RUNNINGHEAD:CaseStudy2–Starbucks
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CaseStudy2-Starbucks
Brian QuintanillaLiberty
University
CaseStudy2- Starbucks
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CaseStudy 2- Starbucks
ExecutiveSummary
Starbucks wasfoundedinSeattlein1987withacollectionofninelocations.Starbucks has
grown to become the most recognizable coffee brand in the world.They now have over 28,000
locations in over 75 countries with sales exceeding $25 billion annually.Starbucks has grown to
a corporation with subsidiaries such asTazoTea’s, Seattle’s Best Coffee, and Ethos
water.Starbucks is examining diversifying their offerings to include upscale roasteries and
tasting rooms, featuring coffee’s, hot and cold teas, ice cream and an assortment of small plate
food items.Starbucks has doubled their net revenue between the 2010 and 2017 while increasing
their amountof stores around the world by over 10,000 during thesame time frame.
WhileStarbuckshasseenrapidgrowth,theyhavealwaysstrivedtoincreasethequalityoftheir product
offerings and increase customer satisfaction.(Thompson et al., 2019)
ExistingMission,ObjectivesandStrategies
MissionStatement.Toinspireandnurturethehumanspirit–oneperson,onecup,one
neighborhood at a time. (Starbucks Corporation Fiscal 2018 Form 10-K)
Objectives.Much like any other business, Starbucks’objectives are to expand their
market share and increase profitability.Starbucks’objectives are accomplished through the
procurementanddistributionofthehighestqualitycoffeeproductsavailable.OneofStarbucks’ major
objectives is their commitment to social impact, they have showed their commitment through
ethically sourcing their products and decreasing their environmental impact during production.
(Starbucks Corporation Fiscal 2018 Form 10-K)
Strategies.Inordertoaccomplishtheirstrategicobjectives,Starbucks’leadershiplaid out
specific strategies in their 2018 annual report.Their strategic initiatives were designed to
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create growth, improve operations and provide higher long-term shareholder value.Starbucks’
2018 annual report lays out strategic initiatives, they focus on mainly on providing a better
customer experience and employee satisfaction.They believe that by increasing employee
satisfaction they will be able to provide a greater overall customer experience.Creating a more
efficient customer experience through the integration of digital ordering allows customers to
order exactly what they want and allows individuals to have a great experience no matter which
Starbucks they visit around the globe.Continuing the rapid global expansion of Starbucks is
another key focus area of their 2018 annual report, this allows them to reach new customer and
extend their market share.Reducing costs is always a focus for organizations, in the coffee
business,foodanddrinkswhicharenotpurchasedcandecreaseprofitmarginandallowforarise in
consumercosts.TheseareasareallfocusedonbyStarbucks’upperlevelmanagementandare key to
their growth. (Starbucks Corporation Fiscal 2018 Form 10-K)
NewMission Statement
“We strive to continually improve our customers’lives by providing them with the
highestqualityingredients,ethics,serviceandpositiveimpactinthecommunitiesweserve.”
AnalysisoftheFirmStructure
(1) Customers.Starbucks’customer base is anyone who drinks coffee, they focus on
suburban areas with disposable income.Starbucks usually opens stores in suburban areas along
with areas with high concentrations of professional offices, these areas usually have customers
with higher disposable income levels.Starbucks has been attempting to take a share of Dunkin’
Donuts and McDonald’s market, Lockyer (2006), “the Seattle company is targeting every
consumerwhodrinkscoffeeintheUnitedStates--andnotjustthehigh-endconsumersStarbucks
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isknowntoattract”.ThismovetoattractnewcustomersallowsStarbuckstoexpandtonew markets and
expand their market share.
