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Strategic planning of starbucks


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Strategic planning of starbucks

  1. 1. Strategic Planning of Starbucks (Past Decisions, Current situation and Future Options)Student ID number: F1005899Full name: Namrataben Govindbhai PanchasaraIntake and group number: 8Module Name: Strategic PlanningAssignment Type: Individual AssignmentDate: 04/11/2011 1Namrataben Panchasara (Student ID:F1005899)
  2. 2. Executive Summery This report aims to strategically based evaluate Starbucks past and current situation and future position of this largely successful company. The analysis uses Michael five forces analysis, Starbucks’ Original Generic Strategy, Company success factor, SWOT, PEST and recommendation for future that Starbucks can organised Reward program Organised, Becoming more Environment Friendly, CD Burning, Install free wireless internet and Rent out meeting space, Increase connection with customers, Continually improve the coffee. At last conclusion and i use book of Michal Porter and some others and electronic articles and websites. 2Namrataben Panchasara (Student ID:F1005899)
  3. 3. Index No. Index Page No. 1. Executive Summery 2 2. Introduction of the company 4 3. Porters five force analysis (Past) 5 4. Starbucks’ Original Generic Strategy (Past) 8 5. Starbucks’ Success Factors 9 6. Michael Porter’s 5 Force analyses (current) 11 7. SWOT Analysis 12 8. PEST Analysis 13 9. Recommendation for Future Action 14 10. Conclusion 16 11. References 17 3Namrataben Panchasara (Student ID:F1005899)
  4. 4. Introduction of company Starbucks is the largest coffeehouse company in the world. [1]Starbucks Corporationwas founded by English teacher Jerry Baldwin, history teacher Zev Siegl, and writer GordonBowker in March 1971. Starbucks Corporation is the most successful coffee shop chain inthe past few decades. Using their aggressive growth most of its competition.The current countries in which Starbucks are located world-wide more than 17018 (as ofJuly 3, 2011) retail stores in 50 countries[2] The first Starbucks first coffee shop opened inWashington, America in 1971 and The first Starbucks location outside North Americaopened in Tokyo, Japan in 1996. Starbucks entered the U.K. market in 1998 with the$83 million (more than 60 stores). [3] Starbucks customers enjoy quality service, an invitingatmosphere and an exceptional cup of coffee. Starbucks selling Coffee (drip brewed coffee), Coffee beans, other hot and colddrinks, cold and hot Sandwiches, Panini, Snacks, Pastries and item like Mug. Customers areable to study read and enjoy music while the drinking coffee. Starbucks strategically positionof each stores with hopes of matching the specific location, helping to create a uniqueatmosphere. 4Namrataben Panchasara (Student ID:F1005899)
  5. 5. Michael Porter’s 5 Force analyses (past) My analysis being with a through breakdown of the competitive environment whichStarbucks corporation in last fifteen years. When Starbucks was first acquired by HawardSchultz. Michal Porter author of competitive strategy to analyze in industrial environment anddevelop an optimum strategy for success. The five variables responsible for the five forcesanalyze using the model are buyers, industry suppliers, potential new entrants, competitiveamong existing firms and substitute products. I will concentrate on the competitiveenvironment in which Starbucks created and I will also considerate social andmicroenvironment force.  Industry rivalry  Potential for new entrance  Substitute products  Supplier bargaining power  Bargaining power of buyersIndustry Rivalry Define an industry can described as drawing a line between the substitute productswhich offered by competitors and the established competitors.[4] (Porter,1998 page no.17)The assumption is that the relevant industry is confine to the competitors within the specialityof coffee segments. Those get any reference to competitors from outside of the speciality ofcoffee segments. By definition should be considered competitors from substitute products.However, given the difficulty in defending the boundary of the speciality coffee industries.The general competitors created by rivalry between established competitors I analyze drivesdown the rate of return on invested capital toward what economist refer to as “the industry 5Namrataben Panchasara (Student ID:F1005899)
