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Emily Thomas
Professor Gervais
Strategy
Starbucks Case
April 2, 2012

Starbucks Strategy and Internal Initiatives to Return to Profitable Growth

Starbucks has been the worlds premier roaster and retailer of coffee since its founding in 1987.
Today they operate stores in over 50 countries. They have 8,812 company-owned stores and
7,583 licensed stores. Sales accumulate on average to about $10 billion dollars.

Starbucks along with the rest of the world was hit hard with the worldwide recession beginning
in 2008. They were forced to change the way in which they operated. Starbucks is a rapidly
expanding company and it is imperative through the leadership of Howard Schultz that they
continue to evolve.

1. Summarize the overall strategy of Starbucks Management in its effort to create and
develop a new concept and a rapidly expanding company.

During the 1990s it was evident that Starbucks needed to adapt and make changes in order
to benefit their rapidly expanding company. The Chief Executive of Starbucks, Howard Schultz,
decided that the way they would expand the company was by increasing distribution channels as
well as acquiring more market segments. They increased their distribution channels by making
products more accessible. By acquiring additional segments they aimed to create new products
that cater to a larger group of consumers. They chose to focus on these changes in order to create
sustained growth in the long run.
Starbucks started working hard to expand their company using the new distributions
channels and expanding to new market segments. They started with new distribution channels by
selling their products to existing Universities, hotels, country clubs, hospitals, airlines, and
restaurants. They also decided to work with large distributors who resided in the U.S. such as
Sysco and US Foodservice. Both distributors began delivering Starbucks products to their clients
soon after the partnership with Starbucks was formed. In order to break into new market
segments Starbucks created new partnerships. Firstly, in 2007 they partnered with PepsiCo in
order to create the International Coffee Partnership. The International Coffee Partnership sold
Starbucks ready-to-drink beverages to countries around the world. In 2008 Starbucks also joined
with Suntory and Arla Foods in 2010 to sell ready ready-to-drink beverages in Japan and the
United Kingdom.
Starbucks decided they would also expand their new market segments into ice cream. In
order to do so they created a partnership with Dreyers Grand Ice Cream in 1995. This
partnership dwindled and in 2008 Starbucks formed a new partnership with Unilever the largest
ice cream manufacturer in the nation. This partnership was far more attractive due to Unilevers
offer of exclusive marketing, manufacturing and distribution of the new ice cream with the
Starbucks name.
Starbucks acquired Tazo Tea in 1999 to continue expanding their market segments. This
allowed Starbucks to create ready-to-drink Tazo beverages within their existing partnership with
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PepsiCo. Kraft Foods began to distribute Starbucks coffee products (beans and grounds) to mass
retailers and grocery stores within the United States. Kraft Foods was responsible for the
distribution, advertising, promotions, and markets of the coffee products giving Starbucks a set
percentage of their net sales. They were also able to include Tazo Tea in this distribution by
Kraft Foods.
Another acquisition Starbucks had in 2003 was that of Seattles Best Coffee. Seattles Best
Coffee kept its name on all its products and stores. Due to their relationship with PepsiCo they
were once again able to create ready-to-drink beverages with the Seattles Best Coffee name, and
through their Kraft Foods partnership Seattles Best Coffee began being distributed in grocery
stores throughout the U.S.
They continued increasing their brand with the purchase of Ethos Water, and a partnership
with Jim Beam Brands. Jim Beam and Starbucks created a Coffee Liqueur available for sale. In
2009 they also started Starbucks VIA Ready Brew. This allowed for on the go consumers to
place a small packet of coffee in hot or cold water and mix it together creating a coffee beverage.
Starbucks also partnered with iTunes to make their music selections available for sale. Overall,
Starbucks greatly increased their market segments and increasing distribution channels in various
ways.
Starbucks had a specific strategy when it came to opening new locations. They believed
more in licensing locations as opposed to franchising new stores because of the lack of control
that comes with franchising. Starbucks also wanted to enter more international markets realizing
that these new markets could increase revenues drastically. All of these things helped Starbucks
as a rapidly expanding company.

2. Which one of the five generic competitive strategies discussed on Chapter 5 most
closely approximates the competitive approach that Starbucks is employing?

