Starbucks

External Analysis of Starbucks 1

RUNNING HEAD: STARBUCKS

External Environmental Analysis of Starbucks and the Coffee Industry

Harold Brown

Strategic Management MGMT 4340

Dr. Nwabueze

March 3, 2011


Contents 1.0.0. Executive Summary ...................................................................................................................... 5

2.0.0. Company History ................................................................................................................................ 8

2.1.0. Background ....................................................................................................................................... 12

Table 1: Starbucks Revenue Trends 2005-2010 ..................................................................................... 12

2.2.0. Purpose of This Study ....................................................................................................................... 14

3.0.0. External Analysis .............................................................................................................................. 15

Diagram 1: The Components of a Coffee Firms Macroenvironment .................................................... 16

3.1.0. General Environmental Analysis ...................................................................................................... 16

3.1.1. Demographic Segment ...................................................................................................................... 16

Table 2: Tracking Measures of Coffee Demographics ........................................................................... 17

3.1.2. Economic Segment ........................................................................................................................... 18

3.1.3. Political/Legal Segment .................................................................................................................... 19

3.1.4. Socio-Cultural Segment .................................................................................................................... 19

3.1.5. Technological Segment ..................................................................................................................... 20

3.1.6. Global Segment ................................................................................................................................. 21

3.1.8. Driving Forces .................................................................................................................................. 22

Diagram 2: Effect of Driving Forces on the Coffee Industry ................................................................. 25

3.2.0. Industry Analysis .............................................................................................................................. 25

3.2.1. Description of the Industry ............................................................................................................... 26

3.2.2. Industry Dominant Economic Features ............................................................................................. 26

Diagram 3: Coffee Industry Dominant Economic Features .................................................................... 27

3.2.3. Market Size ....................................................................................................................................... 27

3.2.4. Market Growth Rate ......................................................................................................................... 28

Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio09 ... 28

Table 4: Global Hot Drink Data for Coffee Industry .............................................................................. 28

Table 6: U.S. Hot Drink Data for Coffee Industry .................................................................................. 29

United States Hot Drinks Market Volume .............................................................................................. 29

3.2.5 Industry Trends .................................................................................................................................. 30

3.2.6. Five Forces Analysis ......................................................................................................................... 31

Diagram 3: Five Competitive Forces in the Coffee Industry .................................................................. 32

3.2.6.1. Threat of New Entrants .................................................................................................................. 32


3.2.6.2. Power of Suppliers ......................................................................................................................... 33

3.2.6.3. Power of Buyers ............................................................................................................................. 33

3.6.2.4. Power of Substitutes ...................................................................................................................... 33

3.2.6.5. Intensity of Rivalry ........................................................................................................................ 34

3.2.7. Summary of Industry Analysis ......................................................................................................... 34

3.3.0. Competition Analysis ........................................................................................................................ 34

3.3.1. Industry Competitors ........................................................................................................................ 35

Table 7: Direct Competitors to Starbucks ............................................................................................... 35

Diagram 4: Strategic Group Map of Coffee Industry ............................................................................. 36

3.3.2. Rivals Anticipated Strategic Moves .................................................................................................. 36

3.3.3. Summary of Competitive Analysis ................................................................................................... 37

3.3.4. Key Success Factors ......................................................................................................................... 38

Diagram 5: Key Success Factors for Survival in the Coffee Industry .................................................... 39

4.0.0. Internal Analysis ............................................................................................................................... 39

4.1.0. Organizational Analysis .................................................................................................................... 40

Diagram 6: Organizational Analysis Framework Model of Starbucks ..................................................... 41

4.1.1. Corporate Mission ............................................................................................................................. 41

4.1.2. Products and Services ....................................................................................................................... 43

4.1.3. Leadership ......................................................................................................................................... 47

4.1.4. Organizational Culture ...................................................................................................................... 49

4.1.5. Structure ............................................................................................................................................ 50

4.1.6. Strategy ............................................................................................................................................. 51

Diagram 7: Five Generic Competitive Strategies ................................................................................... 51

4.1.7. Summary of Organizational Analysis ............................................................................................... 52

4.1.8. Analysis of Firm Resources .............................................................................................................. 55

4.1.8.1. Tangible Resources ........................................................................................................................ 56

4.1.8.2. Intangible Resources ...................................................................................................................... 56

4.1.8.3. Capabilities .................................................................................................................................... 56

4.1.8.4. Core Competencies and Sustainable Advantages .......................................................................... 57

4.1.8.5. Summary of Firms Resources ........................................................................................................ 58

4.2.0. Financial Analysis ............................................................................................................................. 58

4.2.1. Valuation Analysis ............................................................................................................................ 58


Table 8: Valuation Analysis of Starbucks ............................................................................................... 59

4.2.2. Growth Analysis ............................................................................................................................... 59

Table 9: Growth Analysis Ratios for Starbucks ...................................................................................... 60

4.2.3. Profitability Analysis ........................................................................................................................ 61

Table 10: Profitability Ratio Analysis for Starbucks .............................................................................. 61

4.2.4. Financial Strength Analysis .............................................................................................................. 61

Table 11: Starbucks Balance Sheet ......................................................................................................... 62

4.2.5. Management Efficiency Analysis ..................................................................................................... 64

4.2.6. Summary of Financial Analysis ........................................................................................................ 65

5.0.0. SWOT Analysis ................................................................................................................................ 65

Diagram 9: SWOT Matrix for Starbucks ................................................................................................ 66

5.1.0. Strengths ........................................................................................................................................... 66

5.2.0. Weaknesses ....................................................................................................................................... 67

5.3.0. Opportunities ..................................................................................................................................... 68

5.4.0. Threats............................................................................................................................................... 68

6.0.0. Recommendations ............................................................................................................................. 69

6.1.0. Recommendation 1 (External) .......................................................................................................... 69

6.2.0. Recommendation 2 (Internal) ........................................................................................................... 71

Conclusion .................................................................................................................................................. 72

7.0.0 References .................................................................................................................................. 75


1.0.0. Executive Summary

Starbucks is the global leader of the coffee industry in bringing new and innovative products to

market in convenient and easily accessible locations. This paper will provide a detailed analysis

of the coffee industry and the external environment which it operates in as well as a

comprehensive internal analysis aimed at specific evaluation of Starbucks and its performance.

Although Starbucks started from the humble beginnings of three friends that liked high

quality, premium roasted coffee it has since turned into a leader in the coffee industry. This is

due largely through the efforts and vision of Howard Schultz. His success and leadership of the

industry has been compared to what Ray Kroc did to McDonalds and the fast food industry.

Today Starbucks serves as a model that many other successful rivals try to emulate or improve

on. Starbucks is powered by their continual product innovation, customer service aptitude,

ability to expand globally, and successfully select locations.

Coffee and/or tea are consumed globally by most of the population. This coupled with

the forces that drive change in the industry result in a net positive force that makes the industry

attractive to businesses. An analysis utilizing Porters five-forces model outlining competitive

pressures will show that the coffee industry is able to provide for attractive profits by firms in the

industry. The overall competitive pressures are moderate and firms can be successful but they

will have to be efficient and effective in the strategies that they undertake or they risk being

removed from the industry by consumers.

Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a

high priced, high quality product with a wide breadth of product offerings. They are the only

firm in this position. Most other firms offer moderate or few product offerings at a lower price


point. Starbucks has been able to build its brand image and market power while in this position

which has yielded annual profits. As Starbucks is in the strategic group position of power, the

expected moves of rivals are all designed to keep up with Starbucks. No firms have been able to

successfully produce new products that meet market demand in as convenient locations as

Starbucks has been able to offer.

