case methodology - starbuck
DESCRIPTION
A class assignment made for an individual report paper to analyze a case given so the student could understand a business accurately within the information quoted.TRANSCRIPT
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MASTER OF BUSINESS ADMINISTRATION
MGT 6798
CASE METHODOLOGY:
An Individual Assignment
Submitted to:
Mr. Ayub bin Hj. Khalid
Submitted by:
Fakhrul Anour bin Abdullah G1136857
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CONTENTS
1- ABSTRACTS Page 02
2- INTRODUCTION Page 03
3- PROBLEM STATEMENT Page 05
4- SWOT ANALYSIS Page 09
5- CONCLUSION Page 10
6- RECOMMENDATION Page 13
7- OTHER REFERENCES Page 14
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ABSTRACT
Today, STARBUCKS® is an American global coffee company and coffeehouse chain
based in Seattle, Washington. It is the largest coffeehouse company in the world with 20,891
stores in 62 countries. Yet back in 1999 and five years before, STARBUCKS®
was facing a
moment to achieve momentum in the United States for the world market. Tokyo, Japan was the
first outlet it has opened outside United States and Canada in 1996. Through its established
strategy and organizational culture, STARBUCKS® was in its outlook of sustainable competitive
advantage through global business network.
Howard Schultz began his coffee career with
STARBUCKS® Coffee Company in 1982, when it
used to be a retailer solely of whole bean coffees.
On a buying trip to Italy, in 1983, the vast number
of coffee bars in Milan inspired Mr. Schultz. He
returned to STARBUCKS®
and presented his idea
to expand the whole bean retailer into a coffee bar.
The Board of Directors rejected his idea and two
years later, Mr. Schultz left STARBUCKS® to start
his own coffee bar company which he named II
Giornale. After two years of great success, II
Giornale purchased the STARBUCKS® name and
assets and changed the names of all of it retail
outlets to STARBUCKS®.
“Twenty-five years from now, when we look back
again, if we can say that we grew our company with the
same values and guiding principles that we embrace
today, then we will know we have succeeded.”
— Howard Schultz
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INTRODUCTION
At stock market, coffee was the second most traded commodity next to oil. It was divided into
two categories; specialty coffee and basic coffee. In 1994, it was estimated that specialty coffee
industry was growing at a rate of 15% per year and that the basic coffee industry was suffering.
But unlike during the era of 60s and 70s, the per capita consumption of coffee had significantly
decreased from 2 or 3 cups a person per day to 1.7 cups. According to the
National Coffee Association the decrease of coffee consumption derived
from poor product development, packaging and position (price focused) by
the industry’s leading coffee producers. But until 1999, the interest of
consumers in the United States especially on specialty coffee had
increased resulted from these four trends:
1) The Adoption of a healthier lifestyle had led North Americans
to replace alcohol with coffee
2) Coffee bars offered a place where people could meet
3) People liked affordable luxuries and specialty coffee fit the bill
4) Consumers were becoming more knowledgeable about coffee
Specialty coffee was the highest echelon of quality coffee available in the world.
Many people described it as gourmet coffee (though disputable) because of higher
quality than basic supermarket brand coffee. Although most consumers only saw
this division at the retail level, specialty vs. basic coffee was a concept that
originated with the coffee grower.
“22% United States
consumers purchased
specialty coffee and they
are urban people with
annual income over
$35,000 per year. “
::: Avenue for
Growth— 20 Year
Review of the U.S.
Specialty Coffee
Industry.
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STARBUCK® was the largest coffee company that provided specialty coffee in the
United States, with market capitalization about USD2.4 billion with 6% net margin of coffee
chains when compared to competitors in the industry. It owned all of its retail outlets other than
host licensing arrangements. However owning all of its stores, STARBUCK® was faced with the
prospect of depending heavily on equity and debt financing to grow. But its stock price and
Earning per Share/EPS had been rapidly increasing over the last five years (1994-1999).
In 1986 STARBUCK® started to sell espresso coffee at its 6 outlets in Seattle which also
included 1912 Pike Place Market. But in 1987, because of losing sales when the market demand
for specialty coffee increased, the founders sold STARBUCKS® to their former employee,
Howard Schultz who was then in 2 years great success with his coffee bars, II Giornale.
