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STARBUCKS A STRATEGIC REPORT BY JAMES HEAVEY CONTENTS

Introduction page 1
PESTEL analysis page 1
Five forces analysis page 4
Competitor analysis page 6
Resource Audit page 6
Value system analysis page 7
Core competences page 8
Stakeholders page 8
SWOT analysis page 8
Future strategic options page 9
Recommended option page 12
Critical review page 12
References & Bibliography page 13

Introduction:

This is a strategic report on Starbucks. First of all I will explain the external
environment of Starbucks using PESTEL analysis, Porter's five forces analysis and
competitor analysis. Next will be an analysis of Starbucks' strategic capabilities.
These will be determined using a resource audit, a value system analysis, the
identification of possible core competences and the identification of important
stakeholders. After this I will present a SWOT analysis of Starbucks before discussing
three possible strategic options open to the company. Using the information I generate
I will decide upon the most suitable option and then critically evaluate all the models
and techniques used.

Howard Schultz bought a Seattle coffee company in 1987 then transformed the six
coffee stores into a national, publicly owned company with more than 25, 000
employees and over 1,300 stores. By 2002 these figures had risen to 5,689 stores in 28
countries. He is the man behind, and CEO of, Starbucks.

PESTLE Analysis:
PESTLE analysis is a tool that can aid organisations making strategies by helping
them understand the external environment in which they operate now and will operate
in the future. It is a method of examining the many different external factors affecting
an organisation - the outside influences on success or failure.
PESTLE stands for:
Political - The current and potential influences from political pressures
Economic - The local, national and world economy impact
Social - The ways in which changes in society affect us
Technological - How new and emerging technology affects our business
Legal - How local, national and world legislation affects us
Environmental - The local, national and world environmental issues

The PESTLE analysis will be used to identify and understand the important factors
Starbucks must consider in all areas of the business.

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.
* Government stability - Starbucks should thoroughly investigate the political stability
of any country they plan to expand to. Changes in government can lead to changes in
taxation and legislation. The forthcoming American elections may have an effect on
Starbucks as new legislation or new or existing government may bring in taxes. Also,
those countries in political turmoil or civil war (e.g. Zimbabwe at present) should be
approached with great caution when considering new ventures.
* 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:
* Interest rates - A rise in interest rates means investment and expansion plans are put
off resulting in falling sales for Starbucks and their suppliers. Also mortgage
repayments rise so consumers have less disposable income to spend on luxury
products such as coffee. Low interest rates should have the opposite effect.
* 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:
* Population demographics - Population demographics are a very important factor for
Starbucks as they identify what parts of the population they need to aim their products
at or which parts of the population they need to encourage to visit their stores more
than they presently do. Looking at the table in the case study demonstrating the
percentage of the age groups that drink coffee or speciality coffee it can be seen that
the age groups that Starbucks should be aiming their marketing at are the people
between 35 and 54. They should consider targeting the 18-24 age group as they drink
the least amount comparatively and by encouraging this segment to choose Starbucks
coffee now, there is a chance they may continue to drink it long into the future.
* Income distribution - Where income is distributed is another factor that Starbucks
should look at as this also demonstrates 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 to spend 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 attitude to 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 now go 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 that they 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 education and skills locally. They must be sure there are
people who live there with sufficient skills to ensure successful operation of the
business, or at least the potential to learn that comes with a good 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 - Transport needs to the premises must be considered for both staff and
customers. Easy access is 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 are stagnating. Starbucks is presently aiming it's product at young
people but maybe these views will 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 large number of their customers are looking for
healthy alternatives to cakes and biscuits, which have been associated with coffee in
the past.