Starbucks also enjoys critical know how and experience in the key success factors that

the coffee industry demands of successful firms. Starbucks keenly utilizes technology to

enhance customer experience, selects convenient locations, innovates products that are in

demand and profitable, and continually looks to conquer new markets and market share ahead of

rivals.

The Starbucks mission is to nurture the human spirit of everyone around the globe by

offering the finest coffee, tea, and food products in a friendly and inviting atmosphere that serves

as a home away from home. Starbucks does this through a decentralized leadership style that

emphasizes lower level decision making and information sharing to promote product innovation

and customer service. The customer service is a key component to the organizational culture of

rewarding and treating employees as partners in the business. The structure of Starbucks is one

of geographical business units that allow Starbucks to enter into any market and achieve the

think local, act local expansion strategy.

Starbucks is able to leverage its resources, tangible and intangible, to create competitive

capabilities and core competencies that allow for strategy execution. Starbucks achieves this by

utilizing its human capital and expertise to constantly strive for excellence in product innovation.

Furthermore, Starbucks is able to internally fund strategic initiatives from free cash flow


produced from sound financial performance. Starbuckss financial ratios have increased over the

last three years due partially to a recovered general economy and partially to the return of

Howard Schultz to the leadership position in the company. These financial ratio increases have

positioned Starbucks in a greater financial situation.

The SWOT analysis of Starbucks will reveal that the strength of Starbucks lies within

their strong financial performance based on their retail store operations. The weakness of

Starbucks is an over reliance on a saturated U.S. market with a declining market share as a result

from intensified rivalry in the marketplace. This weakness can be overcome by utilizing

Starbuckss strong finances to realize the present opportunities to expand into emerging markets.

To realize the present opportunities Starbucks will need to implement and execute two

critical objectives. The first is to continue to be an industry leader in product innovation. This

will serve to further differentiate Starbucks from rivals and will also open new customer bases

for the new products. The second objective will be to expand globally into emerging economic

markets using a franchising approach. Starbucks will be able to create revenue streams via

franchise fees while the markets mature and retail revenues increase. By implementing both of

these strategic objectives Starbucks will continue to be the leader in the coffee industry and

further enhance its brand power and market position.


External Environmental Analysis of Starbucks and the Coffee Industry

2.0.0. Company History

Starbucks begin doing business in 1971 when three partners teamed up to create a

specialty coffee roasting company in the Pikes Peak Market area in Seattle, Washington. The

company was originally called Starbucks Coffee, Tea, and Spice and was founded by Jerry

Baldwin, Zev Siegel, and Gordon Bowker for a startup fee of $9,050 (Thompson, Jr. &

Strickland, 1999). The Starbucks name is said to be derived from the coffee- loving First Mate

in Herman Melvilles Moby Dick. The logo is that of a twin-tailed siren from Greek mythology

lore (Starbucks, 2011). The siren, in the Homeric view, was a creature that was known to live in

the seas and enchant passing sailors with their song, much like the alluring call of morning

coffee fixes (Homer, 1942). Both the logo and the Pikes Peak shop carried out a nautical theme

that the partners felt embraced the tradition of the early coffee trade and the romantic nature of

the high seas. While all three shared a love for gourmet coffees and teas, none of the partners

had much of a business background. Baldwin and Siegel were English and History teachers

respectively and Bowker was a creative writer (Thompson, Jr. & Strickland, 1999).

The inspiration for the business was a small coffee shop located in Berkley, California

named Peets Coffee and Tea. The business was managed and named after its Dutch immigrant

proprietor Alfred Peet. Peets would have a huge impact on the initial iteration of the Starbucks

business model. Peets started in 1966 and specialized in dark roasting coffee in the European

style to bring out the full flavors of the coffee bean and teaching its loyal customer base proper

techniques on how to grind and properly brew coffee . The partners had all spend considerable

time in Peets both buying product and also listening to Peet pass his expert knowledge in the

benefits of bean quality and the importance of roasting to all who would listen (Thompson, Jr. &


Strickland, 1999). Peets model was one the Starbucks would emulate in the Pikes Peak

location. Starbucks would only offer whole bean coffee along with other coffee related products

to its customers and not serve fresh brewed, ready to drink beverages. Initially, Starbucks would

buy all of its beans from Peets for resale to the public before buying its own roaster from a store

in Holland (Thompson, Jr. & Strickland, 1999).

In the beginning only Siegel was a paid employee of the company and would work the

shop as the resident retail expert, while Baldwin and Bowker kept their day jobs and helped out

as time would allow. Baldwin served as the bookkeeper and constantly strived to increase his

knowledge of all things coffee, and Bowkers responsibilities were centered on being the magic,

mystery, and romance man (Thompson, Jr. & Strickland, 1999). Starbucks would expand in the

Seattle area and have four locations by the early 1980s and never once have a non-profitable

year. The strain of running the business would eventually lead to burnout with Siegel and

Bowker devoted most of his focus on other outside business enterprises. Baldwin would

eventually take over as CEO and manage the day-to-day functions of the company (Thompson,

Jr. & Strickland, 1999).

In 1981 Howard Schultz would make his first visit to Starbucks (cite). Schultz was the

vice president and general manager for the US division of Hammarplast which manufactured

high-end kitchen equipment and housewares (Starbucks, 2011). Schultz had noticed that

Starbucks was ordering more of a certain drip coffee maker than other large clients like Macys

(Thompson, Jr. & Strickland, 1999). Schultz was immediately smitten by Starbucks operations

and business culture. One author has compared this meeting and the way it changed an entire

industry and corporation with that between Ray Kroc and McDonalds (Garza, 2010). Schultz

was determined to work for Starbucks, and after a long negotiating process and much doubt with


the Starbucks partners, Schultz was hired as head of marketing (Thompson, Jr. & Strickland,

1999).

After spending adequate time learning the coffee retail business, Schultz traveled to an

international housewares expo in Milan, Italy in 1983. During this trip Schultz would visit many

of the local espresso bars in the city and marvel at the business model and the simple perfection

of the caf latte (Thompson, Jr. & Strickland, 1999). Upon his arrival back in Seattle, Schultz

felt he had a sure fire way to grow Starbucks by changing the format to an espresso bar that also

sold coffee and housewares. Instead of approval and adulation, the Starbucks partners shot down

the idea holding firm that they were a coffee retailer and not a restaurant or bar of any type.

Schultz would take the next year to convince Baldwin on the merits of serving Italian-style

coffee beverages inside of Starbucks. In 1984 Baldwin accepted, and the sixth store to open up,

in downtown Seattle, would have 300 square feet of space to serve coffee. The experiment was a

success and this location outperformed all of the other stores (Thompson, Jr. & Strickland,

1999). Even though Schultz could, and would, provide daily figures quantifying the validity of

his argument, Baldwin was not willing to except the change in format and ultimately ruled

against Schultz. In 1985, at the age of 33, Schultz decided to leave Starbucks to create his own

company and business format (Ramsey, 1987).

The first step would be to raise capital. Schultz connected with a corporate lawyer named

Scott Greenberg who had experience in raising capital for new ventures. Schultz made

presentations to 242 potential investors, most of which passed at the opportunity citing concerns

that coffee consumption was on the decline or that they did not believe that consumers would be

willing to pay $1.50 for a coffee beverage (Thompson, Jr. & Strickland, 1999). After raising

$1.65 million dollars from 30 different investors, one of which was Starbucks, Schultz was


nearly ready. The next step would be to hire Dave Olsen who had over 10 years experience in

owning and operating a coffee bar named Caf Allegro (Thompson, Jr. & Strickland, 1999). Il

Giornale opened two stores in Seattle in 1986, and one store in Vancouver, British Columbia in

1987 to test the expansion capabilities of the business model outside of Seattle (Ramsey, 1987).

