STARBUCKS A STRATEGIC REPORT BY JAMES HEAVEY CONTENTS

Introduction page 1

PESTEL analysis page 1

Five forces analysis page 4

Competitor analysis page 6

Resource Audit page 6

Value system analysis page 7

Core competences page 8

Stakeholders page 8

SWOT analysis page 8

Future strategic options page 9

Recommended option page 12

Critical review page 12

References & Bibliography page 13

Introduction:

This is a strategic report on Starbucks. First of all I will explain the external

environment of Starbucks using PESTEL analysis, Porter's five forces analysis and

competitor analysis. Next will be an analysis of Starbucks' strategic capabilities.

These will be determined using a resource audit, a value system analysis, the

identification of possible core competences and the identification of important

stakeholders. After this I will present a SWOT analysis of Starbucks before discussing

three possible strategic options open to the company. Using the information I generate

I will decide upon the most suitable option and then critically evaluate all the models

and techniques used.

Howard Schultz bought a Seattle coffee company in 1987 then transformed the six

coffee stores into a national, publicly owned company with more than 25, 000

employees and over 1,300 stores. By 2002 these figures had risen to 5,689 stores in 28

countries. He is the man behind, and CEO of, Starbucks.

PESTLE Analysis:

PESTLE analysis is a tool that can aid organisations making strategies by helping

them understand the external environment in which they operate now and will operate

in the future. It is a method of examining the many different external factors affecting

an organisation - the outside influences on success or failure.

PESTLE stands for:

Political - The current and potential influences from political pressures

Economic - The local, national and world economy impact

Social - The ways in which changes in society affect us

Technological - How new and emerging technology affects our business

Legal - How local, national and world legislation affects us

Environmental - The local, national and world environmental issues

The PESTLE analysis will be used to identify and understand the important factors

Starbucks must consider in all areas of the business.

Political:

* Taxation policy - high taxation imposed on farmers in those countries producing the

coffee bean will usually mean Starbucks pay a higher price for the coffee they

purchase. Any fluctuations in taxation levels in the industry are almost certainly

ultimately passed on to the consumer. Recently (June 13, 2003) Tanzania's Minister of

Finance harmonized and rationalized local government taxation to boost rural

productivity of the coffee bean. Tax was lowered for these 'small holder' farmers and

this saving will have been passed on to purchasers of coffee like Starbucks.

* Deregulation - A decade ago, the USA pulled out of the ICA (international Coffee

Agreement) that set export quotas for producing nations and kept the price of coffee

fairly stable. Coffee quotas and price controls ended. Since the deregulation farmers

have suffered and their earnings have dropped. Many have struggled to make a living

so have given up.

* International trade regulations/tariffs - Trade issues will affect Starbucks

predominantly when exporting and importing goods. When another country's

government imposes a tariff it not only results in an efficiency loss for Starbucks but

large income transfers can become inconsistent with equity. This extra charge can turn

a bargain into a rip-off. Also, since 9/11, trade relations have been adversely affected

between the USA and some other countries.

* Government stability - Starbucks should thoroughly investigate the political stability

of any country they plan to expand to. Changes in government can lead to changes in

taxation and legislation. The forthcoming American elections may have an effect on

Starbucks as new legislation or new or existing government may bring in taxes. Also,

those countries in political turmoil or civil war (e.g. Zimbabwe at present) should be

approached with great caution when considering new ventures.

* International stability - The international economy must be brought into

consideration as it can affect Starbucks' sales and markets. The aftermath of 9/11 was

an example of an economic downturn that affected the world market. If the world

market is in a slump it is not usually the ideal time for a business to look at grand

expansion.

* Employment law - A reduction in licensing and permit costs in those countries

producing the coffee bean for Starbucks would lower production costs for farmers.

This saving would in turn be passed on to the purchaser.

Economic:

* Interest rates - A rise in interest rates means investment and expansion plans are put

off resulting in falling sales for Starbucks and their suppliers. Also mortgage

repayments rise so consumers have less disposable income to spend on luxury

products such as coffee. Low interest rates should have the opposite effect.

* Economic Growth - If growth is low in the nation of location of Starbucks then sales

may also fall. Consumer incomes tend to fall in periods of negative growth leaving

less disposable income. Consumer confidence in products can also fall if the

economic 'mood' is low

* Inflation rates - Inflation is a condition of increasing prices. It is measured using the

Retail Price Index (RPI) in the UK. Business costs will rise for Starbucks through

inflation, as will shoe-leather costs as they shop around for new 'best prices' of

materials, menu costs will rise as Starbucks have to create new price lists. Also,

uncertainty is created when making decisions not least because inflation redistributes

money from lenders to borrowers. A firm that borrows L1000 during an inflation

period will pay back less in 'real terms' as the value of this money will decline over

the period.

