Table of Contents

Executive Summary 1. Starbucks: Company background 1.1 Introduction 1.2 Vision and Mission 1.3 Core Values 2. Industry Analysis 2.1 Porters 5 Forces Analysis of Industry 2.2 Key Success Factors 3. Company Analysis 3.1 Starbucks Strategy 3.2 Competitive Advantage 3.3 SWOT 4. Evaluation of Starbucks Strategy 4.1 Strategic Fit 4.1.1 Develop a strategic vision 4.1.2 Setting objectives 4.1.3 Crafting a strategy to achieve the objectives and vision 4.1.4 Implementing and executing the strategy 4.1.5 Monitoring developments, evaluating performance and making corrective adjustments. 4.2 Sustainability 4.3 Profitability 4.4 Issues 5. The Future for Starbucks 5.1 Recommendations 6. Conclusion

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Executive Summary 1. Starbucks: Company background 1.1 Introduction

Howard Schultz bought over Starbucks in 1987, thus becoming its president and CEO. Under his astute stewardship, Starbucks has grown phenomenally in statue to become a multinational specializing in the specialty coffee market, with 10,241 store locations and profits of $494.5 million by 2005.

1.2 Vision and Mission

Howard Schultzs original vision for Starbucks was: - To be the premier purveyor of the finest coffee - To become a national company with values and guiding principles that employees could be proud of - To become the worlds most respected brand name in coffee - To be admired for its corporate responsibility This vision later evolved into The Starbucks Experience: You get more than the finest coffee when you visit a Starbucks ' you get great people, first-rate music and a comfortable and upbeat meeting place. We establish the value of buying a product at Starbucks by our uncompromising quality and by building a personal relationship with each of our customers. Starbucks is rekindling Americas love affair with coffee, bringing romance and fresh flavor back to the brew. Starbucks mission statement is: To inspire and nurture the human spirit one person, one cup, and one neighborhood at a time. Starbucks is also committed to a role in environmental leadership in all facets of their business. The vision of the Starbucks Experience is both vivid and easily comprehendible. The mission statement further elaborates on the companys purpose by stating specifically how it deals with its stakeholders. Both vision and mission statements are well defined and Starbucks strategic actions are seamlessly aligned with them.

1.3 Core Values

To build a company with soul ' Starbucks would never stop pursuing the perfect cup of coffee. Thus, they were against franchising so as to ensure quality standards across stores, they do not use artificially flavored coffee beans and they did not sell their coffee beans in supermarkets as that would compromise the companys legacy of fresh, dark-roasted, full-flavored coffee. Starbucks also has a Social Responsibility Strategy: Giving back to our communities is the way we do business. This was a broadbased initiative to contribute positively to the communities in which Starbucks had stores and to the environment. 2

To please customers - Employees were trained to go out of their way to accommodate customers requests. Employees were made to feel as if they too are owners of the company. Employees were encouraged to speak their minds without fear of retribution from upper management, involved in and contribute to the process of making Starbucks a better company and were offered good compensation and a comprehensive benefits package

2. Industry Analysis 2.1 Porters 5 Forces Analysis of Industry

|Rivalry ' |( Many Competitors of different sizes (Mccafe, Coffee Bean, Dunkin Donuts etc) in each | |Moderate-High |geographic location | | |( Competitors move to gain market share (expansion by rivals into different geographic | | |locations | | |( Low switching costs for buyers | | |( Potential for further growth in industry | | |( Differentiated Product | | |( High Brand Identity | | |( Niche Market | |Threat of New Entrants ' Moderate-Low |( scalability of business | | |( low barriers of entry | | |( Potential for further growth in industry | | |( Existing rivals expand into other markets | | |( Over-saturation of competitors in market | | |( High Brand preference, High Brand loyalty | | |( Hard to adapt to condition in various geographic location | |Threat of Substitutes ' Moderate-Low |Substitutes for coffee: Tea, carbonated canned drinks | | |( Substitutes readily available, attractively priced and of comparable performance | | |( Consumer preference for coffee is high (to such consumers, coffee cannot be | | |substituted) | |Bargaining power of Suppliers ' Moderate |( Unpredictability of weather makes supply of beans uncertain | | |( Suppliers banding together to do deals with customers | | |( Major customer of suppliers | 3

| |( Increasing number of suppliers | |( Potential for backward integration |Bargaining power of Buyers ' Low |( Consumers single; ungrouped | | |( Strong Brand identity | |( Levels of demand for premium coffee steady | |( low switching costs | |( well informed

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As a whole, the industry still looks moderately attractive as there is still room for growth despite the presence of several strong incumbents in the market. There is still room for potential competitors to carve out a niche for themselves in this huge market.