  6. 6. floor rate of return” which occurs when the market is really competitive[5] (Grant, 2008 pageno.69). Some of the largest basic coffee companies who sales coffee in grocery chains couldhave responded to swift growth in the speciality coffee industry by introducing by they ownversions of popular supermarket brands [6] (Koehn 2005). Some established companieswould have needed to achieve high volume of sales then small companies to achieve profittarget.Potential for new entrants The second force in Porter’s model which will be applied to the analysis of theindustry environment. The potential for new entrants which was Starbucks incubated. Theprimary prevention to new entrants into industry is the barriers to enter. The higher barriersto entry are within any given industry the threats of new entrants to that industry [7] (Porter,1998 page no.7). The especially coffee industry does not pot a high premium on economiesof level. We can tell in other words companies with national distribution in the coffee industryat large experienced some discount thought bulk purchases and suppliers and greaterinfrastructure their advantages was small. This only would involve low barriers to entry in thespeciality in the coffee industry. Starbucks entered in coffee industry in 1971 but Starbucks’ stores launched grewmore successful in 1996, new stores generated an average of $700000 revenue in their firstyear that more than average of $427000in 1990. In this way partly due to growing reputationof Starbucks brands. Starbucks was entered in Japan’s market in 1996. Before 1996Starbucks has business in United States only. In 1998 Starbucks entered in United Kingdommarket. That is new entry in UK coffee industry. In 2002 Starbucks opened first store inLatin America (in Mexico City). In August 2003 opened new store and first store in SouthAmerica (in Lima). In end of 2010, Starbucks opened in EI Salvador (Center America)[5] Inthe early days, Starbucks so busy with selling coffee, one cup at a time, opening store andeducating people about dark-roasted coffee that they never thought much about brandingstrategy. In 1996 Starbucks began selling bottled Frappuccino. In 1999 Starbucks acquiredTazo Tea. In 2000 Acquired hear music, a San Francisco based company. In 2003Starbucks acquired Seattle’s Best coffee. In 2005 introduce Starbucks coffee liqueur;acquires Ethos Wate.Substitute Products Another force which up to an organization and its include in Porter’s five force and itis also threat of substitute products. The Pepsi and Coca-cola is the primary substituteproducts posing a potential threat to specially were the caffeinated soft drink. Competitorslike Coca cola and Pepsi offered drink, which had the caffeine inherent in especially ofcoffee, at significantly lower prices [8] (Quelch 2006). However, this is the large different inthe test and demographic makeup of customers between the two products. That is only truedirect substitute for especially coffee available was basic coffee. Basic coffee wasconsidered to be of significantly lower quality then speciality coffee. As an analysis, itactually presented the industry with little threat of substitution.Bargaining Power of BuyersThe bargaining power of buyer also plays an important role determining the standpoint froman investor’s point of view of the environmental which the speciality of coffee industry existedin inception. The force of the buyer’s bargaining power is relative to the ability of buyers toforce down prices, bargain for higher-quality products or more services, and pit rival 6Namrataben Panchasara (Student ID:F1005899)
  7. 7. organizations against one another.[9] (Porter, 1998, p. 24) In the specialty coffee industry,individual consumers constituted the majority little bit of all buyers; so, they didn’t typicallybuy in large volumes and did not act in concert. Both of these factors reduced the relativebargaining power of buyers in this industry. In addition, the cost of buying a cup of specialtycoffee did not represent a significant small part of any individual buyer’s cost of living,reducing the propensity for price shopping and increasing the importance on quality andcustomer service.One of the primary differences between the basic coffee industry and the specialty coffeeindustry is the amount of differentiation involved in the specialty coffee industry and the lackof differentiation in the basic coffee industry. At last, the buyer or consumer in the 14specialty coffee industry does not have full information. The consumer does not know theactual demand, market prices or supplier costs which seriously reduces their bargainingpower. Overall, then, the bargaining power of the buyers or customers of the specialty coffeeindustry, which consisted basically of individual consumers, was not considerable.Bargaining power of buyers The bargaining power of suppliers to the specialty coffee industry would be exertedby also threatening to move up the price of the Arabica beans which are used in theproduction of dark roasted coffee, or by a threat of drop in the quality or quantity of thecoffee beans themselves. The suppliers of Arabica beans were mostly small to medium-sized family owned farms and typically sold their crops to processors through local markets.(Lee, 2007)[10] Primarily, these farms were located in Latin America, the Pacific Rim and EastAfrica. (Lee, 2007) These farms were numerous and unrelated to one another, with nounionization, giving them very little collective bargaining power. While there was no direct alternative for the Arabica beans used in the production ofspecialty coffee, the huge range of farms which supplied the crop made it easy for buyers toavoid obligations to any particular farmer, which all over again eroded the bargaining powerof suppliers. The farmers who produced the Arabica beans sold exclusively to specialtycoffee retailers and as such were dependent upon their continued business. In spite of all ofthe stated reasons which suggest the specialty coffee industry is one where the bargainingpower of suppliers is severely hindered, the most important 15 Ingredient within specialtycoffee is quality Arabica beans. This allows for differentiation to arise between the manysuppliers farms based upon the quality of beans they produce. This, in turn, shouldconsiderably raise their bargaining power as suppliers. 7Namrataben Panchasara (Student ID:F1005899)