* Competitors pricing - Competitive pricing from competitors can start a price war for

Starbucks that can drive down profits and profit margins as they attempt to increase,

or at least maintain, their share of the market.

* Globalisation - Globalisation of the coffee market has meant farmers of the bean

now earn less money than they used to. This can result in a decrease of people willing

to do it for a living, which will mean a decrease in coffee produced, resulting in a

drop in Starbucks supply levels and probably profits.

* Exchange rates - Starbucks are affected by exchange rates when dealing with

international trade. If the value of the currency falls in the country of a coffee supplier

this enables Starbucks to get more for their $ or L when importing the goods to their

country. This saving can be passed along to the customer. Exchange rates are forever

changing throughout the world in today's market.

Social:

* Population demographics - Population demographics are a very important factor for

Starbucks as they identify what parts of the population they need to aim their products

at or which parts of the population they need to encourage to visit their stores more

than they presently do. Looking at the table in the case study demonstrating the

percentage of the age groups that drink coffee or speciality coffee it can be seen that

the age groups that Starbucks should be aiming their marketing at are the people

between 35 and 54. They should consider targeting the 18-24 age group as they drink

the least amount comparatively and by encouraging this segment to choose Starbucks

coffee now, there is a chance they may continue to drink it long into the future.

* Income distribution - Where income is distributed is another factor that Starbucks

should look at as this also demonstrates the ideal place to aim their marketing or to

locate their stores. Coffee is more of a luxury product so it is those people/places with

the most amount of disposable income to spend that should be targeted the most

intensely.

* Attitude to work - Starbucks would not want to locate to an area where the local

population have a poor attitude to work. Recruitment would be difficult, training

arduous, and staff turnover would be high. Attitudes to work are important in other

ways. A large number of workers in large cities now go out for their lunch rather than

use an internal canteen. Starbucks can use this to their advantage and promote the

shop as a place where people can meet up and so it will mean that they will get a

larger amount of people in their stores at this time of the day.

* Standard of education/skills - When Starbucks are deciding upon new premises they

must look at the standards of education and skills locally. They must be sure there are

people who live there with sufficient skills to ensure successful operation of the

business, or at least the potential to learn that comes with a good education.

* Working conditions/safety - Those people with the most disposable income, e.g.

young single professionals etc, will be accustomed to high standards. Starbucks must

ensure it's shops are clean and comfortable, service is of the highest order and health

and safety issues are fully addressed

* Location - Transport needs to the premises must be considered for both staff and

customers. Easy access is vital to ensure there is no excuse for staff to arrive late or

for customers not to visit.

* Age distribution - Research shows the average age of the population is getting older

and birth rates are stagnating. Starbucks is presently aiming it's product at young

people but maybe these views will change in the long-term as the market proportion

for young people diminishes. The most profitable way forward may be to widen their

target market despite the risk of alienating present customers.

* Health consciousness - Good health and foodstuffs associated with healthy living

are important I today's market place, as this is a trend that is occurring at the moment

in western societies. Starbucks can use this information when deciding the additional

products to sell, as well as coffee, as a large number of their customers are looking for

healthy alternatives to cakes and biscuits, which have been associated with coffee in

the past.

Technological:

* IT development - Starbucks is always looking to develop and improve its Internet

facilities. Starbucks launched its first-generation e-commerce Web site in 1998. In late

1999, Starbucks decided the site needed a major upgrade to enable new functionality

and prepare for long-term growth. To achieve these goals, Starbucks upgraded to

Microsoft Commerce Server 2000, one of the key Microsoft .NET Enterprise Servers.

As a result, scalability and performance have improved, and the company now has the

tools it needs to profile and target customers, analyse site data, and deliver new

features to the market in the shortest time possible.

* New materials and processes - Developments in the technology of coffee making

machines and the computers that Starbucks use to run their cash registers will enable

their staff to work more quickly and efficiently. This will result in customers being

served quicker and create the potential to serve more customers in a day. This will

prevent customers from having to wait around for long periods thus improving

customer relations along with increasing the customer base.

* Software upgrades - In the short-term, Starbucks must identify the most efficient

software upgrades to use to keep up with the competition. This applies to the

improving the accessibility of their website (www.starbucks.com) and also improving

the speed and quality of the service provided on the shop floor.

* Research and Development activity - As a multi-national business empire, Starbucks

has the budget and the resources to have a cutting-edge R+D department. The website

is very accessible, the facilities are state of the art but more importantly new ideas are

consistently being tried in terms of a constantly updating menu.

