GRC 411: Case Study of Starbucks Coffee Company's Business Model

This case study examines Starbucks Coffee Company, starting with its historical background from 1971, its mission, core competencies, and evolution to its current status with over 16,000 stores worldwide. The case study analyzes Starbucks' lifecycle stage, value chain, and Boston Matrix, highlighting its cash cows and potential stars, as well as its differentiation strategy in the competitive landscape. The analysis includes financial ratios, SWOT analysis (strengths, weaknesses, opportunities, and threats), and a strategic factor analysis summary (SFAS). Key issues facing Starbucks, such as overexpansion and competition, are discussed. The case study also provides an overview of Porter's 6 Forces and their level of threat to Starbucks. Overall, the study provides a comprehensive look at Starbucks' business strategy, competitive advantages, and challenges.

CASE STUDY: STARBUCKS COFFEE
BY: KATHLEEN LEE
GRC 411

CASE STUDY: STARBUCKS
KATHLEEN LEE
1
Brief History:
The first Starbucks location opened in 1971. The name is inspired by Moby Dick’s first m
This name and the mermaid logo were inspired by the love of the sea, from Starbucks o
cation in Seattle Washington in the heart of Pike Place Market. Starting as a single shop
izing in high quality coffee and brewing products the company grew to be the largest ro
Washington with multiple locations until the early 80’s. In 1981, current CEO Howard S
recognized a great opportunity and began working with the founder Jerry Baldwin. Afte
to Italy to find new products, Schultz realized an opportunity to bring the café commun
vironment he found in Italy to the United states and the Starbuck’s brand we know toda
to take form. Selling espresso by the cup was the first test. Schultz left Baldwin to open
Italian coffee house Il Giornale which found outrageous success and in 1987 when Starb
decided to sell the original 6 locations, Schultz raised the money with investors and pur
the company and fused them with his Italian bistro locations. The company experience
growth going public in 1992, and growing tenfold by 1997, with locations around the Un
States, Japan and Singapore. Starbucks also began expanding its brand. According to G
Garza in his article The history of Starbucks the following product lines were added:
• Offering Starbucks coffee on United Airlines flights.
• Selling premium teas through Starbucks’ own Tazo Tea Company.
• Using the Internet to offer people the option to purchase Starbucks coffee online.
• Distributing whole bean and ground coffee to supermarkets.
• Producing premium coffee ice cream with Dreyer’s.
• Selling CDs in Starbucks retail stores.
Starbucks uses minimal advertising and has grown on word of mouth and brand recogn
According to Garza by 2004 Starbucks had reached 1,344 locations.
(Garza)

CASE STUDY: STARBUCKS
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Updated history and Current Status
Today, according to the Starbucks website, they have 16,706 stores (as of Dec. 27, 200
countries. In 2009 they made strives socially as they opened the Farmer Support Cente
gali, Rwanda and became the world’s largest buyer of Fair Trade CertifiedTM coffee.
Their mission statement from the company profile is as follows:
“Our mission is to inspire and nurture the human spirit – one person, one cup, an
neighborhood at a time.”
Their core competencies can be defined as high quality coffee and products at accessib
tions and affordable prices, provided a community to share in the coffee drinking exper
and variety of choices. The also value ethics and good business practices and are a lea
voted one of 2010’s most ethical businesses by Ethisphere magazine for the 4th year running.
(“Starbucks”)
Starbucks is facing its own struggles however as it saw sales start slipping before other
panies did in the recent recession. According to Melissa Allison in her article Starbucks
new growth strategy — more revenue with lower costs, Starbucks has closed 900 store
eliminated 34,000 jobs. Starbucks new strategy is to refocus on some of the areas that
risk and up front investment. This includes expanding foreign stores, with aid of partne
that share risk and costs, selling VIA instant coffee and other products in retail and con
stores, and reinvigorating the Seattle’s Best Brand coffee.
A statement from CFO Troy Alstead this March paints this picture:
“We clearly hit a wall and didn’t do very well in the 2007/2008 time period. From
forward, when we grow Via, Seattle’s Best Coffee and consumer products, there’s
investment for each dollar of revenue.”

CASE STUDY: STARBUCKS
KATHLEEN LEE
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This new strategy has inspired some optimistic feedback. Morningstar investment resea
has increased estimate of Starbucks shares from $4 a share to $24 after the statement
ing the brand.
Morningstar analyst had this to say R.J. Hottovy.:
“I’m surprised it wasn’t ramped up in earlier years. Product innovations and inter
al expansion not only make the business potentially more profitable, but defend t
against competition.”
International partnerships increase challenges but also create new ideas in new market
then be translated back to US markets. (Allison)
Introduction Growth Maturity Decline
Starbucks Lifecycle
Starbucks in a mature stage of its lifescycle. It was founded over 20 years ago and it ha
rienced rapid growth in the last 2 decades. However within the last few years its growth
slowed and has even had to close locations. They are now focusing efforts on previous
and international expansion.

