SM CASE STUDY SOLUTION

SUBMITTED TO: Ms. Kanksha

SUBMITTED BY: Teg Mahip Kaur, MBA-EP 2023-25

INTRODUCTION

Name: Starbucks Corporation (NASDAQ: SBUX)

Headquarters: Seattle, Washington, U.S.
Employees: 176,000 in 2008
Revenue for 2008: US$10.383 billion
CEO: Howard Schultz (Founder of Starbucks coffeehouse)

QUESTION 1: In light of this, perform a deep dive into Starbucks as a

company and its environment. What are the strengths and weaknesses?

SITUATIONAL ANALYSIS
External analysis
A) PESTLE Analysis
 Political and Legal: Globalization today has changed worldwide trend of doing business.
Companies find it difficult to survive by relying solely on domestic market. The borders
between various countries are getting invisible. Companies are nowadays creating business in
various countries without boundaries. Advertisements are all over the world for many
products. Company strategists find it not an easy task to expand the business beyond borders.
The basic need for globalization is to learn the different cultures of the country they plan to
start business. Taking all aspects including tax rates, law and legislation is important in
globalization.
 Economic: People are nowadays looking for more income to continue their luxurious life.
The number of two income households is getting increased all over the world. People are
looking forward for products which reduce their time to be spent on. Improved customer
service, immediate availability, trouble free operation of products is becoming more
important. Since the world is facing crisis, people are looking forward for cheap and quality
products. Price is becoming priority to customers. Increase in the inflation rates and increase
in unemployment is also a factor for demand in lower priced products.
 Social, Cultural, Demographic and Environmental: According to these analyses, it creates
different type of consumer and consequently needs for different products, different services,
and different strategies. In the view of social, employees should have benefits. Consequently,
after retirement for the group of baby boomer, there must be an allocation of funds for the
retiree to support their families in life long. Provide benefits such as Medicare and Medicaid
retirement beneficial. Next, products produced globally must be convenient and attractive to
be used by any customers. A cultural connection is created, among customers because
producing the products with quality flexible price for the rich and middle-class family. People
are also looking forward for free chemical products. This means that the product is free from
chemical or additional flavour mix, and it is made from natural products.
 Technological: Mass communication and high technology are creating patterns of diverse
cultures worldwide. Revolutionary technological changes and discoveries are having a
dramatic impact on organization. Internet is the world information spread machines that have
covered an interaction from one user to another user. In contrast, advertising through have
brought high achievement into marketing strategy. For example, advertising products on
Facebook so that the users can consume their products. Online purchasing, this option will
create less hassle for customer for purchasing the products which they needed. Advancement
of the technology can cause the life cycle of the product changed and increased in the
distributing of the products. High technology machineries can be incorporated for the supply
of products and achieve a better profit for the organization.

B) Porter’s 5 Forces Model

The Radial Diagram is Porter’s Five-force model. It helps the Company’s strategists to
evaluate the industry growth, market development and organization Strategy accompanied
with the good intuitive judgment.

The big corporation firm such as Starbucks needs a systematic and effective external-audit
system because external forces among foreign countries vary so greatly. The analysis of the
Competitive can be divided into Porter’s Five-Forces.

The five forces are as follows:

 Threat of New Entrants: Moderate
There is a moderate threat of new entrants into the industry as the barriers to entry are not
high enough to discourage new competitors to enter the market. The industry’s saturation
is moderately high with a monopolistic competition structure. For new entrants, the initial
investment is not significant as they can lease stores, equipment etc. at a moderate level
of investment. At a localized level, small coffee shops can compete with the likes of
Starbucks, Gloria Jeans Coffee and Caribou Coffee because there are no switching costs
for the consumers. Even though it’s a competitive industry, the possibility of new entrants
to be successful in the industry is moderate.

 Threat of Substitutes: High

There are many reasonable substitute beverages to coffee, which are mainly tea,
fruit juices, water, soda’s, energy drinks etc. Bars and Pubs with non/alcoholic
beverages could also substitute for the social experience of Starbucks. Consumers
could also make their own home-produced coffee with household premium coffee
makers at a fraction of the cost for buying from premium coffee retailers like
Starbucks. There are no switching costs for the consumers for switching to
substitutes, which makes the threat high. But it’s important to note that industry
leaders like Starbucks are currently trying to counter this threat by selling coffee
makers, premium coffee packs in grocery stores but this threat still puts pressure on
the margins.

