Starbuck's Strategic Management Case Study

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STARBUCKS PROJECT

By Nanette Walthour, Thao Nguyen, Mengjia Yuan, Abigail McCrimmon, Brianna Courchene Leadership and Strategic Management HFT4295 Wednesday 1:30-2:45 Mehmet Altin, PhD April 15, 2020

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OVERVIEW We will give an overview of Starbucks History, Mission and Vision. Also, give an Macro and Micro environment analysis of the company with an overall strategy and strategic plan for the future direction.

STRUCTURE OF THE PROJECT Front Page -Nanette Project Proposal-Nanette Executive Summary -Nanette Table of contents – Thao Nguyen Introduction and methodology-Jenny Yuan History of company, mission, vision, values and goals - Nanette Analysis of general environment (PESTE - Political Economical Social Technological Ecological) - Thao Nguyen Analysis of task environment (Porter’s Industry)- Jenny Yuan Analysis of internal environment - Thao Nguyen Company’s resources, competencies, distinctive competencies, competitive advantage and sustainability - Brianna Company overall’s strategy, its strategic direction, leadership, main problems and challenges - Abigail Conclusions and Recommendation - Abigail What you learn from the project - Abigail References- Brianna

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STARBUCKS EXECUTIVE SUMMARY As a major company making global impact in our communities around the world, we selected Starbucks Company for our project. Starbucks are actively involved in many different social responsibilities such as creating job opportunities, helping with farming communities, providing education, as well as starting youth foundations. They train young people skills that would eventually help them succeed in a rapidly changing global economy and strengthen the communities within the US and China.

Therefore, we utilize various sources regarding this brand, in order to gather the information and data for our research paper. Some included the company’s website, academic credit article and online post resources to collect primary analytical data regarding Starbucks' internal and external environment, distinctive competency, competitive advantage and sustainability. After conducting our research, we found out that as Starbucks continues to expand into new markets, it has increasing competitors from different levels of local and regional competition. The main target is the U.S. and China in terms of coffee consumption.

Following problems are looked at. The tax policies and employment, high turnover rate, laws and regulations worldwide and local currency exchange rate. Also, now dealing with the COVID19 and how it has impacted the company in the US and China by shutting down many of their stores.

Primarily, we looked at PESTE analysis to understand the impact of the macro environment on Starbucks’ business. The Porter’s Industry Five Forces strategy was also used to help understand the competitiveness and profitability of the company environment. Threat and

2 opportunities of new entrants have resources that may cause changes in the industry such as Regional Integration Markets, Improving Governmental Support for Infrastructure, Health related Policies, Stock Market, Fed Action, Cost of Input Factors, Psychographic Changes, Cultural Changes, Ecological and Technology, how it’s being used without having to be in the stores.

Recommendations were that Starbucks should give more effort on healthier options due to the healthier lifestyle of many of its consumers, by adding more refreshers to their menu instead of Frappuccino. Starbucks should be more in tune with the plant based or vegetarian trend. Also, they need to be more environmentally conscious and get rid of plastic or at least reduce its plastic use. In conclusion, Starbucks will have a strong competitiveness in the US if they continue to change the economy globally and strengthen their communities through their CSR projects.

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TABLE OF CONTENTS OVERVIEW........................................................................................................................................... 2 STRUCTURE OF THE PROJECT........................................................................................................... 2 EXECUTIVE SUMMARY....................................................................................................................... 3 INTRODUCTION................................................................................................................................... 6 METHODOLOGY.........................................................................................................................................................6 BACKGROUND..................................................................................................................................... 6 MISSION.....................................................................................................................................................................7 VALUES......................................................................................................................................................................7 GOALS........................................................................................................................................................................8 ANALYSIS OF GENERAL ENVIRONMENT........................................................................................... 8 Political Environment..........................................................................................................................................9 Economic............................................................................................................................................................10 Sociocultural......................................................................................................................................................12 Technology..........................................................................................................................................................14 Ecological...........................................................................................................................................................15 ANALYSIS OF TASK ENVIRONMENT................................................................................................ 16 ANALYSIS OF INTERNAL ENVIRONMENT....................................................................................... 19 Operations..........................................................................................................................................................19 Marketing...........................................................................................................................................................19 Human Resources Management.......................................................................................................................20 Finance...............................................................................................................................................................21 Information Technology.....................................................................................................................................21 COMPETENCIES, COMPETITIVE ADVANTAGES, AND SUSTAINABILITY.......................................22 OVERALL STRATEGIES..................................................................................................................... 27 STRATEGIC DIRECTION...........................................................................................................................................27 MAIN PROBLEMS AND CHALLENGES.....................................................................................................................28 CONCLUSION..................................................................................................................................... 29 RECOMMENDATIONS........................................................................................................................ 30 WHAT WE LEARNED.......................................................................................................................... 31

2 REFERENCES..................................................................................................................................... 33 APPENDIX........................................................................................................................................... 36 MINUTES..................................................................................................................................................................36

2 INTRODUCTION We have selected Starbucks Company for our project, as it is a major company making a global impact in our communities around the world. There are many reasons why we chose Starbucks as our Strategic Leadership Project. First, we believe Starbucks is a global social company that has made a major impact across 75 countries, that believe in reaching many people, customers, suppliers, and neighbors one person, one cup, and one neighborhood at a time. Since Starbucks have been in business, they have always made a social impact in our communities by opening their locations in just about everyone’s neighborhood. Starbucks has covered several important milestones in its history to arrive where it is today.

Everyday

Starbucks opens its doors, they go to work hoping to do two things: share great coffee with friends and help make the world a little better. Lastly, we believe Starbucks will continue to make a difference even if it means they will deliver door to door, one cup at a time to serve our communities for economic growth and development.

METHODOLOGY In order to gather the information and data for our research paper, we utilize various sources regarding this brand. These include this company’s website, academic credit article and online post resources to collect primary analytical data regarding Starbucks' internal and external environment, distinctive competency, competitive advantage and sustainability. Academic books and journals written by known management, marketing and business academicians and scholars were used as a guide in analyzing the current situation of Starbucks. Academic books and journals written by known management, marketing and business academicians and scholars were used as a guide in analyzing the current situation of Starbucks. A personal interview was also conducted to support the findings and conclusions drawn in this paper. The employee interview was conducted with a primary aim of getting the employee’s insights and perceptions toward Starbuck’s recent and past activities that include pricing strategy, leadership strategy, and other operational and management strategy.

