Strategic Planning of Starbucks

(Past Decisions, Current situation and Future Options)

Student ID number: F1005899

Full name: Namrataben Govindbhai Panchasara
Intake and group number: 8
Module Name: Strategic Planning
Assignment Type: Individual Assignment
Date: 04/11/2011

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Namrataben Panchasara (Student ID:F1005899)

Executive Summery

This report aims to strategically based evaluate Starbucks past and current
situation and future position of this largely successful company. The analysis uses
Michael five forces analysis, Starbucks Original Generic Strategy, Company success
factor, SWOT, PEST and recommendation for future that Starbucks can organised
Reward program Organised, Becoming more Environment Friendly, CD Burning,
Install free wireless internet and Rent out meeting space, Increase connection with
customers, Continually improve the coffee. At last conclusion and i use book of
Michal Porter and some others and electronic articles and websites.

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Namrataben Panchasara (Student ID:F1005899)

Index
No. Index

Page No.

1. Executive Summery

2. Introduction of the company

3. Porters five force analysis (Past)

4. Starbucks Original Generic Strategy (Past)

5. Starbucks Success Factors

6. Michael Porters 5 Force analyses (current)

11

7. SWOT Analysis

12

8. PEST Analysis

13

9. Recommendation for Future Action

14

10. Conclusion

16

11. References

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Namrataben Panchasara (Student ID:F1005899)

Introduction of company
Starbucks is the largest coffeehouse company in the world. [1]Starbucks Corporation
was founded by English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon
Bowker in March 1971. Starbucks Corporation is the most successful coffee shop chain in
the past few decades. Using their aggressive growth most of its competition.
The current countries in which Starbucks are located world-wide more than 17018 (as of
July 3, 2011) retail stores in 50 countries[2] The first Starbucks first coffee shop opened in
Washington, America in 1971 and The first Starbucks location outside North America
opened in Tokyo, Japan in 1996. Starbucks entered the U.K. market in 1998 with the
$83 million (more than 60 stores). [3] Starbucks customers enjoy quality service, an inviting
atmosphere and an exceptional cup of coffee.
Starbucks selling Coffee (drip brewed coffee), Coffee beans, other hot and cold
drinks, cold and hot Sandwiches, Panini, Snacks, Pastries and item like Mug. Customers are
able to study read and enjoy music while the drinking coffee. Starbucks strategically position
of each stores with hopes of matching the specific location, helping to create a unique
atmosphere.

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Namrataben Panchasara (Student ID:F1005899)

Michael Porters 5 Force analyses (past)

My analysis being with a through breakdown of the competitive environment which
Starbucks corporation in last fifteen years. When Starbucks was first acquired by Haward
Schultz. Michal Porter author of competitive strategy to analyze in industrial environment and
develop an optimum strategy for success. The five variables responsible for the five forces
analyze using the model are buyers, industry suppliers, potential new entrants, competitive
among existing firms and substitute products. I will concentrate on the competitive
environment in which Starbucks created and I will also considerate social and
microenvironment force.

Industry rivalry
Potential for new entrance
Substitute products
Supplier bargaining power
Bargaining power of buyers

Industry Rivalry
Define an industry can described as drawing a line between the substitute products
which offered by competitors and the established competitors.[4] (Porter,1998 page no.17)
The assumption is that the relevant industry is confine to the competitors within the speciality
of coffee segments. Those get any reference to competitors from outside of the speciality of
coffee segments. By definition should be considered competitors from substitute products.
However, given the difficulty in defending the boundary of the speciality coffee industries.
The general competitors created by rivalry between established competitors I analyze drives
down the rate of return on invested capital toward what economist refer to as the industry