Although Starbucks follows many of the five generic competitive strategies the strategy they
follow most closely is the broad differentiation approach. Starbucks has put an emphasis on
product differentiation in order to keep up with their ever-expanding company base. They have
been extremely successful in their differentiation compared to their competitors. Starbucks offers
such a multitude of products, which allows them to appeal to a variety of consumers. There are
seven differentiating features of the generic competitive strategies. The following are ways in
which the differentiating features prove that Starbucks follows a broad differentiation approach.

i. Strategic Target- Starbucks has a broad market and they are able to meet the needs of a
multitude of consumers. They are able to reach the more on-the-go customers through
their VIA Ready Brew, health conscious customers with their Vivanno smoothies, at
home consumer through their grocery store sales, as well as international consumers
through their overseas expansion.

ii. Competitive Strategy- Starbucks has always emphasized that the products Starbucks
sells are important but just as important is the atmosphere of each individual Starbucks
location. Each location is designed specifically to fit its geographical location. These
specialized stores allow for even further differentiation from competitors whose stores
are usually the same no matter the location with slight variations.

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iii. Product Line- Starbucks has an immense number of products in which they offer
compared to its competitors. They offer everything from the specialty coffees sold in
stores to ice cream, t-shirts and other merchandise, liqueur, food products, etc. Starbucks
product line is ever expanding and evolving.

iv. Product Emphasis- Usually when a company offers an immense number of products the
quality of each individual product dwindles. However, Starbucks products are
guaranteed high quality even with such a broad variety of products available. From the
beginning of Starbucks their claim to fame and emphasis has been on the high quality of
their goods especially coffee. This is one of their main differentiating principles to make
sure they always have the highest quality products available to the consumer.

v. Marketing Emphasis- Another differentiating factor of Starbucks is the atmospheres of
each individual location. They make sure that customers are comfortable and happy with
the service. They train their staff intensely in order to provide the best customer service
possible. This helps market to a variety of consumers who know the high quality of both
the products and service available at Starbucks.

vi. Keys to Maintaining Strategies- Starbucks is constantly innovating their products and
store locations. They have gained many new partnerships and entered many new market
segments. They have created partnerships with companies spanning from iTunes to food
distributors such as Kraft Foods. Starbucks is continuously becoming more innovative
through their various offerings.

vii. Capabilities Required- Starbucks offers broad differentiation by providing products that
are extremely high in quality and an extremely innovative business model. This allows
for differentiation across the entire spectrum of the Starbucks Corporation.

3. What are the key policies, practices, business principles, and procedures that underlie
how Howard Schultz and Starbucks management have implemented and executed the
companys strategy?

Starbucks has many business principles that are key to the companys success. The main two
are the high quality costumer service, and their commitment to having the highest quality
products (especially coffee discussed in the following section). Since the beginning of Starbucks
one of their major draws to consumers was their high quality costumer service and overall store
ambiance. Starbucks wasnt just a place to pick up your coffee and run there was a certain degree
of comfortability within each store. Costumers are able to sit and read a newspaper with their
morning coffee, meet and catch up with friends, or even to come and complete some work. The
main reason Starbucks locations are so comfortable is due to the people who work there.
Starbucks emphasis on their staff all stemmed from Howard Schultz belief that the success of the
company was most directly dependent on a positive in store experience.
In order to make this possible the first step is to have a pleasant workplace environment.
Starbucks does not refer to their workers as employees, but rather as partners. Starbucks
empowers their workers through other ways such as encouraging them to offer up any ideas they
should have. Employees also are regularly given awards for a job well done. There are a variety
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of awards (18 total) employees can obtain and each one is meant to further motivate employees
to continue improving.
Starbucks offers benefits for both full-time and part-time employees, which is a major draw
to working at Starbucks and motivates employees to keep their jobs. Even when the company fell
on hard times Schultz made sure that health care was not touched. Another draw for Starbucks
employees are the available stock options for employees. They are awarded options based on
Starbucks success and profitability in said year, the size of base wages per employee, and the
stock option price. Furthermore, after 90 days of working Starbucks employees are offered a
stock purchase plan. Within this plan employees can devote from 1-10% of their base earnings to
buy Starbucks stock. This makes it so that employees have a monetary incentive to make the
company successful because they have their own money invested within the company.
In order for someone to become and employee of Starbucks they must enter intensive
training. Within the first few weeks of employment new employees are expected to complete at
least 24 hours of training. They learn about coffee history, drink preparation, retail skills, and of
course customer service. There is also basic training on how to work the register, clean, set up
equipment, and how to interact with customers. Within these trainings it is instilled in each new
member that their service was invaluable in the quest for pleasing costumers. Managers go
through much more extensive training which culminates in making sure that managers support
increasing sales, instilling customer service values on new employees, keeping up with the
companys environmental mission, and overall creating a welcome environment for customers.
Employees happiness correlates into how hard and efficiently they work for their employer.
Starbucks recognizes this to be true and therefore puts a large emphasis on the well being of their
partners. The variety of stock option and benefits each employee is offered as well as the
praise and awards they may receive are all key in creating a welcome environment for customers.

