STARBUCKS TRABAJO STRATEGY PDF

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TRABAJO STARBUCKS...

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Strategy Analysis MGMT 562

Rusty Gates Margaret Hogan Liberty McCarty Anita Ramachandran Tony Reed

TABLE OF CONTENTS Executive Summary…………………………………………………………….3 Introduction……………………………………………………………………..4 External Analysis……………………………………………………………….5 Suppliers………………………………………………………...…….5 Customers………………………………………………………..……5 Competitors…………………………………………………………...6 New Entrants………………………………………………………….7 Substitutes……………………………………………………………..7 Opportunities and Threats……………………………………………..8 Internal Analysis………………………………………………………………..8 Strengths………………………………………………………………8 Weaknesses…………………………………………………………...9 Value Chain, VRIO Framework, Core Competencies……………….10 Key Strategies………………………………………………………………….11 Investment Recommendation………………………………………………….12 References…………………………………………………………………….13

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Executive Summary Starbucks Coffee Company, founded in 1971 is headquartered in Seattle, WA and operates in 37 countries around the world. The backbone of Starbuck’s business is its company-operated retail stores. Starbucks has employed a strong differentiation strategy in order to turn a traditional $.50 commodity into a $4 experience. This following report provides an analysis of the strategies used by Starbucks to stay on top of its growing and volatile industry. Starbucks’ governing principles are based on three strategic stances: the third place experience, creating a human connection, and providing a quality everyday experience for customers. The specific strategies used by Starbucks include: • Horizontal Integration: acquisitions of Seattle’s Best, Torrefazione Italia and Coffee People • Market Penetration: differentiation and product placement outside of retail stores • Market Development: educating the consumer about specialty coffee • Concentric Diversification: release of bottled drinks, Ice Creams, and Liqueur • Conglomerate Diversification: expansion into music and movies • Value Chain Development: the human connection gained by business ecosystem maintenance The overall level of competitive threat in the coffeehouse industry is moderate. This is due primarily to the moderate threat of green coffee supply and the moderate to high threat of competitors. These two threats carry more weight than the lower threats of buyers, substitutes, and new entrants. Competition is traditionally considered to be other specialty coffeehouses. However, when one considers other fast food retailers serving coffee, such as McDonald’s, the threat of rivalry intensifies. Many opportunities exist for Starbucks in this industry. The premium coffee market continues to grow, offering opportunities such as rural U.S. expansion and continued international proliferation. The firm may also be able to create new distribution channels for other products as it has done with music, DVD’s, and books. Premium and proprietary food offerings can be used to drive growth in order to compete with fast food restaurants, and acquisitions and joint venture/licensing agreements provide additional possibilities for brand leverage. The Starbucks brand is very strong, but more steps can be taken to ensure that it becomes an enduring global brand. Strengths of the firm lie in its tremendous brand image and loyalty, innovative business strategy, and strong financial performance over the long-term. Weaknesses lie in Starbucks’ heavy reliance on the U.S. market for sales, its image as an enormous, dominating corporation, possible overcrowding and storefront cannibalism, and the price sensitivity of other nations. This report provides a VRIO analysis based on Starbucks’ value chain, which indicates that the firm has core competencies in the areas of human resource management, marketing, and operating retail locations. Based on the analysis provided in this report we maintain that Starbucks is a strong company that is wellpositioned for steady growth. We are recommending the firm as a buy with a long-term focus on returns.