BACKGROUND

2 Starbucks was founded in 1971 and opened its first location on March 31 st in Seattle Washington, by three partners who met while they were students at the University of San Francisco: English teacher Jerry Baldwin, history teacher Zev Siegl and writer Gordon Bowker who 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. They opened their first location in Seattle’s Pike Place Market selling only coffee beans. Howard Schultz became director of retail operations and marketing in 1982, who then eventually purchased Starbucks in 1987 and the company opened the first store to sell brew coffee and espresso beverages. By 1989, 46 stores exited across the Northwest and Midwest and annually Starbucks was roasting over 2,000,000 pounds of coffee. Today Starbucks globally has more than 2,900 stores, employs more than 350,000, partners in 78 countries, and expects to reach 4,500 stores by the end of 2019.

In January 1999, Starbucks entered China’s mainland market and opened its first store in Beijing at the China World Trade Building. In 2018 China Starbucks had 3,700 stores in 150 cities and had nearly 50,000 partners. Presently, in 2019 Starbucks has 4,121 stores. Price competition has driven Starbucks in a position in the coffee market that they don’t want to be in.

Meanwhile, Starbucks hopes its store war against competitors with a combination of production innovation, solid service, attractive atmosphere, a compelling digital loyalty program and delivery.

In the meantime, it has changed its mission statement. The brand had achieved a critical milestone of more than 22,500 stores in 2015. Apart from that 99% of its coffee is sourced ethically. Most notable thing about Starbucks is its special emphasis on ethics.

MISSION To inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.

VALUES Starbucks live with these values: their partners, coffee and customers are at their core. ● Creating a culture of warmth and belonging, where everyone is welcome. ● Delivering their very best in all we do, holding ourselves accountable for results.

2 ● Acting with courage, challenging the status quo and finding new ways to grow their company and each other. ● Being present, connecting either transparency, dignity and respect.

Starbucks is performance driven, through the lens of humanity.

GOALS Our goals for our project is to make an analysis on Political Economical Social Technological Ecological (PESTE), task environment, and internal environment. We will do research on Starbucks resources, competencies, distinctive competencies, competitive advantage and sustainability. We will also be looking at the company’s’ overall strategy, its strategic direction, leadership, main problems and challenges and will make recommendations on how we think Starbucks may improve and make better decisions for the company’s’ best interest.

ANALYSIS OF GENERAL ENVIRONMENT The macro environment that Starbucks operates in is characterized by the ongoing social subcategories, which have affected the purchasing power of the consumers. In order to gauge the impact of the macro environment on Starbucks’ business, the PESTE analysis will be conducted.

As Starbucks continues to expand into new markets, it has increasing competitors from different levels of local and regional competition. The main target is the U.S. and China in terms of coffee consumption.

2 Figure: Starbucks Expansion, Adapted from Forbes.com, 2019 POLITICAL ENVIRONMENT 1. Regional Integration of Markets (Opportunity) Regional integration is the progress when two or more parties agree to cooperate and work closely together to achieve their goals. This is a current trend in many corporations and an external factor that presents an opportunity for Starbucks to expand around the world. Many forums are formed based on the same interests, such as the European Union (EU), North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC). Regional integration helps Starbucks to adapt the tastes of different cultures – which is called localization strategy.

Such as in China, Nestle already has a major distribution with 1.5 million outlets. As Starbucks wanted to roll out products quickly across China, they created a partnership where Nestle handled the retail sales with a deal for $7 billion. They also joined the joint venture with Taiwan’s Uni President group, for $1.3 billion, to give Starbucks full control over Shanghai and Taiwan (Ambler, 2019).

2. Improving Governmental Support for Infrastructure (Opportunity) Most governments are focusing on improving infrastructure, which creates the opportunity for many businesses to develop their management strategy. Infrastructure includes transportation, power, water and telecom systems. According to McKinsey, the world spends more than $2.5 trillion a year on infrastructure and keeps demanding more budget for this segment just to keep pace with projected GDP growth ("Four ways governments can get the most out of their infrastructure projects", 2020). Through the development, Starbucks has more rooms and benefits to grow.

3. Health-related Policies (Threat) Due to the outbreak of COVID-19, Starbucks needed to follow social distancing policies.

They announced on March 20, 2020 that it would pay all workers for 30 days regardless of employees laid-off. On the same day, the chain also closed its stores and moved to a drive-thru and delivery-only model (Jang, 2020). Also, the coffee chain had removed seating from its stores to discourage crowded gathering. This was a potential loss for beverages chains since they depend heavily on regular walk-in customers, and the online orders would potentially cut-down their revenue. Also, they still need to pay for all expenses which leads to an expectation of its

2 fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets (Lucas, 2020).

The company has quickly prepared to respond to any situation that may unfold their market as they have gained insight experience in China. They make protective measures such as daily temperature checks, require wearing masks, equip safety stations to automatically check customers’ temperatures and provide masks for guests.

4. Sensitive to culture wars (Threat)

Figure: Illustration by Lauren Kolm, Adapted from Pinterest.com, 2018 The best illustration for this threat is back in the 2016 US election, Starbucks were faced with boycotts over big topics, like its response to Trump’s refugee policy, which some called “political brainwashing”. The chain faced backlash when it debuted minimalist red cups to clash with Trump. Also, in 2013 Starbucks’s shareholders meeting, a shareholder argued that Starbucks lost customers because of its support of same-sex marriage (Taylor, 2017). Indeed, Starbucks insists the company does not make any political statement to make money but to emphasize that its business model works. This model requires the company to differentiate itself through limited political activism. Starbucks wants to establish a higher-end image that persuades customers to pay more for their products than they would.

ECONOMIC 1. Stock Market (Threat) Due to COVID-19, the FTSE, DJIA and the Nikkei have all seen the biggest one-day declines since Black Monday in 1987, falling almost 10%.

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The spread of the coronavirus destroys the economic growth and that government action may not be enough to stop the decline. Starbucks’ fiscal second-quarter earnings will be cut roughly in half due to the effects. They expect adjusted earnings of 28 cents to 32 cents a share for the second quarter, which would be down from 60 cents a share in the second quarter of 2019 (Owens, 2020). The company suffered lost sales during the period as well as incremental expenses for wages and benefits, store operations, and other expenses related to the coronavirus pandemic. The company also rescinded its annual guidance. According, Starbucks’ shares fell by more than 2% in after-hours trading (Dhaliwal, 2020).

