MG 309 STRATEGIC MANAGEMENT

Faculty of Business and Economics

Mid Semester Test

Semester 2, 2017

DFL

Duration of Exam: 1.5 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 1.5 hours

Instructions:

1. This exam has two (2) sections:

a. Section A: 12 marks
b. Section B: 8 marks
2. Answer all questions in Section B. There are choices in Section A.
3. Write your answers in the answer booklet provided.
4. This exam paper has a cover page and 4 pages of questions.
5. This is a closed book test.
6. No materials are allowed in the exam hall except for writing stationery.
7. This exam contributes 20% towards your coursework.
SECTION A: SHORT ANSWERS (ANSWER ANY FOUR OUT OF THE FIVE
QUESTIONS GIVEN) (12 MARKS)

1. Discuss the characteristics of the 21st century landscape and explain how globalisation
and technological changes have shaped it.

(3 Marks)

2. What are the key segments of the general environment? Discuss the role of these
segments in the external environment analysis process.

(3 Marks)

3. Compare and contrast the resource based model and industrial organisation model of
above average returns.

(3 Marks)

4. Explain the need for firms to study and understand its internal environment.
(3 Marks)

5. Discuss with examples from the Pacific Island Countries, the specific risks associated with
using each business level strategy.

(3 Marks)

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SECTION B: (8 marks) Case Study: Starbucks

Introduction

With the economy in trouble, the stock market tanking it is important to start your day with a good
cup of coffee to take on these challenges. Can Starbuck’s sustain its business model and place in
the market? The paper examines Starbucks business and it respective practices. In 1971, the
original Starbucks opened in Pike Place Market in Seattle, Washington by three partners named
Jerry Baldwin, Zev Siegal, and Gordon Bowker. Their focus was to sell coffee beans and
equipment. They purchased green coffee beans from Peet’s, a specialty coffee roaster and retailer,
during their first year of operation. Later, they began buying coffee beans directly from the
growers. In 1983, an entrepreneur by the name of Howard Schultz joined the company; Schultz
felt that the company should sell coffee and espresso drinks as well as coffee beans. The partners
felt that selling coffee and espresso drinks would take away from their primary focus of selling
coffee beans. Since the idea did not work, Schultz started his own company called II Giornale
coffee bar chain in 1985. In 1987, the original owners of Starbucks sold their chain to Schultz’s
II Giornale. Schultz changed II Giornale outlets to Starbucks chains and quickly began to expand.
Starbucks coffee has grown into the largest coffeehouse company in the world with 16,120 stores
in 94 countries such as in Australia, Canada, China, Puerto Rico, etc. Starbucks has thirty blends
and single origin coffee. Starbucks brand coffee can also be purchased in local stores to brew at
home. Starbucks employs over 140,000 employees worldwide with over five million customers a
week. At one point they had typical customers coming in on an average of six times a month while
loyal customers come in on an average of eighteen times a month spending averaging $50.
Starbucks is one of Fortune magazine’s 100 Best Companies to work for in 2008 and is Business
Ethics 100 Best Corporate Citizens for the fourth year.

Competition

Starbucks main competitors are quick-service restaurants and specialty coffee shops. There are an
abundant amount of competitors in the specialty coffee beverage industry. The company believes
that its customers choose among retailers primarily on the basis of product service, service, price,
and convenience. Starbucks, in recent times, has experienced drastic direct competition from large
US competitors from quick-service restaurants. These restaurants have significantly greater
marketing and operating resources than they do. Starbucks is also faced with well-established
competitors in the International markets with increased competition in the U.S. ready-to-drink
coffee beverage market.

Starbucks whole bean coffees compete directly against specialty coffees sold through
supermarkets, specialty retailers and a growing number of specialty coffee stores. Both their whole
bean coffees and coffee beverages compete indirectly against all other coffees on the market.
Starbucks Specialty Operations face significant competition from established wholesale and mail
order suppliers, some of whom have greater financial and marketing resources than the Company.
Starbucks faces intense competition from both restaurants and other specialty retailers for prime
retail locations and qualified personnel to operate both new and existing stores.

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The intensity of rivalry increases as businesses try to improve their position in the industry. In
order to gain new customers, competitors may reduce prices, introduce new products or substitutes,
and increase marketing efforts. For example, on February 26, 2008, Starbucks closed its
operations for several hours across the board to conduct employee training. Dunkin Donuts took
advantage of this opportunity to gain new customers. Dunkin Donuts offered a small latte,
cappuccino or espresso drink for 99 cents from 1 p.m. to 10 p.m. during Starbucks’ shutdown.