Technological:

* IT development - Starbucks is always looking to develop and improve its Internet


facilities. Starbucks launched its first-generation e-commerce Web site in 1998. In late
1999, Starbucks decided the site needed a major upgrade to enable new functionality
and prepare for long-term growth. To achieve these goals, Starbucks upgraded to
Microsoft Commerce Server 2000, one of the key Microsoft .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, analyse 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 Starbucks use to run their cash registers will enable
their staff to work more quickly and efficiently. This will result in customers being
served quicker and create the potential to serve more customers in a day. This will
prevent customers from having to wait around for long periods thus improving
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 keep up 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 on the shop floor.
* Research and Development activity - As a multi-national business empire, Starbucks
has the budget and the resources to have a cutting-edge R+D department. The website
is very accessible, the facilities are state of the art but more importantly new ideas are
consistently being tried in terms of a constantly updating menu.
* 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 information can be communicated around the
globe. Starbucks will need to invest heavily just to stand still in their ever expanding
and developing market, and even more so to try to stay ahead of competitors.

Legal:
* Trade and product restrictions - Starbucks need to be aware of the trade laws in the
various countries they occupy and do business with. They need to ensure they are not
in violation of e.g., religious laws. Also, certain countries impose a tariff that has to be
paid when goods are imported/exported so this must be taken into account.
* Employment law - Each country has varying employment laws. Some may have a
Sabbath day, some may have a limit on the number of hours an employee may work
per week, all will have varying levels of minimum wage. Starbucks should consider
these factors when deciding on relocation.
* Health and Safety regulations - Starbucks may find these regulations are not as
stringent or well enforced in certain countries. It would be wise though to enforce a
universally high standard of health and safety throughout all it's shops to maintain a
good global image and ensure all laws are abided by. Also, by not maintaining high
standards they will be liable for a large amount of civil cases as it is a legal
requirement for them to enable that their staff and customers are safe when they are in
their stores.
* Monopolies commission - If Starbucks consider expanding their operations further
to control an even larger percentage of the market than they already have they will
have to consider the possibility of breaking monopolies legislation as they may have a
share of the market that is too large. This would mean that they would have unfair
advantage over other companies in the same market. This would mean that they could
benefit from economies of scale and would also be able to charge prices that were not
competitive in the market and get away with it due to the lack of competition. The
Competition Commission are in place to try and prevent these situations occurring
[e.g. CC (back then the MMC) block BskyB attempted takeover of Manchester United
in 1999].
* Land use - Starbucks may have to abide by local planning regulations when building
shops or altering purchased sites, as certain areas of land may be protected or
unsuitable. All matters would be addressed by the local government.

Environmental:

* Pollution problems - Starbucks customers create a lot of waste as they often leave
the shop with their cup of coffee and then dispose of it in the street. The packaging for
this cup must be carefully considered to make it as biologically degradable as
possible. Certain other materials can be very harmful to the natural environment.
* Planning permissions - Planning permission may not be granted if Starbucks wish to
build in an area that could be harmful to the environment. The land may be protected.
* Work disposal - Starbucks need to carefully consider the methods in which they
dispose of their waste as there are strict laws in most countries to ensure a firm trading
in their country disposes of the waste that is created in their business in a specific and
efficient way. If they do not follow these laws they may find themselves being
sanctioned, which not only affects them financially but also tarnishes the reputation of
the brand name, as most of the waste created will bear the logo of Starbucks.
* Environmental pressure groups - Starbucks should be aware of the physical and
influential power of groups such as Greenpeace and Friends of the Earth. Any
violation of animal or environmental rights by a company is usually followed by a
swift and attention-drawing protest from one of the groups. Brand image and
customer bases are often irreconcilably tarnished due to the actions of these groups.

Porter's Five Forces analysis:

Porter's five forces analysis is an important tool for analyzing an organizations


industry structure in strategic processes. It helps the marketer to contrast a
competitive environment. It tends to focus on the single, stand alone, business or SBU
(Strategic Business Unit) rather than a single product or range of products.

Porter has identified five competitive forces that shape every industry and every
market. These are: The threat of entry, The power of buyers, The power of suppliers,
The threat of substitutes and Competitive rivalry.

