Change Management

How do they Manage the Change

Herex Enterprise

SUBMITTED BY:
ABDUL BASIT JAMIL MB083019

SUBMITTED TO:
Dr. Shoaib

DATE: - 22nd December, 2010.

 Summary

If we observe closely, we will come to know that living standards of people are improving
globally. One of the reasons behind it is the increased customers’ focus; they demand offerings of
customized nature. Another fact which cannot be denied is the increased scope and unlimited
boundaries of businesses due to increased demand of customers. Below we have a tale narrating
that how a company named Starbucks drove for its global dominance from year 1971-2004.

Starbucks took its start in 1971 when three academics, English teacher Jerry Baldwin, History
teacher Zev Siegel, and Writer Gordon Bowker invested $1,350 each and borrowed $5,000 from
bank to open a retail store Starbucks at Pikes Place Market in Seattle’s territory, USA. Three
partners were inspired by a Dutch named Alfred Peet who had a store in California. The company
started with offering fine coffees, exotic teas and dark roasting coffee. At the beginning, sales
exceeded expectations therefore; they opened four more stores at Seattle area. In 1980, Zev
Siegel left the company to pursue other interests.

In 1981, Howard Schultz, Vice President and General Manager of Swedish maker of stylish
kitchen equipments and coffeemakers visited Starbucks. He took three sips of dark roasted coffee
and got hooked; he started asking the questions about the company and its offerings. He went
back to his place where he thought about Starbucks all the time; it became difficult for him to
forget those three sips. He went to USA and met Baldwin and Bowker to request them that if he
could be the part of Starbucks. After endeavoring a lot to convince Bowker and Baldwin for this
job he got recruited in Starbucks as a marketing head of retail stores in 1982.

From 1982-1985, Howard Schultz brought new ideas and innovations in Starbucks. He started
with learning coffee making techniques at the back of counter. In 1983, Schultz visited Milan,
Italy where he went inside an ‘espresso coffee bar’ which was a restaurant containing a retail
counter of coffee and a place at other side where people could sit with families and friends to

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have a chit chat with a cup of coffee. Moreover, there were ‘baristas’ who were at the duty to
greet people. Schultz was impressed from this business model, he went back to USA and
convinced Bowker and Baldwin to open espresso bars. The sales at espresso side was more than
retail counter but Bowker and Baldwin were still unhappy as they were risk averse people and
they never appreciated Schultz’ ideas. At last Schultz got frustrated and left Starbucks in 1985.

After leaving Starbucks, Schultz started raising capital for his own company and Baldwin became
his first investor by investing $150,000. At the beginning, Schultz found difficulty to raise capital
but later on he was succeeded and got his first store opened in 1986 at Seattle with the company
name IL Giornale (pronounced il jor NAHL ee) in which Bowker was a consultant and Baldwin
was a director. This new company got success at its start and acquired Starbucks in 1987. In this
way Starbucks became a corporation and Howard Schultz became CEO of Starbucks at the age of
34. Whereas; Baldwin, Bowker left Seattle and went to San Francisco for the purpose of joining
Alfred Peet.

From 1987-1992, Schultz worked a lot to make Starbucks a dream place. He expanded the
business outside the Pacific Northwest i.e. in Chicago, Portland, Los Angeles and San Francisco.
Moreover, he did not limit his business within specific boundaries and expanded the business
globally by entering into the markets of different places in the world. During these years Schultz
did efforts to make Starbucks the best place to work by motivating his employees to increase
their commitment and emotional attachment towards the company. For this very purpose, he
started Stock Option Plan and Stock Purchase Plan for employees. Furthermore, he worked on
store ambiance and offerings as well.

In 1994, Starbucks did joint venture with PepsiCo to use their distribution channels because
Starbucks had to increase distribution channels. In 1997 and afterwards Starbucks started Mail
Order Sales through which they sold coffee making equipments, candies, and pastries etc. In the
same time period Starbucks worked a lot on corporate social responsibilities by starting different
schemes. In 2003, Starbucks competitors were Second Cup, Kraft General Foods, Proctor and
Gamble, Nestle, and some small locals. In 2004, Starbucks’ offerings were Fine coffees, Exotic
teas, Dark roasting coffees (Coffee beans), Italian style hot and cold espresso drinks, Hot and
iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and Music CDs.

