Strategic Management

Visakh Babu Vignesh

IntroductionStarbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 20,366 stores in 61 countries, including 13,123 in the United States, 1,299 in Canada, 977 in Japan, 793 in the United Kingdom, 732 in China, 473 in South Korea, 363 in Mexico, 282 in Taiwan, 204 in the Philippines, and 164 in Thailand. Starbucks sells hot and cold drinks, coffee beans, salads, hot and cold sandwiches, sweet pastries, snacks, and items such as mugs and tumblers Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand icecream and coffee are also offered at grocery stores. From Starbucks' founding in 1971 in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid1990s, and overseas stores now constitute almost one third of Starbucks' stores. The company planned to open a net of 900 new stores outside of the United States in 2009, but has announced 300 store closures in the United States since 2008. The first Starbucks opened in Seattle, Washington, on March 30, 1971 by three partners: English teacher Jerry Baldwin, history teacher Zev Sigel, and writer Gordon Bawker. The three were inspired by coffee roasting entrepreneur Alfred Peet, whom they knew personally, to sell high-quality coffee beans and equipment. Originally the company was to be called Pequod after a whaling boat from Moby-Dick but this name was rejected by some of the cofounders. The company was instead named after the chief mate on the Pequod, Starbuck. From 19711976, the first Starbucks was at 2000 Western Avenue; it then was relocated to 1912 Pike Place. The company only sold roasted coffee and did not yet brew coffee to sell. During their first year of operation, they purchased green coffee beans from Peet's then began buying directly from growers.

In 1984, the original owners of Starbucks, led by Jerry Baldwin took the opportunity to purchase Peet's. During the 1980s total sales of coffee in the USA were falling, but sales of specialty coffee increased, forming 10% of the market in 1989, compared to 3% in 1983. By 1986 the company had 6 stores in Seattle and had only just begun to sell espresso coffee. In 1987, the

original owners sold the Starbucks chain to former employee Howard Schultz, who rebranded his Giornale coffee outlets as Starbucks and quickly began to expand. In the same year, Starbucks opened its first locations outside Seattle at Waterfront Station in Vancouver, British Columbia, and Chicago. By 1989 there were 46 stores across the Northwest and Midwest in 1989 and Starbucks was roasting over 2,000,000 pounds (910,000kg) of coffee a year. At the time of its initial public offering on the stock market in June 1992, Starbucks had grown to 140 outlets and had a revenue of $73.5m, up from $1.3m in 1987. Its market value was $271million . The 12% portion of the company sold raised the company around $25m which would help it double the number of stores over the next two years. By September 1992, the share price had risen 70% to over 100 times the earnings per share of the previous year.

Expansion into new markets

The first Starbucks location outside North America opened in Toyko, Japan , in 1996. Starbucks entered the U.K. market in 1998 with the $83million acquisition of the then 60-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks. In September 2002, Starbucks opened its first store in Latin America, at Mexico City In 1999, Starbucks experimented with eateries in the San Francisco Bay area through a restaurant chain called Circadia. These restaurants were soon "outed" as Starbucks establishments and converted to Starbucks cafes. In October 2002, Starbucks established a coffee trading company in Lausanne, Switzerland to handle purchases of green coffee. All other coffee-related business continued to be managed from Seattle. In April 2003, Starbucks completed the purchase of Seattle's best coffeeand Torrezafine Italia from AFC Enterprise for $72m. The deal only gained 150 stores for Starbucks, but according to the Seattle post Intelligenter the wholesale business was more significant.In September 2006, rival DiedRich Coffee announced that it would sell most of its company-owned retail stores to Starbucks. This sale includes the company-owned locations of the Oregon-based Coffee People chain. Starbucks converted the Diedrich Coffee and Coffee People locations to Starbucks, although the Portland airport Coffee People locations were excluded from the sale. In August 2003, Starbucks opened its first store in South America in Lima, Peru. In 2007, the company opened its first store in Russia, ten years after first registering a trademark there. In March 2008 they purchased the manufacturer of the Clover System. They began testing the "fresh-pressed" coffee system at several Starbucks locations in Seattle, California, New York and Boston. In early 2008, Starbucks started a community website, My