(2) Products or Services.Starbucks’signature products are fine coffees and teas, they
were founded in 1971 on the idea that customers would appreciate and frequent higher quality
teas and coffees in their shops.In the mid-1990s Starbucks began to expand their products
outside of their retail stores in order to capitalize on their popularity.They began to diversify
theirproductlineandcreatedoneoftheirmostpopularproductstheready-to-drinkFrappuccino in
1995.In 2012, Starbucks began to expand their offerings by selling small plate foods and
pastries.This expansion in the diversity of their products led Starbucks to create s Consumer
Products Group (CPG), which was later renamed the Channel Development segment, to be
responsible for the distribution of all Starbucks’products outside of their retail stores.In 2017
their sales through the Channel Development segment was $2.0 billion, representing a major
share of the company’s annual revenue. (Thompson, et al. 2019)
(3) Markets.Starbucks is truly a global corporation, they have over 7,500 locations in
countries around the globe, mainly in China, Japan and Europe.Starbucks worldwide stores total
over 28,000, they began with only 17 stores total and opened their first international stores in the
late 1990s.They rapidly expanded their location totals and it is difficult to find an area in the
United States ofAmerica where there is notaStarbucks.Starbucks has been able to achieve rapid
expansion through the adaptation of their stores to the market in which they are located.
Throughtheexpansionoftheirproductofferingsoutsideoftheirstores,Starbucksalsocompetes in the
retail marketplace through the sales of bulk coffee and coffee roasting related products.
(4) Technology.Starbuckshaspridedthemselvesonbeingontheforefrontoftechnology usage
in their organization.Starbucks was one of the first chains to offer free internet to their
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customers in order to create an atmosphere in which customers would feel comfortable working
on their work or education while enjoying their coffee.Starbucks also uses their app in order to
enticecustomerstobecomerepeatcustomers.Theappallowscustomerstotracktheirpurchases and earn
free rewards after reaching a certain point total.Customers can also order on the app
andpickupinthedrivethruwhichdecreasesservicetime.Thedatafromonlineorderingallows
forStarbucks tokeeptrackofcustomerdemands andshapeproductofferings.Starbucks’ability to
leverage technology has been a key to their success and popularity.
(5) Concernforsurvival,growth,andprofitability.OnemajorfactorwhichStarbucks is
determining the right markets in which to enter and which current markets can use new stores
without oversaturating the area.An area which is highlighted in the Starbucks’2018 annual
report is the dependence on which Starbucks’has on the discretionary spending of their
customers.Starbucks’must be aware of the larger macro-economic conditions when looking to
expand their stores.If the overall economic market does not allow for customers to have higher
levels of disposable income, Starbucks’profitability will suffer. (2018Annual Report P. 10)
Starbucks’business growth depends on their relationships with licensees, retailers and
foodservice operators.These critical relationships allow for Starbucks’s to growth without the
same risks as would be present if each store was corporate owned.Starbucks’customers expect
the same level of service and often does not know the difference between licensed stores and
corporate owned stores.The quality of experience should be the same not matter what type of
store they are visiting, this allows Starbucks to expand and maintains familiarity with customers
aroundtheglobe.Aconcernwithprofitabilityliesinthecostoflabor,aslaborcostsincreasethe overall
profitability of the store will decrease.Other rising costs such as employee benefits can decrease
profits.Starbucks’has committed to paying their customers a living wage along with
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having excellent benefits.They believe that by having happier workers will increase their
effectivenessatworkandcreateabetterexperiencefortheircustomers.WhileStarbucks’had issues
with over expansion from oversaturation of markets, they have since crafted a plan to negate
oversaturation and proper expansion.
