Case analysis about Starbucks

Instructions

It is a case analysis about Starbucks and no external sources should be used (only source is the case. I have completed a couple of pages already. and have attached a sample paper from last semester

Solution

Management

Introduction

Starbucks is a world leading company that sources, distributes, and serves fresh brewed coffee among other food products and drinkware. Before it became a household name, the company was a tiny 9 store operation in Seattle, Washington. Former management had an entirely different vision for the company (they wanted to stay in the bean business rather than sell beverages) but under the leadership of Howard Schultz, the company has blossomed into what it is today. “Schultz’s vision is for the company is to become a national company with values and guiding principles that employees could be proud of.”  Which is a vision that is partly accomplished as Starbucks is not only a national but an international company with stores in virtually every corner.

The company has integrated itself in the market to become one of the world’s most successful companies. Its strategy to success is a differentiation strategy. At first, there were doubts and others were “skeptical that people would pay $1.50 or more for a cup of coffee”, but management and Howard Schultz have sucessfully achieved their goal to distinguish themselves from competitors by creating an atmosphere unlike any other coffee place around. The goal was for the customers to feel like it’s their “third place” (first being home and second being work). The company went to great measures to make that happen by performing big strategic decisions such as making all their stores consistent looking and small decisions by asking their employees to refrain from perfume, sealing up food, and banning smoking in order for the store smells like fresh coffee. Starbucks has also strengthened its position in the market and achieved it’s goal of brand awareness by entering into agreements with successful companies like Pepsi, Horizon Airlines, Wells Fargo and several hotels like the Hilton, Sheraton, Hyatt, Radisson and Westin.

Strategic Issue

Recently, a change is needed for Starbucks and the company needs to be strategic to one of its most important issues which is achieving profitability like previous years. This issue came up due to the economic crisis (2008-2009) and resulted in major consequences such as the closing of 800 stores and fewer numbers of new store openings. In addition, Starbucks’ total employees were trimmed by more than 200 in order to save costs. Operating margin is also reduced from 14.3 percent in 2007 to 6 percent in 2008. 

Moreover, strong competitors are entering the industry which may affect the company’s future prospects. Some of the major competitors include Costa, Tim Hortons and Peet’s Coffee (which is owned by Starbucks’ original founders). It is therefore crucial for Starbucks to have a good strategy in order to be the place coffee drinkers go to in order for them to boost sales and cause the company to return to a profitable growth. CEO Howard Schultz agrees that “that new strategic initiatives and rejuvenated strategy execution efforts were very much needed at Starbucks”. Management should come up with good initiatives so that the company goes back to what it once was; including financial strategies, customer strategies or internal business process strategies. Several important questions should be asked by management such as; How will Starbucks be able to achieve profitable growth in the  years to come? How can the company strengthen customer awareness and loyalty? How can Starbucks improve business activity and processes so that the company will be more efficient?

External Environment

The external environment of a company is crucial to develop strategic decisions and every company needs to take into consideration its external environment as directly affects them. In this section I will be analyzing Starbucks’ external environment using Porter’s five force analysis, a macro environment analysis using PESTLE, and an analysis of the coffeehouse industry profile and attractiveness.

 Porters Five Forces Analysis

            Porter’s Five forces is a useful tool for evaluating a firm’s competitive environment as given in appendix 1.

Rivalry among existing firms

The retail coffee and snacks store industry is known to be extremely competitive as there are many companies in that industry rivaling against each other. As a result, there are many coffee shops from small coffee business to large chain corporations such as Starbucks, Costa and Dunkin Donuts. Rivalry among existing firms is thus intense. These large companies strive to achieve a large customer base at the same time so there is a lot of rivalry in attracting customers and trying to keep them loyal to the company.

 Threat of Substitute Products

The threat of subtitle products in the retail coffee industry is weak. Unlike technological products, the food and beverage industry is consistent throughout the years because their products are a staple and so the threat of a substitute for coffee is fairly low. It is however Important to achieve a strong position in that industry in order to operate efficiently and maximize profits.