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Above, you have seen the evidence of Starbucks’ efforts for global dominance. So, we do not feel
hesitant to predict that if Starbucks continue with such spirit, then there will be no point left as a
mistake on their part and it will become the most respected and regarded brand of this world.

Questions

Q. NO. 1

What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the
customer offerings and differentiators? The expansion strategy? The financial strategy? The
personnel management and social responsibilities? Conduct a five forces analysis?)

Q. No. 02

What was the original strategic vision and objectives and how did they evolve? What is your
opinion of Starbucks’ mission statement? What grade would you give Howard Schultz for his job
as the CEO Starbucks and why?

Q. No. 3

What is your assessment of Starbucks financial performance during years 1998-2003? (Growth
rates, profitability, control of major cost categories, financing, ROE, and P/E ratio?)

Q. No. 04

What were the key issues faced by Starbucks in 2004?

Q. No. 05
What recommendations would you make to Howard Schultz to sustain the company growth and
support strong financial performance in the years ahead?

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 Q. NO. 1

What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the
customer offerings and differentiators? The expansion strategy? The financial strategy? The
personnel management and social responsibilities? Conduct a five forces analysis?)

Key Elements of Starbucks’ Strategy

After going through the case study we found that Starbucks did a lot to bring the innovation in
strategy throughout its journey from 1971 to 2004. We will be discussing the strategies and its
elements in our document. Below, we just have a glimpse of these:-

 The store concept

 Product line (Offerings)

 Competitive edge (Differentiators)

 Expansion

 Idea

 Geographical

 Product

 Distribution channels

 Financial management

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  Human resource management (Personnel management)

 Meeting the social responsibility measures.

In upcoming text we are going to put light on these elements i.e. how Starbucks managed to
move with the dynamic environment which is the basic need for any business to survive.

Store Concept

Starbucks started with the concept of retail coffee store but later on due to the entrepreneurial itch
of Howard Schultz they entered into restaurant business which was the addition to their retail
store concept. This restaurant’s idea came from Schultz’ trip to Milan, Italy where he visited
espresso bars. The theme behind this idea was to provide special sitting areas where families and
friends could sit together and enjoy chit chat holding a cup of coffee with Baristas performing
around to cheer and entertain them. Moreover, they made a strategy to attract the professionals by
adding a facility of Wi-Fi in their stores. In short, they created the ambiance of stores in a way
that could make customers’ feel pleasant.

Product Line or Offerings

The offers are as follows:-

 Fine coffees

 Exotic teas

 Dark roasting coffees (Coffee beans)

 Italian style hot and cold espresso drinks

 Hot and iced teas

 Fresh pastries

 Juices

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  Coffee making equipments

 Coffee mugs

 Music CDs.

Competitive Advantages or Differentiators

Their differentiating elements are as follows:-

 They were the pioneers to introduce espresso bar idea in USA

 Mail order sales

 Word of mouth marketing

 Employee motivation strategies to attain improved employee commitment

 Convenient distribution channels

 Introducing chemical free cultivation process.

Expansion

To expand the business they worked on three areas which are elaborated below:-

Idea

They expanded their business idea by moving towards the restaurant business from a retail coffee
store.

Geographical

They started with expanding the business outside Northwest Pacific i.e. in Chicago, California,
Los Angeles and Portland. For this particular aim, Starbucks made zonal “Hubs” in which they
hired Vice Presidents to induce the culture of Starbucks in newly opened stores. After their
success of this little geographical expansion, they began to enter into the international market and
for this purpose they brought local license holders into the partnership to control business
activities in their relative regions.

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Product

Back in 1971, they started with Fine coffees, Exotic teas and Dark roasting coffees (Coffee
beans). Later on they expanded the product line by adding Italian style hot and cold espresso
drinks, Hot and iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and
Music CDs.

Distribution Channels

One of the expansion strategies was to do the joint venture with PepsiCo in 1994. The purpose of
this venture was to use the distribution channels of PepsiCo which were convenient so that
Starbucks’ distribution channels could also become convenient eventually.

Financial Management

Schultz asked for the “Centralized Information Systems” to have a check and balance on sales in
thousands of stores around the world by keeping the back up of transactions. Another strategy
which they adopted was to convert the form of business from partnership to Private Company
which opened the doors for raising firm’s capital.

