CRAFTING AND EXECUTING STRATEGY SEC 001

RESEARCH AND CASE ANALYSIS STARBUCKS

PART B

APARNA KRISHNASTUDENT NO. 300807035

1) Go to Yahoo! Finance and create a line chart comparing the share price of

Starbucks Corporation with that of McDonald’s Corporation from 1992 up to the

present time and describe in a summary statement what the chart portrays. Also,

do provide an insightful comment on what the chart portrays, from the perspective

of a student of strategic management. Be sure that you attach a copy of the chart

with your submission.

a) The chart highlights the meteoric rise of the SBUX common share. MCD has

been rising, but the growth has paled in comparison to that of SBUX. It is also

apparent that Starbucks was more adversely impacted by the recession as seen

by the sharp drop in share prices around 2008-2010 while McDonald’s managed

to fare better. This could possibly be due to McDonald’s having a larger

international presence than Starbucks; geographical diversification may have

cushioned the impact of the recession. SBUX would be a strong buy since the

company is enjoying a price premium that is driven by very strong fundamentals

and not fleeting trends.

2. For the purpose of updating the information provided in the case material and

also for other purposes, please consult the 2014 Annual Report of the company.

Then state the total net revenues ($B), net earnings attributable to Starbucks ($B),

ROA, ROE, and the total number of stores in respect of the last five fiscal years –

2014 to 2010, in that order. Please present your answer in tabulated form.

2014 2013 2012 2011 2010Net Total Revenue (B$) 16.45 14.87 13.28 11.70 10.71

Net Earnings Attributable to Starbucks (B$) 2.07 0.01 1.38 1.25 0.95Total Assets (B$) 10.75 11.52 8.22 7.36 6.39Total Equity (B$) 5.27 4.48 5.11 4.38 3.67

ROA (%) 19.23 0.07 16.83 16.91 14.81ROE (%) 39.23 0.19 27.07 28.39 25.73

Total No. of Stores 21366 19767 18066 17003 16858

3. What factors might explain the relative decline in the performance of the

company during specific periods in the last decade? (You can pursue additional

research on this question. If you do so, please use information from articles from

Business Week and Fortune only.) Be sure that the sources are appropriately

acknowledged.

a) The period of dramatically poor performance that I would like to focus on is

from 2006-2010. According to Aaron Pressman in an article titled ‘Starbucks,

Are You Listening?’, the chief reason for SBUX performing so poorly was due to

intense competition from rivals like McDonalds, Dunkin’ Donuts and others. He

opines that Starbucks lost its coffee origins and became vulnerable to

competition from its not as premium competitors. In an internal memo that was

leaked on the internet, Schultz admits to his employees that Starbucks is facing

tremendous competition from not only goliaths like McDonalds and Tim Hortons

but also small, local coffee houses and mom and pop stores, which has lead to the

beginning of ‘coffee-wars’.

4. What specific measures had the company undertaken to affect a turnaround in

its performance? Was the company successful in this regard?

Schultz was requested to re-join the company as the CEO. Schultz lead a

major restructuring and revitalisation initiative, changing key personnel

and their roles and responsibilities.

It was felt that the customer service experience had been watered down.

He hired a creative officer who was solely tasked with elevating the in-

store experience of customers.

He focussed his energies on three main themes: strengthening the core,

elevating the experience and investing and growing.

Cost containment and efficiency campaigns were launched, which lead to

a dramatic increase in productivity per employee.

Continued to focus on international expansion to drive its growth.

In my opinion, the transformation has been very successful as evidenced

by all financial metrics. The last 7 years have proven to be very successful

for the company with it scaling new heights under the management and

vision of Schultz.

5. Why do you think Starbucks has opted for joint ventures as an entry mode for

international expansion?

In my opinion, Starbucks opts for joint ventures as an entry mode as local

partners would be able to shoulder the capital costs and risks along with

Starbucks. Local partners may also be more clued in to local nuances and

tastes, which may be vital in the company’s success. Starbucks can set

various rigorous criteria to ensure prospective partners share the same

commitment and vision towards success as the firm. Once on board, the

relationship would be mutually beneficial – the local partner can use the

Starbucks brand name and be relatively certain of earning an attractive

return on its investment, while Starbucks can leverage local partner to get

a pulse of the market.