Threat of New Entrants

The retail coffee and snacks store industry is very easy to enter into because of the low start up cost. Therefore, the threat of new entrants is intense. Unlike technology or pharmaceuticals which need a lot of capital and knowledge to be established, food and beverages are simpler to operate. This is why competition is high and why new coffee shops are established virtually every week. As a result, companies need to be objective by having a good strategy either differentiation or by selling their coffee/food at competitive prices. Starbucks has to contend with new entrants in the form of fast food chains such as McDonalds who have started offering premium coffee drinks at prices lower than what it charges.

Buyers Bargaining Power

            Starbucks operates in an industry characterized by strong levels of buyer power. The industry has many sellers, most of whom have managed to create brand awareness among customers. Buyers are aware of the various options that exist in the market and can switch between the varuious sellers with relative ease. There are no switching costs involved, which means consumers face no hurdles in moving from one seller to another. However, the fact that there are no buyers who are big and powerful means that it is not possible for the buyers to dictate prices.   

Bargaining power of Suppliers

            Suppliers hold a moderate level bargaing power over Starbucks even though it is not as significant. The industry features a high number of suppliers so that no single supplier can claim to possess a high level of control over the the the supply of inputs. Starbucks has a choice of suppliers and can choose to switch between them. Therefore, that limits the ability of a single supplier to significantly raise the prices. However, Starbucks faces switching costs when moving from one supplier to another, and that impiers a moidetate level of bargaining power among suppliers.

            Overall, the application of Porter’s five forces provides a clear picture of Starbucks’ competitive position. The company faces the threat of competition from its rivals who can eat into its market share. However, the firm sells unique products and thus faces a low level of threats of substitutes. While Starbucks has established a strong brand recognition, it still faces competition from new entrants due to the industry’s low entry costs. Apart from that, Starbucks has to deal with buyers’ bargaining power because they can switch to other sellers without incurring switching costs. Lastly, the firm’s suppliers have moderate bargaining power because Starbucks would face switching costs moving from one to another. However, that power is reduced by the fact that there are many suppliers, implying that a single supplier may not possess significant levels of power.

Macro Environment 

            An analysis of the macro environment is important as it provides a picture of how the environment in which the company operates affects it. Starbucks must thus remain aware of the external factors that are pertinent to its operations and how they affect its ability to generate profits.

Political Factors

            The operations of Starbucks are subject to political factors. A stable political environment allows the company to thrive and operate uninterrupted. However, political instability can have an adverse effect on the company and limit its operations. Therefore, the company requires a stable economic climate to operate successfully.

Economic Factors

            The economic climate can have a marked impact on the operation of Starbucks. Situations such as the 2008 financial crisis can have a negative impact on the company’s operations. In such an event characterized by unemployment and poor economic performance, Starbucks could struggle to sell its products and that could have an unwanted effect on the company’s profitability. The company might even be forced to lower its prices to sell under such conditions. On the other hand, good economic performance can have a positive effect on Starbucks. The company would be able to grow its sales and to increase its profitability. In an event where people are generally doing well and consumers have significant levels of disposable incomes, the company is likely to make more sales.

Technological Factors

            An organization must be alert to the impact of technology on its business. In the case of Starbucks, technology affects its various functions such as supply chain, marketing, and finance. The company’s performance could suffer if it failed to incorporate technology into its operations. Consequently, the company has entrenched technology into its operations. For example, the firm has a mobile application, which allows for customer interaction and making of orders. The technology allows it to gain useful insights on the customers and their consumption trends, and that is good for business. However, the company needs to keep adapting to the emergent technological trends for it to remain relevant. Failure to make the appropriate investments could lead to the firm falling behind the competition.

Social Factors

            Social factors also influence the performance of Starbucks. The habit of coffee drinking is seen as a desirable social habit and that drives up demand. Changing demographics may also have an impact on the company’s operations. A growing population will demand more of Starbuck’s products. Apart from that, the level of people’s disposable incomes also has an impact on the demand for Starbucks products.