2.2 Key Success Factors

What are the key elements of Starbucks strategy as of 2006? Which of the five generic competitive strategies best fits what Starbucks is doing to build a competitive advantage?

First Mover Advantage and Sound Strategic Growth Strategy

On acquiring Starbucks in 1987, Howard Shultz attained a first mover advantage by being the first to capitalise on the niche consumer segment of the speciality coffee industry. He executed this through a very aggressive store expansion strategy. Besides targeting areas with favourable demographic profiles and those that the companys operations could support, Starbucks was blanketed in all major metropolitan cities. This Starbucks everywhere approach cut down costs and shortened customer service lines, increasing foot traffic for the stores in all of these areas. This strategy demonstrated the feasibility of business concept as a first mover in specialty coffees and exploited key demographic segments. Starbucks gradually worked on global expansion moving into the Asia Pacific region in 2005.

Customer Service, Work Culture and Strong Employee Support Structure

Shultz knew the importance of a positive customer Starbucks experience. He identified the need to groom and retain valuable store employees who interacted directly with the customers. Through the implementation of enhanced health care benefits and employee stock option plans even while cutting costs, as well as thorough training programs, Starbucks was able to attract and retain passionate employees of the highest quality-Those who shared in the vision of the company.

Dedicated Coffee Sourcing Strategy and Quality Control of Arabica Beans

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Starbucks personnel travelled the globe regularly to producing countries to seek out and establish good business relationships with premium coffee growers and exporters- even to the extent of caring for these communities. In spite of the supplier power it possessed in the premium coffee industry, Starbucks never abused or exploited their coffee suppliers. Instead Starbucks set out to form strategic alliances with Conservation International to encourage social change through contribution to the sustainability of these coffee growers and to help conserve the environment while creating a sustainable supply chain of premium grade coffee suited to Starbucks exacting taste and flavour. Starbucks even went further to open a Farmer Support Centre in Costa Rica and marketed Fair Trade certified Coffee in support of small coffee growers communities.

Community Environment and Store ambience

Starbucks paid much attention in creating a community environment where people could interact casually and were truly comfortable. Firstly, this was the reason behind Starbucks extension of care for its coffee suppliers. Starbucks unique appeal is the sense of belonging that customers feel when they walk into a store. The management viewed each store as a symbol portraying the companys brand and image. Every detail was scrutinized to enhance the mood and ambience in the store. Attention to detail was placed on store furniture, layout, banners, music and even aromas to create a consistent inviting environment. Starbucks was everyones second home.

Easily Adaptable and Flexible Business Model

Although Starbucks had the first mover advantage in the specialty coffee bar industry, competitors and consumer demographics dynamics are constantly changing. Nevertheless, Starbucks has been able to constantly re-invent themselves through the expansion of product lines and its consistent ever-high coffee quality. This adaptability has also allowed the company to stay at the forefront of the specialty coffee industry.

3. Company Analysis 3.1 Starbucks Strategy

Has Starbucks strategy evolved as the strategic vision has evolved? How many times has his strategic vision changed? Is his present strategic vision likely to undergo further evolution? How well do they connect to the strategy and to the manner in which the company conducts its business? Howard Schultz recognized the potential for growth in Starbucks business, and he was only able to implement significant changes in strategy after taking over the company in 1987. The previous owners 5