  8. 8. Starbucks’ Original Generic Strategy Michael porter defines three potentially successful generic strategy; overall costleadership, differentiation and focus.Overall cost leadership 20 implies the pursuit of cost reductions in all areas of a firm throughstrongly controlling overhead, avoiding marginal, not as much of profitable consumers andsacrificing explore and development, customer service, advertising and other areas notrelevant to the direct manufacturing of a product. The generic strategy of differentiationinvolves the creation of something that is supposed by the industry as being unique. Thiscan take on many different forms including but not limited to brand image, technology,features, dealer networks and customer service [11]. The last generic strategy mentioned isfocus, which targets an exacting group, geographic market, or segment of a given productline. (Michael Porter, 1998, p. 38)[12] The Starbucks seen today would seem to fit the genericstrategy of differentiation; though, the original strategy used by Starbucks was closer to thegeneric strategy of focus with an importance on differentiation within the particular targetconsumer segment. At the requirements for a generic strategy of differentiation, as definedby Michael Porter, sheds light on why this could not have been Starbucks’ original genericstrategy.A firm that focuses on the generic strategy of differentiation would reveal strong marketingabilities; so far, Starbucks did not even run a television advertisement until 1998. In fact,their advertising budget only constituted 4% of their total incurred costs. [9] (U.S. Securitiesand Exchange Commission, 1998)[13] A second characteristic universal in a companypursuing the generic strategy of differentiation is a strong and established capability in basicresearch and development, with individual as different to quantitative measurement goals.The primary means by which Starbucks conducted its research and development in pastwas through trial and error within company stores. A third characteristic of companiespursuing a generic strategy of differentiation is an extensive belief in the industry of havingunique skills or unique products. Starbucks had this reputation within the distributionsegment of the specialty coffee industry. Their original store was founded in 1971 and theywere known for their luxury standards and knowledgeable staff. With this information in give, an understanding of why Starbucks has continued suchhigh profit margins while at the same time increasing market share exponentially can beascertained. 8Namrataben Panchasara (Student ID:F1005899)
  9. 9. Starbucks’ Success Factors  First-mover advantage  Maintaining quality of Arabica beans  Employee Satisfaction  First factor was their ability to design a strategic approach to growth that quickly established the possibility of their business model and took advantage of some key demographic groups.  The second factor was their ability to attract the highest-quality employees through the execution of advanced healthcare plan while reducing costs and giving equity rights to all employees. The strategic alliance they had with preservation international allowed them to create a sustainable supply chain of high quality coffee.  The three previous factors helped enable them to advance  The fourth factor in their success, a centre of population environment in which casual community interactions could take place.  The fifth factor to their success was their ability to adjust to the changing dynamics of their consumer demographics. All of these factors have allowed them to stay at the forefront of the specialty coffee industry. Success...The strength of the company, together with promising market forecast has lead Starbucks toone of the most victorious IPO (Initial Public Offering) in 1992.By going public, Starbucks would get funding to fuel its expansion strategy over the years tocome. From $5.50 in 1992, Starbucks common stock price went up to $25 in 2001, and istoday at $58. 9Namrataben Panchasara (Student ID:F1005899)
  10. 10. In order to maintain the balanced equity among shareholders, Starbucks stock was split fourtimes (1993, 1996, 1999 and 2001). As the share value greater than before, these split alsoprevented high prices from deterring small investors .Starbucks stock growth (in blue on thechart) has always been above the average beverage industry stock growth. 10Namrataben Panchasara (Student ID:F1005899)