Starbucks Idea, designed to collect suggestions and feedback from customers. Other users comment and vote on suggestions. Journalist Jack Schofield noted that "My Starbucks seems to be all sweetness and light at the moment, which I don't think is possible without quite a lot of censorship". The website is powered by the Syndicate software. In May 2008, a loyalty program was introduced for registered users of the Starbucks Card (previously simply a gift card) offering perks such as free Wi-Fi Internet access, no charge for soy milk & flavored syrups, and free refills on brewed drip coffee. A store in Seattle known for its use of the corporation's new ideas reopened in the fall 2010 with a modified interior design in which the espresso machines were placed in the middle of the store. On November 14, 2012, Starbucks announced it will purchase Teavana for $620 million dollars in cash.

Coffee beans of different sizes are used for different products. This is crucial in making the products of same nature different from each other and hence each product has a good demand. Name Measurement Demi 3 US fl oz (89mL) Short 8US fl oz (240mL) Tall 12US fl oz (350mL) Grande 16US fl oz (470mL) Venti 20US fl oz (590mL), 26USfloz (770mL) Trenta 30 US fl oz (890mL) Notes Smallest size. Espresso shots. Smaller of the two original sizes Larger of the two original sizes Italian/Spanish/Portuguese/French for "large" Italian for "twenty" Italian for "thirty"

The PESTLE analysis of Starbucks.(External Environment) Political: Taxation policy High taxation imposed on farmers in those countries producing the coffee bean will usually mean Starbucks pay a higher price for the coffee they purchase. Any fluctuations in taxation levels in the industry are almost certainly ultimately

passed on to the consumer. Recently (June 13, 2003) Tanzania's Minister of Finance harmonized and rationalized local government taxation to boost rural productivity of the coffee bean. Tax was lowered for these 'small holder' farmers and this saving will have been passed on to purchasers of coffee like Starbucks. Deregulation A decade ago, the USA pulled out of the ICA (international Coffee Agreement) that set export quotas for producing nations and kept the price of coffee fairly stable. Coffee quotas and price controls ended. Since the deregulation farmers have suffered and their earnings have dropped. Many have struggled to make a living so have given up. International trade regulations/tariffs - Trade issues will affect Starbucks predominantly when exporting and importing goods. When another country's government imposes a tariff it not only results in an efficiency loss for Starbucks but large income transfers can become inconsistent with equity. This extra charge can turn a bargain into a rip-off. Also, since 9/11, trade relations have been adversely affected between the USA and some other countries. International stability The international economy must be brought into consideration as it can affect Starbucks' sales and markets. The aftermath of 9/11 was an example of an economic downturn that affected the world market. If the world market is in a slump it is not usually the ideal time for a business to look at grand expansion. Employment law A reduction in licensing and permit costs in those countries producing the coffee bean for Starbucks would lower production costs for farmers. This saving would in turn be passed on to the purchaser.

Economic: Economic Growth If growth is low in the nation of location of Starbucks then sales may also fall. Consumer incomes tend to fall in periods of negative growth leaving less disposable income. Consumer confidence in products can also fall if the economic 'mood' is low Inflation rates - Inflation is a condition of increasing prices. It is measured using the Retail Price Index (RPI) in the UK. Business costs will rise for Starbucks through inflation, as will shoe-leather costs as they shop around for new 'best prices' of materials, menu costs will rise as Starbucks have to create new price lists. Also, uncertainty is created when making decisions not least because inflation redistributes money from lenders to borrowers. A firm that borrows L1000 during an inflation period will pay back less in 'real terms' as the value of this money will decline over the period. Competitors pricing Competitive pricing from competitors can start a price war for Starbucks that can drive down profits and profit margins as they attempt to increase, or at least maintain, their share of the market. Globalisation Globalisation of the coffee market has meant farmers of the bean now earn less money than they used to. This can result in a decrease of people willing to do it for a living, which will mean a decrease in coffee produced, resulting in a drop in Starbucks supply levels and probably profits. Exchange rates Starbucks are affected by exchange rates when dealing with international trade. If the value of the currency falls in the country of a coffee supplier this enables Starbucks to get more for their $ or L when importing the goods to their country. This saving can be passed along to the customer. Exchange rates are forever changing throughout the world in today's market. Social: Income distribution Where income is distributed is another factor that Starbucks should look at as this