In China, Starbucks experienced reduced operating hours and limited seating in compliance with local guidelines. Having leveraging experience in China, Starbucks has a response strategy in the U.S. this included elevating cleaning and sanitizing protocols in stores, temporarily closing stores with high levels of customer gathering-spots, shifting to a -to-go’ model and restrict to drive-thru and delivery channels in selected locations. The operation can be volatile since the coronavirus pandemic does not have the ending signals yet. It would affect the operations of the chain worldwide.

2. Fed Action (Opportunity) The Federal Reserve has taken unprecedented actions to save the economy during the coronavirus crisis. On April 9 2020, the market learned that the market was worsening as the Labor Department reported that another 6.6. million Americans had joined the ranks of the jobless. In just a three-week period, more than 16 million Americans, or 10% of the workforce had suffered the unemployment line (Liesman, 2020).

2 Hence, the Fed announced a series of programs to help business, such as an unprecedented $2.3 trillion in economic stimulus. The Fed also cut interest rates to near-zero in an attempt to lift up the economy. This would encourage business in operating during the crisis with the lesson burden on costs.

3. Cost of Input Factors (Threat)

Coffee prices have jumped more than 25% in recent research, lifting signs of coffee future productions. The International Coffee Organization forecasted that the coffee production for the 2020 year is expecting to decline by 0.9%, this would be a lowest production of coffee at the meantime (Maltais, 2019). The slowdown in coffee harvesting at key supply sources would affect the coffee giant Starbucks to maintain the prices and quality of coffee in a long time.

SOCIOCULTURAL 1. Psychographic Changes (Opportunity) In recent research, the younger generation uses creamer products more than their parents did. Lifestyle has changed recently, since more people like coffee milkshake than black coffee (Gasparro, 2020).

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Figure: Liquid Coffee Creamer Sales and Sales Change in 2019, Adapting from WSJ, 2020 Moreover, sales of plant-based creamers rose 30% last year to 8% of the creamer market (Gasparro, 2020). With this in mind, adding creamers would make consumers consider them more healthful because of the narrower list of natural ingredients they contain. Consumer awareness on health raises as a current trend. This would be a potential market for coffee chains such as Starbucks to join.

2. Cultural Changes (Opportunity) Starbucks has a long-time history of cultural adaptation when they expanded their locations overseas. Starbucks operates on 6 continents and in 78 countries and territories. This would be an opportunity for Starbucks when they want to open a location in a new country. The success and acceptance of Starbucks by different cultures is carefully planned in their business strategy, which is called “localization�.

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Figure: How Starbucks Adapts To Other Cultures, Adapted from Daytranslations.com, 2019 With localization, Starbucks is able to adapt to the tastes of different cultures and convince consumers to drink their coffee. In some cases, Starbucks will wear a new brand’s colors and appearance as well as adapt the brand name to fit the local culture. Such as in Japan, the company hired local designers to create the right atmosphere as they want to build up a local craft store with the style of a traditional Japanese teahouse.

Starbucks also invested in programs to strengthen economic and social development in local communities, while also caring for the environment. Through collaborative farmer programs and activities, such as farmer support centers, farmer loans and forest carbon projects, these supports help to improve farmer livings and ensure a long-term supply of high-quality coffee for the industry.

TECHNOLOGY 1. Artificial Intelligence (AI) Development (Opportunity) Personalization is growing stronger, seeing the trend Starbucks wants to bring out the customized experience to consumers. Starbucks sees the potential in deploying AI-equipped hardware and analytics. They announced their “My Barista” feature that will likely support users

2 to order drinks and food through messaging and voice recognition on the application without having to be in the stores. The new feature would make the order easier.

There is a rising number that use Mobile Order and Pay programs. The convenience of this app makes the purchase easier since it helps to save waiting time, reduce the queuing and make the services more convenient while enhancing customer loyalty.

2. Implement Technology Devices (Opportunity) Starbucks partnered with Microsoft to develop Internet of Things (IoT) devices across their store equipment. Understanding the struggle when handling dozens of pieces of equipment in each store, Starbucks wants to create additional moments of connections between their partners and customers. To reduce disruptions to that experience and securely connect in the cloud, Azure Sphere is designed to secure the IoT devices across its store equipment. Hence, new coffee recipes can be sent directly to machines from the cloud of Azure Sphere at the click of a button. Longer term, Azure Sphere is expected for additional uses, such as managing inventory, order supplies, and building solutions into future versions of their products.

3. Rising Availability of Home Coffee Machine (Threat) The rising availability of home-use specialty coffee machines creates more alternatives for consumers since they can make their own cup at home. Moreover, with the coronavirus pandemic, more people spend time at home and the decrease in purchasing coffee is foreseeable.

More people prefer to make their own coffee during this time to save budget and more convenience since people cannot go out.

ECOLOGICAL 1. Demand for “green” products (Opportunities) In recent trends, new business models aim to promote sharing, reusing, refiling and renting to avoid waste. As more younger generations prioritize experiences over ownership, environmental awareness is increased (Byron, 2020). Brands should incentivize consumers to switch to reusable or refillable options. Seeing the trend, Starbucks trials a NextGen Cup solution. This is a new BioPBS – lined cup will be available in selected stores. The tests are designed to provide key insights and learnings into the partner and customer experience with the goal of “no noticeable differences in performance between the new cup and current cup” "Starbucks trials a NextGen Cup solution", 2020). Also, they partnered with Closed Loop Partners to conduct a test that validates the new cup can be recycled more readily than the current cup.

2 2. Disposal of Waste (Opportunities) Starbucks creates a goal to double the recycled content, recyclability and composability, and reusability of their cups and packaging by 2022 ("Greener Cups and Packaging", 2020).

Starbucks has continually worked on cup innovation and committed to phasing out plastic straws and replacing them with a lightweight, recyclable straw-less lid and using alternative material straw. Also, they use recycling programs that encourage their partners, consumers, employees to save the environment. They advocate for model legislation and best practices. Also, they work with local governments to find support for increased or improved commercial recycling opportunities across the country.