of Starbucks saw the business as a retailing business, choosing to focus on selling fine coffee beans and keeping the scope of the business small. As such, the business was limited to six stores in only one city, Seattle. As Schultz took over the business, the vision of Starbucks remained largely unchanged. It persisted to be a premier purveyor of the finest coffee, only this time on a worldwide basis. While Starbucks main competitive advantage would still be its quality of coffee, Schultz saw huge potential outside of America and decided that a business model resembling a coffee bar beverage business would be more suitable. Thus, the defining component of Starbucks shift in strategy was its rapid expansion plan. In five years, Starbucks had opened 161 new stores in regions outside of Seattle, such as Chicago, Portland and Los Angeles. The expansion strategy in America continued for the next decade, targeting major metropolitan cities and blanketing such areas with a large number of stores, using a Starbucks everywhere approach. Outside of America, Starbucks mostly employ licensing to expand its business, establishing its presence in large cities of Europe and Asia. In 2005, it had set up 1,734 licensed stores in 34 countries. Starbucks rapid expansion plan required a growing workforce worldwide which could provide the same high quality of service everywhere. Schultz wanted to generate enthusiasm and commitment amongst its employees which in turn will result in better customer service. Hence, it provided its staff with higher pay scales and fringe benefits such as an employee stock option plan and employee stock repurchase plan. Every barista hired around the world was given standardized 24 hour trainings in the first month, while new management trainees attended classes lasting up to two months. Starbucks employee recognition and training ensured they had a quality as well as a motivated workforce to accommodate its worldwide rapid expansion plan. Furthermore, a lot of effort was put into each stores design to enhance store ambience. This created an environment which was able to provide a unique coffee drinking experience for customers sitting in every Starbucks store around the world. Finally, Starbucks use of fair trade certified coffee and its efforts on corporate social responsibility further built up its brand equity. An example of Starbucks contributions to society is the setting up of the Starbucks Foundation to orchestrate its philanthropic activities. With the vision to purvey the finest quality of coffee worldwide, Howard Schultz recognized that setting up coffee bars around the world will be the most viable way to achieve that. In order to be a profit making business, the critical success factor was to establish brand equity strong enough to charge premium prices for its high quality products around the world. Thus, Starbucks strategy was geared towards building up its brand equity and its rapid expansion plan, high quality customer service, the overall Starbucks experience in each store, and its contributions to society all contributed to achieving that goal. As such, Starbucks has become a brand so well-known that it has been able to dominate the coffee industry around the world despite charging premium prices for a product once viewed by most as a mere commodity.

3.2 Competitive Advantage

What are the key elements of Starbucks strategy as of 2006? Which of the five generic competitive strategies best fits what Starbucks is doing to build a competitive advantage?

3.3 SWOT
What is your evaluation of Starbucks social responsibility strategy? Is it sincere or just something the company does and talks about to create a good public image? What grade would you give Howard Schultz for the job he has done in trying to make Starbucks a great place to work?

Strengths
Starbucks is a highly profitable company that remembers its roots and the society. It is a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries. Starbucks was one of the Fortune Top 100 Companies to Work For in 1998, 1999, 2000, 2002, 2003, 2004 and 2005. Starbucks is a respected employer that cares and values its workforce- Extensive Health care benefits and allowing employees to be partners and have a share in the equity success of the company. Besides being known for its excellent products and services, the organization believes in giving back to the society. Starbucks possess 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.' It has committed itself in many alliances and programmes aimed at encouraging social change.

Weaknesses
Starbucks has a reputation for constant new product development and creativity. However, they remain vulnerable to the possibility that their innovation may falter over time as competitors continually rise to the occasion. Although it has a strong presence in the USA where more than three quarters of their stores are located, Starbucks needs to continue expanding globally to other emerging markets and solidify its position in these markets in order to obtain a larger portfolio of countries to diversify their business risk. Another weakness is that Starbucks is purely dependant on one main competitive advantage, the retail of premium coffee. This could make them slow to diversify into other sectors should there be a need to.

Opportunities
Starbucks have always had eyes for new opportunities. In 2002, Starbucks collaborated with T-Mobile USA to provide Wi-Fi Internet services at over 1200 Starbucks stores. In 2004, after a store manager chanced on the opportunity to sell his tapes of the month, the company and introduced Hear Music (Hear Music was acquired in 2000) media bars in stores, which offered custom CD burning services at select Starbucks stores. 7

Starbucks constantly pays attention to new products and services that can be retailed in their cafes. One such example is the sale of Fair Trade products in support of the Fair Trade Labelling Organization. In light of their international expansion, Starbucks has the opportunity to expand its operations especially in many new emerging markets for coffee such as India and the Pacific Rim nations such as China. Starbucks can also consider co-branding with other manufacturers of food and drink (initially with PepsiCo, Dreyers and Jim Bean Brands) to produce products (e.g. bottled coffee and ice cream beverages), as well as brand franchising to manufacturers of other goods and services both have great potential.