  11. 11. Michael Porter’s 5 Force analyses (current)Industry rivalry The industry rivalry within the specialty coffee industry has changed dramaticallysince 1990. Nothing like the early days of the specialty coffee industry when Starbuckscompeted mainly against other small-scale specialty coffee retailers they now competeagainst companies of changing sizes and different exposures to specialty coffee. Starbuckscompetes by a variety of smaller scale specialty coffee shops, mostly well-built in differentregions of the country. All of these specialty coffee chains are differentiated from Starbucksin one way or any more. 10 years ago Starbucks and McDonalds were at complete opposed ends of therange in the restaurant industry. yet, McDonalds, encouraged by the success of itsupgraded drip coffee, began testing many drinks sold under the name McCafe. Starbucksmeanwhile, with its rapid development, was adding drive-through windows and manybreakfast sandwiches, similar to the Egg McMuffins served at McDonalds. These measureshave drawn the two companies closer together as competitors due to an advance into thedemographic consumer base made by each company. [14] The McCafe, first conceptualized in Australia in 1993, was bringing to the UnitedStates in 2001. The concept took an area of the typical McDonalds restaurant and addedleather couches and an attractive counter on which cappuccinos and sweets were sold. TheMcCafes did not take hold originally, not making it past their first trial stage, mainly due tothe unfortunate conditions of the stores in which they were placed. Now, seven years later,McDonalds has invested $700 million in its "plan to win" strategy, initiated during 2003,which has led to modify of thousands of US locations.Substitute ProductsThe force of substitute products in the specialty coffee industry has decreased. Manycompanies that presented the specialty coffee industry with a threat in the form of substituteproducts have actually entered the industry and now struggle directly by offering their ownquality coffee selections. The primary substitute products still affectation a threat to thespecialty coffee industry are the caffeinated soft drinks offered by Pepsi and Coca-Cola. Still,even these substitute products front little threat to the quality coffee industry. In the past fiveyears, studies done on the percentage of meals or snacks that included a fizzy soft drink asdifferent to coffee have shown a problem in consumer favourite. Coffee has regularly gainedpreference over carbonated soft drinks. SWOT AnalysisStrengthMotivated staffThe cafe industry is to some level dependent on front house staff, their manner and their skillto make customers come back. Starbucks promotes a situation that encourages teamworking and collaboration. As such it encourages managers to follow its motto of theirpersonality, train the skill·. Hence through outstanding service, customers keep coming back. 11Namrataben Panchasara (Student ID:F1005899)
  12. 12. possibly, Starbucks has one of the lowest staff revenue rate in the industry( strengths offer a favourable impact.WeaknessesOver-reliance on home market:Although the American coffee market is value over $18 Billion (, over-reliance on this market leaves Starbucks vulnerable to unexpected changes that may occurin such market. E.g. recession affects disposable income for customers and then, income.Thus the management decision to focus mainly on the US market it a weaknessOpportunityGrowth coffee marketThe universal taste of coffee drinkers in America is shifting near the more expensive organiccoffee which accounted for $1.3 billion in imports (Restaurant hospitality). This links to theSocial factors recognized in the External analysis and relates to changing tastes this isfavourable because it provides an opportunity for Starbucks to increase its customer supportwith the possibility of high profit margins as a result.ThreatsCompetition Coffee industry is very competitive. McDonalds is the main competitor of Starbuckscoffee. McDonalds which was recently found to sell good coffee for better value is damagingfor Starbucks ( In other words this is a u critical influence. (Look at pageno.11 Industry rivalry)PEST AnalysisPoliticalGovernment stabilityPolitical stability of countries is a main issue that firms need to consider becaus eitherindicator may aim to a country as being investor friendly, however that could rapidly changewhen there is elections or political instability (e.g. Egypt). This could lead to huge trouble in afirms operations and strategy or in a worst case situation where Starbucks was forced tototally pull out of Israel because of such issues therefore harmfully affecting its strategy forexpansion. Political control is unfavourable in this case and presents a risk to StarbucksEconomicalExchange RatesThe falling dollar rates compared to other currencies ( which was caused inpart by weaker economic policy will affect imports. Most of Starbucks· vital supplies such ascoffee beans, sugar and milk will be affected because they are imported, so incurring highercost due to weak dollar. This raises a question as to whether the company will pass the extracost to consumer and risk creation its coffee even more costly. 12Namrataben Panchasara (Student ID:F1005899)
