Starbucks Strategy

Strengths Weaknesses Opportunities Threats

Issues and Recommendations Facing Starbucks

Corporate Strategy

Competitive Strategy

Functional Strategy

Different Market Expansion Strategies

1) Starbucks used mostly a differentiation strategy; however it had also used a cost leadership
strategy. Its differentiation strategy was exemplified by their stores providing an experience,
offering interesting coffee-related drinks in a theatrical kind of atmosphere, their unique Coffee
blending and roasting process which enabled them to create an extensive product variety, their
employees received great deal of training to become very knowledgeable about coffee in order to
provide an exceptional service to increasingly coffee-educated consumers, and their ability to
find the perfect location for their stores enabled them to maximize market share in a given area
of a city and build their regional reputation which then increased their image to a national level
of high prestige and status. For all these reasons, consumers were willing to pay a premium.
Their cost leadership strategy was exemplified by their supply chain operations where they
received the best transportation rates, and were able to achieve economies of scale by eliminating
redundancy and maximize efficiency. Starbucks was also a cost leader due to its good
relationship with coffee exporters who were "very anxious to become Starbucks suppliers", a fact
that enabled the company to get better prices and reduce bean-sourcing costs. The activities that
created superior value for Starbuck's retail coffee-house business were: Procurement – purchased
more high quality coffee than anyone else in the world. Technological Development. A lot of
research was put into the roasting and blending process to create unique tastes. Human Resource
Management – extensive training and educating of employees (baristas) and turning them into
part of the organizational culture. Outbound Logistics -   finding good Real estate to maximize
market share in certain area and provide the coffee in key places to consumers.
2) Starbucks' core competencies are: R&D – Invested a lot in research of it roasting and blending
of its coffee.
Other factors:
a. Grow the business by constantly adding more stores around the world: The Company has had
tremendous success in opening stores around the world. It has applied its global strategy
effectively and has enjoyed increase in sales from global operations.
b. Store design, planning and construction are also part of the strategy. The company began to
create its own in house architects and designers to design Starbucks locations. Locations are
designed for customers to meet, relax or simply enjoy a peaceful interlude in their day. Each
location was designed to signal "best of class" and to reflect the personality of the community
and the neighbourhood.
c. Product Line: The Company has a vast product line and is constantly engaging in efforts to
develop new ideas, new products, and new experiences for their customers.
d. Employee selection and training are also elements of the strategy. Starbucks employed diverse
people which reflected the community. Starbucks trained each employee to perform to their best
capabilities.
e. Increasing sales by new means of selling: Starbucks indulged in mail order sales. It published
a mail order catalog that was distributed 6 times a year. It also has an electronic store on the
internet though which Starbucks sells its products.
f. Joint ventures and Licensing: Starbucks entered in to joint ventures with PepsiCo and Dreyer's
Grand Ice Cream. It also has licensed agreements with Marriott Host International, Horizon
Airlines, United Airlines, Nordstrom's, Barnes & Noble book store and Wells Fargo Bank

Strengths Weaknesses Opportunities Threats

Strengths

■ Starbucks Corporation is a very profitable organization, earning $600 million and generating
revenue of $5 billion in 2004.

■ Ad Week Magazine recognized the Company as one of the “Most Trusted Brands” in 2003.
“The Starbucks logo is recognized by most, which also helps to retain customers that travel
internationally, allowing them to get the same Starbucks coffee in the same Starbucks cup that
they enjoy back home.”

■ It is a global coffee brand built upon a reputation for fine products and services. It has about
8500 stores in over 30 countries.

■ Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The company is
a respected employer that values its workforce.

■ They have strong ethical values and an ethical mission statement as follows, “Starbucks is
committed to a role of environmental leadership in all facets of our business.”

Weaknesses

■ Starbucks has a reputation for new product development and creativity. However, they are
dependant on a main competitive advantage, the retail of coffee.

■ Overcrowding the Market: If Starbucks has two stores close to each other, they potentially
take business away from each other.

■ They have a strong presence in the United States with more than three quarters of their cafes
located in the home market. Many have said that they need to look for a portfolio of countries, in
order to spread business risk.
 ■ They have been facing certain difficulties in some of its international operations. In 2003
Starbucks ended its joint venture in Shalom in Israel and closed six stores in Tel Aviv.

■ There was the infamous situation after September 11, when the Starbucks in Manhattan
charged firefighters outrageous prices for water, $130 for three cases.