 Industry Profile and Attractiveness

Environment

People are getting more environmentally cautious and are concerned about climate change. This is important for Starbucks because it is one of the biggest beverage companies and so they have a lot of plastic waste, so the company needs to be strategic about plastic consumption and the environment in general. The company should thus turn to environmentally- friendly cups to increase its appeal among the masses.

Industry Profile and Attractiveness

The analysis reveals that the industry is characterized by competition and that brand building is important for the survival of an organization. More entrants want to get into the market, and that will only intensify the competition. The analysis reveals that the industry is still attractive to the incumbents in spite their lack of growth for some years now. The key success factors for the industry include creating a strong brand, quality products, and high levels of operational efficiency. However, the industry faces challenges such as intense competition and the need to continuously keep rebranding to stay ahead. However, the industry remains attractive to current players given that sales were growing even in the face of a worsening global economy.

Company Situation

The assessment of a company’s situation is important when performing an evaluation of a firm. It is based on a host of indicators that help to present the state of an organization at the present. Perhaps the most critical aspect when assessing a company’s situation is an analysis of its financial status. The company experienced declining sales growth from 2005 to 2008 before seeing negative revenue growth in 2009 as seen in appendix 2. The declining growth followed by negative sales growth indicates that the company is in  the decline phase. Therefore, that that is something that should be of concern to the management of the firm.

Financial Analysis

The financial analysis addresses four important areas that provide a picture of the company’s performance. Firstly, one must consider the profitability of the firm. This measure is important considering that the primary aim of the organization is to make profits. The company’s profitability has been declining as evidenced by its return on equity (ROE). The ROE initially increased from 2005 to 2007 before declining in 2008 and 2009 as shown on appendix 2. The declining ROE is a concern going forward as it demonstrates the company’s inability to generate the desired value for its shareholders. The evaluation of the company’s profitability reveals concerns and it is little wonder that the CEO sounds concerned over the company’s performance and stresses the need to return the firm to sustainable profit growth.

            Secondly, the analysis should include an evaluation of the company’s liquidity situation. A breakdown of the firm’s liquidity shows that it declined from 2005 to 2007 before slightly increasing in 2008 and 2009. However, the levels did not rise to the 2005 levels as shown on appendix 2. The results do not the paint a good picture for the company considering that its liquidity ratio has remained below 1 for all the years apart from in 2005. In such a case, the firm is at risk of suffering a liquidity crunch. However, the management can take encouragement from the fact that the liquidity ratio increased from 2007 to 2009 which indicates that the company could achieve healthy liquidity levels.

            Thirdly, it is important to evaluate the leverage of the company. This is given by the debt-to-equity ratio. The ratio rose from 2007 to reach above 0.5 in 2007 and 2008, levels which are quite concerning. However, the company managed to reduce it to 0.18 in 2009, which is commendable as shown in appendix 2. Having high levels of above 0.5 for the 2 years is something that should cause the company a lot of concern. However, the company managed to reduce the ratio to desirable levels in 2009. The 2009 ratio of 0.18 means that the company is safe as it is not overly levered and is not at risk of sinking into a debt crisis. The management should ensure that the leverage levels remain within desirable levels in the long-term to avoid unnecessary risk for the firm.

            The fourth aspect of the financial analysis considers activity as given by the asset turnover ratio. The ratio increased from 2006 all the way to 2009, indicating better utilization of the firm’s assets to generate revenues. The management can take it as a positive as it strives to take the company back to the top. Therefore, the company can use this metric as a springboard to guarantee better performance in the future.

            Overall, Starbucks’ financial picture does not look good. The company will need to do more to sustain its profitability over the long run and generate wealth for shareholders. The firm’s liquidity is an area of concern given that the ratio has been below 1 for four years, making the company vulnerable to liquidity shocks. Apart from that, the company needs to maintain healthy leverage so that it is not overexposed to debts.

SWOT Analysis

The SWOT analysis is a critical tool for assessing a company’s prospects.

Strengths

            Starbucks has several strengths that can help it to advance into the future. They include its strong brand positioning and recognition and a loyal customer base. Another strengths is the company’s tradition of creating products that resonate with the masses.

Weaknesses

            Starbucks has several weaknesses which could hamper the company’s progress. For starters, its business model is not unique and other businesses can replicate it. Apart from that, the company’s products are as deemed as high- priced, and that could scare away potential customers.

Opportunities

The greatest opportunity for Starbucks is its presence in international markets where it has room for more growth. It could leverage its strong brand presence to get even more growth in overseas markets.

Threats

            Starbucks inflexibility and rigidity in the way it operates could prove to be its weakness especially as other competitors who are more nimble enter the market. Therefore, that could see the company losing out on its market share.

Recommendations

            Starbucks faces the challenge of growing its profit sustainably while continuing to remain attractive to its customers in the face of shifting conditions in the operating environment.

Strategy Recommendations

The recommendation is for the company to find new ways of generating revenues and providing enhanced customer value. The management needs to come up with means of transforming the company’s brand so that the company remains competitive and profitable. Top of the agenda is a revamped menu offering that captures the aspirations of the customers and keeps them wanting to come back to the firm’s stores. One of the considerations that the firm should make in the process is including options for price- sensitive customers to prevent them from being swayed by the competitors offering cheaper options.

Objectives

            Starbucks needs to monitor its performance through objectives that are smart. These objectives will allow the company to monitor its performance and know the direction in which it is headed. The first is positive profitability growth. The company has to prioritize its profitability that has not been impressive for a while. The company should implement continuous measures that allow it to maintain its profitability. Another metric that the company management should consider is the customer numbers. Starbucks should have a goal of growing the traffic into its stores because that will transform into revenues. While prioritizing financial measures, the company should also track the nonfinancial aspects of its performance, as they are useful indicators. Such measures include staff and customer satisfaction for which the company may obtain the information through surveys. Starbucks can then use the data obtained to improve its operations and boost its performance.

Strategic Justification

            The strategic recommendations that Starbucks pursues new means of generating revenue while continuing to provide enhanced customer value is the best approach to enable Starbucks to achieve its goals. From the analysis, it is clear that Starbucks needs to be nimble and adaptable to its market realities. Adding more products to its menu will boost sales and could earn it new customer categories. Apart from that, a strong focus on customers will help the company to continue growing through turbulent times. The company has a strong brand position and will need to capitalize on that to guarantee continued success in the future. Therefore, the company must put measures in place to enable it to anticipate the customer’s needs so that it can address them. Ultimately, this approach will help Starbucks to navigate the future.

Appendices

Appendix 1: Porter’s five forces

Financial Analysis
	2005	2006	2007	2008	2009
Sales ($ bn)	6369.3	7786.9	9411.5	10383	9774.6
Sales Growth Rate		22.2568	20.8632	10.3225	-5.8596
Net Income	494.4	564.3	672.6	315.5	390.8
Net income growth		14.1383	19.1919	-53.092	23.8669
Shareholder’s Equity	2090.3	2228.5	2284.1	2490.9	3045.7
ROE	23.6521	25.322	29.447	12.6661	12.8312
Short- term Borrowings	277	700	710.3	713
Long- term debt	3.6	2.7	550.9	550.3	549.5
Total debt	280.6	702.7	1261.2	1263.3	549.5
Debt to equity	0.13424	0.31532	0.55216	0.50717	0.18042
Total Assets	5576.8	5672.6	5343.9	4428.9	3513.7
Average Assets		5624.7	5508.25	4886.4	3971.3
Assets Turnover Ratio		1.38441	1.70862	2.12488	2.46131
Current Assets	2035.8	1748	1696.5	1529.8	1209.3
Curent Liabilities	1581	2189.7	2155.6	1935.6	1227
Liquidity Ratio	1.28767	0.79828	0.78702	0.79035	0.98557

Appendix 2: Financial Ratios

Strengths Strong brand position Tradition of creating brands that resonate with the masses	Weaknesses Business is not uniqueHigh priced products
Opportunities Presence in international markets	Threats Inflexibility and rigidity

Appendix 3: SWOT Analysis