 Bargaining Power of Buyers: Moderate to Low Pressure

There are many different buyers in this industry and no single buyer can demand
price concession. It offers vertically differentiated products with a diverse consumer
base, which make relatively low volume purchases, which erodes the buyer’s power.
Even though there are no switching costs with high availability of substitute
products, industry leaders like Starbucks prices its product mix in relation to rivals
stores with prevailing market price elasticity and competitive premium pricing.
Consumers have a moderate sensitivity in premium coffee retailing as they pay a
premium for higher quality products but are watchful of excessive premium in
relation product quality.

 Bargaining Power of Suppliers: Low to Moderate Pressure

The main inputs into the value chain of Starbucks is coffee beans and premium
Arabica coffee grown in select regions which are standard inputs, which makes the
cost of switching between substitute suppliers, moderately low. The suppliers in the
industry also pose a low threat of competing against Starbucks by forward vertical
integration, which lowers their power. Starbucks also forms a highly important part
of the suppliers business, due its size and scope, which make the power of the
suppliers lower. Given these factors, suppliers pose a moderately low bargaining
power.

 Intensity of Competitive Rivalry: High to Moderate

The industry has a monopolistic competition, with Starbucks having the largest
markets share and its closest competitors also having a significant market share,
creating significant pressure on Starbucks. Consumers do have any cost of switching
to other competitors, which crates high intensity in rivalry. But it’s important to note
that Starbucks maintain some competitive advantage as it differentiates its products
with premium products and services, which cause a moderate level of intensity in
competition.

Looking at the Porters five forces analysis, we can get an aggregate industry
analysis that the strength of forces and the profitability in the retail coffee and
snacks industry are Moderate.
C) External Factor Evaluation Matrix (EFEM)
External Evaluation Matrix comprises of 2 lists. Both are important for the company. It’s
identified as the opportunities and threats of the company. The factors are rated from 1 till 4,
where 1 is the lowest and 4 is the highest. The highest weight is assigned to the most
important factors or several very important factors. The most important factors maybe a threat
or an opportunity. In this case, it is an opportunity.

Opportunities Weight Rating Weighted

Score
Globalization makes it easy to enter international 0.15 4 0.60
market.
People are looking for cheap internet connections. 0.10 3 0.30
Express foods are getting famous to reduce time to be 0.10 2 0.20
spent.
Demand for non-chemical and healthy products. 0.10 3 0.30
Threats
Increase in the inflation rates creates a demand in 0.15 3 0.45
lower priced products.
Many companies are pricing their products cheaper to 0.20 3 0.60
impress customers.
Increase in hypermarkets and economical 0.10 2 0.20
supermarkets
1.00 2.55

Weight of TWSO=0.6+0.3+0.2+0.30 =1.40/0.45 = 3.11

Weight of TWST=0.45+0.60+0.20 =1.25/0.452 = 2.78

Based on the key external factors, the most critical factors are that many companies are pricing their
products cheaper to impress customers. Increase in the inflation rates creates a demand in lower
priced products comes along as the most critical threats to the company. Anyway, there are still
opportunities to increase the growth of the company. It is known that the factors which carries most
weight is the factor that most to be address. Globalization makes it easy to enter international market
is a good opportunity for Starbucks.
Since the total weighted score is 2.78 generally Starbucks is not so effective in addressing its CFS
which exists in its current environment. It needs to upgrade its effectiveness. However, this is subject
to further analysis of individual weighted score of opportunities (TWSO) and weighted score of
threats (TWST).
Based on the calculation, as shown in the table above, is more effective in addressing the
Opportunities. Still, Starbucks must find the way to reduce the threats to focus on the future
challenges.

Internal analysis
A) Internal Factor Evaluation Matrix (IFEM)

Key Internal Factors Weight Rating Weighted

Score
Strengths
1. Huge market expansion to China, Brazil, India and Russia 0.21 4 0.84
2. Provide a great work environment 0.10 4 0.40
3. Apply the highest standards of excellence in services. 0.10 3 0.30
4. Starbucks has monopolistic advantages over its 0.10 3 0.30
competitors.
5. Purchased Ethos healthy water for 8 million and also does 0.12 4 0.48
not use chemical flavor for coffee.
6. Launching the sales of Frappuccino in Japan and Taiwan. 0.08 3 0.24
Weaknesses
1. Price of coffee is high at Starbucks. 0.10 2 0.20
2. Less marketing and advertising its product. 0.07 2 0.14
3. Starbucks products are not available at supermarket. 0.12 2 0.24
TOTAL 1.00 3.14