Also in 1987, the remaining partners of Starbucks had decided that they were done with the

company and wanted to divest themselves and sell off the business. Schultz saw the opportunity

and made a successful bid. Starbucks Coffee, Tea, and Spice and Il Giornale would become one

business and be named Starbucks Corporation with Schultz as the CEO and president (Starbucks,

2011).

Beginning in 1987, Schultz unveiled an aggressive 5-year plan to open 125 stores in new,

large downtown markets with projected revenues in 1992 at $60 million dollars (Thompson, Jr.

& Strickland, 1999). The next market outside of Seattle would be Chicago with Portland, Los

Angeles, and San Francisco coming right after. Starbucks would open 150 stores, outperforming

the 125 store projection, in the five years even though many of the years in this period Starbucks

reported losses (Thompson, Jr. & Strickland, 1999). Schultz firmly believed that Starbucks had

to be a great place to work in order to provide the atmosphere and service that he envisioned.

During this 5-year period, Schultz launched a number of initiatives to accomplish this objective.

In 1988 Starbucks decided it would offer all employees that worked more than 20 hours per

week the same benefits that full-time employees received (Starbucks, 2011). This later came to

include full coverage to terminally ill employees no longer able to work until government

benefits took over or the death occurred. Starting in 1991, Starbucks began offering employee

stock options to all employees, and in 1995 would be expanded to include employee stock

purchase programs (Thompson, Jr. & Strickland, 1999).


The next major step forward for Starbucks was the initial public offering (IPO) held in

June 1992. The success of the IPO enabled Starbucks to unveil an even more aggressive

expansion plan. Starbucks would target a large, demographically favorable region that would fit

into existing company operations capabilities, and this target area would serve as a hub that

would spawn many more satellite locations feeding off of the hub (Thompson, Jr. & Strickland,

1999). The strategy was a success allowing for: 677 locations open in 1995, 3,501 locations

open in 2000, and 16, 858 locations open in 2010 (Starbucks, 2011).

2.1.0. Background

Starbucks continues to change and innovate in the coffee industry. Over the last five

years Starbucks has continued to be successful firm in spite of pressures from economic realities

and competitors. Starbucks succeeds on three main fronts: financially, strategically, and

competitively. Table 1 on page 10 expresses the revenues and the percent change in revenues as

compared to the previous year for the last five full years:

Table 1: Starbucks Revenue Trends 2005-2010

Year Total Revenues Change in Revenues

2006 $7.8 Billion 22%

2007 $9.4 Billion 21%

2008 $10.4 Billion 10%

2009 $9.8 Billion -6%


2010 $10.7 Billion 10%

Source: Starbucks, 2011

With the exception of 2009, Starbucks has outperformed the previous year with at least a

10% increase in total revenues. Starbucks was affected, like most of the global economy, by the

2009 economic slowdown and posted a decrease in revenues by 6%. The revenues did increase

for 2010 and the total revenues of $10.7 Billion dollars is an all-time high (Starbucks, 2011).

Over the last five years Starbucks has continued its strategy of aggressive expansion in

metropolitan US markets as well as rapid growth into international markets. As of 2010, the total

store locations are up to 16,858 with 11,131 domestic and 5,727 stores internationally. In 2006

Starbucks had 12,440 total stores; this is over a 4,400 location net increase in a five year period

(Starbucks, 2011). Starbucks also continues to market and grow the Starbucks card through

cross promotions and in-store marketing. In the first quarter of 2006, Starbucks card new card

sales and card reloads amounted to $333,500,000, while in the first quarter of 2011 card revenues

accounted for $703,000,000 in sales (Starbucks, 2011). One of the latest strategic moves that

Starbucks has undertaken is a Memorandum of Understanding (MoU) with Tata Coffee Limited

from India. This MoU will give Starbucks a foot into the proverbial door of the India coffee

market, both to purchase Arabica beans and to serve coffee beverages to the Indian market

through retail outlets and restaurant and hotel collaboration (Starbucks, 2011).

Competitively, Starbucks continues to innovate and bring to market new product

offerings each quarter. This includes products like flavored VIA ready brew coffee, hot artesian

sandwiches, hot breakfast options, and Vivanno smoothies (Starbucks, 2011). Starbucks also

continues to be an employee friendly company as evidenced by selection as a top company to


work for by Fortune for the last five years (Fortune, 2011). Keeping a committed and

enthusiastic staff has allowed Starbucks to maintain a relatively low turnover rate and maintain

high levels of customer service (Thompson, Jr. & Strickland, 1999). Starbucks also continues to

search out new opportunities to expand brand awareness. In January 2011, Starbucks announced

a cross promotion with Courtesy Products to place and stock Starbucks single serve coffee in

over 500,000 luxury and premium hotels (Starbucks, 2011).

2.2.0. Purpose of This Study

The purpose of this study is to engage in an external analysis of the coffee industry to

examine how the external market affects Starbucks Corporation and to answer seven critical

questions on the coffee industry and the competitive environment that Starbucks works in

(Gamble & Thompson, Jr., 2011). These questions are:

1. What are the industrys economic characteristics?

2. What are the types and relative strength of the economic forces that industry members

face?

3. What are the industry driving forces and how do these driving forces act on the industry?

4. What positions in the market do rivals occupy?

5. What strategic moves are rivals willing and able to make?

6. What are the Key Success Factors for successful competition?

7. Does the industry offer good prospects for profitability?

The answer for these questions will lead into future work of an internal analysis of Starbucks

as an organization and also allow for the author to make strategic recommendations to Starbucks

on the coffee industry. The information for this study will come from academic and financial


resources including company websites, financial analysis websites, news releases, academic

journals, and government filed reports.

3.0.0. External Analysis

The external analysis is divided into two main components. These components are the

general environmental analysis and the industry analysis. Collectively these are the external

analysis and through exploration and examination can explain the competitive environment of

the industry where the company operates in an attempt to make profits. The external analysis

always focuses on the industry and not the individual firm.

Diagram 1 on page 16 shows the two major components that comprise the external

environment of the coffee industry. The Macroenvironment is the focus of the general

environmental analysis and is comprised of the outer five segments. The inner ring is considered

to be the industry analysis and consists of Porters Five Forces which act individually and

collectively on the company.


Diagram 1: The Components of a Coffee Firms Macroenvironment

Source: Gamble & Thompson, Jr., 2011

3.1.0. General Environmental Analysis

The general environmental analysis consists of the outer ring of the Macroenvironment

and the five main segments. The segments are comprised of: general economic conditions

(economic), legislative and regulations (political/legal), societal values and lifestyle (socio-

cultural), technology (technological), and population demographics (demographic) (Gamble &

Thompson, Jr., 2011). The general environmental analysis has also been referred to as a PEST

or PESTEL analysis (Oxford University Press, 2007).

3.1.1. Demographic Segment

The demographic segment of the coffee industry is involved with the population

segments and characteristics of the consumers that purchase product from firms in the industry.

These characteristics include age, race, gender, income, and education. These characteristics


affect the tastes and buying habits of the industrys consumer base. Coffee drinkers over age 59

have different preferences than the 18-24 ages demographic. Also, the amount of coffee

consumed and the times of day for consumption vary with demographic characteristics (National

Coffee Association of the USA, Inc., 2008). The coffee industry will continue to innovate

product offerings in an attempt to gain large demographic market shares of the different classes

of consumers. This will be done by changing the preferences of targeted demographics like

increasing gourmet coffee consumption in mature customers or by expanding into untapped

coffee markets like Chinese tea drinkers. The coffee industry demographics segment can be

visualized by table 2 on page 17.