alsodemonstrates the ideal place to aim their marketing or to locate their stores. Coffee is more of a luxury product so it is those people/places with the most amount of disposable income tospend that should be targeted the most intensely. Attitude to work Starbucks would not want to locate to an area where the local population have a poor attitudeto work. Recruitment would be difficult, training arduous, and staff turnover would be high.Attitudes to work are important in other ways. A large number of workers in large cities nowgo out for their lunch rather than use an internal canteen. Starbucks can use this to their advantage and promote the shop as a place where people can meet up and so it will mean thatthey will get a larger amount of people in their stores at this time of the day. Standard of education/skills When Starbucks are deciding upon new premises they must look at the standards of educationand skills locally. They must be sure there are people who live there with sufficient skills toensure successful operation of the business, or at least the potential to learn that comes with agood education. Working conditions/safety Those people with the most disposable income, e.g. young single professionals etc, will be accustomed to high standards. Starbucks must ensure it's shops are clean and comfortable,service is of the highest order and health and safety issues are fully addressed. Location T ransport needs to the premises must be considered for both staff and customers. Easy accessis vital to ensure there is no excuse for staff to arrive late or for customers not to visit. Age distribution Research shows the average age of the population is getting older and birth rates arestagnating. Starbucks is presently aiming it's product at young people but maybe these viewswill change in the long-term as the market proportion for young people diminishes. The most profitable way forward may be to widen their target market despite the risk of alienating present customers. Health consciousness Good health and foodstuffs associated with healthy living are important I today's

market place, as this is a trend that is occurring at the moment in western societies. Starbucks can use this information when deciding the additional products to sell, as well as coffee, as a largenumber of their customers are looking for healthy alternatives to cakes and biscuits, whichhave been associated with coffee in the past. Technological: IT development Starbucks is always looking to develop and improve its Internet facilities. Starbucks launchedits first-generation e-commerce Web site in 1998. In late 1999, Starbucks decided the siteneeded a major upgrade to enable new functionality and prepare for long-term growth. T oachieve these goals, Starbucks upgraded to Microsoft Commerce Server 2000, one of the keyMicrosoft .NET Enterprise Servers. As a result, scalability and performance have improved,and the company now has the tools it needs to profile and target customers, analyze site data,and deliver new features to the market in the shortest time possible. New materials and processes Developments in the technology of coffee making machines and the computers that Starbucksuse to run their cash registers will enable their staff to work more quickly and efficiently. Thiswill result in customers being served quicker and create the potential to serve more customersin a day This will prevent customers from having to . wait around for long periods thusimproving customer relations along with increasing the customer base. Software upgrades In the short-term, Starbucks must identify the most efficient software upgrades to use to keepup with the competition. This applies to the improving the accessibility of their website(www.starbucks.com) and also improving the speed and quality of the service provided onthe shop floor. Rate of technological change The rate of technological change in the current world market is high, much higher than, say,thirty years ago. Much of this is down to the Internet and the speed with which informationcan be communicated around the globe. Starbucks will need to invest heavily just to standstill in their ever expanding and developing market, and even more so to

try to stay ahead of competitors.

Political Industry-specific rules and regulations The level of relationships between USA and countries that produce coffee beans The level of political stability within a country Social Changing family patterns in USA and Europe Consumer preferences Changing work patterns Changes in lifestyles of population The level of education of population in local markets Changing values among population Environmental Environmental rules and regulations Environmental disasters in countries producing coffee beans Global warming and other environmental issues in a global level

Economic Buying power of consumers Local currency exchange rates Local economic environment within each market Starbucks operates Taxation level

Technological Emergence of innovative technology Biotechnological developments Developments in agriculture

Legal Introduction of policies and regulations by health authorities about caffeine production and consumption Introduction of tougher customs and trade regulations Licensing regulations related to the industry.