ANALYSIS OF TASK ENVIRONMENT The Porter’s Industry Five Forces was created by Harvard Business School professor Michael Porter, to analyze an industry's attractiveness and likely profitability. This tool is simple but powerful for understanding the competitiveness of a company’s environment, and identifying the company’s strategy profitability. This Porter’s Industry Five Forces strategy is useful due to its feature of helping the company realize which potential competitors get the most strength in the given market. The tool assumes there are five forces that determine competitive power in a business situation, these forces are supplier’ power, buyer’s power, competitive rivalry, threat of substitution and threat of new entry.

The supplier power is basically determined by how easy and often the supplier raises up their price, and how unique are the products and services that they provide to that specific company. From this situation, the supplier sometimes holds more power since they give the price in the first place. As a company, you can always find the most reasonable price suppliers if you have more alternatives. However, in this specialty coffee industry, due to the number of coffee farms and plantations spread across multiple continents. There are Latin America, the pacific Rim, East Pacific and Asia Pacific. Under this circumstance, suppliers’ bargaining power is usually low (Larson 2008). Although there is only one of the amounts of coffee required by the Arabica coffee industry, there are actually thousands of plantations and individual coffee growers growing this particular type of coffee beans. Under the following circumstances, coffeehouse companies have more options to replace existing suppliers: if some supplier requires higher prices for its coffee beans. Therefore, suppliers are diverse, Spread, industry participants exert greater influence and gain greater share of the profits of the industry over the suppliers.

2 For the buyer’s power perspective. Customer has the power of bargaining the price with the company, so the customer’s attitude can sometimes decide the price range of the company’s products. Also, the buyer has the power to ask the company to deliver good customer services, making each company remain a competitive relationship for each other to encourage more and more excellent companies to stand out from the market. Starbucks was the first company to make the coffee consuming experience more convenient for business people to enjoy a cup of coffee while they are busy at work and freely enjoy the internet access, more vibrant for a group of social people to have a place to grab a coffee and chat together. As long as companies like Starbucks keep on thinking, listening, and satisfying the customer’s needs. This can decrease the bargaining price procedure from the buyer’s power. Product or services differentiation in this industry is so high that consumers tend to look more for the quality of services and the image of the brand than the price of the product or where did the product’s raw materials come from, or what is the price of the raw materials, etc. hence, the bargaining power of the buyers is low.

Competitive rivalry is the greatest among the five forces. It has the greatest potential to affect the competitiveness of the industry, which in turn affects the profitability of the company.

Although the collective strength of the five forces determines the ultimate profit potential for an industry (Porter 1998b, p. 21), industry rivalry is the deciding factor for the determination of such profit rate. If competition within the industry is mild, or there are only few competitors, the rate of profit is generally higher, but if the competition is intense, companies cannot expect to earn “spectacular returns on investment” (Porter 1998b). You might think Dunkin donuts is the biggest competitor to Starbucks. However, the rise of trendy neighborhood shops has the potential to draw customers away from Starbucks in the long term — especially if Starbucks can't compete when it comes to service and environment. Stated by Starbucks CFO Scoot Maw. (Tylor, 2017) The Starbucks product also faces another substitute item from the market are those soft drinks like the new trendy beverage milk tea, or energy drink and non-alcoholic beverage.

More than 140 Starbucks locations in the Houston area face rising competition from nearly 30 vendors of Asian bubble tea - a concoction of black tea, milk, sugar and marble-sized black tapioca balls served in a clear cup and sucked up through a straw. However, unlike other industries, competition in the specialty coffee industry is not based on price. In this particular industry, the consumption of coffee does not depend on the price of the product or commodity, but on the difference between each product. And some value-added variables, such as customer service quality, brand, brand awareness or company image. Therefore, the specialty coffee industry is not sensitive to price adjustments or changes.

2 Threat of new entrants means the new player merges into the market, also at the same time bringing more competitors into the industry to make the whole industry reach at a new and higher level. New entrants, most especially large ones, bring new capacity, the desire to gain market share and often substantial resources that could cause a shake-up or a rearrangement of the current competitive positions of companies within the industry (Porter 1998). Today, the specialty coffee industry is undoubtedly dominated by Starbucks, no company of equal or greater size competes directly with the company. However, the industry is open to all potential competitors, especially to large companies engaged in consumer goods and retail chain business.

For example, the participants in the coffee shop business are McDonald ’s and Dunkin Donuts, Burger King, these three big companies are challenging Starbucks in the hospitality industry.

These new entrants can rival Starbucks in the following ways: Distribution channels, marketing and other fields. They have the ability to bring new resources that may cause changes in the industry, but not enough to overthrow Starbucks from the current dominant position. With the entry of three major companies entering the specialty coffee retail field, Starbucks' position must have been shaken. Starbucks can differentiate themselves from other rivals from the services they provide to the guest, the quality of their coffee beans. For Starbucks competitors, this feature is simply a big challenge because they must assure customers that the coffee, they provide is made by similar Starbucks' premium coffee beans. In this regard, the cost disadvantage will be the experience of new entrants such as McDonald's and Dunkin Donuts.

But, McDonald's, Dunkin Donuts and other potential competitors are still aiming at the Low-end market, leaving people who still attract high-end market Starbucks. However, these new entrants are shaking the entire industry, as the coffee chain develops, Starbucks lowers prices to maintain its investment rate market share is now being swallowed up by competitors.

Threat of substitute as explained as a product from other industries and can be used as a pose as a trade-off for products in the underlying industry. In the specialty coffee industry, alternative products can be those non-alcoholic beverages, such as tea, soft drinks, fruit juices, energy drinks and other caffeinated beverages. These are the sources of alternative products that consumers can buy from coffee places. However, the only real alternative to specialty coffee is coffee, but the quality ratio of basic coffee specialty, so it does not pose a threat to specialty coffee.

On the other hand, although there are several potential alternatives, consumers still prefer to buy specialty coffee. Product differentiation and brand image play an important role in this industry. Specialty coffee products are different from alternatives in many ways. The cafe not

2 only provides a cup of coffee, but tastes the specialty coffee experience in a luxurious atmosphere, such as the large-scale marketing of soft drinks companies and non-alcoholic beverage producers provided by Starbucks, selling products in retail stores and supermarkets. On the other hand, the coffee house provides a unique place for consumers to enjoy coffee.

Therefore, the threat of alternative products is not of great significance in the specialty coffee business or considered as a major force.