Threats

■ Distribution

■ Marketing

■ Advertising

■ Promotions

■ Gov. Regulation

❑ Minimum Wage?

■ New Entrants

❑ Krispy Kreme?

Opportunities

■ Joint Venture

❑ Krispy Kreme?

■ Innovation

❑ RTD’s & Ice-Cream Breakfast Snack Bar?

■ Market Expansion

❑ China & Europe

■ Menu Expansion?

■ Full Service Breakfast & Lunch Eatery?

Current Events

■ Starbuck hear music

■ Starbuck’s card

■ Wireless Internet
 ■ Brewing equipment

■ Ichiro Card

■ Ethos Water

■ Giving Voices

Because of the diversity of Starbucks competition, in the past three years the stocks do not seem
to be a parallel population to each other. In specific, Green Manhattan stock peaked the highest
of the four around one year ago. Starbucks Corporation stock has been on a steady and consistent
rise for the past five years, and Diedrich Coffee, Inc., possibly because of the increased market
share competition put on by Starbucks Corporation and Green Manhattan Inc, has seen a steady
drop in stock prices over the past two years.

The evidence of this is compelling. People are clearly attracted to the cheaper alternatives right
now, which is why McDonald's stock has been so strong and the stock of Starbucks has been so
weak.

How weak? Since September 14th, 2007, Starbucks is down a whopping 62%. McDonald's, on
the other hand, is up 11.51%. McDonald's just announced very strong third quarter earnings, and
also said that their business is looking very strong over the short-term. Starbucks, on the other
hand, is pretty much the exact opposite, announcing store closures and layoffs to cut costs.

When the economy was doing well, people didn't have any problem with shelling out hundreds
of dollars per month for their lattes and mochas. They also turned their noses up at McDonald's
and hit some of the higher-price alternatives. Now that the economy is reeling and people are
watching where they spend their money, McDonald's has re-established its dominance and
Starbucks is facing a very real crisis.

Issues and Recommendations Facing Starbucks

Corporate Strategy:-

What measures can Starbucks take to ensure that their brand image and reputation for
quality is not tarnished while implementing a growth strategy?

Starbucks has, and will continue to have, a major corporate growth strategy. As corporations
grow there can be a tendency to focus too heavily on increasing output and locations, and less
focus on quality and brand image. Starbucks needs to stay with its values and ideals that have
made it successful. Those ideals are a great place for employees to work, which creates happy,
productive employees with low turnover, which has a direct impact on the customer's experience
and satisfaction. Also a commitment to quality cannot be sacrificed as Starbucks locations will
likely double in the next five years. If Starbucks can keep a consistent atmosphere that combined
with consistent, excellent quality coffee products, they can ensure their brand image and
reputation.

How does Starbucks corporate decision of not franchising affect its business? What would
be the advantages and disadvantages of franchising for Starbucks?

In general, franchising shifts the financial risk from the corporation to an individual. So an
advantage of Starbucks franchising would be to open hundreds of new stores with less risk to the
company, and make profits in doing so. In addition Starbucks would have less research and
development costs because the franchisee would have greater knowledge of the local market in
terms of demographics, psychographics, geographic, and local/state/country regulations. The
disadvantages of franchising are that Starbucks would give up a certain amount of control over
the store, and the way it operates. Despite the high amount of rules and regulations that
Starbucks would hypothetically have in place for a franchisee, the each store would be run
slightly different. If Starbucks franchised, there is the risk of different stores deleting some of the
menu to it's standards, and picking and choosing what products (music, coffee equipment, books)
to make available for the customers. By keeping all stores corporately owned Starbucks can
control and monitor all location's operations and ensure a high employee and customer relations
through consistent management, store operation, and location environments.

What will Starbucks do once the International growth strategy has become saturated, that
is, once Starbucks has penetrated all foreseeable worldwide markets?

Starbucks has the potential for finding a new type of growth strategy once the International
growth strategy is no longer beneficial. We believe that in this case Starbucks will need to
concentrate on its core competency, high quality coffee products, and use a Concentration
growth strategy. Starbucks will stay in the same industry, so the two main sub-strategies would
be Product Development, and Product-Market Diversification. It is important to understand this
in the Product Development phase they would need to focus solely on making their existing
products better. The company could demonstrate Product Market Diversification through
research and development, and creativity. The company could be extra sensitive to changes in
customer tastes, and the external environment. In doing so, Starbucks could quickly react to
environmental changes and make sure to entice as many people as possible into their stores. For
example, Starbucks could start a line children's fruit drinks and "yummy" milkshakes which
would help bring families into the store. This way the mothers and fathers could go to Starbucks
and get their favorite coffee drink while making their children happy.