Table 2: Tracking Measures of Coffee Demographics

By Type of Coffee

Daily, weekly, annual

50-year trending

By Age

Daily, weekly, annual

By coffee type

Total, Traditional, Gourmet

By Region

Total, Traditional, Gourmet

By Time of Day

By coffee type

Driver and Barriers

Consumer attitudes

By age

Health messages

Key Driver Analysis

Coffee Origins/Certifications

Country associations

Certification awareness

Additives and Flavorings

Breakout of additives by type and by age


By age

By location and share of cups

By Location

In-home vs. out-of-home

By age

By share of cups

Consumer flavor preferences, added and pre-flavored

Consumer Profiles

Demographics, traditional vs.gourmet drinkers

Gourmet drinkers over time

Non-drinkers

Source: NCA Market Research

3.1.2. Economic Segment

The economic segment is characterized by the general economic conditions in the non-

controllable environment that the coffee industry operates in. The most notable factor is the

recent global economic recession of 2008 and 2009. The recession affected both businesses with

rising operational costs and lower profit margins, and consumers of the products that have seen

product prices rise while wages remain the same and unemployment levels increase (Bureau of

Labor Statistics, 2011). The outlook is improving and as confidence grows, the global economy

will improve (World Bank, 2010). The coffee industry competes on two levels, the

undifferentiated traditional coffee offering and gourmet, Italian-style coffee beverages. By

offering both lower cost coffee options to fringe customers and higher cost options to more

affluent clientele, the coffee industry will attempt to serve coffee to all that want or need it. In

2008 during the economic crisis as consumers were making severe spending cutbacks, coffee

drinkers in the US still drank the same amount of coffee, 3.3 cups per day on average, but simply

opted for the lower cost options (Moreno, 2008).


3.1.3. Political/Legal Segment

The coffee industry faces many types of political and legal pressures in the

Macroenvironment. Coffee firms import coffee beans from a variety of countries, each with

their own respective customs and tariff regulations. On an international scale, these firms must

gain expertise on how to import beans from each different country and keep detailed tabs on

political upheavals, changes to policies, and be fearful of foreign government seizing company

assets.

On the legal front, firms must file for all necessary forms and permits to be authorized to

do business. This includes tax forms, business entity applications, legal contracts, store and

factory leases, etc. The local and federal governments will also dictate certain laws and

regulations onto the businesses. These include labor laws, food handling regulations, and

business practices restrictions as in the arena of marketing and advertising.

3.1.4. Socio-Cultural Segment

The socio-cultural element focuses on how the consumers exert forces on the industry

and how the firms do business. As the consumer outcry for fair practices have grown and

evolved, so to have many of the firms operating practices (Northey, 2007). Starbucks

implemented a C.A.F.E. program to address concerns about the social responsibility of the

industry to perpetuate sustainability of coffee bean growers. The C.A.F.E. program looks

establish quality criteria and share responsibility throughout the supply chain (ICO, 2011). Other

firms use third party certifications in an effort to be more social responsible and will label their

product as a badge of honor. These social responsible accepted labels include the Fair-trade

Certificate, The Rainforest Alliance certification, and the Organic certification (ICO, 2011).


As consumers become increasing more educated and health conscious, the industry must

constantly monitor the environment and adapt product offerings to meet demand. Although

companies like Starbucks initially resisted using anything other than whole-milk in coffee

beverage preparation, they eventually gave in to pressure and adopted 2% milk as the standard

and also offer non-fat milk as well (Thompson, Jr. & Strickland, 1999). The next big issue on

the consumer health watch radar is sugar intake (Wall Street Journal, 2009). Given this pressure,

industry producers will need to either reduce sugar levels in beverages and food offerings, or

come up with new product that will satisfy the consumer both nutritiously and flavor-wise.

3.1.5. Technological Segment

The technological area of the Macroenvironment is a major factor in the coffee industry.

The main influences in this portion of the environment are technology as it relates to customer

interaction to the business, product innovation and product service, and customer ambience.

Customers interact with the industry in a number of ways. Technological improvements allow

for firms to directly market new product offerings to consumers by way of text messages, emails,

and social network sites (Buckstein, 2010). Technology is readily available to all firms in the

industry for relatively lower cost than traditional advertising. Industry firm Dunkin Donuts has

experimented with on-counter digital billboards that advertise messages to drive customers back

to the store for same day purchases (Steel, 2008).

Product innovation is another important aspect of the technology segment. Firms must

strive to keep pace with customer tastes and rivals. Technology allows for changes to product

mix to compete in new market segments like Starbucks VIA ready brew offering (Starbucks,

2011). Technology also improves the way firms can produce product through new machines and


more efficient processes which will lead to improved service to the end consumer. The

companies that stay on the cutting edge with process and equipment, like bean roasters and

brewing machines, will have an advantage. The industry is also influenced to utilize technology

to improve the overall customer experience. This includes the use of Wi-Fi internet capability

services as a draw to customers that can utilize the technology for business or personal purposes

(Oliviera, 2011). Keeping customers in store for longer periods of time will result in more sales.

3.1.6. Global Segment

The global segment of the Macroenvironment centers on the prospects of coffee firms

operating on a global scale. The coffee comes from various parts of the world and in varying

types and qualities. The most popular coffee types are Arabica, Robusta, or Liberica bean and are

grown primarily in Africa, Central America, and South America (ICO, 2011). The global

segment also refers to the quantity of coffee drinkers across the globe.

On a global scale, the demographic characteristics will vary as well. The coffee industry

sees this as an opportunity to increase market share as it has previously in the US market. The

prime example of this is Starbucks introducing gourmet, Italian-style coffee beverages to the

domestic populace (Thompson, Jr. & Strickland, 1999). The coffee industry has recently made

headway into converting tea drinkers in the United Kingdom to gourmet coffee offerings (Bell,

2005). Multinational coffee houses like Gloria Jeans and Starbucks have targeted Russia and its

growing capitalist economy for retail store expansion (Reuters, 2008). Furthermore, coffee giant

Starbucks has set its sights on the one billion plus Chinese tea drinkers, and looks to change

preferences to gourmet coffee beverages (Adamy, 2006).


3.1.7. Summary of General Environmental Analysis

The coffee industry will continue to look for and find ways to increase to demographic

that it services. This will be done with continued product innovation and increased product

offerings to fit the consumers demand. The industry will also continue to expand globally into

new markets to attract a larger number of customers. The stabilization and improvement of the

global economic condition will lead to an increase of gourmet beverage consumption among

fringe consumers. Also, the competing firms must continue to be ever vigilant and monitor the

global political landscape that affects coffee trade viability, retail markets, and sustainability

efforts in social responsibility to all users of the value chain.

3.1.8. Driving Forces

Driving forces are defined as change agents that have the biggest influence in reshaping

the industry landscape and altering competitive conditions (Gamble & Thompson, Jr., 2011).

There are three components to the analysis of industry driving forces. The first is to identify what

the three to four most influencing forces are. These are referred to as the industrys determinant

driving forces. The second step is to assess how the determinant driving forces individually and

collectively act upon the industry. The final step is to determine strategy changes that the

industry will need to make in order to counterbalance the effect of the determinant driving forces

(Gamble & Thompson, Jr., 2011).

The first step is to identify the four major industry driving forces. There are thirteen

forces that are generally believed to affect any given industry, however on average only three to

four will be able to be considered as determinant driving forces (Gamble & Thompson, Jr.,

2011). The four determinant driving forces for the coffee industry are: product innovation,


changing societal concerns, attitudes and lifestyles, growing buyer preference for differentiated

products, and increasing globalization.