The threat of entry:

The threat of entry covers:

Economies of scale, The high or low cost of entry, Ease of access to distribution
channels, Cost advantages not related to the size of the company, Whether
competitors will retaliate? Government action and How important differentiation is.
There will always be a continuous pressure for Starbucks to react and adjust to these
new entrants. The easier it is for new entrants to enter the market the more
competition there is within the market. Although this really should not pose too much
of a problem for Starbucks as they have a very large share of the market that will be
relatively immune to the threat of new entrants. Starbucks is a company that have
years of experience in roasting specialised coffee, if a company was to enter the
coffee industry it would be extremely difficult for them to offer the same quality of
coffee at a competitive price. As a company's volume increases, so does its experience
and knowledge which tends to decrease the cost of their products
The power of buyers:

Buyer power is likely to be high if a number of conditions are in place. There is a


concentration of buyers, particularly if the volumes of purchases of the buyers are
high, the supplying industry comprises a large number of small operators, there are
alternative sources of supply, the component or material cost is a high percentage of
total cost, the cost of switching a supplier is low or involves little risk, there is a threat
of backward integration by the buyer. This is high where there a few, large players in
a market If there are a large number of undifferentiated, small suppliers The cost of
switching between suppliers is low for Starbucks.

The power of suppliers:

If the market is dominated by few large suppliers rather than numerous fragmented
sources, a suppliers bargaining power is likely to be high. Although suppliers do have
certain amounts of power, it is limited. With Starbucks being 'the most famous
specialty coffee shop chain in the world' reaching sales of $3.28 billion in 2002 and
still expanding they should still be requiring coffee beans for some time. It is safe to
say that the Suppliers need Starbucks, just as much, if not more so than Starbucks
need their supplies. Fortunately for Starbucks they buy their coffee beans directly
from producing countries: Latin America (50%), Pacific Rim (35%) and East Africa
(15%).

The threat of substitutes:


This occurs where there is product-for-product substitution, where there is a
substitution of need e.g. a bald head reduces the need for hair gel, where there is
generic substitution and finally the attitude 'we could always do without ...'.

An example for Starbucks would be if an alternative to coffee was offered e.g. a


customer switching from coffee to tea. Competitive rivalry: Numerous factors
contribute to intense rivalry between existing competitors in an industry. This is most
likely to be high where entry is likely; there is the threat of substitute products, and
suppliers and buyers in the market attempt to control. This is why it is found in the
centre of the diagram. The extent to which competitors are in balance, this is where
competitors are of an equal size which creates intense competition as one of the
competitors tries to gain dominance over the other, high fixed costs in an industry
may result in price wars, differentiation is important as in a commodity market where
products or services are undifferentiated there is little to stop customers switching
between competitors. Starbucks do not really have any competitive rivals that are of
similar size to them so there are not any rivals in the market that would be considered
in balance with them. However, they must maintain their excellent standards and
always be on the lookout for new innovations in order to stay as the market leader.

Competitor Analysis:
Competition is steadily growing against Starbucks each year as the industry grows.
Competitors look to gain an advantage by price cuts, launching a rival product,
aggressive expansion of production to increase market share or inclusion of
significant modifications to a product that other competitors must also undertake to
keep up.
The following are the current figures showing the market share of companies in the
coffee industry. 35% Starbucks 20% Local Coffee Outlets 14% Internet Cyber Cafes
13% Caffe Nero 10% Costa Coffee 8% Coffee

Republic Resource Audit:


The strategic capability of any company is underpinned by the resources available to
it. Practically all resources fall into one of four categories: Physical, Human, Financial
or Intellectual capital.

Physical resources:
The physical resources of Starbucks are the shops that they own, any vehicles they
own for transporting goods and all the equipment that is used to create the cup of
coffee (or pastry etc). Those resources that are younger and in better condition are
deemed more useful to Starbucks.
In 2002 Starbucks had 5689 outlets around the world, which at the time was still
increasing at a 'breakneck speed' and at the end of the 1990's the company was
opening an average 2 stores per day. In January 2004 the company opened their
8000th store (www.Starbucks.com)

Human Resources:
The human resources are the knowledge, skills and adaptability of the workers at
Starbucks. Staff who work to their potential in these areas often become a company's
'most valuable asset'. Schultz, the founder of Starbucks, believes every member of
staff plays an equal part in the 'customer experience' regardless of whether they be
CEO or waiter.
Financial Resources: These are the capital, cash, debtors & creditors, and suppliers of
money (e.g. shareholders) of Starbucks. Obviously for Starbucks the less debt they are
in, the more positive their resource audit looks. Starbucks have a lot of working
capital tied up in the business. Some of this capital includes varieties of whole coffee
beans, foodstuffs, teas, coffee mugs, coffee grinders, coffee-making equipment,
filters, storage containers and other accessories.