4. What values does Starbucks have? How well do they connect to the strategy and to
the manner in which the company conducts its business? Are they successful in
implementing them?

Starbucks cornerstone vale is to build a company with soul. This value has been instilled
since the company was created. They strived to do so especially by creating the highest quality
coffee possible by buying the best beans and brewing them to perfection. They also value
employees input on what pleases customers. Employees were given the theme just say yes in
order to keep customers coming into Starbucks locations. They also want employees to speak
their minds in order to voice what they believe is going wrong within Starbucks as well as any
thing they have seen as positive or working well for the company. In Starbucks Mission
Statement there are six main values that are to be focused on. They are: Our Coffee, Our
Partners, Our Customers, Our Stores, Our Neighborhood, and Our Shareholders. Starbucks is
successful in implementing these values in the following ways:

Our Coffee- Starbucks has always strived to have the highest quality coffee. They do
so by buying the best beans, and continuing to make sure that the roasting of the
coffee was done to perfection. They also make sure that the small coffee growers
Starbucks uses for their beans were able to have enough earnings to compete in the
global market.
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Our Partners- Starbucks as discussed previously holds a special importance on the
well being of their employees or partners. In order to do this they offer incentives,
benefits, and awards to their employees to make sure they understand their
importance within the company. The success in this can be measured by their
inclusion on the Fortune magazine 100 Best Companies to Work For list.

Our Customers- Starbucks goal has always been to make their locations are a
pleasant place to visit. They are successful in doing this through the extensive
training given to new employees to teach them customer service.

Our Stores- Starbucks first influence were the Espresso shops in Italy. They saw how
happy the people inside were and how fantastic the ambiance of each store was for
costumers. In order to emulate a similar atmosphere their various locations are also
designed specifically to fit the geographical area each store is in. This helps to make
customers feel more at home and at peace when they visit Starbucks.

Our Neighborhood- Starbucks understands that each store is a part of a specific
community. They also know that they must contribute positively to their surrounding
communities. They do so through being good neighbors, and also engaging in many
different community service projects such as the Starbucks Youth Action Grant,
which is given to young people within specific communities monetary aid in
community service

Our Shareholders- Starbucks also recognizes that they have a duty to their
shareholder to make their company as successful as possible. Their goal is to keep
investors happy and do whatever is possible to make the company thrive to benefit
said investors. They have done this so far by becoming the global powerhouse that
Starbucks is today.

5. What is your evaluation of Starbucks social responsibility strategy? How much does it
helps to create their public image?

Howard Schulz main effort to build a company with soul includes an extensive social
responsibility strategy. He wanted to make sure that Starbucks had a way of doing business that
was both socially and environmentally conscious. In 1997 the Starbuck Foundation was created
in order to manage the companys philanthropic activities. Starbucks corporate responsibility has
four main elements:

i. Ethically sourcing all of the companys products- This has to do with their activity in
buying from suppliers of coffee beans that are only Fair Trade Certified or practice
C.A.F.E guidelines. This means that supplier practices responsible growing and
harvesting practices. They also make sure that they practice fair labor. By 2015
Starbucks hopes to purchase 100% of their coffee through Fair Trade suppliers.

ii. Community involvement- Starbucks strives to be active within the communities they
reside in. They have a goal of having their partners and customers contribute 1 million
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hours of community service by 2013. Starbucks also created the Starbucks Youth Action
Grants in order to help young people get involved in community improvement projects.
All of these community involvements are key in Starbucks CSR initiatives.

iii. Environmental stewardship- Starbucks also strives to decrease their waste, use
renewable energy, increase recycling, make facilities more green, and overall to help
address the climate change more. They have set many goals such as by 2015 to ensure
that all of its cups were reusable or recyclable, to have front-of-store recycling in each
store, and to reduce water consumption by 25%. Starbucks also entered the Business for
Innovative Climate Change and Energy Policy coalition in 2009.

iv. Farmer Loans- Starbucks has given more that $15 million to coffee farmer loan funds in
order to support the small family farms Starbucks uses as coffee suppliers. They hope to
give $20 million by 2015.

All of these initiatives have led to a very positive image for Starbucks who in 2010 was
named to the Corporate Responsibility Magazines 100 Best Corporate Citizens. This honor
helps Starbucks reach their socially responsible consumers who require the companies they buy
from to be good corporate citizens. All of Starbucks CSR initiatives make them extremely
attractive to consumers and boosts their public image.

