Starbucks Case Analysis

This case analysis of Starbucks includes competitive forces, market position, financial analysis, VRIN model analysis, and competitive strength assessment. The report analyzes the competitive forces surrounding Starbucks using Porter’s five forces model. The coffee industry lifecycle model is used to identify the driving forces affecting Starbucks. The market position of the rivals of Starbucks is explained with the help of a strategic group map. The report also includes a financial analysis of Starbucks using certain financial ratios. VRIN model analysis has been carried out for Starbucks in order to analyze the strengths and weaknesses of resources and capabilities attained by the company. Finally, a competitive strength assessment of Starbucks Company is indicated in the report.

Running head: STARBUCKS CASE ANALYSIS
Starbucks Case Analysis
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1STARBUCKS CASE ANALYSIS
Table of Contents
Answer to Question 6:.....................................................................................................................2
Answer to Question 7:.....................................................................................................................3
Answer to Question 8:.....................................................................................................................4
Answer to Question 9:.....................................................................................................................5
Answer to Question 10:...................................................................................................................6
Answer to Question 11:...................................................................................................................8
Answer to Question 12:...................................................................................................................9
Answer to Question 13:.................................................................................................................10
Answer to Question 14:.................................................................................................................11
Answer to Question 15:.................................................................................................................12
References:....................................................................................................................................14

2STARBUCKS CASE ANALYSIS
Answer to Question 6:
The main competitive forces surrounding Starbucks could be explained effectively with
Porter’s five forces model, which are described briefly as follows:
Threats of new entrants:
There are low entry barriers in the coffee shop industry; however, it is difficult to tap into
the international market due to requirement of high capital. Moreover, the customers usually
have higher loyalty for the coffee shops they like. Thus, the threat of this force is medium for
Starbucks.
Threat of competition:
Starbucks operates in a highly captive industry, as it has both domestic and global
competitors. All nations or even cities would have their own popular coffee shops and thus, this
threat is high for the organisation (Aiello & Dickinson, 2014).
Threat of substitutes:
Coffee could be substituted by many items like juice, water, milk and tea. Starbucks sells
all these products; however, the main product is coffee. When the coffee prices of Starbucks are
compared with other substitutes, the latter have attractive prices. The switching cost of the
buyers is low as well and the customers could move over to the other alternatives and as a result,
this threat is deemed to be high for Starbucks.
Bargaining power of suppliers:

3STARBUCKS CASE ANALYSIS
Starbucks could select from a variety of suppliers, as the products of the suppliers do not
differ much from each other. Hence, the suppliers of Starbucks have low bargaining power.
Bargaining power of buyers:
The customers have lower switching costs to other coffee shop brands; however, they are
less price-sensitive and they tend to remain loyal with their preferred coffee shops (Ali, 2016).
Hence, the buyers of Starbucks have medium bargaining power.
Answer to Question 7:
The coffee industry lifecycle model could be used to identify the driving forces affecting
Starbucks, which include per capita coffee consumption, global coffee pricing and
demographics. During recession, fall in household disposable income because of increased
unemployment and stagnant wages resulted in downward pressure on profitability and revenue
margins in the industry (Cho et al., 2017). The other factors are summarised as follows:
Expansion growth:
One of the main drivers in the coffee industry is growth in the form of both domestic as
well as global expansion. From 1992, Starbucks has concentrated on its store expansion
programs having favourable demographic profiles, which the operations infrastructure of the
organisation could provide support (Glowik, 2017). For the foreign nations, the expansion
strategy of Starbucks was to merge with local partners or obtain licence having adequate
knowledge of the retail sector to operate the stores of Starbucks.
Technology:

4STARBUCKS CASE ANALYSIS
With rapid technological developments, high-tech coffee producing equipment and
premium ingredients could be accessed for manufacturing a variety of products. Starbucks uses
various technologies for producing different types of coffee products to maintain competitive
position in the market.
Product innovation:
With the passage of time, the product line of the coffee industry has become broader. In
order to cope up with this trend, Starbucks added certain products like Espressos, Cappuccinos,
Mochas, Lattes and Frappuccino’s.
Answer to Question 8:
The market position of the rivals of Starbucks could be explained with the help of
strategic group map or positioning map, which is illustrated as follows:

5STARBUCKS CASE ANALYSIS
Figure 1: Strategic group map of the industrial rivals of Starbucks
(Source: Iliopoulos, 2017)
As per the above figure, it is inherent that Henry’s has been placed on the top followed by
Starbucks and Costa. All these organisations follow premium pricing strategy; however, they
maintain high quality of their products, since there are many customers who are not price
sensitive. Moreover, these organisations provide loyalty cards to its long-term customers for
maximising their satisfaction level. On the other hand, McDonalds is another major competitor
of Starbucks, which follows low pricing strategy and the quality of products does not match with
those of the other three organisations. This is because it uses cost-effective production techniques
due to which quality is deemed to be inferior compared to the other three organisations (Duke,
2017). In case of Pumpkin, the pricing structure of the products is high, while the product quality
fails to match with Starbucks. As a result, many customers turn over to the other coffee shops
due to such pricing strategy.
Answer to Question 9:
For Starbucks, key success factors are focussed on its distinguishing its business from its
major rivals in the industry. Such capabilities are highlighted to offer biggest impact on market
success of the company (Wang, Qiao & Peng, 2015). Such key success factors that contributed to
market success of Starbucks are explained under:
 Market leadership has facilitated in attaining market share that is more than 70% in US
and China (Starbucks.ca, 2018). Being a market leader Starbucks has set industry trends
that the organization has attained in past with its Frappuccino beverage