Intellectual capital:
These are the intangible/immeasurable resources of Starbucks. This is the information
captured in brands, patents, customer databases, business systems and relationships
with business partners. All these can contain great value and when a business is
purchased these values fall under the price-tag marked 'goodwill'. One of the few
ways Starbucks can protect this intangible information is to ensure employees sign
confidentiality agreements to protect any leaks of knowledge to competitors. Value-
system analysis:
THE VALUE SYSTEM:
SUPPLIER VALUE CHAINS 
FIRM VALUE CHAINS 
CHANNEL VALUE CHAINS 
BUYER VALUE CHAINS

The value system is the inter-organisational links that are vital in the creation of the
product or service of a company. It follows the production of the service/product from
raw material stage right through to the customer purchase. Each instruction for the
development of the product is detailed and explained at each stage of the value
system.

The 'firm value chain' is the most important to a manager because that is their
company, however, a good manager will understand the whole process and how to
manage each individual link and relationship to maximise customer value. Managers
should also need to learn the whole value system because most of the cost and value
creation occurs in the supply and distribution chains.

For Starbucks, the 'supplier value chain' deals with where they get the coffee beans
from that they use to create their end product - a cup of coffee. Starbucks buy all their
beans direct from the farmers in the producing countries cutting out any middle-man
therefore keeping prices to a minimum. The countries that supply them can be found
in Latin America, East Africa and on the Pacific Rim. Starbucks fully appreciate the
need to oversee all aspects of the value system and we can see an example of this in
their determination to obtain the highly sought Narino Supremo crop in 1992. This
acquisition ensured some of the highest quality coffee supplies in the world would be
reaped by Starbucks. The company has close relationships with their coffee exporters.
They maintain this by working directly with them and training them. A good
relationship here is essential and needs to be maintained.
The 'firm's value chain' consists of:
-The Firm's infrastructure; which is about the ways in which Starbucks want their
organisation to run and how it is best to implement systems of planning, finance,
quality control and information management, it is also where they have made the
decision to make high quality coffee from the best coffee beans as this is involved
with the quality control.
-Human Resource Management; It is concerned with the activities involved in
recruiting, managing, training, developing and rewarding people within the
organisation.
For Starbucks this is where they have made decisions about the fact that all employees
are equal, even those on the shop-floor that are working over 20 hours a week receive
bonuses like free coffee and health care coverage, this was to make sure that the
members of staff felt as if they were valued by the company and would continue to
provide a good service. Another implemented scheme is for all Starbucks store staff to
have a comprehensive 24 hour training scheme before they were allowed on to work
directly with customers.
-Technology development;
Starbucks has a large number of areas where it uses technology from regulating their
stock levels to the cash registers. There is also technology to enable customers can to
order their coffee over the internet and then pick it up from the store when they get
there. Some stores now also contain computers where customers can access the
internet.
-Procurement; this refers to the processes for acquiring the various resource inputs to
the primary activities. For instance, the method of obtaining the grade A coffee beans
from suppliers to use in the Starbucks coffee.
-Inbound logistics; For Starbucks this means receiving the coffee beans and other
products that they need to make the products in their stores from their suppliers and
storing these until they are used to make the product that they are going to sell.
-Operations; this is the stage where Starbucks make the coffee in the store and
package the other subsidiary products. -Outbound logistics; this is collection, storage
and distribution of coffee. A customer actually purchasing a cup of Starbucks coffee
from the store. -Marketing and Sales; This is how consumers become aware of
Starbucks coffee and purchase it. Starbucks is a worldwide company and their brand
is recognised all over the world, which means that marketing is not as necessary as it
once was. Most people now recognise the name and associate the brand-image with
high quality products.
-Service; this includes all the activities that enhance or maintain the value of the
product, e.g. installation, repair and training. This area is concerned with the members
of staff that deal with the customers, it focuses on the need to ensure the 'customer
experience' of visiting a Starbucks store is all the more enjoyable due to the
friendliness and efficiency of staff and consistently high quality product on offer.

