Case Analysis 2 page

You will refer to page 460 of the text - How to Conduct a Case Analysis and you will analyze Starbucks based on the Strategic Management Process - Analysis, Formulation and Implementation (AFI). Please refer to pages 461-463

Analysis

1. Perform an External environment analysis

analyze the points listed on page 461 (Liz)

2. Perform an internal analysis of the firm using the resource-based view

analyze the points listed on page 461 (Felipe Colon)

3. Analyze the firm's current business-level and corporate-level strategies

analyze the points listed on page 461 (Stephanie Guillen)

4. Analyze the firm's performance

analyze the points listed on page 461 (Scheila Suarez)

please ensure that you compute the financial ratios (see page 462)

Based on the information gathered in Analysis (points 1,2,3 & 4) -

You will then: (Vic)

Make a diagnosis - see page 462

Formulation: Proposing Feasible Solution - see page 462

Plan for Implementation - see page 462

1.

Macro-level environment (PESTEL analysis)

Starbucks is affected by various external factors as seen in the case. The political factors which affect the company include the integration and disintegration of the markets which determine how the organization can perform international trade. Political stability also impacts on the business; when there is unrest the sales go down because the purchasing power of consumers is affected. The business is influenced by economic factors such as costs of labor which increase operational costs and employment rates which determine how much sales the company makes (Abu Amuna et al., 2017). A social factor which affects the business is the growing coffee culture where people are taking more coffee for meetings, dates and dinners. The technology of mobile apps and social media is presenting an opportunity for the company to put itself out there through advertisements. Starbucks needs to watch out for environmental factors such anti-plastics campaigns which encourage more environmentally friendly packaging. Lastly, the organization needs to adhere to laws and regulations concerning product safety, healthy competition, employee protection and GMO regulations among others.

Industry environment (Porter’s five force model)

The organization can be analyzed using the five forces. First, there is a lot of rivalry in the industry and this is because of the many new similar organizations which offer the coffee at slightly lower prices when compared to Starbucks. The customers have a high bargaining power and this is because there are a lot of available substitutes and the costs of switching from one seller to the other are low. The suppliers have a weak bargaining power and this is because there is a large number of the suppliers who give Starbucks a lot of options in case one of them offers high prices (Bruijl, 2018). The threat of substitution for the organization is very high and this is because there is a large number of substitutes who offer the same products at affordable prices. Lastly, the industry is growing and there is a threat of new entrants coming in who offer very competitive prices in the market.

Competitive environment

As seen, the industry is very competitive with a limitless number of competitors in the market. However the company has established itself as a brand and this is because it offers quality coffee and snacks which cannot be found in the other restaurants. The new businesses entering the industry are making the competition intense because now the customers have a huge number of substitutes available and they can switch from one to the other at very low costs. The current biggest competitors for Starbucks coffee are Costa, Dunkin donuts, McDonalds McCafe and Café Coffee Day. The core competitive strategy which is used by Starbucks is product differentiation. The company offers products which have features that cannot be found in other competitors; they offer quality, fresh and good tasting products to their customers. The company has maintained its position in the market as a market leader.

Strategic group analysis

The company has established itself as one of the leading organizations in the industry and this is because of its marketing efforts and level of innovation. Strategic group analysis involves placing the organization in a group of organizations which use similar business model and strategy (Makadok et al., 2018). Starbucks can be grouped as a coffee chain business just like some other organizations in the industry, the company has various locations and branches which offer similar products and services. The company has succeeded in getting huge sales in most of its branches.

2.

Firm Resources, Capabilities, and Competencies

Starbucks strategic evolution through its change in leadership has defined what the company will dedicate itself to in order to have a competitive advantage. CEO Howard Schultz focused on creating Starbucks with the core competencies of establishing the “third place” for social interaction between the home and office and providing specialty crafted, high-quality coffee to its customers. This was inspired by his time in Italy and observing how Italian coffee-bars served as a meeting place to engage in social activities. As such, the competencies as well as the resources and capabilities necessary to fulfill said competencies were established around Schultz’ intentions.

When Schultz acquired Starbucks in the late 1980s, he invested heavily in the tangible resource of the brick-and-mortar store platform to house a forum where customers could sit and enjoy their coffee before going to work or heading home. This was a resource and initiative that competitors at the time did not seek to create or invest in. The only comparison that could be argued as something similar are the family fast-food restaurants, such as McDonalds, that existed at the time that served coffee as a menu item rather than a store specialty. In addition, these family restaurants focused more on curating an atmosphere for family social interactions rather than for an adult-focused demographic. Although Starbucks was early to invest in a resource as valuable as this, the brick-and-mortar coffee-bar model was not rare nor costly to imitate as eventually other market entrants, such as Caribou and the now-defunct Barnie’s Coffee, began to enter the mass-retail coffee bar market as a result of Starbucks success.

