Starbucks Company

Running head: STARBUCKS CASE STUDY 1

Starbucks Case Study

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STARBUCKS CASE STUDY 2

Starbucks Case Study

Executive Summary

Starbucks’ case study highlights the range of issues affecting the organization at the time

of writing the case study. One such issue includes Starbucks’ ever-evolving and highly

competitive operating environment. A situational analysis of the firm’s macro environment

reveals that a wide range of forces have a direct impact on the performance of Starbucks. The

bargaining power of suppliers constitutes a key force that affects the pricing of Starbucks’

products on the mainstream market. The exclusivity of Starbucks’ suppliers gives the them

sufficient bargaining power over Starbucks particularly with reference to the pricing of supplies.

An analysis of Starbuck’s internal environment also reveals that the organization wields a wide

range of strengths that give it an edge over rivals. One such strength includes the firm’s

extensive stores network that enables it to tap into lucrative specialty coffee market segment.

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Issues

At the time of writing the case study, it is apparent that Starbucks faces a vast array of

issues. One such issue is the growing competition from players in the specialty coffee market

segment. Despite Starbuck’s leading position in market share, roughly 50%, players such as

McDonald’s, Dunkin Donuts and Caribou coffee make up a significant competitive force.

Another key issue relates to the organizations slow pace in expansion both in the US and

international markets. Initially, Starbuck’s Chairman, Howards Schulz expressed his skepticism

about the use of licensing to accelerate expansion and primarily preferred that Starbuck’s own its

stores. As opposed to opening as many stores as possible in far flung outposts across the country,

Schulz’s strategy banked on establishing a foothold in markets where it already had operations

before venturing into novel markets. The third key issue that is evident in the case study relates

to the impact of 2008 recession of the performance of Starbucks globally. A combination of

factors, namely, the 2008 recession, increased competition, as well as Starbucks’ market

saturation led to a sales decline in 2009. Between 2009 and 2010, Starbucks also closed roughly

900 stores operated by the organization, in a bid to reignite growth in sales.

The issue of employee compensation and benefits constitutes a key issue that is evident in

the case study. Schulz’s decision to offer benefits to part-time workers drew opposition from the

different quarters both within and outside the organization. Insurance companies, in particular,

avoided dealing with Starbucks since they opposed the idea of covering part-time employees. In

addition, Schulz’s idea of offering stock options to both fulltime and part-time employees at

Starbucks drew opposition from shareholder, as well as venture capitalists on Starbucks’ board.

Their opposition was based on the argument that the stock option plan would serve significantly

dilute their interest. Lastly, Schulz decision to announce Starbucks’ stance on a range of societal

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issues constitutes a major issue in the case study. It is evident that pronouncements made by

Schulz on behalf of the company on emotive issues such as gay marriage, gun control and the

welfare of war veterans had a negative impact on the organization’s relationship with consumers,

investors and other parties. This is primarily because not all people concur with Starbucks’ stand

on the above issues.

Situational Analysis

External Environment

As illustrated in the case study, Starbucks’ general external and operating environments,

industry drivers, industry structure, life cycle, as well as other trends have a positive and negative

impact on the organization and the industry as a whole. At different points since the

establishment of Starbucks, the organization’s macro environment, in particular, seems to have a

significant bearing on the performance of the organization. As such, a Porter’s 5-forces analysis

will critical to understanding the macro environment of Starbucks.

Porter’s Five Forces Analysis

According to Ormanidhi and Stringa 2008, industries are made up of companies that

create close substitutes. However, the companies’ competitive environment possesses a universal

structure comprising of 5 competitive forces (Ormanidhi and Stringa, 2008). In the case study,

Porter’s forces have a direct impact on the profitability of Starbucks and are critical to

determining the overall competitiveness, as well as the profitability of the specialty coffee

industry. The forces include;

The Threat of New Entrants

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From the case study, the threat of new entrants in Starbucks’ operating environment is not

profound. The threat level posed by novel entrants in any industry is contingent upon extant

entry barriers, in addition to the cumulative reactions from established market players (Indiatsy,

Mwangi, Mandere, Bichanga and George, 2014). Potential entrants in the specialty coffee

industry do not pose a significant threat to Starbucks since the organization has a robust and

well-known brand. In addition, penetrating the specialty coffee market in the US is not easy for

new entrants given the significant foothold held by existing players. The fact that Starbuck’s

primary competitors all entered the market in the 1990s is testament to difficulty new entrants

faced at the time of writing the case study.

Competitive Rivalry

According to Hill, Jones and Schilling 2014, competitive rivalry denotes the struggle that

occurs between industry players as they attempt to acquire a bigger market share for themselves.

In the case study, competitive rivalry in Starbucks’ macro environment constitutes a significant

force that the organization cannot afford to underestimate. As of 2015, Starbucks held lead

specialty coffee market position in a number of regions on the international front, namely, the

UK, the US and Canada among others. In its home market, the United States, Starbucks controls

about half of the coffee specialty market while three of its chief competitors control the rest.

From the case study, it is clear that the competitive advantage held by Starbucks in the US

market is attributable to its management’s attention to quality. Its quality checks in the brewing

process is unmatched and this ensures that the company maintains lead market position.

The Bargaining Power of Suppliers

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Karagiannopoulos, Georgopoulos and Nikolopoulos 2005, posit that the power of

suppliers denotes the relative concentration, as well as size of suppliers as compared to industry

players. A lower concentration of suppliers ordinarily gives the suppliers higher bargaining

power. In the case study, some of the suppliers have a higher bargaining power. Case in point

includes the suppliers of the rare Narino Supremo coffee bean that is used in brewing Starbuck’s

coffee. The crop that produces the bean only grows in a specific region in Colombia and this

gives the suppliers of the commodity higher bargaining power over Starbucks, particularly with

regards to pricing.

The Bargaining Power of Buyers

Porter 2008, posits that the bargaining power of buyers is predicated on the negotiating

leverage buyers have over industry players, particularly if the buyers demonstrates price

sensitivity, employing their clout to push for price reductions. In the case study, the bargaining

power of buyers is somewhat diluted by the high quality product offered by Starbucks. This

evidenced by the amount of cash buyers are willing to part with just to consume a Starbucks cup

of coffee. In 1991, for instance, despite Starbucks placing a price tag of over $2 per cup of its

coffee, sales rose by a whopping 84%, an unprecedented high given that Starbucks was still in its

nascent stages of growth. Another incident in the case study that serves to show the relatively

diluted bargaining power held by the buyers of Starbucks’ products includes the period

immediately after the 2008 recession. In 2009 when Starbucks registered its first ever drop in

sales, the company’s CEO, Howard Schulz opted out of lowering prices and instead chose a

strategy emphasized on quality products and services at the organization. The strategy entailed a

24-month organizational transformation that would push for exceptional service, as well as top

quality coffee. The fact that the transformation paid off in the absence of a reduction in process

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gives credence to the observation that the quality products and services offered by Starbucks

serve to dilute the bargaining power of buyers.

The Threat of Substitutes

Grundy 2006, observes that substitutes ordinarily pose a threat to the products of industry

players if they offer a better price-performance tradeoff relative to the product of an industry

player. In addition, substitutes pose a high level of threat if the buyers are bound to incur low

cost in moving to the substitutes (Grundy, 2006). In the case study, the threat posed by

substitutes to the products offered by Starbucks is relatively low. This is primarily because the

existing substitutes do not offer an improved price-performance tradeoff to Starbucks’ products.

In terms of performance, Starbucks coffee ranks top in the US specialty coffee market and

consumers prefer spending top dollar on high quality coffee, as opposed to lower quality

substitutes at lower prices.

Opportunities and Threats

Ommani 2011, contends that a SWOT analysis consists of both internal, as well as

external analysis. The internal analysis primarily focuses primarily focuses on the strengths and

weaknesses of an organization while an external analysis focuses on the opportunities and threats

faced by the firm. In the case study, an external analysis reveals that Starbucks faces a host of

threats and concurrently has a wide range of opportunities.

Opportunities

In the case study, international expansion constitutes a key opportunity that lies ahead for

Starbucks. This is primarily because the company had primarily focused on the North American

market in the past and the international market presented a great opportunity for expansion.