►
The first STARBUCKS® opened in Seattle,
Washington (at 2000 Western Avenue) on
March 30, 1971 by three partners who met
while students at the University of San
Francisco; Jerry Baldwin (English teacher),
Zev Siegl (history teacher), and Gordon
Bowker (writer). The three were inspired to
sell high-quality coffee beans and equipment
by coffee roasting entrepreneur Alfred Peet
after he taught them his style of roasting
beans. But after they bought Peet, sales
started to fell though the market deman on
specialty coffee increased. So in 1987,
STARBUCK® was sold to Howard Schulz.
◄
Howard Schultz came from rather humble beginnings. He remembered how
his father used to work hard for little money and no respect. He said his
upbringing instilled in him “not a fear of a failure but a fear of mediocrity”.
He was the first in his family to get a college degree and had always been an
over-achiever.
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PROBLEM STATEMENT
About a third of the coffee farms in the world were less than three acres and the farmers
did not have the desire, the volume, the money, the expertise, or the connections to export coffee
themselves because most countries regulated coffee sales. How the specialty coffee companies
got their supply was through the exporters instead. The price of certain coffee was a direct
reflection of the quality and
quantity of a coffee available
at a particular time. It was
very difficult to get price
confirmations because a
successful coffee harvest was
dependent on so many
different factors such as
weather conditions, health of
the coffee trees, harvesting
practices, disease and
infection caused by insects,
and the social, political,
regulatory and economic
environments of the coffee-
producing countries.
►
Typically, coffee was moved
from the farmer, to the collector,
to the miller, to the exporter, to
the importer, and finally, to the
specialty coffee seller.
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Looking at the limited sources for specialty coffee but yet with increasing demand from
consumers, STARBUCKS® under the command of Howard Schultz (Chairman and CEO of
STARBUCKS® Corporation) assembled a business system that would increase its value strategy.
Each component of the system was advised to deliver expectation at best quality to enhance
confident not only to the shareholders but also the stakeholders.
Through sourcing, STARBUCKS® maintained close relationships with its exporters by
working directly with them and providing them with training. Exporters of high quality coffee
were very anxious to become STARBUCKS® suppliers because it purchased more high quality
coffee than anyone else in the world. Over the next three years, STARBUCKS® hoped to double
volumes but this would effect on its requirement of quality coffee against quantity. And despite
STARBUCKS® large supply needs, growing its own high-quality coffee was an option that was
never seriously considered.
THE
RETAIL
STORE
UNITS
THE SPECIALTY SALES
AND WHOLESALE
CHANNELS
THE MAIL
ORDER
BUSINESS
THE
GROCERY
CHANNELS
SOURCING
ROASTING AND BLENDING
SUPPLY CHAIN OPERATIONS
RETAIL SALES
SPECIALTY VALUES
VENTURES
MAIL ORDERS
Employees
Real-estate Approach
Domestic
vs.
International Retail Image
BUSINESS
SYSTEM
50%
Latin
America
35% Pacific Rim
15%
East
Africa
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STARBUCKS® tried to build its supply chain operations in order to eliminate
redundancy and maximize efficiency based on its four business units. STARBUCKS® formula
was firmly based in its coffee, its employees, its merchandising, its ownership philosophy, its
real-estate approach, its image, and its innovativeness.
As STARBUCKS®
grew; finding enough good people that could replicate the values,
culture and service experiences was an ongoing challenge for STARBUCKS®. Because
developing coffee knowledge and service expertise demanded a great deal of effort from
employees. In terms of merchandising, STARBUCKS® faced challenges related to the design of
a nationally consistent merchandising program, since many of its stores dealt with individual
suppliers.
Having baristas
(STARBUCKS®’s store
employees) that had strong coffee
education was essential because
STARBUCKS® consumers were
becoming more and more
knowledge about coffee.
►
Quality upon quantity is the best deal of process that
STARBUCKS® offered to its customers to ensure eternal confident
on the purchasing power. Through roasting and blending of coffee,
STARBUCKS® held quite a detailed research and development
(R&D) of how to gain a better serve for its choice of specialty
coffee. The one-way valve technology packaging extended the
shelf life of coffee to 26 weeks. No stocks on shelf last for more
than 3 months at STARBUCKS® and what was in store for
beverages, the shelf life only limited keep to 7 days.