(6) Philosophy.Starbucks has aspired to continuously pursue the perfect cup of coffee
through purchasing the highest quality coffee beans and always striving to perfect the brewing
process.Another aspect of Starbucks’philosophy is to train their employees to always place an
emphasisoncustomersatisfaction.Theyalsoplacedanemphasiscreatinganorganizationwhich values
the inputs of their employees in organizational change.Starbucks’values are centered around
creating an environment in which all customers and employees are welcomed.An organization
which continually searches for improvements in their processes in an effort to increase customer
satisfaction.And always be an organization which connects through transparency, dignity and
respect.Starbucks’ethical philosophy centers around responsibly sourcing their coffee along with
paying their employees a living wage along with excellent benefits. (Thompson, et al. 2019)
(7) Self-concept.Starbucks’major competitive advantage come from their strong brand
image and reputation they have built over the years.Consumers know what they are getting when
they visit a Starbucks store and their dependability is key to the success of the
organization.Another major competitive advantage is from the distribution network they have
created.Starbucks’sisabletogettheirproductstotheendlinecustomersforacheapercostthan
competitors which allows them to recognize greater profits. (Thompson, et al. 2019)
(8) Concernforpublicimage.Starbuckshasastrongcorporatesocialresponsibility
(CSR) strategy with five key components.First, they have committed ethically sourcing all
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products,notonlyfortheenvironmentbutforthoseworkingintheharvestingprocess.Second, they
have committed to community involvement and corporate citizenship, this commitment to
community involvement helps improve the community around them.Third, environmental
stewardship, taking care of the environment through the reduction of waste in the production
process and through packaging can entice people to frequent Starbucks.Fourth, creating
opportunitiestohelppeopleachievetheirdreams,thisinitiativefocusesonhiringyoungpeople,
veterans and refugees helps promote diversity.They also provide tuition matching programs in
ordertohelptheiremployeesreceivetheirdegrees.Finally,charitablecontributions,Starbucks’ has
committed to donating to over 40 nonprofit organizations in their communities around the
world.(Thompson, et al. 2019)
(9) Concern foremployees.Starbucks was one of the first organizations to offer health
care options to their part-time employees.They have pioneered the concept of taking care of
their employees in order generate higher levels of employee engagement which leads to an
overall increase in the customer experience.Another employee initiative from Starbucks’has
beentheimplementationofperformancebasedstockrewardstotheiremployees.Therewarding of
stock for performance has allowed employees to be engaged in their work in order to receive
highly valuable stock.Starbucks has prided themselves on being a great place to work, they are
often on Fortune’s list of “100 Best Companies toWork For”, this attracts higher quality
workers.(Thompson, et al. 2019)
AnalysisofExistingBusinessModel
CurrentBusinessAnalysis
Starbucks is the most recognizable name in coffee in the United States ofAmerica and
mostoftheworld.TheyhavegrownfromasmallbusinessoffivestoresinSeattleWashington
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to dominate the coffee market.They operate their stores through a mixture of corporate and
licensed stores.Starbucks has divided their business into four main structures in their matrix
organizationalstructure.Functional,geographic,product-baseddivisions,andteamsarethefour
structures.The functional structure is utilized to organize the company based on business
functionwith authority splithorizontally.The geographic divisionsStarbucks utilizesare, China
andAsia-Pacific,America and Europe, Middle East, Russia andAfrica.In the United States of
America there are also western, northwest, southeast and northeast divisions.The product-based
divisions are broken down by the product they create, either coffee, tea, baked goods or
merchandise.The divisions are organized to make changes quickly in order to meet customer
needs.TheircurrentbusinessishighlyeffectiveandhasledtoStarbucksbeingthemarketleader in the
coffee market.
SWOTAnalysis
Strengths.Starbucks has many strengths as an organization which has led them to be
oneofthemostrecognizablecoffeebrandsintheworld.Theirstrongbrandimageandextensive global
supply chain are strengths which allow Starbucks to hold a competitive advantage over others in
their market.Starbucks’has the ability to produce their own roasting products, allowing
themselves the ability to price premium products in a way which generates the most
income.Finally, Starbucks’has created a culture in which employees are valued, allowing them
to attract higher level employees, which leads to a better experience for their customers and
builds on their reputation.
Weaknesses.Starbucks’isheavilydependentonthepriceoftheirmainrawproductof
coffee.This creates a situation in which Starbucks’profits are dependent on the price of raw
coffee beans, an extreme increase or shortage of coffee beans would have massive impacts on
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Starbucks’ability to maintain profits.Starbucks’products are purchased through the disposable
incomeofit’scustomers,aneconomicdownturnwhichdecreasesthedisposableincomeoftheir
customers would decrease the profits of each store.Alimited product offering is another
weaknesswhichStarbucks’hasbeentryingtoaddressthroughtheiradditionoffoodofferingsto
maintain competitiveness.
