Fall

Starbucks Case Analysis: From

a Business Strategy Perspective
Neoma Business school
Satya Prakash Peravali

08

Starbucks Case: From a Business Strategy

Perspective
Starbucks Case: From a Business Strategy Perspective
2
1. Executive Summary...............................................3
2.Introduction............................................................3
3. SWOT Analysis.......................................................4
4.Porters Five Forces Analysis For the Coffeehouse Industry
..................................................................................7
5.Starbucks Original Strategy and Now.....................9
6.Starbucks Value Chain..........................................10
7.Issues and Recommendations..............................11

1.Executive Summary
The aim of the paper is to evaluate the firm Starbucks business strategies that
contributed to its success and further study their effectiveness in the 21st
century . As the company grows and faces a volatile global economy as a big
corporate giant rather than a small disruptive-minded challenger, the question
arises whether it can sustain its competitive advantage. Different tools are used
to identify a few issues and strategic options to tackle them are discussed.

2.Introduction
Name

Starbucks Corporation

Headquarters

Seattle, Washington, U.S.

Employees

149,000 in 2011

Revenue for 2012 :

US$13.290 billion

CEO

Howard Schultz (Founder of Starbucks coffeehouse)

Starbucks Corporation is an international coffeehouse chain based in Seattle, Washington,

United States. Starbucks is the largest coffeehouse company in the world, with 20,891 stores
in 62 countries(as of March 22, 2013), including around 11,000 in the United States, followed
by nearly 1,000 in Canada and more than 800 in Japan. Starbucks sells drip brewed coffee,
espresso-based hot drinks, other hot and cold drinks, snacks, and items such as mugs and
coffee beans. Through the Starbucks Entertainment division and Hear Music brand, the

company also markets books, music, and film. Many of the company's products are seasonal
or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered
at grocery stores. Starbucks Italian style coffee, espresso beverages, teas, pastries and
confections had made Starbucks one of the greatest retailing stories of recent history and
worlds biggest specialty coffee chain. In 2003, Starbucks made the fortune 500.

3. SWOT Analysis

Strengths
1.

Sound financial records. Starbucks profitability has been rising for the past few years and is
now 14%. The company also outmatches its nearest competitors with 24.54% return on
investment and 29.16% return on equity.

2.

No. 1 brand in coffeehouse segment, valued at $4 billion. Starbucks has a strong brand
reputation associated with quality coffee and excellent customer service. Its brand is the most
valuable brand in coffeehouse segment and is valued at $4 billion.

3.

Starbucks experience. One of the strongest advantages Starbucks has is the experience
it delivers to its customers with perfectly blended coffee, premium music, friendly staff and
warm atmosphere, which results in incomparable customer service.

4.

Largest coffeehouse chain in the world. The company operates around 20,000
coffeehouses in 60 countries, making it the largest coffeehouse chain in the world.

5.

Employee management. The company offers its employees extensive range of benefits and

a pay rate higher than offered by competitors.

Weaknesses

1.Product pricing.
Starbucks offers great coffee and customer experience but that results in high price of
its products. In comparison, McCafe premium coffee was price lower than Starbucks
coffee and was better evaluated.
2.Negative publicity.
The corporate continuously receives negative publicity over its poor efforts of
becoming greener company, tax evasions and poor treatment of some suppliers.

Opportunities

1.

To extend supplier network. Starbucks doesnt grow its own coffee beans but has to buy
them from various suppliers, which are mainly clustered in South America, Arabia or Africa.

For Starbucks to ensure critical supplies for its operations in Asia, reduce the dependence of
good or bad harvests in Africa and South America , Starbucks has to extend its supplier
network.
2.

Expansion to emerging economies. There are great opportunities for coffeehouses in

China and India, in which Starbucks has comparably only modest number of restaurants.

3.

Increase product offerings. The business could expand the number of coffeehouses that
offer wine and beer, plus adding some new products and reaching broader customer group.

4.

Expansion of retail operations. Starbucks does not only manage coffeehouses and
franchises but sells some of its products through other retailers. The firm should form more of
such partnerships and offer to sell its coffee, for example, in supermarkets.

Threats

1.

Rising prices of coffee beans and dairy products. The chain strongly depends on the
coffee beans and dairy products prices, which Starbucks cannot control or can hardly
estimate.

2.

Trademark infringements. The company is often involved in cases over illegal use of its
trademark, which is costly and detrimental for Starbucks.

3.

Increased competition from local cafes and specialization of other coffeehouse chains.

Local cafes can offer much lower price and more suited menu for its customer. Starbucks
experiences intense competition and loses market share.
4.

Saturated markets in the developed economies. Coffee markets in the developed

economies are already saturated and with intensifying competition, Starbucks will find it hard
to grow in these markets.

4.Porters Five Forces Analysis For the Coffeehouse

Industry

Porters
five
Forces

Scale
of
Influen
ce(Low
-High)

Details

Rivalry

Among

There is intense competition in the coffee market

Competing Firm

amongst established coffee shops that are fighting

to get customers. There are local coffee shops
High

offering specials to lure potential customers in.

Restaurants are opening earlier and closing later
to accommodate customers on the go. With the
85% North American customers taking their coffee
to go, convenience is a major factor

Potential

of

new

There is a great deal of risk of entry by potential

competitors

competitors due to the low start up costs.

High

McDonalds is able to add specialty coffee to their

existing services to tap into the specialty coffee
market. There is potential of $125,000 per year in
revenue to be made by each store if they are able
to successfully enter the specialty coffee market.

Potential development of
substitute products

Water is a substitute which is healthy for us and it

High

is free. The option to buy bottled water is also

inexpensive compared to coffee. With the focus
on healthier living, water is the ultimate choice.