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Introduction Starbucks Coffee Company, founded in 1971 as a humble coffee shop in Seattle’s Pike Place Market, has since grown into a dominant multinational corporation operating in 37 countries and serving over 40 million customers every week. At the end of fiscal 2005 Starbucks owned and operated nearly 5,700 coffeehouses around the world and licensed an additional 3,200 locations, generating $780 million in profit on revenues of $6.4 billion. The firm has employed a multitude of well-focused strategies in order to capture the bulk of its growing market and remain on top of the competition. The mission of the firm: Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. The six principles guiding this mission are to (1)Provide a great work environment and treat each other with respect and dignity, (2)Embrace diversity as an essential component in the way we do business, (3)Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee, (4)Develop enthusiastically satisfied customers all of the time, (5)Contribute positively to our communities and our environment, (6)Recognize that profitability is essential to our future success. Starbucks is continuously striving to provide a great work environment through strong management and benefit packages that surpass industry standards. The firm has also made a point to hire a workforce of diverse personalities ensuring that each employee is outgoing and helpful. In the words of one Starbucks employee in Tigard, Oregon, “we are all encouraged to be upbeat, friendly, personal, and outspoken. The corporate office holds yearly gatherings that foster these outgoing personality traits. The energy is contagious.”i Quality is essential to the firm at all levels of the value chain and Starbucks makes various efforts to boost the health of its business ecosystem. Lastly, Starbucks is focused on growth and profitability for its long-term future. The Starbucks mission and principles are encompassed by three major strategic stances: the third place experience , establishing a human connection, and providing quality everyday experiences. The third place experience is created by Starbucks’ unique ambience. Tom Barr, VP of Food for Starbucks said, “ambience is very hard to communicate. Usually if someone is asked why they love a particular store they would not say ambience as the first thing. Customers might say they don’t care about the ambience; that they just want their coffee fast. Ninety percent of people that walk into a store will never stop to read the paper or sit outside with their dogs. But in the back of these customer’s minds there is something that says ‘I wish I could do these things and I’m glad that such a place exists.’ There is a subconscious signal that this is a good place to be. That is the power of the third place.”ii Starbucks also strives to maintain a human connection through ecosystem management, sustainable practices, supplier networks maintenance, firm transparency, and innovation. Lastly, Starbucks’ customers aren’t united by demographics, but rather by a desire to seek quality everyday experience. Company-operated stores are the backbone of Starbucks’ business. This is where the third place experience is most prevalent. The goal of the retail stores is to offer a place outside of the home and office for customers to relax and gather. Last year Starbucks opened 735 new retail storefronts. Ten percent of Starbucks’ business is in licensing the brand to other locations (i.e. Fred Meyer). While employees at these licensed stores are required to follow Starbucks’ detailed operating procedures, they do not receive all of the benefits of a company-operated store employee.

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The firm also has licensing arrangements with Kraft Foods and SYSCO to market, distribute, and promote food items to grocery stores and warehouse clubs. Partnerships have emerged from these licensing arrangements. The famous Frappacino drinks are bottled and distributed