TOTAL WEIGHTED SCORE FOR STRENGHT / TOTAL SCORE FOR STRENGHT

TWSS: (0.84+0.40+0.30+0.30+0.48+0.24 /0.21+0.10+0.10+0.10+0.12+0.08) = 2.56/0.71
=3.60
TOTAL WEIGHTED SCORE FOR WEAKNESS / TOTAL SCORE FOR WEAKNESS
TWSW: (0.20+0.14+0.24 / 0.10+0.07+0.12) = 0.58/0.28 = 2.00
Internal Factor Evaluation (IFE) Matrix is a summary step in conducting an internal strategic-
management audit. This strategy-formulation tool summarizes and evaluates the major strengths
and weaknesses in the functional areas of business, and it’s also provides a basis for identifying
and evaluating relationship among those area. Based on key Internal Factor, the most advantage
factor is Starbucks' company is expanding its market to china, Brazil and Russia. These are very
big markets and will definitely increase its growth. The strategic of Starbucks' services provided,
quality of coffees and management of the company makes strength became as very important
factor. It is because Starbucks' provide a great work environment and treat each other with respect
and dignity. Besides of that, other than that, Starbucks Purchase Ethos healthy water for 8 million
and also does not use chemical flavor for coffee. This is also a great strength to it as its coffee’s
are free from chemical flavors and it blends and mix the real hazelnuts to the coffee. Since the
total weighted score is 3.14 generally Starbucks is effective in addressing its CFS which exists in
its current environment. But still, its weakness is also high. 2.00 is very high, this means that
Starbucks is still weak in identifying its weakness. Since Starbucks' has its own strength to
increase the growth of the company, there is also has weaknesses. The prices of coffees sold at
Starbucks are higher compared with other stores. This is a major strength for other competitors.
Other than that, Starbucks does not interest in marketing its products through advertisings a lot. It
focuses on its quality coffee which has the power to attract customers. Anyway, this is subject to
further analysis of individual weighted score of strength (TWSS) and weighted score of weakness
(TWSW). Based on the calculation, as shown in the table above, is more effective in addressing
the Strength, still, Starbucks' must find the way to overcome weaknesses to focus on the future
challenges.

B) Space Matrix
 FINANCIAL STRENGTHS

RATING
1. A Starbucks asset is financed through equity and is safe if creditors start to 5
demand repayment of debt. Long term debt-to-equity ratio is only 0.0017.
2. Starbucks Return on Asset ratio shows that in year 2005, the efficiency of 4
using assets to generate earning has increased from 12% to 14%.
3. Starbucks net income increased to $494.5 million in the year 2005 compared 4
with $388.9 million in 2004. There is an increase of 21.3% in the income of
Starbucks.
13

 INDUSTRY STRENGTHS

RATING
1. Starbucks Coffee Liqueur was the top selling new spirit product, grossed sales 4
over $8million annually.
2. Starbucks agreed to serve Starbucks Coffee in all United flights. 3
3. “Starbucks Everywhere” approach has increased foot traffic for all the stores in 5
area. This makes customers easy to fine Starbucks all the places in town.
TOTAL 12

 ENVIRONMENTAL STABILITY

RATING
1. Starbucks products prices are high compared with competing coffee houses. -4
They price their products several dollars below then Starbucks price.
2. Demand for Starbucks products to be supplied in supermarkets increase. But, -2
doing that will put Starbucks business in risk as customers don’t know the way to
brew the coffee.
3. Increase in world coffee bean price in 2001, forced Starbucks to increase its -3
beverages and coffee sold at retail.
TOTAL -9

COMPETITIVE ADVANTAGES

RATING
1. Starbucks coffee and beverages are high in quality brewed by well-trained -1
employees.
2. Starbucks teamed up with T-Mobile Wi-Fi service to provide internet access to -1
all over Starbucks Coffeehouse.
3. There are 16,120 Starbucks coffeehouses worldwide and plan to open another -2
1800 stores.
4. Starbucks is a customer-oriented Coffeehouse. -2
TOTAL -6

CONCLUSION
FS Average is 13/3 = 4.3
IS Average is 12/3 = 4.0
ES Average is -9/3 = -3.0
CA Average is -6/4 = -1.5
Directional Vector Coordinates:
X- axis: 4.0 + (-1.5) = 2.5
Y- axis: 4.3 + (-3.0) = 1.3

Starbucks must pursue a strategy that is Aggressive. The strategies that include in aggressive
strategies is backward integration, forward integration, horizontal integration, market penetration,
market development, product development and diversification which include related and
unrelated diversification.