The 'channel value chain' deals with the outlets Starbucks uses to enable consumers to
purchase their product. Starbucks should know everything that is sold under their
banner and also the sales methods used to customers. They should know the location
of every store along with its surrounding area so it can generate an idea of the
surrounding customer demographics, e.g. students, young professionals, etc.
Starbucks should know in detail all information regarding any business partners they
are involved with, be they retail estate agents - used to obtain premium retailing sites -
or foreign suppliers
- who can take advantage of market conditions.
'Customer value chains' illustrate how value is added by the end buyers of the product.
Customer value can be increased by Starbucks by ensuring the store environment is
how it should be, the coffee is consistently up to a high standard, the menu is broad
and varied enough to cater for most tastes, value for money is achieved and most of
all the service is exemplary. Through training and research and development all these
factors are achievable and maintainable for Starbucks and should ensure a bright and
prosperous future.

Core Competences:
Core competences help to provide firms with a 'competitive advantage'. They are used
to achieve a strategic advantage through activities, skills or know-how, and basically a
general expertise in the development of the product. This advantage will provide
value to customers. 'In the 1990s managers will be judged on their ability to identify,
cultivate, and exploit the core competences that make growth possible - indeed, they'll
have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel
(1990) The aim is for Starbucks to focus attention on competences that really affect
competitive advantage. For Starbucks, these competences include the knowledge of
where the finest coffee beans are grown, the knowledge of how best to prepare them
in order to make the best cup of coffee and also the knowledge of how best to
approach a foreign market as, of all their industry competitors, they are the most
successfully globalised. Core competences can provide potential access to a wide
variety of markets so can be of immeasurable use to Starbucks and their varied
attempts of product diversification. Starbucks have established such a strong
leadership in the coffee market due to core competences such as clear distinctive
brand proposition that focuses solely on a closely-defined customer group and leading
direct marketing skills in the Starbucks Research and Development department.
Stakeholders: A stakeholder is an individual or a group, which has an effect on, and is
affected by, an organisation. The stakeholder approach believes all groups associated
with the firm can benefit at the same time without one party, e.g. shareholders,
suffering. By working with its stakeholder groups the firm can generate more profit.
Main stakeholders in Starbucks are the employees, owners, suppliers and, of course,
the customers. Individual stakeholders may not have too much influence on the way
that Starbucks perform due to lack of sufficient power. Influence has more chance of
occurring if stakeholders share their expectations and grievances with others, uniting
them as a stakeholder group.

Swot Analysis:
Every organization has some strength. In some cases this is obvious, for example,
dominant market shares. In other cases, it is a matter of perspective, for instance, a
company is very small and hence has the ability to move fast. It is important to note
that companies that are in a bad position also have strengths. Whether these strengths
are adequate is an issue for analysis.
Every organization also has some weakness. In some cases, this is obvious; say for
example, a stricter regulatory environment. In other cases, it is a matter of
perspective, for example, a company has 99% market share and is open to attack from
every new player. It is important to note that companies that are extremely competent
in what they do, also have weaknesses. How badly these weaknesses will affect the
company is a matter of analysis.
All organizations have some opportunities that they can gain from. These could range
from diversification to sale of operations. Identifying hidden opportunities is the mark
of an astute analyst.
No organization is immune to threats. These could be internal, such as falling
productivity. Or they could be external, such as lower priced international
Competition.