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Another significant opportunity for Starbucks includes the possibility of product line expansion

to allow the firm to cater to a broader customer base.

Threats

The greatest threat faced by Starbucks emanates from competitors in the specialty coffee

market segment. This is primarily because any possible enhancement of product quality to match

the quality espoused Starbucks’ products could enable the competitors to eat into the market

share held by Starbucks.

Internal Environment

An evaluation of Starbuck’s financial situation, growth rates and market share as

illustrated in the case study demonstrates that organization’s overall health is generally robust.

With reference to the Starbucks’ growth rate, the firm experienced a significant increase in its

number of stores between 1993 and 2014, with 2009 being the sole exception. In 2009, the firm

closed down 900 stores in response to the low sales brought about by the 2008 global financial

crisis. In the case study, it is also clear that the Starbucks’ financial performance is significantly

strong. In the year 2000, for instance, the organization beat expectations to register sales

revenues amounting to roughly $2 billion. Analysts had earlier predicted that Starbucks would

attain annual sales revenue $1 billion, a significant amount by industry standards. Between the

years 1992 and 2015, Starbucks’ average annual growth in revenue equaled 26% every year. The

capacity of Starbucks’ management to offer generous compensation and benefits to its

employees also points to the financial strength of the firm. With regards to market share,

Starbucks possesses a 50% market share in the United States while its three most prominent

STARBUCKS CASE STUDY 9

competitors in the specialty coffee market segment share out the rest. On the international front,

Starbucks also has a significant market share in Canada, the UK, and Western Europe.

The organizational structure, leadership and culture at Starbucks affects the firm

profoundly. The organizational culture at Starbucks pays particular attention to the welfare of

employees and the management sees to it that employees are sufficiently motivated through a

vast array of generous benefits, stock options and compensation. This culture increases employee

productivity since employees feel that they are part and parcel of the organization. Starbucks’

organizational culture also empowers employees to take decisions based on their own best

judgement, an important aspect of organizational culture that boosts job satisfaction among the

employees. With reference to organizational structure and leadership, the firm’s chairman, CEO,

the board and shareholders all play a critical part in the decision making process. The CEO, in

particular, has a major influence on the day-to-day activities at Starbuck’s as evidenced by the

role of Schulz as the firm’s CEO at the height of the 2008 global financial crisis. Schulz only

returned to the role of CEO in 2008 after realizing that the impact of the financial crisis on

Starbucks was quite profound, a role that allowed him to implement a two-year organizational

transformation.

Strengths and Weaknesses

Oreski 2012, posits that a SWOT analysis is a systematic analysis tool that helps identify

the internal, as well as the external influences on the firm. In the case study, internal influences

that have a bearing on the Starbucks include the organization’s strengths and weaknesses.

Strengths

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Starbucks’ resources, value chain activities, capabilities and core competencies include

some of the strengths espoused by the organization. With regards to resources, the Starbucks’

financial position is capable of supporting expansion activities and the organization’s extensive

retail store network, particularly in the US, constitutes an important resource that allows it to tap

into the lucrative specialty coffee market. Starbucks also stands out with regard to the firm’s

competency in coffee brewing. Roasting is an art at Starbucks remain that only industry players

that roasts coffee beans in its own roasting facilities, a capability that allows it to produce high

quality coffee. It is worth noting that Starbucks’ value chain activities commence in Columbia

where the firm sources the rare Narino Supremo coffee bean for its coffee.

Weaknesses

From the case study, the sole identifiable weakness that may be associated with Starbucks

includes the organization’s relatively narrow product range. This weakness limits the

organization’s ability to exploit market requirements.

Key Industry Success Factors

In the case study, it is evident that there are several key factors that affect the success of

players in the specialty coffee industry. One such factor is the coffee culture in the United States,

partly nurtured by Starbucks since the 1990s. When Schulz initially conceptualized the

Starbuck’s business model, Americans did not fully appreciate the value of premium coffee.

However, over the years, Americans increasingly appreciated specialty coffee and were willing

to pay top dollar for it, a critical factor that allowed the industry players to register impressive

growth in sales. The state of the economy constitutes another key factor that has a direct impact

on the success of industry players. The incremental growth in sales and revenue registered by

STARBUCKS CASE STUDY 11

players in specialty coffee market between 1991 and 2015 is directly attributable to the state of

the US economy, with 2008 being the sole exception.