QUESTION 2: Outline the core competencies that the company can

further develop, perform BCG analysis to identify scope of further
development.
BCG Matrix
The Boston Consulting Group (BCG) matrix is enhancing a multidivisional firm’s efforts to
formulate strategies. This matrix allows a multidivisional organization to manage its portfolio of
businesses by examining the relative market share position and the industry growth rate each
division relative to all other divisions in the organization. Starbucks are measured to identify the
stores strategic position in the Boston Consulting Matrix. The BCG matrix were included 4
divisions which is Question Marks, Star, Cash Cows, and Dogs. In division quadrant I, shows low
relatives market position, high growth industry. Firms cash needs are high, and cash generation is
low.
This division decides to strengthen on pursuing an intensive strategy. Division quadrant II
identifies best long-run opportunities for growth and profitability. Star division is high relative
market share and high industry growth rate. In convince of substantial investment to maintain or
strengthen their dominant positions. Next in quadrant III, Cash Cows with high relative market
share position but compete in a low growth industry, while this division will be managed to
maintain strong position for as long as possible. Finally, in quadrant IV Dogs have low relative
market share position and compete in a slow or no market growth industry. This divisional are
weak into internal and external position and often liquidated, divested or trimmed down the
retrenchment. Retrenchment can be best strategy to pursue because many dogs bounced back,
after strenuous asset and cost reduction, to become viable, profitable divisions. In contrast, the
highest scored is 3.5, and it determinant that relative share position is HIGH.

Besides that, Starbucks Income Statements shows the Net Revenue were consecutively increased
between the years 2003 until 2005. The revenues on the year 2003 is $4075,000, while $2191,000
in year 2004, $6369,000 in year 2005. Moreover, the industry sales growth rate between year
2004 and 2005is 56.3%. It determinant HIGH position of industry sales growth rate. In
conclusion, Starbucks were identified in STAR division. This division represents the Starbucks
long-run opportunities for the growth and profitability. While, this division is in high relative
market share and industry growth rate and subsequently they received substantial investment. The
divisions are forward, backward, and horizontal integration, market penetration, market
development and product development are will be considered.

VRIO Analysis: The VRIO framework is used to analyze in detail the competitive position of
Starbucks Corporation and its strategic positioning.

Inbound logistics – Sourcing coffee from diverse coffee beans producers with whom they
have great relationships and built up efficient supply chain management system. Operations
– They have operation in 60 countries with their stores being modeled on company operated
stores and licensed stores. Outbound logistics – Most of its product mix are sold in-store and
some through large box retailers. Payment around source through point of sale, prepaid
Starbucks Cards and mobile payments. Marketing and Sales – Traditionally, investment in
marketing activities have not be significant and relied mainly on the growing reputation of
premium quality product mix and superior customer services to give the ‘Starbucks
Experience’ to drive customers to their stores and products. Service - Starbucks has a
reputation for providing supreme level of customer services to their consumers. Support
activities Firm Infrastructure. They have well designed, aesthetically pleasing stores. They
have efficient level of finance, accounting and legal departments to support the firm’s
infrastructure. Human Resource Management – Great benefits, employee empowerment
and amazing corporate culture makes Starbucks drive efficient management of human
capital. Technology development – Investments in innovative technologies like the well like
mobile app. Procurement – Starbucks procures its products from a diverse group of
supplier and has fixed contracts with some of the suppliers.

QUESTION 3: Analyse the financial statements and project to next 5 years.

Suggest reasonable strategies for further growth that can be sustainable.

Reduce their price by producing a new product of coffee using cheaper beans or may come
out with special discounts promotions to increase the sales. Starbucks’ coffee is world’s
preeminent global brand. Starbucks’ should decrease price of the coffee to face competition
from nationwide coffee manufactures. They also can do promotion or promote packages of
coffee set to impress customers, such as McDonald promoting their product. If the challenge
was met successfully, in all likelihood company’s best years lay on the strategic road ahead.
BUSINESS LEVEL: Large companies like Starbucks can effectively pursue Focus-Based
Strategy in conjunction with differentiation or cost leadership based strategy. Being a lower
cost store will increase the difference between Starbucks and other stores. At present,
Starbucks competitors are attempting to specialize in the coffee business, therefore
Starbucks must pursue focus strategy to increase its strength.
FUNCTIONAL LEVEL: Advertisement can develop through internet that services
convinced for users to access, give the brochures, do road shows, so that public come to
know more about Starbucks details. Market penetration and market development will help
to increase the sales and reduce the weakness in Starbucks. Distribute packaging of
Starbucks instant coffee will increase the sales as it is a demand from customers.
Introducing accurate mixing level of the coffee in a tea bag style will increase the sales at
supermarkets. Packing it together with the guidelines on mixing coffee beans and sugars
with milk to result same taste of coffee will never reduce the quality of the coffee. Providing
proper steps to customer will make a better quality of coffee indeed.