* Rate of technological change - The rate of technological change in the current world

market is high, much higher than, say, thirty years ago. Much of this is down to the

Internet and the speed with which information can be communicated around the

globe. Starbucks will need to invest heavily just to stand still in their ever expanding

and developing market, and even more so to try to stay ahead of competitors.

Legal:

* Trade and product restrictions - Starbucks need to be aware of the trade laws in the

various countries they occupy and do business with. They need to ensure they are not

in violation of e.g., religious laws. Also, certain countries impose a tariff that has to be

paid when goods are imported/exported so this must be taken into account.

* Employment law - Each country has varying employment laws. Some may have a

Sabbath day, some may have a limit on the number of hours an employee may work

per week, all will have varying levels of minimum wage. Starbucks should consider

these factors when deciding on relocation.

* Health and Safety regulations - Starbucks may find these regulations are not as

stringent or well enforced in certain countries. It would be wise though to enforce a

universally high standard of health and safety throughout all it's shops to maintain a

good global image and ensure all laws are abided by. Also, by not maintaining high

standards they will be liable for a large amount of civil cases as it is a legal

requirement for them to enable that their staff and customers are safe when they are in

their stores.

* Monopolies commission - If Starbucks consider expanding their operations further

to control an even larger percentage of the market than they already have they will

have to consider the possibility of breaking monopolies legislation as they may have a

share of the market that is too large. This would mean that they would have unfair

advantage over other companies in the same market. This would mean that they could

benefit from economies of scale and would also be able to charge prices that were not

competitive in the market and get away with it due to the lack of competition. The

Competition Commission are in place to try and prevent these situations occurring

[e.g. CC (back then the MMC) block BskyB attempted takeover of Manchester United

in 1999].

* Land use - Starbucks may have to abide by local planning regulations when building

shops or altering purchased sites, as certain areas of land may be protected or

unsuitable. All matters would be addressed by the local government.

Environmental:

* Pollution problems - Starbucks customers create a lot of waste as they often leave

the shop with their cup of coffee and then dispose of it in the street. The packaging for

this cup must be carefully considered to make it as biologically degradable as

possible. Certain other materials can be very harmful to the natural environment.

* Planning permissions - Planning permission may not be granted if Starbucks wish to

build in an area that could be harmful to the environment. The land may be protected.

* Work disposal - Starbucks need to carefully consider the methods in which they

dispose of their waste as there are strict laws in most countries to ensure a firm trading

in their country disposes of the waste that is created in their business in a specific and

efficient way. If they do not follow these laws they may find themselves being

sanctioned, which not only affects them financially but also tarnishes the reputation of

the brand name, as most of the waste created will bear the logo of Starbucks.

* Environmental pressure groups - Starbucks should be aware of the physical and

influential power of groups such as Greenpeace and Friends of the Earth. Any

violation of animal or environmental rights by a company is usually followed by a

swift and attention-drawing protest from one of the groups. Brand image and

customer bases are often irreconcilably tarnished due to the actions of these groups.

Porter's Five Forces analysis:

Porter's five forces analysis is an important tool for analyzing an organizations

industry structure in strategic processes. It helps the marketer to contrast a

competitive environment. It tends to focus on the single, stand alone, business or SBU

(Strategic Business Unit) rather than a single product or range of products.

Porter has identified five competitive forces that shape every industry and every

market. These are: The threat of entry, The power of buyers, The power of suppliers,

The threat of substitutes and Competitive rivalry.

The threat of entry:

The threat of entry covers:

Economies of scale, The high or low cost of entry, Ease of access to distribution

channels, Cost advantages not related to the size of the company, Whether

competitors will retaliate? Government action and How important differentiation is.

There will always be a continuous pressure for Starbucks to react and adjust to these

new entrants. The easier it is for new entrants to enter the market the more

competition there is within the market. Although this really should not pose too much

of a problem for Starbucks as they have a very large share of the market that will be

relatively immune to the threat of new entrants. Starbucks is a company that have

years of experience in roasting specialised coffee, if a company was to enter the

coffee industry it would be extremely difficult for them to offer the same quality of

coffee at a competitive price. As a company's volume increases, so does its experience

and knowledge which tends to decrease the cost of their products

The power of buyers:

Buyer power is likely to be high if a number of conditions are in place. There is a

concentration of buyers, particularly if the volumes of purchases of the buyers are

high, the supplying industry comprises a large number of small operators, there are

alternative sources of supply, the component or material cost is a high percentage of

total cost, the cost of switching a supplier is low or involves little risk, there is a threat

of backward integration by the buyer. This is high where there a few, large players in a

market If there are a large number of undifferentiated, small suppliers The cost of

switching between suppliers is low for Starbucks.