Competitive Strategy:-
The biggest threat to Starbucks right now, some believe, is that national food servers such as
McDonalds and Denny's could create high quality coffee menus. What could Starbucks do to
counter-act this?

In order to compete against this possible market threat, Starbucks must push to be the first
mover. Starbucks must constantly innovate new products to stay ahead of such competitive
tactics. If they have any chance of stopping the companies from being the innovator, it can do so
by being the innovator itself. Starbucks needs to be extremely aware of what is going on in the
competitive markets. A way they could fight this type of competition is by entering into
agreements, long-term contracts, with the food service companies that they are competing
against. This way their coffee would be sold at these outlets, rather than competitors, and they
would gain access to a new market and increase sales while decreasing competition. This option
would have a chance of harming the companies' brand image and reputation for quality and its
coffee drinking atmosphere. This would, of course, take much top management debate that
would be a "last resort" in the case of an extreme competitive threat. If, for example, McDonalds
entered into a coffee agreement with Diedrich Coffee, Starbucks could respond by acquiring
Diedrich Coffee. Through acquisition Starbucks would ultimately gain a greater market share,
salvage its brand image and decrease the threat of competition. Another possibility would be for
Starbucks to create a subsidiary that specializes in catering to the food service industry. This
would be another way for Starbucks to compete without the risk of damaging its reputation and
brand image.

Could Starbucks gain a significant amount of market share by entering the markets of less
populated cities in the United States, contradicting its current strategy of only entering
markets with high population and affluence?

We believe that Starbucks would gain a considerable amount of market share if it entered into
markets with less population, and affluence. Starbucks has a reputation throughout the United
States, and we think that this image will carry through and make certain profitability and
increased market share in smaller markets. We will demonstrate this opinion by using
Springfield, Missouri as an example. Springfield does not have a Starbucks coffee, yet it the third
largest city in Missouri. According to business4springfield.com, Springfield has a population of
over 300,000 people, a population growth of 2.3% and a workforce of over 180,000 people. Most
people from Springfield are very much aware of Starbucks, which is located in Kansas City and
St. Louis. In Springfield, Starbucks would be forced to compete against Churchills Coffee, which
is well established in the area. Starbucks could use many tactics to overcome this competition
and gain the Springfield market share in the high quality coffee industry. Some tactics include
building many locations combined with a heavy marketing campaign to draw customers from
Churchill's. Another option could be to use Starbucks incredible purchasing power to acquire
Churchill's. This also goes along with its growth strategy and history of acquiring its
competition. Our main point is Starbucks reputation precedes itself. It has shown to be successful
in every new market penetration, and to move into smaller city markets would be no different.
Functional Strategy

Starbucks Corporation continues to grow, and has goals of greater international expansion. For
example, The company plans on opening 500 stores in Europe by 2003 (BBC News Online,
1998). Starbucks plans on opening hundreds of new stores internationally, as well as continuing
to grow in the United States. Research has shown that industry growth rate is slowing. Threats
loom from the Starbucks' general and specific environment. How can Starbucks continue to be
the world leader in their industry? This large question can be partially answered by answering
future functional strategy questions. Functional strategies, according to Mary Coulter, are the
short term goal-directed decisions and actions of the organization's various functional units,
which include production and operations, marketing, and financial/accounting.

In the face of an uncertain future, what kind of Research and Development emphasis and
timing should Starbucks employ in order to facilitate its continuing expansion?

Starbucks is ranked as Fortune's #1 most innovative company in the food services industry.
Starbucks has differentiated its product lines to include teas, sodas, ice creams, foods,
etc.Starbucks organizational culture is one of innovation and creativity. The company has been a
first mover into the market with products such as the Starbucks Card, or the ‘DoubleShot'
Espresso beverage. Starbuck's Research and Development should emphasize product
development. Product differentiation has proven an excellent defense to threats such as
bargaining power of buyers. Developing new products will offset potential risks. For example, if
the prices of coffee beans rise dramatically, Starbucks will be able to use sales from its diverse
array of products to soften the blow of reduced coffee sales. An R&D emphasis on product
development is often synonymous with company growth, and company growth will continue to
be a major corporate strategy of Starbucks.