6. Compare the US and international share of yearly revenue, revenue growth and operating
income/revenue. What do these rations tell you? What is your overall assessment of
Starbucks financial performance during fiscal years 2005-2009? Explain the
performance of Starbucks stock.

Starbucks United States
2009 2008 2007 2006 2005
Revenue $ millions $6,572.10 $6,997.70 $6,560.90 $5,495.20 $4,539.50
Growth rate % -6.10% 6.70% 19.40% 21.10%
Operating Income $m $531.80 $454.20 $1,005.20 $955.20 $818.50
Operating Income/Revenue
% 8.09% 6.49% 15.32% 17.38% 18.03%

Starbucks International
2009 2008 2007 2006 2005
Revenue $ millions $1,608.00 $1,774.20 $1,437.40 $1,087.90 $852.50
Growth rate % -9.40% 23.40% 32.10% 27.60%
Operating Income $m $92.90 $110.00 $137.70 $108.50 $82.30
Operating Income/Revenue
% 5.78% 6.20% 9.58% 9.97% 9.65%

Looking at the data for both Starbucks performance in the United States as well as
Internationally it is clear that the United States market is much larger and more profitable.
Firstly, when looking at yearly revenue the revenue in the United States market in 2009 alone
was around four times as higher than the International market revenue. The United States had
revenue of $6,572.10 million while the International revenue was only $1,608.00 million.
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Next comparing the revenue growth rate percentages both did have a negative growth
rate in 2009, but Starbucks International growth rate was about 3% lower still than that of the
United States. This is a rarity however for up to 2009 in both sectors their had been a
consistently positive growth rate. However, due to the economic recession, which struck in 2008-
2009, it is not surprising that there was a significant decrease in growth within both markets.
Before this downturn the growth rate in the United States had began to slow since 2006, but the
figures were still positive once again until 2009. Internationally the growth rates have been
fluctuating since 2006 but they remained quite high reaching 32.1% growth in 2007. This is due
to Starbucks trying to expand more into the international markets in recent years.
Looking at the operating income for the United States and International markets once
again there was a significant difference. Starbucks United States operating income was much
higher. This is due to the much larger size of the market and revenues in the United States
compared to the International market. Looking also at the operating income to revenue
percentage the United States is comparatively high once again. As it gets closer to the present;
however, for example in 2009 the operating income to revenue ratio is much closer. For the
United States it is 8.09% and for the International market it is 5.78%. This is once again due to
the recession, which leveled most economies to a similar level.
Overall, Starbuck is on average a healthy and profitable company. The only years that
they saw a decrease in sales was during the recession which is quite common in most companies.
However, Howard Schultz had a plan for this decline in sales in which he cut stores, and made
sure to refocus the company on sustaining growth. In fact, in 2009 Starbucks gave out its first
ever dividend to shareholders or $.10 per share. This is a good sign for the financially health of
Starbucks.

7. What are the key elements and your evaluation of Howard Schultzs transformation
agenda for Starbucks during 2008-2010? What do you think of the letters shown on
page C-364 and C-365? Has Schultz do a good job since his return as Starbucks
CEO? Why or why not?

Reading the letters from Howard Schultz in the text it is clear what a strong and powerful
leader Schultz is. I believe that he is extremely passionate about the success of the entire
Starbucks Company. He is always thinking about the ever-evolving nature of consumers how
Starbucks can adapt to these new trends. He also strives to empower and inform his
employees to the best of his ability. He has created goals and agendas in order to have
Starbucks be profitable and sustainable for years to come. I believe that he has done an
amazing job since his return as Starbucks CEO and it is clear through his letters that he will
continue to work his hardest to allow Starbucks to continue to rise as one of the most
powerful companies in the world.
The main elements highlighted in Howard Schultzs transformation agenda were to
strengthen the core, elevate the experience, and invest and grow. All of these elements are
extremely important in order for Starbucks to see long-term growth and sustainability. If all
of the following elements can be enacted and their goals fulfilled there is no doubt that
Starbucks will be a successful and sustainable company for years to come.

i. Strengthen the Core- In order to do this there would have to be some store sacrifices.
Schultz wanted to make sure that each store was able to be successful and those that were
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would have to be closed for the good of the company. This included around 900 stores in
hopes that the stores who survived would have a revamp in their success. There was also
a new program started in which best practices were taught throughout the entire
Starbucks company.

ii. Elevate the Experience- Another way Schultz planned on transforming Starbucks was
through making small changes which would help make costumers experience that much
more pleasant. For example, they got rid of the breakfast sandwiches in order to relieve
an unwanted smell created by the eggs. Schultz also retrained employees in order to amp
up the relationship between employees and customers. When it came to new stores new
designs were put in place in order to reflect the different geographically locations they
were set it.

iii. Invest and Grow- In order to grow Schultz realized there was a golden opportunity
waiting within in China and Japan. These two countries are ever growing and presented
the most promising opportunity for growth. The company also decided to start focusing
on raising the return on capital flow especially in new stores. They thought this would be
key for Starbucks success.