Strategies

At the time the case study was written, there existed several strategies employed by the

management at Starbucks to support growth. One such strategy includes setting up its stores in

highly visible locations in order to reduce the amount of money the organization spends on

advertising and marketing. Starbucks also changed its logo in 2011, an important strategy that

allowed the organization to expand its product range and penetrate into countries that are a bit

conservative with regards to nudity. Notably, this strategy has been quite effective particularly

with reference to Starbucks’ ability to penetrate the Middle-Eastern market. Starbucks’ decision

to increasingly accept licensing as a mode of market entry constitutes a major strategy shift that

has enabled the organization to successfully penetrate high risk markets at a relatively lower

cost. Another key strategy employed by Starbuck’s includes the provision of stock options to

both fulltime and part-time employees. A key aim of the strategy is to enhance job productivity

and its success is manifest in the relatively high growth rates registered at the organization on an

annual basis.

Recommendations

To deal with the issues highlighted earlier, Starbucks could seek to modify some of its

current strategies and explore a host of options. In dealing with the issue of slow expansion on

the international front, Starbucks could explore additional modes of market entry other than

licensing and company-owned outlets. Franchising, for instance, would constitute a suitable and

feasible mode of entry in international markets primarily because it reduces both the level of risk

STARBUCKS CASE STUDY 12

and the cost of entry. Starbucks could also deal with the issue of increased competitive rivalry in

the US market by employing a strategy that seeks to diversify its product range. Successfully,

implementing this strategy would necessitate Starbucks to conduct comprehensive market

surveys aimed at obtaining data on a viable product range, as well as the changing needs and

preferences of consumers.

Update

Since the case study was written, a lot has happened to the organization with reference to

the issues that were highlighted earlier. In 2017, Starbucks sought to place more emphasis on its

non-coffee brands by streamlining its Teavana tea brand and selling the organization’s Tazo tea

business (Hirsch, 2016). Crowley 2018, observes that in 2018, Starbucks sought to expand its

product range by adding a new product layered with cold brew, tea and lemonade.

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References

Crowley, C., 2018. Starbucks’s New Color-Changing Cold Brew Is Basically a Caffeinated Lava

Lamp. [Online] (updated 21 Feb. 2018) Available at: <

http://www.grubstreet.com/2018/02/starbucks-debuts-new-color-changing-cold-brew-

drink.html [Accessed 24 Feb. 2018].

Grundy, T., 2006. Rethinking and reinventing Michael Porter's five forces model. Strategic

Change, 15(5), pp.213-229.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated

approach. Cengage Learning.

Hirsch, L., 2016. Starbucks tanks on revenue miss, to sell Tazo tea brand to Unilever. [Online]

(updated 2 Nov. 2017) Available at: < https://www.cnbc.com/2017/11/02/starbucks-

earnings-q4-2017.html [Accessed 24 Feb. 2016].

Indiatsy, C.M., Mwangi, M.S., Mandere, E.N., Bichanga, J.M. and George, G.E., 2014. The

Application of Porter’s Five Forces Model on Organization Performance: A Case of

Cooperative Bank of Kenya Ltd. European Journal of Business and Management, 6(16),

pp.75-85.

Karagiannopoulos, G.D., Georgopoulos, N. and Nikolopoulos, K., 2005. Fathoming Porter's five

forces model in the internet era. info, 7(6), pp.66-76.

Ommani, A.R., 2011. Strengths, weaknesses, opportunities and threats (SWOT) analysis for

farming system businesses management: Case of wheat farmers of Shadervan District,

Shoushtar Township, Iran. African journal of business management, 5(22), p.9448.

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Oreski, D., 2012. Strategy development by using SWOT–AHP. Tem Journal, 1(4), pp.283-291.

Ormanidhi, O. and Stringa, O., 2008. Porter's model of generic competitive strategies. Business

Economics, 43(3), pp.55-64.

Porter, M.E., 2008. The five competitive forces that shape strategy. Harvard business

review, 86(1), pp.25-40.

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