Threats
The specialty coffee industry has been growing and with it a rising number of competitors as well. Since its conception in Pikes Place Store in 1971, Starbucks great success has propelled the market entry of many close competitors such Dunkin Donuts and McDonalds in more recent times and these companies pose a significant threat as well. Another threat is whether the market for specialty coffee will continue to grow and stay popular with customers. Premium coffee may very well be just a fad when a new type of beverage or even leisure activity replaces the premium coffee niche market in the future. Starbucks is very much exposed to volatile price fluctuations in coffee and dairy products due to the nature of its business. Unexpected jumps in prices have put a squeeze on profit margin in certain years resulting in the need to raise retail prices. Although fixed price purchase commitments and coffees futures contracts aid to limit exposure to such fluctuations, they still pose a significant threat to Starbucks profitability.

4. Evaluation of Starbucks Strategy

Starbucks uses a broad differentiation, multinational strategy by expanding its product offerings and geographical reach as well as adding new complementary businesses such as Hear Music, into its portfolio. A companys strategy must fit its strengths and weaknesses, external environment and competitive competencies. Firstly, we will evaluate how Howard Schultz and his team had implemented and executed their chosen strategy. After which, we shall look into the sustainability of competitive advantage and profitability of Starbucks.

4.1 Strategic Fit

Starbucks strategy in achieving its vision is to build brand equity as well as to broaden its product lines and geographical presence. We shall now look at the performance of Howard Schultz and his management team in view of the Starbucks vision.

4.1.1 Develop a strategic vision

Rating: A+ Since starting Starbucks Corporation, Howard Schultz had always been clear of the vision he had for the company. He had always wanted to build a large scale network of coffee houses to promote the consumption of high quality coffee. This focused effort is summed up in the vision of Starbucks, to be the upmarket evangelist for high quality, good tasting coffee. This strategic vision has not changed since 1992. The success Starbucks continues to enjoy is testament to its flexibility, seeing Starbucks through from an American retail juggernaut to a worldwide conglomerate. The vision has also focused guidance on operational efficiencies like Starbucks everywhere, Just say Yes and process improvement. Schultz is a master communicator. In the mid nineties, his vision to be the premium purveyor rallied his staff to buy into the 2000 by 2000 target. As a gauge of successful leadership, Starbucks had opened 3200 stores in 2000. Rapid expansion drew resistance from initial investors who believed Schultz was biting off more than he could chew in the quest to fulfill his vision. Schultz had to rely on existing store sales and data on mature stores to prove that demand had not abated despite the speed of expansion. Over a few months, despite a 3rd year annual operating loss of over a million dollars, Schultz broke down the resistance, raising more capital to continue his ambitious plans.

4.1.2 Setting objectives

Rating: A Howard Schultz is known as a micro-manager. He signs off on all changes to Starbucks business plans and personally visits stores to find out how customers are reacting to Starbucks. The result is that Starbucks is a focused and well oiled machine that operates on the objectives set by Schultz. As mentioned earlier, Starbucks has pursued the same operational procedure over the years, relentlessly pursuing Schultzs original ambitions. It is now about 13,000[1] stores strong, and still wildly profitable. While Schultz ambition was big, he had to adjust for the bigger than expected reception to Starbucks. When the 2000 by 2000 objective had been met too easily, Schultz had to readjust his stretch objectives to keep his workers challenged. Short term objectives are set with the goal to overtake key competitors on product performance, quality and customer service. Starbucks management invested heavily in any improvements suggested by staff. By reducing the seconds it takes to fulfill a customer order, the big payoff on the short term plan has been that Starbucks now does twice the number of coffee orders than the industry average.

4.1.3 Crafting a strategy to achieve the objectives and vision

Rating: A+ Schultz knew that rapid expansion brought about commoditisation of new stores. To maintain the image of a premium purveyor, he needed each store to have its own distinctive look, while still maintaining the 9

Starbucks brand equity and keeping costs down. To that end, he hired corporate intrapreneurs, gave them free reign to strategise and innovate, while always keeping them apprised of the Starbucks strategy. He united the team with board members who were apprehensive about the new proposals. The outcome was that per store construction costs were cut by 20%, while each store was distinctive enough such that 2 Starbucks stores sat opposite one another in Vancouver, and both attracted different groups of consumers. All this time, Schultz acted as the final barometer on which projects would be implemented. However, he was not egotistical about it. When ice and flavoured versions of coffee drinks were tested to be a good growth area, Schultz had apprehensions about diluting the Starbucks fine coffee image. However, he allowed his executives to experiment, and now these coffee drinks account for more than 1 billion dollars of annual sales.

