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MASTER OF BUSINESS ADMINISTRATION

MGT 6798

CASE METHODOLOGY:

An Individual Assignment

Submitted to:

Mr. Ayub bin Hj. Khalid

Submitted by:

Fakhrul Anour bin Abdullah G1136857

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CONTENTS

1- ABSTRACTS Page 02

2- INTRODUCTION Page 03

3- PROBLEM STATEMENT Page 05

4- SWOT ANALYSIS Page 09

5- CONCLUSION Page 10

6- RECOMMENDATION Page 13

7- OTHER REFERENCES Page 14

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ABSTRACT

Today, STARBUCKS® is an American global coffee company and coffeehouse chain

based in Seattle, Washington. It is the largest coffeehouse company in the world with 20,891

stores in 62 countries. Yet back in 1999 and five years before, STARBUCKS®

was facing a

moment to achieve momentum in the United States for the world market. Tokyo, Japan was the

first outlet it has opened outside United States and Canada in 1996. Through its established

strategy and organizational culture, STARBUCKS® was in its outlook of sustainable competitive

advantage through global business network.

Howard Schultz began his coffee career with

STARBUCKS® Coffee Company in 1982, when it

used to be a retailer solely of whole bean coffees.

On a buying trip to Italy, in 1983, the vast number

of coffee bars in Milan inspired Mr. Schultz. He

returned to STARBUCKS®

and presented his idea

to expand the whole bean retailer into a coffee bar.

The Board of Directors rejected his idea and two

years later, Mr. Schultz left STARBUCKS® to start

his own coffee bar company which he named II

Giornale. After two years of great success, II

Giornale purchased the STARBUCKS® name and

assets and changed the names of all of it retail

outlets to STARBUCKS®.

“Twenty-five years from now, when we look back

again, if we can say that we grew our company with the

same values and guiding principles that we embrace

today, then we will know we have succeeded.”

— Howard Schultz

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INTRODUCTION

At stock market, coffee was the second most traded commodity next to oil. It was divided into

two categories; specialty coffee and basic coffee. In 1994, it was estimated that specialty coffee

industry was growing at a rate of 15% per year and that the basic coffee industry was suffering.

But unlike during the era of 60s and 70s, the per capita consumption of coffee had significantly

decreased from 2 or 3 cups a person per day to 1.7 cups. According to the

National Coffee Association the decrease of coffee consumption derived

from poor product development, packaging and position (price focused) by

the industry’s leading coffee producers. But until 1999, the interest of

consumers in the United States especially on specialty coffee had

increased resulted from these four trends:

1) The Adoption of a healthier lifestyle had led North Americans

to replace alcohol with coffee

2) Coffee bars offered a place where people could meet

3) People liked affordable luxuries and specialty coffee fit the bill

4) Consumers were becoming more knowledgeable about coffee

Specialty coffee was the highest echelon of quality coffee available in the world.

Many people described it as gourmet coffee (though disputable) because of higher

quality than basic supermarket brand coffee. Although most consumers only saw

this division at the retail level, specialty vs. basic coffee was a concept that

originated with the coffee grower.

“22% United States

consumers purchased

specialty coffee and they

are urban people with

annual income over

$35,000 per year. “

::: Avenue for

Growth— 20 Year

Review of the U.S.

Specialty Coffee

Industry.

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STARBUCK® was the largest coffee company that provided specialty coffee in the

United States, with market capitalization about USD2.4 billion with 6% net margin of coffee

chains when compared to competitors in the industry. It owned all of its retail outlets other than

host licensing arrangements. However owning all of its stores, STARBUCK® was faced with the

prospect of depending heavily on equity and debt financing to grow. But its stock price and

Earning per Share/EPS had been rapidly increasing over the last five years (1994-1999).

In 1986 STARBUCK® started to sell espresso coffee at its 6 outlets in Seattle which also

included 1912 Pike Place Market. But in 1987, because of losing sales when the market demand

for specialty coffee increased, the founders sold STARBUCKS® to their former employee,

Howard Schultz who was then in 2 years great success with his coffee bars, II Giornale.