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floor rate of return which occurs when the market is really competitive[5] (Grant, 2008 page
no.69).
Some of the largest basic coffee companies who sales coffee in grocery chains could
have responded to swift growth in the speciality coffee industry by introducing by they own
versions of popular supermarket brands [6] (Koehn 2005). Some established companies
would have needed to achieve high volume of sales then small companies to achieve profit
target.
Potential for new entrants
The second force in Porters model which will be applied to the analysis of the
industry environment. The potential for new entrants which was Starbucks incubated. The
primary prevention to new entrants into industry is the barriers to enter. The higher barriers
to entry are within any given industry the threats of new entrants to that industry [7] (Porter,
1998 page no.7). The especially coffee industry does not pot a high premium on economies
of level. We can tell in other words companies with national distribution in the coffee industry
at large experienced some discount thought bulk purchases and suppliers and greater
infrastructure their advantages was small. This only would involve low barriers to entry in the
speciality in the coffee industry.
Starbucks entered in coffee industry in 1971 but Starbucks stores launched grew
more successful in 1996, new stores generated an average of $700000 revenue in their first
year that more than average of $427000in 1990. In this way partly due to growing reputation
of Starbucks brands. Starbucks was entered in Japans market in 1996. Before 1996
Starbucks has business in United States only. In 1998 Starbucks entered in United Kingdom
market. That is new entry in UK coffee industry. In 2002 Starbucks opened first store in
Latin America (in Mexico City). In August 2003 opened new store and first store in South
America (in Lima). In end of 2010, Starbucks opened in EI Salvador (Center America)[5] In
the early days, Starbucks so busy with selling coffee, one cup at a time, opening store and
educating people about dark-roasted coffee that they never thought much about branding
strategy.
In 1996 Starbucks began selling bottled Frappuccino. In 1999 Starbucks acquired
Tazo Tea. In 2000 Acquired hear music, a San Francisco based company. In 2003
Starbucks acquired Seattles Best coffee. In 2005 introduce Starbucks coffee liqueur;
acquires Ethos Wate.
Substitute Products
Another force which up to an organization and its include in Porters five force and it
is also threat of substitute products. The Pepsi and Coca-cola is the primary substitute
products posing a potential threat to specially were the caffeinated soft drink. Competitors
like Coca cola and Pepsi offered drink, which had the caffeine inherent in especially of
coffee, at significantly lower prices [8] (Quelch 2006). However, this is the large different in
the test and demographic makeup of customers between the two products. That is only true
direct substitute for especially coffee available was basic coffee. Basic coffee was
considered to be of significantly lower quality then speciality coffee. As an analysis, it
actually presented the industry with little threat of substitution.
Bargaining Power of Buyers
The bargaining power of buyer also plays an important role determining the standpoint from
an investors point of view of the environmental which the speciality of coffee industry existed
in inception. The force of the buyers bargaining power is relative to the ability of buyers to
force down prices, bargain for higher-quality products or more services, and pit rival

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organizations against one another.[9] (Porter, 1998, p. 24) In the specialty coffee industry,
individual consumers constituted the majority little bit of all buyers; so, they didnt typically
buy in large volumes and did not act in concert. Both of these factors reduced the relative
bargaining power of buyers in this industry. In addition, the cost of buying a cup of specialty
coffee did not represent a significant small part of any individual buyers cost of living,
reducing the propensity for price shopping and increasing the importance on quality and
customer service.
One of the primary differences between the basic coffee industry and the specialty coffee
industry is the amount of differentiation involved in the specialty coffee industry and the lack
of differentiation in the basic coffee industry. At last, the buyer or consumer in the 14
specialty coffee industry does not have full information. The consumer does not know the
actual demand, market prices or supplier costs which seriously reduces their bargaining
power. Overall, then, the bargaining power of the buyers or customers of the specialty coffee
industry, which consisted basically of individual consumers, was not considerable.

Bargaining power of buyers

The bargaining power of suppliers to the specialty coffee industry would be exerted
by also threatening to move up the price of the Arabica beans which are used in the
production of dark roasted coffee, or by a threat of drop in the quality or quantity of the
coffee beans themselves. The suppliers of Arabica beans were mostly small to mediumsized family owned farms and typically sold their crops to processors through local markets.
(Lee, 2007)[10] Primarily, these farms were located in Latin America, the Pacific Rim and East
Africa. (Lee, 2007) These farms were numerous and unrelated to one another, with no
unionization, giving them very little collective bargaining power.
While there was no direct alternative for the Arabica beans used in the production of
specialty coffee, the huge range of farms which supplied the crop made it easy for buyers to
avoid obligations to any particular farmer, which all over again eroded the bargaining power
of suppliers. The farmers who produced the Arabica beans sold exclusively to specialty
coffee retailers and as such were dependent upon their continued business. In spite of all of
the stated reasons which suggest the specialty coffee industry is one where the bargaining
power of suppliers is severely hindered, the most important 15 Ingredient within specialty
coffee is quality Arabica beans. This allows for differentiation to arise between the many
suppliers farms based upon the quality of beans they produce. This, in turn, should
considerably raise their bargaining power as suppliers.