Starbucks should continue to be a first mover into markets with new products and ideas. An
advantage of being a first mover into a market, according to Mary Coulter, is a reputation for
being innovative and an industry leader. Image will be very important to Starbucks' international
marketing strategies. Starbucks image will be crucial if the company does not want to become a
commodity. Being a first mover of new products into new international markets will be an
excellent way for Starbucks to build customer loyalty and uphold its image as an innovative
company.

Should Starbuck's employees continue to be Starbuck's most important asset? Should

Starbucks' employees, it is shown, share common goals, such as believing in the product they
sell. Starbucks employees are referred to as partners, and even part-time employees are eligible
to receive health-care, participate in the Bean Stock program, and get free coffee! All Starbucks'
employees are well trained. The investment in training obviously pays off, as Starbucks has a far
lesser turnaround than the industry average.

Employees should continue to be Starbucks' most important asset, and resource. The extremely
low turnover rate of employee has contributed to the development of Starbucks' image, and
brand image is vital to the future success of the expanding company.

The Human Resource Management strategy, however, should be tailored to the host country's
culture. Starbucks must be sensitive to the performance appraisal, and compensation techniques
that best fit the country in which they are operating. For example, in the United States, an
individualistic culture, individual reward systems are useful and employed. In Asian countries
such as China, who have collectivist cultures, individual reward systems would not motivate
employees. Rather, group reward systems, and group recognition is coherent with the culture of
the country.

Geert Hofstede's popular cultural dimensions can be used by Starbucks to develop uniquely
tailored Human Resource Management Strategies. The four dimensions are power distance,
uncertainty avoidance, individualism, and masculinity. Understanding these cultural dimensions
can lead Starbucks to the most effective ways to communicate with employees , and appraise
performance. It is critical that Starbucks avoid an ethnocentric disposition of their Human
Resource Management techniques. Tailoring HRM strategies to different cultures is critical to
the success of their brand image.

What marketing differentiation strategy best fits with Starbucks' goal of expansion? How
should Starbucks position their brand in new markets? How can their marketing strategies
offset potential environmental threats such as a slowing of the market?

Starbucks positions their products based on quality and image. Starbucks created the coffee shop
revolution, and they have had the ability to be the public educator on espresso coffee. According
to magazine article found on Starbucks.com, the company's brand is a member of the coming
century's top twenty-five brands. It is critical that Starbucks position their brand for what the
brand stands for: an innovative industry leader that produces high quality products. Brand image,
as already shown, is a goal that all the future functional strategies will work to attain.

Starbucks must differentiate their products based firstly on image and secondly on the product
itself. Considering that international markets such as Italy are renowned for high quality coffees,
it will be difficult for Starbucks to differentiate their products on quality alone. Combined with
its research and development emphasis on product development and being the first mover into a
market, Starbucks should differentiate its new products based on their unique features and brand
image.

Starbucks must position its brand as an experience. The Starbucks' experience is what will entice
new customers to visit their locations and create customer loyalty. First impressions will be vital
in ensuring repeat customers. Starbucks will be able to combat the threats of bargaining power of
buyers, substitute products, and competitive forces by continuing to market based on their highly
differentiated products and unique brand image.

How should Starbucks locate their operations and layout in new markets? Should
Starbucks cannibalize in order to minimize the threats of smaller competitors?

Starbucks' coffee shops are typically clustered in high traffic, high visibility locations. Varying
store sizes also allows Starbucks' to be situated in various settings, such as airports, grocery
stores, office buildings, and street corners. Starbucks has traditionally taken great care in picking
the right locations. In the United States, the average Starbuck's location draws on a population
base of 200,000. In some cities, Starbucks draws on much smaller population bases, flooding the
market and reducing the threat of smaller competition, but increasing the risk of cannibalization.

Starbucks should not flood new markets to drive out threats of smaller competition. If
cannibalization occurs, and Starbucks is forced to close some of its operations, this could
seriously damage their reputation. Starbucks' image is too important an asset in the company's
international expansion efforts to let reputation tarnish it. Starbucks' should continue to locate
their operations in high traffic areas, high visibility areas. The company should continue to take
excellent care in picking locations. It is extremely important that Starbucks' international stores
reflect uniqueness in their location and layout. Having locations in a variety of locations will
ensure large market exposure.

