26095695 starbucks case study

8/2/2019 26095695 Starbucks Case Study

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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 worlds biggest specialty coffee

chain. In 2003, Starbucks made the fortune 500.

Strategic Management PMS 3393 1
http://en.wikipedia.org/wiki/Seattle,_Washingtonhttp://en.wikipedia.org/wiki/Washingtonhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/List_of_coffeehouse_chainshttp://en.wikipedia.org/wiki/Seattlehttp://en.wikipedia.org/wiki/Washingtonhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Coffeehousehttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Drip_brewhttp://en.wikipedia.org/wiki/Espressohttp://en.wikipedia.org/wiki/Hear_Musichttp://en.wikipedia.org/wiki/Musichttp://en.wikipedia.org/wiki/Ice_creamhttp://en.wikipedia.org/wiki/Seattle,_Washingtonhttp://en.wikipedia.org/wiki/Washingtonhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/List_of_coffeehouse_chainshttp://en.wikipedia.org/wiki/Seattlehttp://en.wikipedia.org/wiki/Washingtonhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Coffeehousehttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Drip_brewhttp://en.wikipedia.org/wiki/Espressohttp://en.wikipedia.org/wiki/Hear_Musichttp://en.wikipedia.org/wiki/Musichttp://en.wikipedia.org/wiki/Ice_cream


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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.

http://en.wikipedia.org/wiki/Alfred_Peethttp://en.wikipedia.org/wiki/Alfred_Peet


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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 its 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.

http://en.wikipedia.org/wiki/Waterfront_Station_(Vancouver)http://en.wikipedia.org/wiki/Vancouverhttp://en.wikipedia.org/wiki/British_Columbiahttp://en.wikipedia.org/wiki/Chicagohttp://en.wikipedia.org/wiki/Illinoishttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Waterfront_Station_(Vancouver)http://en.wikipedia.org/wiki/Vancouverhttp://en.wikipedia.org/wiki/British_Columbiahttp://en.wikipedia.org/wiki/Chicagohttp://en.wikipedia.org/wiki/Illinoishttp://en.wikipedia.org/wiki/Initial_public_offering


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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 companys 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

handsStarbucks 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.



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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.



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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 companys vision is concern to

employee, it still have to add it in mission statement.

2.3.2 Proposed Mission Statement



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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



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3.1 External analysis

3.1.1 PEST Analysis

PoliticalGlobalization 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



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BARGAININGPOWER OFSUPPLIERS

POTENTIAL ENTRYOF NEW

COMPETITORS

BARGAININGPOWER OF

CONSUMERS

POTENTIALDEVELOPMENT OF

SUBSTITUTEPRODUCT

RIVALRY AMONGCOMPETING 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



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The Radial Diagram above is Porters Five-force model. It helps the Companys

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 Porters 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



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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.



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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.

Porters Five Forces Table



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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

Potent ial 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 Jeans coffee



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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

PriceCompetitiveness

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 0.20Customer 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 Jeans 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)



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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. Its 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


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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



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Oct 22005

% Oct 32004

% Sept 32003

% Diff.between

2005and

2004

Diff.between

2004and

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 andamortization expenses 340169 5 289182 6 244671 6 18 18

24

60

General andadministrative

developmentIncome 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 ofinvestment - - - - - - - -

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



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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 fromAFC 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

http://en.wikipedia.org/wiki/Seattle's_Best_Coffeehttp://en.wikipedia.org/wiki/Torrefazione_Italiahttp://en.wikipedia.org/wiki/AFC_Enterpriseshttp://en.wikipedia.org/wiki/Seattle's_Best_Coffeehttp://en.wikipedia.org/wiki/Torrefazione_Italiahttp://en.wikipedia.org/wiki/AFC_Enterprises


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In millions, exceptFor per Share Items

Oct 22005

DifferentBetween2004and2005

%

Oct 32004

DifferentBetween2004and2003

%

Sept 302003

Current assets $1209334 (11) $1350895 46 $924029

Current liability 1226996 64 746259 23 608703

Working Capital (17662) 604636 80 335767Total assets 3514065 4 3386541 22 2776112

Long-termdebt(includingcurrent 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 its because of the stability net earning.

Long term debt shown in the table dropped 14% from 2003 to 2004 previously it

was known companys net earning increases, thus it could mean that the



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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 companys

performance.

Financial Ratio

1. Liquidity ratios

2005 2004



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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 andshould be seriously concerned and still enough to cover up current liability or

short-term debt.

2. Leverage Ratio

2005 2004

Long termDebt-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



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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 firms 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. Companys no-

inventory policy has significant effects on its superiority. In both ratios , there is a

slide increase which shows the companys efficiency on using assets has

increased too.

4. Profitability Ratios

2005 2004



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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 companys

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



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$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 2004Earning per share $0.61 $0.49The 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



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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



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: 0.58/0.28

: 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 its 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 coffees are free from chemical flavors and it blends and

mix the real hazelnuts to the coffee.

Since the total weighted score is 3.14generally 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



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calculation, as shown in the table above, is more effective in addressing the

Strength, still, Starbucks' must find the way to overcome weaknesses to focus on

the future challenges.

.



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3.3 TOWS Analysis


STRENGTHS

S1.Huge market expansion to China,

Brazil, India and RussiaS2.

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

W1Price of coffee is high at

Starbucks

W2

less marketing

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 Advertis

products all over the places.

W1,W3,O3

Do R&D to sell product

supermarkets without reducin

quality with cheap price

28


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3.4 Space Matrix


THREATSST 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 produc

which contain good quality and low

price to attract more customers.

W3,T3

Starbucks needs to analyze the wa

to reduce the risks of selling its coffe

products at supermarkets a

customers are demanding for it.

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


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FINANCIAL STRENGTHS

RATING

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

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

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

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 the

stores in area. This makes customers easy to fine Starbucks all the places in

town.

5

12

ENVIRONMENTAL STABILITY


+6 = best +1= worst

30


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RATING

Starbucks products prices are high compared with competing coffee

houses. They price their products several dollars below then Starbucks price. -4

Demand for Starbucks products to be supplied in supermarkets

increase. But, doing that will put Starbucks business in risk as customers dont know

the way to brew the coffee.

-2

Increase in world coffee bean price in 2001, forced Starbucks to

increase its beverages and coffee sold at retail. -3

-9

COMPETITIVE ADVANTAGES

RATING

Starbucks coffee and beverages are high in quality brewed by well

trained 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 open

another 1800 stores. -2

Starbucks is a customer oriented Coffeehouse.

-2

-6

CONCLUSION


-1 = best -6= worst

31


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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



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HIGH MEDIUM LOW

HIGH

MEDIUM

LOW

SUMMARY

The Boston Consulting Group (BCG) matrix is enhancing a multidivisional firms

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.

This division decides to strengthen on pursuing an intensive strategy. Division

quadrant II, identifies best long-run opportunities for growth and profitability. Star


Backward, Forward, or

Horizontal Integration Market Penetration

Market Development

Product Development

STARSII

STARBUCKS

Market Penetration

Market Development Product Development

Divestiture

QUESTION MARKSI

Product Development

Diversification

Retrenchment Divestiture

CASH COWSIII

Retrenchment

Divestiture

Liquidation

DOGSIV


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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 ISSUES

4.1 Corporate Level



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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 ofthe 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.



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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. Customers

satisfaction on the coffee will badly affect and as well as demand of the

Starbucks coffee.



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5.0 RECOMMENDATION

5.1 CORPORATE LEVEL

Reduce 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 worlds 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 companys 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.



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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.

.



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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.

26095695 starbucks case study

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