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Starbucks Original Generic Strategy

Michael porter defines three potentially successful generic strategy; overall cost
leadership, differentiation and focus.
Overall cost leadership 20 implies the pursuit of cost reductions in all areas of a firm through
strongly controlling overhead, avoiding marginal, not as much of profitable consumers and
sacrificing explore and development, customer service, advertising and other areas not
relevant to the direct manufacturing of a product. The generic strategy of differentiation
involves the creation of something that is supposed by the industry as being unique. This
can take on many different forms including but not limited to brand image, technology,
features, dealer networks and customer service [11]. The last generic strategy mentioned is
focus, which targets an exacting group, geographic market, or segment of a given product
line. (Michael Porter, 1998, p. 38)[12] The Starbucks seen today would seem to fit the generic
strategy of differentiation; though, the original strategy used by Starbucks was closer to the
generic strategy of focus with an importance on differentiation within the particular target
consumer segment. At the requirements for a generic strategy of differentiation, as defined
by Michael Porter, sheds light on why this could not have been Starbucks original generic
strategy.
A firm that focuses on the generic strategy of differentiation would reveal strong marketing
abilities; so far, Starbucks did not even run a television advertisement until 1998. In fact,
their advertising budget only constituted 4% of their total incurred costs.[9] (U.S. Securities
and Exchange Commission, 1998)[13] A second characteristic universal in a company
pursuing the generic strategy of differentiation is a strong and established capability in basic
research and development, with individual as different to quantitative measurement goals.
The primary means by which Starbucks conducted its research and development in past
was through trial and error within company stores. A third characteristic of companies
pursuing a generic strategy of differentiation is an extensive belief in the industry of having
unique skills or unique products. Starbucks had this reputation within the distribution
segment of the specialty coffee industry. Their original store was founded in 1971 and they
were known for their luxury standards and knowledgeable staff.
With this information in give, an understanding of why Starbucks has continued such
high profit margins while at the same time increasing market share exponentially can be
ascertained.

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Namrataben Panchasara (Student ID:F1005899)

Starbucks Success Factors

First-mover advantage
Maintaining quality of Arabica beans
Employee Satisfaction
First factor was their ability to design a strategic approach to growth that quickly
established the possibility of their business model and took advantage of some key
demographic groups.
The second factor was their ability to attract the highest-quality employees through
the execution of advanced healthcare plan while reducing costs and giving equity
rights to all employees. The strategic alliance they had with preservation international
allowed them to create a sustainable supply chain of high quality coffee.
The three previous factors helped enable them to advance
The fourth factor in their success, a centre of population environment in which
casual community interactions could take place.
The fifth factor to their success was their ability to adjust to the changing dynamics
of their consumer demographics. All of these factors have allowed them to stay at the
forefront of the specialty coffee industry.
Success...

The strength of the company, together with promising market forecast has lead Starbucks to
one of the most victorious IPO (Initial Public Offering) in 1992.
By going public, Starbucks would get funding to fuel its expansion strategy over the years to
come. From $5.50 in 1992, Starbucks common stock price went up to $25 in 2001, and is
today at $58.

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In order to maintain the balanced equity among shareholders, Starbucks stock was split four
times (1993, 1996, 1999 and 2001). As the share value greater than before, these split also
prevented high prices from deterring small investors .Starbucks stock growth (in blue on the
chart) has always been above the average beverage industry stock growth.