►

The first STARBUCKS® opened in Seattle,

Washington (at 2000 Western Avenue) on

March 30, 1971 by three partners who met

while students at the University of San

Francisco; Jerry Baldwin (English teacher),

Zev Siegl (history teacher), and Gordon

Bowker (writer). The three were inspired to

sell high-quality coffee beans and equipment

by coffee roasting entrepreneur Alfred Peet

after he taught them his style of roasting

beans. But after they bought Peet, sales

started to fell though the market deman on

specialty coffee increased. So in 1987,

STARBUCK® was sold to Howard Schulz.

◄

Howard Schultz came from rather humble beginnings. He remembered how

his father used to work hard for little money and no respect. He said his

upbringing instilled in him “not a fear of a failure but a fear of mediocrity”.

He was the first in his family to get a college degree and had always been an

over-achiever.

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PROBLEM STATEMENT

About a third of the coffee farms in the world were less than three acres and the farmers

did not have the desire, the volume, the money, the expertise, or the connections to export coffee

themselves because most countries regulated coffee sales. How the specialty coffee companies

got their supply was through the exporters instead. The price of certain coffee was a direct

reflection of the quality and

quantity of a coffee available

at a particular time. It was

very difficult to get price

confirmations because a

successful coffee harvest was

dependent on so many

different factors such as

weather conditions, health of

the coffee trees, harvesting

practices, disease and

infection caused by insects,

and the social, political,

regulatory and economic

environments of the coffee-

producing countries.

►

Typically, coffee was moved

from the farmer, to the collector,

to the miller, to the exporter, to

the importer, and finally, to the

specialty coffee seller.

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Looking at the limited sources for specialty coffee but yet with increasing demand from

consumers, STARBUCKS® under the command of Howard Schultz (Chairman and CEO of

STARBUCKS® Corporation) assembled a business system that would increase its value strategy.

Each component of the system was advised to deliver expectation at best quality to enhance

confident not only to the shareholders but also the stakeholders.

Through sourcing, STARBUCKS® maintained close relationships with its exporters by

working directly with them and providing them with training. Exporters of high quality coffee

were very anxious to become STARBUCKS® suppliers because it purchased more high quality

coffee than anyone else in the world. Over the next three years, STARBUCKS® hoped to double

volumes but this would effect on its requirement of quality coffee against quantity. And despite

STARBUCKS® large supply needs, growing its own high-quality coffee was an option that was

never seriously considered.

THE

RETAIL

STORE

UNITS

THE SPECIALTY SALES

AND WHOLESALE

CHANNELS

THE MAIL

ORDER

BUSINESS

THE

GROCERY

CHANNELS

SOURCING

ROASTING AND BLENDING

SUPPLY CHAIN OPERATIONS

RETAIL SALES

SPECIALTY VALUES

VENTURES

MAIL ORDERS

Employees

Real-estate Approach

Domestic

vs.

International Retail Image

BUSINESS

SYSTEM

50%

Latin

America

35% Pacific Rim

15%

East

Africa

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STARBUCKS® tried to build its supply chain operations in order to eliminate

redundancy and maximize efficiency based on its four business units. STARBUCKS® formula

was firmly based in its coffee, its employees, its merchandising, its ownership philosophy, its

real-estate approach, its image, and its innovativeness.

As STARBUCKS®

grew; finding enough good people that could replicate the values,

culture and service experiences was an ongoing challenge for STARBUCKS®. Because

developing coffee knowledge and service expertise demanded a great deal of effort from

employees. In terms of merchandising, STARBUCKS® faced challenges related to the design of

a nationally consistent merchandising program, since many of its stores dealt with individual

suppliers.

Having baristas

(STARBUCKS®’s store

employees) that had strong coffee

education was essential because

STARBUCKS® consumers were

becoming more and more

knowledge about coffee.

►

Quality upon quantity is the best deal of process that

STARBUCKS® offered to its customers to ensure eternal confident

on the purchasing power. Through roasting and blending of coffee,

STARBUCKS® held quite a detailed research and development

(R&D) of how to gain a better serve for its choice of specialty

coffee. The one-way valve technology packaging extended the

shelf life of coffee to 26 weeks. No stocks on shelf last for more

than 3 months at STARBUCKS® and what was in store for

beverages, the shelf life only limited keep to 7 days.

Every employee, even those that were hired for executive

positions, went through the same training programs, which

included a two-week term in store.