CASE STUDY: STARBUCKS
KATHLEEN LEE
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Value Chain
Bean and
ingredient
Selection
Product
Development
Product
Distribution Storefront Take-home
products
The above is the value chain for Starbucks. The upstream portion of the value chain sh
product development from adding teas and international influences, to the research tha
place to develop the VIA instant coffee line. They also search the globe for Fair Trade s
of high quality beans. These products are then distributed to corporate storefronts, fran
locations, airport terminals, grocery stores and more, and finally offer ground coffee an
cards to take home.
New Value Chain
Bean and
ingredient
Selection
Product
Development
Product
Distribution
Storefront Take-home
products
International
Development
Online Storefront
customization
Mobile Apps
The above is a new value chain with international development added upstream to allo
ternational markets to develop new products that better suit there cultures that could p
add value to the US market as well such as the Green Tea Latte developed in Japan’s S
Added downstream is Online Storefront customization, that would allow you to create a
online, order online, create new drinks etc. Also added is a mobile app that could locate
bucks locations, put in drink orders etc.

CASE STUDY: STARBUCKS
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Above is the Boston Matrix. It shows the cash cows as the regular Starbucks line of Coff
Latte’s and Frappacinos found at nearly every location. These are stable products that
for the bulk of sales. A potential star is the International locations, which hold less finan
and open doors for innovation and stability. Question marks are the recently added VIA
coffee to be expanding to grocery stores and convenient stores. Current products like t
as the dog, pre-bottle frappacinos account for a tiny fraction of sales. Another question
is the oft forgotten sub-brand Seattle’s Best. The company will be revamping this brand
future is unknown.
The following is Porter’s Generic Competitive strategy. Shown is Starbucks as a whole i
differentiation strategy as they provide a high quality coffee and unique experience in
convenience of a large volume of locations, which separates them from their competiti
the new instant coffee line is straddling differentiation and low cost- leadership. While i
be a low cost and convenient alternative to Starbucks regular coffee, it is still unique fr
products in the market. The in-store gifts and brewing utensils are in the focused differ

CASE STUDY: STARBUCKS
KATHLEEN LEE
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tion category as they cater to the coffee lover, and are unique items found only in the S
stores.
Competetive Advantage
Lower Cost Differentiation
Cost Leadership Differentiation
Cost Focus Focused Differentiation
Starbucks
VIA
In-Store brewing
products/gifts
Below are the financial ratios from the income statement and balance sheets for Starbu
Current Acid Debt to Equity Gross ProfitNet Margin
2009 1.29 0.86 0.83 56% 0.19
2008 0.8 0.49 1.28 20% 0.15
2007 0.79 0.47 1.34 24% 0.3
The ratios show that assets vs. liabilities has increased which is promising after the risk
of expanding to 30,000 has since been abandoned. The acid ratio also reflects this. Deb
equity has decreased which also shows stability. Gross profit has shown a large increas
is very good in a mature company. Their net margin in 2009 was very promising and is
sustainable competitive advantage.

CASE STUDY: STARBUCKS
KATHLEEN LEE
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SWOT Analysis
Internal Factor Analysis Summary (IFAS)
Internal Strategic forces Weight Rating Weighted ScoreComments
Strengths
S1- Brand Identity
S2- Quality
S3- Variety
S4- Locations
S5- Convenience
S6- Store Ambiance
S7- Ethics
20%
10%
10%
10%
20%
5%
5%
4
3
3
5
4
3
3
.8
.3
.3
.5
.8
.15
.15
S1- the company consistently
maintains its brand, even without he
marketing.
S2- They search for quality beans
worldwide.
S3- They offer drink variety and
customization.
S4- locations are everywhere as
the company’s main goals.
S5- with new products live VIA,
drive thru windows, instore locations
convenience is important.
S6- ambiance was a foundation
starbucks brand and continues in
locations.
S7- by using fair trade ingredients
are a leader in ethics.
Weaknesses
W1- Overexposure
W2- Too many products
W3- Risky investment in
more locations
10%
5%
5%
4
4
4
.025
.0125
.0125
W1- Starbucks goal to have 30
locations stalled in the recent
recessions. By becoming overexpose
they risk losing the unique quality the
were founded on.
W2- By constantly adding products,
some products have lost value, Seattle’s
Best for example, and they are
endeavors.
W3 expanding locations in the
a high risk and costly investment
comparison to international expansion.
TOTAL SCORES 1.00 3.05
External Factor Analysis Summary (EFAS)
External Strategic forcesWeight Rating Weighted ScoreComments
Strengths- Opportunities
O1- Customization
O2- International Markets
O3- On-the-Go Lifestyle
O6- Partnerships
10%
15%
20%
10%
4
5
5
3
.4
.75
1
.3
O1- Starbucks introduced a
completely custom frappacino in
Canada.
O2- Increasing efforts
internationally, to increase
stability.
O3- VIA instant coffee and other
products to be in groceries
convenience stores.
O3 Partnering with more locations
including NYSE.