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Michael Porters 5 Force analyses (current)

Industry rivalry
The industry rivalry within the specialty coffee industry has changed dramatically
since 1990. Nothing like the early days of the specialty coffee industry when Starbucks
competed mainly against other small-scale specialty coffee retailers they now compete
against companies of changing sizes and different exposures to specialty coffee. Starbucks
competes by a variety of smaller scale specialty coffee shops, mostly well-built in different
regions of the country. All of these specialty coffee chains are differentiated from Starbucks
in one way or any more.
10 years ago Starbucks and McDonald's were at complete opposed ends of the
range in the restaurant industry. yet, McDonald's, encouraged by the success of its
upgraded drip coffee, began testing many drinks sold under the name McCafe. Starbucks
meanwhile, with its rapid development, was adding drive-through windows and many
breakfast sandwiches, similar to the Egg McMuffin's served at McDonald's. These measures
have drawn the two companies closer together as competitors due to an advance into the
demographic consumer base made by each company. [14]
The McCafe, first conceptualized in Australia in 1993, was bringing to the United
States in 2001. The concept took an area of the typical McDonald's restaurant and added
leather couches and an attractive counter on which cappuccinos and sweets were sold. The
McCafes did not take hold originally, not making it past their first trial stage, mainly due to
the unfortunate conditions of the stores in which they were placed. Now, seven years later,
McDonald's has invested $700 million in its "plan to win" strategy, initiated during 2003,
which has led to modify of thousands of US locations.
Substitute Products
The force of substitute products in the specialty coffee industry has decreased. Many
companies that presented the specialty coffee industry with a threat in the form of substitute
products have actually entered the industry and now struggle directly by offering their own
quality coffee selections. The primary substitute products still affectation a threat to the
specialty coffee industry are the caffeinated soft drinks offered by Pepsi and Coca-Cola. Still,
even these substitute products front little threat to the quality coffee industry. In the past five
years, studies done on the percentage of meals or snacks that included a fizzy soft drink as
different to coffee have shown a problem in consumer favourite. Coffee has regularly gained
preference over carbonated soft drinks.

SWOT Analysis
Strength
Motivated staff
The cafe industry is to some level dependent on front house staff, their manner and their skill
to make customers come back. Starbucks promotes a situation that encourages team
working and collaboration. As such it encourages managers to follow its motto of their
personality, train the skill. Hence through outstanding service, customers keep coming

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back. possibly, Starbucks has one of the lowest staff revenue rate in the industry
(workforce.com).The strengths offer a favourable impact.

Weaknesses
Over-reliance on home market:
Although the American coffee market is value over $18 Billion (e-importz.com)., overreliance on this market leaves Starbucks vulnerable to unexpected changes that may occur
in such market. E.g. recession affects disposable income for customers and then, income.
Thus the management decision to focus mainly on the US market it a weakness
Opportunity
Growth coffee market
The universal taste of coffee drinkers in America is shifting near the more expensive organic
coffee which accounted for $1.3 billion in imports (Restaurant hospitality). This links to the
Social factors recognized in the External analysis and relates to changing tastes this is
favourable because it provides an opportunity for Starbucks to increase its customer support
with the possibility of high profit margins as a result.
Threats
Competition
Coffee industry is very competitive. McDonalds is the main competitor of Starbucks
coffee. McDonalds which was recently found to sell good coffee for better value is damaging
for Starbucks (digitaljournal.com). In other words this is a u critical influence. (Look at page
no.11 Industry rivalry)

PEST Analysis
Political
Government stability
Political stability of countries is a main issue that firms need to consider becaus either
indicator may aim to a country as being investor friendly, however that could rapidly change
when there is elections or political instability (e.g. Egypt). This could lead to huge trouble in a
firms operations and strategy or in a worst case situation where Starbucks was forced to
totally pull out of Israel because of such issues therefore harmfully affecting its strategy for
expansion. Political control is unfavourable in this case and presents a risk to Starbucks
Economical
Exchange Rates
The falling dollar rates compared to other currencies (Bloomberg.com) which was caused in
part by weaker economic policy will affect imports. Most of Starbucks vital supplies such as
coffee beans, sugar and milk will be affected because they are imported, so incurring higher
cost due to weak dollar. This raises a question as to whether the company will pass the extra
cost to consumer and risk creation its coffee even more costly.

