The Strategic Analysis of Starbucks

Group 7

Dr. Kimberlee Keef

MGMT 4710-001

7 May 2014

Table of ContentsThe Vision and Mission Statements of Starbucks – Samba CoulibalyProposed New Vision and Mission Statements – Samba CoulibalyThe History of Starbucks – Samba CoulibalyIndicators & Symbols of the Starbucks Organizational Culture – Samba CoulibalyCompetitive Profile Matrix – Laura ToldyThe External Opportunities & Threats of Starbucks – Justin BoltonPorter’s Value Chain – Ambernique JohnsonThe Internal Strengths & Weaknesses of Starbucks – Justin Bolton The SWOT Strategies Available – Justin BoltonSPACE Matrix – Laura ToldyBCG Matrix – Ambernique JohnsonIE Matrix – Laura ToldyGrand Strategy Matrix – Jesse HendersonThe Quantitative Strategic Planning Matrix – Jesse Henderson2Long-Term Objectives: Past Strategies – Josh Hiltenbrand9Best Specific Strategies – Josh Hiltenbrand41Results & Implementations of Strategies – Josh Hiltenbrand50Annual Objectives to Achieve – Josh Hiltenbrand51Policies to Implement with Strategies – Josh HiltenbrandProcedures to Evaluate & Review – Josh Hiltenbrand54Contigency Plans – Josh Hiltenbrand57Works Cited60

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1). Identify firm and its existing and new vision and mission statements.

The firm that we identified for this analysis is Starbucks. The Starbucks Corporation is

headquartered in Seattle, WA, and has the largest coffeehouse company in the world with stores

in multiple (64) countries of the world. Starbucks stores serve both hot and cold beverages. Pre-

packaged food items, and sandwiches are also sold at their stores. We visited the official website

of Starbucks to discover their mission and vision statements. The mission of Starbucks is “to

inspire and nurture the human spirit – one person, one cup and one neighborhood at a time”. We,

however, did not find any vision statement from Starbucks.

2). If needed, develop new vision and mission statements for the firm.

We would like to propose the vision statement for Starbucks – “Starbucks will want to be

the most preferred coffee joint and a place to both hangout and rejuvenate for people across the

world and make effort to inspire and nurture the human spirit”.

We also feel that while the mission statement should be specific, the current mission

statement is too much focused on one customer, the desire to meet his/her demands and cater to a

neighborhood. We would take the first part of the mission statement out about human spirit to

the vision and will have the following mission statement- “Starbuck’ mission is to grow its

business globally by providing its customers the best experience both in terms of products as

well as service and ambiance”.

3). Firm’s history (how they started, etc., what are they known for?)

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Starbucks operates in the restaurant industry founded by Jerry Baldwin, Gordon Bowker,

and Zev Siegl in 1971. When the company was founded, it was a roaster and retailer of whole

bean, ground coffee, tea, and spices with a single store in Seattle’s Pike Place Market. Based on

the information from Starbucks’ website, Starbucks positioned Howard Schultz as the director of

retail, operations, and marketing in 1982. After this, Starbucks began providing coffee to fine

restaurants and espresso bars as well. After visiting Italy in 1983, Howard was impressed with

the espresso bars in Milan and thought of developing a similar coffeehouse culture in Seattle.

After a year, he convinced the founders of Starbucks to test the coffeehouse concept in

downtown Seattle where the first Starbucks Cafe Latte was served. In 1985, Howard founded Il

Giornale, a company offering brewed coffee and espresso beverages made from Starbucks coffee

beans. In a couple of years’ time, Il Giornale acquired Starbucks assets with the backing of local

investors and changed its name to Starbucks Corporation. At that time in 1987, Starbucks started

opening stores in Chicago and Vancouver, Canada, and had 17 total stores. As the business grew,

it started offering full health benefits to full-time and part-time employees and slowly expanded

with 33 stores by the end of 1988, 55 stores by 1989, 84 stores by 1990, and 116 stores by 1991.

In 1992, the company completed its initial public offering with 165 stores and opened up

roasting plant in Kent. In 1994, Starbucks opened up its first drive-thru location, and in 1995 it

began serving Frappuccino blended beverages and opened another roasting facility in York, PA.

Japan and Singapore happened to be the locations for its first outside North America stores by

1996. By that time, the company had 1015 stores in all. In 1997, it established the Starbucks

Foundation and opened up stores in Philippines. The number of stores gradually grew with more

stores opened in England, Malaysia, New Zealand, Taiwan, and Thailand. Currently, the number

of stores is at a staggering 19,767 with its presence in South America, Central America, Asia and

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most of the countries of Europe. As per the statistics in 2013, Starbucks has 160,000 employees

and revenue of $14.89 billion in Financial Year 2013.

Starbucks is best known for its coffee products. However, they are “not just passionate

purveyors of coffee, but everything else that goes with a full and rewarding coffeehouse

experience. [They] also offer a selection of premium Tazo teas, fine pastries and other delectable

treats to please the taste buds. And the music you hear in store is chosen for its artistry and

appeal”. Starbucks coffeehouses are often a place where people come to chat, meet up or even

work at times. Starbucks store project themselves as the neighborhood gathering place where one

could experience a social, clean, eatable ambiance with a lot on offer.

4). Describe indicators and symbols of organizational culture for the firm.

Symbols play a huge role in the development of culture in an organization. Over time these

symbols help in the creation of identity, response routines, and values that help the perpetuation

of the activities in an organization. Starbucks provides an example of an organization that has

grown leaps and bounds while keeping its culture intact. Starbucks has been tremendously

successful for numerous reasons; however, customers return because of the unique experience.

Employees are friendly and welcoming, often remembering names of frequent customers.

Starbucks knows the value of its culture and it recognizes the importance of hiring the right

people to continue to make customer’s experience enjoyable. Starbucks' culture is mainly to be

the "third place" for an individual after home and work. This kind of mind set explains a lot

about what Starbucks wishes to represent for a customer. Starbucks wants to be part of a

customer's life, immersed in his/her everyday routine. Part of Starbucks' culture as well is

building a common vision for its employees so that they would share the vision and purpose of

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self-esteem and self-respect. These kinds of values all contribute to well-known Starbucks

culture that is familiar to any Starbucks customer worldwide. Starbucks artfully and purposely

develops and maintains an organizational culture with which customers and stakeholders

identify. In essence, Starbucks created its own community, driven and expressed by symbols and

language, built on the shared aspirations of its customers, who come to view the store and its

meanings as a way of life. The Starbucks’ lifestyle helps patrons not only understand themselves,

but also become a version of themselves through the symbols, ideas, and ideologies that the

corporation values. Starbucks’ attempts to recreate the social experiences and communal rituals

of Italian cafes and British pubs have been aided by company language designed to foster

feelings of belonging and connection. What one finds in Starbucks stores in the U.S. and

worldwide is a template, or sameness, that many customers find comforting. From the familiar

logo to the dark wood interiors and constant smell of coffee beans, Starbucks provides

reassurance to coffee drinkers regardless of location, perhaps even a bit of home as they travel.

The first sentence of the Starbucks website page ‘Our Heritage’ reads: “Every day, we go to

work hoping to do two things: share great coffee with our friends and help make the world a little

better”. The accompanying picture provides a counter-level view of the Starbucks logo with the

words ‘Espresso’ and ‘Cappuccino’ in neon. Consumers begin to associate Starbucks with the

American ideal, and in order to fill the emptiness they consume a product that they feel is the

epitome of the ideal American lifestyle.

5). Construct a Competitive Profile Matrix for the Firm. Illustrate with the CPM

Competitive

Profile Matrix

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(CPM)

  Starbucks Dunkin Donuts McDonalds

Critical Success

FactorsWeight Rating Score Rating Score Rating Score

Advertising 0.06 2 0.12 3 0.18 4 0.24

Market Penetration 0.10 3 0.30 2 0.20 4 0.40

Customer Service 0.08 4 0.32 3 0.24 2 0.16

Product Variety 0.06 3 0.18 4 0.24 2 0.12

Brand Recognition 0.12 4 0.48 2 0.24 3 0.36

Employee Dedication 0.06 3 0.18 2 0.12 1 0.06

Financial Profit 0.11 3 0.33 2 0.22 4 0.44

Customer Loyalty 0.10 4 0.40 2 0.20 3 0.30

Market Share 0.09 3 0.27 2 0.18 4 0.36

Product Quality 0.07 4 0.28 3 0.21 2 0.14

Social Responsibility 0.08 4 0.32 3 0.24 1 0.08

Price

Competitiveness0.07 2 0.14 3 0.21 4 0.28

Totals 1.00   3.32   2.48   2.94

The competitive profile matrix help Starbucks better understand what makes them

different from their competitors and what areas do they have to improve in order to keep their

leading position in the market. In the following, we will be evaluating Starbucks against its two

biggest competitors; Dunkin Donuts and McDonalds.

As the table shows, Starbucks has a stable leading position with a score of 3.32. The most

important evaluative criteria are; customer service, brand recognition, customer loyalty, product

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quality, and social responsibility. These five factors are crucial to the success of Starbucks` over

its competitors, these are the reason why Starbucks can price their product higher and still

compete with Dunkin Donuts and McDonald`s.

Dunkin Donuts and McDonald`s have been trying to keep up with the rapid success of

Starbucks. However, it seems like Starbucks has established such a strong brand they cannot

compete. Starbucks` two major competitors are McDonald`s and Dunkin Donuts. They both

offer coffee but they do not do it as Starbucks does.

Starbucks has established such a strong brand with its excellent customer service and product

quality that customers stick to its brand no matter what. Starbucks has a major focus on

customer service; the company understands its customers and knows what they like when it

comes to coffee. Starbucks does a lot to provide customers with the best experience at their

stores. The company trains their employees in a way that none of the competing brands do.

Starbucks wants its employees to know everything about coffee so they can answer any

questions a customer might have. There is no wonder that customers stay loyal to the Starbucks

brand.

Starbucks only serves high quality coffee made with the best espresso machine available

out there. This is why customers know and love Starbucks because it is constantly providing high

quality. In other words, when you go to Starbucks you know that you will end up with a good

cup of coffee quickly and this is why customers keep coming back.

In addition, Starbucks offers many social responsibility programs such as educating

farmers about coffee and providing kids with meals. Therefore, customers keep coming back

because they know that it is a company that not only serves good coffee but it helps making the

world a better place.

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McDonald`s had tried to imitate Starbucks strategies with opening up McCafé houses

however they could not provide the same customer service and atmosphere that makes Starbucks

so unique. Today McDonald`s tries to keep up with Starbucks by offering lower prices and

advertising their coffee more.

The question which coffee tastes better Dunkin Donuts or Starbucks has been asked

many times. The answer seems to be not so much about the taste of the coffee but the location of

the stores. Dunkin Donuts was founded in Massachusetts, whereas Starbucks originates from

Oregon. Thus, people on the East Coast prefer Dunkin and people on the West Coast prefer

Starbucks. It seems very simple but Starbucks has more stores and offers a wider variety of

coffee than Dunkin Donuts. Starbucks also offers a much higher quality, therefore if somebody

desires quality coffee made from quality beans with a quality espresso machine that person will

pick Starbucks over Dunkin Donuts.

In conclusion, Starbucks had been able to lead the market because it puts effort into

educating their employees about coffee so they can provide the highest level of customer service

which helps them maintain customer loyalty. Starbucks is also mastered creating the best

atmosphere to sip on your coffee by investing a lot of in designing stores. It is also recognized as

a socially aware brand which makes customers wanting to come back. Furthermore, Starbucks

offers the highest quality and a wider range of variety then any of the competing brands that is

why Starbucks has been able to build a leading global brand.