Opportunities.Starbucks has the opportunity to expand their supplier base in order to
decrease their dependence on a singular supplier.They also have an opportunity to expand into
emerging markets such as China and India, these markets represent a large sector of the market
in which Starbucks can take advantage over their competitors.The opportunity to expand their
productofferingsinthefoodsegmentisanareawhichStarbucks’hasbeenattemptingtoenterin order to
keep pace with McDonald’s and Dunkin Donuts. (Starbucks Corporation Fiscal 2018 Form 10-
K)
Threats.The rising costs of coffee beans and the dependence of Starbucks on the price of
coffee is a major threat.Market saturation is another threat for Starbucks, in order to
continuallyincreaseprofitsStarbucksmustcarefullychoosetheirnewlocations,toomanystores in an
area will decrease the profits of each store.Another emerging threat has been a rise in
competition from local coffee houses.Many consumers feel as though they can get a better cup
of coffee while supporting a local business when they shop at local stores.(Starbucks
Corporation Fiscal 2018 Form 10-K)
InternalFactorEvaluationMatrix
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ExternalFactorEvaluationMatrix
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SWOTBivariateStrategyMatrix
BCG Matrix
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TheBCGMatrixrevealedsomeastoundingnumbersinStarbucks’favor.Theirrevenues
surpassed all rivals in every meaningful segment of competition.Starbucks beverage revenue
was $14.7 billion for 2018, the closest competitor of McDonalds was only $1.4 billion in
McCafe sales.The four quadrants are stars, question marks, cash cows and dogs.Starbucks is by
far the market leader in all segments, however, its real domination comes in the beverage sales
department.
CompetitiveForces
CompetitiveForcesAnalysis.Starbuckshashighlevelofcompetitionsineachoftheir
business segments.The strong force of competition is identified through the Five Forces
analysis.The most significant forces for Starbucks consideration is competitive rivalry, the
bargaining power of customers and the threat of substitutes.The Five Forces which most directly
affect Starbucks are:
1. Competitiverivalryorcompetition–Strong Force
2. Bargainingpowerofbuyersorcustomers–StrongForce
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3. Bargainingpowerofsuppliers–WeakForce
4. Threatofsubstitutesorsubstitution–Strong Force
5. Threatofnewentrantsornewentry–ModerateForce
Inordertoremaincompetitiveintheirbusinesssegment,Starbucksmustimplementstrategiesto make
their business even stronger.Starbucks must continue to build on its strengths and shore up their
weaknesses.
Competitiverivalryorcompetition.Starbucksfacesstrongcompetitionfromavariety of
brands in the coffee segment.From major brands such as Dunkin Donuts or McDonald’s to the
local coffee shop, there is a wide variety of competition in this market.The external factors that
contribute to the strong force of competition are the large number of firms and the low
switching cost.There are a wide variety of competitors and there is no cost to the customer to
switch which coffee shop they frequent.This ease of change makes competition a strong
competitive force.
Bargaining Power of Customers/Buyers. This force is based on the influence of
individual customers or groups of customers in the business environment.In the case of
Starbucks the following external factors contribute to the bargaining power of customers, low
switchingcostsandhighsubstituteavailability.Thebargainingpowerofcustomersisoneofthe strongest
competitive forces that Starbucks faces.If Starbucks were to raise prices significantly customers
would simply switch where they buy their coffee due to the wide availability of substitutes.
Bargaining Power of Starbucks Coffee’s Suppliers. This is a relatively weak force
compared to the other factors in the industry.The external factors which contribute to the weak
bargainingpowerofsuppliersare,moderatesizeofindividualsuppliers,largeoverallsupplyand
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highvarietyofsuppliers.Thelargevarietyofsuppliersinthecoffeeandteaindustryweakenthe
bargaining power of each individual producer.Starbucks buys high quality coffee which is
sustainably sourced, however, many producers are moving to this type of supply which expands
Starbucks’options.
ThreatofSubstitutionorSubstitutes.The threatofsubstitutes isastrongforcewhich
pertains to the impact of substitute goods or services to Starbucks.The external factors
contributingtothestrongthreatofsubstitutionarehighsubstituteavailabilityandlowswitching
costs.The high availability of substitutes is a strong factor in Starbucks business situation, if
Starbucks is to combat this factor they need to create products or services which cannot be
duplicated easily.If they have something which cannot be easily substituted and give them a
competitive advantage.