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Technical
Technological Influence
Technological advancements have never been so fast, hence firms need to consistently
follow the trends and exploit any opportunities that may result and implement any change
required. For example, Starbucks have embraced the new phone payments system that was
introduced recently which helps cut long queues at peak time

Recommendation for Future Action

Reward program Organised

Increase International Expansion
Becoming more Environment Friendly
CD Burning
Install free wireless internet and Rent out meeting space
Increase connection with customers
Continually improve the coffee

Rewards Program
Recently, Howard Shultz has referred to a strategy he calls segmentation, as being
one of the initiatives he will use to reach new consumer segments. A recommendation not to
pursue this strategy is supported by the analysis done in this paper. As previously stated, a
couple of Starbucks primary recent competitors are McDonalds and Dunkin' Donuts. Both of
these companies have given many market signals which can be interpreted as their strong
commitments to selling value specialty coffee. The strategy of segmentation would seem to
be Starbucks counter to both McDonalds and Dunkin' Donuts intentions. However, if
Starbucks pursues their segmentation strategy they risk degrading the most significant
competitive advantage they possess: their brand image. By selling a discounted specialty
coffee at Starbucks locations, the overall brand's image could be degraded and an unwinnable price war with McDonalds and Dunkin' Donuts becomes more likely.
Instead of selling discounted coffee under their segmentation strategy, which seems aimed
at appealing to the price sensitive lower end of the market which is likely destined for
McDonalds and Dunkin Donuts, Starbucks should concentrate on creating more elaborate
discounting techniques to employ with their most frequent customers. This both eliminates
the potential degradation of the Starbucks brand and increases the bond customers will
experience with Starbucks. Additionally, a rewards program will encourage customers to visit
Starbucks more often and will dissuade them from visiting competitor stores, such as
McDonald's and Dunkin' Donuts, which seem unlikely to offer reward programs.
Increase International Expansion
The first and most great action which Starbucks should take is to decrease their US
expansion efforts. Continued aggressive attempts at growing in the United States by adding
as many new store locations as in the past will inevitably act to cannibalize existing locations
same store sales. The primary reason why this is true and why Starbucks should reduce
their U.S. expansion plan is the conclusion reached earlier in this analysis: one of the
qualities natural to the mature stage of the industry lifecycle is excess numbers. By dropping
their expansion efforts in the United States, Starbucks can convey the capital saved into
their international expansion efforts. The international market provides an ideal target for
increase for three important reasons. First is the lack of penetration of specialty coffee in
many nations and the potential market share which one these nations represent. For

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example, Starbucks currently operates around 16,000 stores with 10,000 in the United
States and 6000 internationally. so far, the United States has not ranked in the top 10 for
total coffee expenditure per person in the last 25 years. This suggests that internationally,
there is an vast coffee drinking population to be tapped into. For example, originally,
Starbucks introduced their Tazo tea brand into the Japanese market. After a successful
examination run in Japan then Tazo was brought into the US market. More such modern
products should be tested first in international markets 70 because there, Starbucks does
not put its brand reputation at as great a risk. This is true since those markets have not been
exposed to Starbucks for as general a period of time and, thus, the brand is more flexible in
those markets.
CD Burning
In addition to free wireless Internet access, Starbucks could equip stores with a CD
burning device to allow customers to burn copies of the online albums they purchase within
Starbucks at a low charge. Not only would this increase the customers options when
purchasing an online album but would also encourage customers to buy online albums
within Starbucks locations. so, customers could not only get the electronic version of their
selected music for their Ipods but could also have a hard copy CD for use in other devices
such as the vehicles which transported them to the Starbucks store. Having this extra
motivation could well increase foot traffic in Starbucks locations. As well Starbucks could
promote their brand and music label on the blank CDs. The labels of the CDs could use or
include Starbucks logo and the interactive experience the customer will have watching their
CD being burned and the label being placed onto it will give them a better sense of
ownership.