Starbucks SWOT Analysis


Strengths
- Excellent product diversification: coffee, baked goods, cds, and etc.
- Established logo, developed brand, copyrights, trademarks, websites, and patents
- Company Operated Retail Stores, International Stores
- High Visibility Locations to attract customers.
- Valued and motivated employees: low employee turnover
- Good Relationship with coffee suppliers
- Not a Franchise
- Coffee industry market-leader
- Globalised Weaknesses
- Ever-increasing number of competitors in growing market
- Clustering of too many shops in a small area: self cannibalization
- Cross Functional Management
- Price: expensive Opportunities
- Expansion into retail operations
- Technological advances
- Finding new distribution channels, i.e. delivery - Launch new products
- Further international market expansion
- Asia etc.
- Distribution Agreements
- Brand Extension Threats
- Competition: restaurants, street carts, supermarkets, other coffee shops, other
caffeine products.
- US Coffee Saturated Market by 2004
- Coffee price volatility in developing countries
- Poorly treated farmers struggling to make a living in those countries supplying the
coffee beans - negative publicity.
- Consumer trends toward more healthy ways and away from caffeine

Future strategic options:


Having analysed the external and internal forces of Starbucks it is now possible
to generate three possible future strategic decisions. These strategies will be analysed
thoroughly before one of them is recommended as the best way forward. The options
I have chosen to analyse are Diversification, Mergers and Expansion.

Diversification:
If a business diversifies it starts making new products or offering new services.
Businesses can diversify in two ways; related and unrelated. I propose Starbucks
attempt related diversification; by this I mean diversification reflecting some
connection with the organisation's activities.
Suitability:
Starbucks already sells Brewing and serving equipment, Coffee beverages, Coffee by
the pound, Books, Gifts, Music, Sweets and Tea, so as you can see it has a successful
history of product diversification in the short time it has been around. New products
preparing for launch currently include the Prepaid Starbucks Card, Starbucks Express
(pre-order products) as well as general store changes (installing automatic espresso
machines and a high-speed wireless Internet service).

I propose the introduction of savoury products such as pastries as I feel current


foodstuffs on offer tend to be sugary and unhealthy. If there were products that could
be eaten as a substitute lunch or snack then I feel customers would be more inclined to
stay in the shop longer and have less of an excuse to leave. The more time a customer
spends in a store, the more likely they are to spend more money and drink more
coffee. Thus far Starbucks have proved how successful diversification can be when a
new product can be combined with the existing product. If you really look at
Starbucks' products, you'll see that the company has remained true to its core product,
coffee.
Basically, any product that one could ever need to make and/or enjoy coffee is sold.
The introduction of pastries just seems like a natural progression in the Starbucks
diversification line. Although this option would appear to be a good direction for the
company go in it may have a few problems at the suitability level.
The problem with this option is that it may be moving away from Starbucks' position
as a market leader and pushing them into another market which would mean that they
would be dealing with new competitors (e.g. Greggs Bakers) that are already
established in that market. These firms would have an industry-knowledge advantage
over Starbucks.

Acceptability:
In 1997, Starbucks began offering the popular books recommended by Oprah
Winfrey. Giving customers the opportunity to relax, combining reading with coffee
drinking. It went down a storm because it was the sort of thing that people did at
home whilst drinking coffee. Eating savoury pastries is also done at home with a
coffee.
Each coffee related new product Starbucks have launched has been a financial success
and there is no reason to suggest why this would be anything otherwise. This idea
would also appeal main customer base of young professionals as they come in the
stores on their rushed dinner breaks.
A savoury snack is often all they need to get them through the rest of the day. The
option may be a financially viable and successful campaign but this is not that definite
as they will have a number of new competitors who know the market a lot better than
they do. Their customers may also not like the direction that they are taking as they
may feel that they are not concentrating on what they do well and may become
disillusioned with the new direction of the company.
Another problem at this level is that the key stakeholders may not agree with the
decision and may oppose it due to the fact that they will not like the amount of control
the organisation is losing over what it does well

Feasibility:
Starbucks has moulded its future with a commitment to diversifying its product lines.
Marketing your new product is essential if it is to survive.
Starbucks' marketing strategy needs to identify who their potential clients are, what
sort of product they are interested in, how they can best promote your product to
them, and most importantly how they can provide your product to them in a way that
satisfies their needs Very few changes would need to be made to the resource audit.
The same oven used to bake the muffins could be used for the pastries. A heating
stand would need to be purchased to ensure pastries stayed warm and some simple
training schemes would need to be initiated to inform on cooking times. The pastries
would be bought ready-made but uncooked. However, it may be quite difficult for the
company to find new suppliers. It could be risky, as they would not know if they
could trust the supplier. The second problem in this area is that they may not have the
resources to sell the products effectively as they would not have enough space in their
stores and may have to go through a restructuring process that could become very
expensive.

