Executive Summary In 1971 in Seattle’s Pike Place Market, Starbucks opened its doors hoping that it would create a “third Place” in-between work and home. The main goal behind Starbucks creation was to produce premium coffee while considering core principles in the times of economic growth. The company came into a realization that people don’t only come for coffee but also the atmosphere. When drinking coffee customers can socialize, study or enjoy music. In this paper I will analyze Starbucks’s key factors to success, industrial analysis using pattern of Porter’s Five Forces, Attractiveness of Industry and the profitability analysis.

Starbucks is an international company that has branches in 30 countries and reports nearly $ 5.1 billion in revenues in the year 2006. The objective of Starbucks is to grip the diversity through the application of the highest standard of excellence. An American can drink an average of 3 cups of coffee per day, putting into consideration that this may vary depending on the personal rate. Starbucks has succeeded in establishing a perfect relationship with the working class community by ensuring that the services are as fast as possible. The company provides consumers with options of purchasing equipment for coffee brewing such as espresso machines, coffee filters and cleaners. This has helped Starbucks to advertise in the stores in the residential areas.

Starbucks’s Porters Five Forces Model

Sociological forces and demographical factors are some of the macroeconomic opportunities and threats that are handled by Starbucks on a daily basis. In the identification of where improvements are necessary, porters five forces model can be very effective. Some of these improvements are the current competitive force, the bargaining power of both supplier, threats of potential entrants and the threat of substitute products.

As the Starbucks mission statement states the sociological forces are essential in the improvement of environmental issues that affects the society (Allison, 2007). Starbucks has organizes activities such as walk-a-thons and clean-ups. The image of the company has been strengthening by such actions and it actively contributes to such actions while maintaining the right focus. To become as efficient as possible Starbucks has plans of reducing energy usage. Employees are being taught about the sociological efforts so they can make a positive contribution to the environment.

On the other hand the demographic factors are also important as the management is able to make crucial decisions that regards to the population, ethnic groups and expansion.

The people whose age is between 15-64 make the largest population according to CIA World Factbook and this has a great influence on the maximum profit of Starbucks. Starbucks believes that the study of population spread and ethnicity in the U.S. is important as this provides information regarding the current tastes, trends, value and perception of the consumers. When the inflation is on the low end and consumer’s expenditure on coffee is high, Starbucks seizes this opportunity and expand business.

In the process of understanding the opportunities and threats of a company through the competitors the Porter’s Five Forces Model is very important (Adamy, 2008). The model can be very helpful when Starbucks what to access the potential opportunities when venturing in the new markets. It is good to keep in mind that a company such as Starbucks has few major competitors but they are nowhere close to the company’s volume of operations. Starbucks is on the lead as a retailer, roaster and brand of specialty coffee in the whole world. But the major threat that Starbucks faces is in the cities that are sparsely populated as the cities prosper on smaller competitors that steal away customers from Starbucks when the store is opened in an area that is questionable.

Another thing that place Starbucks in the lead is company’s innovation and strong product differentiation in the industry. A good example is the introduction of prepaid debit card by Starbucks and shortly after this Seattle’s Best launched their version. This is a clear indication that Starbucks is the letter in the coffee industries and therefore the company should be aware of the threats of potential entrants.

As we know coffee is ranked the second after oil as the largest traded commodity. . Starbucks rely on the Central America to produce the coffee that it trades (Harris, 2006). There may be a major risk on the price of the coffee bean as the supply is lowering there is a heightened demand. Because of the over population that cause the demand to go high the suppliers have a bargaining power. Coffee beans have no substitute products and therefore Starbucks and must buy. This is seen as one of the potential threat to the Starbucks.

Key Success Factors to Starbucks

Starbucks has built a strong and successful brand image and this is seen as the main reason that enabled it to gain loyalty of customers. Starbucks has established a brand that is successful that every company desires to achieve. The leadership style, organizational culture, systems and human resources have greatly contributed to the Starbucks success in the coffee industry. Also what have contributed to this trust are experimental branding, excellent customer service, product variety and the high quality of coffee. The company has a portfolio of hot coffee, cold drinks, salads, brewed coffee, pastries, sandwiches, snacks and mugs. The company also has a music division that markets the company’s books, films and music. The brand building based strategy has really boosted the retail system which enables the lifestyle attributes of the brand. This moves the company in the new markets.