6). Identify Firm’s External Opportunities and Threats. Illustrate with the EFE Matrix

  External Factor Evaluation Matrix (EFE)      

  OpportunitiesWeight

Rating

Weighted Score

1. China is becoming more open to the world and presents as a major market to further penetrate.

0.10 4 0.40

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2. Franchising out prepackaged operations outside of Starbucks locations, such as giant retailers.

0.06 3 0.18

3. Green techniques and practices can be pursued by companies to be eco-friendly and gain goodwill.

0.06 3 0.18

4. Opportunities for continued growth for in international markets outside the saturated US market.

0.05 2 0.10

5. Teaming up with other retail locations such as bookstores can prove as increased profits.

0.05 2 0.10

6. Bringing more Free Trade products in the retail locations can help with the ethical friendly perception.

0.04 2 0.08

7. Advancements in technology are available to refine and better business processes.

0.05 2 0.10

8. Emerging and developing companies are opening opportunities for retail expansion.

0.03 1 0.03

9. With competition still far behind, domestic growth will allow for domination of the market.

0.05 2 0.10

10.

Emerging and developing economies will provide more distribution channels to help stabilize the fluctuating price of coffee.

0.06 4 0.24

The above EFE matrix lists the ten current opportunities that Starbucks could pursue in

their external environment. These opportunities take into account, both chances to adapt to an

ever-growing market, as well as growing in general (David, 2013). This is imperative to be

monitored and exploited as so the company does not fall behind the tight competition that are

also pursuing expansion in these areas. The first area of opportunity for Starbucks is expansion.

China is becoming more and more open to the rest of the world making for quickly growing

market potential. Emerging and developing companies in various parts of the world are also

becoming viable options for retail expansion. Finally, with the domestic market becoming

saturated with companies in this area, continued growth opportunities are plentiful outside of the

United States (“Annual Reports”, 2013).

According to the fiscal 2013 report released by Starbucks, China and the Asian Pacific

segment, was the quickest growing region in regards to sales. This growth was totaled at twenty-

seven percent overall. These numbers continue to look very promising moving into the future.

Also, within this fiscal year, Starbucks opened 206 additional stores in the China region alone.

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This is opposed to the 193 stores opened in the United States. Keeping these numbers high

internationally is vital for the company to adapt and continue to grow. With this strategy

continuing to unfold, China will become the second biggest market for Starbucks, next to

America (“Annual Reports”, 2013).

This need to grow is also coming off the heels of the US market becoming more and

more saturated. With the success of Starbucks, many companies have started getting into the

market by adding similar products lines to their product mix. Some of these companies include

Burger King, McDonalds, Wendy’s, Subway, Sonic, and 7-Eleven to name a few. All of these

companies are heavily based in the United States as well and are becoming viable competition.

With more and more companies moving into the coffee beverage market, growth in profits will

need to begin coming from emerging markets (“SWOT”, 2013).

Although growth in emerging markets is vital to the growth of Starbucks, this does not

mean that they should abandon domestic growth. A large majority of revenues still comes from

the US region, with seventy-four percent of the revenue. Even with the stiff, and ever-growing,

competition in America, Starbucks still dominates the market in retail operations. Keeping this

unchanged is imperative to be able to fund growth in emerging markets. This requires Starbucks

to keep a steady growth pattern within the domestic market. This, however, can leave the

company with other downfalls, such as neglecting internal growth over external growth in

general (“Annual Reports”, 2013).

Another major focal point for the opportunity of growth is the continuation of joint

ventures, as well as signing new deals. This provides extra streams of revenue coming into the

company. This provides opportunities to expand in bookstores, grocery stores, specialty retailers,

and even convenience stores. A major joint venture that is currently held and makes these

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options possible is with Pepsi-Cola, which produces their ready-to-drink beverages. These

prepackaged beverages make it possible for the Starbucks brand to make it into retail giants, such

as Wal-Mart, Kroger, and Walgreens. Joint ventures can also be extremely helpful in markets

that are not easily penetrated due to cultural variables. These ready-to-drink-beverages and

prepackaged items accounted for almost ten percent of the revenue for the 2013 fiscal year. This

leaves an opportunity to continue expansion in these areas to further increase these margins by

expanding on current ventures while attempting to gain new ones as well (“Annual Reports”,

2013).

Threats Weight Rating Weighted Score1. Heightened tensions between governments can affect trade and

investments outside of the country. 0.07 2 0.14

2. The coffee market is becoming highly saturated with businesses offering similar products and services.

0.06 3 0.18

3. Documents and more light is being shined on the mistreatment of coffee farmers and are boycotting big chains.

0.02 3 0.06

4. Unstable price of coffee that is being imported in third world countries

0.04 2 0.08

5. Customers in the US market are becoming more health-oriented, shying away from things such as caffeine.

0.06 2 0.12

6. In a less than undesirable economic times, specialty coffees can be considered luxury items

0.05 1 0.05

7. Competitors on the lower end, as well as the higher end, are finding success and growth to add to competition.

0.04 2 0.08

8. Rising prices can cut into profit margins as time passes, possibly forcing them to raise prices to offset this cut.

0.04 2 0.08

9. Increased vulnerability to copy-cats and duplications of recipes used.

0.05 2 0.10

10. The growth of the internet is adding more transparency to companies, allowing customers to keep closer tabs about ethical processes.

0.02 2 0.04

The next aspect of the EFE matrix is the threats of the company. This lists the ten top

threats in the company’s external environment at the current time (David, 2013). The biggest

threats that are listed in this matrix have to deal with the topics of coffee distribution, market

saturation, high pricing strategies, and health-oriented consumers. Each of these looming threats

can, on its own, set the company back, both financially and in public perception. With these

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reasons in mind, these threats should be understood and monitor to discover the best way to

minimize their threat and circumvent completely (“Annual Reports”, 2013).

The first threat that should be taken into mind is the subject of the manufacturing and

collection of coffee beans. This requires being constantly aware of the heightened tension

growing between governments which could, in turn, put an added strain on trade and investments

occurring outside the country. Even without this added stress of governments, the price of coffee

being imported has been historically unstable due to major fluctuations. With these continually

growing prices, this could begin to cut into profit margins, enough to where prices may have to

be increased to offset these price growths. Finally, the mistreatment of third world coffee farmers

is becoming more well-known to consumers. This has brought on movements, such as Free

Trade products, to ensure that these farmers are treated with the highest of standards. Receiving

negative publicity on this subject could spell disaster in public relations if customers began to

boycott, or take action in any form (“SWOT”, 2013).

The next topics deal with the issues regarding the growing saturation of businesses in the

retail coffee market, as well as the growing health trend in the United States. This topic was

touched upon in the previous portion of the paper; however, the high pricing strategy becomes

more unsteady as the market begins to add even more options for coffees at various different

locations and prices. The health-oriented consumers also fall into this area of threats. Many

consumers are reducing their consumption of these products due to their unhealthiness, and some

cutting them out completely. These two threats mixed together can spell disaster for the bottom

line. If a company were to begin marketing a line of coffee beverages with the healthy consumer

in mind, then this could have the possibility of increasing their consumer base, or pulling

consumers away from Starbucks (“Annual Reports”, 2013).

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TOTALS 1.00 2.44With the entirety of the external factors taken into consideration, Starbucks has a 2.44

rating in the EFE. The standard score here is normally around 2.5, putting Starbucks just slightly

beneath the average company. This can be interpreted that the company is right around the

average mark for responding to external opportunities while minimizing threats to the company.

Compared to the internal environment, which will be covered next, the external is lacking and

needs to be dealt with more effectively (David, 2013).

7). Construct Porter’s Value Chain for the Firm

Porter’s value chain for Starbucks is fairly simple. The components of the value chain I

created had five simple characteristics. Also, having good value and more value gives the

company sufficient enough room to make bigger profits which is always a plus. The

characteristics of the value chain that was created exemplify the keys factors of the Starbucks

Corporation during the fiscal year of 2013.

The components of the value chain above are product development, bean and ingredient

selection, product distribution, store front, and take home products. Adding teas and influences

internationally give the product an authenticity and that helps keep the customers loyal to the

Starbucks brand. Having a good quality coffee bean selection is very important when dealing

with the bean and ingredient selection, because you want a higher quality bean so that the coffee

has a rich and potent flavor. High quality coffee beans are found all around the world from Fair

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Trade suppliers. After products are made, they are then distributed to different locations to be

sold. Locations vary and they range from airport terminals, grocery stores, and franchise

locations. Take home products would include such things as gift cards, coffee to make, tea to

make, gift cards, and desserts.

In the fiscal year of 2014, mobile applications will hopefully be added to the value chain

because the actual Starbucks mobile application is awesome and i features great things that I

deem as valuable and important to the Starbucks Corporation.

8). Identify Firm’s Strengths and Weaknesses. Illustrate with the IFE Matrix

  Internal Factor Evaluation Matrix (IFE)       

Strengths Weight RatingWeighted Score

1. The Starbucks brand is very recognizable and easily one of the most recognizable brands in the coffee market 0.10 4 0.40

2. Starbucks keeps products as luxury and as comfort item rather than items of simple convenience. 0.05 3 0.15

3. Employee morale is kept high within the business due to high ethical standards and staff benefits. 0.05 3 0.15

4. The ability to advertise themselves well within the market they are defined. 0.05 4 0.20

5. Starbucks have sound financial records that allow it comfort to pursue aggressive strategies. 0.06 4 0.24

6. The atmosphere of the retail locations is appealing to their market base, bringing people in for longer periods of time 0.03 3 0.09

7. Carefully chosen locations in high traffic areas ensure constant visibility and exposure. 0.05 3 0.15

8. Perfection goes into the selection of each ingredient of a new product to make the highest quality product at the lowest cost to produce.

0.07 4 0.28

9. A large amount of time is put into training each barista to make every drink offered effectively and efficiently. 0.03 3 0.09

10. Strong customer base that is loyal to the Starbucks brand to go as far as create regular routines. 0.06 4 0.24

The Internal Factor Evaluation Matrix, or IFE, gauges how well a company reacts to

strengths and weaknesses within the company. The above matrix detailed ten strengths that

Starbucks currently has going for them to use as an advantage (David, 2013). Currently, some of

the biggest strengths for the company to leverage are the Starbucks brand and logo, its position

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in the market, its current financial records, and the ability to advertise themselves well (“Annual

Reports”, 2013).

The first, and possibly one of Starbuck’s biggest strengths, is the Starbucks brand and

logo. This brand has become very easy to recognize across the world. In regards to a survey

provided by Forbes, Starbucks ranks seventy-sixth in most recognizable brands across the world

(“Starbucks”, 2013). They have also further strengthened this by acquiring other companies in

their horizontal market with powerful brands including Tazo Tea, Seattle’s Best Coffee, and

Teavana. This strength will work to the favor of Starbucks when it comes to further growth and

expansion in markets that have already been penetrated (“Annual Reports”, 2013).

Starbucks has also worked hard to define themselves as an “affordable luxury.” They are able to

sell their coffee beverages at a premium price while keeping a strong customer base. This

strength can be contributed to a variety of strengths also listed here. One benefit is the overall

atmosphere in their retail locations. These locations have been described as calming and

relaxing. People come inside for a varying amount of reasons other than just purchasing

products. Whether it is to work on a paper or to just sit with friends, people come into the store

and stay for elongated periods of time. The longer people stay, the potential to sell products rises

(“SWOT”, 2013).

These strengths listed above have resulted in another major strength of Starbucks, which

is their sound financial record. Revenue growth has been a trend for Starbucks, especially in the

Americas and the China/Asian Pacific markets. The China/Asian Pacific market alone grew

revenues by twenty-seven percent. The Europe/Middle East/African markets have also begun to

provide positive revenue growths again. Having these sound financial records is an important

factor in determining future strategic planning. Continuing to penetrate new markets will be a

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costly plan, and the continued growths in revenue will be needed to follow through these plans

successfully (“Annual Reports”, 2013).