The first driving force is product innovation. The industry must continuously strive to

innovate new product offerings for two reasons: to continue to attract new customers that do not

buy from the current product mix and to offer differentiated products from rival firms. The

industry needs to listen to its customer base as they are one half of the product innovation

equation. The customers know what they want and will sound off by making current items

popular and successful or by giving in-store or online feedback as to what products and services

they would like. Overall this driving force has a positive effect on the industry as it forces firms

to lead follow or get out of the way. The successful firm will be one that is able to continuously

bring new, successful products to market.

The second driving force is changing societal concerns, attitudes, and lifestyles. As

discussed previously, societal changes related to the coffee industry center on two major topics.

These are the trends that consumers are increasingly demanding healthy alternatives to full-fat,

high-sugar coffee drinks, and the growing concern on the addictive properties of coffee and how

long term coffee consumption may affect health (Laitala, Kaprio, & Silventoinen, 2008). The

coffee industry has responded over the years as consumers have demanded healthy alternatives.

In most coffee houses the customer will be able to choose between whole milk and non-fat milk,

with or without whipped cream, and caffeine or decaf. Recent studies have shown that moderate

coffee consumption can have health benefits like reducing the risks of common ailments like:

mens prostate cancer, stroke, Alzheimer's, dementia, Parkinson's, endometrial cancer, colon

cancer and gallstones (Washington Post, 2009). This driving force acts on the industry in a

positive manner as it forces firms to bring new, desirable products to market which will result in


additional sales and revenues. Also, the industry can now choose from multiple studies to show

that their product is actually beneficial. These studies would not have been done if not for this

driving force and concerns on how coffee affects the consumers.

The third driving force is growing buyer preference for differentiated products. This

force acts on the industry to require firms to continually stay in touch with buyer demand. If

every coffeehouse offered the same product mix then consumers would simply go to the closest

store for their purchases. By differentiating products, customers will travel to a certain firm or

even a certain location of that firm to get their favorite products. Differentiation is a business

strategy to give firms a competitive advantage (Gamble & Thompson, Jr., 2011). In this aspect

differentiation of product is required to be an industry leader. This driving force acts upon the

industry in a negative way. Firms must have considerable industry expertise and know how to

develop new products. Also, large amounts of capital will be required to develop, design,

market, and produce new products in the industry.

The final determinant driving force is globalization. Globalization as a force acts to open

new markets and new consumers to firms in the industry. Once firms have adequately reached a

critical mass in a country or region, they must seek new opportunities to continue to grow their

business. The face and definition of how companies will act as globalization evolves is subject

to debate, but firms will need to continue to grow across the globe to increase revenue

production (Laudicina, 2010). Firms in the coffee industry will view increased globalization as a

way to increase market share by changing consumer preferences (Bell, 2005) or by expanding

into new untapped markets (Adamy, 2006). This force acts on the industry in a strong positive

manner as continued increases in globalization allow for continued increases in opportunities by

way of market expansion.


The collective push of the driving forces is in a positive direction. The lone negative

push comes from firms in the industry that are not creative or innovative and are relegated to

follower or generic low cost provider status in the industry. Diagram 2 shows the net affect that

the determinant driving forces have on the coffee industry:

Diagram 2: Effect of Driving Forces on the Coffee Industry

, 2011

Source: Harold Brown, 2011

3.2.0. Industry Analysis

In the United States, approximately 150 million consumers purchase and drink coffee

beverages with 89% opting to brew coffee at home rather than purchase premade products from

retailers and coffee houses (Gamble & Thompson, Jr., 2011). The average coffee drinker

consumes 3.3 cups of coffee per day (Moreno, 2008). The amount of coffee that is consumed

has lead way to an increase in firms offering prepackaged coffee in retail locations and large

super market chains. The prepackaged coffee producers include lower cost options like Folgers

and Maxwell House, store brand alternatives like Archer Farms (Target) or Caf Ole (HEB), and

premium brands like Starbucks and Seattles Best. Since the 1990s, when Howard Schultz

Coffee Industry Product

Innovation

Globalization

Product Differentiation

Societal Concerns

Positive Driving Forces Negative Driving Forces


brought the idea and concept of an Italian Espresso bar to the United States, specialty coffee

sales have grown to 20% of industry revenues. The specialty coffee market has grown to over

$13.5 billion at an average annual growth rate of 32% between 2000 and 2007 (Gamble &

Thompson, Jr., 2011).

3.2.1. Description of the Industry

The coffee industry is comprised of three main segments. The first segment is the coffee

and tea roasting and manufacturing segment. The second segment is the ground and instant

coffee segment through retail and supermarket locations. The final segment is the coffee house

espresso bar and quick service food establishment segment.

3.2.2. Industry Dominant Economic Features

The dominant economic features of the coffee industry are characterized by ten general

economic characteristics. The predominant characteristics are market size and market growth

rate. Diagram 3 on page 27 outlines all ten dominant economic features.


Diagram 3: Coffee Industry Dominant Economic Features

Source: Gamble and Thompson, 2011

3.2.3. Market Size

The coffee industry is a sub-section of the hot drinks industry as defined by Datamonitor,

which also includes the tea industry as well (Datamonitor, 2010). The global hot drinks market

size was $81,432 million dollars for 2009 with a global volume of 5,374 million kilogram output.

The United States share of the hot drinks market for 2009 was $10,834 million dollars and 794

million kilograms (Datamonitor, 2010). Coffee accounts for 54.2% of total global hot drink

consumption, while the United States has a 68.7% of hot drinks as coffee. Europe is the leading

consumers of hot drinks at 44.6% of total consumption, while Americans gulp down 14.2% of

the worlds hot drinks (Datamonitor, 2010).

Market size Number of rivals Scope of rivalry Number of buyers Differentiation Product innovation Demand-Supply Technological change Vertical integration Economies of scale Learning curves

Coffee Industry


3.2.4. Market Growth Rate

The market growth rate for the hot drink industry still shows expected increases. Over

the last five years both the global market and US market have grown at a fairly consistent clip

each year (Datamonitor, 2010) . The growth prospects are centered around firms being able to

innovate new products and for firms to expand globally and capture new emerging markets. The

following tables (tables 3-7, on pages 28 to 29) show the trends in the growth rate of industry

revenues and industry production:

Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio09

Global Hot Drinks Market Value

Year $ in Millions % Growth 2005 58,862.3 - 2006 60,728.9 3.2% 2007 62,950.8 3.7% 2008 65,406.2 3.9% 2009 68,030.9 4.0%

CAGR 2005-2009 3.7%

source: Datamonitor

Table 4: Global Hot Drink Data for Coffee Industry

Global Hot Drinks Market Volume

Year Million Kilograms %

Growth 2005 4,899.8 - 2006 4,988.1 1.8% 2007 5,110.0 2.4% 2008 5,240.8 2.6% 2009 5,374.6 2.6%


CAGR 2005-2009 2.3%

Source: Datamonitor

Table 5: U.S. Hot Drink Data for Coffee Industry

United States Hot Drinks Market Value

Year $ in Millions % Growth 2005 8,933.7 - 2006 8,892.5 -0.5% 2007 9,091.2 2.2% 2008 9,381.3 3.2% 2009 9,672.6 3.1%

CAGR 2005-2009 2.0%

source: Datamonitor

Table 6: U.S. Hot Drink Data for Coffee Industry United States Hot Drinks Market Volume Year Million Kilograms % Growth 2005 754.4 - 2006 741.1 -1.8% 2007 757.1 2.2% 2008 776.8 2.6% 2009 793.8 2.2%

CAGR 2005-2009 1.3%

source: Datamonitor


3.2.5 Industry Trends

The industry trends refer to the remaining eight dominant economic features of the

industry. The number of rivals characteristic focuses on whether the industry is fragmented into

many small companies or if it is dominated by a few large companies (Gamble & Thompson, Jr.,

2011). The global landscape is much different than the US landscape as far as industry rivals.