Leadership

Since the formation of the partnership by the three partners Jerry Baldwin, Zev Siegel and Gordon Bowker, Starbucks brand image has been enhanced. Since when Howard Schultz joined in 1982 Howard Schultz expanded its operations in Italy through espresso drinks and coffee beans. When Orin Smith, the Chief Executive Officer of Starbucks joined the company in 2001 to 2005 helped the company expand and improve the distribution network. Schultz who is also the current CEO of Starbucks have formulated several strategies that have helped the company exploits the core capabilities to stay in the lead. Ahead of the competitors such as McDonald’s and Dunkin’ Donuts who are offering lower prices.

The Organization Culture

This constitutes the values that determine how the stakeholders will interact with each other. This provides a better environment for the management and employees and other stakeholders such as the customers and suppliers and have freedom to express their opinions. The main objective of organization culture is to provide a good working environment. This ensures that everyone is treated with respect and dignity and this guarantee health and safety measures in the workplace. Starbucks supports diversity and discrimination is not allowed in the employment practices.

The organization culture embraces fair competition, law and regulations, compliance to laws and regulations, awarding of gifts. The other aspects that Starbucks values is the strong relationships building with the customers who are satisfied by the high standard of coffee and the customers service that is excellent. By maintaining the in intellectual property rights, securing confidential information and maintaining proper financial account are vows of Starbucks.

Starbucks applies a flat organizational structure where the employees are seen as business partners.

Because of this the employee can input on what is requires improvement and this makes make them feel valued and appreciated in the process of decision making. In addition to this the heads of marketing and retail departments have direct contact with the customers and for this reason they are able to get direct information in regard to the needs and the preferences. The managers from the head office frequently visit the employees when they are working to correct their views, queries and grievances. This is friendly way of handling such situations.

The System at Starbucks

This system has largely contributed to the success of Starbucks coffee in the market. Starbucks coffee service system has three principles which are education, production and hospitality. Coffee baristas are trained on customer hospitality which has helped them to offer coffee in relation to the needs and preference of the customers. The training enables the baristas to freely interact with customers responding to the queries of the customers. Training is one requirement that all baristas have to undergo before they can be allowed to serve the customers. Those in the in the management also have to pass a rigorous and more advanced training that perfect their customer service and the handling skills.

The Employee Compensation

Starbucks compensation package is above average market rates and includes other benefits such as life insurance, health insurance and disability insurance. Employees are allocated special stocks option which gives them a chance to own the company. This motivates them. The rate of retention of employees in the company is high and therefore the company can capitalize on the experienced and high skilled talents. This raises the loyalty of the customers and it is very essential in the new market penetration. The company attracts vey highly qualified staff that is from college or the university. The staff is knowledgeable enough to handle diversified needs and preferences of customers.

Attractiveness of Industry

Unlike Coca-Cola and Nike who fill up the TV time with commercials Starbucks choose a unconventional as strategy to marketing. As stated by Starbucks’ lead marketing executive, Brad Stevens “So much of the relationship with the company exists between you and that barista behind the bar (Harris, 2006). We haven’t been able to conceive of a way for TV advertising to repeat that, to capture the heart and soul of the company.” The change in lifestyle from alcohol to coffee has enabled Starbucks to raise the consumption of coffee because of the health factors. The consumers are enlightened on the need of drinking coffee and most coffee takers take coffee because it us luxurious and nutritious.