Every employee, even those that were hired for executive
positions, went through the same training programs, which
included a two-week term in store.
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THE PRINCIPLES OF SERVICE SYSTEM
at STARBUCKS®
STARBUCKS® had a very flat organizational structure where everyone from the CEO to
a barista was a partner and not an employee. It placed a great deal of effort into seeking the
thoughts and opinions of its barista, because they were in direct contact with customers. The
head office managers had sessions with people in the field, standard mission reviews where they
collected questions from anyone about any topic and then responded and open forums where
they heard from and listened to the partner base.
Meanwhile, to meet its growth needs, STARBUCKS® had approximately 20 real estate
managers across the country. These managers worked with ‘street sniffers’ to identify the best
retail locations and their commissions were paid either by the landlord or by STARBUCKS®. As
it grew and the number of ‘A’ sites in ‘A’ markets decreased, one of the key challenges faced by
STARBUCKS® was to constantly motivate its real estate staff to continue generates 20 to 40
solid stores per month. This challenge has to be met if it was going to meet its goal of 2000
stores by the year 2000.
Howard Schultz and the senior management at STARBUCKS® were committed to the
company’s strategy. How the company should react to all of these opportunities was one of Mr.
Schultz’s key concerns. Was STARBUCKS® growing in the
best way possible? Or was it overextending in its quest for
growth?
HOSPITALITY PRODUCTION EDUCATION
With these principles, baristas were expected to be a customer-service oriented.
This demanded a great deal of effort at their behalf. ▲
►
Of key concern at marketing department in STARBUCK® was its
brand equity. The retail business had historically been its source of
brand equity. This had meant that STARBUCKS® was never just
about the coffee; it was about a place, an experience.
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SWOT ANALYSIS
STRENGTHS
1) Leading brand on specialty
coffee
2) Diversified portfolio to
offer coffee variety and
customization
3) Defined focus on quality
and taste
4) Convenience and easy to
find its stores
5) Huge number of talented
& well-trained employees
WEAKNESSES
1) Flat organizational
structure
2) Supply of coffee came from
second-hand suppliers not
first-hand
3) Limited sources for good
quality coffee at short
distance
W-O
The unique quality of
STARBUCKS® could be
upon its weakness as a flat
organizational structure to
increase opportunity of
bargaining power. As
second largest stock
market, demand should
increase supply.
S-O
Being the leading brand of
high specialty coffee in an
increasing demand market
is a ‘safe to win’ situation.
All STARBUCKS® needed
to ensure was to maintain
its quality, performance
and production at a
sustaining level through
expanding and market
sharing such as merger and
acquisitions.
OPPORTUNITES
1) The demand for
specialty coffee
had increased
2) The second largest
stock market after
oil
3) The increasing
potential of urban
lifestyle
4) People are
becoming more
knowledgeable
about coffee
THREATS
1) Strong competitors
in the market
2) Coffee beans prices
fluctuated through
time
3) People became more
and more health
conscious
4) Demand for
specialty coffee
increasing but low
sources
5) Easy access to
specialty coffee
W-T
With low supply but high
demand, STARBUCK®
should start looking at new
market approach of real-
estates by cultivating its
own coffee as a standby for
any circumstances in short
of supply. This would help
preservation at long-run.
S-T
The growth of competitors
was considerably
impressive. With limited
sources for raw materials,
being the leading brand
proved to have more
potential on buyers and
sellers’ strong business
relationship, which at good
spot would surpass all other
competitors in the market
share.
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CONCLUSION
Looking at the financial performance of STARBUCK® within the five years period, it is a fair
consideration to define it as a workable status for long-run business. Unlike its competitors,
STARBUCKS® used internal financing to roll out stores, but with new ventures in the
mainstream of strategy, financial stability i convinced. Three of STARBUCKS® newest business
ventures included its contract with Dreyers’ Ice Cream, its bottled Frappuccino product with
Pepsi and its penetration into the grocery channel.
It was estimated that this ventured
would perhaps reach $40 million
at retail and contribute at least
$500,000 to earning during fiscal
1997. Although the return was
somewhat limited, it opened
STARBUCKS® to an entirely new
customer base, reinforced its
premium quality image, and built
its reputation with supermarket
chains.