The power of suppliers:

If the market is dominated by few large suppliers rather than numerous fragmented

sources, a suppliers bargaining power is likely to be high. Although suppliers do have

certain amounts of power, it is limited. With Starbucks being 'the most famous

specialty coffee shop chain in the world' reaching sales of $3.28 billion in 2002 and

still expanding they should still be requiring coffee beans for some time. It is safe to

say that the Suppliers need Starbucks, just as much, if not more so than Starbucks

need their supplies. Fortunately for Starbucks they buy their coffee beans directly

from producing countries: Latin America (50%), Pacific Rim (35%) and East Africa

(15%).

The threat of substitutes:

This occurs where there is product-for-product substitution, where there is a

substitution of need e.g. a bald head reduces the need for hair gel, where there is

generic substitution and finally the attitude 'we could always do without ...'.

An example for Starbucks would be if an alternative to coffee was offered e.g. a

customer switching from coffee to tea. Competitive rivalry: Numerous factors

contribute to intense rivalry between existing competitors in an industry. This is most

likely to be high where entry is likely; there is the threat of substitute products, and

suppliers and buyers in the market attempt to control. This is why it is found in the

centre of the diagram. The extent to which competitors are in balance, this is where

competitors are of an equal size which creates intense competition as one of the

competitors tries to gain dominance over the other, high fixed costs in an industry

may result in price wars, differentiation is important as in a commodity market where

products or services are undifferentiated there is little to stop customers switching

between competitors. Starbucks do not really have any competitive rivals that are of

similar size to them so there are not any rivals in the market that would be considered

in balance with them. However, they must maintain their excellent standards and

always be on the lookout for new innovations in order to stay as the market leader.

Competitor Analysis:

Competition is steadily growing against Starbucks each year as the industry grows.

Competitors look to gain an advantage by price cuts, launching a rival product,

aggressive expansion of production to increase market share or inclusion of

significant modifications to a product that other competitors must also undertake to

keep up.

The following are the current figures showing the market share of companies in the

coffee industry. 35% Starbucks 20% Local Coffee Outlets 14% Internet Cyber Cafes

13% Caffe Nero 10% Costa Coffee 8% Coffee

Republic Resource Audit:

The strategic capability of any company is underpinned by the resources available to

it. Practically all resources fall into one of four categories: Physical, Human, Financial

or Intellectual capital.

Physical resources:

The physical resources of Starbucks are the shops that they own, any vehicles they

own for transporting goods and all the equipment that is used to create the cup of

coffee (or pastry etc). Those resources that are younger and in better condition are

deemed more useful to Starbucks.

In 2002 Starbucks had 5689 outlets around the world, which at the time was still

increasing at a 'breakneck speed' and at the end of the 1990's the company was

opening an average 2 stores per day. In January 2004 the company opened their

8000th store (www.Starbucks.com)

Human Resources:

The human resources are the knowledge, skills and adaptability of the workers at

Starbucks. Staff who work to their potential in these areas often become a company's

'most valuable asset'. Schultz, the founder of Starbucks, believes every member of

staff plays an equal part in the 'customer experience' regardless of whether they be

CEO or waiter.

Financial Resources: These are the capital, cash, debtors & creditors, and suppliers of

money (e.g. shareholders) of Starbucks. Obviously for Starbucks the less debt they are

in, the more positive their resource audit looks. Starbucks have a lot of working

capital tied up in the business. Some of this capital includes varieties of whole coffee

beans, foodstuffs, teas, coffee mugs, coffee grinders, coffee-making equipment,

filters, storage containers and other accessories.

Intellectual capital:

These are the intangible/immeasurable resources of Starbucks. This is the information

captured in brands, patents, customer databases, business systems and relationships

with business partners. All these can contain great value and when a business is

purchased these values fall under the price-tag marked 'goodwill'. One of the few

ways Starbucks can protect this intangible information is to ensure employees sign

confidentiality agreements to protect any leaks of knowledge to competitors. Value-

system analysis:

THE VALUE SYSTEM:

SUPPLIER VALUE CHAINS

FIRM VALUE CHAINS

CHANNEL VALUE CHAINS

BUYER VALUE CHAINS

The value system is the inter-organisational links that are vital in the creation of the

product or service of a company. It follows the production of the service/product from

raw material stage right through to the customer purchase. Each instruction for the

development of the product is detailed and explained at each stage of the value

system.

The 'firm value chain' is the most important to a manager because that is their

company, however, a good manager will understand the whole process and how to

manage each individual link and relationship to maximise customer value. Managers

should also need to learn the whole value system because most of the cost and value

creation occurs in the supply and distribution chains.