Finally, the last strength to be mentioned is the ability to advertise themselves well within

the market and having the funds to achieve this. Starbucks has chosen a strategy in their

marketing mix to effectively get their message out to their customer base while using marketing

funds efficiently. Marketing expenses for the 2013 fiscal year totaled 306.8 million dollars. This

can be compared to other beverage companies that tip the billion dollar mark. Since 2011, the

marketing expenses for Starbucks, however, have increased by roughly twenty-five percent. This

could begin to spell trouble for them if this number continues to swell (“Annual Reports”, 2013).

Weaknesses Weight Rating Weighted Score1. A vast majority of the retail locations are located within the US.

This leaves Starbucks dependent on the US Market, Business risk for expanding.

0.02 1 0.02

2.Encountered problems in penetrating certain markets due to taste palate differences, and the culture in general.

0.04 1 0.04

3.Even with the high employee morale, the company still holds a rather high turnover rate due to the nature of the business.

0.04 1 0.04

4.The prices of the coffee is rather high and can deter those within the market base that they are trying to appeal towards.

0.04 1 0.04

5.The risk of the cannibalization of sales exists with locations positioned so closely together in some areas.

0.07 2 0.14

6. Foods and beverages served can be high in fat and other unhealthy attributes, which is unappealing to the health community.

0.05 2 0.10

7.The menu is more focused upon the adult consumer, leaving slim options for kids (as if they weren't obese enough)

0.05 2 0.10

8.Overdependence on coffee can be prove dangerous as the business is at mercy of the market swings.

0.06 2 0.12

9. The overdependence on technologies can negatively affect operations and be a liability if interrupted or failing.

0.03 2 0.06

10. Overaggressive growth strategies in opening new stores has taken away from improving existing stores and product lines, risking the company to lose direction or the competitive advantage

0.05 2 0.10

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On the other side of the coin, the above graph lists out the ten biggest weaknesses that

Starbucks has in their internal environment. These weaknesses should be solved by efficiently

leveraging their own strengths before another company within the market is able to exploit these

weaknesses (David, 2013). A few of the major weaknesses that Starbucks has to contend with at

the time being is the overdependence on the US domestic market, the self-cannibalization of

sales, and the overdependence on coffee beverages (“Annual Reports”, 2013).

The first major weakness that Starbucks has to contend with is the overdependence on the

U.S. markets. In the 2013 fiscal year, Starbucks received almost three quarters of their revenues

from the American markets. Having to rely this heavily on a single market can be easily

construed as a major weakness. If anything changed for the worse in this market, it would

directly affect the bottom line of the company. The Starbucks Company needs to combat this by

investing in the penetration and growth in markets outside the United States (“Annual Reports”,

2013).

The next major weakness that needs to be tackled is the self-cannibalization of sales from

closely positioned stores. Even though having a Starbucks on every corner in a city gives patrons

the ability to choose which store they will frequent, this is taking away the overall potential sales

of other stores. Even though the revenues are still flowing into Starbucks, this could be

accomplished with fewer stores in some regions. This could cut down on fixed costs that each

storefront location has to pay while strategically maximizing sales with certain locations

(“Annual Reports”, 2013).

The final important weakness that needs to be watched is the overdependence on the

coffee market alone. The coffee market can be very unreliable when it comes to the stability of

pricing. Many varying factors, that are unpredictable, go into whether a year will bring a good

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harvest or not. This also comes on top of strained relationships with governments and the

growing mistreatment of coffee farmers in general. Even though Starbucks is predominately in

the coffee market, they have overdependence on this market. The continually fluctuating price of

coffee can leave a dent in the profit margin of that fiscal year. This can be offset be pushing more

into other markets such as baked goods and other products close to the market in order to

alleviate the pressure of rising coffee prices (“Annual Reports”, 2013).

TOTALS 1.00 2.75With all of the strengths and weaknesses taken into consideration, our calculations

returned a rating of 2.75 for the internal environment. This places Starbucks just a bit higher than

the average score of 2.5. This means that Starbucks has a slightly better reaction to changes in

their internal environment than the average company. This number is also slightly higher than

the result given from the external factors evaluation. This discretion shines a light on the fact that

Starbucks needs to put a little more focus into adapting to their external environment, especially

when it comes to growing outside of the domestic market (David, 2013).

9). Prepare SWOT Matrix (Strengths, Threats, Opportunities, and Weaknesses/

Alternative Strategies) Fill in EACH of the 4 empty cells of the SWOT with at least TWO

Alternative Strategies)

With the strengths, weaknesses, threats, and opportunities listed and described in the

previous two points, the next process to be completed is the SWOT strategies matrix. This

intercepts the outcomes of the SWOT analysis and puts them into possible strategies to be used.

These strategies are combined into strengths/opportunities, strengths/threats,

weaknesses/opportunities, and weaknesses/threats (David, 2013).

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SO StrategiesStarbucks should diversify globally into international markets, paying close attention to local cultures.Starbucks needs to advertise with joint venture allies to strengthen existing and new partnerships.Take advantage of health movement to introduce pricier organic coffee beverages and likewise products. Make the store area even more technology friendly, as well as increase technologies for business use.

The first set of strategies is classified under strengths and opportunities. This area is more

about moving forward than it is about shielding the company from weaknesses or looming

threats. These aspects are taking strengths within the company and applying them to achieve any

opportunities to be had in the most effective way possible (David, 2013). After an analysis of

these strengths and weaknesses, we determined that the more important aspects to be observed

were international growth, growth through licensing, prepackaging products and partnerships,

the health movements in the United States, and finally the growth of technology in society. With

these in mind, our primary strategy under this heading is to diversify globally into international

markets, paying close attention to local cultures (“Annual Reports”, 2013).

The second strategy also falls under this idea of penetrating new markets by advertising

and advancing joint venture allies to strengthen existing and new partnerships, prepackaged

products, and licensing. As spoken about earlier in this analysis, China and the Asian market, is

becoming a major emerging market to the world. Starbucks has already responded by this by

opening more stores, in the past fiscal year, than in any other region. The market has already

retorted to this action by returning massive profit growth percentages. This, and other markets,

can be penetrated in many various ways. This can be achieved through direct store openings and

licensed stores, or can be as simple as getting into a local retailer to sell ready-to-drink beverages

and prepackaged products (“Annual Reports”, 2013).

The next two strategies can also be seen as linked together at the high level. The first is to

take advantage of the health movement in order to introduce organic coffee and likewise

~ 19 ~

products, likely at a slightly higher price. The second strategy is to take steps to make the store

area even more technology friendly, both for the consumer and for business operations. The

health movement has been sweeping through the American population here recently. Many

companies have seen decreases in sales for products that are deemed unhealthy. Starbucks has a

strong strength in implementing new coffee-based beverages for their consumers and can be

leveraged in this area (“Annual Reports”, 2013).

This strength would carry major incentives to introduce a new healthy line of coffee and

food products. As for the more expensive price, Starbucks already considers themselves an

affordable luxury with the average consumer making close to $100,000 a year. Those truly eating

a healthy diet with this kind of funding would not be deterred by a small increase if this product

line was successful. This market base is also very technology-savvy. Making the store area more

technology friendly could help bring in more customers inside the store, and they are more likely

to stay longer, which in turn increases the chance of purchasing more items. On the business side

of this, major technology upgrades would be a steep expense at the front side. This, however,

would pay off in the long-run with the reduced costs of operating on a daily basis (“Annual

Reports”, 2013).

ST Strategies

1With sound financial records, Starbucks should devote funding to develop new health-friendly products

2Starbucks need to invest in developing more budget friendly drinks to bring cash-strapped customers back.

3Refine ingredients in current drinks to be leaner and disclose nutritional contents to be more transparent.

4 Drop popular beverages to $.50, and use aggressive advertising to promote these price changes. The next set of strategies is labeled under the title of strengths and threats. This area

leverages a company’s strengths in order to circumvent and minimize the chances of external

threats occurring. The major strength to take away from the IFE is their solid financial statements

~ 20 ~

(David, 2013). This, more than anything, can help Starbucks deal with looming threats on a

general basis. The two threats that could be best averted through these strategies are higher prices

of coffee products in the undesirable economy and the loss of customers due to a strong health

movement (“Annual Reports”, 2013).

To begin with, the first threat to handle is the growing health movement. As mentioned

before, this is hurting many companies as they lose business on unhealthy products. This is a

chance for Starbucks to not only introduce a healthier line of beverages, but to refine the

ingredients of current beverages to make them leaner and healthier without affecting taste. With

Forbes rating the Starbucks Company in the nineteenth position in terms of inventiveness, it

would be a perfect team to create the new line of healthy beverages (“Starbucks”, 2013). This

strategy would also give the opening to disclose the nutritional content of products in order to be

more transparent. The other main threat is the price of coffee in a receding economy. Even

though Starbucks considers themselves as an affordable luxury, many people who frequent

Starbucks are spending discretionary income (“Annual Reports”, 2013).

With the unfavorable economy, the discretionary spending of the average consumer has

dropped. Two strategies that could help offset this loss of discretionary spending is creating a

new budget friendly line of coffee beverages and slightly dropping the price of more popular

beverages. The new price friendly line of beverages would bring in more customers that,

otherwise could not afford top line beverages. With this in mind, I would not drop prices to

match lower quality coffee providers such as McDonalds, but to find a happy medium between

the two. The second strategy would involve slightly decreasing the price of certain popular

beverages. Even though this would cut into profit margins, the idea is that the extra sales would

~ 21 ~

make up for the reduced profit margins. This can be further achieved through a heavy marketing

strategy to advertise these price decreases (“Annual Reports”, 2013).

WO Strategies1 Create products outside coffee to diversify as well as remove dependence on market swings2 Switch focus onto internal growth opposed to aggressive store expansion within the US.

3Make joint ventures with various companies to grow more sources of revenue, such as hotels & planes.

4 Use deals to increase food sales through combos or refill days to bring customers back more often The third set of strategies is combining points from the weaknesses and the opportunities

analyses. This is aiming at refining the weaknesses of the company by pursing the opportunities

in the external environment (David, 2013). Some of the threats we chose to focus on is the

overdependence of the coffee market in an already saturated market and the overaggressive

growth strategy opposed to internal growth. These can be offset by the growing market to partner

with other companies with licensing and joint ventures, as well growing product lines internally

while penetrating international markets more heavily (“Annual Reports”, 2013).

The first strategy here is to diversify product lines outside of coffee beverages. In doing

this, this will also help detach the business from the sheer dependence on coffee products, which

is prone to market swings. Diversifying the business will help stabilize it in the long-term

timeline. This, however, must be taken carefully, because the list of factors that can cause a

product to fail is endless. One example of this was the move into breakfast by Starbucks. They

quickly found out that the aroma of coffee and breakfast was not the most ideal of smells, hurting

the business (“Annual Reports”, 2013).

Another way to achieve this is by following the joint venture route and creating more

streams of revenue by creating more product lines in the form of ready-to-drink products and

prepackaged products in general. A market that could be very profitable by doing this is

traveling, such as hotels and airlines. The other main strategy is to take a less aggressive stance

~ 22 ~

on domestic expansion and opt for more internal growth, as well as international growth.

Starbucks needs to ensure that every location is giving the best service in all ways possible

(“Annual Reports”, 2013).

Creating a better experience for the consumer should always take priority. One way this

can be accomplished is to create deals that consumers can take advantage of. This can be in the

form of discounts on food when coffee is purchased to help grow other product lines. This can

also be achieved by designating certain slow days as refill days, where a customer who had a

purchase of a certain denomination could come in and get a select free coffee beverage. This will

also help bring in customers on slow days, giving even more of a chance to make a sale on

another item (“Annual Reports”, 2013).