Mergers: A merger is the marriage of one company's assets with another. If a deal is
agreed on both sides, it is viewed as a merger. However, if one company raids the
market for another company's shares in an effort to force a merger it is known as a
hostile takeover. Essentially, all takeovers and mergers set out to achieve the same
goal: to grow a company in size, value, market share and profit. This strategic
decision is for Starbucks to merge with current Internet Cyber Cafes.

Suitability: Starbucks have already stated that a current aim of theirs is to introduce
Internet facilities to their stores so this strategy makes good business sense in that
respect. Starbucks will not only acquire the premises and customers from these sites
but also the facilities and expertise gained from working in an Internet environment.
This knowledge can be fully utilised in the process of establishing Starbucks' own
Internet facilities in other shops. This idea is compatible with expectations and will
also exploit an opportunity whilst avoiding threats. Starbucks will have found a
synergy between the two companies and also increased market share.

Accessibility:
This idea should be successful because the Internet is something that Starbucks' R&D
department have identified, as a customer need. The Cyber Cafes already hold 13% of
the market-share altogether, that is third position.
Seemingly the only thing holding them back from further growth is the lack of high
quality products on offer and possibly an inferior 'customer experience' offered by the
shop as oppose to that offered by Starbucks. The fact expansion and an increase in
market share looks certain to be achieved should persuade stakeholders to accept this
proposal. An added bonus is that it will enhance the chances of Starbucks new
Internet idea becoming a success.

Feasibility:
A big problem facing Starbucks with this proposal is that there is government
legislation in place to threaten this decision. There are strict rules enforced in Britain
by the Competition Commission (which used to be called the Monopolies and
Mergers Commission) to ensure that companies do not become overly dominant in
any one sector through mergers. The deals are also monitored by the Takeover Panel
to ensure that more rules - this time governing codes of conduct and market
information - are adhered to.
Starbucks is the market-share leader with 35% and Internet Cyber Cafes are in third
place with 14%. These figures together would amount to almost half the market-share
so this decision would be a prime contender to be rejected by the CC on grounds it
would create an unfair monopoly in the market. Another question that needs to be
asked is will the new facilities disrupt the idyllic Starbucks environment? Some
customers may not like the change in atmosphere so Starbucks could risk losing their
clientele.

Expansion:
A firm can expand within a country it already exists or branch out and expand into a
foreign market. Starbucks should attempt to expand into new countries to further
globalise itself.

Suitability:
Starbucks believes the key to growth is rapid expansion so this idea is in line with
their thinking. There is so much exploitable potential out there undiscovered by
Starbucks. It is a suitable move because the US coffee market is reaching saturation
point so the need to expand overseas is more pressing than ever.
As of February 2004 Starbucks shops can be found in 25 countries in the world. This
shows Starbucks have a real strength in this area as they have achieved remarkable
growth for such a young company. It also shows they have experience in cracking
foreign markets. Although this represents a very good start, and they are undoubtedly
the market leader in this area, it also illustrates how much potential is actually waiting
there for Starbucks.

- Current market of Europe: over 50% of world's coffee consumption Well-


developed market, long-standing coffee drinking traditions Affluent population,
room for gaining market share.
- Current market Asia: 12-15% of world's coffee consumption Developing market,
long-standing tea drinking traditions High potential for market growth
- Current market South America: under 10% of world's coffee consumption
Traditional coffee growing countries Less affluent population, room for gaining
market share in frequented commercial districts.

Asia and, in particular, Europe are attractive places to relocate to. There is real
potential due to the population sizes, amount of people with a high disposable income,
development in the market and genuine love for caffeine! When looking at the life
cycle portfolio matrix it identifies that Starbucks is a Dominant Company in a mature
market, when looking at the link between these two it states that in this position they
should defend their position as a cost leader. Overseas expansion is the way forward.