For Starbucks, the 'supplier value chain' deals with where they get the coffee beans

from that they use to create their end product - a cup of coffee. Starbucks buy all their

beans direct from the farmers in the producing countries cutting out any middle-man

therefore keeping prices to a minimum. The countries that supply them can be found

in Latin America, East Africa and on the Pacific Rim. Starbucks fully appreciate the

need to oversee all aspects of the value system and we can see an example of this in

their determination to obtain the highly sought Narino Supremo crop in 1992. This

acquisition ensured some of the highest quality coffee supplies in the world would be

reaped by Starbucks. The company has close relationships with their coffee exporters.

They maintain this by working directly with them and training them. A good

relationship here is essential and needs to be maintained.

The 'firm's value chain' consists of:

-The Firm's infrastructure; which is about the ways in which Starbucks want their

organisation to run and how it is best to implement systems of planning, finance,

quality control and information management, it is also where they have made the

decision to make high quality coffee from the best coffee beans as this is involved

with the quality control.

-Human Resource Management; It is concerned with the activities involved in

recruiting, managing, training, developing and rewarding people within the

organisation.

For Starbucks this is where they have made decisions about the fact that all employees

are equal, even those on the shop-floor that are working over 20 hours a week receive

bonuses like free coffee and health care coverage, this was to make sure that the

members of staff felt as if they were valued by the company and would continue to

provide a good service. Another implemented scheme is for all Starbucks store staff to

have a comprehensive 24 hour training scheme before they were allowed on to work

directly with customers.

-Technology development;

Starbucks has a large number of areas where it uses technology from regulating their

stock levels to the cash registers. There is also technology to enable customers can to

order their coffee over the internet and then pick it up from the store when they get

there. Some stores now also contain computers where customers can access the

internet.

-Procurement; this refers to the processes for acquiring the various resource inputs to

the primary activities. For instance, the method of obtaining the grade A coffee beans

from suppliers to use in the Starbucks coffee.

-Inbound logistics; For Starbucks this means receiving the coffee beans and other

products that they need to make the products in their stores from their suppliers and

storing these until they are used to make the product that they are going to sell.

-Operations; this is the stage where Starbucks make the coffee in the store and

package the other subsidiary products. -Outbound logistics; this is collection, storage

and distribution of coffee. A customer actually purchasing a cup of Starbucks coffee

from the store. -Marketing and Sales; This is how consumers become aware of

Starbucks coffee and purchase it. Starbucks is a worldwide company and their brand

is recognised all over the world, which means that marketing is not as necessary as it

once was. Most people now recognise the name and associate the brand-image with

high quality products.

-Service; this includes all the activities that enhance or maintain the value of the

product, e.g. installation, repair and training. This area is concerned with the members

of staff that deal with the customers, it focuses on the need to ensure the 'customer

experience' of visiting a Starbucks store is all the more enjoyable due to the

friendliness and efficiency of staff and consistently high quality product on offer.

The 'channel value chain' deals with the outlets Starbucks uses to enable consumers to

purchase their product. Starbucks should know everything that is sold under their

banner and also the sales methods used to customers. They should know the location

of every store along with its surrounding area so it can generate an idea of the

surrounding customer demographics, e.g. students, young professionals, etc.

Starbucks should know in detail all information regarding any business partners they

are involved with, be they retail estate agents - used to obtain premium retailing sites -

or foreign suppliers

- who can take advantage of market conditions.

'Customer value chains' illustrate how value is added by the end buyers of the product.

Customer value can be increased by Starbucks by ensuring the store environment is

how it should be, the coffee is consistently up to a high standard, the menu is broad

and varied enough to cater for most tastes, value for money is achieved and most of

all the service is exemplary. Through training and research and development all these

factors are achievable and maintainable for Starbucks and should ensure a bright and

prosperous future.

Core Competences:

Core competences help to provide firms with a 'competitive advantage'. They are used

to achieve a strategic advantage through activities, skills or know-how, and basically a

general expertise in the development of the product. This advantage will provide

value to customers. 'In the 1990s managers will be judged on their ability to identify,

cultivate, and exploit the core competences that make growth possible - indeed, they'll

have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel

(1990) The aim is for Starbucks to focus attention on competences that really affect

competitive advantage. For Starbucks, these competences include the knowledge of

where the finest coffee beans are grown, the knowledge of how best to prepare them

in order to make the best cup of coffee and also the knowledge of how best to

approach a foreign market as, of all their industry competitors, they are the most

successfully globalised. Core competences can provide potential access to a wide

variety of markets so can be of immeasurable use to Starbucks and their varied

attempts of product diversification. Starbucks have established such a strong

leadership in the coffee market due to core competences such as clear distinctive

brand proposition that focuses solely on a closely-defined customer group and leading

direct marketing skills in the Starbucks Research and Development department.