WT Strategies

1Starbucks should bring in more Free Trade products to build goodwill since actions are more closely watched.

2Starbucks needs to grow advertising campaigns to fight growing competition from all sides of the market.

3 Start a campaign for the better treatment of coffee farmers in third world countries.4 Try to appeal to a wider customer base than the current market base that is advertised towards.

The final set of strategies combines weaknesses and threats to the business. The purpose

of this is to take a defensive stance by not only reducing controllable weaknesses, but by

avoiding known threats altogether (David, 2013). One of these threats is the growing competition

from all sides of the market and the mistreatment of third world coffee farmers (“Annual

Reports”, 2013).

Some people have criticized that Starbucks does not carry enough Free Trade products.

These products are produced under the assurance that they were created under a high set of

ethical standards. By using more of these products, it will help lessen the critics from this aspect

while avoiding an even bigger misstep of being labeled as a company that mistreats third-world

~ 23 ~

farmers, which could have bigger consequences. With the market becoming more and more

competitive from all aspects, Starbucks needs to constantly be working to differentiate

themselves so they do not fall under the threat of a saturated market. This can be achieved by

growing bigger advertising campaigns as well as appealing to a wider market base. Many

companies have gone on these advertising campaigns and have used this opportunity to take

shots at Starbucks. This could be a chance to put the Starbucks brand and logo even further out

there as well as be angled to bring in more demographics to keep profit margins growing overall

(“Annual Reports”, 2013).

10). Prepare SPACE Matrix

7

6

5

4

3

2

1

-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7-1

-2

-3

-4

-5

-6

-7

CP

Defensive

AggressiveConservativeFP

CompetitiveSP

IP

~ 24 ~

After completing the SPACE matrix it is clear that Starbucks should follow an aggressive

strategy since it is a financially stable company and it is in a growing market. An aggressive

strategy has five main components; integration, market penetration, market development,

product development, and diversification.

Starbucks represents a forward integration strategy which is the concept of having more

control and increased ownership over distributors as well as retailer. A perfect example to this is

that Starbucks has an agreement with Green Mountain Coffee Roasters to sell Tazo-branded

coffee and tea in their brewers. In this way, Starbucks can reach their customers on an even

broader spectrum providing that they stay the market leader in the coffee industry.

Another typical tactic of an aggressive strategy is market penetration. Market penetration

means achieving higher market share for present or new market via new marketing efforts.

Starbucks is expanding rapidly domestically as well as globally. It does not matter where you are

people know the brand Starbucks. Starbucks is opening new stores in Vietnam and India and it

is doing great in the Latin American areas as well as in Europe and in the Middle East.

Nonetheless, it is tripling its number of stores in China. It is no wonder it was able to yield a

revenue growth in 2013.

Starbucks would not be this successful without its excellent product development which

constantly introducing their existing products to new markets. Bringing coffee to the world can

be a tricky business since customers` preferences might differentiate on a big scale but Starbucks

seems to be handling it well. Like mentioned earlier, it is continually expanding into new

geographic areas.

Starbucks` key to its success in so many different geographic areas that it is able to offer

continuous product development. This means Starbucks has mastered how to improve or modify

~ 25 ~

their products to suit their customers` taste. It is a very crucial point especially when you have to

please so many different geographic areas. Product development such as, introducing the new

Hazelnut Macchiato or the Reserve Coffee brand from Colombia are all to please customers.

After all, Starbucks is as successful as it is because it knows coffee and what its customers want

more than any other competing company.

In order to satisfy customers` demand, Starbucks must use related diversification, which

is its value chain possess competitively valuable cross –business strategic fits. Starbucks recently

came out with their new bakery brand called La Boulange. Moreover, the company had recently

opened their first Teavana Fine Teas + Tea Bar in New York City. This is an attempt to transfer

the experience of having a cup of tea just like they transformed the ultimate coffee experience.

Starbucks is also creating new healthier drinks as people are becoming more health conscious,

which could represent a great opportunity for Starbucks to yield more revenues.

As the above examples show, Starbucks is representing an aggressive strategy which makes

sense as it is the absolute leader in the market. Currently, there is no other company that could

compete with Starbucks. Aside from its absolute leading position, Starbucks always strives for

the best and it keeps improving its brand. The key to its aggressive strategy is to have its brands

placed in other retail stores, to expand more globally, and to have improved and new products.

This aggressive strategy will likely to secure Starbucks` leading position in the coffee industry.

11). Prepare BCG Matrix

With the BCG matrix, it tells us how and which areas of the organization or business

which in this case is Starbucks need more investment and more resources. In the following

~ 26 ~

explanation, I will be examining relative market share position dealing with Starbucks and every

division that is relative to all the other divisions.

`We all know that Starbucks is the world’s leading retailer of high quality specialty coffee

as well as the top roasting company. We have used the four divisions that make up Starbucks

worldwide to evaluate their financials and where they stand as far as the fiscal year of 2013. The

Americas, EMEA, CAP (China/Asia), and Channel segments all make up the four divisions that

will be talked about. All four divisions either fall into the Star category or Question Mark

category. A little background information on the question mark category is that the divisions in

this quadrant often time have a lower market share position in a high growth industry. The star

category is basically representing the high relative market share and high industry growth rate.

The Americas has the highest percentage of profits out of all four divisions with 74% and

total profit of $11,000,800,000 with a remainder of $3,891,140,000. Revenues grew over 11%

and store sales rose 7%. Growth and expansion in food offerings, improvements and adjustments

~ 27 ~

to the operational aspect of Starbucks, and new beverage innovation and advancement all played

a major role in the rise of store sales and profits in the Americas. Sales and profitability are

expected to consistently grow in the coming fiscal year especially with new stores and franchises

on the rise and new products constantly being rolled out. The Americas are considered a star

because they are continuing to grow at steady rates and they have one of the best organizations

with long time running for profitability and growth.

The next division that also fell in the star category was the EMEA division which

consists of the European, Middle Eastern, and African countries. With a total profit of

$1,160,000,000 they only made up 8% of the EMEA’s profit and had a remainder of $13,732,

200,000. Even though they were far behind the Americas, the EMEA’s have consistently

progressed to work towards having long term profitability and will continue to do so for the

fiscal year of 2014. With a 2% revenue increase, that helped in the overall profitability of the

EMEA Starbucks. Stores that were under performing had a change in the ownership structure

and improved store sales during the second half of the fiscal year of 2013. Continuing efforts to

improve cost management and portfolio optimization caused the company’s operating margin to

rise to 5.5% in 2013. In the next fiscal year, there should be an even bigger improvement in

overall sales revenue and profits.

In the CAP division, which is made up of China and Asia, they fell into the question

mark quadrant because they had a low market share but they compete in a high growth industry.

The CAP division had a total profit of $9,117,000,000 and a remaining profit of

$13,975,200,000. With the already existent store base that has been performing really well, and

new stores coming along, these two things caused total revenue to rise 27% during the fiscal year

of 2013. Store sales grew 9% as well as operating income grew 27% (321 million). The

~ 28 ~

operating margin remained the same at 35%. The operating margin did not really change because

store growth was moving away from the original historical model. In the future, profitability is

expected to be a more major factor especially with new stores opening up.

Last but not least, with the Channel Development division, they had a total profit of

$1,814,400,000 and a remaining profit of $13,077,800,000. Revenues rose 10% in this division

during the fiscal year of 2013. This was due to growth in sales of single serve products that

Starbucks carries. In the future, the Channel division plans to increase sales even more with the

single serve products and hopefully it will become more a contributor in the future.

12). Prepare IE Matrix

The Total IFE Weighted ScoresStrong Average Weak4.0 to 3.0 2.99 to 2.0 1.99 to

1.04.0 I II III

High

3.0 IV V VI

Medium

~ 29 ~

2.0 VII VIII IX

Low

1.0

13). Prepare Grand Strategy Matrix

From the data collected for the Strengths Weaknesses Opportunities and Threats (SWOT)

Matrix, Strategic Position and Action Evaluation (SPACE) Matrix, Boston Consulting Group

(BCG) Matrix, and Internal-External (IE) Matrix, we are able to create an informed opinion to

create our Grand Strategy Matrix. The purpose of the Grand Strategy Matrix is to formulate

alternative strategies for organizations determined by two evaluative dimensions, competitive

position and market industry growth. Any industry that exceeds annual growth of 5 percent can

be considered to have rapid growth. For firms located in Quadrant I of the Grand Strategy

Matrix, they are in excellent strategic position for market development, market penetration,

product development, forward, backward, and horizontal integration, and related diversification.

Firms competing in Quadrant II have to assess their current approach to market completely. For

these firms they belong to a growing industry that is leaving them behind due to their current

approaches being ineffective. The only way for these firms to become competitive and stay

ahead or alongside the competition they most evaluate why their current strategies are ineffective

and how they can improve to create a competitive advantage for their respective company within

their rapidly growing industry. If a firm determines that it is not possible to create a competitive

~ 30 ~

advantage, they must evaluate if horizontal integration is possible or if they have no alternative

but to divest or liquidate their respective firm. Firms from Quadrant III are in slow-growth

industries and compete very poorly. The only hope for survival within these industries require

complete restructure of the firms including extreme cost and asset liquidations otherwise these

firms will face the fate of divesture and liquidation. Lastly, firms in Quadrant IV participate in a

slow-growth market with strong competition. These firms are more likely to participate in joint

ventures which require large levels of capital with limited need for internal growth. These

business activities create to ability to pursue related or unrelated diversification into alternative

markets and industries.

Based on the criteria for a Grand Strategy Matrix, we have identified Starbucks

Corporation to be located in Quadrant I.

~ 31 ~

Starbucks

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV

Rapid Market Growth

Quadrant II Quadrant I

For market development, Starbucks Corporation has the financial capability and

resources for expansion in their Europe Middle East and Africa (EMEA), China/Asia, and

Channel divisions. To make this effort successful in the international market, Starbucks plans to

partner with well established businesses to share in the cost and risk making their international

ventures more profitable than ever before. This has been a hard push for the coffee giant because

its foreign stores are not nearly as profitable as its domestic market which is why Starbucks has

leaned so much on its domestic business since its inception. Of their EMEA, China/Asia, and

Americas divisions, Starbucks is most profitable in the United Kingdom, Canada, and Japan. For

market penetration, Starbucks also has its eye on expanding into countries such as India and

Vietnam, where they have had no market before. In response to product development, Starbucks

~ 32 ~

will continue to create new products such as pre-packaged instant coffee, coffee mugs, and travel

mugs and make them available in major grocery supermarket chains and convenience stores

across the United States and in their international markets. Starbucks will also continue to focus

on reinvigorating their acquired secondary brand, Seattle’s Best Coffee. Since 2010, Starbucks

has expanded distribution of the Seattle’s Best Coffee brand across the globe partnering with

companies such as Burger King, Border’s, and most recently airline giant, Delta Airlines. With

this expansion, Starbucks is looking to increase venues selling the SBC brand from 550 stores to

over 30,000 stores. Internationally, Starbucks has been latching onto foreign product ideas and

creating their own creative spin to boost foreign sales.

14. Complete Quantitative Strategic Planning Matrix (QSPM) List advantages and disadvantages of THREE different Potential strategies

In addition to the Grand Strategy Matrix, we implemented the Quantitative Strategic

Planning Matrix (QSPM) to further evaluate the relative attractiveness of feasible alternative

strategies using the data formulated in the Stage 1 analyses and their matching results from Stage

2. Stage 1 analyses consist of the EFE Matrix, IFE Matrix, and the Competitive Profile Matrix.

Stage 2 analyses consist of the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and the

Grand Strategy Matrix. This QSPM is quantitatively explained in the graphs below:

~ 33 ~

Opportunities Weight AS TAS AS TAS1. China is becoming more open to the world and presents as a

major market to penetrate. 0.10 4 0.40 2 0.20

2. Franchising out prepackaged operations outside of Starbucks locations, such as giant retailers. 0.06 3 0.18 4 0.24

3. Green techniques and practices can be pursued by companies to be eco-friendly and gain goodwill. 0.06 3 0.18 4 0.24

4. Opportunities for continued growth for in international markets outside the saturated US market. 0.05 4 0.20 2 0.10

5. Teaming up with other retail locations such as bookstores can 0.05 2 0.10 4 0.206. Bringing more Free Trade products in the retail locations can

help with the ethical friendly perception. 0.04 3 0.12 4 0.16

7. Advancements in technology are available to refine and better business processes. 0.05 4 0.20 4 0.20

8. Emerging and developing countries are opening opportunities for retail expansion.

0.03 4 0.12 2 0.06

9. With competition still far behind, domestic growth will allow for domination of the market. 0.05 2 0.10 4 0.20

10. Emerging and developing economies will provide more distribution channels to help stabilize the fluctuating price of coffee.

0.06 4 0.24 4 0.24

Bolstering Domestic Presence

Expanding International

Divisions

With this QSPM we have determined two alternative strategies for Starbucks Corporation

to evaluate to see if either is feasible to pursue are expanding Starbuck’s international divisions

or bolstering their domestic presence in their dominant Americas division. From the

opportunities we have identified that in relation to expanding their international divisions, China

is a prime segment to penetrate in the current market and would be a very attractive strategy for

Starbucks to further penetrate and expand within. In the rest of the international coffee market,

Starbucks will continue to partner with established retailers in the grocery and bookstore

industries to include their products and services at minimal cost with great potential for profit.

Advancements in technology have the potential to refine industry and business processes

for Starbucks. Refining industry and business processes could mean newer, better, more

advanced processing equipment for harvesting the coffee beans in their South America farms. It

could also mean more innovation in the information technology aspect of Starbucks, creating

~ 34 ~

more efficient processes for their website, marketing, shipping, and distribution aspects of the

Starbucks brand.

Emerging and developing countries such as India in the EMEA division and Vietnam in

the China/Asia Pacific division will be huge potential profit centers for Starbucks in the future.

Starbucks has already begun expansion into the communist country of Vietnam by opening

several locations in Ho Chi Minh City. This brand of western capitalism could cause a

geopolitical shift in Asia with an already increasing demand for western brands such as

Starbucks in China. As there is an increasing demand for Starbucks products in emerging and

developing countries, the market price for the demand of coffee, a commodity, will increase as

well. The international saturation of the coffee industry will level out the market price causing

less fluctuation in the industry for supply and demand respectively.

Threats Weight AS TAS AS TAS1. Heightened tensions between governments can affect trade and

investments outside of the country. 0.07 1 0.07 1 0.07

2. The coffee market is becoming highly saturated with businesses offering similar products and services.

0.06 2 0.12 2 0.12

3. Documents and more light is being shined on the mistreatment of coffee farmers and are boycotting big chains.

0.02 1 0.02 1 0.02

4. Unstable price of coffee that is being imported in third world countries

0.04 1 0.04 1 0.04

5. Customers in the US market are becoming more health-oriented, shying away from things such as caffeine.

0.06 3 0.18 1 0.06

6. In a less than undesirable economic times, specialty coffees can be considered luxury items

0.05 1 0.05 1 0.05

7. Competitors on the lower end, as well as the higher end, are finding success and growth to add to competition.

0.04 4 0.16 4 0.16

8. Rising prices can cut into profit margins as time passes, possibly forcing them to raise prices to offset this cut.

0.04 2 0.08 3 0.12

9. Increased vulnerability to copy-cats and duplications of recipes used.

0.05 1 0.05 1 0.05

10. The growth of the internet is adding more transparency to companies, allowing customers to keep closer tabs about ethical processes.

0.02 4 0.08 4 0.08

For threats concerning Starbucks, the United States, Starbucks’ largest market in their

Americas division, is experiencing an epidemic of more health conscious people due to record-

breaking trends of obesity, cancer, and diabetes. Because of the studies being made available to

~ 35 ~

the public, more Americans are starting to diet and take better care of their personal health

respectively. To adapt to this new trend, Starbucks has begun and will have to continue to create

product lines that appeal to the more health conscious consumer or this could create a loss of

market share for Starbucks.

Franchising is creating a loss in market share for Starbucks as of late. Large fast food

franchises such as McDonalds, Wendy’s, Burger King, and Jack N’ The Box have taken special

attention to crafting a coffee menu comparable to Starbucks but at a more affordable price.

While there are still consumers still brand loyal to Starbucks, this push to consume Starbucks’

market share could be a crippling problem in the future if consumers are willing to sacrifice

quality for price or these large franchisers can find a way to create better quality coffee at a lower

selling price and cost.

With the age of the internet, business practices and ethical standards have come under

much scrutiny causing many companies across all industries to become more transparent to

appease investors when deciding on which companies to invest in. Investors and the American

electorate have the right to know how the barons of business are conducting their affairs and how

they are creating value for their consumers. Luckily, Starbucks has always excelled in this

department. Starbucks has always represented a cleaner more proactive company to its

consumers and investors. They have been very active in green initiatives since their inception

and have maintained a reputation of being one of the most eco-friendly companies in their

industry and in business as a whole. If Starbucks can continue this trend and report high ethical

standards, they should be able to hedge this problem before it becomes out of hand.

~ 36 ~

Strengths Weight AS TAS AS TAS1. The Starbucks brand is very recognizable and easily one of the

most recognizable brands in the coffee market0.10 4 0.40 4 0.40

2. Starbucks keeps products as luxury and as comfort item rather than items of simple convenience.

0.05 3 0.15 3 0.15

3. Employee morale is kept high within the business due to high ethical standards and staff benefits.

0.05 4 0.20 4 0.20

4. The ability to advertise themselves well within the market they are defined.

0.05 3 0.15 4 0.20

5. Starbucks have sound financial records that allows it comfort to pursue aggressive strategies.

0.06 4 0.24 4 0.24

6. The atmosphere of the retail locations is appealing to their market base, bringing people in for longer periods of time

0.03 4 0.12 4 0.12

7. Carefully chosen locations in high traffic areas ensure constant visability and exposure.

0.05 4 0.20 4 0.20

8. Perfection goes into the selection of each ingredient of a new product to make the highest quality product at the lowest cost to produce.

0.07 4 0.28 4 0.28

9. A large amount of time is put into training each barista to make every drink offered effectively and efficiently.

0.03 3 0.09 3 0.09

10. Strong customer base that is loyal to the Starbucks brand to go as far as create regular routines. 0.06 4 0.24 4 0.24

Expanding International

Divisions

Bolstering Domestic Presence

For strengths, Starbucks first and foremost has one of the most recognizable brands in the

world. Brand loyalty is an enormous part of Starbucks and its market share. Consumers of

Starbucks shop there primarily because they know no matter which location they visit whether

it’s in Seattle, Washington or Hong Kong, China, the quality of Starbucks coffee and related

products is on par at each location. Starbucks relies on brand loyalty and it has paid off.

Starbucks prides itself on their employees and the atmosphere and benefits they provide to their

employees. Starbucks operates under a lower than average turnover rate in respect to their

employees which makes Starbucks a very attractive company in the respect of employment.

Great benefits, higher pay, and a great corporate structure provide Starbucks with an

unbelievable strength in their industry.

Consumers have bought into the brand loyalty of Starbucks for many reasons. One

reason in particular being the atmosphere of each Starbucks location. The atmosphere found at a

Starbucks is of people gathered together and talking and making small talk and catching up on

~ 37 ~

old times or the activities during the day. This atmosphere created by Starbucks is why brand

loyalty is so strong. Starbucks pays very close attention to where it places its retail locations.

Most of their locations are focused to high traffic areas of businesses, colleges and universities,

and the downtown areas of major metropolitan cities. This provides the coffee giant with the

optimal exposure to boost their profit centers. Starbucks puts an exorbitant amount of time into

the research and development of its products. Each flavor of coffee bean used by the Starbucks

brand is carefully tested and sampled for quality and taste. Starbucks also pays particular

attention to who grows the coffee beans they use in each cup of coffee.

Weaknesses Weight AS TAS AS TAS1. A vast majority of the retail locations are located within the US.

This leaves Starbucks dependent on the US Market, Business risk for expanding.

0.02 1 0.02 4 0.08

2. Encountered problems in penetrating certain markets due to taste palate differences, and the culture in general.

0.04 2 0.08 2 0.08

3. Even with the high employee morale, the company still holds a rather high turnover rate due to the nature of the business.

0.04 1 0.04 1 0.04

4. The prices of the coffee is rather high and can deter those within the market base that they are trying to appeal towards.

0.04 1 0.04 1 0.04

5. The risk of the cannibalization of sales exists with locations positioned so closely together in some areas.

0.07 1 0.07 1 0.07

6. Foods and beverages served can be high in fat and other unhealthy attributes, which is unappealing to the health community.

0.05 1 0.05 1 0.05

7. The menu is more focused upon the adult consumer, leaving slim options for kids (as if they weren't obese enough)

0.05 3 0.15 3 0.15

8. Overdependence on coffee can be prove dangerous as the business is at mercy of the market swings.

0.06 1 0.06 1 0.06

9. The overdependence on technologies can negatively affect operations and be a liability if interrupted or failing.

0.03 1 0.03 1 0.03

10. Overaggressive growth strategies in opening new stores has taken away from improving existing stores and product lines, risking the company to lose direction or the competitive advantage

0.05 4 0.20 2 0.10

TOTALS 5.50 5.43

For weaknesses, over aggressive growth strategies can in opening new stores take away

from improving existing stores and product lines resulting in Starbucks losing their competitive

advantage in the industry. Starbucks experienced a huge loss in earnings per share for a few

years because of over expansion in the Americas which caused cannibalization between locations

~ 38 ~

causing a loss in profits. Starbucks should have focused on how to improve on existing stores

and how to expand internationally instead of saturating their U.S. market.

After totaling all the scores for the QSPM, we noticed that expanding internationally or

bolstering the Americas division almost bring the almost the same benefit but with different

opportunities, threats, strengths, and weaknesses. That being said we still believe that Starbucks

would be best served by expanding internationally into new markets and existing ones. By

partnering with established foreign companies to drive down cost and bolster profit will be a

huge benefit to Starbucks.

15). Long-Term Objectives; Past Strategies

Starbucks has two long term objectives. The first is to “maintain Starbucks standing as

one of the most recognized and respected brands in the world.” The second is to “be the leading

retailer and brand of coffee in each of our target markets by selling the finest quality coffee and

related products, and by providing each customer a unique Starbucks Experience” (“Annual

Reports”, 2013).

To accomplish these objectives, Starbucks has previously implemented numerous

strategies. One of the main strategies Starbucks has used to meet these objectives is its retail

growth strategy, which focuses on continuing expansion of its retail presence across the globe.

As of September 29th, 2013, Starbucks has 7,049 stores open in the United States. As Starbucks

continues to move toward market saturation in the United States, global expansion opportunities

have become increasingly important. The retail growth strategy has historically involved the

construction of new Starbucks locations and remodeling of existing Starbucks locations.

However, in emerging markets where a competitor already has a market presence, Starbucks has

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chosen to acquire the companies it would otherwise compete against, and converted their stores

to Starbucks locations (“Annual Reports”, 2013).

Another strategy Starbucks has implemented previously is focusing on the creation of

new and innovative food and beverage products to meet consumer preferences. The roll out of

new product lines has successfully created new revenue streams in a maturing coffee market, and

helped Starbucks maintain its position in the marketplace amidst fierce competition. Examples of

new product lines Starbucks has created beyond its core coffee menu is the addition of juices,

baked goods, breakfast items, and teas. On top of creating new product lines, Starbucks is also

focused on finding ways to deliver these products across a number of channels. In addition to the

traditional Starbucks retail locations, previous strategies have resulted in food service

partnerships that have landed Starbucks coffee on grocery store shelves and partnerships that

have allowed Starbucks to serve hotels, businesses, and universities (“Annual Reports”, 2013).

Another way that Starbucks has worked towards accomplishing its long term objectives is

the implementation is its Global Responsibility strategy. Through the use of the Global

Responsibility strategy, Starbucks has aimed to source coffee in the most ethical ways possible,

reduce the environmental impact of its coffee harvesting and brewing, and serve the many

diverse communities in which it operates. Starbucks has historically faced intense scrutiny over

the living conditions of farmers that harvest the coffee it sells, with some critics claiming that

farmers are unable to make a living and face slave-like labor conditions. Starbucks Global

Responsibility strategy has helped reduce some of these issues and successfully protected the

reputation of the brand (“Annual Reports”, 2013).

An additional strategy Starbucks has implemented to meet its long term objectives are to

create what it calls the “Starbucks Experience.” As part of this strategy, Starbucks has

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endeavored to provide clean, inviting retail spaces for customers, and a high quality customer

service experience. An important part of this strategy is Starbucks hiring and retention strategy.

Unlike most companies, which refer to those they employ as “employees” or “associates,”

Starbucks refers to its employees as “partners.” The term partner is not purely symbolic;

Starbucks offers equity options to both full-time and part-time employees. Additionally, unlike

most brick-and-mortar retailers, Starbucks offers full health insurance benefit packages to part

time and full time employees. The attractive benefits Starbucks has offered to employees has

helped reinforce employee “buy-in”, increasing morale and assisting in the successful execution

of the “Starbucks Experience” (“Annual Reports”, 2013).

16). Recommend your Best Specific Strategy and explain how it will lead to achieving

Long-Term Objectives.

Successful implementation of past strategies has resulted in many years of strong

business and profitability for Starbucks. As a result, many new strategy possibilities are not

mutually exclusive; Starbucks can afford to implement strategies that do not conflict with one

another simultaneously. With this reality in mind, there are two best strategies Starbucks can use

to successfully achieve its long-term objectives.

Starbucks Best Strategy Part A: Retail & Product Distribution Growth

Starbucks first best strategy is to ramp up expansion, by growth of new company-owned

retail locations, especially in new and existing international markets, and by expanding

alternative methods that Starbucks uses to deliver products to consumers outside of retail stores.

On the retail side of its business, Starbucks currently has two main types of store locations. The

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first are traditional company owned and operated stores. The second are company licensed

stores. From a customer experience standpoint, the traditional company-operated locations are

the most advantageous for Starbucks. At these locations, all employees are employed by

Starbucks, and Starbucks retains full control over the operations of these locations. However,

there are many locations globally where access to the best retail space is difficult to access. At

these locations, Starbucks has often chosen to create licensing agreements with retail business

partners as a cost-effective method to access these areas. At company licensed stores, Starbucks

shares space and operations with a business partner. Employees working at Starbucks licensed

stores complete a training program that is very similar to the program employees that work for

company-operated stores receive. However, because Starbucks does not own these locations,

they do not retain full control of the operations and customer experience at these stores.

Additionally, Starbucks derives significantly more revenue from company owned and operated

stores. At the end of fiscal 2013, Starbucks had 10,194 company-operated stores, and 9,573

licensed stores. Even though the mix of stores is split fairly evenly, company-operated stores

accounted for 79% of revenues, while licensed stores accounted for only 9%. With this revenue

disparity in mind, Starbucks best strategy for retail growth is to take advantage of opportunities

to open new company owned and operated Starbucks retail locations. While company licensed

stores represent an opportunity to enter existing markets where access would otherwise be

impossible, they do not provide anywhere near the same return on investment that company-

operated stores provide (“Annual Reports”, 2013).

Starbucks currently has three main global “segments” in which it operates. The first of

these segments is the Americas, including the US, Canada, and Latin America. The second

segment is what Starbucks refers to as its “EMEA” segment, which includes Europe, the Middle

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East, and Africa. The third segment is what Starbucks refers to as its “CAP” segment, which

includes China and the Asia Pacific region. In addition to the aforementioned global segments in

which Starbucks operates, Starbucks operates a fourth segment, which is comprised of retail

stores owned by Starbucks but operating under a different brand name. This segment includes

Starbucks Teavana, Seattle’s Best Coffee, and Evolution Fresh locations (“Annual Reports”,

2013).

Company-Operated Store Data for the Year-Ended September 29, 2013Sep 30th, 2012

Stores Opened

Stores Closed

Net Openings

Stores Open as of Sep 29th, 2013

Americas:US 6,856 231 (38) 193 7,049Canada 874 69 (3) 66 940Brazil 53 18 (1) 17 70Puerto Rico 19 1 (1) - 19Total Americas 7,802 319 (43) 276 8,078EMEA:UK 593 6 (50) (44) 549Germany 157 9 (9) - 157France 67 7 (2) 5 72Switzerland 50 4 (2) 2 52Austria 12 4 - 4 16Netherlands 3 4 - 4 7Total EMEA 882 34 (63) (29) 853CAP:China 408 209 (3) 206 614Thailand 155 22 (3) 19 174Singapore 80 20 (6) 14 94Australia 23 1 - 1 24Total CAP 666 252 (12) 240 906All Other Segments:Teavana - 340 (2) 338 338Seattle’s Best Coffee

12 11 (8) 3 15Evolution Fresh 2 2 - 2 4Total All Other Segments

14 353 (10) 343 357Total Company-Operated

9,364 958 (128) 830 10,194

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As depicted in the table above, Starbucks has a significant number of company-operated

stores throughout the globe. However, Starbucks’ current mix of retail locations is weighted

heavily in the Americas segment. The Americas segment comprises approximately 80% of

Starbucks company-owned retail locations. The majority of this 80% are stores located in the

United States. Canada, while still significantly behind the United States market, has the second

largest market presence of any other country in which Starbucks operates, with 940 company-

owned stores. While there are still opportunities for growth in the United States, Starbucks has

already established a strong retail presence throughout the United States. Continuing to expand

aggressively in the United States is likely to produce diminishing returns. Opening additional

Starbucks locations in close proximity to other Starbucks locations may risk cannibalizing

existing business. Additionally, competition is intensely fierce in the United States, with

competitors that also have an existing strong retail presence continuing to expand, as well

(Sanburn, 2013).

The EMEA segment of Starbucks global operations represents a significant growth

opportunity, with a total of only company-operated 853 stores. One area of opportunity in the

EMEA segment in particular is the United Kingdom. Consumer preferences in the United

Kingdom coffee market are shifting towards high-end coffee like the variety that Starbucks

produces. Starbucks recently moved its European headquarters to London, likely in an attempt to

be closer to what is a key growth region. With only 549 stores in the United Kingdom, Starbucks

should capitalize on the change in consumer preferences and aggressively drive growth in this

part of the EMEA segment (Evans, 2014).

The CAP segment of Starbucks global operations represents another significant growth

opportunity, with a total of only company-operated 906 stores. One particular area that

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represents a tremendous opportunity for growth is China. China has historically been a tea-

drinking country, but consumer demand for coffee is growing, especially among the young and

more affluent demographic. Additionally, Starbucks has already invested in tea products to serve

at its Teavana retail locations, which would likely be a perfect product line to serve alongside

Starbucks more traditional coffee offerings. Increasing Chinese acceptance of foreign businesses

and the massive consumer population in China make this a key area for Starbucks growth.

Starbucks should capitalize on these opportunities and aggressively drive growth in this part of

the CAP segment (Zhu, 2013).

In addition to expansion of Starbucks retail stores presence, another opportunity for

Starbucks to grow its business is through foodservice accounts and consumer packaged goods.

Aside from Starbucks retail locations, Starbucks delivers its products to customers in a number

of other ways, including hotels, grocery stores, warehouse chains, restaurants, airlines, schools

and hospitals. In locations such as colleges or hospitals, Starbucks delivers products very much

in the same way they do at Starbucks retail locations. In grocery stores and warehouse chains,

Starbucks sells Starbucks and subsidiary branded consumer packaged goods. Some examples of

Starbucks consumer packaged goods are Starbucks Ground Coffee and Starbucks K-Cups. Sales

of consumer packaged goods generate significantly less revenue for Starbucks than products sold

in company-operated retail stores. For example, a Grande coffee at a Starbucks retail location

costs anywhere between $2 and $5, while a box of 16 single serving K-Cups at Wal-Mart sells

for approximately $12. However, the popularity of home coffee makers, such as the Keurig

Single Cup Brewing System, is increasing rapidly. As a result, it is important that Starbucks take

advantage of product distribution using this channel. Ignoring the strong consumer preference for

making coffee at home could harm the Starbucks brand name, and allow competitors to

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completely occupy this growing space in the market. Foodservice and consumer packaged goods

sales accounted for approximately 11% of Starbucks total revenues in 2013. Starbucks should

continue to capitalize on growth opportunities in this category by making more of their products

available to customers through these channels, at more locations (“Annual Reports”, 2013).

Starbucks Best Strategy Part B: Product Expansion

Starbucks second best strategy is to expand its product offerings, both in the coffee

segment, as well as in entirely new categories. With a variety of hot and cold coffee offerings,

sold in a seemingly endless variety of flavors, Starbucks has done a great job so far of catering to

consumer preferences and delivering coffee products in just about any way consumers have a

demand for. However, as the United States coffee market matures, Starbucks will face difficulty

creating new and innovative product offerings in its coffee segment. With obesity in United

States adults reaching nearly 35%, one very significant opportunity for Starbucks to expand

further into the coffee market is to offer a low or no calorie version of their existing coffee

products. While black coffee contains virtually no calories, the vast majority of Starbucks

popular coffee products contain between 200 and 400 calories. Even Starbucks existing “skinny”

product offerings, intended to be a low calorie alternative, often contain upwards of 200 calories.

For consumers trying to lose weight, a single drink that contains 200 calories is not an acceptable

option. It is possible to reduce the calories of Starbucks’ “skinny” options even further, but doing

so requires more extensive customization, such as asking for a skinny menu item, made with

nonfat milk, and without whipped cream, which can be tedious for consumers. Even after the

additional customization, these products still contain 100 calories or more. Additionally, not all

of Starbucks’ coffee products are available in a skinny configuration, which means consumers

hoping for a lower calorie version of certain Starbucks drinks have no alternative whatsoever.

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As a result, if Starbucks could find a way to offer a calorie free version of its products that have a

relatively good taste, it could achieve immediate growth in the coffee market. Starbucks should

invest capital into developing low or no calorie products that require minimal customization

from consumers to take advantage of this existing marketplace opportunity (“Adult Obesity

Facts”, 2014).

Another opportunity for Starbucks to grow business at new and existing locations is to

start offering new product lines, outside of coffee. Starbucks has already expended considerable

effort expanding their menu items beyond coffee products to baked goods, hot breakfast,

sandwiches, salads, and yogurt. Additionally, Starbucks recently acquired Teavana, in an attempt

to expand into the 40 billion dollar tea market. However, significant opportunities still remain.

One such area that Starbucks is already exploring is the area of alcohol sales. Starbucks is testing

sales of alcohol sales after 4 p.m. in select markets. Sales of Starbucks products peak in the

morning and then see another surge in the afternoon hours. However, demand for existing

products dips in the evening hours, where alcohol sales have an opportunity to provide

significant additional revenues for Starbucks. Alongside the sale of alcohol products, Starbucks

is serving upscale snack items on what it calls its “light bites” menu, which includes chocolate

fondue, bacon-wrapped dates, and truffle macaroni and cheese. Starbucks is marketing its entry

into the alcohol market as an evening event called “Starbucks Evenings,” which is intended to be

a way for friends, dates, or adult family members to have a quiet evening over a glass of wine or

beer at a Starbucks location. Alcohol products cost considerably more than coffee products,

which could be a tremendous source of additional revenue for Starbucks going forward

(“Starbucks Evenings”, 2013).

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The recommended strategy for retail growth and expanding ways to deliver products to

consumers will require significant capital, but will also provide a significant return on

investment. Supplementing this growth strategy with new product lines will help draw more

customers to both new and existing Starbucks locations. These two strategies will work

synergistically to increase Starbucks’ global profitability.

In order to reach long term objectives, Starbucks needs to move quickly to implement the

recommended strategies. In order to implement these strategies, Starbucks should open 2,500

new company-operated stores across the globe over the next 5 years. Additionally, Starbucks

should continue to invest in new product lines to increase sales at new and existing locations.

The cost to open a new Starbucks location is approximately $450,000. In addition to the cost

required to open each new store, each store will bring with it associated operating expenses, such

as salary, wages, utilities, insurance, and other overhead expenses. The approximate annual cost

of these expenses, per store, is $217,000. Additionally, the cost of goods sold at these stores,

including our recommendations for new products, will be approximately $360,000 per store. We

arrived at these numbers by analyzing prior year trends and comparing the relationship between

number of stores and related expenses. The costs to the suggested 2,500 stores over the next 5

years will cost approximately $1,125,000,000, which will need to be acquired through a

combination of 30% stock and 70% debt, based on EPS-EBIT analysis. However, the store

operating costs, as well as the cost of goods sold, will be covered by the revenue generated by

each store. Therefore, Starbucks does not need to acquire capital for these costs up front. Please

see the following table for a list of projected annual costs, based on the recommendations

presented (Lawless, 2012).

Year 2014 2015 2016 2017 2018

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Costs to Open New Stores

$225,000,000

$225,000,000

$225,000,000 $225,000,000 $225,000,000

Store Operating Costs

$108,500,000

$217,000,000

$325,500,000 $434,000,000 $542,500,000

Cost of Goods Sold

$180,000,000

$360,000,000

$540,000,000 $720,000,000 $900,000,000

Total $513,500,000

$802,000,000

$1,090,500,000

$1,379,000,000

$1,667,500,000

The strategies we have presented here share similarities and differences with actual

strategies implemented by the company. Starbucks currently plans to open approximately 5,000

stores globally in the next 5 years. However, Starbucks’ expansion plans include opening stores

through a combination of constructing company-operated stores and working with retail partners

to license stores, which generate significantly less revenue. Our recommendation is that

Starbucks focus on growth of company-operated stores that will generate the most profitability in

the long run, albeit at a slower pace (“Annual Reports”, 2013).

Starbucks is also focused on continuing to expand their product offerings in locations

other than their traditional retail stores, just as our recommendations state. This focus recently

cost Starbucks some significant litigation costs when it ended an exclusive distribution contract

with Kraft three years early. Under this contract, Kraft had exclusive rights to market the

Starbucks ground coffee seen on many grocery stores today. However, Starbucks felt that Kraft

was not meeting the performance requirements of the contract, which required Kraft to work

closely with Starbucks on customer accounts and marketing decisions. Starbucks felt that Kraft

was in breach of contract, and ended the partnership prematurely in order to gain more control of

the distribution of its products. Kraft entered into arbitration proceedings to recover damages

from the premature ending of the agreement. In a recent decision, an arbitrator sided with Kraft’s

claims, and ordered Starbucks to pay Kraft $2,760,000,000 (“Annual Reports”, 2013).

~ 49 ~

Starbucks is also focused on product expansion, through many of the product lines

discussed above. However, Starbucks does not appear to be focused on significantly expanding

product lines for consumers looking for low calorie options, which we disagree with. As obesity

increases, especially in the United States, the potential marketplace for low calorie items

increases each year. If Starbucks continues to marginalize this trend, it risks missing out on a

significant amount of additional revenue (“Adult Obesity Facts”, 2014).

17). Specify how your recommendations can be implemented and what results you expect.

Prepare forecasted ratios and projected financial statements; prepare a timetable for

action.

Based on Starbucks’ best strategy discussed above, we have created projected

consolidated income statements and consolidated balance sheets for five years, and projected

financial ratios for three years. We have included projected recent financial ratios for Starbucks’

main competitor, Dunkin’ Donuts, for comparison purposes. Please see this pro-forma

information below.

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Projected Income Statements for Starbucks2013 2014 2015 2016 2017 2018

Net Revenues:Company-operated stores 11,793.20$ 12,680.79$ 13,621.64$ 14,618.94$ 15,676.07$ 16,796.64$ Licensed stores 1,360.50$ 1,442.13$ 1,528.66$ 1,620.38$ 1,717.60$ 1,820.66$ GPG, foodservice and other 1,738.50$ 1,912.35$ 2,103.59$ 2,313.94$ 2,545.34$ 2,799.87$ Total net revenues 14,892.20$ 16,035.27$ 17,253.88$ 18,553.26$ 19,939.01$ 21,417.17$ Cost of sales including occupancy costs 6,382.30$ 6,573.77$ 6,770.98$ 6,974.11$ 7,183.33$ 7,398.83$ Store operating expenses 4,286.10$ 4,414.68$ 4,547.12$ 4,683.54$ 4,824.04$ 4,968.76$ Other operating expenses 457.20$ 498.35$ 543.20$ 592.09$ 645.38$ 703.46$ Depreciation and amortization 621.40$ 664.90$ 711.44$ 761.24$ 814.53$ 871.55$ General and administrative expenses 937.90$ 998.86$ 1,063.79$ 1,132.94$ 1,206.58$ 1,285.00$ Litigation charge 2,784.10$ -$ -$ -$ -$ -$ Total operating expenses 15,469.00$ 13,150.56$ 13,636.54$ 14,143.91$ 14,673.86$ 15,227.61$ Gain on sale of properties -$ -$ -$ -$ -$ -$ Income from equity investments 251.40$ 291.62$ 338.28$ 392.41$ 455.19$ 528.03$ Operating income (loss) (325.40)$ 3,176.33$ 3,955.63$ 4,801.75$ 5,720.35$ 6,717.58$ Interest income and other, net 123.60$ 129.78$ 123.29$ 128.22$ 125.66$ 128.17$ Interest expense (28.10)$ (77.10)$ (77.10)$ (77.10)$ (77.10)$ (77.10)$ Earnings/(loss)before income taxes (229.90)$ 3,229.01$ 4,001.82$ 4,852.88$ 5,768.91$ 6,768.66$ Income taxes (238.70)$ 1,033.28$ 1,280.58$ 1,552.92$ 1,846.05$ 2,165.97$ Net earnings including NCI 8.80$ 2,195.73$ 2,721.24$ 3,299.96$ 3,922.86$ 4,602.69$ Net earnings attributable to NCI 0.01$ 1.43$ 1.77$ 2.14$ 2.55$ 2.99$ Net earnings attributable to Starbucks 8.79$ 2,194.30$ 2,719.47$ 3,297.81$ 3,920.31$ 4,599.69$

Projected Balance Sheets for Starbucks2013 2014 2015 2016 2017 2018

AssetsCurrent assets:Cash and cash equivalents 2575.70 899.15 1285.79 1838.67 2629.30 3759.90Short-term investments 658.10 875.27 1164.11 1548.27 2059.20 2738.74Accounts receivable, net 561.40 640.00 729.60 831.74 948.18 1080.93Inventories 1111.20 1233.43 1369.11 1519.71 1686.88 1872.44Prepaid expenses and other current assets 287.70 379.76 501.29 661.70 873.45 1152.95Deferred income taxes, net 277.30 316.12 360.38 410.83 468.35 533.92Total current assets 5471.40 4343.74 5410.27 6810.93 8665.36 11138.87Long-term investments 58.30 283.30 508.30 733.30 958.30 1183.30Equity and cost investments 496.50 531.26 568.44 608.23 650.81 696.37Property, plant and equipment, net 3200.50 3744.59 4381.16 5125.96 5997.38 7016.93Deferred income taxes, net 967.00 97.30 450.70 256.60 943.00 850.00Other assets 185.30 226.07 275.80 336.48 410.50 500.81Other intangible assets 274.80 406.70 601.92 890.84 1318.45 1951.31Goodwill 862.90 1328.87 2046.45 3151.54 4853.37 7474.19Total Assets 11516.70 10961.81 14243.05 17913.88 23797.17 30811.77

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Liabilities & EquityCurrent liablities:Accounts payable 491.70 590.04 708.05 849.66 1019.59 1223.51Accrued litigation charge 2784.10 0.00 0.00 0.00 0.00 0.00Accrued liabilities 1269.30 1408.92 1563.90 1735.93 1926.89 2138.84Insurance reserves 178.50 189.21 200.56 212.60 225.35 238.87Deferred revenue 653.70 797.51 972.97 1187.02 1448.16 1766.76Total current liabilities 5377.30 2985.69 3445.48 3985.21 4619.99 5367.98Long-term debt 1299.40 1456.90 1614.40 1771.90 1929.40 2086.90Other long-term liabilities 357.70 372.01 386.89 402.36 418.46 435.20Total liabilities 7034.40 4814.60 5446.77 6159.47 6967.85 7890.08Shareholders' equity:Common stock 0.80 0.90 1.00 1.10 1.20 1.30Additional paid-in capital 282.10 516.24 944.72 1728.85 3163.79 5789.73Retained earnings 4130.30 5516.35 7663.23 9714.99 13152.07 16281.93Accumulated other comprehensive income 67.00 111.22 184.63 306.48 508.75 844.53Total shareholders' equity 4480.20 6144.72 8793.58 11751.41 16825.82 22917.49Noncontrolling interests 2.10 2.50 2.70 3.00 3.50 4.20Total equity 4482.30 6147.22 8796.28 11754.41 16829.32 22921.69Total Liabilities and Equity 11516.70 10961.81 14243.05 17913.88 23797.17 30811.77

2011 2012 2013 2014 2015 2016 2011 2012 2013Current Ratio 1.8 1.9 1.0 1.5 1.6 1.7 1.3 1.2 1.3

Quick Ratio 1.4 1.3 0.8 1.0 1.2 1.3 1.2 1.1 1.3Long Term Debt to Equity 0.1 0.1 0.3 0.2 0.2 0.2 1.9 5.3 4.5

Inventory Turnover 12.1 10.7 13.4 13.0 12.6 12.2 30.9 30.2 36.2Total Assets Turnover 1.6 1.6 1.3 1.1 1.0 0.8 0.2 0.2 0.2

Accounts Receivable Turnover 30.3 27.4 26.5 25.1 23.6 22.3 16.9 20.3 15.1Average Collection Period 12.1 13.3 13.8 14.6 15.4 16.4 21.6 18.0 24.1

Gross Profit Margin 0.6 0.6 0.6 0.6 0.6 0.6 0.8 0.8 0.8Net Profit Margin 0.1 0.1 0.0 0.1 0.2 0.2 0.1 0.2 0.2

Return on Total Assets (ROA) 0.2 0.2 0.0 0.2 0.2 0.1 0.0 0.0 0.0Return on Equity (ROE) 0.3 0.3 0.0 0.4 0.3 0.3 0.0 0.3 0.4

Starbucks Dunkin' Donuts

18 Part A). Recommend specific annual objectives

In order to ensure the success of long term objectives, it is important to set smaller goals,

in the form of annual objectives. Additionally, it is important to set policies that support long

term objectives by motivating employees to embrace favorable behaviors and abandon

unfavorable ones. Starbucks has two long term objectives. The first is to “maintain Starbucks

standing as one of the most recognized and respected brands in the world.” The second is to “be

the leading retailer and brand of coffee in each of our target markets by selling the finest quality

coffee and related products, and by providing each customer a unique Starbucks Experience”

(“Annual Reports”, 2013).

To support Starbucks’ first long term objective, Starbucks should hire Gallop, Inc., or

another respected consulting organization, to conduct public opinion polls about Starbucks’

standing as a recognized and respected company. Based on metrics provided by the consulting

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company, Starbucks’ annual objective should be to rank as well respected and well recognized

with 90% with domestic customers. In emerging markets, Starbucks’ thresholds for these scores

should be appropriate for the market share that has been established in those markets. Based on

data provided by the public to the consulting firm, Starbucks management should actively search

for ways to combat issues that are negatively influencing Starbucks standing as the most

recognized and respected brandings in the world.

To support Starbucks’ second long term objective, Starbucks should set annual objectives

related to growth. Starbucks should set an annual objective of increasing revenues 10% per year

in each global market in which Starbucks does business. This goal is feasible and attainable,

based on historical trends and recommendations we have made regarding growth. Additionally,

evaluating annual revenue increases for each global market (such as the CAP or EMEA markets)

will help ensure that Starbucks is making strides to become the leading retailer and brand of

coffee in each market in which it does business, and will prevent exceptional revenues in one

market from covering for poor revenues in others (“Annual Reports”, 2013).

To further support Starbucks’ second long term objective, Starbucks should set annual

objectives regarding customer satisfaction. During each retail store transaction, customers should

receive an invitation on their receipt to take a survey at home regarding the quality of Starbucks

products, as well as the unique experience that customer received that day. To provide additional

incentive for these customers, Starbucks should offer participating customers a code to receive a

small coffee or other inexpensive menu item for free on their next visit. For customers

purchasing Starbucks items at the grocery store or other foodservice segment, Starbucks should

work with distributors to include a similar survey with an incentive that is appropriate for the

channel through which the customer is buying the product. During this survey, customers that

~ 53 ~

did not rate either the products they received or their overall experience with the highest possible

ratings should be given the opportunity to explain what fell short of their expectations. Starbucks

should set an annual objective to earn an average of 90% customer satisfaction with regards to

both the quality of the products and the customer experience on the surveys collected.

Additionally, an internal audit team should be assembled to review the customer satisfaction

surveys for patterns. If there are specific locations or specific products that are consistently

receiving poor ratings, this audit team should go out into the field to evaluate the responses

customers are providing for validity. Based on their findings, this internal audit team should be

required to submit a report to management to recommend further action to protect the Starbucks

consumer experience.

18 Part B). Recommend policies.

In order to support Starbucks’ first long term objective, Starbucks should create

employee conduct and ethics policy. This policy should cover all manner of conduct, for all

categories of employees, including customer facing employees, employees that work with

vendors, management, and others. This policy should outline specific behaviors that are expected

of employees in various types of situations. Additionally, the consequences for violating the

policy should be clearly stated, which may include corrective action or termination, based on the

severity of the violation. On top of the policy suggested, employees should be required to

complete annual conduct and ethics policy refresher training to help highlight any changes in the

policy and reinforce the conduct and ethics Starbucks expects of its employees. Creating this

policy, and reinforcing the policy with annual training, will help ensure that Starbucks

employees are acting in a manner consistent with the expectations of the company. Employee

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and supplier adherence to the policy will help Starbucks achieve its goal to be the most respected

brand in the world. In addition to the policy created for Starbucks employees, Starbucks

suppliers should be required to agree to a code of conduct and ethics, reflecting the values stated

in the employee policy. Starbucks suppliers that are found to have violated this agreement should

be made aware that violations may cause them to be in breach of contract.

In order to support its second long term objective, Starbucks should create a number of

policies outlining expected behaviors, especially for forward-facing employees that work with

customers as part of their job descriptions. Examples of these policies are a policy regarding cell

phone use at work, time and attendance policies, a policy handling customer complaints, and a

policy for the safe and sanitary handling of food and beverage products. These policies will help

ensure that Starbucks customers receive the unique customer experience that Starbucks’

management has outlined in the second long term objective.

19). Recommend procedures for strategy evaluation and review.

When management creates potential strategies, they are created based on research,

analysis, and careful thought and discussion. However, there is no amount of data analysis for

industry expertise that can correctly predict the future, 100% of the time. The most carefully

constructed strategies still have the potential to fail. As a result, it is important to outline

procedures for strategy evaluation and review to ensure that proposed strategies are having the

desired effect on the company’s profitability. If not, the strategies must be changed or replaced

quickly to prevent significantly damaging the business. There are several evaluation methods we

propose to evaluate the strategies we have suggested. Based on recommended strategy for

growth, the first strategy evaluation we propose is an evaluation of store performance metrics,

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such as sales revenues and gross profit. Management should be provided daily, weekly, monthly,

and annual reports on actual store performance compared to company expectations. If there are

specific stores that are performing poorly compared to the rest of the region in which they are

located, the company management should contact the store management to develop an action

plan to get performance numbers within acceptable performance parameters. If the store

management is unable to rectify the issue, Starbucks should send an internal audit team to

determine the cause of the store’s poor performance. Based on their findings, management

should take action, including replacing store personnel, providing additional training, adjusting

the marketing budget in the area, or, if necessary, even closing the store. Additionally, if there is

a specific store that is consistently exceeding expectations, the management should work with

that store to evaluate what that store is doing differently to enable them to perform at a high

level. If the cause of the high performance is behavior based, training materials and policies

should be adjusted to encourage other stores to adopt these same behaviors, where possible.

In addition to individual store performance, we propose that Starbucks evaluate regional

performance metrics. Starbucks’ formula for success in the United States and Canada may not

necessarily produce desired results all over the globe. Company stores should be broken down

from their larger markets, such as the Americas, CAP, or EMEA markets, and into more

localized regions. Once broken down into these regions, management should evaluate the

performance of each region on a daily, weekly, monthly, and annual basis. It is critical to

evaluate regional performance, because poor performance across an entire region can indicate a

very serious problem that, if not addressed quickly, could seriously damage the company’s

profitability. If a region is consistently underperforming, management should evaluate the cause

of the underperformance. Based on their findings, management may need to make major changes

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to a regional marketing budget or product availability. If the people in a specific region simply

do not enjoy Starbucks products, and management is unable to make changes to suit customer

preferences in the area, it may require a modification or cancellation of the expansion in that

particular area. It is critical that new store construction should be halted in areas where regional

performance is consistently performing below company expectations. If Starbucks continues to

open new stores in a region where profitability is not sustainable, then company profitability

could be damaged even further (“Annual Reports”, 2013).

To evaluate our strategy for product expansion, both at the retail store and foodservice

levels, management should evaluate the performance of individual product lines. Additionally,

Starbucks should hire a consulting group to poll public opinion about the perception of new

products being produced. If certain product lines or individual products are underperforming,

management should evaluate the cause. If the cause of the underperformance is the taste of the

product, management should use customer feedback regarding taste to make changes to the

formula or ingredients. If the cause of the underperformance is a lack of consumer awareness,

Starbucks should increase the marketing budget committed to the underperforming product lines,

as necessary. In some situations, it is possible that changes to salvage the underperforming

products may not be feasible. For example, it may be determined that the only way to change the

taste of a product to fit consumer preferences is to drastically increase the cost of the product. In

situations where necessary changes to a product line are either impossible or not cost-effective,

the product lines should be eliminated. By contrast, if there are certain new products that are

performing exceptionally well, it may be prudent for management to explore the option of

expanding that particular product line to include additional products to capitalize on the success

that the high performing product is enjoying.

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20). Specify Contingency Plan and detail all concerns in Step 16 for this contingency plan.

Starbucks coffee, as well as the Starbucks experience, is considered by many as an

“affordable luxury.” Starbucks charges higher prices to deliver premium prices and an upscale

experience at its retail locations. In an economic climate where consumers have money available

for discretionary spending, this business model has served Starbucks and its shareholders

extremely well. However, Starbucks’ management admits that its business model is very much at

the mercy of the economy. In 2008, at the height of the United States economic recession, as

consumer spending decreased, Starbucks was forced to close 600 stores and lay off nearly 12,000

employees. Even though Starbucks has largely recovered from the recession, it is has been

opening stores at a pace of about 300 stores per year since that time, as opposed to the 1,300

stores it was opening per year prior to 2008. If economic conditions worsen, tightened

discretionary spending budgets for consumers will significantly reduce sales revenue, making a

growth strategy inappropriate. Similarly, trying to develop and market brand new product lines

that do not already have a strong consumer following would be inappropriate during an

economic downturn. Lastly, if global factors cause construction and real estate costs to exceed

what Starbucks’ management feels is reasonable to remain profitable and provide a return to its

shareholders, then a global expansion strategy becomes inappropriate. If circumstances arise that

prevent a growth strategy or product development strategy to become inappropriate, Starbucks

needs a contingency plan to operate effectively under the altered circumstances (Evans, 2014).

In the case of a prolonged economic recession, Starbucks’ best strategy is still technically

one of growth, but it will need to achieve it in a very different way. One of the primary reasons

that Starbucks’ competitors, such as Dunkin’ Donuts, McDonalds, and Nestle, have continued to

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compete with Starbucks is the price of their products. Starbucks charges a premium over its

competitors because of its top quality products and superior customer experience. However, the

price advantage that Starbucks’ competitors have makes them less susceptible to harm from a

reduction in consumer spending. If consumers’ discretionary spending drops, then Starbucks

must fight its competitors to capture some of the market share they possess in existing markets.

As previously stated, Starbucks commands significant market share among more affluent

customers; its average customer makes $90,000 a year. Dunkin’ Donuts and McDonalds

command significant market share among customers with lower incomes. In order to do so,

Starbucks is going to have to fight its competitors directly on price. The best way for Starbucks

to go about doing this is to pick a few popular menu items and reduce their price to a price

similar to what its competitors offer for similar products. By doing so, Starbucks will be able to

offer higher quality products than its competitors for similar prices. Starbucks is not known for

having a low price menu, so it will need to invest considerably in marketing the new changes. As

part of the marketing the lower cost items, Starbucks should highlight the advantage its products

have in quality over competitors’ similar product offerings. This drastic change in strategy will

lead to a significant reduction in gross margin per item sold. However, if Starbucks is successful

in capturing market share from its competitors, it will be able to make up some of the difference

by an increase in total sales revenue. From a shareholder prospective, this change is certainly not

ideal. However, the alternative to this strategy is reminiscent of 2008; plummeting sales resulting

in closing stores and employee layoffs, which is certainly more damaging to shareholder value

than what we are proposing (O’Connor, 2013).

Currently, Starbucks’ cost of goods sold is approximately 43% of sales revenue generated

by those products. Additionally, its gross margin percentage is approximately 20%. Starbucks’

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prices are approximately 15-25% higher than its competitors, depending on the item. We believe

that a 15% reduction in price of an assortment of Starbucks popular menu items is sufficient to

acquire a significant amount of the market share its competitors possess. This change will reduce

Starbucks gross margin percentage from approximately 20% to 11%. However, we believe that

this price reduction will increase total sales by 30%, resulting in a net 9.5% increase in total sales

revenue dollars. Aside from an adjustment to the marketing budget to advertise the new lower

cost pricing options, no additional expenditures are necessary to implement this alternative

strategy. Please see the table below for an estimate of how the proposed changes will impact

profitability from operations (“Annual Reports”, 2013).

Effect of Proposed 15% Price Reduction on Operating Profit

Before Changes After Changes % Change

Total Sales Revenue

14,892,200,000 $16,455,881,000 9.5% increase

Total Expenses 12,684,900,000 $14,599,590,000 13.1% increase

Gross Profit 2,207,300,000 1,856,291,000 15.9% reduction

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