6STARBUCKS CASE ANALYSIS
 Superior store locations are another key success factor for Starbucks in which the
company is efficient in locating its stores in areas that has increased foot traffic along
with superior local demographic compositions. This considers attaining close proximity
to interest and landmark places.
 Supply chain management is another key success factor for Starbucks a it has its own
supply chain operations. In this success factor the company has managed to project its
integrity of their coffee beans along with premium quality coffee beverages all over the
world (Shirdastian, Laroche & Richard, 2017).
 The supply chain management of the company is another key success factor for
Starbucks in which it is implementing ethical sourcing practices that turns out to be the
norm. The company has also managed to develop a long lasting along mutually beneficial
partnerships with sustainable suppliers all through the world.
Answer to Question 10:
In order to conduct the financial analysis of Starbucks, certain financial ratios are used
and they are compared with industry benchmarks, which are represented as follows:

7STARBUCKS CASE ANALYSIS
From the above table, it is inherent that the gross margin of Starbucks has declined from
50% in 2007 to 44.82% in 2012 with fluctuating trends in between the years. This ratio helps in
computing the percentage of profit left after cost of production is deducted from revenue (Grant,
2016). The fall in gross margin could be attributed to the increased commodity costs, mainly the
higher coffee costs (Investor.starbucks.com, 2018). In case of net margin, the ratio has fallen
massively in 2008 after which considerable increase could be seen until 2012. Even though no
gain was made in 2011 due to the acquisition of the leftover interest in past joint venture
operations in Austria and Switzerland, it was offset partially by realisation of additional income.
This was related to unredeemed gift cards in the second half of 2012, which was followed by a
court ruling associated with state unclaimed property laws (Starbucks.ca, 2018).
The trend is similar in case of operating margin as well for Starbucks. This ratio is used
to obtain the portion of income left after deduction of all relevant expenses (Hossain & Islam,
2015). This increase is mainly due to the fall in store operating expenses owing to licensed store
revenues, increased sales leverage as well as channel development. Moreover, the organisation
has earned income from its joint venture operations in North American Coffee Partnership, Japan
and Shanghai. However, both operating margin and net margin have been below the industrial
average, as other coffee shops managed to generate additional market demand because of
competitive pricing strategy. Return on capital employed is a profitability ratio that helps in
ascertaining the overall asset performance while considering long-term financing policy of the
organisation (Isa, Subhan & Saud, 2017). The ratio has been observed to be fluctuating over the
years; however, it has managed to perform above the industrial average of 30% in 2012, which is
favourable. This is because Starbucks has rented out its unused assets from which sufficient
return on capital has been generated to outperform the industrial expectations. Therefore, in

8STARBUCKS CASE ANALYSIS
terms of profitability, focus needs to be placed on minimising operating expenses for increasing
profit margin; however, the overall performance is deemed to be suitable in terms of business
operations.
Current ratio is a measure of liquidity determining the ability of an organisation in
settling its short-term dues and obligations with its existing asset base (Jones, Forsythe & Kemp,
2015). In case of Starbucks, the ratio has increased significantly from 0.79 in 2007 to 1.90 in
2012, which has been close to the industry average of 2. The main reason behind this
improvement has been the increase in cash balance, as the organisation has tightened its debtor
policy over the years due to which credit sales could be converted into cash within shorter
timeframe. Finally, debt-to-equity ratio for Starbucks has fallen significantly from 2007 to 2010
with a considerable rise in 2011 and followed by a slight decline in 2012. This ratio helps in
signifying the capital structure of an organisation (Li, 2018). The main reason that the ratio has
increased was due to the increase in short-term borrowings; however, the ratio is still below the
industry average and this is deemed to be desirable for Starbucks. Therefore, in terms of liquidity
and capital structure, Starbucks is positioned effectively in the coffee industry.
Answer to Question 11:
VRIN model analysis has been carried out for Starbucks in order to analyse the strengths and
weaknesses of resources and capabilities attained by the company. VRIN model for the company
is explained under:
 Valuable: Starbucks has attained a strong brand image that serves as a valuable resource
for the company which facilitates in growing its consumer base along with increasing its
reputation (Sam & Cai, 2015). Moreover, it offers special flavours of coffee that is