The global market is considered to be fragmented with the top three firms having only 22.9% of

the total market, while the US market is considered to be trending towards consolidation with the

top three firms having 59.4% of the market volume (Datamonitor, 2010). The scope of rivalry

among competitors is global with the top market holding companies. These companies offer

products to all countries and regions throughout the world. The main distribution channel both

globally and in the US are the hypermarket and supermarket chains (Datamonitor, 2010).

The key buyers in the hot drinks market are the retailers of hot drinks products. These

include the specialty coffee houses, the hyper and supermarkets, and restaurant chains. The

primary buyers are the hyper and supermarkets which account of 80.4% of the market

(Datamonitor, 2010). With such a large share of the market resting with a few large market

chains, the number of buyers should be considered as consolidated. On the other side of the

equation are the suppliers. These are the growers of tea leaves, coffee beans, and cocoa beans.

Demand has continued to steadily increase over the last five years and prices have not fallen,

therefore there is not a surplus of capacity pushing prices and profits down.

Product innovation is key economic characteristic as does the pace of technological

change. Being a leader in product innovation will lead to stronger brand power and increased

customer satisfaction. Giving the customers what they want will also lead to increased revenues.

The firms that keep up with improvements in technology can utilize these new efficiencies to


improve portions of the supply chain and reduce drag to the value chain. Some firms are

experimenting with direct digital advertisement in stores, Wi-Fi enabled environments, social

networking as a marketing medium, and even mobile apps for handheld devices that will make

ordering and purchasing of product faster and more convenient (Starbucks, 2011).

Two other economic characteristics play a considerable role. The economies of scale that

the large multinational firms possess act as a barrier of entry to new entrants. These large firms

enjoy a cost advantage over small firms and also possess an advantage in supply chain activities

(Datamonitor, 2010). Certain large retail firms enjoy a significant advantage in learning and

experience curve effects. One firm, Starbucks, has a competitive advantage over rivals based on

their considerable ability to select, design, and market new locations in key demographic areas

(Thompson, Jr. & Strickland, 1999).

3.2.6. Five Forces Analysis

One of the widely held assessment tools of an industrys competitive forces is the five-

forces model of competition created by Michael Porter (Gamble & Thompson, Jr., 2011). These

five forces are: the competitive force of buyer bargaining power, the competitive force of

substitute product, the competitive force of supplier bargaining power the competitive force of

potential new entrants, and the competitive force of rivalry among sellers (Porter, 1980).

Diagram 3 on page 32 illustrates the five competitive forces in the coffee industry model.


Diagram 3: Five Competitive Forces in the Coffee Industry


3.2.6.1. Threat of New Entrants

According to Datamonitors 2010 Hot Drinks industry report, the threat of new entrants

into the coffee industry is an average force. This is based on negligible switching costs for

consumers to purchase new product or lower priced product from competitors and easy access to

pre-existing distribution channels and suppliers, with very little regulation, act to strengthen the

forces and make the industry attractive to potential entrants. These forces are offset by brand

loyalty of established firms that also enjoy economies of scale that will be hard for new firms to

initially compete with. Also, established firms have high product innovation that will make it

hard for new firms to differentiate themselves. As these forces oppose each other, the net result

is threat of new entrants is moderate (Datamonitor, 2010).

Rivalry among Competing

Sellers STRONG

Substitutes WEAK

Suppliers MODERATE

New Entrants MODERATE

Buyers MODERATE


3.2.6.2. Power of Suppliers

The major suppliers to the industry are countries from Africa, South America, and Asia.

This is due to the fact that tea leaves and coffee beans must be grown in a certain climate. As

such, many of these supplying regions are lower economic countries. This coupled with the

amount of independent growers and undifferentiated quality of the product weakens the power of

the suppliers. Coffee beans are a commodity product and coffee prices are dictated by supply

and demand. The power of suppliers is also deemed to be moderate (Datamonitor, 2010).

3.2.6.3. Power of Buyers

The large hyper and supermarkets account for 80.4% of coffee and tea purchased in the

United States. These large chains have considerable price negotiating power as a buyer based on

the quantity of product they buy and the ability to shelve competing brands. Some product

differentiation exists based on brand power, quality, and taste which forces retailers to stock the

product choices that consumers are looking for even if it is more costly. In this aspect buyers

power is reduced. The net power of the buyers is considered to be moderate (Datamonitor,

2010).

3.6.2.4. Power of Substitutes

The hot drinks consumption patterns of most countries are dictated by culture and

customs. This phenomenon greatly reduces the pressures form substitute products. Some

consumers may opt for caffeine intake from soft drinks or energy drinks, but the sheer number of

coffee and tea drinkers globally will minimize the financial impact on consumers changing to

substitutes. The threat of substitutes is considered to be very weak in this industry (Datamonitor,

2010).


3.2.6.5. Intensity of Rivalry

Rivalry intensification has increased due to the continual introduction of new products

into the market, and moves to differentiate products based on selection, service, and quality

(Gamble & Thompson, Jr., 2011). As the economic downturn affect high-end coffee

establishments and sales growth became consistent but slow, the rivalry further intensified

(Moreno, 2008). Finally, the ability for consumers to switch products and firms with no barrier

has forced the competing companies in the industry to stress brand image and quality to steal

rivals market share. The intensity of rivalry is very high in the coffee industry.

3.2.7. Summary of Industry Analysis

As a general guideline, the stronger the collective amount of pressure the industry feels

from the five forces, the lower the expected profits will be industry wide (Gamble & Thompson,

Jr., 2011). The coffee industry faces very strong pressures from the intensity of rivals but

relatively weak pressures from the threat of substitute products. The other three forces are

characterized as moderate. Overall, the collective impact of the five forces is moderate. Firms

that operate in the industry efficiently and effectively can make above average profits, but new or

inefficient firms will struggle or be forced out by the five forces.

3.3.0. Competition Analysis

Competition in the coffee industry can be broken down into two different categories,

direct and indirect competition. The direct competition would include firms that manufacture

and product hot drinks (Datamonitor, 2010). These firms will be retailers of ready-to-drink

coffee and tea products, quick service restaurants, and supermarkets. Also, in this category are

the large multinational companies that produce ground coffees and instant coffees (Datamonitor,


2010). The indirect competitors are comprised of energy drinks, caffeinated soft drinks, and

energy shots.

3.3.1. Industry Competitors

Competitive strategy will aim to position rival companies into strategic groups. These

strategic groups consist of industry members that have similar goals and positions in the

competitive industry (Gamble & Thompson, Jr., 2011). These groups are placed on a strategic

group map for analysis on how industry firms are positioned. Firms in the coffee industry will

be mapped based on price and quality of their products versus product line breadth. The size of

the circle representing each firm on the strategic group map is symbolic proportional to the size

of the firms share of total group revenues (Gamble & Thompson, Jr., 2011).

The major direct competitors in the coffee industry are listed in the following table. The

firms are broken down by breadth of products offered to the market, industry related sales, and

percentage of sales relative to rivals. The data listed in table 7 are used in constructing the

strategic group map (diagram 4, page 36).

Table 7: Direct Competitors to Starbucks

Firm Product line

Breadth Revenues (2010)

in Millions % of Total Group

Revenues Starbucks High 10,707 27% Dunkin Donuts Moderate 5,500 14% McDonald's Moderate 2,400 6% Green Mountain Coffee Roasters Low 803 2% Kraft Foods, Inc. Low 3,100 8% Nestle S.A. Low 17,700 44%

Source: Harold Brown 2011


Diagram 4: Strategic Group Map of Coffee Industry

Source: Harold Brown 2011

3.3.2. Rivals Anticipated Strategic Moves

Starbucks will focus on strategic moves as outlined previously by expanding into global

locations like China and Russia, utilize cross-platform marketing with companies in the Indian

Hotel market to increase brand awareness, and further incorporate new technology into customer

experience.

