . Strategic Management PMS 3393 27
  • 3.3 TOWS Analysis Strategic Management PMS 3393 STRENGTHS S1. Huge market expansion to China, Brazil, India and Russia S2. Provide a great work environment S3. Apply the highest standards of excellence in services. S4. Starbucks has monopolistic advantages over its competitors. S5 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 Taiwan WEAKNESSES W1 Price of coffee is high at Starbucks W2 less marketing and advertising its product W3 Starbucks products are not available at supermarket OPPORTUNITIES O1. Globalization makes it easy to enter international market O2. People are looking for cheap internet connections O3. Express foods are getting famous to reduce time to be spent O4. Demand for non-chemical and healthy products SO Strategies S1,S3,O1,O2,O3 Do advertisements about the FREE internet connections and the excellent service they provide. S5,O4 Starbucks shall increase the healthy products into market as the demand for it is high. WO Strategies W1,W2,O1,O3 Reduce the price and Advertise the products all over the places. W1,W3,O3 Do R&D to sell products at supermarkets without reducing the quality with cheap price 28
  • Strategic Management PMS 3393 ST Strategies S2,S3,S4,T1,T2 Starbucks needs to change its market strategy by reducing the price to compete with the competitors. WT Strategies W1,W2,T1,T2 Create new complementary products which contain good quality and lower price to attract more customers. W3,T3 Starbucks needs to analyze the way to reduce the risks of selling its coffee products at supermarkets as customers are demanding for it. THREATS 29 T1. Increase in the inflation rates creates a demand in lower priced products. T2. Many companies are pricing their products cheaper to impress customers. T3. Increase in hypermarkets and economical supermarkets
  • 3.4 Space Matrix FINANCIAL STRENGTHS RATING 1. A Starbucks asset is financed through equity and is safe if creditors start to demand repayment of debt. Long term debt-to-equity ratio is only 0.0017. 5 2. Starbucks Return on Asset ratio shows that in year 2005, the efficiency of using assets to generate earning has increased from 12% to 14%. 4 3. Starbucks net income increased to $494.5 million in the year 2005 compared with $388.9 million in 2004. There is an increase of 21.3% in the income of Starbucks. 4 13 INDUSTRY STRENGTHS RATING 1. Starbucks Coffee Liqueur was the top selling new spirit product, grossed sales over $8million annually. 4 2. Starbucks agreed to serve Starbucks Coffee in all United flights. 3 3. “Starbucks Everywhere” approach has increased foot traffic for all the stores in area. This makes customers easy to fine Starbucks all the places in town. 5 12 Strategic Management PMS 3393 +6 = best +1= worst 30
  • ENVIRONMENTAL STABILITY RATING 1. Starbucks products prices are high compared with competing coffee houses. They price their products several dollars below then Starbucks price. -4 2. Demand for Starbucks products to be supplied in supermarkets increase. But, doing that will put Starbucks business in risk as customers don’t know the way to brew the coffee. -2 3. Increase in world coffee bean price in 2001, forced Starbucks to increase its beverages and coffee sold at retail. -3 -9 COMPETITIVE ADVANTAGES RATING 1. Starbucks coffee and beverages are high in quality brewed by well trained employees. -1 2. Starbucks teamed up with T-mobile WI-Fi service to provide internet access to all over Starbucks Coffeehouse -1 3. There are 16,120 Starbucks coffeehouses worldwide and plan to open another 1800 stores. -2 4. Starbucks is a customer oriented Coffeehouse. -2 -6 Strategic Management PMS 3393 -1 = best -6= worst 31
  • CONCLUSION 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. Strategic Management PMS 3393 32
  • 3.5 BCG Matrix HIGH MEDIUM LOW HIGH MEDIUM LOW SUMMARY The Boston Consulting Group (BCG) matrix is enhancing a multidivisional firm’s efforts to formulate strategies. This matrix allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate each division relative to all other divisions in the organization. Starbucks are measured to identify the stores strategic position in the Boston Consulting Matrix. The BCG matrix, were included 4 divisions which is Question Marks, Star, Cash Cows, and Dogs. In division quadrant I, shows low relatives market position, high growth industry. Firms cash needs are high and cash generation is low. Strategic Management PMS 3393 33  Backward, Forward, or Horizontal Integration  Market Penetration  Market Development  Product Development STARS II STARBUCKS  Market Penetration  Market Development  Product Development  Divestiture QUESTION MARKS I  Product Development  Diversification  Retrenchment  Divestiture CASH COWS III  Retrenchment  Divestiture  Liquidation DOGS IV
  • This division decides to strengthen on pursuing an intensive strategy. Division quadrant II, identifies best long-run opportunities for growth and profitability. Star 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. Strategic Management PMS 3393 34
  • 4.0 MAJOR ISSUES 4.1 Corporate Level  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
  •  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
  • 5.0 RECOMMENDATION 5.1 CORPORATE LEVEL Reduce their price by producing a new product of coffee using cheaper beans or may come out with special discounts promotions to increase the sales. Starbucks’ coffee is world’s preeminent global brand. Starbucks’ should decrease price of the coffee to face competition from nationwide coffee manufactures. They also can do promotion or promote packages of coffee set to impress customers, such as McDonald promoting their product. If the challenge was met successfully, in all likelihood company’s best years lay on the strategic road ahead. 5.2 BUSINESS LEVEL Large companies like Starbucks can effectively pursue Focus-Based Strategy in conjunction with differentiation or cost leadership based strategy. Being a lower cost store will increase the difference between Starbucks and other stores. At present, Starbucks competitors are attempting to specialize in the coffee business, therefore Starbucks must pursue focus strategy to increase its strength. 5.3 FUNCTIONAL LEVEL Advertisement can develop through internet that services convinced for users to access, give the brochures, do road shows, so that public come to know more about Starbucks details. Market penetration and market development will help to increase the sales and reduce the weakness in Starbucks. Distribute packaging of Starbucks instant coffee will definitely increase the sales as it is a demand from customers. Strategic Management PMS 3393 37
  • Introducing accurate mixing level of the coffee in a tea bag style will increase the sales at supermarkets. Packing it together with the guidelines on mixing coffee beans and sugars with milk to result same taste of coffee will never reduce the quality of the coffee. Providing proper steps to customer will make a better quality of coffee indeed. . Strategic Management PMS 3393 38
  • 6.0 CONCLUSION Starbucks 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 world These factors not only have increased the sales but also the reputation among the coffee lovers. Starbucks encounters aggressive competition in all areas of its business activity. The market for each of their business segments are characterized by vigorous competition among major corporations with long established positions and a large number of new and rapidly growing firms. Anyway, as Starbucks have a good financial capacity with good strategies; it can overcome all the competitors to shine high as the first class coffee purveyor. Strategic Management PMS 3393 39
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