An intangible resource (capability) that Starbucks has been able to take advantage of due to its size and economy of scale, is the intangible resource of coffee futures contracts. Although this resource is not rare, it is valuable and organized to capture. These contracts allow Starbucks to hedge its risk in purchasing costly coffee commodities and avoid price volatility that could eventually translate into financial hardship for the company and drastic increase in the sale price of their beverages as a result of passing the costs to the customers. Additionally, this resource has proven to benefit Starbucks compared to smaller, independent coffee house rivals that do not have the capital to purchase future contracts and hedge coffee commodity price volatility. However, Starbucks' most innovative resource is the capability of its technology platform in the form of its WIFI partnership with Google and its Starbucks mobile application, specifically.

With its WIFI partnership with Google, Starbucks has been able to secure a rare, valuable, costly to imitate, and organized-to-capture-value capability of providing reliable and quick WIFI for no additional cost to the customer. Although free WIFI capability is offered by other coffeehouse competitors, a case can be made that the exclusive partnership for Google WIFI provides a peace of mind to the customer that a Starbucks location can almost-always be a reliable avenue for one to use internet access capabilities at an environment other than the home or office. The Starbucks mobile application provides customers to have an online account with Starbucks to order items for pickup and redeem points to receive free or discounted Starbucks items through My Starbucks Rewards. In addition, the Rewards program allows a customer to have a Starbucks virtual card that they can fill and use to purchase Starbucks items, all through the mobile application. This application serves as the most rare, valuable, costly to imitate, and organized-to-capture-value capability the company has due to the sheer volume usership the application and rewards program has, value and convenience it provides to the customer, as well as the development and implementation costs the program and application require.

Value Chain

Starbucks’ value chain begins with their coffee sourcing. Starbucks sources their coffee from Fair Trade coffee farmers that source coffee cherries from coffee trees. These coffee cherries are typically harvested once a year and then processed, fermented, rinsed, and dried before the beans are removed from the hull of the cherry and exported. They are then inspected and imported as green coffee beans, and are then roasted where they become ready for grounding at one of the 25,000 stores worldwide. Although Starbucks sources coffee in the same manner as most coffee houses do, Starbucks has gained notoriety for creating and adopting industry practices that ensure ethical soundness through the Coffee and Farmer Equity (C.A.F.E.) initiative. The initiative calls for a focus on Fair Trade certified grown coffee and establishing support for local farmers with resources and expertise in coffee production.

Another way Starbucks adds value to their product is by the special training they provide to their baristas. When Schultz returned as CEO of Starbucks, he emphasized the need to focus on creating one beverage at a time to ensure quality control. This aspect of the beverage making process was lost before his return as the company focused on operational efficiency and optimization at the cost of quality. By re-training the baristas properly and dedicating their time with each drink, Starbucks was once again able to guarantee a quality cup of coffee that makes the customer come back.

Another crucial area of Starbucks’ value chain is their Research and Development department, as well as their Tryer Center innovation lab, where barista’s, chefs, and bakerers collaborate on creating new items for the Starbucks menu and identify which creation makes it to the stores within 100 days (Warnick). It is out of this department where popular items such as the “Pumpkin-Spice Latte” as well as other seasonal beverages are created (Falkowitz). Even with competitors like McDonalds or Dunkin Donuts, Starbucks still maintains a competitive edge because they have proved that even with new beverage innovation, their product still maintains the same value to its customers.

Other avenues that support Starbucks’ value chain are by their Human Resources, I.T, Finance, and Accounting department. These types of activities are needed to create value for the company. Even though the company maintains corporately owned and licensed franchise based stores, these departments are the ones who help ensure operational efficiency within said stores and vet franchise candidates to ensure that anyone who owns a Starbucks franchise maintains the same level of quality for the customer.

3.

Business-Level Strategy (product Market positioning)

The business-level strategies for Starbucks are based on their target markets as well as their ability to compete effectively against other market providers. The first strategy utilized by Starbucks is by offering a third-place experience to its customers. Starbucks has effectively positioned itself as the third-place away that people should be away from work and home. They offer a friendly environment as well as free wifi to enable their customers to work in their stores. Second, the chain stores offer excellent customer services as well as high-quality products a strategy that differentiates and gives Starbucks a competitive advantage over other market players. Starbucks is attentive to the customers’ preferences, and they create products that fulfill their needs, a strategy that further increases their attractiveness to customers.

