SUBMITTED BY:
ABDUL BASIT JAMIL
MB083019
SUBMITTED TO:
Dr. Shoaib
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Summary
If we observe closely, we will come to know that living standards of people are improving
globally. One of the reasons behind it is the increased customers focus; they demand offerings of
customized nature. Another fact which cannot be denied is the increased scope and unlimited
boundaries of businesses due to increased demand of customers. Below we have a tale narrating
that how a company named Starbucks drove for its global dominance from year 1971-2004.
Starbucks took its start in 1971 when three academics, English teacher Jerry Baldwin, History
teacher Zev Siegel, and Writer Gordon Bowker invested $1,350 each and borrowed $5,000 from
bank to open a retail store Starbucks at Pikes Place Market in Seattles territory, USA. Three
partners were inspired by a Dutch named Alfred Peet who had a store in California. The
company started with offering fine coffees, exotic teas and dark roasting coffee. At the
beginning, sales exceeded expectations therefore; they opened four more stores at Seattle area. In
1980, Zev Siegel left the company to pursue other interests.
In 1981, Howard Schultz, Vice President and General Manager of Swedish maker of stylish
kitchen equipments and coffeemakers visited Starbucks. He took three sips of dark roasted coffee
and got hooked; he started asking the questions about the company and its offerings. He went
back to his place where he thought about Starbucks all the time; it became difficult for him to
forget those three sips. He went to USA and met Baldwin and Bowker to request them that if he
could be the part of Starbucks. After endeavoring a lot to convince Bowker and Baldwin for this
job he got recruited in Starbucks as a marketing head of retail stores in 1982.
From 1982-1985, Howard Schultz brought new ideas and innovations in Starbucks. He started
with learning coffee making techniques at the back of counter. In 1983, Schultz visited Milan,
Italy where he went inside an espresso coffee bar which was a restaurant containing a retail
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counter of coffee and a place at other side where people could sit with families and friends to
have a chit chat with a cup of coffee. Moreover, there were baristas who were at the duty to
greet people. Schultz was impressed from this business model, he went back to USA and
convinced Bowker and Baldwin to open espresso bars. The sales at espresso side was more than
retail counter but Bowker and Baldwin were still unhappy as they were risk averse people and
they never appreciated Schultz ideas. At last Schultz got frustrated and left Starbucks in 1985.
After leaving Starbucks, Schultz started raising capital for his own company and Baldwin
became his first investor by investing $150,000. At the beginning, Schultz found difficulty to
raise capital but later on he was succeeded and got his first store opened in 1986 at Seattle with
the company name IL Giornale (pronounced il jor NAHL ee) in which Bowker was a consultant
and Baldwin was a director. This new company got success at its start and acquired Starbucks in
1987. In this way Starbucks became a corporation and Howard Schultz became CEO of
Starbucks at the age of 34. Whereas; Baldwin, Bowker left Seattle and went to San Francisco for
the purpose of joining Alfred Peet.
From 1987-1992, Schultz worked a lot to make Starbucks a dream place. He expanded the
business outside the Pacific Northwest i.e. in Chicago, Portland, Los Angeles and San Francisco.
Moreover, he did not limit his business within specific boundaries and expanded the business
globally by entering into the markets of different places in the world. During these years Schultz
did efforts to make Starbucks the best place to work by motivating his employees to increase
their commitment and emotional attachment towards the company. For this very purpose, he
started Stock Option Plan and Stock Purchase Plan for employees. Furthermore, he worked on
store ambiance and offerings as well.
In 1994, Starbucks did joint venture with PepsiCo to use their distribution channels because
Starbucks had to increase distribution channels. In 1997 and afterwards Starbucks started Mail
Order Sales through which they sold coffee making equipments, candies, and pastries etc. In the
same time period Starbucks worked a lot on corporate social responsibilities by starting different
schemes. In 2003, Starbucks competitors were Second Cup, Kraft General Foods, Proctor and
Gamble, Nestle, and some small locals. In 2004, Starbucks offerings were Fine coffees, Exotic
teas, Dark roasting coffees (Coffee beans), Italian style hot and cold espresso drinks, Hot and
iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and Music CDs.
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Above, you have seen the evidence of Starbucks efforts for global dominance. So, we do not
feel hesitant to predict that if Starbucks continue with such spirit, then there will be no point left
as a mistake on their part and it will become the most respected and regarded brand of this world.
Questions
Q. NO. 1
What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the
customer offerings and differentiators? The expansion strategy? The financial strategy? The
personnel management and social responsibilities? Conduct a five forces analysis?)