  13. 13. TechnicalTechnological InfluenceTechnological advancements have never been so fast, hence firms need to consistentlyfollow the trends and exploit any opportunities that may result and implement any changerequired. For example, Starbucks have embraced the new phone payments system that wasintroduced recently which helps cut long queues at peak time Recommendation for Future Action  Reward program Organised  Increase International Expansion  Becoming more Environment Friendly  CD Burning  Install free wireless internet and Rent out meeting space  Increase connection with customers  Continually improve the coffeeRewards Program Recently, Howard Shultz has referred to a strategy he calls “segmentation,” as beingone of the initiatives he will use to reach new consumer segments. A recommendation not topursue this strategy is supported by the analysis done in this paper. As previously stated, acouple of Starbucks’ primary recent competitors are McDonalds and Dunkin Donuts. Both ofthese companies have given many market signals which can be interpreted as their strongcommitments to selling value specialty coffee. The strategy of “segmentation” would seem tobe Starbucks’ counter to both McDonalds’ and Dunkin Donuts’ intentions. However, ifStarbucks pursues their “segmentation” strategy they risk degrading the most significantcompetitive advantage they possess: their brand image. By selling a discounted specialtycoffee at Starbucks’ locations, the overall brands image could be degraded and an un-winnable price war with McDonalds and Dunkin Donuts becomes more likely.Instead of selling discounted coffee under their “segmentation” strategy, which seems aimedat appealing to the price sensitive lower end of the market which is likely destined forMcDonalds and Dunkin’ Donuts, Starbucks should concentrate on creating more elaboratediscounting techniques to employ with their most frequent customers. This both eliminatesthe potential degradation of the Starbucks’ brand and increases the bond customers willexperience with Starbucks. Additionally, a rewards program will encourage customers to visitStarbucks more often and will dissuade them from visiting competitor stores, such asMcDonalds and Dunkin Donuts, which seem unlikely to offer reward programs.Increase International Expansion The first and most great action which Starbucks should take is to decrease their USexpansion efforts. Continued aggressive attempts at growing in the United States by addingas many new store locations as in the past will inevitably act to cannibalize existing locationssame store sales. The primary reason why this is true and why Starbucks should reducetheir U.S. expansion plan is the conclusion reached earlier in this analysis: one of thequalities natural to the mature stage of the industry lifecycle is excess numbers. By droppingtheir expansion efforts in the United States, Starbucks can convey the capital saved intotheir international expansion efforts. The international market provides an ideal target forincrease for three important reasons. First is the lack of penetration of specialty coffee inmany nations and the potential market share which one these nations represent. For 13Namrataben Panchasara (Student ID:F1005899)
  14. 14. example, Starbucks currently operates around 16,000 stores with 10,000 in the UnitedStates and 6000 internationally. so far, the United States has not ranked in the top 10 fortotal coffee expenditure per person in the last 25 years. This suggests that internationally,there is an vast coffee drinking population to be tapped into. For example, originally,Starbucks introduced their Tazo tea brand into the Japanese market. After a successfulexamination run in Japan then Tazo was brought into the US market. More such modernproducts should be tested first in international markets 70 because there, Starbucks doesnot put its brand reputation at as great a risk. This is true since those markets have not beenexposed to Starbucks for as general a period of time and, thus, the brand is more flexible inthose markets.CD Burning In addition to free wireless Internet access, Starbucks could equip stores with a CDburning device to allow customers to burn copies of the online albums they purchase withinStarbucks at a low charge. Not only would this increase the customer’s options whenpurchasing an online album but would also encourage customers to buy online albumswithin Starbucks’ locations. so, customers could not only get the electronic version of theirselected music for their Ipods but could also have a hard copy CD for use in other devicessuch as the vehicles which transported them to the Starbucks store. Having this extramotivation could well increase foot traffic in Starbucks’ locations. As well Starbucks couldpromote their brand and music label on the blank CDs. The labels of the CDs could use orinclude Starbucks logo and the interactive experience the customer will have watching