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THE PRINCIPLES OF SERVICE SYSTEM

at STARBUCKS®

STARBUCKS® had a very flat organizational structure where everyone from the CEO to

a barista was a partner and not an employee. It placed a great deal of effort into seeking the

thoughts and opinions of its barista, because they were in direct contact with customers. The

head office managers had sessions with people in the field, standard mission reviews where they

collected questions from anyone about any topic and then responded and open forums where

they heard from and listened to the partner base.

Meanwhile, to meet its growth needs, STARBUCKS® had approximately 20 real estate

managers across the country. These managers worked with ‘street sniffers’ to identify the best

retail locations and their commissions were paid either by the landlord or by STARBUCKS®. As

it grew and the number of ‘A’ sites in ‘A’ markets decreased, one of the key challenges faced by

STARBUCKS® was to constantly motivate its real estate staff to continue generates 20 to 40

solid stores per month. This challenge has to be met if it was going to meet its goal of 2000

stores by the year 2000.

Howard Schultz and the senior management at STARBUCKS® were committed to the

company’s strategy. How the company should react to all of these opportunities was one of Mr.

Schultz’s key concerns. Was STARBUCKS® growing in the

best way possible? Or was it overextending in its quest for

growth?

HOSPITALITY PRODUCTION EDUCATION

With these principles, baristas were expected to be a customer-service oriented.

This demanded a great deal of effort at their behalf. ▲

►

Of key concern at marketing department in STARBUCK® was its

brand equity. The retail business had historically been its source of

brand equity. This had meant that STARBUCKS® was never just

about the coffee; it was about a place, an experience.

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SWOT ANALYSIS

STRENGTHS

1) Leading brand on specialty

coffee

2) Diversified portfolio to

offer coffee variety and

customization

3) Defined focus on quality

and taste

4) Convenience and easy to

find its stores

5) Huge number of talented

& well-trained employees

WEAKNESSES

1) Flat organizational

structure

2) Supply of coffee came from

second-hand suppliers not

first-hand

3) Limited sources for good

quality coffee at short

distance

W-O

The unique quality of

STARBUCKS® could be

upon its weakness as a flat

organizational structure to

increase opportunity of

bargaining power. As

second largest stock

market, demand should

increase supply.

S-O

Being the leading brand of

high specialty coffee in an

increasing demand market

is a ‘safe to win’ situation.

All STARBUCKS® needed

to ensure was to maintain

its quality, performance

and production at a

sustaining level through

expanding and market

sharing such as merger and

acquisitions.

OPPORTUNITES

1) The demand for

specialty coffee

had increased

2) The second largest

stock market after

oil

3) The increasing

potential of urban

lifestyle

4) People are

becoming more

knowledgeable

about coffee

THREATS

1) Strong competitors

in the market

2) Coffee beans prices

fluctuated through

time

3) People became more

and more health

conscious

4) Demand for

specialty coffee

increasing but low

sources

5) Easy access to

specialty coffee

W-T

With low supply but high

demand, STARBUCK®

should start looking at new

market approach of real-

estates by cultivating its

own coffee as a standby for

any circumstances in short

of supply. This would help

preservation at long-run.

S-T

The growth of competitors

was considerably

impressive. With limited

sources for raw materials,

being the leading brand

proved to have more

potential on buyers and

sellers’ strong business

relationship, which at good

spot would surpass all other

competitors in the market

share.

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CONCLUSION

Looking at the financial performance of STARBUCK® within the five years period, it is a fair

consideration to define it as a workable status for long-run business. Unlike its competitors,

STARBUCKS® used internal financing to roll out stores, but with new ventures in the

mainstream of strategy, financial stability i convinced. Three of STARBUCKS® newest business

ventures included its contract with Dreyers’ Ice Cream, its bottled Frappuccino product with

Pepsi and its penetration into the grocery channel.

It was estimated that this ventured

would perhaps reach $40 million

at retail and contribute at least

$500,000 to earning during fiscal

1997. Although the return was

somewhat limited, it opened

STARBUCKS® to an entirely new

customer base, reinforced its

premium quality image, and built

its reputation with supermarket

chains.

