Management Case study on Strategic Analysis of Starbucks Company

Executive Summary

Starbucks Company is one of the largest premier roaster, distributor, retailer, and marketer of specialty coffee in America and across the world. Founded in Seattle Washington in 1971, Starbucks has expanded tremendously from 7000 coffee chain stores by 2003 to today’s over 24,000 licensed coffee stores in seventy countries where it has established operations. Starbucks has grown to a multinational company over time employing over 182000 full time employees in its stores (Schultz & Gordon, 2011). The range of products offered at Starbucks stores includes high quality handcrafted and roasted coffee, fresh foods, beverages and tea. They also provide a variety of tea and coffee products as well as licensing their trademarks through other licensed national foodservice joints, groceries, and stores. Starbucks also markets its products with big brands within the industry including Evolution Fresh, Verismo, Starbucks Refreshers and Starbucks VIA. This paper explores the strategic approach taken by Starbucks to create a brand that is synonymous with longevity, loyalty, and integrity. In particular, the paper focuses on the macro and micro environment of Starbucks Corporation, SWOT analysis, financial performance and the strategic opportunities.

 

Strategic Analysis of Starbucks Company

Introduction

Coffee stores plays a crucial role in the society as they provide for excellent meeting places for people from all walks of life. In fact, when coffee was introduced in Europe, it was acknowledged due to its taste and sociability. Soon coffee stores became prevalent in Europe and were turned into natural joints for social, political, and literary debates (Gilbert, 2009). Coffee crossed the Atlantic Ocean by mid seventeenth century replacing beer as the favorite morning beverage. Empirically, the Americans consumed on average 3.2 cups of coffee by early 1960s. As Starbucks began expanding, more emphasis was placed on hiring talented leaders capable of providing guidance to the momentous company. Huge amount of resources were dedicated to building organizational infrastructure necessary to support the projected future Starbucks stores.

The management of Starbucks believed that many companies failed as a result of declining to set up proper systems and processes that ensures that the vision is implemented. Besides, the senior management believes that employees are the most valuable asset since every dollar earned passes through their hands. In line with this belief, Starbucks puts more emphasis on employees’ satisfaction and morale. Most policies within the company are geared towards making the internal culture comfortable for the employees such as the full healthcare program for all fulltime employees’.

Today, Starbucks competes with numerous players in the specialty coffee market as well as those outside the specialty market (Schultz & Gordon, 2011). Within the coffee specialty market, the biggest competitors include Seattle’s Best Coffee, Dunkin Brands, and Tully’s Coffee amongst other smaller coffee chains. Outside the specialty market, Starbucks competes with coffee establishments like McDonalds and Caribou. In order to fend off the competition, Starbucks leverages on premium quality, customer loyalty and the relaxed atmosphere of its store chains.

The External Environment

The coffee industry experienced a significant slowdown in 2009 as a result of the changing customer taste and the economic crisis at that time. Before then, the industry enjoyed a decade of consistent growth. The economic crisis led to consumers spending less on luxury goods due to the shrinking budgets. Between 2008 and 2013, the industry grew at an annualized growth rate equal to 1%. It is forecasted to grow at the rate of 3.9% for the next five years with the potential of reaching $35 billion in revenues in United States alone (Gilbert, 2009). The growth will be driven by the increasing consumer confidence, growing economy, and the expanding offers in the menu.

Empirically, Starbucks is the market leader with a market share of approximately 38% while Dunkin Brands takes up 25%. Other competitors in the coffee industry takes up the remaining percentage of market share. The demand for specialty coffee is driven by several factors including the consumers’ attitude towards health, the changing demographics, and the competitive coffee prices across the world. Since the coffee beans are the inputs in the coffee industry, the prevailing market prices also determines the profit margins (Gilbert, 2009). The price of coffee beans has in the recent past risen due to the increased demand in many countries and shortages in supply. The price of coffee beans is however expected to go down over the next five years which will result in high profitability. The shift towards healthy diets could be a big threat to the industry as consumers tend to tailor their diets towards more healthy and organic products.

 

Internal Environment of Starbucks Company

Starbuck Corporation’s vision and mission statements are a reflection of the Corporation’s emphasis on leading the coffee industry. The vision and the mission statements serves as the guiding principles to both the employees and the customers. In particular, they guide employees as they perform their duties as well as showing the customers the benefits they can derive from the company. The mission statement state: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time while the vision states: to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.