Threat of New Entrants.The threat of new entrants is a moderate force in the five forces
model for Starbucks.The external factors for the threat of new entrants is the moderate cost of
doing business and the high cost of brand development.The weight of effort put into a new
competitor is a determining factor on how much entering the market will cost.Asinglestore will
not be as costly as entering the market through a chain of stores.Starbucks itself started out with
five stores which have grown into thousands.Their cost to enter the market was smalland now
they control theentiremarket.Asmaller coffee house willnot havethe resources
tocontrolthemarketfromtheoutset,howevertheycanhaveaneffectonanindividualStarbucks store.For
example in many small to medium sized cities there are only one or two Starbucks stores,
however, there is a lot of competition from local stores in the area.Starbucks must find a way to
differentiate themselves and show their buy in to local communities in order to maintain
customer support and keep them from finding alternates.
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CPMandAnalysis
Competitor’sRatiosandAnalysis
ThroughthisresearchithasbeenidentifiedthatthetwodirectcompetitorsforStarbucks are
McDonald’s and Dunkin Donuts.The ratios chosen were based on desired metrics for the food
service industry such as average sales per square foot and return on invested capital.
Starbucksoutpacestheircompetitiononaveragesalespersquarefootalongwithhighestfour
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year CAGR revenue growth, highest ROIC and highest ROE.The company has been able to
create value through ROIC and revenue growth, they have been able to create a sizeable returnon
investment for their investors.Starbucks has been ableto createademand in themarketfor a
previouslyunidentifiedsegment.Whilecoffeeshopshavebeenastapleofsociety,Starbuckshas been
able to create a brand image which customers feel a sense of value from purchasing.This
relationship is reflected in the sizable business advantage Starbucks has over the competition.
HistoricalFinancialStatements
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RatioAnalysis
Starbucks’currentratiohasdecreasedovertheyearsto.9165,thisisalowernumberthan would
be expected from a worldwide firm, however, this may be due to their increase in
expansion.Theirlongtermdebttocapitalratiohasalsogrownablethemoredesirable1.0level. Their
gross margin ratio has stayed steady around .70 which means that after paying inventory costs
Starbucks has 70% of their sales to cover operating costs.Starbucks’free cash flow per share is
the excess available per share that the firm has left after expenses.While Starbucks is one of the
most successful corporations in the United States ofAmerica, their ratios show how
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dependent they are on operating leases and debt.Starbucks’overall financials show that they
havetheabilitytopaytheirdebtsifneeded,theyneedtofindwaysinwhichtolimittheirdebt and further
increase profits.(Starbucks Corporation Fiscal 2018 Form 10-K)
AlternativeStrategies
WhileStarbucksisaprofitableorganizationwithahighlyrecognizablebrandname,there are
still areas in which improvements can be made.
1. IncreasingProductDifferentiation
The majority of coffee shops offer the same types of food and drinks.If a coffee shop
would be able to create a drink which cannot be purchased at any other store thy would be able
to increase their customer base and separate themselves from the market.There would need to be
a concerted effort to develop a new product, but the payoff could be significant.Often when new
products are introduced, other companies will attempt to copy or mimic the product.To combat
this, an organization would need to constantly innovate their product offering.If
Starbucksweretocreateaspecialproduct,theywouldbeabletoenhancetheirstrongpositionin the
market.An alternative to creating new products would be to rotate popular products so they are
not available all of the time.McDonald’s often does this with the McRib and Whataburger
utilizesthisconceptwith therotationofitsburgers.This keepscustomer demandhigh when the
product is in place and lowers the cost of having all products available year round.
2. DecreasingCosts
Starbuckshashighoperatingcosts,betweenrentonbuildings,employeeturnoverandthe cost of
ingredients.Lowering costs when it comes to sourcing ingredients may not be a feasible option
due to the lowering of end product quality.However, lowering costs could be addressed through
finding better lease deals on locations or by building stand-alone stores which could be
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purchasedbythecompanyanddecreaseoperatingcosts.Anothercostsavingscouldpotentially come
from changing to a franchising business model.In a franchise, the majority of operating costs
would be passed on to the franchisee while Starbucks would still profit from the sale and
distribution of the coffee to the end line franchisee.An alternative to this would be to find cost
savings through lowering sourcing costs.This could bethrough finding cheaper cups and other
items used in day to day operations which add up costs over the long term.
FinancialStatements
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The changes in business including creating a new signature product line and decreasing costs
through a variety of initiatives will lead to increased revenue and decreased fixed costs.By
creatingaproductwhichcannotbeduplicated,customerswillhaveanincreasedswitchingcost and
keep their business with Starbucks.By decreasing sourcing and location costs, individual stores
are able to generate greater income thus leading to greater costs for the company as a
whole.With increased business, Starbucks will further control the market of coffee and
breakfastfoods.Starbucksalreadydominatesthecoffeemarket,however,anincreasedmarket
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share along with an increase in food sales will help them become the leader in the fast food
market.Therewillbeincreasesincostsofgoodssoldandsourcingcostswithnewinitiativesbut this will
be offset by the increased sales.
The projected ratios are from 2018 and projected into the year 2020.The current ratio
increasefrom1.96to2.28showsthatStarbuckswillhavemoreassetstopayoffdebtsinaworse case
scenario.Another positive ratio increase is in the asset turnover ratio, increasing form 1.08 to
1.15, this shows that every $1 of assets generate $1.15 of revenue.This number woud ideally be
higher but any increase is positive.Changes in business strategy may take years to see the end
result and eventual greater unrealized profits.
NetPresentValue
An estimated initial investment of $1,500,000 would be needed to begin the research and
development of a new product along with new sourcing and potential franchising options.This
newproductwouldcreateanincreasedcashflowof$5,000,000inthefirstyear.TheNPVofthe new
product and franchising initiative is calculated to be $3,261,905.The value of the new
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initiativetobeginfranchisingstoreswouldendupbeingmuchhigherafterthedecreased corporate costs
of rent and other current high fixed costs.These initial calculations are extremely conservative
and new initiatives may produce much higher results.
RecommendedStrategy
ThetwomainareasinwhichanewstrategyforStarbuckswouldneedtobefocusedonis a cost
lowering initiative and a differentiation strategy.To lower costs there are many options which
could be investigated.The first is through sourcing cheaper raw ingredients and attempting to
lower fixed costs.An option for decreasing costs could come from franchising stores, Starbucks
currently has licensing agreements with organizations to sell their products in airports, malls and
other locations, however, franchising agreements would allow Starbucks to realize greater
profits.This initiative would not be very costly in the initial phase and franchisees would be
placing most of the investment.Another new strategy would be to create a new signature product
to create differentiation between other coffee shops.If Starbucks were to
createaproductwhichcannotbeduplicatedquicklybyothers,theywouldbeabletoincreasethe
switching costs for customers.This new product would initially cost around $750,000 to research
and develop a new product.There would be significant effort needed to create the product and
test it in select stores before launching worldwide.The increased revenue from this new product
would create significant profits and separate Starbucks even further from competitors.The new
product would take approximately six months to create with testing in selected stores to begin in
the seventh month.The new product would debut nationwide at the end of the year and profits
from the product would be realized during the second year.
ProposedNewBusinessModel
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Aproposed new business model for Starbucks would center around investing more into
research and development of new products.Anew beverage to differentiate Starbucks from other
coffee shops would allow Starbucks to generate even greater revenues.Other innovative products
such as a wider variety of breakfast foods could realize greater profits.The issue in creating more
food products is this would cause a need for change in the structure of current stores.The
additional items would need to be created within the existing store structure.Other changes could
be made through the structure of the store organization.By franchising stores, Starbucks would
gain profits from selling the ingredients to franchisees while decreasing their
fixedoperationalcosts.Starbucksisalreadythemarketleaderincoffeeproducts,however,these new
changes would be simple and could lead to greater profits and a larger market share for
Starbucks.
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References
Lockyer,SarahE."Starbucksboostsexpansionoutlook25%amiddemographicgains:asfood menu
rollouts spread nationwide, chain claims broadened customer base."Nation's Restaurant
News 16 Oct. 2006: 3+. Business Insights: Global.
“StarbucksCorporationFiscal2018Form10-K”.StarbucksInvestorRelationship.Starbucks,
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