Corporate-Level Strategy (diversification)

Starbucks has been involved in mergers and acquisitions as well as implemented effective human resource management that plays the role of corporate-level strategies. From its onset, Starbucks has continuously created new products that have enhanced its diversification as well as penetration into newer markets. Starbucks sells products ranging from coffee beans, coffee beverages, coffee-flavored ice creams, and other food items. All the products are made to the highest quality and in a way that would satisfy the needs of the customer. This in turn has enabled Starbucks to enjoy high profitable benefits as well as improve its competitive advantage and reduce threats from new competitors in the business environment. Again, the company has ventured in opening up many retail stores across the country which enables them to reach even more of their customers. In addition, Starbucks continues to protect its brand image and reputation by adding products that are of great quality and that impress its' customers as well as shape the attitude of suppliers, customers, and partners toward the company.

International Strategy (geographic scope and mode of entry)

Starbucks has implemented three approaches to its international strategy. First, it uses the licensing plan when it wants to expand faster in a particular country. Secondly, it uses a joint-venture strategy when initiating business deals with local markets, and thirdly, they use wholly-owned subsidiaries when it knows the market it is operating in for instance the United States market. Starbucks also conducts great market research before entering into foreign territories. In most cases, Starbucks ensures that they have total domination of the market before they venture. This concept enables them to enjoy the benefits of market leadership which ultimately makes it easy to consolidate the market. In addition, Starbucks operates differently in the international market. Starbucks learned how to be mindful of the diverse cultures and principles around different global markets. This has enabled the company to customize its products and services in a way that aligns with the cultural setting of a given market.

Implementation of Strategies

To implement its business-level and corporate-level strategies, Starbucks has set clear goals and objectives that need to be achieved within a particular range of time. The company also evaluates its resources to identify the different roles that different resources will play in the implementation process. In addition, Starbucks has a diversified and talented human resource management that play the role of implementing the stated strategies and policies of the company. Internationally, Starbucks is changing the experience and perception of people about coffee shops and how they go out to drink coffee. They are providing a place apart from home where people can enjoy, relax, and have a cup of coffee.

4.

CEO perspective is of importance to regard in the strategic decision making in the organization. These senior personnel are majorly responsible for strategy determination in most organizations. Cases arising help one find themselves in the same situation as these strategic leaders, making views with their perspective. Cases can help get a bigger picture in a way that is not costumed to our daily lives. Cases also give us a long-term view of the firm's depiction through corporate history, which helps us understand a firm's position.

Starbucks began to lose its focus on competency. Many baristas began taking shortcuts in making coffee. This was due to the brand's rapid growth. Coffee beans could now be ground in the morning and then stored for use the whole day as opposed to the previous method where coffee beans were ground in order. The new espresso machines, though great inefficiency, could not match the customer service. They were so tall and blocked the interaction between baristas and customers. The primary reason for the success of Starbucks was undercut, even though the new operational changes reduced cost and improved the general efficiency.

The fact that Starbucks lost McDonald's blind taste test added to the negative impact of cost-cutting efforts. Among the six coffee brands evaluated, Starbucks came in last. Between 2004 and 2008, when it rapidly expanded operations by doubling its store count, Starbuck's capabilities deteriorated due to forgetting. It also expanded into other products and services, like ice cream, desserts, and sandwiches, to name a few.

Financial ratios

The financial ratios entail the leverage ratios, which is the degree to which a firm relies on debt versus equity. For Starbucks we can see that the Company finances half of all its assets with debt. However, their financial leverage index is indicating that the firm is effectively using leverage in its capital structure, even though the company has more debt than equity but less than assets. Which means that the company has enough assets to afford debts.

Liquidity ratios, this is the firm’s ability to pay off its short-term obligations. Profitability ratios, this shows how efficiently a company can utilize its resources, however, we can see that for the year 2016 was a good margin. Meaning that the company have a profitable year, because they had a gross margin of 60%. Activity ratios, describes how effectively a firm manages its assets.

Financial ratios were computed from the following information:

Source: Starbucks Annual Reports (various years)

Diagnosis

References

Abu Amuna, Y. M., Al Shobaki, M. J., & Abu-Naser, S. S. (2017). Strategic environmental scanning: An approach for crises management.

Bruijl, G. H. T. (2018). The relevance of Porter's five forces in today's innovative and changing business environment. Available at SSRN 3192207.

Makadok, R., Burton, R., & Barney, J. (2018). A practical guide for making theory contributions in strategic management.

Falkowitz, Max. Who Invented the Pumpkin Spice Latte? n.d. Web. 29 October 2021. <https://tastecooking.com/invented-pumpkin-spice-latte/>.

Warnick, Jennifer. Inside the Tryer Center, the Starbucks lab where anything is possible. 11 June 2019. Web. 29 October 2021. <https://stories.starbucks.com/stories/2019/inside-the-tryer-center-the-starbucks-lab-where-anything-is-possible/>.