ANALYSIS OF INTERNAL ENVIRONMENT OPERATIONS Strengths Designs of Goods and Services: Starbucks emphasizes premium designs for their products, and ensures that its goods and services reflect the firm’s high-end brand image. They try to avoid standardization of their quality. Starbucks design studios are located worldwide to make sure that designers can fully understand the communities they serve. Starbucks wants to create a spectacular Starbucks experience with a touch of local culture and reflect the unique characteristics of each location. There are different core store formats: Single-Tenant Drive Thru, End-Cap Drive-Thru, Drive Thru Only, Exterior Kiosk, Interior Kiosk and CafÊ. The packaging of Starbucks succeeds at storytelling and enhances the way we interact with coffee.

Weaknesses Negative Corporation Image: The coffee giant dropped to its lowest reputation metric in 10 years after a video of the two men being handcuffed and removed from a Starbucks store went viral. (Fottrell, 2018). Also, Starbucks received backlash on social media when they replaced annual symbols of the season Christmas cup design with a simple two-tone red cup. The daily consumer perception helps the company modify their strategy to fit with consumer awareness. Like any big corporation, Starbucks does come under increased scrutiny and have to invest in maintaining public relations and corporate social responsibility.

MARKETING Strengths Strong Market Position and Global Brand Recognition: Starbucks focuses on a niche market. From the history, understanding that most of the Americans were unhappy with the

2 coffee experience, Starbucks was built to make the revolution of coffee. In the meantime, people were becoming health conscious and tried to promote a positive lifestyle, Starbucks had to evolve and target additional customer segments by adding new value propositions. By selling an authentic coffee experience and carefully designing every store to enhance the quality, Starbucks pursues “Aroma” as a vital theme in the store experience.

Weaknesses Expensive Products: While Starbucks differentiates their products with “Starbucks Experience” high-end brand image, consumers have many alternatives through competitor’s products with lower prices and forgo paying a premium. Since many giant businesses joined the coffee battle, Starbucks needed to position their brands to maintain the loyalty. By continuous innovation in theme, design, concepts and seasonal menus, Starbucks tried to set themselves an image in consumers. They also partnered with some third-parties and other related businesses to expand sales and reach additional customers. One of the good strategies is that Starbuck was ahead of the competition with its loyalty program and app (Cheng, 2019).

HUMAN RESOURCES MANAGEMENT Strengths Human Resource Management: Starbucks is known for its highly knowledge base employees. Employees are the main assets of the company and they provide great benefits. It was ranked 121 on Fortune 500 with 291,000 employees in total ("Starbucks", 2020). They offer a total Rewards package including base pay and bonus, benefits, retirement savings, stock and perks. Starbucks offers health coverage, paid time off, parental leave, education sponsors, commuter benefit, partner assistance to their employees.

Also, there are some perks including: coffee and tea markout, In-store discount, Recognition Programs, Partner Networks, Affiliate Discounts, Spotify Premium Subscription, Elite Athlete Program, On-Site Gym, Daycare and Dry Cleaning and Matching Gifts Program. In 2018, they received awards from Fortune World’s Most Admired Companies and World’s Most Ethical Companies.

Weaknesses Expanding to Overseas: As Starbucks targets the international expansion and mostly are in Asia, where Starbucks has been making a massive expansion push. These rapid developments would put a pressure on human resources to train front-line employees to create an unforgettable customer experience as in America. Also, they need to get the best talents in their board to make

2 sure that everyone can be on the same page. It is difficult in staffing, developing and managing foreign operations, including ensuring the consistency of product and service due to language and cultural barriers. It is also a challenge in recruiting and retaining high quality employees.

FINANCE Strengths Diverse Product Mix: Starbucks portfolio of products are widening, as they tried to cater all demographic factors. As of the fiscal year of 2019, beverages and food accounted for 74% and 20% respectively. Also, they use omnichannel strategies to utilize revenue streams. Other revenues primarily included sales of packaged coffee, tea and ready-to-drink beverages. The partnership with Nestle also brought product sales and licensing revenue.

Weaknesses Highly Dependent On The Financial Performance of America's Operating Segment: Starbucks’ financial performance is highly dependent on America’s operation, as it comprised about 69% of revenues in fiscal 2019 ("Starbucks 10-K Report", 2019). It means that if the operation in the American market was slow or decline, other segments would be affected or impossible to adverse the effects. Since America is the biggest market of Starbucks operating cash flow, the decline in revenue from this market would affect the cash flows for funding the expansion of international businesses and returning cash or dividends to shareholders.

INFORMATION TECHNOLOGY Strengths Use of Omnichannel Strategy: Starbucks rely heavily on information technology across their operations including point-of-sales processing, payment, Starbucks Cards, online business, delivery services. They efficiently leverage technology with mobile applications called “Starbucks App” in both Apple and Android software that support mobile payments, ordering apps and loyalty programs. This investment in technology supports their growth annually. The success in IT helps Starbucks to increase digital relationships with consumers to drive healthier traffic. On the replies to Coronavirus pandemic, Starbucks partners with delivery third-party partners to expand their sales and serve customers from home.

Weaknesses

2 Reliance Son Technology May Adversely Affect The Business: Although the technology helps to bring additional consumers and solve problems faster, the weakening of operational safeguards may lead to failure of systems or platforms to operate effectively and be available. Such failures can be caused by various factors., including catastrophic events, power outages, physical theft, computer and network failures or flaws in third-party software or services like cyber-attacks. If Starbucks could not resolve the issues in a proper manner, they could result in an interruption in operations and can bring negative impacts to products and services.

COMPETENCIES, COMPETITIVE ADVANTAGES, AND SUSTAINABILITY

According to Starbucks Corporation reports for the first quarter of the 2020 fiscal year, they currently operate 31,795 stores in 82 markets. The most recent report of Allegra’s World Coffee Portal, a market research and event firm, found that Starbucks maintains a 40% share of the U.S. coffee shop market, followed by Dunkin’ which represents 26% market share, and in third place is JAB Holding-owned brands which includes about 4,700 U.S. coffee-focused shops and accounts for about 12% market share. Although Starbucks has clear advantage over direct competitors within the U.S. coffee shop market, they also face competition from McDonald’s, a company that has made extensive pushes to compete directly with Starbucks without leaving the quick service restaurant market. As of January 2020, McDonald’s reported 38,000 restaurants around the world (Rosenberg, 2020) which exceeds Starbucks and also Dunkin’ Brands which reported ending the year with over 21,000 restaurants worldwide in its 2019 (Hoffman, 2020).

It is significant to note that Starbucks has been able to achieve rapid growth and large size without relying heavily on franchising, which is a strong contrast to competitors Dunkin’ and McDonald’s. Besides utilizing minimum franchising to help them enter international markets like Europe and Asia, all of Starbucks’ stores in the U.S. are either company-operated or licensed locations (Hargrave, 2020). Starbucks’ dedication to a company-operated or chain business model is a striking contrast to the sweeping franchise business model of its largest competitors.

As of 2017 all Dunkin’ locations are franchise owned and operated and as of 2019 McDonald’s operates less than 5% of its 14,000 U.S. locations. While franchising is typically considered a way for companies to gain competitive advantage by quickly expanding their brand without

2 losing much capital, it seems to have provided Starbucks’ competitive advantages in other areas by not choosing that path.

Because restaurants such as McDonald’s generate a significant portion of their revenues from franchisee royalties and fees, the company’s primary business has become selling the right to operate its brand. Many corporate changes too quickly by McDonald’s at a time when they have distanced themselves substantially from the front lines of operating stores has damaged their relationship with many franchise business owners. In January of 2019 an aggressive push for remodeling and other changes that were more costly, riskier, and straining on franchise operators than the corporate company enforcing it resulted in the recent and quick creation of the National Owners Association composed of McDonald’s franchise owners who are calling for projects to stop until negotiations can be made (Maze 2019). McDonald’s is not alone in franchising obstacles. In 2019 Dunkin’ Donuts Franchising LLC had to file a series of lawsuits against more than 30 of its own store owners for violating federal hiring immigration laws and its franchise agreements, which also occurred in 2006 and 2007 with hundreds of other stores (Geske 2019). Not only are these situations damaging for brand image and operational goals but they show a weakness in company culture and values across the companies. Howard Schultz throughout his multiple tenures as Starbucks CEO always held strong opposition to franchising because he believed that it would cause too much of a fracture to their company culture which was and continues to be key to success.

Despite the benefits for maintaining company culture, opting out of revenues from franchising means that Starbucks’ profitability relies on capabilities such as optimization of resources and can be affected greatly by the prices of raw materials. In 2008, company leadership realized that the company’s supply chain could not keep up with their success in opening stores around the world at a rapid rate. Relying so much on outsourcing had driven up operating costs and distribution and delivery failures were poorly affecting stores. In response they transformed their supply chain through reorganization, cost reductions, and developing a more efficient model for manufacturing and delivering. They invested in owning more roasting and distribution centers allowing them to regionalize its coffee production which reduced its transportation costs and lead times. In addition to its own roasting and distribution centers in the U.S. Starbucks also relies on 24 co-manufacturers, most of them in Europe, Asia, Latin America, and Canada.

Starbucks leadership had a strong focus on sustaining effective operations for the future, not just fixing it immediately and the result is that Starbucks now has one the most efficient supply chains in the world that is able to be responsive to customer demands which is a significant

2 competitive advantage. Although important to note, this competitive advantage is not entirely inimitable should competitors such as Dunkin’ which currently outsource its production process and relies on third-party intermediaries to carry out supply chain operations for the company, decide to make changes.

Starbucks’ investment in their suppliers and distribution system has been crucial in their ability to use high quality beans that are ethically sourced. Sustainability is at the core of Starbucks’ sourcing practices because mutually-beneficial, long-term supplier relationships are the key to its future growth and success. Ethically and sustainably sourced beans is a large part of their brand image and contributes to their loyalty from guests and employees. Although many other companies focus on ethically sourcing to some extent, Starbucks’ tends to still shine above in this area and has long been focused on high quality beans for premier products.

Starbucks has made various investments and decisions over the years that focus on their ability to provide high quality products while also enhancing the customer service experience they provide. In 2008, a specialty espresso machine was developed exclusively for Starbucks by a Swiss company called Thermoplan AG (Peterson, 2014). The investment in this expensive equipment helps the company deliver a gourmet and consistent product to all its guests but was also designed to be shorter than typical machines with the goal of increased customer engagement by allowing for more eye contact with baristas. In addition to this, Starbucks also acquired The Coffee Equipment Company and its proprietary Clover brewing system which was known as a significant innovation at the time (“Starbuck Coffee”, 2008). Starbucks’ investment in high quality equipment provided a competitive advantage in some ways over competitors who had not yet fully committed to the espresso and coffee beverage market. Although the investment has given their product a valuable competitive advantage, it has not proved to be a sustainable competitive advantage over time as both McDonald’s and Dunkin’ have since made similar investments, albeit a decade later than Starbucks. In 2017 McDonald’s announced it would be revamping their McCafé brand with addition of new $12,000 espresso machines (Global Coffee Report, 2017) and Dunkin’ has also invested in new espresso machines among other equipment as part of the aggressive new rebranding initiative to dive deeper into the espresso-based beverages market (Taylor, R., 2018). However, at the time that these competitors are starting to invest more focus on coffee and espresso products, Starbucks is already moving on to new innovations. In 2017, Starbucks developed a new process to produce a concentrated shot of coldpressed espresso to be used as a base for several menu offerings. In addition to enhancing the flavor of drinks and allowing them to expand drink options on the menu, the new technology

2 turns 20 hours of slow-steeping into a process that takes about an hour. The patent-pending Aqua Temp Technology, which is trademarked, is part of the investment that the company began making into a new cold brew platform (QSR, 2017). One of Starbucks’ core competencies has been in bringing new, unique coffee products to a mass market while focusing on maintaining consistency and customer service. A major sustainable competitive advantage for Starbucks is their ability to use passion, knowledge, and resources to lead the coffee industry towards new innovations while other competitors are just now catching up with the resources and capabilities of Starbucks in basic espresso-based beverages.