theirCD being burned and the label being placed onto it will give them a better sense ofownership.Install Free Wireless Internet and Rent out Meeting Space Next, Starbucks should create a more business and technology friendly atmospherein its stores. With the advent of the Internet and the ever increasing array of electronicproducts capable of accessing it, there has been an increasing shift in consumers worklocations from office buildings to home offices. With this shift and natural humanpsychological needs, Starbucks is allotted an opportunity to cater to these consumersworking out of the home by providing meeting space for rent. These meeting spaces shouldbe accompanied with the addition of free wireless Internet access throughout everyStarbucks store and printers accessible to the customers, which are color capable andreasonably priced. The meeting space should be offered at a per hour rate while the printersshould charge per copy. The availability of meeting space and printers, coupled with freewireless Internet access would encourage those consumers working from their homes toengage in business activities at local Starbucks. Some of Starbucks’ competitors, such asCaribou coffee, have already taken advantage of this trend in consumer preference but donot currently have the market share to use it as a defendable competitive advantage.Increase Connection with Customer One way in which Starbucks has for all time differentiated itself from its competitionhas been through the emotional relationship formed with its customers. This connection isformed in important part by creating a store impression that fits the local settings and bytraining baristas to increase the personal relation between themselves and their customers.Specifically, Starbucks encourages feedback from their customers to induce a family likefeeling and instructs all baristas to welcome every customer with the question “how are you 14Namrataben Panchasara (Student ID:F1005899)
  15. 15. doing today?” To extra increase this expressive connection with their customers, Starbuckscould implement digital photo frames in all store locations and upload local customer photosand probably even customer supplied family photos, which are appropriate in nature, uponrequest. This would be a new, classier version of that time worn image, the local pub withinnumerable photos of the regulars festooning the walls. At present, the majority ofStarbucks stores have latte machines that are placed in such a way as to block the baristasfrom presentation the customers and vice versa when the barista is in the act of creation thelatte. These latte machines pose a serious physical blockage to the barista’s ability toestablish a lasting impression on the customer.Continually Improve the Coffee Given the specialty coffee market’s transition into the mature stage of the industrylifecycle, it is important to maintain a reputation for the highest quality coffee in the industry.In February of 2008 the magazine Consumer Reports rated McDonalds drip coffee astasting better than that of Starbucks. To ensure the quality of their coffee, Starbucks shouldcontinually analyze their brewing systems and practices and consider renovations. Thebrewing process should at all times be judged based upon its ability to bring out thecomplexities and distinctive flavours of the world’s different exotic specialty coffees.Starbucks should also be intent upon protecting whatever brewing process they deem to bethe best through patents or acquisition of patents, which would, in turn, provide a defendablecompetitive advantage.ConclusionStarbucks strategy is fairly simple increase the perception of high quality of a product,become accustomed stores to the consumers’ lifestyle, and blanket areas totally, one afterthe other, even if the stores cannibalize one another business. Starbucks is very successfulcoffee chain.The company’s move on cuts down on delivery and organization costs,shortens customer lines at individual stores, and increases base traffic for all the stores in anarea.Reference[1][2] th[3] McDonalds Corp Betting That Coffee Is Britains Cup of Tea". New York Times. 28 March 1999. RetrievedAugust 6, 2009[4] Porter, M. E. (1998). Competitive Strategy page no.17) Techniques for Analyzing Industries andCompetitors. New York: The Free Press. 15Namrataben Panchasara (Student ID:F1005899)
  16. 16. [5] Robert M. Grant : Strategy Analysis august 2008 (Page no.69),London Retrieved July 7, 2011.[6]Phillip Kohen 2005[7] Porter, M. E. (1998). Competitive Strategy page no.7) Techniques for Analyzing Industries and Competitors. st[8]John Quelch Globle market Strategy include in 21 century (2006)[9] Porter, M. E. (1998). Competitive Strategy page no.24) Techniques for Analyzing Industries andCompetitors.[10]Lee broen,John Joseph Garners Books 2007.[11][12] Porter, M. E. (1998). Competitive Strategy: Page no.38 Techniques for Analyzing Industries andCompetitors. New York: The Free Press.[13] U.S. Securities and Exchange Commission, 1998[14] Review, Is Starbucks a Broken Brand? , 2008 16Namrataben Panchasara (Student ID:F1005899)