The types of food choices, pricing and restaurant ambiance create the diversity among competitors.
Customers may choose among competitors based on preference. Some competitors offer a full
menu while others offer a bakery-café menu. Pricing varies among competitors as well. Starbucks
pricing is considered to be higher than average. The ambiance among the competitors varies from
a fast-food chain where the objective is to get fast service, while the coffeehouses ambiance is
slow-paced and relaxed. New entrants can increase the fight for market share, lowering prices,
and the profitability of an industry. Some existing competitors can retaliate against new entrants
to deter them from entering the industry in the first place. There are seven major barriers/obstacles
to entry that make it difficult for new entrants.

Economies of scale refer to the decline in unit costs as absolute production volume increases.
Starbucks can take advantage of reduced unit costs due to its specialization and expertise through
volume purchase discounts from their supplies. Starbucks retail stores can generally be found in
extremely busy, accessible locations including being located directly off exit ramps to serve a
wider range of customers and promote brand awareness. The stores can also be found in downtown
and suburban retail settings, shopping malls, within office buildings and can even be found on
university campuses. Drive Thru stores continue to develop to reach non-pedestrian customers.

Starbucks relies a great deal on information technology systems in the operations of its supply
chain, point-of-sale processing, and many other business transactions. The management of these
transactions greatly affects the production, distribution, and sale of its products. Any technical
failure within these systems can cause delays in sales and decrease efficiency. Starbucks utilized
its Human Resources to its full capacity. Employees are required to follow Starbucks
comprehensive store operating procedures and attend training classes. Starbucks realizes that its
growth depends considerably on the knowledge, skills, and abilities of key executives and other
employees and its ability to recruit and retain those employees. Government policy exists to
manage entry into an industry with licensing requirements regulations. Opening a coffee shop or
restaurant will require obtaining certain licenses, i.e., business licenses, and tax id’s, among other
possible licenses.

Despite all the barriers or obstacles associated with entry, the most significant barrier to entry is
catching a niche market. Name brand franchises have ultimately captured most of the market share
because of their own personal niche. Looking for atmosphere, for a place to hang out, for velvet
sofas. "We've known for a long time now that Starbucks is more than just a wonderful cup of
coffee. It's the experience,” says Howard Schultz. His genius understanding is that: modern brand-
building is at least as much about the customer experience as it is about the actual product. (Shultz).
The threat of substitute products or services that are produced in another industry that satisfy
similar needs. Starbucks experiences a high threat of substitution because any new product could
be the start of the next consumer trend or craze, creating an initial high demand for that product.

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The highly caffeinated drinks such as Monster and Red Bull have certainly proven to be big sellers
among consumers. Some former coffee drinkers now prefer to get their caffeine from the energy
drinks rather than through coffee products. Soda also contains caffeine and can serve as a
substitute for coffee. Water can also be a substitute product as adverse public or medical opinions
about the health effects of consuming caffeine continue. While Starbucks has a variety of beverage
and food items that are low in caffeine and calories, some of the other products contain high fat
and calorie count have been the focus of adverse health effects. This has caused a significant
reduction in the demand for Starbucks products and an increase in the demand for healthier
products.

The bargaining power of buyers lowers the profitability of an industry by bargaining for more
services and perhaps higher quality. More than 77 percent of all adults over 18 -- or 161 million
people -- drink coffee on a daily or occasional basis, the study reported. According to the 2007
National Coffee Drinking Trends Report, 18- to-24-year olds have contributed to the increases in
coffee consumption in the past year (daily, weekly, and annual consumption). They are also the
only age group that showed an increase in daily gourmet coffee beverage consumption. People
aged 40 and up showed the largest growth in consumption of gourmet coffee beverages over the
past year.

The buyers hold enough power to influence company pricing. The industry depends upon
consumer spending on specialty eatery products; a lack of demand will ultimately force a firm to
change its product line and to lower prices. Starbucks has recently introduced a 99 cent cup of
coffee; this move will help them to compete with the lower priced competitors and the sagging
economy. Bargaining power is the capability to control the setting of prices. The more
concentrated and controlled the supply, the more power it leverages against the market. While
there are many competitors in the specialty eateries industry, Dunkin Donuts, McDonalds, and
Panera Bread are the main players in the industry.

Source: www.ewp.rpi.edu/hartford/~stoddj/BE/starbucks%20final.doc

Discussion Questions:

1. Discuss the main strategic management issues highlighted in this case study. (3 Marks)

2. Discuss the internal environment factors that have major impact on the performance of
Starbucks. (2 Marks)

3. Discuss how Starbucks can manage its industry environment in order to implement value
creating strategy. (3 Marks)

__________________________________________THE END____________________________________

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