Q. No. 02
What was the original strategic vision and objectives and how did they evolve? What is your
opinion of Starbucks mission statement? What grade would you give Howard Schultz for his job
as the CEO Starbucks and why?
Q. No. 3
What is your assessment of Starbucks financial performance during years 1998-2003? (Growth
rates, profitability, control of major cost categories, financing, ROE, and P/E ratio?)
Q. No. 04
What were the key issues faced by Starbucks in 2004?
Q. No. 05
What recommendations would you make to Howard Schultz to sustain the company growth and
support strong financial performance in the years ahead?
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Q. NO. 1
What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the
customer offerings and differentiators? The expansion strategy? The financial strategy? The
personnel management and social responsibilities? Conduct a five forces analysis?)
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Store Concept
Starbucks started with the concept of retail coffee store but later on due to the entrepreneurial
itch of Howard Schultz they entered into restaurant business which was the addition to their
retail store concept. This restaurants idea came from Schultz trip to Milan, Italy where he
visited espresso bars. The theme behind this idea was to provide special sitting areas where
families and friends could sit together and enjoy chit chat holding a cup of coffee with Baristas
performing around to cheer and entertain them. Moreover, they made a strategy to attract the
professionals by adding a facility of Wi-Fi in their stores. In short, they created the ambiance of
stores in a way that could make customers feel pleasant.
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Expansion
To expand the business they worked on three areas which are elaborated below:Idea
They expanded their business idea by moving towards the restaurant business from a retail coffee
store.
Geographical
They started with expanding the business outside Northwest Pacific i.e. in Chicago, California,
Los Angeles and Portland. For this particular aim, Starbucks made zonal Hubs in which they
hired Vice Presidents to induce the culture of Starbucks in newly opened stores. After their
success of this little geographical expansion, they began to enter into the international market
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and for this purpose they brought local license holders into the partnership to control business
activities in their relative regions.
Product
Back in 1971, they started with Fine coffees, Exotic teas and Dark roasting coffees (Coffee
beans). Later on they expanded the product line by adding Italian style hot and cold espresso
drinks, Hot and iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and
Music CDs.
Distribution Channels
One of the expansion strategies was to do the joint venture with PepsiCo in 1994. The purpose of
this venture was to use the distribution channels of PepsiCo which were convenient so that
Starbucks distribution channels could also become convenient eventually.
Financial Management
Schultz asked for the Centralized Information Systems to have a check and balance on sales in
thousands of stores around the world by keeping the back up of transactions. Another strategy
which they adopted was to convert the form of business from partnership to Private Company
which opened the doors for raising firms capital.
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Substitute
product
Minor pressure
building
Suppliers
bargaining
power
Glad to supply
inputs
Competitors
Exerting weak
pressure
Bargaining
power of buyers
Higher level of
attraction
New entrants
High entry
barriers
Q. No. 02
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What was the original strategic vision and objectives and how did they
evolve? What is your opinion of Starbucks mission statement? What grade
would you give Howard Schultz for his job as the CEO Starbucks and why?
Strategic Vision
To establish Starbucks as the most recognized and respected brand in the world.
Strategic Objectives
They wanted to have 15,000 stores by the year-end 2005.
They aimed to provide a great work environment and treat each other with respect and
dignity.
They believed in taking on diversity as an essential component in the way they do
business.
To apply the highest standards of excellence to the purchasing.
Roasting and fresh delivery of coffee.
To develop enthusiastically satisfied customers all of the time.
To contribute positively to their communities and environment, and recognize that
profitability is essential to future success of business.
Mission Statement
To inspire and nurture the human spirit one person, one cup,
and one neighborhood at a time.
Our Opinion
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This mission statement along with strategic objectives provides a focus for employees as they
make strategic decisions. It not only supports the employees, but supports the customers as well,
making a note that they should be satisfied all of the time. The mission shows alignment with the
vision by stating how the company plans to reach the broad goals set by the vision. Another
supporting sentence of strategic objective aligned with the mission statement shows that the
company applies the highest standards of excellence to the purchasing, roasting and fresh
delivery of its coffee which supports the idea that Starbucks uses the best available resources to
give it a recognized and respected name.