Bargaining

power

of

There is more bargaining power for suppliers of

suppliers

technological innovations such as automated

Moder
ate

coffee machines, latte and espresso machines,

etc because there are not as many suppliers for

such equipment as there are for coffee beans but

most of the major coffeehouses owning the
suppliers reduces the influence

Bargaining power of
consumers

Customers did not really have bargaining power

Low

when it came to premium coffee such as

Starbucks. The sheer scale of Starbucks business
reduces the bargaining power of any single group
of buyers.

5.Starbucks Original Strategy and Now

As defined by Porter, there are three generic successful strategies i.e overall cost leadership,
differentiation and focus. The Starbucks seen today would seem to fit the generic strategy of
differentiation; however, the original strategy used by Starbucks was closer to the generic
strategy of focus with an emphasis on differentiation within the particular target consumer
segment. Looking at the requirements for a generic strategy of differentiation, as defined by
Michael Porter, it can be said that Starbucks initial target market was different. . In the case of
Starbucks, the demographic composition of their consumer base was narrow in orientation.
Their target consumer was a wealthy, educated, coffee drinker who preferred quality and
customer service over a discounted price. The target market has changed over time due to
which they had to change their products over the years to suit a younger, working class

population.
A firm that focuses on the generic strategy of differentiation would demonstrate strong
marketing abilities; but Starbucks advertising budget was quite low until recently. Hence, it
can be said that the differentiation between its competitors products and its original products
diminished over time. So, Starbucks was forced to go for new form of differentiation by
innovative mass advertising campaigns.

6.Starbucks Value Chain

Product
developme
nt

Bean &
Ingredient
selection

Product
distributio
n

Storefront

Take-home
products in
retail
stores

The above is the value chain for Starbucks. They search the globe for Fair Trade suppliers of
high quality beans. These products are then distributed to corporate storefronts, franchise

locations, airport terminals, grocery stores and more, and finally offer ground coffee and gift
cards to take home.

7.Issues and Recommendations

1. In the face of increasing competition and unpredictable macro-economic trends, there

is a need for a re-think on the strategic positioning and focus of the firm.
The advantage of the firm over its nearest competitors like McCafe and Peets is that it
still has better differentiation and high brand value.
Strategic option 1:This gives an opportunity to differentiate even more by turning the
weakness(High price compared to competitors) into an advantage by offering
customization options to the customers using current IT infrastructure. The downside to
this plan will be it is experimental and the operations to support such a plan would be
immense.
Strategic option 2: To reduce the number of locations and variety of drinks planned to
concentrate on consistency and exclusivity of the main product portfolio so that the
brand does not get diluted. The disadvantage of this option would be they can lag
behind the competitors like Dunkin Donuts in offering a larger variety of drinks.
Strategic option 3: To implement both the above options together will create a
interesting scenario in which the reasons for the differentiation with the competitors
decreasing would be tackled while creating a new form of differentiation with the online
customization option where customers can choose their blends and syrups and save it
to their profile. Users can log onto their online Starbucks interface and have complete
control to create their own drink, order online, find the nearest Starbucks and receive

directions. Users could post their favorite drink combination and others could vote on it.
Also involved in user experience could be mobile apps, putting in drink orders, finder
etc. to enhance the Starbucks brand in the new digital era and to create a blue ocean
for the coffee experience.
The product can be made to order when they visit the store next. As it will be costly to
implement, low cost competitors like McCafe would not be able to copy.
Hence, I would recommend strategic option 3.

2. Product life-cycle is in the mature phase in initial markets like US and Canada and can
enter the decline phase soon.

Strategic option 1: Introduce new products in accordance to the changing preferences

to the customers to keep the product portfolio fresh. The downside of this option is the
competitors in the region are doing the same and similar products will decrease the
differentiation and make the market more homogenous in nature.

Product
developme
nt

Internation
al
developme
nt

Bean and
Ingredient
selection

Product
distributio
n

Storefront

Take-home
products

Strategic option 2:
To take advantage of its wide presence in the international market as a truly global brand, a
new addition to the value chain with international development added upstream to allow for
international markets to develop new products that better suit there cultures that could
potential add value to the US market as well such as the Green Tea Latte developed in
Japans Starbucks.
I would recommend Strategic option 2 as it has good implications for issue 1 in which online
customization experience was proposed .

3. Issue 3: Starbucks have poor marketing strategy on advertising. Till now they preferred
to build the brand by promoting the drinks cup-by-cup with customers. In this way, the

advertisement ends until they drink the coffee, while some groups of people willing to
support the advertisement for timing just to taste the drink for free. The chances to
attract valuable customers are very low. Therefore, it also affects gross profit of
Starbucks, the study does not show drastic increase between year 2004 and 2005.
The percentages of the profit increased from 58% in year 2004 to 59% in year 2005.
Strategic option 1: Increase advertising budget to industry standards to match with
the nearest competitors. The disadvantage of this is that if the advertising is not
innovative it can lead to commodification of the products and the brand message
getting diluted.
Strategic option 2: Indirect advertising budget to be increased. Starbucks has a
presence in music and entertainment industry, this can be further leveraged the way
BMW tied up with James Bond brand for a time period. This method of advertising is a
double-edged sword as the outcomes are less predictable and the value difficult to
quantify.
Strategic option 3: Promote low-cost packaging of Starbucks instant coffee which will
lead to increase in visibility and bring many new customers. It might turn out to be a
brilliant option in the short run as people prefer low-cost products in the uncertain
economic environment but might turn out to be a mistake in the long-run as it will dilute
the luxury brand.
I would recommend Strategic option 2 or 1 depending on the depth of human
resources available in the market.