Install Free Wireless Internet and Rent out Meeting Space

Next, Starbucks should create a more business and technology friendly atmosphere
in its stores. With the advent of the Internet and the ever increasing array of electronic
products capable of accessing it, there has been an increasing shift in consumer's work
locations from office buildings to home offices. With this shift and natural human
psychological needs, Starbucks is allotted an opportunity to cater to these consumers
working out of the home by providing meeting space for rent. These meeting spaces should
be accompanied with the addition of free wireless Internet access throughout every
Starbucks store and printers accessible to the customers, which are color capable and
reasonably priced. The meeting space should be offered at a per hour rate while the printers
should charge per copy. The availability of meeting space and printers, coupled with free
wireless Internet access would encourage those consumers working from their homes to
engage in business activities at local Starbucks. Some of Starbucks competitors, such as
Caribou coffee, have already taken advantage of this trend in consumer preference but do
not currently have the market share to use it as a defendable competitive advantage.

Increase Connection with Customer

One way in which Starbucks has for all time differentiated itself from its competition
has been through the emotional relationship formed with its customers. This connection is
formed in important part by creating a store impression that fits the local settings and by
training baristas to increase the personal relation between themselves and their customers.
Specifically, Starbucks encourages feedback from their customers to induce a family like
feeling and instructs all baristas to welcome every customer with the question how are you

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Namrataben Panchasara (Student ID:F1005899)

doing today? To extra increase this expressive connection with their customers, Starbucks
could implement digital photo frames in all store locations and upload local customer photos
and probably even customer supplied family photos, which are appropriate in nature, upon
request. This would be a new, classier version of that time worn image, the local pub with
innumerable photos of the regulars festooning the walls. At present, the majority of
Starbucks stores have latte machines that are placed in such a way as to block the baristas
from presentation the customers and vice versa when the barista is in the act of creation the
latte. These latte machines pose a serious physical blockage to the baristas ability to
establish a lasting impression on the customer.
Continually Improve the Coffee
Given the specialty coffee markets transition into the mature stage of the industry
lifecycle, it is important to maintain a reputation for the highest quality coffee in the industry.
In February of 2008 the magazine Consumer Reports rated McDonald's drip coffee as
tasting better than that of Starbucks. To ensure the quality of their coffee, Starbucks should
continually analyze their brewing systems and practices and consider renovations. The
brewing process should at all times be judged based upon its ability to bring out the
complexities and distinctive flavours of the worlds different exotic specialty coffees.
Starbucks should also be intent upon protecting whatever brewing process they deem to be
the best through patents or acquisition of patents, which would, in turn, provide a defendable
competitive advantage.

Conclusion
Starbucks strategy is fairly simple increase the perception of high quality of a product,
become accustomed stores to the consumers lifestyle, and blanket areas totally, one after
the other, even if the stores cannibalize one another business. Starbucks is very successful
coffee chain.The companys move on cuts down on delivery and organization costs,
shortens customer lines at individual stores, and increases base traffic for all the stores in an
area.
Reference
[1] http://www.hoovers.com/company/Starbucks_Corporation/rhkchi-1.html
[2] http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-infoReq
th

[3] McDonalds Corp Betting That Coffee Is Britains Cup of Tea". New York Times. 28 March 1999. Retrieved
August 6, 2009
[4] Porter, M. E. (1998). Competitive Strategy page no.17) Techniques for Analyzing Industries and
Competitors. New York: The Free Press.

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[5] Robert M. Grant : Strategy Analysis august 2008 (Page no.69),London

http://news.starbucks.com/news/starbucks+celebrates+first+store+opening+in+el+salvador.htm
News.starbucks.com. Retrieved July 7, 2011.
[6]Phillip Kohen 2005
[7] Porter, M. E. (1998). Competitive Strategy page no.7) Techniques for Analyzing Industries and Competitors.
st

[8]John Quelch Globle market Strategy include in 21 century (2006)

[9] Porter, M. E. (1998). Competitive Strategy page no.24) Techniques for Analyzing Industries and
Competitors.
[10]Lee broen,John Joseph Garners Books 2007.
[11] http://www.slideshare.net/TL327/starbucksa-strategic-analysis-rlarson-honors-2008-2607618
[12] Porter, M. E. (1998). Competitive Strategy: Page no.38 Techniques for Analyzing Industries and
Competitors. New York: The Free Press.
[13] U.S. Securities and Exchange Commission, 1998
[14] Review, Is Starbucks a Broken Brand? , 2008

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