4.1.4 Implementing and executing the strategy

Rating: A+ Howard Schultz wants his company to be with soul. Starbucks has maintained its health benefits for all qualifying employees despite recent increases in health care costs. This initiative has not only kept employee turnover low, but also provided free advertising by featuring in Fortunes Best companies to work for list. The channels of communication are always open, the headquarters have no offices and so Starbucks continues to promote effective communication through all levels in the hierarchy. This allows the chain to be adaptable to process improvement.

4.1.5 Monitoring developments, evaluating performance and making corrective adjustments.

Rating: B+ Employee relations have evolved in Starbucks as automation make baristas work more idiot-proof. As such the scope of benefits baristas enjoy have come into question. Alliances with partners in complementary services like the music industry, have forced Starbucks to make adjustments to failed initiatives. For example, CD kiosks to create your own Starbucks music playlist were abandoned in favour of a tie up with Apple iTunes when customers found the service inconvenient to use. Key to Strategy Focus Policy: Relationship with Coffee growers Process Improvement: Observation of customer behavior. Just say yes campaign Health benefits for workers Make Starbucks the most convenient coffee house Practice: 10

8-10 weeks training for Baristas Evangelistic Annual General Meetings Focused research. Controlled customization: in the form of thematic designs, while using mass produced components to save on costs. Business Principle: A company with soul: Evangelistic annual general meetings. Fair trade relations with coffee growers. Be good to workers. Make high quality coffee. Procedure: Employee recognition awards/Training programs Real estate planning Store Design Sales process improvement Acquisitions/Partnerships

4.2 Sustainability
Starbucks competitive advantage lies in its synergistic alliances that provide healthy growth, brand equity, community culture, global expansion plan and competent management team will probably be able to sustain its stellar financial performance within the next decade.

4.3 Profitability
From 2000-2004, Starbucks revenue grew at a steady pace before experiencing a steep drop in 2005. This might be due to a surge in rivals entering the market, thus making the industry more competitive, despite the continued growth of the industry overall. However, Starbucks operating profit margin remained relatively unchanged throughout the years, and even increased in 2005. This shows that Starbucks is able to compete effectively in the market through its pricing power due to its comparative advantage over its competitors. Starbucks leverage ratio and current ratio remains at extremely healthy regions and this bodes well for Starbucks in the future. Financially, Starbucks has performed very well and this could be attributed mainly to its effective strategy.

4.4 Issues
What issues confront the company as of 2006? What should Starbucks management be worried about?

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5. The Future for Starbucks 5.1 Recommendations

What recommendations would you make to Howard Schultz to sustain the companys growth and support continued strong financial performance in the years ahead?

6. Conclusion
Starbucks Mission Statement: To inspire and nurture the human spirit one person, one cup, and one neighborhood at a time. Here are the principles of how we live that every day: Our Coffee It has always been, and will always be, about quality. Were passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We care deeply about all of this; our work is never done. Our Partners Were called partners, because its not just a job, its our passion. Together, we embrace diversity to create a place where each of us can be ourselves. We always treat each other with respect and dignity. And we hold each other to that standard. Our Customers When we are fully engaged, we connect with, laugh with, and uplift the lives of our customers even if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes far beyond that. Its really about human connection. Our Stores When our customers feel this sense of belonging, our stores become a haven, a break from the worries outside, a place where you can meet with friends. Its about enjoyment at the speed of lifesometimes slow and savored, sometimes faster. Always full of humanity. Our Neighborhood Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action bringing together our partners, customers, and the community to contribute every day. Now we see that our responsibilityand our potential for goodis even larger. The world is looking to Starbucks to set the new standard, yet again. We will lead. Our Shareholders We know that as we deliver in each of these areas, we enjoy the kind of success that rewards our shareholders. We are fully accountable to get each of these elements right so that Starbucksand everyone it touchescan endure and thrive.

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Appendix Starbucks is committed to a role of environmental leadership in all facets of our business. We fulfill this mission by a commitment to: Understanding of environmental issues and sharing information with our partners. Developing innovative and flexible solutions to bring about change. Striving to buy, sell and use environmentally friendly products. Recognizing that fiscal responsibility is essential to our environmental future. Instilling environmental responsibility as a corporate value. Measuring and monitoring our progress for each project. Encouraging all partners to share in our mission.

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