Human Resource Management or Personnel Management

Following are the efforts they did to achieve employee commitment:-

 Starting Health Care Program for permanent and part time employees as well

 Paid vacations

 Stock Purchase Plan (Employees could buy shares at discounted rates)

 Stock Option Plan (Shares were offered on 12-14 percent deduction of basic pay)

 30 percent discounted products.

Meeting the Social Corporate Responsibility Measures

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Starbucks did few efforts to meet its social corporate responsibility measures:-

 In 1991, they organized concerts to sponsor CARE (The world relief organization)

 In 1995, they provided financial assistance to Agricultural Improvement Projects

 In 1997, they provided technology to the coffee growers of Guatemala.

 In 2002, they started Green Store Task Program which was to reduce, reuse and recycle
the wastes.

Five Forces Analysis

Substitute
product

Minor pressure
building

Suppliers’
Bargaining
bargaining Competitors
power of buyers
power
Exerting weak
Higher level of
Glad to supply pressure
attraction
inputs

New entrants

High entry
barriers

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 Q. No. 02

What was the original strategic vision and objectives and how did they evolve?
What is your opinion of Starbucks’ mission statement? What grade would you
give Howard Schultz for his job as the CEO Starbucks and why?

Strategic Vision

“To establish Starbucks as the most recognized and respected brand in the world.”

Strategic Objectives

 They wanted to have 15,000 stores by the year-end 2005.

 They aimed to provide a great work environment and treat each other with respect and
dignity.

 They believed in taking on diversity as an essential component in the way they do

business.
 To apply the highest standards of excellence to the purchasing.
 Roasting and fresh delivery of coffee.
 To develop enthusiastically satisfied customers all of the time.
 To contribute positively to their communities and environment, and recognize that
profitability is essential to future success of business.

How did they evolve?

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At the earlier stages they promised themselves that they will not leave even a single stone
unturned to make Starbucks the most recognized and respected brand in the world. Therefore,
they thought that this could only be possible if they will develop these strategic objectives
because these are basis to earn the respect and fame for any business.

Mission Statement

“To inspire and nurture the human spirit— one person, one cup,
and one neighborhood at a time.”
Our Opinion
This mission statement along with strategic objectives provides a focus for employees as they
make strategic decisions. It not only supports the employees, but supports the customers as well,
making a note that they should be satisfied all of the time. The mission shows alignment with the
vision by stating how the company plans to reach the broad goals set by the vision. Another
supporting sentence of strategic objective aligned with the mission statement shows that the
“company applies the highest standards of excellence to the purchasing, roasting and fresh
delivery of its coffee” which supports the idea that Starbucks uses the best available resources to
give it a recognized and respected name.

Grade A- to Howard Schultz

We deducted his marks a bit because he left the spaces in the area of marketing as he did not
spend adequate budgets on advertising and product innovation. Last but not the least is that he did
not attempt to study the environment properly while entering into new geographical areas e.g. he
opened a store down street in Chicago which was not a good idea due to cold weather conditions.
On the other hand, this higher grade to him is due to the reason that he did not leave the space for
us to give too many recommendations.

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 Q. No. 3

What is your assessment of Starbucks financial performance during years

1998-2003? (Growth rates, profitability, control of major cost categories, financing, ROE, and
P/E ratio?)

Growth Rate
Years 1998 1999 2000 2001 2002 2003
Growth rate 0 0.2889 0.29095 0.2164 0.2415 0.2391

Profitability
Years 1998 1999 2000 2001 2002 2003
Operating profit margin 8.34 9.29 9.74 10.57 9.6183 10.42

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 ROE
Years 1998 1999 2000 2001 2002 2003
Return on equity 8.6 1.58 8.23 13.1 18.35 12

Price Per Earning Share

Years 1998 1999 2000 2001 2002 2003
Price Per Earning Share 0.19 0.27 0.24 0.46 0.54 0.67

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 Control of Major Cost Categories

In this portion we have analyzed that how Starbucks controlled its fixed cost. If we talk about
the locations, it was very expensive to purchase land and then develop it as a store, so to
overcome this problem Starbucks started leasing the land for long term periods. In our
opinion, it was a quit impressive move to cut down its fixed cost. Secondly they observed that
to get the license was too costly for them, so they made contracts with the partners who had
license with them.