8. What issues confront the company as of mid-2010? What should Starbucks
management be worried about? What are the challenges in expanding internationally?

As of the mid-2010 the recession was the biggest issue confronting Starbucks, as was how to
deal with the recent decline in sales caused by the recession. Management should be extremely
worried about this seeing as never before had they had a decline in sales. Starbucks must
confront the issue of their higher prices compared to their competitors. With the recession people
are less willing to spend money on simple things like coffee every morning. Starbucks must
reconnect with customers reminding them of the high quality of the coffee and even perhaps they
should slightly lower their price point, because it is higher compared to other coffee shops.
They also faced the challenges of expanding internationally. Breaking into international
markets is always hard for companies. One reason it is hard to break into international markets is
due to the lack of brand awareness. Since Starbucks was started as an American company there
is a good chance that in other countries their awareness of Starbucks and what it stands for may
be weak. This reduces the chance of a companys success drastically. Also Starbucks has always
emphasized that the atmosphere of each store location corresponds with the geographic location.
If Starbucks were to continue to expand internationally they would need to put a great deal of
time and money into researching the customs and atmosphere of the countries they were moving
into. Expanding internationally is extremely difficult to do.

9. What recommendations would you make to Howard Schultz to sustain the companys
growth and support continued strong financial performance in the years ahead?
Consider both the US and I nternational strategies.

Lower Prices- In order to reach more consumers who may shy away from Starbucks due
to their high coffee prices Starbucks may want to think about slightly lowering their
prices. This would help to reach more consumers who dont feel comfortable with the
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current high prices. Alternatively if the management did not feel comfortable in doing
this perhaps by offering new deals such as a buy one get one free offer during obscure
hours for example, from 3-6pm on week days. This would help increase the flow into
Starbucks during the non-rush hours. This would also attract more consumers who
perhaps have never tried Starbucks but are interested in the deal. When they taste the high
quality of the brew they may be more willing to splurge on a good cup of coffee.

K-Cup Availability- The Keurig system has become increasingly popular within the
United States. Especially during the recent recession when consumers are more likely to
make coffee at home than buy it on their way to work. This opens up an opportunity for
Starbucks to break further into the at home coffee market. The Keurig machines brew
single cups of coffee using their K-Cups, which are easily disposable after use. This
system allows you to make coffee mess free and quickly at home. Starbucks could easily
partner with Keurig in order to create Starbucks K-Cups for sale. They could start with
basic blends of Starbucks coffee for sale in local grocery stores. Starbucks competitors
such as Dunkin Donuts have already broken into this market, and I believe it would be a
golden opportunity for Starbucks to do the same.

International Growth- Although Starbucks is currently located in over 50 countries, I
believe the idea Howard Schultz had to expand into Japan and China is a good one. Japan
outside of the United States has been the largest consumer of Starbucks products. This
opens up the door for Starbucks to open up a multitude of stores in Japan. Due to Chinas
ever expanding economy and its large ties with the United States it would also be
beneficial to open up a large number of Starbucks there. It is important to start opening
stores strategically in large cities within these companies and recording their growth. This
way the locations that are failing can be shut down, and stores that are thriving can be
focused on.

United States Growth- Although the United States has an extremely large number of
stores the number of drive thru locations is still fairly small. In order to cater to the on-
the-go American coffee drinkers I believe that more drive thru locations are necessary.
This would also allow for quicker customer turnover due to dividing the customers
between coming inside to order, and the outside drive thru window. Of course it is
imperative that Starbucks with the addition of the drive thru windows keeps the high
quality costumer experience alive. This would be done through nice flower beddings
around the drive thru area as well as training employees how to work efficiently at the
window.









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Works Cited

Thompson, Arthur A. Crafting and Executive Strategy: the Quest for Competitive Advantage:
Concepts and Cases. New York: McGraw- Hill Higher Education, 2011. Print.