Stakeholders: A stakeholder is an individual or a group, which has an effect on, and is

affected by, an organisation. The stakeholder approach believes all groups associated

with the firm can benefit at the same time without one party, e.g. shareholders,

suffering. By working with its stakeholder groups the firm can generate more profit.

Main stakeholders in Starbucks are the employees, owners, suppliers and, of course,

the customers. Individual stakeholders may not have too much influence on the way

that Starbucks perform due to lack of sufficient power. Influence has more chance of

occurring if stakeholders share their expectations and grievances with others, uniting

them as a stakeholder group.

Swot Analysis:

Every organization has some strength. In some cases this is obvious, for example,

dominant market shares. In other cases, it is a matter of perspective, for instance, a

company is very small and hence has the ability to move fast. It is important to note

that companies that are in a bad position also have strengths. Whether these strengths

are adequate is an issue for analysis.

Every organization also has some weakness. In some cases, this is obvious; say for

example, a stricter regulatory environment. In other cases, it is a matter of

perspective, for example, a company has 99% market share and is open to attack from

every new player. It is important to note that companies that are extremely competent

in what they do, also have weaknesses. How badly these weaknesses will affect the

company is a matter of analysis.

All organizations have some opportunities that they can gain from. These could range

from diversification to sale of operations. Identifying hidden opportunities is the mark

of an astute analyst.

No organization is immune to threats. These could be internal, such as falling

productivity. Or they could be external, such as lower priced international

Competition.

Starbucks SWOT Analysis

Strengths

- Excellent product diversification: coffee, baked goods, cds, and etc.

- Established logo, developed brand, copyrights, trademarks, websites, and patents

- Company Operated Retail Stores, International Stores

- High Visibility Locations to attract customers.

- Valued and motivated employees: low employee turnover

- Good Relationship with coffee suppliers

- Not a Franchise

- Coffee industry market-leader

- Globalised Weaknesses

- Ever-increasing number of competitors in growing market

- Clustering of too many shops in a small area: self cannibalization

- Cross Functional Management

- Price: expensive Opportunities

- Expansion into retail operations

- Technological advances

- Finding new distribution channels, i.e. delivery - Launch new products

- Further international market expansion

- Asia etc.

- Distribution Agreements

- Brand Extension Threats

- Competition: restaurants, street carts, supermarkets, other coffee shops, other

caffeine products.

- US Coffee Saturated Market by 2004

- Coffee price volatility in developing countries

- Poorly treated farmers struggling to make a living in those countries supplying the

coffee beans - negative publicity.

- Consumer trends toward more healthy ways and away from caffeine

Future strategic options:

Having analysed the external and internal forces of Starbucks it is now possible

to generate three possible future strategic decisions. These strategies will be analysed

thoroughly before one of them is recommended as the best way forward. The options

I have chosen to analyse are Diversification, Mergers and Expansion.

Diversification:

If a business diversifies it starts making new products or offering new services.

Businesses can diversify in two ways; related and unrelated. I propose Starbucks

attempt related diversification; by this I mean diversification reflecting some

connection with the organisation's activities.

Suitability:

Starbucks already sells Brewing and serving equipment, Coffee beverages, Coffee by

the pound, Books, Gifts, Music, Sweets and Tea, so as you can see it has a successful

history of product diversification in the short time it has been around. New products

preparing for launch currently include the Prepaid Starbucks Card, Starbucks Express

(pre-order products) as well as general store changes (installing automatic espresso

machines and a high-speed wireless Internet service).

I propose the introduction of savoury products such as pastries as I feel current

foodstuffs on offer tend to be sugary and unhealthy. If there were products that could

be eaten as a substitute lunch or snack then I feel customers would be more inclined to

stay in the shop longer and have less of an excuse to leave. The more time a customer

spends in a store, the more likely they are to spend more money and drink more

coffee. Thus far Starbucks have proved how successful diversification can be when a

new product can be combined with the existing product. If you really look at

Starbucks' products, you'll see that the company has remained true to its core product,

coffee.

Basically, any product that one could ever need to make and/or enjoy coffee is sold.

The introduction of pastries just seems like a natural progression in the Starbucks

diversification line. Although this option would appear to be a good direction for the

company go in it may have a few problems at the suitability level.

The problem with this option is that it may be moving away from Starbucks' position

as a market leader and pushing them into another market which would mean that they

would be dealing with new competitors (e.g. Greggs Bakers) that are already

established in that market. These firms would have an industry-knowledge advantage

over Starbucks.

Acceptability:

In 1997, Starbucks began offering the popular books recommended by Oprah

Winfrey. Giving customers the opportunity to relax, combining reading with coffee

drinking. It went down a storm because it was the sort of thing that people did at

home whilst drinking coffee. Eating savoury pastries is also done at home with a

coffee.