CASE STUDY: STARBUCKS
KATHLEEN LEE
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Weaknesses- Threats
T1- Direct Competition
T2- Cheaper Alternatives
T3- Recession
15%
15%
15%
3
2
4
.45
.3
.6
T1- Direct competition
from Peets and Coffee Bean
increasing. Lack of marketing
T2- Cheaper alternatives from
McDonalds and Dunkin Donuts
T3- Recession has affected
customers willingness to spend,
greater risks in investment
TOTAL SCORES 1.00 3.8
Strategic Factors Weight Rating Weighted ScoreS I L Comments
S1- Brand Identity
S5- Convenience
W1- Overexposure
O1- Customization
O2- International Markets
O3- On-the-Go Lifestyle
T1- Direct Competition
T2- Cheaper Alternatives
20%
20%
5%
10%
15%
15%
5%
10%
5
4
3
3
4
4
2
2
1
.8
.15
.3
.6
.6
.1
.2
S
S
I
I
I
L
L
L
Brand Identity is extremely
important to the company
is a long term factor for the
company.
Convenience is also one of
foundations that the company
grew on and will continue
maintain their advantage.
International Markets offer
lower risk investment and
innovation opportunities.
Cheaper Alternatives like
McDonalds threaten the
convenience factor.
Total Score 1.00 3.9
Strategic Factor Analysis Summary (SFAS)
The strategic factors summary shows that the most important factors overall received
3.9 which is above average. This is positive for the company. They are responding well
strength, weaknesses, opportunities and threats. After some recent re purposing it is cl
the company is focusing on its core competencies but has room to improve.

CASE STUDY: STARBUCKS
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Analysis of Key Issues facing the firm
The key issues facing this firm was its attempts at massive expansion and creating new
innovation. The need to expand could cause the company to become over exposed and
ability to change. New players in the field such as McDonalds pose a new potential thre
competition, though it is unclear if they share the same market.
Above are Porters 6 Forces and their level of threat to Starbucks. The bargaining power
pliers is high because of the natural resources needed to create their ingredients and S
believes in finding fair-trade and high quality beans, often from other countries These s
cations limit the number of suppliers. The threat of new entrants is medium in that the
market is changing. The need for ambiance and a place to share is losing edge to the o
alternatives, and should a new entrant come along with a different business model the
room for threat. However Starbucks is the household name. Industry competitors is on
because of McDonalds creating the McCafe line. Peets has increased presence as well.

CASE STUDY: STARBUCKS
KATHLEEN LEE
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substitutes is low, because coffee is always going to be a desired drink and pastime of
Alternative Action
There are alternative actions Starbucks can take to secure its competitive advantage it
for so long. Below is the current value curve for Starbucks and its most relevant compe
Peets, and the McCafe Line.
McDonalds shows a similar curve but lower in all levels. The one item that truly separat
two is the reputation Starbucks has in the coffee industry unlike McDonalds. The rest is
which shows a threat to Starbucks becoming part of a red ocean. Peets has an opposin
which could be a threat but their lack of volume, and brand recognition limits them from
petition.
My suggestions for the Four Action frame work would be to create more customization
lowing users to create new flavors and drinks above and beyond the options they have
would incorporate with the other creation of online user experience. Users could go on

CASE STUDY: STARBUCKS
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online Starbucks interface and have complete control to create their own drink, order o
find the nearest Starbucks and receive directions. Users could post their favorite drink
tion and others could vote on it. Also involved in user experience could be mobile apps
in drink orders, finder etc. to enhance the Starbucks brand in the new digital era and to
blue ocean for the coffee experience.

CASE STUDY: STARBUCKS
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Conclusion
Overall Starbucks has maintained a competitive advantage since creating its original b
of bringing quality, bistro-style coffee choices to the masses. In order to stay current it
to focus on its core competencies and avoid spreading themselves to thin. To avoid com
such as McDonalds and other coffee chains, they will need to create new value innovat
enhancing the customer experience by investing in online content and interactivity. Ra
creating more new products, I think their strength lies in their brand and by enhancing
nection to their loyal customers, they will separate themselves from McDonalds and oth

CASE STUDY: STARBUCKS
KATHLEEN LEE
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WORKS CITED
Garza, George. “The history of Starbucks.” Catalogs.com. Catalogs.com, n.d. Web. 7 Ju
<http://www.catalogs.com/info/food/the-history-of-starbucks.html>.
“Our Heritage.” Starbucks. Starbucks, 2010. Web. 7 Jun 2010. <http://www.starbucks.
about-us/our-heritage>.
Allison, Michelle. “Starbucks has a new growth strategy — more revenue with lower co
Seattle Times. Seattle Times, 15 May 2010. Web. 7 Jun 2010. <http
attletimes.nwsource.com/html/businesstechnology/2011861321
bucksstrategy16.html>.