One of Starbucks stiffest rivals is Dunkin Donuts. Following in Starbucks footsteps,

Dunkin Donuts will look to expand globally, especially in the Asian markets. Dunkin Donuts

has set a goal of 100 locations in 10 years in Shanghai alone. The expansion will also include

Price/Quality of P

High

Low

Product Line Breadth

Few Products Many Products

Starbucks

Nestle Kraft McDs

Dunkin Donuts

Green Mountain


parts of the United States that have yet to become saturated with Dunkin Donuts yet. Many of

the older stores will be getting face lifts to incorporate a new design theme that will enable better

use of new, advanced equipment and technology to enhance the customer experience (Dunkin

Donuts, 2011)

McDonalds will continue its 2009 strategy of competing against Starbucks through

expansion of McCafe locations into more stores both domestically and internationally.

McDonalds has a cost advantage over Starbucks in the sense that they can go into existing

McDonalds for one-third of the price that it would cost Starbucks to open a new location (Liu,

2009). McDonalds will also need to counter the new aggressiveness of Dunkin Donuts, which

shares a similar market position based on product offerings and price. One way McDonalds

could improve their strategic position would be to sell their coffee prepackaged in stores and

supermarkets. Both Starbucks and Dunkin Donuts offer this option, as do large food

conglomerates like Kraft and Nestle. This is currently the subject of a Facebook campaign

(Facebook, 2011)

3.3.3. Summary of Competitive Analysis

The main question to answer here is whether the coffee industry offers good prospects for

attractive profits. The industry will not offer the same attractiveness for all competing firms and

the analysis will be focused on one firm (Gamble & Thompson, Jr., 2011). For the purposes of

this paper the firm to focus on will be Starbucks. The above sections have answered the major

points in addressing this question. The coffee industry is in a slow growth phase which will

intensify competitive pressures. Competition will continue to grow stronger as firms look to


expand globally to discover new markets and new customers, develop new products to bring to

market to satisfy consumer demand, and further differentiate products and quality.

The determinant driving forces of the coffee industry all play favorably well to Starbucks.

Starbucks has long sought out global markets and continues to expand each year. Also,

Starbucks utilizes technology extremely well as evidenced by their heavy use of internet

capabilities, social network marketing, Starbucks rechargeable payment cards, and even new

mobile apps to speed ease and ability of payment and ordering. Starbucks is also an industry

leader in both product innovation and product offerings. Most other firms take a follower

position and simply copy successful Starbucks products at lower prices. This positions

Starbucks well in the industry. The strategic group map shows Starbucks as the leader in both

price/quality of product offerings as well as the breadth of products offered. The white space on

the map is possible openings for new firms or areas where existing firms can move into. These

would be a high priced, low breadth offering positions, or a low cost, high breadth offering

position.

3.3.4. Key Success Factors

An industrys key success factors (KSFs) are those factors that affect industry members

ability to successfully compete in the market place. The KSFs are strategy elements, product

features, competitive capabilities, or other intangible assets that deeply affect future success.

These factors are extremely important to all firms in the industry and failure to devote proper

attention will increase the risk of a firms exit from the industry (Gamble & Thompson, Jr., 2011).

The coffee industry faces six common KSFs (as displayed in diagram 5, page 39) that are

applicable to the success of each competing firm (Gamble & Thompson, Jr., 2011).


Diagram 5: Key Success Factors for Survival in the Coffee Industry


As previously discussed in prior sections, product innovation, breadth of product line,

brand power, and the ability to put product into convenient locations for the consumers are the

key success factors for the coffee industry. The firms that can do these KSFs well will compete

at the highest level and have an advantage over all other firms in the industry.

4.0.0. Internal Analysis

The internal analysis is where the strategic analysis changes from an evaluation of the

coffee industry as a whole (external analysis) to a focused evaluation specifically aimed at

Starbucks and their organization. The internal analysis evaluates Starbucks collection of

Internet use for marketing Mobile communication apps Technology KSFs

Quality control know how Customer service ability Service KSFs

Strong network of distributors/suppliers Internet and retail store sales capabilities Distribution KSFs

Breadth of product line Well known and respected brand name Marketing KSFs

Product innovation capabilities Courteous, personilized customer service

Skills and Capability KSFs

Convenient locations Ability to capture new market segments Other KSFs


valuable resources and capabilities, its cost position in relation to rival firms, and its competitive

strength in the market (Gamble & Thompson, Jr., 2011). The internal analysis of Starbucks will

consist of an organizational analysis utilizing a modified 7S framework, an analysis of

Starbucks resources, a financial analysis of Starbucks financial performance, and a SWOT

analysis of Starbucks.

4.1.0. Organizational Analysis

The primary purpose of organizational analysis is to analyze the current state of the entire

organizations operational and structural framework (uslegal.com, 2011). For the purpose of this

report, the McKinsey 7S framework model will be modified to cover six elements instead of

seven. This type of framework modeling is one of the most common methods to conduct an

organizational analysis. The McKinsey 7S was developed in the early 1980s by Tom Peters and

Robert Waterman, and the basic premise of the model is that there are seven internal aspects of

an organization that need to be in sync with each other if success is to be reached

(www.mindtools.com, 2011).

The six internal aspects involved with the organizational analysis of Starbucks are the

corporate mission, the products and services, leadership, organizational culture, structure, and

strategy. The framework can best be used to determine how to implement a chosen strategy

since this organizational analysis serves to answer the question of where is the company

going? (www.mindtools.com, 2011). The visual representation of the Starbucks framework

consists of six interconnected elements. The organizational culture element is in the center of the

framework because this is the central culture and values of Starbucks and why the company was

founded. All other elements rely on the organizational culture for definition


(www.mindtools.com, 2011). Diagram 6 on page 41 is a model of the full organizational

analysis framework of Starbucks.

Diagram 6: Organizational Analysis Framework Model of Starbucks


4.1.1. Corporate Mission

The corporate mission of Starbucks, along with their vision statement and business model

reside are key factors in determining where Starbucks wants to go as an organization (Gamble &

Thompson, Jr., 2011). The corporate mission statement of Starbucks is based on their present

business scope and purpose, unlike the vision statement which outlays the future strategic course,

and answers for the public who they are, what they do, and why they do it (Gamble &

Thompson, Jr., 2011).

Organizational Culture

Strategy

Corporate Missionure

Products and

Services Leadership

Structure


The Starbucks mission statement is concise and clear and does a good job of answering

who they are, what they do, and why they do it. The Starbucks mission statement is:

Our mission: to inspire and nurture the human spirit one person, one cup and

one neighborhood at a time. - (www.starbucks.com, 2011)

Starbucks achieves to deliver on their mission through execution of five core principles: Our

Coffee, Our Partners, Our Customers, Our Stores, Our Neighborhood, and Our Shareholders

(www.starbucks.com, 2011)

The Our Coffee principle refers to how strongly Starbucks feels about the quality of

coffee that they serve their customers. This is a two-sided equation that involves not only quality

to the end consumer, but also to purchase the coffee beans in an ethical manner that will improve

the lives of the farmers that grow them (www.starbucks.com, 2011). The Our Partners principle

refers to how important Starbucks views their employees as a critical resource and asset to its

operations. By treating the employees as partners both the company and employees win

(www.starbucks.com, 2011). The Our Customers principle is made possible by the Our Partners

principle. Starbucks is guaranteeing a perfect cup of coffee to their customers, which can only

be delivered by willing engagement of the staff (www.starbucks.com, 2011).