Each coffee related new product Starbucks have launched has been a financial success

and there is no reason to suggest why this would be anything otherwise. This idea

would also appeal main customer base of young professionals as they come in the

stores on their rushed dinner breaks.

A savoury snack is often all they need to get them through the rest of the day. The

option may be a financially viable and successful campaign but this is not that definite

as they will have a number of new competitors who know the market a lot better than

they do. Their customers may also not like the direction that they are taking as they

may feel that they are not concentrating on what they do well and may become

disillusioned with the new direction of the company.

Another problem at this level is that the key stakeholders may not agree with the

decision and may oppose it due to the fact that they will not like the amount of control

the organisation is losing over what it does well

Feasibility:

Starbucks has moulded its future with a commitment to diversifying its product lines.

Marketing your new product is essential if it is to survive.

Starbucks' marketing strategy needs to identify who their potential clients are, what

sort of product they are interested in, how they can best promote your product to

them, and most importantly how they can provide your product to them in a way that

satisfies their needs Very few changes would need to be made to the resource audit.

The same oven used to bake the muffins could be used for the pastries. A heating

stand would need to be purchased to ensure pastries stayed warm and some simple

training schemes would need to be initiated to inform on cooking times. The pastries

would be bought ready-made but uncooked. However, it may be quite difficult for the

company to find new suppliers. It could be risky, as they would not know if they

could trust the supplier. The second problem in this area is that they may not have the

resources to sell the products effectively as they would not have enough space in their

stores and may have to go through a restructuring process that could become very

expensive.

Mergers: A merger is the marriage of one company's assets with another. If a deal is

agreed on both sides, it is viewed as a merger. However, if one company raids the

market for another company's shares in an effort to force a merger it is known as a

hostile takeover. Essentially, all takeovers and mergers set out to achieve the same

goal: to grow a company in size, value, market share and profit. This strategic

decision is for Starbucks to merge with current Internet Cyber Cafes.

Suitability: Starbucks have already stated that a current aim of theirs is to introduce

Internet facilities to their stores so this strategy makes good business sense in that

respect. Starbucks will not only acquire the premises and customers from these sites

but also the facilities and expertise gained from working in an Internet environment.

This knowledge can be fully utilised in the process of establishing Starbucks' own

Internet facilities in other shops. This idea is compatible with expectations and will

also exploit an opportunity whilst avoiding threats. Starbucks will have found a

synergy between the two companies and also increased market share.

Accessibility:

This idea should be successful because the Internet is something that Starbucks' R&D

department have identified, as a customer need. The Cyber Cafes already hold 13% of

the market-share altogether, that is third position.

Seemingly the only thing holding them back from further growth is the lack of high

quality products on offer and possibly an inferior 'customer experience' offered by the

shop as oppose to that offered by Starbucks. The fact expansion and an increase in

market share looks certain to be achieved should persuade stakeholders to accept this

proposal. An added bonus is that it will enhance the chances of Starbucks new

Internet idea becoming a success.

Feasibility:

A big problem facing Starbucks with this proposal is that there is government

legislation in place to threaten this decision. There are strict rules enforced in Britain

by the Competition Commission (which used to be called the Monopolies and

Mergers Commission) to ensure that companies do not become overly dominant in

any one sector through mergers. The deals are also monitored by the Takeover Panel

to ensure that more rules - this time governing codes of conduct and market

information - are adhered to.

Starbucks is the market-share leader with 35% and Internet Cyber Cafes are in third

place with 14%. These figures together would amount to almost half the market-share

so this decision would be a prime contender to be rejected by the CC on grounds it

would create an unfair monopoly in the market. Another question that needs to be

asked is will the new facilities disrupt the idyllic Starbucks environment? Some

customers may not like the change in atmosphere so Starbucks could risk losing their

clientele.

Expansion:

A firm can expand within a country it already exists or branch out and expand into a

foreign market. Starbucks should attempt to expand into new countries to further

globalise itself.

Suitability:

Starbucks believes the key to growth is rapid expansion so this idea is in line with

their thinking. There is so much exploitable potential out there undiscovered by

Starbucks. It is a suitable move because the US coffee market is reaching saturation

point so the need to expand overseas is more pressing than ever.

As of February 2004 Starbucks shops can be found in 25 countries in the world. This

shows Starbucks have a real strength in this area as they have achieved remarkable

growth for such a young company. It also shows they have experience in cracking

foreign markets. Although this represents a very good start, and they are undoubtedly

the market leader in this area, it also illustrates how much potential is actually waiting

there for Starbucks.