FINANCIAL ANALYSIS
1. Projected Income Statement
The Total net revenue for the Starbucks shows steadily increased from 2003 until 2005.The
big increase from 2003 to 2004 could be due to the major customer demand and customer
royalty for the product. Total net revenue can be divided into retail and specialty. Retail is
meant by selling food beverage directly to customer and specialty means customer royalty.
The sale for 2004-2005 periods is less then 10% from 2003 to 2004 which is 20%. Another
significant observation from the statement is the operating income. It is shown that from
2003 to 2005 the income is increased. It could be because of the performance of the company
is going concern. Operating income from 2003 to 2004 is increased by 44%.This drastic
increase is because of the purchase of Seattle's Best Coffee and Torrefazione Italia from
AFC Enterprises, bringing the total number of Starbucks-operated locations worldwide to
more than 6,400. While the shareholder is important to any company, the net earnings per
share are equivalently important to the shareholders. As observed, the net earnings of share
diluted of the company increased from $0.34 in 2003 to $0.49 in 2004, reaching $0.61 by
2005. This is because of the company performance in achieving target. The net earnings per
share increased by 44% from 2003 to 2004 and increased by 24% from 2004 to 2005.
2. Balance Sheet

As observed in the above table current assets increased for 2003-2004 by 46%.It could be
because of company activations and reloads on Starbucks Cards, but for the year 2004-2005
is dropped by 11% because of the advertising Starbuck coffee Besides, the shareholder
Equity increased due to the increases in net earning for the company. While the shareholder
equity decreased for about 15% in comparison of 2004-2005. However shareholder equity
increased by $2090634 in 2005 it’s because of the stability net earning. Long term debt
shown in the table dropped 14% from 2003 to 2004 previously it was known company’s net
earning increases, thus it could mean that the company has extra earnings to pay off debt.
Since this is a long term debt, the amount is tremendously big and by reducing it by 14%
within a year shown that the development new shops really has a big impact on the
company’s performance.

3. Ratio Analysis
a. Liquidity Ratios
 Current Ratio
2005: = $1209334/$1226996 = 0.99x
2004: = $1350895/$746259 = 1.81x

The Current ratio is another test of a company's financial strength. It calculates

how many dollars in assets are likely to be converted to cash within one year in
order to pay debts that come due during the same year. Liquidity can be
measured through current ratios and quick ratio. An acceptable current ratio
varies by industry. The more liquid the current assets are, the smaller the
current ratio can be without cause for concern. For most industrial companies,
1.5 is an acceptable current ratio and Starbucks current ratio is 0.99x for the
year 2005 compared to 1.81 x for the year 2004. This can be considered as a
decline and should be seriously concerned and still enough to cover up current
liability or short-term debt.

b. Leverage Ratio (Long term debt to total assets ratio)

2005: = $3618/$2090634 = 0.0017
2006: = $4353/$2470211 = 0.0018
The Debt-to-total-assets ratio Shows the proportion of a company's assets which
are financed through debt. If the ratio is less than one, most of the company's
assets are financed through equity. If the ratio is greater than one, most of the
company's assets are financed through debt. Companies with high ratios are
said to be "highly leveraged," and could be in danger if creditors start to
demand repayment of debt and for Starbucks, the ratio is very low at both
years. The ratio is 0.0017 at 2005 and 0.0018 for the year 2004 respectively and
the ratio drop slightly. This means that most of the Starbucks assets are financed
through equity and is safe if creditors start to demand repayment of debt.

c. Activity Ratios
Activity ratios show how effectively a firm’s assets are being managed. Activity
analysis, together with the leverage ratios are the key factors in determining
profitability. Fixed Asset turnover ratio is one of the measures of activity.
Another activity measure is the Total Asset turnover ratio. Based on the above
tables, Starbucks has a bigger asset turnover which means that the company is
using its assets more efficiently than other competitors in the industry.
Company’s “no- inventory” policy has significant effects on its superiority. In
both ratios , there is a slide increase which shows the company’s efficiency on
using assets has increased too.
TOWS MATRIX