6. In a 2006 interview with a reporter, Howard Schultz had stated that Starbucks’

business was recession proof. How would you evaluate this statement?

a) I would have agreed with this statement had Starbucks positioned itself

as a low-cost, no-frills coffee chain like Tim Hortons. Such a chain would

be more resistant to recessions since customers would probably not forgo

a cup of coffee that more of than not costs about a dollar. However, since

Starbucks is selling an experience and not merely coffee, its customers

probably have a much higher elasticity of demand when skipping a

Starbucks Venti Latte would lead to a saving of USD 1,500 a year, as

approximated by Katie Couric on CBS News (Economy’s A Bitter Brew For

Starbucks).

7. State, in separate and numbered sentences, all the comments made about Wall

Street by Howard Schultz in the videotaped presentation. Also, please indicate two

distinct aspects of the presentation that you have found to be personally

interesting.

He says that Wall Street has a much narrower, short-term focus.

He believes that some financial metrics that retail public companies

report to the Street promote a short-term mentality and culture

within the organisation that is very detrimental in the long run.

He adds that it is difficult for a company to simultaneously serve the

best interests of its customers and of the company itself as well as

the short-term interests of the Street.

He believes that if customers and employees are happy, it will

eventually lead to long-term value creation, which will tie back to

profits for the shareholders as well.

He admits that there have been some missteps within the

organisation that has contributed to the company’s market

capitalisation having fallen, but he doesn’t seem to be very

perturbed by it because he has a much more long-term focus.

8. A. G. Lafley and Roger L. Martin in their book, Playing to Win: How Strategy

Really Works, (2013) assert that strategy is the answer to five interrelated

questions. You have studied Starbucks Corporation in some depth. Assume that you

have been appointed as a Special Assistant to Howard Schultz and that Howard has

asked you to prepare some notes for him on these five questions for an upcoming

presentation on Starbucks at the Rotman School of Management and at which

Professor Roger Martin would be present. Be sure that your notes are compiled for

each question clearly and fully and numbered separately for each point that you

put forward.

a) The purpose of the company is to deliver a coffee-experience to its customers.

The focus is not just on the sale of a cup of coffee but also on the entire in-store

‘Starbucks’ customer experience. The company is attempting to position itself as

a third space – after a person’s house and office. Core competency would be to

serve high-quality premium beverages and superior customer service.

b) The playing field is primarily North America. Outside of the U.S., China is the

biggest market. Intention is to further diversify internationally. Since the brand

has such global brand recognition, the entire world can eventually be the playing

field. The company can leverage local partners in an attempt to make inroads

into emerging markets and other countries in which there is currently no

presence.

c) Product differentiation would be the primary winning strategy. Differentiators

could be the coffee itself, the store and its ambience, superior customer service

and strategic locations. Constantly innovate and ensure there is a feedback loop

across the organisation to make sure senior management is cognizant of

developments on the ground.

d) Heavy reliance on baristas as they are customer facing and represent the

company to the customer. The company ensures customer service personnel and

baristas are a strategic fit and understand the firm’s goals. Thus, amassing the

best human resource pool is mandatory. The firm ensures deserving employees

are rewarded with monetary and non-monetary benefits. Also, continue to invest

in technology to better manage the customer interface (mobile apps for instance)

and also to manage the supply chain more efficiently.

e) Long term focus without much regard to short-term volatility in share prices.

Management has full faith in its employees. Customer requests are prioritised

and employees are given significant leeway in deciding what is the optimal

solution to a customer complaint. This discretion empowers employees as they

feel they can make a difference to the company. Management also treats all

employees fairly with health benefits, stock options etc. Contented employees

eventually lead to happy customers.

BIBLIOGRAPHY

1) Crafting and executing strategy. (2014). MC Graw hill

2) Retrieved December 1, 2015, from

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-

reportsannual

3) Pressman, A. (2007, July 14). Archrivals Storm Starbucks.

Retrieved December 1, 2015, from

http://www.bloomberg.com/bw/stories/2007-07-18/archrivals-

storm-starbucksbusinessweek-business-news-stock-market-

and-financial-advice

4) Couric, K. (2008, December 1). Economy's A Bitter Brew For

Starbucks. Retrieved December 1, 2015, from

http://www.cbsnews.com/news/economys-a-bitter-brew-for-

starbucks/