In 1985, Michael Porter outlined three primary strategies for a company to achieve sustainable competitive advantage as being cost leadership strategy, differentiation strategy, and focus strategy. Whereas McDonald’s and Dunkin’ have historically sought out competitive advantage through the cost leadership strategy, Starbucks has always been operating to achieve sustainable competitive advantage through differentiation. This is evident in their commitment to not only high-quality coffee products but high-quality customer service both of which are achieved through continuous innovation. Much of the company’s success has come from refusal to stray from the differentiation strategy alone because trying to compete with the low costs of competitors would have required them to stray from the identity, values, and operations they had already established. Starbucks now has this advantage over McDonald’s and Dunkin’ who are trying to emerge into the market of espresso-based drinks despite their well-established position as restaurants offering low cost, simple menu items. They must now try to balance the cost leadership strategy that their guests and employees are accustomed to with the strategies of quality and innovation to compete with Starbucks in terms of differentiation.

Their refusal to franchise has only made their success in these areas more substantial because the company has stronger control over ensuring consistency and maintaining brand reputation and loyalty which is arguably one of Starbucks’ most valuable sustainable competitive advantages. Starbucks drives loyalty through offering an experience and different products of higher quality than competitors that guests are willing to pay a higher price for because of higher quality and commitment of the company. They’ve recently experienced 16% growth in active U.S. membership of their Starbucks Rewards program bringing membership to 18.9 million and a 40% growth in active China membership bringing them to 10.2 million. Their rewards program and advancements in mobile ordering are all centered around personalization and an enhanced experience for the guests.

2 OVERALL STRATEGIES Starbucks has many strategies they used to become what they are today. Their success lends itself to the strategies they started with and continue to use.

Having a premium product mix has been a strategy of Starbucks since the beginning of Howard Schultz. Howard visited Italy, he brought back the concept of espresso and handcrafted beverages to Seattle. Having high quality coffee gives the premium experience when you go to any Starbucks around the world. Which brings us to another strategy Starbucks continues to use, locations all over the world. They currently have more than 26,000 stores in more than 70 countries. Expanding to country after country is a strategy, they have used to be a familiar place for anyone who is traveling, as well as, a household name in the coffee business. This is a longterm strategy.

Many of their strategies go into the environment. Starbucks has made changes to use more solar power and clean energy every year. Along with their promise to reduce plastic by 2022. Making sure to remain committed to a more environmentally friendly or make changes to become one is an important strategy in this day and age.

The internal and external aesthetic and environment has landed to their success. “Starbucks stores are meticulously designed to make customers stay longer, buy more, and return for another visit.� They want you to study with your colleagues, have business meetings, or just bring your book and lounge with your coffee. Their strategy with this strategy is to get people to feel comfortable and have a place in their neighborhood they keep going back to, time and time again.

Seasonal beverages and food items have been a part of the Starbucks strategy for years.

Items like the pumpkin spice latte, or peppermint mocha, have people coming back more often because of the limited timing.

STRATEGIC DIRECTION Starbucks has managed to stay one of the biggest and most recognizable coffee brands for decades. Taking their past strategies and continuing to implement them in the future, as well as changing some, can ensure the success of their billion-dollar company. Starbucks’ strategic direction consists of many different variables. In 2014, Starbucks opened their first Reserve Roastery in Seattle Washington. There are now six locations. These are unlike any normal Starbucks store, there are baristas, bartenders and coffee experts perfecting new and creative

2 recipes. They are innovative and different and working as a tourist hub. Opening these new stores has started a brand-new Starbucks experience, allowing a more upscale form of the original Starbucks store. The success of these stores means that more Reserve Roastery locations are in Starbucks’ strategic direction.

A few articles and videos also mentioned the growth of Starbucks’ healthy alternatives or replacements for their well-known “Frappuccino”, in the past few years they have added cold brew and nitro brew to bring low calorie, high quality smooth coffee. Along with healthier menu items, Starbucks has added a new dynamic recently to deliver coffee, they have paired up with apps such as “UberEATS” to deliver their handcrafted espresso or refreshers right to your door.

Expanding into delivery is a huge step in strategic direction and as they grow you will see them in more delivery apps.

Starbucks Rewards is a great way they stay a part of their customers everyday life.

Offering pre-ordering, endless customizations, weekly deals/challenges, and endless rewards, Starbucks has been able to personalize the experience for everyone, as well as make it more accessible for the consumer.

Starbucks has always been a growing company, however, in 2007 there was a financial crash that left them closing many of the storefronts. This caused them to reevaluate their strategic plan and decide to not open as quickly in the future- that being now. In their current strategic plan they have less store growth. This results in more focus on the current stores they have, and the fewer ones they plan on opening in the future.

When it comes to the shareholders Starbucks plans to sharpen the focus on increasing the shareholder return. This is a main focus on their current strategic plan. Efficiency is also a focus as well, adapting to more solar power energy. Also keeping up with smaller competition by reducing the use of plastic in stores.

MAIN PROBLEMS AND CHALLENGES Starbucks has problems and challenges like every company. Many of them are because they are such a successful and reputable company. Since there are so many stores all over the world, Starbucks runs into many problems in this category. Tax policy and employment are an issue they have, as well as a high turnover rate. This affects the cost of new employment being higher. They also have some challenges with the laws and regulations worldwide and local currency exchange rates, again, come with the expansion of their company.

2 They do however face smaller challenges as well. One, being the reputation or title of a big corporation. This is not something they can technically get away from, it is not their fault they had a good plan and became how big they are. This is however, something that turns people away or gets you into more problems faster than smaller corporations. Another problem with them having the big corporation title is having so many storefronts, there is not enough same store loyalty. This is referred to as “profit cannibalization� and is a problem they face especially continuing to open stores closer together. For example, New York City having a storefront on every corner.

Researching Starbucks, I noticed how every article or video touched base on how they keep up with consumer preferences. This is a huge challenge, given how massive the company has become. Starbucks has always tried to keep up with the trends, sometimes creating their own (Unicorn Frappuccino). However, the pace can never be fast enough or a big enough variety to reach all the consumers at Starbucks. So, they dial it to reach as many as possible. This has always been a challenge for them.

CONCLUSION In conclusion, Starbucks is a well-known company across the country and that is one of the reasons we chose it for our group project. In addition to that, we wanted to be able to examine such a huge and successful company and see what brought them to where they are today, as well as what did not. Studying their history, strategies, competitors, environments, advantages, problems and etc. we got to see Starbucks’ on a very vulnerable level. Overall, the company that Starbucks is, is one to look up to. They consist of few failed strategies, and the ones they maintain, for the most part, are long term. Their competition is slim to none in their specific category of a coffee mogul. However, they do have some indirect competition, such as huge fast food franchises or hip new coffee or tea concepts. They separate themselves with premium coffee, environment, and experience. Starbucks also maintains ahead of other coffee places, such as Dunkin Donuts, being in 75 countries, having better sustainability, and accessibility (being in many next-door neighborhoods).