Q. No. 3
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Growth Rate
Years
Growth rate
1998
0
1999
0.2889
2000
0.29095
2001
0.2164
2002
0.2415
2003
0.2391
2000
9.74
2001
10.57
2002
9.6183
2003
10.42
Profitability
Years
Operating profit margin
1998
8.34
1999
9.29
ROE
Years
Return on equity
1998
8.6
1999
1.58
2000
8.23
2001
13.1
2002
18.35
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2003
12
1998
0.19
1999
0.27
2000
0.24
2001
0.46
2002
0.54
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2003
0.67
In this portion we have analyzed that how Starbucks controlled its fixed cost. If we talk about
the locations, it was very expensive to purchase land and then develop it as a store, so to
overcome this problem Starbucks started leasing the land for long term periods. In our
opinion, it was a quit impressive move to cut down its fixed cost. Secondly they observed
that to get the license was too costly for them, so they made contracts with the partners who
had license with them.
Financing
For the financing, Starbucks instead of taking loans preferred raising the equity. It was a
better idea to generate capital because they did not have to pay any short term and long term
interests against the borrowings.
Q. No. 04
What were the key issues faced by Starbucks in 2004?
Every company faces major challenges, even companies that are as successful as Starbucks.
Although they have an outstanding reputation, have won many awards like top sustainable
retail store award and most ethical company award etc, and even give back to their
community, they are still facing challenges like any other company.
Following are the most obvious challenges that Starbucks is dealing with: Schultz was overflowing with the ideas for the company, early on he noticed that
first-time customers sometimes felt uneasy in the stores because of their lack of
knowledge about fine coffees and because store employees sometimes came
across as a little arrogant or superior to coffee beginner.
Howard Schultz when came back from Italy shared his ideas for modifying the
format of Starbucks store with Baldwin and Gordon Bowker. But instead of
winning approval for trying out some of his ideas, Schultz encountered strong
resistance but after a year Schultz succeeded in winning the approval from
Baldwin and Bowker.
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After sometime Baldwin and Bowker again went against the ideas of Schultz so
he became so frustrated and left Starbucks in late 1985 to open his own separate
Espresso Bars in high-traffic down town locations.
Schultz acquired Starbucks in 1987 and after the 20 months of acquiring, some
employees felt unappreciated that there was a feeling of prior management had
abandoned them. So, Schultz decided to make building a new relationship of
mutual respect between employees and management.
Starbucks lost its money when it expanded market to Chicago because in Chicago
that was the first downtown store opened on to the street rather than into the lobby
of the building where it was located; in the winter months, customers were
hesitant to go out in the wind and cold to acquire a cup of coffee. It was expensive
to supply fresh coffee to the Chicago stores from Seattle warehouse.
The challenge to Starbucks, in Schultz view, was how to attract, motivate, and
reward store employees in a manner that would make Starbucks a company that
people would want to work for and that would generate enthusiastic commitment
and higher level of customer service.
A values and principles crisis arose at Starbucks in 1989 when customers
starting requesting nonfat milk in making Cappuccinos and lattes (an espresso
coffee with frothy steamed milk) So, Starbucks started selling both fat milk and
nonfat milk Cappuccinos and lattes.
They were facing the issue of Wi-Fi (wireless internet service) in 2002, the
number of accesses was in the millions by T-Mobile; internal research showed
that the average connection last approximately 45 minutes So, in October 2003,
Starbucks announced that they will expand Wi-Fi capability to additional
locations and would have 2700 stores equipped with wireless Internet access by
year end.
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They were also facing challenges from their competitors. In 2003 there were an
estimated 14000 specialty coffee outlets in the United States but they were not
competent enough to exert pressure at Starbucks.
Q. No. 05
What recommendations would you make to Howard Schultz to sustain the
company growth and support strong financial performance in the years
ahead?
Recommendations
After analyzing the whole case study, we became able to give few suggestions to Howard
Schultz which can be handy to sustain the growth and support strong financial performance in
the forthcoming years: He should spend more budgets on advertisement of products.
He should bring innovations in his products because we saw in this case study that he was
inspired by espresso bars so he imitated the whole theme of Italian espresso bars and the
idea of dark roasted bean was an older one as well.
Before entering to any new geographical region he should study the market environment
of that particular region as we saw that at Chicago there was an issue of cold weather and
his store was at down-town-street. Furthermore, the labor rates and rents of building were
higher as well.
At the stores Starbucks technique to teach customers about how to make coffee was not a
good idea because it does not support their business model. Therefore, it should be
avoided in future.
Above elaborated things were having details about the strategies of Starbucks which drove it for
the Global dominance till 2004. Starbucks is in fact the recognized and respected brand in the
world and if it can overcome the shortcomings which we identified then nobody can create
bother for it to be successful and there will be no point left as a mistake on its part.
Reference
www.starbucks.com
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Case Study Starbucks in 2004: Driving for Global Dominance written by Arthur A. Thompson,
Amit J. Shah and Thomas F. Hawk.
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