The Our Stores principle seeks to establish the Starbucks third place experience where

the customers will feel a human connection and a sense of belonging (www.starbucks.com,

2011). The third place experience is how Starbucks attempts to establish itself as the third

place that its customers enjoy coffee and also come to relax in a gratifying environment (Rice,

2009). The Our Neighborhood principle sets the tone for Starbucks to act as a world leader and

set the standard and be a good neighbor and act in a positive manner (www.starbucks.com,


2011). Starbucks utilizes the Our Shareholder principle to hold itself accountable to enrich the

lives of everyone that it touches (www.starbucks.com, 2011). This is based on the Stakeholder

Theory that explains that organizations are not just responsible to the shareholders of the firm,

but to all of the groups that it interacts with, like employees, customers, suppliers, investors, and

governments (Freeman, 1984)

4.1.2. Products and Services

The products and services that Starbucks offers is critically important to Starbucks

achieving differentiation in the market by way of constant product innovation (Kelly, 2006).

Starbucks currently offers more than just high quality gourmet coffee. Other products that

Starbucks offers are ready-to drink cold beverages, food items, and retail merchandise

(Starbucks, 2011).

The primary focus of Starbucks is still high quality gourmet coffee and tea products.

These products include espresso drinks, brewed coffee drinks, blended coffee with ice drinks

(Frappuccino), and Tazo tea drinks (Starbucks, 2011). Images 1 through 4 on pages 43 and 44

illustrate Starbucks coffees, Frappuccino, and tea offerings.

Image 1 Image 2


Image 3 Image 4

Starbucks now offers multiple ready-to-drink cold beverages like the espresso Double

Shot, bottled Frappuccino, and bottled coffee. Images 5 through 6 on page 45 depict these

Starbucks product offerings (Starbucks, 2011). These products are sold at Starbucks locations as

well as outside retailers like grocery stores, convenience stores, and concession counters.

Starbucks has also been successful in putting their own brand of ground coffee inside the big box

retail grocers. This coffee is bagged as ground or in whole bean form for the consumers that will

brew their own coffee at home or at work (Starbucks, 2011). The grocers now carry the VIA

ready brew product as well. VIA ready brew is instant coffee that just needs hot water added to

be able to enjoy the same renowned Starbucks taste virtually anywhere (Starbucks, 2010).

Images 7 through 9 on page 45 display the grocery coffee offerings from Starbucks.


Image 5 Image 6

Image 7 Image 8 Image 9

Starbucks offers a wide range of food products as well as just the beverage service.

These food items are breakfast sandwiches and oatmeal, lunch sandwiches, and sweets. These

Sweets are a variety of cakes, cookies, and cupcakes (Starbucks, 2011). Images 10 through 15

on page 46 show a sample of the food items that Starbucks offers.


Image 10 Image 11

Image 12 Image 13

Image 14 Image 15


The primary service that Starbucks offers is its customer service to its customer base.

Starbucks prides itself on its customer service and is dedicated to ensuring that each customer

enjoys each trip to Starbucks (Starbucks, 2011). Starbucks lists customer service as a key

principle in its corporate mission statement (www.starbucks.com, 2011). This service is

paramount and as such, Starbucks recruits and hires high quality workers that fit into their

corporate culture. The staff is considered partners in the organization based on how critical their

job is to fulfilling exceptional customer service and allowing Starbucks to deliver its promise of

quality coffee in its mission statement (www.starbucks.com, 2011).

Other services that Starbucks offer are third place experience atmosphere and onsite

coffee service. The third place experience is what Starbucks refers to as the third location that

consumers will relax and enjoy drinking coffee beverages (Rice, 2009). This is accomplished by

expert location selection, warm and inviting dcor, comfortable resting areas, and friendly

customer service (Rice, 2009). Starbucks also offers free Wi-Fi to everyone at its store locations

to entice customers to stay longer and work or surf the web while they enjoy their products

(Starbucks, 2011). Starbucks also offers companies the option of having brewed coffee service

in their break rooms (Starbucks, 2011). This allows employees the option of staying on site to

increase productivity by not having to leave to get their coffee.

4.1.3. Leadership

Leadership is defined by using a three prong test that requires the authoritative position or

office of a leader, the capacity of the individual to lead, and the actual act of leading (Merriam-

Webster, 2011). The undeniable leader of Starbucks is Howard Schultz, who after an eight year

hiatus returned to the CEO position and Chairman of the Board at Starbucks. Starbucks was


experiencing an economic downturn and underperforming financially. Schultz came back into

the picture to save Starbucks and guide it back to a successful path (Stacy Finz, 2011). Schultz

would shoulder most of the blame for the downturn since he insisted on personal accountability

as a fundamental leadership value (Caliendo, 2010). Schultz would close down over 600

locations, invest in retraining each barista, and change business plans (Stacy Finz, 2011). Under

Schultzs leadership Starbucks rebounded and began showing positive increases and trends in its

financial performance.

The leader of any organization is tasked with not only forming strategy but also with

execution. As CEO and chairman, Schultz is in charge of making sure that Starbucks has a good

strategic plan, staying on top of what is happening, and using pressure and corrective actions to

achieve performance (Gamble & Thompson, Jr., 2011). Although Schultz maintains the

positions of Chief Executive Officer, President, and Chairman of Starbucks Corporation, he is

not alone in the leadership of the company. Other key executives are Cliff Burrows who is the

President of Starbucks Coffee U.S., John Culver who is President of Starbucks Coffee

International, Arthur Rubinfeld who is President of Global Development, Annie Young-Scrivner

who is the Chief Marketing Officer, and Troy Alstead who is the Chief Financial Officer and

Chief Administrative Officer (Starbucks, 2011).

In the authors opinion, Starbucks may have a talented team of executives, but they failed

to properly plan a strategy that fit Starbucks situation. The rapid expansion strategy, combined

with failure to adequately adapt to the economic downturn placed Starbucks in a perilous

position, one in which drove Schultz out of his pseudo retirement to retake the leadership mantle

(Associated Press, 2008). Schultz was able to turn the company back around with calculated

strategic moves, but the team as a whole must be viewed as a weakness. Without Schultz and his


leadership capabilities, Starbucks may have turned into a disaster. It does not appear that there is

a feasible succession plan in place at the moment and the future of Starbucks rest in the capable

hands of Howard Schultz. Overall this is a dangerous position to occupy; one Apple knows all

too well, that as goes Schultz goes Starbucks.

4.1.4. Organizational Culture

A firms organizational culture is both unique to the company and at the same time of

critical intrinsic importance for the firm to be able to deliver and execute its chosen strategy.

Organizational culture is defined as a companys internal work climate that is shaped by the core

values, beliefs, business principles, traditions, work practices, and operating style (Gamble &

Thompson, Jr., 2011). The culture of the company influences how the company conducts

business and makes decisions and in a simpler viewpoint is the makeup of the firms

organizational DNA (Reid & Hubbell, 2005).

Organizational culture can be divided into three broad categories: unhealthy, high-

performance, and adaptive. Unhealthy corporate culture has one or more counterproductive

traits that negatively impact the work climate and company performance (Kotter & Heskett,

1992). High-performance cultures are dominated by positive traits where a can-do attitude

prevails in a results driven environment (Gamble & Thompson, Jr., 2011).

Starbucks has an adaptive corporate culture with positive traits of internal

entrepreneurship, supportive managers and employees at all levels, and a proactive approach to

identify issues, evaluate options, and implement workable solutions quickly (Gamble &

Thompson, Jr., 2011). This is important to Starbucks because the rivalry among competing

sellers in the market has intensified with the economic recession and super-saturated U.S. coffee


market (Datamonitor, 2010). Starbucks is a leader in the coffee industry due to its ability to

differentiate through product innovation. This places the competition in a

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