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through Pepsi Co., Starbucks ice cream products are made possible through a partnership with Dreyer’s Grand, and the new Starbucks coffee liqueur is made by Jim Beam Brands Co. Other initiatives, representing less than 1% of Starbucks’ business include music, movies, and the Starbucks Duetto Visa credit card. External Analysis Suppliers Due to its large size, Starbucks can exert significant pressure on its suppliers. However, it chooses not to abuse this power as it is not in its best interest. Starbucks does not operate by a model in which it ‘squeezes 2 down’ its suppliers. It treats the relationship as a partnership. Some of the suppliers have grown up with Starbucks and have built their businesses around its growth. “We believe that if we take actions to push 2 our weight around and that causes our supplier to go out of business then we have served no one.” Starbucks has high operating standards for its suppliers and needs to ensure they make a reasonable profit so that the suppliers are able to meet these expectations. These high standards include environmental policies such as energy conservation, excessive packaging, and farming methods as well as employee iii benefits. Starbucks understands the importance of the health of the overall supplier “ecosystem.” Green Coffee, dairy, paper products, and personnel are the major inputs into the Starbucks operation. Coffee is a commodity and a volatile industry. In a recent coffee crisis, prices dropped so low that many farmers were unable to stay in business. Starbucks is completely dependent upon its supply of coffee and demands a very high quality bean. It mitigates risk to ensures its supply through agronomy programs it has developed in coffee producing regions. It works with the farmers teaching valuable farming methods and bringing prospective farms up to par. It is growing its supply base as it grows its retail base.2 Again, it is important to keep these farmers in business and Starbucks pays a premium to ensure this. Dairy and paper product suppliers are a minimal threat. Starbucks watches dairy prices closely and sources from multiple vendors. Starbucks exerts some pressure on paper products suppliers for sustainability purposes. It introduced the first paper drinking cup manufactured from 10% recycled material. Overall, the threat exerted by suppliers is moderate due, mostly, to the instability of the green coffee industry and the scarcity of the high quality bean that Starbucks demands. Customers The threat of customers is low for Starbucks due to: a low likelihood of backward integration, differentiated products, diversified customer base, and Starbucks’ ability to shape consumer tastes. The percentage of iv Americans drinking specialty coffee daily increased from 9% to 16% between 2000 and 2004. Also, there 4 is a perception that coffeehouse products are of superior quality than other venues. The survey indicates that the specialty coffee market is growing in the U.S. and Americans will continue to buy coffeehouse products. It is unlikely that customers will integrate backward by making coffee at home to replace coffeehouse products. Starbucks brand and products are highly differentiated which lowers the threat of customers. The brand has become well-known in the U.S. and abroad. One of Starbucks’ self-proclaimed differentiators is its third place experience, yet survey results question the value of its ambiance. Roughly 70% of survey respondents who visited a coffeehouse in the last week listed convenience and quality as reasons to choose one 4 coffeehouse over another. Only one third of respondents use the coffeehouse as a point of socialization or as workspace which are cornerstones of the third place experience. The survey results suggest that Starbucks’ dominance is based on the quality of its coffee and its ubiquity, rather than the Starbucks third place experience. Starbucks executives disagree and claim that the Starbucks atmosphere is one of the most important reasons 2 that customers come in. Customers may be less likely to identify something like ambiance as a reason for going to a coffee shop because it is less tangible. Ambiance is subtler and more difficult to articulate than convenience, quality, or service in a survey.

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With over 40 million customers a week and no typical demographic profile, Starbucks’ has a wide customer base which diversifies risk. Tom Barr, the VP of Food for Starbucks explains that the customer can be defined as anyone seeking a quality everyday experience and this person could be anybody from a 2 construction worker to a grandmother to a soccer mom. However, eighty percent of Starbuck’s revenue comes from regular customers who visit an average of 18 times/month.v So while we can’t pin the customer down, we do know that this devoted following holds significant weight for the company. If regulars were alienated in some way, then it would present a problem for Starbucks. The company has taken a $.50 commodity and turned it into a $4 experience. While transitioning this market, Starbucks has been able to keep its premium products from being perceived as exclusive luxury goods. When a company is able to drive consumer preferences and play a significant role in the moving a product upscale, consumers pose little threat to the company. Competitors Defining the basis of competition for Starbucks is difficult. Starbucks brought specialty coffee to the mainstream and now it can be found at convenience stores and gas stations (see pie chart at right). Competition seems to lie along two axes: product and venue. If competition lies in the product, coffee, then all of the places that coffee is consumed may be a competitor. If competition lies in the coffee experience, then Starbucks may be in competition with only coffeehouses.

Places coffee was cosumed in %, 2005 !Did you buy or drink coffee (or tea) at any of the following locations in the last month?Ó %& $# !!

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Analysts typically identify Dunkin Donuts and smaller chains like New World Restaurants, Deitrich Coffee and Caribou Coffee as Starbucks’ competitors.vi In our interviews, Starbucks executives identified two main competitors: Dunkin Donuts and McDonalds.vii

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The coffeehouse segment has experienced rapid growth from 2000 to 2005 (see graph). The number of retail outlets for coffee has expanded from 12,600 in 2000 to over 21,000 in 2005.4 Starbucks’ expansion is at an average of 32% per year and independent and small chains are expanding at 4 about 13.5% per year. The market shows no sign of saturation in North America. The market is predicted to increase by 84% from 2005 to 2010, led by a compound annual growth rate of 17.6% in the coffeehouse segment.

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However, rapid growth is drawing competition from

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