◄
►
Bottled Frappuccino was STARBUCKS® attempt to
introduce a quality ready-to-drink coffee beverage into the
North American market place. STARBUKCS® viewed this
bottled beverage as $1 billion opportunity. These estimates
were from Pepsi who, who said that it had never seen a
product test quite as well as bottled Frappuccino, where 70%
of testers became repeat purchasers. This product was
currently being offered in all STARBUCKS® retail stores
and had begun to be distributed via PepsiCo’s national
distribution channels.
“Presence in supermarkets is not essential to STARBUCKS® survival or
prosperity. However, in the interest of being a major player in coffee for the
home, we have to be available in supermarkets. This is because convenience
plays a key role in decision to purchase coffee for the home.”
— Mr. Orin Smith (President & COO of STARBUCKS®)
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Specialty sales in the business system of STARBUCKS® were agreements with retailers,
wholesalers, restaurants or service providers to carry its coffee brand. It was not only provided
STARBUCKS® with revenue growth potential buat also with increased name recognition. It was
the benchmark strategy for new ventures. Some of these partnerships involved serving
STARBUCKS® coffee, some where for product development and others were for store
development. STARBUCKS® was actively increasing its participation in specialty sales
contracts.
▲
Among many different companies that had
been partnered with STARBUCKS®.
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Another way in which STARBUCKS® hoped to reach new customer base was through
the introduction of its new espresso carts or kiosks. By introducing STARBUCKS® Espresso
Carts, the company had succeeded in branding the coffee cart, which had always been a
brandless, grassroots type of specialty coffee retailer. STARBUCKS®
was in the initial stages of
its carts strategy that called as Doppio. It would allow the company to take advantage of sales
areas such as train stations, street corners, malls, etc.
When it comes to human resource, STARBUCKS® took great care in recruitment, from
its baristas to its senior managers. For baristas, turnover rates, were about 60%, this was less than
half of the industry average (150% to 300%). To prepare them for the challenge, they all
underwent 24 hours of training before they were allowed to serve a cup of coffee to a
STARBUCKS® customer.
►
STARBUCKS® called its version of the
espresso cart as Doppio. The Doppio was an
8’ x 8’ cube that unfolded into a larger stand
with sides, counters, and STARBUCKS®
trademark finishes.
“We have very educated consumers. So we have to give the
baristas some kind of a basis and background so that they can
answer these difficults questions.”
— Mary Williams (SVP Coffee for STARBUCKS®)
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RECOMMENDATION
STARBUCKS® decision to enter the international market place to prevent competitors from
getting a head start was considerably a perfect plan for the future long-run of its business. It was
a way to build upon the growing desire for Western brands, and to take advantage of higher
coffee consumption rates in different countries. It was expected that in the next five to ten years,
international retail’s contribution would be sizeable.
Another recommendation that could grow the marketing potential of STARBUCKS® was to gain
more ventures through its specialty sales by going into the fast-food market like McDonald, KFC
and Pizza Huts. This kind of venture would only extend brand marketing but also expand
awareness on specialty coffee.
Last but not least, with its strong business system and wise-oriented strategies on a flat
organizational structure that had been proven effective, sustaining it was recommended. It was
believed that STARBUCKS® had already build a strong structure of strategy for specialty coffee
business.
With a strong presense of its organizational culture that followed six guiding principles, it
helped STARBUCKS® to measure the appropriateness of its decisions.
Provide a great work
environment and treat each
other with respect and dignity.
Embrace diversity as an
essential component of the way
we do business.
Apply the highest standards of
excellence to the purchasing,
roasting, and fresh delivery of
our coffee.
Develop enthusiastically
satisfied customers all of the
time.
Contribute positively to our
community and our
environment.
Recognize that profitability is
essential to our future success.
SIX GUIDING PRINCIPLES
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OTHER REFERENCES
— http://inkdrawing.blogspot.com/2011/0
4/howard-schultz-ceo-of-
starbucks.html
— http://www.starbucks.com/
“Howard is very creative, he is
very inspiring, he is exceptionally
demanding, he is tremendously
competitive, exceptionally
ambitious, has very high standards
in everything we can do and he is
always ratcheting the bar up. He
really cares about people;
anything anyone would do to
damage the culture — he would be
right on it.”
— Orin Smith (COO of STARBUCKS®)
▲
Ink illustration of Howard Schultz for
Worth magazine by Graham Smith.