starbucks case
Step #1
Identify Economic Characteristics in the Industry
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
PESTEL Analysis
Economic Attributes Framework
Tools for Studying Industry Economics
Why might these be helpful in conducting a
financial analysis of a company?
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
https://hbr.org/video/3590615226001/the-explainer-porters-five-forces
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Vertical Competition
Horizontal Competition
Threat of Entry
Bargaining Power of Supplier
Bargaining Power of
Buyer
Threat of Substitutes
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Rivalry Among Existing Firms
Industries are characterized by concentrated vs diffused rivalry.
Greater the industry concentration (i.e., monopoly), the lower the competition between existing rivals and thus the more profitable the firms will be.
How about Starbucks?
High
Highly competitive with many rivals, ranging from global fast-food restaurant chains, to specialty coffee retail chains, to local cafes.
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Threat of New Entrants
How easily can new firms enter a market?
Are there entry barriers?
Do the existing rivals have distinct competitive advantages making it difficult for other firms to enter and compete?
If so, firms in the industry will likely generate higher profits than if new entrants can enter the market easily.
How about Starbucks?
High
No barriers to entry
However, major players have competitive advantages through brand names and existing locations, which limits threat from entrants and increases the ability to enter new markets around the world.
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Threat of Substitutes
How easily can customers switch to substitute products or services?
How likely are they to switch?
With close substitutes, competition increases and profitability decreases.
Unique products with few substitutes enhance profitability.
How about Starbucks?
High
Highly competitive with many substitute beverages, ranging from soft drinks to teas, water, juices, sports drinks, beer, and wine.
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Buyer Power
Relates to the relative number of buyers and sellers in the industry and the leverage buyers have with respect to price.
Relates to buyers’ price sensitivity and the elasticity of demand.
Are the buyers price takers or price setters?
How about Starbucks?
Low
Consumers purchasing coffee beverages are price takers, not price setters.
Although switching costs are low, that does not create buyer power for consumers in this industry; it makes existing rivalry more competitive.
Step #1
Identify Economic Characteristics in the Industry
Porter’s 5 Forces
Supplier Power
Relates to leverage in negotiating input prices from suppliers.
If an industry has a large number of potential buyers of inputs that are produced by relatively few suppliers, the suppliers will have greater power in setting prices and generating profits.
How about Starbucks?
Low
Coffee beverage industry relies primarily on coffee beans, which are agricultural commodities grown in warm climates in Central and South America, Asia, and Africa.
Step #2
Identify the Company Strategies
Step #2
Identify Company Strategies
Framework for Strategic Analysis
S.W.O.T.
BCG Matrix
Tools for Studying Company Strategy
Why might these be helpful in conducting a
financial analysis of a company?
Step #2
Identify the Company Strategies
Starbucks Strategy
Is the firm operating in a single industry or diversifying across multiple industries?
https://www.youtube.com/watch?v=-xVekEX2qkQ
Nature of Product or Service
Degree of Integration in Value Chain
Degree of Geographical Diversification
Degree of Industry Diversification
Step #2
Identify the Company Strategies
Nature of Product or Service
Product differentiation strategy
Unique products
Achieving relatively high profit margins
Low-cost leadership strategy
Non-differentiated products
Accepting a lower profit margin in return for a higher sales volume and market share
How about Starbucks?
Primary strategy to be world’s leading branded coffee shop chain.
Although product differentiation is debatable, the service and experience is a unique point of difference, which allows Starbucks to charge a premium price.
Nature of Product or Service
Degree of Integration in Value Chain
Degree of Geographical Diversification
Degree of Industry Diversification
Step #2
Identify the Company Strategies
Value Chain Integration
Manufacturing
Is the firm doing all manufacturing, outsourcing all manufacturing, or outsourcing the manufacturing of components but conducting the assembly operation in-house?
Distribution
Is the firm maintaining control over the distribution function or outsourcing it?
How about Starbucks?
To control quality and cost, Starbucks has vertically integrated its operations.
Often takes delivery of green coffee beans directly from growers.
Manages the shipping, roasting, packaging, and distribution to all its coffee shops around the world, including grocery stores.
Nature of Product or Service
Degree of Integration in Value Chain
Degree of Geographical Diversification
Degree of Industry Diversification
Step #2
Identify the Company Strategies
Geographical Diversification
Is the firm targeting its products to its domestic market or integrating horizontally across many countries?
How about Starbucks?
Starbucks has 23,043 coffee shops in 68 countries (2015): 64% in Americas, 24% in China/Asia Pacific, 10% in Europe, Middle East, and Africa.
Nature of Product or Service
Degree of Integration in Value Chain
Degree of Geographical Diversification
Degree of Industry Diversification
Step #2
Identify the Company Strategies
Industry Diversification
Is the firm operating in a single industry or diversifying across multiple industries?
How about Starbucks?
Primarily concentrated in the coffee beverage industry.
Diversifies revenue generation beyond coffee shops by selling coffee and other branded products to grocery stores, warehouse clubs, and food service accounts through channel distribution.
Nature of Product or Service
Degree of Integration in Value Chain
Degree of Geographical Diversification
Degree of Industry Diversification
Team Exercise
Separate into breakout rooms.
Download the company 10-K.
Review Part I Item 1 of the 10-K (“Business”).
Begin to address the Framework for Strategic Analysis questions for your respective companies.
Case Introduction
Starbucks Corporation: Financial Analysis of a Business Strategy
Case Questions
What is Starbucks’ ROA for 2012, 2011, and 2010? Why might focusing specifically on ROA be misleading when assessing asset management (aka management efficiency)?
Why is ROE considered the most useful metric in measuring the overall ability of a business strategy to generate returns for shareholders?
How do the financial statements reveal company strategy (i.e., what story do the numbers tell and does that story align with the strategy of Starbucks?)?
Action Items
Case
Read: Starbucks Corporation – Financial Analysis of a Business Strategy
Assignment: Complete the case questions and post to Sakai before the deadline.
Presentation (Presenting team only): Complete a 10 min or less presentation thoroughly summarizing the case.
Data Detective Simulation
Identify the companies/industries and provide explanations that substantiate your position. You must provide an explanation for each of your responses to receive full credit, even if your selections are correct.
Recommended FSA Project Assignments
Economic Analysis
Company Strategic Analysis