Financing

For the financing, Starbucks instead of taking loans preferred raising the equity. It was a
better idea to generate capital because they did not have to pay any short term and long term
interests against the borrowings.

Q. No. 04

What were the key issues faced by Starbucks in 2004?

Every company faces major challenges, even companies that are as successful as Starbucks.
Although they have an outstanding reputation, have won many awards like top sustainable
retail store award and most ethical company award etc, and even give back to their
community, they are still facing challenges like any other company.

Following are the most obvious challenges that Starbucks is dealing with:-

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 Schultz was overflowing with the ideas for the company, early on he noticed that
first-time customers sometimes felt uneasy in the stores because of their lack of
knowledge about fine coffees and because store employees sometimes came
across as a little arrogant or superior to coffee beginner.
 Howard Schultz when came back from Italy shared his ideas for modifying the
format of Starbucks’ store with Baldwin and Gordon Bowker. But instead of
winning approval for trying out some of his ideas, Schultz encountered strong
resistance but after a year Schultz succeeded in winning the approval from
Baldwin and Bowker.
 After sometime Baldwin and Bowker again went against the ideas of Schultz so he
became so frustrated and left Starbucks in late 1985 to open his own separate
Espresso Bars in high-traffic down town locations.
 Schultz acquired Starbucks in 1987 and after the 20 months of acquiring, some
employees felt unappreciated that there was a feeling of prior management had
abandoned them. So, Schultz decided to make building a new relationship of
mutual respect between employees and management.
 Starbucks lost its money when it expanded market to Chicago because in Chicago
that was the first downtown store opened on to the street rather than into the lobby
of the building where it was located; in the winter months, customers were
hesitant to go out in the wind and cold to acquire a cup of coffee. It was expensive
to supply fresh coffee to the Chicago stores from Seattle warehouse.
 The challenge to Starbucks, in Schultz view, was how to attract, motivate, and
reward store employees in a manner that would make Starbucks a company that
people would want to work for and that would generate enthusiastic commitment
and higher level of customer service.
 A values and principles “crisis” arose at Starbucks in 1989 when customers
starting requesting nonfat milk in making Cappuccinos and lattes (an espresso
coffee with frothy steamed milk) So, Starbucks started selling both fat milk and
nonfat milk Cappuccinos and lattes.
 They were facing the issue of Wi-Fi (wireless internet service) in 2002, the
number of accesses was in the millions by T-Mobile; internal research showed that

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 the average connection last approximately 45 minutes So, in October 2003,
Starbucks announced that they will expand Wi-Fi capability to additional locations
and would have 2700 stores equipped with wireless Internet access by year end.
 They were also facing challenges from their competitors. In 2003 there were an
estimated 14000 specialty coffee outlets in the United States but they were not
competent enough to exert pressure at Starbucks.

Q. No. 05
What recommendations would you make to Howard Schultz to sustain the
company growth and support strong financial performance in the years
ahead?
Recommendations
After analyzing the whole case study, we became able to give few suggestions to Howard Schultz
which can be handy to sustain the growth and support strong financial performance in the
forthcoming years:-
 He should spend more budgets on advertisement of products.
 He should bring innovations in his products because we saw in this case study that he was
inspired by espresso bars so he imitated the whole theme of Italian espresso bars and the
idea of dark roasted bean was an older one as well.
 Before entering to any new geographical region he should study the market environment
of that particular region as we saw that at Chicago there was an issue of cold weather and
his store was at down-town-street. Furthermore, the labor rates and rents of building were
higher as well.
 At the stores Starbucks’ technique to teach customers about how to make coffee was not a
good idea because it does not support their business model. Therefore, it should be
avoided in future.
Above elaborated things were having details about the strategies of Starbucks which drove it for
the Global dominance till 2004. Starbucks is in fact the recognized and respected brand in the
world and if it can overcome the shortcomings which we identified then nobody can create bother
for it to be successful and there will be no point left as a mistake on its part.

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Reference
www.starbucks.com
Case Study “Starbucks in 2004: Driving for Global Dominance” written by Arthur A. Thompson,
Amit J. Shah and Thomas F. Hawk.

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