- Current market of Europe: over 50% of world's coffee consumption Well-

developed market, long-standing coffee drinking traditions Affluent population,

room for gaining market share.

- Current market Asia: 12-15% of world's coffee consumption Developing market,

long-standing tea drinking traditions High potential for market growth

- Current market South America: under 10% of world's coffee consumption

Traditional coffee growing countries Less affluent population, room for gaining

market share in frequented commercial districts.

Asia and, in particular, Europe are attractive places to relocate to. There is real

potential due to the population sizes, amount of people with a high disposable income,

development in the market and genuine love for caffeine! When looking at the life

cycle portfolio matrix it identifies that Starbucks is a Dominant Company in a mature

market, when looking at the link between these two it states that in this position they

should defend their position as a cost leader. Overseas expansion is the way forward.

Acceptability:

To make the project a success Starbucks will need help. Previously, joint ventures,

licenses and company-owned operations are mechanisms that have brought success

with previous global expansion. In most countries Starbucks select a local partner that

fits their strict criteria, to help recruit, obtain supplies and learn market conditions

(e.g. in Singapore Starbucks tied up with Bonvests Holdings Ltd).

To ensure the idea is accepted by stakeholders it must be proved to be financially

profitable.

Using collaborated financial data it has been proven that there is a definite positive

correlation between the number of stores owned by Starbucks and profit levels.

Between 1987 to 2002 the number of shops increased from 17 to 5689, while profits

increased at a rate of 30% per annum.

Evidence like this is more than likely to win over the stakeholders.

Feasibility:

This will discover if Starbucks has the financial resources to allow a broad venture

such as international expansion.

I believe they have, especially since the figures suggest they will only be out of

pocket in the short-term.

Starbucks already has a strict, precise and successful policy on the way that they go

about opening new stores so this mean that they already have the resources in place to

implement the action plan.

The major barrier to this option is the fact that if they continue to grow at the rate that

they are growing at the moment then they may have to look at the legislation involved

with having a monopoly share of the market.

Smaller problems that Starbucks may face when attempting international expansion

are; local negative preconceptions about American multinational companies, mass

culture infecting traditional values, large scale service meaning poor quality, people

growing to despise U.S. commercialism and the notion of being "invaded".

Recommended option:

On the basis of all the research and evidence consulted for these three strategic

decisions, I am inclined to suggest Expansion would be the most profitable and

successful venture to undertake. It also seems this decision has the most undiscovered

potential for Starbucks to exploit.

The prospects for this plan look good and, at the end of the day, Starbucks are a strong

brand, and strength of brand is often the key factor in whether a growth strategy is a

success or failure.

Critical Review:

The PESTEL analysis is mainly used to assess the future impact of environmental

influences. It only deals with the external business environment.

Another limitation is that environmental forces especially important to one firm may

not be so important to another. Also, items found in a PESTEL analysis are of limited

value if they are merely seen as a listing of influences.

Although the PESTEL analysis is a good tool used by all companies to examine their

general external environment the number of macro environmental influences are

unlimited.

For the analysis to be more accurate the company must prioritise and monitor those

factors that influence their industry. Porter's Five Forces model can be applied to

practically every company.

However, its main weakness is due to the historical context in which it was

developed. It is best used with companies with simple market structures.

The analysis of all five forces can get very difficult in industries with multiple

interrelations, product groups, by-products and segments. It is important that

companies don't do a too narrow analysis, risking missing important elements.

The model assumes relatively static market structures and it does not really take into

consideration strategies like strategic alliances, electronic linking of information

systems of all companies along a value chain, virtual enterprise-networks, etc.

Porters Five Forces Model has some major limitations in today's market environment.

It is not able to take into account new business models and the dynamics of markets.

The value of Porters model is more that it enables managers to think about the current

situation of their industry in a structured, easy-to-understand way - as a starting point

for further analysis.

SWOT analysis is widely used by businesses to identify internal strengths and

weaknesses. It will highlight external opportunities and threats.

However, it can be undermined by subjectiveness, also ignoring a firm's intangible

resources mean a full picture of their strategic position is not given. Also, this

marketing plan fails to prioritise objectives.

The SWOT analysis is best used only as a guide. In the long term, strategic analysis

will only keep being successful if all staff are made fully aware of its effects upon

decision making.

References and Bibliography:

Chambers I (1997) Business Studies (7th ed.)

Causeway Press Genus A (1996) Flexible Strategic Management (2nd ed)

Chapman & Hall Johnson G Scholes K (2002) Exploring Corporate Strategy (6th ed.)

FT/Prentice Hall www.microsoft.com/resources/casestudies/CaseStudy.asp?

CaseStudyID=10664

http://www.investopedia.com

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