Acceptability:
To make the project a success Starbucks will need help. Previously, joint ventures,
licenses and company-owned operations are mechanisms that have brought success
with previous global expansion. In most countries Starbucks select a local partner that
fits their strict criteria, to help recruit, obtain supplies and learn market conditions
(e.g. in Singapore Starbucks tied up with Bonvests Holdings Ltd).
To ensure the idea is accepted by stakeholders it must be proved to be financially
profitable.
Using collaborated financial data it has been proven that there is a definite positive
correlation between the number of stores owned by Starbucks and profit levels.
Between 1987 to 2002 the number of shops increased from 17 to 5689, while profits
increased at a rate of 30% per annum.
Evidence like this is more than likely to win over the stakeholders.

Feasibility:
This will discover if Starbucks has the financial resources to allow a broad venture
such as international expansion.
I believe they have, especially since the figures suggest they will only be out of
pocket in the short-term.
Starbucks already has a strict, precise and successful policy on the way that they go
about opening new stores so this mean that they already have the resources in place to
implement the action plan.
The major barrier to this option is the fact that if they continue to grow at the rate that
they are growing at the moment then they may have to look at the legislation involved
with having a monopoly share of the market.
Smaller problems that Starbucks may face when attempting international expansion
are; local negative preconceptions about American multinational companies, mass
culture infecting traditional values, large scale service meaning poor quality, people
growing to despise U.S. commercialism and the notion of being "invaded".

Recommended option:
On the basis of all the research and evidence consulted for these three strategic
decisions, I am inclined to suggest Expansion would be the most profitable and
successful venture to undertake. It also seems this decision has the most undiscovered
potential for Starbucks to exploit.
The prospects for this plan look good and, at the end of the day, Starbucks are a strong
brand, and strength of brand is often the key factor in whether a growth strategy is a
success or failure.

Critical Review:
The PESTEL analysis is mainly used to assess the future impact of environmental
influences. It only deals with the external business environment.
Another limitation is that environmental forces especially important to one firm may
not be so important to another. Also, items found in a PESTEL analysis are of limited
value if they are merely seen as a listing of influences.
Although the PESTEL analysis is a good tool used by all companies to examine their
general external environment the number of macro environmental influences are
unlimited.
For the analysis to be more accurate the company must prioritise and monitor those
factors that influence their industry. Porter's Five Forces model can be applied to
practically every company.
However, its main weakness is due to the historical context in which it was
developed. It is best used with companies with simple market structures.
The analysis of all five forces can get very difficult in industries with multiple
interrelations, product groups, by-products and segments. It is important that
companies don't do a too narrow analysis, risking missing important elements.
The model assumes relatively static market structures and it does not really take into
consideration strategies like strategic alliances, electronic linking of information
systems of all companies along a value chain, virtual enterprise-networks, etc.
Porters Five Forces Model has some major limitations in today's market environment.
It is not able to take into account new business models and the dynamics of markets.
The value of Porters model is more that it enables managers to think about the current
situation of their industry in a structured, easy-to-understand way - as a starting point
for further analysis.

SWOT analysis is widely used by businesses to identify internal strengths and


weaknesses. It will highlight external opportunities and threats.
However, it can be undermined by subjectiveness, also ignoring a firm's intangible
resources mean a full picture of their strategic position is not given. Also, this
marketing plan fails to prioritise objectives.
The SWOT analysis is best used only as a guide. In the long term, strategic analysis
will only keep being successful if all staff are made fully aware of its effects upon
decision making.

References and Bibliography:

Chambers I (1997) Business Studies (7th ed.)


Causeway Press Genus A (1996) Flexible Strategic Management (2nd ed)
Chapman & Hall Johnson G Scholes K (2002) Exploring Corporate Strategy (6th ed.)
FT/Prentice Hall www.microsoft.com/resources/casestudies/CaseStudy.asp?
CaseStudyID=10664
http://www.investopedia.com
http://faculty.babson.edu/gwin/indstudy/valuechain.gif