1.   Different Market Expansion Strategies

When Starbucks started to grow, there weren’t many other coffee chains.   Fast food restaurants
provided the best models for Starbucks to follow.   McDonald’s had grown massive through
franchising.   Starbucks owner and CEO Howard Schultz had a different plan in mind.  
Certainly, he knew domestic expansion could have been done through licensing, franchising, or
joint ventures.   He also knew that with a full-equity stake in units, there is a high risk and
involvement, but there is also a high degree of control and maximum reward.  In the US,
Starbucks expanded market share primarily by adding company-owned units.   They had
thorough knowledge of their target market, legal issues, and their competition.   They have no
supply restrictions.   There are no tariffs, quotas, or other export barriers.   In the US, full
ownership was sought.

      In foreign locations, full ownership was not the way to go.   They didn’t have a thorough
knowledge of their target market, legal issues, and their competition.   They often had supply
restrictions.   There were frequently tariffs, quotas, or other export barriers.   For global
expansion to work, they could not do it themselves.   They opted to work with partners through
joint ventures that allow them to take partial equity.   In this way, they could rely on their
partners to get everything running as they expand into new markets.   This method combines the
strengths of both organizations: the Starbucks brand and core products and the local partner’s
intimate knowledge of the market and ability to get things done.
2.   New Lines: VIA Ready Brew & Breakfast

      Starbucks is a global leader in providing coffeehouse coffee, but their share of the total
coffee market is miniscule.   In May of this year, they held less than 10% share of coffee
consumption in North America and less than 1% share internationally.[1]   Coffee drinkers brew
their own.   Starbucks needed to find a way into their homes and offices.   Starbucks made an
excellent decision to find a way to get into more coffee cups.   With VIA Ready Brew,
consumers could have their brew and drink it too.   With this new product, they can sell more to
their existing customers and gain new customers by selling in the grocery store along the side of
market leader Folgers.

      A breakfast sandwich and your morning cup of Joe[2] seem made for each other.   Not so
fast, my friend.   Starbucks made a boo boo when adding low cost breakfast to their morning line
up.   It didn’t work.   It is generally a good idea to sell more to your existing customers.   When
times are tough, it’s generally a good idea to put an offer on the table for the value-minded
individuals.   But Starbucks is not known for discounting.   Starbucks is a premium brand known
for premium coffee at premium costs.   Value is found at McDonald’s (on their value menu).

3.   Coffee Wars

      Starbucks had built its empire by dominating markets.   They appeared everywhere and took
their lion’s share.   Their massive growth to more than 16,000 locations in 50 countries[3] helped
establish Starbucks as the leader in the coffee shop market with high-priced high-quality coffee.  
Then cometh the beast.   McDonald’s is a behemoth with around 32,000 restaurants.[4]   From
these restaurants, McDonald’s launched an attack on the coffee drinking market.   Bam! Zap!
Boff!   Whack![5] Through a high-quality low-cost coffee lineup their goal was first to establish
a foothold and then to expand until they achieve worldwide market domination.   With its enemy
in sight, Starbucks had to defend its market share.   They reequipped Seattle’s Best Coffee with a
low price and a stronger brand to compete against the beast.   With more than 30,000 new outlets
from new partners like Burger King and Subway, Starbucks launched a massive counter attack.
[6]   Kapow! Sock! Whack![7]   Using this strategy of partnering allows Starbucks not only to
stay in the battle, but to increase market share substantially faster than they would have been able
to do otherwise expanding their leadership position against even the mighty McDonald’s.

Beer, Wine, and Cheese

      After the success of beer, wine, and cheese in the U.S., Starbucks will undoubtedly attempt to
expand their new product line into their locations across the globe.   Why wouldn’t they?  
Success in the US wouldn’t have come easy.   They would have had to work through liquor laws
and culture issues.   It would not have been easy, but if it could be done here, it could work
elsewhere – especially in places that have fewer cultural hang-ups.

      Like in the US, global success will not come easily.   Liquor laws in some areas will strictly
prohibit the product line expansion.   In others, it may be easier, but global success will ride upon
the efforts of the vast army of Starbucks partners that run the majority of their global operations.
It is they, the partners, who will help determine if the product line can be added and if it will be
prosperous.   Encouraged by the successes in the US, the partners will undoubtedly make their
best efforts.   They too seek profits.   One must also consider it is already commonplace in some
other countries to have coffee served side-by-side beer and wine.   These countries will quickly
and easily adopt the new buzz coming from Starbucks.