Also, something no one expected to be in our proposals at the beginning of the semester, COVID19. This has immensely impacted many companies including Starbucks. Seeing the impact is not hard, it has caused a tremendous loss in sales, political environment, and use of stores/staff. It has also given us a chance to see into their stance on health. Having closed all their

2 stores, and only using drive-thru and delivery. This shows their concern for the community, as well as their staff.

No matter the problems or challenges Starbucks has faced, they remain on top. They have loyalty many companies do not. They also are taking steps to improve their “PESTLE� on a daily basis. Starbucks is a company many should look up to and from a strategic analysis basis, they are well-rounded.

RECOMMENDATIONS

Researching customer reviews, statistics, and articles, there are always recommendations from outsiders- whether factual or opinion based. Big corporations always have room for improvement, even if it’s a small change it can be a huge mogul like Starbucks.

Healthier options have been something Starbucks has started thriving for due to the healthier lifestyle of many of its consumers. Adding more refreshers to their menu instead of Frappuccino, not only is a strategy but also statistically makes more sense for the customer preference. However, Starbucks needs to focus on their food items. How globally known they are, they should be more in tune with the plant based or vegetarian trend 2019 and 2020 has brought. Many competitive companies, such as Dunkin Donuts, have followed this trend. Adding meatless options or alternatives, and turning out to be successful. Starbucks has yet to have a plant-based option for the consumer. Having just one or two options, will give the people with this diet something to choose from if they come to Starbucks for a beverage and a snack.

Starbucks price margin for food almost doubles a beverage tab. This would not only increase sales, but also get more vegans and vegetarians through the door.

Another change many customers want to see is a difference in the stores given the region or country. Having more variation with stores based on their origin instead of having the same spread across the world. Maybe not even a different menu, just different items that are native to that area. Making it more personal to that neighborhood or country with a specialty menu or drink.

The environmental aspect of Starbucks has been a huge issue for a lot of consumers, why is such a big business not changing to more environmentally safe materials? Starbucks is a household name at this point, and pride themselves on being a more premium brand than competitors. It is time for them to make the change to be more environmentally conscious and

2 get rid of plastic or at least reduce its plastic use. They have taken steps towards this using reusable cups, however, this is not enough for the current environmental issues that are happening today.

When it comes to the political environment, they bring in coffee from other countries.

This is something that people love about them; great coffee imported. However, their stores are everywhere, this causes a problem with tariffs. This is affecting the company’s competitiveness in some areas. A recommendation for this issue would be locally sourcing coffee, or at least for the places that have coffee beans for their customer’s standards, to locally source there.

WHAT WE LEARNED [Abigail McCrimmon] When I came into this group project, I didn't understand the importance of strategies within a company. Having a good strategy is one thing, executing it is a completely different thing. With a company as big as Starbucks there can be so many strategies, but even with how successful Starbucks looks on the outside they have had their fair share of failure. Not all strategies are long term, and nowadays it is hard to come up with a creative strategy that will work long term for your company. So, the biggest component I learned is no matter how big the success, you can still always fail. But when it comes to strategic management, I learned how a company so big still has room for more strategic direction and strategies.

[Nanette Walthour] I am not a coffee drinker at all, but the project has enlightened my eyes to see the major impact that Starbucks has made globally around the world. Starbucks employs many people from different Continents and invested in programs around the world to strengthen economic and social development in almost every community, while caring for our environment.

The CSR programs help with farmers support centers, farmers loans and forest carbon projects.

CSR can bring more possibility to the company by increasing sales and brand positive awareness.

[Thao Nguyen] I feel that the group project helps me to understand the tasks easier. The group members help me to explain the tasks that I struggled with. Starbucks is an interesting company since they are a famous brand to everyone and taking an insight on their management strategy let me understand and learn how they can be successful in the coffee market. In this report, I have a look in the financial report and they have details on their strengths and weaknesses and bring out strategies for other quarter fiscal year strategies. I feel interested with their response to the

2 coronavirus pandemic and how they lead the market to bring out a high-quality brand image to consumers and shareholders.

[Brianna Courchene] I was surprised to learn how complex the success of Starbucks was from a strategic management perspective. The company has a wide variety of competitive advantages that have developed and changed over the course of time. Seeing how Starbucks has affected not just the coffee market but the quick service market is surprising but enlightening. It is especially important going forward to understand as much as possible about what successful companies have done to overcome hardship in the hospitality industry since we can expect rough waters for a while.

[Mengjia Yuan] I have learnt Starbuck leadership strategy thoroughly from this project. And this opportunity got me to acknowledge myself to find the key reason behind their successful business strategy. I love my part as utilizing the porter’s analysis from the five significant aspects as from the supplier’s power aspect to buyers’ power. From the market threat to the new rival entrants, I realized how important is for a brand to know their external threat to prevent themselves from getting replace from the market competition. Always be aware of your rivals better to get your brand to be competitive in this game!

2

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APPENDIX

MINUTES + Minutes Record (2/3/2020): assign tasks. Format the paper, do the outline. Time: 1 hour. + Minute Record +

(2/26/2020): assign tasks for the new member. Have a meeting after class. Length: 30 minutes. Discuss strategy for resources

+ Minute Record +

(3/4/2020): Goal to have rough draft completed by March 18th, final draft completed by April 1st, and decide on meeting for practice presentation two weeks before presentation (April 1 and 8th 10am possibly)

+ Minute Record +

(3/23/2020): Since there was a change due to coronavirus, we set up a new plan for the team. Some team members live in different time zone so we decide to use texts as main communication channel

+ Minute Record (4/1/2020): Wrap up all parts. Discuss through texts. We decide to hurry up to let our paper ready before the deadline. + Minute Record (4/10/2020): Edit our paper and decide main theme (color, format, structure) + Minute Record (4/13/2020): Review the paper, correct grammar and paper format, peer review to make sure the paper transition smoothly. + Minute Record (4/15/2020): Wrap up the paper and email the copies of the case study to everyone to make sure we are on the same page of the case study design.