            One of Starbuck’s core competence is its ability to leverage on differentiation strategy (Schultz & Gordon, 2011). The ability to effectively offer premium products including high quality coffee, snacks, and beverages. Starbuck’s strong brand is built on the quality of its specialty coffee and the related products that results in customer loyalty. The ability to provide customers with unique experience derived from well-maintained chain stores and superior customer service. Starbucks other core competencies include the value-based human resource approach that maintains strong relationship both internally and externally. The core competencies enable Starbucks to successfully tap the international markets and to leverage on horizontal integration through acquisitions and mergers in becoming the market leaders.

SWOT Analysis

Starbucks draws its major strength from its powerful market position as well as the recognition of its brand globally (Gilbert, 2009). It enjoys a substantial geographical presence in seventy countries across the world maintaining a market share of 37% in United States alone. In 2013, Starbucks was ranked 91st amongst the best brands across the entire world. As a renowned brand in the coffee industry, Starbucks increases its revenue by licensing out its brand logo. It is the brand recognition and the powerful market position that enables Starbucks to gain competitive advantage in expanding further to international markets as well as reporting high growth in both the international and domestic markets. Other strengths of Starbucks Corporation include high quality products, strategic position of its stores, staff of high caliber, the goodwill amongst the consumers as a result of Starbuck’s social responsibility programs, diversified product portfolio, customer loyalty, and the ability to utilize the mobile application software in reaching out to customers (Schultz & Gordon, 2011).

The high prices of some Starbuck’s products as a result of high cost of inputs, overreliance in the US market, American coffee culture and beliefs that crash with those of other countries, and negative image as portrayed by the competitors are some of the weaknesses facing Starbucks Corporation. However, Starbuck’s numerous opportunities by far outweigh its threats. For instance, the emerging markets provide Starbucks with massive growth opportunities. In order to successfully expand into these markets, Starbucks leverages on experience, financial muscles, its size and efficiencies in tapping them. Besides, the expanding menu offerings and product mix provide excellent growth opportunities for Starbucks (Parnell, 2013). Other opportunities are related to the expanding retail operations, application of technology especially the mobile application software, and the new channels of distribution. The few threats facing Starbucks are as a result of high competition, global prices volatility, market saturation especially in the developed economies, and the ever changing customer tastes, lifestyles and preferences.

 

 

Financial Performance

Looking at the financial trends of Starbucks since 2008, it is evident that the revenues have grown apart from 2009 when there was a major financial crisis. From 2010 through 2015, Starbucks has posted high revenues. For instance, in 2014, the revenue from all the chain stores amounted to $16.45 billion, an increase from $14.9 billion in 2013. In 2015, the revenues rose further by $1.5 billion as a result of further expansion. Starbuck’s return on assets has been impressive since 2010 through 2015 hitting all time high in 2014 at 29% (Gilbert, 2009). Looking at the efficiency ratios of Starbucks, it has gained substantial operational efficiency reporting impressive inventory turnover ratio of 5.4% and asset turnover ratio of 1.5%. In a nutshell, Starbucks takes pride of its healthy financial position with a relatively low debt to equity ratio of 0.3% as of 2015 financial year and decent quick and current ratios.

Strategic Opportunities

Starbucks primary growth lies in the international markets. Although Starbucks has established stores in most emerging economies with expanding middle class population such as India, South Africa, Brazil, Mexico and China, there are still untapped areas in these emerging economies. Starbucks needs to establish more chain stores especially in major urban areas of these markets in order to realize its full potential. Moreover, in order to effectively leverage on the international strategy, Starbucks needs to transfer its capabilities and core competencies from country to country (Parnell, 2013). Given the high volatility in the price of coffee beans, Starbucks can mitigate the price volatility by executing hedging strategy such as entering into future contracts with the suppliers. Furthermore, integrating the Starbucks’s mobile application with its loyalty program could further streamline the ease of payment which would decrease the waiting time in the stores, bring more customers and increase efficiency.

References

Gilbert, S. (2009). The story of Starbucks. Mankato, MN: Creative Education.

Parnell, J. A. (2013). Strategic Management: Theory and Practice. Thousand Oaks: SAGE Publications.

Schultz, H. & Gordon, J. (2011). Onward: How Starbucks fought for its life without losing its soul. New York, NY: Rodale.