9STARBUCKS CASE ANALYSIS
another valuable resource which complements quality of Starbuck products and in
attaining consumer retention. Store environment maintenance is another valuable
resource that facilitates the company in increasing its popularity along with supporting its
business in retaining quality of all its goods.
 Rare: Attaining strong brand image is not rare but is challenging for other competing
brands. In addition, in introducing special flavours and varieties like Starbucks, the
competitors have to make significant investment in their creation and procurement
(Rothaermel, 2015).
 Imitable: Attaining strong brand name is difficult to imitate but is possible over long
term. In addition, introducing special flavours of coffee is complex to imitate for its
procedures and prices. Moreover, effective consumer services along with maintaining
effective store environment just like Starbucks is quite difficult to imitate.
Answer to Question 12:
Starbucks is deemed to be observed in using activity-based costing (ABC) system for
cost allocation. Most of the competitors of Starbucks use direct labour as the costing pool for
allocating manufacturing overhead cost (Martínez-Torres, Rodriguez-Piñero & Toral, 2015).
This fails to take into consideration any other related indirect costs and thus, the allocated
production cost and product profitability seem distorted. By using ABC system, Starbucks
provide a more correct costing evaluation for its individual products. Therefore, the low-volume
products and high-volume products of the organisation use overheads at different rates after
adoption of the ABC system. The existing costing systems of the competitors use direct labour
hours as the cost driver for applying cost of manufacturing overhead to its products. However, in

10STARBUCKS CASE ANALYSIS
Starbucks, all manufacturing overhead costs are not driven by volume and thus, product pricing
is made appropriately.
Answer to Question 13:
Competitive strength assessment of Starbucks Company is indicated in the table below
that explains the strategies of internal capabilities based on which the company is able to
maintain its competitive advantage in the industry (Wang, Qiao & Peng, 2015).
Critical Success Factor Starbucks Deidrich Tully’s
Brand Recognition 0.50 0.10 0.10
Quality Product 0.10 0.05 0.05
Distribution 0.15 0.25 0.25
Total 0.75 0.40 0.40
From the above table, it is evident that Starbucks goes tough competition to the renowned
companies in the industry like Deidrich and Tully’s through its exceptional strategies of brand
recognition, quality product and distribution initiatives. In addition, in developing quality
products the company develops effective and innovative strategies to stay ahead of competition.
Such strategies include introducing new varieties and flavours in their product line-up (Yang &
Davaanyam, 2015). Moreover, their distribution strategy is focussed on maintaining a highly
efficient supply chain for attaining strategic growth through retaining highly skilled employees.
Moreover, brand recognition has also facilitated Starbucks in attaining competitive edge over its
rivals. In this strategy the company has facilitated in developing a good public image. It has

11STARBUCKS CASE ANALYSIS
generated a great consumer base through offering an attractive ambiance such as comfortable
chairs, cozy atmosphere along with other complementary services (Wang, Qiao & Peng, 2015).
The company offered ranges of coffee products in certain geographical areas at affordable cost.
In addition, it also increased its marketing expenditure that facilitated it in attracting increased
consumer base.
Answer to Question 14:
Porter’s generic strategies model is used in order to analyse the generic business level
strategies of Starbucks along with their effectiveness in the industry.
Figure 2: Porters Generic Strategies of Starbucks
(Source: Wu, 2017)

12STARBUCKS CASE ANALYSIS
 The differentiation strategy implemented by Starbucks is deemed to be effective in
maintaining its sustainable competitive advantage. This strategy majorly focussed on
maintaining differentiation based on quality (Yang& Davaanyam, 2015). Focussed on
this strategy Starbucks has implemented highest standards of quality coffee beans.
 The focus strategy of Starbucks is centered on developing only premium a quality coffee
product in which it charges a premium price for its coffee items. This strategy
implementation has been efficient for the company in attaining competitive advantage
through attaining increased market share due to its exceptional tasting coffee.
 Cost leadership strategy of Starbucks is focussed on developing ethical and consumer
friendly brand image. This strategy is observed to be successful as efficient consumer
service facilitated the company in attaining competitive advantage.
 Starbucks has also implemented low cost focus strategy for attaining increased market
penetration. The company offered ranges of coffee products in certain geographical areas
at affordable cost. In addition, it also increased its marketing expenditure that facilitated
it in attracting increased consumer base.
 Differentiation strategy of Starbucks considered implementation pf product development
initiative that has been successful for Starbucks in positioning itself as an innovative
brand and introducing new flavours and varieties.
Answer to Question 15:
Starbucks has applied a four-fold strategy to emerge as a winner into the global market
and they are explained as follows:
Appropriate market segmentation:

13STARBUCKS CASE ANALYSIS
Starbucks has remained in the top scale of the coffee market competing on comfort,
instead of convenience. The case is similar with its nearest competitors like Dunkin Donuts and
McDonalds.
Execution:
Starbucks has maintained its focus on the original product bundle, which includes good
coffee, quality services and a cozy environment for relaxation of the customers. On the other
hand, its competitors have focused on maintaining updated and natural dining environment
(Rothaermel, 2015).
Sound leadership:
The founder of Starbucks, Howard Schultz, has continued to come up with new and
innovative products for diversifying the product portfolio of the organisation. In this aspect, the
competitors are lagging behind Starbucks due to absence of strong leadership skills.

14STARBUCKS CASE ANALYSIS
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15STARBUCKS CASE ANALYSIS
Investor.starbucks.com. (2018). Starbucks Corporation - Financial Data - Annual Reports.
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