◄

►

Bottled Frappuccino was STARBUCKS® attempt to

introduce a quality ready-to-drink coffee beverage into the

North American market place. STARBUKCS® viewed this

bottled beverage as $1 billion opportunity. These estimates

were from Pepsi who, who said that it had never seen a

product test quite as well as bottled Frappuccino, where 70%

of testers became repeat purchasers. This product was

currently being offered in all STARBUCKS® retail stores

and had begun to be distributed via PepsiCo’s national

distribution channels.

“Presence in supermarkets is not essential to STARBUCKS® survival or

prosperity. However, in the interest of being a major player in coffee for the

home, we have to be available in supermarkets. This is because convenience

plays a key role in decision to purchase coffee for the home.”

— Mr. Orin Smith (President & COO of STARBUCKS®)

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Specialty sales in the business system of STARBUCKS® were agreements with retailers,

wholesalers, restaurants or service providers to carry its coffee brand. It was not only provided

STARBUCKS® with revenue growth potential buat also with increased name recognition. It was

the benchmark strategy for new ventures. Some of these partnerships involved serving

STARBUCKS® coffee, some where for product development and others were for store

development. STARBUCKS® was actively increasing its participation in specialty sales

contracts.

▲

Among many different companies that had

been partnered with STARBUCKS®.

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Another way in which STARBUCKS® hoped to reach new customer base was through

the introduction of its new espresso carts or kiosks. By introducing STARBUCKS® Espresso

Carts, the company had succeeded in branding the coffee cart, which had always been a

brandless, grassroots type of specialty coffee retailer. STARBUCKS®

was in the initial stages of

its carts strategy that called as Doppio. It would allow the company to take advantage of sales

areas such as train stations, street corners, malls, etc.

When it comes to human resource, STARBUCKS® took great care in recruitment, from

its baristas to its senior managers. For baristas, turnover rates, were about 60%, this was less than

half of the industry average (150% to 300%). To prepare them for the challenge, they all

underwent 24 hours of training before they were allowed to serve a cup of coffee to a

STARBUCKS® customer.

►

STARBUCKS® called its version of the

espresso cart as Doppio. The Doppio was an

8’ x 8’ cube that unfolded into a larger stand

with sides, counters, and STARBUCKS®

trademark finishes.

“We have very educated consumers. So we have to give the

baristas some kind of a basis and background so that they can

answer these difficults questions.”

— Mary Williams (SVP Coffee for STARBUCKS®)

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RECOMMENDATION

STARBUCKS® decision to enter the international market place to prevent competitors from

getting a head start was considerably a perfect plan for the future long-run of its business. It was

a way to build upon the growing desire for Western brands, and to take advantage of higher

coffee consumption rates in different countries. It was expected that in the next five to ten years,

international retail’s contribution would be sizeable.

Another recommendation that could grow the marketing potential of STARBUCKS® was to gain

more ventures through its specialty sales by going into the fast-food market like McDonald, KFC

and Pizza Huts. This kind of venture would only extend brand marketing but also expand

awareness on specialty coffee.

Last but not least, with its strong business system and wise-oriented strategies on a flat

organizational structure that had been proven effective, sustaining it was recommended. It was

believed that STARBUCKS® had already build a strong structure of strategy for specialty coffee

business.

With a strong presense of its organizational culture that followed six guiding principles, it

helped STARBUCKS® to measure the appropriateness of its decisions.

Provide a great work

environment and treat each

other with respect and dignity.

Embrace diversity as an

essential component of the way

we do business.

Apply the highest standards of

excellence to the purchasing,

roasting, and fresh delivery of

our coffee.

Develop enthusiastically

satisfied customers all of the

time.

Contribute positively to our

community and our

environment.

Recognize that profitability is

essential to our future success.

SIX GUIDING PRINCIPLES

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OTHER REFERENCES

— http://inkdrawing.blogspot.com/2011/0

4/howard-schultz-ceo-of-

starbucks.html

— http://www.starbucks.com/

“Howard is very creative, he is

very inspiring, he is exceptionally

demanding, he is tremendously

competitive, exceptionally

ambitious, has very high standards

in everything we can do and he is

always ratcheting the bar up. He

really cares about people;

anything anyone would do to

damage the culture — he would be

right on it.”

— Orin Smith (COO of STARBUCKS®)

▲

Ink illustration of Howard Schultz for

Worth magazine by Graham Smith.