SWOT Analysis(internal environment) Strengths Starbucks owns the most recognizable brand in the specialty coffee business, and the Starbucks experience is an irreplaceable differentiating factor.

 Howard Shultz, founder and chairman of Starbucks is the barista to the world. Shultz has practically invented specialized coffee as a mass product, his leadership and innovative vision are very valuable assets. The company has a loyal customer base willing to pay premium prices for Starbucks products. Store location is an important competitive factor, and Starbucks has secured its presence in many of the most desirable corners of the planet. Starbucks is ahead of most competitors when it comes to financial strength and profitability. Weaknesses Starbucks products are more expensive than those offered by the competition, and customers could easily switch to lower priced alternatives in times of economic hardship. Aggressive expansion can be risky, as it can lead to cannibalization and a watered down Starbucks experience. Health implications of coffee consumption are a matter of debate, and many of the companys products have high calories and fat content. Opportunities International expansion is still in its first stages, there is plenty of room for growth in emerging markets. Revamped food offerings, juice, energy drinks and even potentially some alcoholic drinks are smart ways to leverage the brand and attract different kinds of customers. The acquisitions of Evolution Fresh and La Boulangerie fit quite well into this strategy. The company has taken a two sided approach to the home brewing boom popularized by Green Mountain Coffee Roasters (NASDAQ: GMCR). On one hand it produces K-Cup coffee and tea packs for use in Green Mountains Keurig, but at the same time Starbucks is competing with its own premium brewing machine, Verisimo. Introducing new products and different distribution venues is a strategy which Starbucks is implementing successfully, and it still offers many opportunities in the US and abroad. Threats McDonalds (NYSE: MCD) is successfully expanding its Mc Caf stores on a global scale. The fast food giant has an unparalleled geographical presence and lower prices than Starbucks in addition to a globally recognized brand. Dunkin' Brands (NASDAQ: DNKN) makes 60% system wide sales from coffee and other beverages, and the company is expanding beyond its core northeastern U.S. market. Dunkin Brands is another relevant competitor with lower prices than Starbucks. High end competition is increasing too, with companies like Panera (NASDAQ: PNRA) growing strongly both on a total sales and comparable store sales basis. Panera offers high quality food and coffees for premium prices, and in that sense it goes after a similar customer group.

 Starbucks is exposed to commodity price fluctuations and possible supply problems in coffee and other products. Bottom Line Competition is rising, both from lower priced alternatives and premium players. But Starbucks has enough differentiation power to sustain its market share and expand into different business lines and geographies. Overall, this cup of coffee is still quite tasty.

SWOT ANAL YSIS

Strengths Product diversification Established logo, developed brand,copyrights, trademarks, website and patents Company operated retail stores,International stores (no franchise) High visibility locations to attract customers Valued and motivated employees, good work environment Good relationships with suppliers Industry market leader Globalized Customer base loyalty Product is the last socially accepted addiction Widespread and consistent Knowledge based Strong Board Strong financial foundation Weaknesses Size Lack of internal focus (too much focus on expansion) Ever increasing number of competitors in a growing market Self cannibalization Cross functional management

Product pricing (expensive)

Opportunities Expansion into retail operations Technological advances New distribution channels (delivery) New products Distribution agreements Brand extension Emerging international markets Continued domestic expansion/domination of segment Threats Competition (restaurants, street carts,supermarkets, other coffee shops, other caffeine based products) US market saturation Coffee price volatility in developing countries Negative publicity from poorly treated farmers in supplying countries Consumer trends toward more healthy ways and away from caffeine Fragile state of worldwide production of specialty coffees Alienation of younger, domestic market segments Corporate behemoth image Cultural and Political issues in foreign countries source: