Individual Written Case Analysis On Starbucks

Purpose of the assignment

The main competitive forces surrounding Starbucks could be explained effectively with Porter’s five forces model, which are described briefly as follows:

Threats of new entrants:

There are low entry barriers in the coffee shop industry; however, it is difficult to tap into the international market due to requirement of high capital. Moreover, the customers usually have higher loyalty for the coffee shops they like. Thus, the threat of this force is medium for Starbucks.

Threat of competition:

Starbucks operates in a highly captive industry, as it has both domestic and global competitors. All nations or even cities would have their own popular coffee shops and thus, this threat is high for the organisation (Aiello & Dickinson, 2014).

Threat of substitutes:

Coffee could be substituted by many items like juice, water, milk and tea. Starbucks sells all these products; however, the main product is coffee. When the coffee prices of Starbucks are compared with other substitutes, the latter have attractive prices. The switching cost of the buyers is low as well and the customers could move over to the other alternatives and as a result, this threat is deemed to be high for Starbucks.

Bargaining power of suppliers:

Starbucks could select from a variety of suppliers, as the products of the suppliers do not differ much from each other. Hence, the suppliers of Starbucks have low bargaining power.

Bargaining power of buyers:

The customers have lower switching costs to other coffee shop brands; however, they are less price-sensitive and they tend to remain loyal with their preferred coffee shops (Ali, 2016). Hence, the buyers of Starbucks have medium bargaining power.

The coffee industry lifecycle model could be used to identify the driving forces affecting Starbucks, which include per capita coffee consumption, global coffee pricing and demographics. During recession, fall in household disposable income because of increased unemployment and stagnant wages resulted in downward pressure on profitability and revenue margins in the industry (Cho et al., 2017). The other factors are summarised as follows:

Expansion growth:

One of the main drivers in the coffee industry is growth in the form of both domestic as well as global expansion. From 1992, Starbucks has concentrated on its store expansion programs having favourable demographic profiles, which the operations infrastructure of the organisation could provide support (Glowik, 2017). For the foreign nations, the expansion strategy of Starbucks was to merge with local partners or obtain licence having adequate knowledge of the retail sector to operate the stores of Starbucks.

Assigned Questions

Technology:

With rapid technological developments, high-tech coffee producing equipment and premium ingredients could be accessed for manufacturing a variety of products. Starbucks uses various technologies for producing different types of coffee products to maintain competitive position in the market.

Product innovation:

With the passage of time, the product line of the coffee industry has become broader. In order to cope up with this trend, Starbucks added certain products like Espressos, Cappuccinos, Mochas, Lattes and Frappuccino’s.

The market position of the rivals of Starbucks could be explained with the help of strategic group map or positioning map, which is illustrated as follows:

Figure 1: Strategic group map of the industrial rivals of Starbucks

(Source: Iliopoulos, 2017)

As per the above figure, it is inherent that Henry’s has been placed on the top followed by Starbucks and Costa. All these organisations follow premium pricing strategy; however, they maintain high quality of their products, since there are many customers who are not price sensitive. Moreover, these organisations provide loyalty cards to its long-term customers for maximising their satisfaction level. On the other hand, McDonalds is another major competitor of Starbucks, which follows low pricing strategy and the quality of products does not match with those of the other three organisations. This is because it uses cost-effective production techniques due to which quality is deemed to be inferior compared to the other three organisations (Duke, 2017). In case of Pumpkin, the pricing structure of the products is high, while the product quality fails to match with Starbucks. As a result, many customers turn over to the other coffee shops due to such pricing strategy.

For Starbucks, key success factors are focussed on its distinguishing its business from its major rivals in the industry. Such capabilities are highlighted to offer biggest impact on market success of the company (Wang, Qiao & Peng, 2015). Such key success factors that contributed to market success of Starbucks are explained under:

• Market leadership has facilitated in attaining market share that is more than 70% in US and China (Starbucks.ca, 2018). Being a market leader Starbucks has set industry trends that the organization has attained in past with its Frappuccino beverage
• Superior store locations are another key success factor for Starbucks in which the company is efficient in locating its stores in areas that has increased foot traffic along with superior local demographic compositions. This considers attaining close proximity to interest and landmark places.
• Supply chain management is another key success factor for Starbucks a it has its own supply chain operations. In this success factor the company has managed to project its integrity of their coffee beans along with premium quality coffee beverages all over the world (Shirdastian, Laroche & Richard, 2017).
• The supply chain management of the company is another key success factor for Starbucks in which it is implementing ethical sourcing practices that turns out to be the norm. The company has also managed to develop a long lasting along mutually beneficial partnerships with sustainable suppliers all through the world.

In order to conduct the financial analysis of Starbucks, certain financial ratios are used and they are compared with industry benchmarks, which are represented as follows:

From the above table, it is inherent that the gross margin of Starbucks has declined from 50% in 2007 to 44.82% in 2012 with fluctuating trends in between the years. This ratio helps in computing the percentage of profit left after cost of production is deducted from revenue (Grant, 2016). The fall in gross margin could be attributed to the increased commodity costs, mainly the higher coffee costs (Investor.starbucks.com, 2018). In case of net margin, the ratio has fallen massively in 2008 after which considerable increase could be seen until 2012. Even though no gain was made in 2011 due to the acquisition of the leftover interest in past joint venture operations in Austria and Switzerland, it was offset partially by realisation of additional income. This was related to unredeemed gift cards in the second half of 2012, which was followed by a court ruling associated with state unclaimed property laws (Starbucks.ca, 2018). 

Macro-environmental factors

The trend is similar in case of operating margin as well for Starbucks. This ratio is used to obtain the portion of income left after deduction of all relevant expenses (Hossain & Islam, 2015). This increase is mainly due to the fall in store operating expenses owing to licensed store revenues, increased sales leverage as well as channel development. Moreover, the organisation has earned income from its joint venture operations in North American Coffee Partnership, Japan and Shanghai. However, both operating margin and net margin have been below the industrial average, as other coffee shops managed to generate additional market demand because of competitive pricing strategy. Return on capital employed is a profitability ratio that helps in ascertaining the overall asset performance while considering long-term financing policy of the organisation (Isa, Subhan & Saud, 2017). The ratio has been observed to be fluctuating over the years; however, it has managed to perform above the industrial average of 30% in 2012, which is favourable. This is because Starbucks has rented out its unused assets from which sufficient return on capital has been generated to outperform the industrial expectations. Therefore, in terms of profitability, focus needs to be placed on minimising operating expenses for increasing profit margin; however, the overall performance is deemed to be suitable in terms of business operations.

Current ratio is a measure of liquidity determining the ability of an organisation in settling its short-term dues and obligations with its existing asset base (Jones, Forsythe & Kemp, 2015). In case of Starbucks, the ratio has increased significantly from 0.79 in 2007 to 1.90 in 2012, which has been close to the industry average of 2. The main reason behind this improvement has been the increase in cash balance, as the organisation has tightened its debtor policy over the years due to which credit sales could be converted into cash within shorter timeframe. Finally, debt-to-equity ratio for Starbucks has fallen significantly from 2007 to 2010 with a considerable rise in 2011 and followed by a slight decline in 2012. This ratio helps in signifying the capital structure of an organisation (Li, 2018). The main reason that the ratio has increased was due to the increase in short-term borrowings; however, the ratio is still below the industry average and this is deemed to be desirable for Starbucks. Therefore, in terms of liquidity and capital structure, Starbucks is positioned effectively in the coffee industry.

Competitive forces surrounding Starbucks

VRIN model analysis has been carried out for Starbucks in order to analyse the strengths and weaknesses of resources and capabilities attained by the company. VRIN model for the company is explained under:

• Valuable: Starbucks has attained a strong brand image that serves as a valuable resource for the company which facilitates in growing its consumer base along with increasing its reputation (Sam & Cai, 2015). Moreover, it offers special flavours of coffee that is another valuable resource which complements quality of Starbuck products and in attaining consumer retention. Store environment maintenance is another valuable resource that facilitates the company in increasing its popularity along with supporting its business in retaining quality of all its goods.
• Rare: Attaining strong brand image is not rare but is challenging for other competing brands. In addition, in introducing special flavours and varieties like Starbucks, the competitors have to make significant investment in their creation and procurement (Rothaermel, 2015).
• Imitable:Attaining strong brand name is difficult to imitate but is possible over long term. In addition, introducing special flavours of coffee is complex to imitate for its procedures and prices. Moreover, effective consumer services along with maintaining effective store environment just like Starbucks is quite difficult to imitate.

Starbucks is deemed to be observed in using activity-based costing (ABC) system for cost allocation. Most of the competitors of Starbucks use direct labour as the costing pool for allocating manufacturing overhead cost (Martínez-Torres, Rodriguez-Piñero & Toral, 2015). This fails to take into consideration any other related indirect costs and thus, the allocated production cost and product profitability seem distorted. By using ABC system, Starbucks provide a more correct costing evaluation for its individual products. Therefore, the low-volume products and high-volume products of the organisation use overheads at different rates after adoption of the ABC system. The existing costing systems of the competitors use direct labour hours as the cost driver for applying cost of manufacturing overhead to its products. However, in Starbucks, all manufacturing overhead costs are not driven by volume and thus, product pricing is made appropriately.

Competitive strength assessment of Starbucks Company is indicated in the table below that explains the strategies of internal capabilities based on which the company is able to maintain its competitive advantage in the industry (Wang, Qiao & Peng, 2015).

Critical Success Factor	Starbucks	Deidrich	Tully’s
Brand Recognition	0.50	0.10	0.10
Quality Product	0.10	0.05	0.05
Distribution	0.15	0.25	0.25
Total	0.75	0.40	0.40

From the above table, it is evident that Starbucks goes tough competition to the renowned companies in the industry like Deidrich and Tully’s through its exceptional strategies of brand recognition, quality product and distribution initiatives. In addition, in developing quality products the company develops effective and innovative strategies to stay ahead of competition. Such strategies include introducing new varieties and flavours in their product line-up (Yang & Davaanyam, 2015). Moreover, their distribution strategy is focussed on maintaining a highly efficient supply chain for attaining strategic growth through retaining highly skilled employees. Moreover, brand recognition has also facilitated Starbucks in attaining competitive edge over its rivals. In this strategy the company has facilitated in developing a good public image. It has generated a great consumer base through offering an attractive ambiance such as comfortable chairs, cozy atmosphere along with other complementary services (Wang, Qiao & Peng, 2015). The company offered ranges of coffee products in certain geographical areas at affordable cost. In addition, it also increased its marketing expenditure that facilitated it in attracting increased consumer base.

Porter’s generic strategies model is used in order to analyse the generic business level strategies of Starbucks along with their effectiveness in the industry.

Coffee industry lifecycle model

Figure 2: Porters Generic Strategies of Starbucks

(Source: Wu, 2017)

• The differentiation strategy implemented by Starbucks is deemed to be effective in maintaining its sustainable competitive advantage. This strategy majorly focussed on maintaining differentiation based on quality (Yang& Davaanyam, 2015). Focussed on this strategy Starbucks has implemented highest standards of quality coffee beans.
• The focus strategy of Starbucks is centered on developing only premium a quality coffee product in which it charges a premium price for its coffee items. This strategy implementation has been efficient for the company in attaining competitive advantage through attaining increased market share due to its exceptional tasting coffee.
• Cost leadership strategy of Starbucks is focussed on developing ethical and consumer friendly brand image. This strategy is observed to be successful as efficient consumer service facilitated the company in attaining competitive advantage.
• Starbucks has also implemented low cost focus strategy for attaining increased market penetration. The company offered ranges of coffee products in certain geographical areas at affordable cost. In addition, it also increased its marketing expenditure that facilitated it in attracting increased consumer base.
• Differentiation strategy of Starbucks considered implementation pf product development initiative that has been successful for Starbucks in positioning itself as an innovative brand and introducing new flavours and varieties.

Starbucks has applied a four-fold strategy to emerge as a winner into the global market and they are explained as follows:

Appropriate market segmentation:

Starbucks has remained in the top scale of the coffee market competing on comfort, instead of convenience. The case is similar with its nearest competitors like Dunkin Donuts and McDonalds.

Execution:

Starbucks has maintained its focus on the original product bundle, which includes good coffee, quality services and a cozy environment for relaxation of the customers. On the other hand, its competitors have focused on maintaining updated and natural dining environment (Rothaermel, 2015). 

Sound leadership:

The founder of Starbucks, Howard Schultz, has continued to come up with new and innovative products for diversifying the product portfolio of the organisation. In this aspect, the competitors are lagging behind Starbucks due to absence of strong leadership skills.

References:

Aiello, G., & Dickinson, G. (2014). Beyond authenticity: A visual-material analysis of locality in the global redesign of Starbucks stores. Visual Communication, 13(3), 303-321.

Ali, S. A. (2016). Directions to explore the principles of service innovation: With various companies’ case study. Journal of Research in Business, Economics and Management, 6(3), 971-978.

Cho, J., Yu, J., Oh, S., Ryoo, J., Song, J., & Kim, H. (2017). Wrong siren! A location spoofing attack on indoor positioning systems: the Starbucks case study. IEEE Communications Magazine, 55(3), 132-137.

Duke, D. (2017). Porter’s Five Forces and the Coffee Industry. Management Teaching Review, 27(6), 19-36.

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Iliopoulos, T. (2017). The State Aid Cases of Starbucks and Fiat: New Routes for the Concept of Selectivity. Eur. St. Aid LQ, 263.

Investor.starbucks.com. (2018). Starbucks Corporation – Financial Data – Annual Reports. Retrieved 2 November 2018, from https://investor.starbucks.com/financial-data/annual-reports/default.aspx

Isa, A. M., Subhan, M., & Saud, M. B. (2017). Does western culture impact customer loyalty for western multinational companies in Malaysia? A case study of Starbucks. In Enhancing Business Stability Through Collaboration (pp. 443-454). CRC Press.

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Li, C. Y. (2018). Consumer behavior in switching between membership cards and mobile applications: The case of Starbucks. Computers in Human Behavior, 84, 171-184.

Martínez-Torres, M. D. R., Rodriguez-Piñero, F., & Toral, S. L. (2015). Customer preferences versus managerial decision-making in open innovation communities: the case of Starbucks. Technology Analysis & Strategic Management, 27(10), 1226-1238.

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