Profitability Analysis These are ratios that measures the performance of a company analyzing how much profit have been earn from sales, net worth and the total assets. Three key financial ratios for business are used in the measurement the company’s efficiency. Return on sales (Profit margin) Ratios The ratio measures the profits after taxes in a fiscal year of sales. When the ratio is higher the more ready the business is to handle downtrends that are brought by conditions that are adverse. The formula of calculating the ratio is Net profit after taxes ÷ Net SalesReturn on Equity This is a ratio that measures the company’s management ability in the realization of the adequate return on the capital that is invested by the company’s shareholders. The following is the formula that used in the calculation. Net Income ÷ Shareholder’s Equity Return on Asset This is a ratio that shows the asset after tax earnings and also indicates the profitability of a company. This matches the net profits after taxes the assets that are used in profit earnings. When the percentages rates are high it means that the company has good management and means it has a healthy return on assets. The formula is used in the calculation,Net Profit After Taxes ÷ Total Assets

Profitability 2004-09 2005-09 2006-09 2007-09 2008-09 2009-09 2010-09 Return on Assets % 12.93 14.45 14.21 13.77 5.73 6.95 15.81 Return on Equity % 17.15 21.60 26.13 29.81 13.21 14.12 28.14

The Lesson Learnt From the Case Study The success of many companies such as Starbucks has appealed to wide target market and they are not threatened by the competitors such as McDonald’s Corporation. Corporations such as Starbucks are in danger of supply and the prices of coffee that maybe unpredictable. To protect their brand image they hunt for high coffee standards that are often affected by many factors such as climate, politics and financial situations. Maintaining a brand image of muilt-billion dollar business such as Starbucks is not easy as it calls for constant innovation and creations. Companies should put into considerations the problems that come with the economic fluctuations and competition before implementation of decisions such as adding new stores in the same region. Another lesson that is learnt from this is that good managerial decisions are very vital in the growth of the businesses. For the said reason it is very important to conduct market research before expensive implementing. This can forecast future changes in the market and in the end cost can be minimized in the long ran. Also they address the issue of competitions as this may create a competitive advantage through the increase of perceived value of the product. Perceptive of the product is something else that has to be considered because this can change the economic response over time, the image of the company, the social responsibility and the experiences as a whole. These issues are of importance and call for attention regardless of the product the company deals in. The Good and Not-So-Good Decisions For The Focal CompanySome of the good strategies that were a success are;The Perfect Cup of Coffee For so many years Starbucks has been putting emphasis on the quality of a product. Even though their products are highly priced and more expensive than the expected, the customers remain loyal to the company. Starbucks has been notorious in the satisfaction of customers with its rich, aroma and delicious taste. The Third Place Since long Starbuck strategy focus has been to provide a “third place” between home and work for everyone. This will create an experience and atmosphere that is relaxing and unique. Starbucks has come into realization that this is one strong concept that is attached to the company that attracts customers. Starbucks Community Creation Strategy That is Starbucks marketing strategies such as creating and expanding a community around the company’s brand. In the company’s website customers are encouraged to express their feelings and their experiences history of Starbucks and the company is “personally” involved in the chat. Smart partnerships Over the years Starbucks has been involved in strategic partnerships that have been demonstrating that there is another way that a business can grow is through smart partnerships. The sales have gone high because of the application of this strategy. Starbucks Bad DecisionsBringing Back Howard Schultz as Full CEO The reason why it wrong decision to bring back the CEO is that he had donated to John Edwards’s campaigns a candidate who was openly anti-free trade that it favors strongly the pro-union barriers. Handing him the multi-billion dollar business would hurt Starbucks operations overseas. Again this meant that this brought a mixture of politics in business which can hurt the business badly.
Poor Real Estate Decisions, Not Bad Coffee The company greatest and challenges has been boiled down into three words; location, location, location. According to brokers, Starbucks misjudged the risks of establishing stores that were to close too each other. This led to the decline of sales in some stores. Also the company over-extended themselves in the some regions such as south and southern California which were among the hardest hit by the housing crisis. These parts demographics and hot weather are not conducive for selling the $4 foam-top lattes. What Starbucks could do differently?Should Forget 1$ Cup of Coffee Instead They Should Give It Away For Free The fact that customers are paying expensively for the lattes, treats and food why not place collection jars to encourage customers to donate to the local Causes and what really matters (Allison, 2007). This will indulge in the complimentary Starbucks finest cups.The Free Wi-Fi In today’s world Wi-Fi is complimentary, free and unrestricted. Wi-Fi is treated as a public utility such water, electricity and air. Starbucks strikes deal with the providers who provide Wi-Fi in our homes. Why not provide this service for free, end of story if they want to relate the community as a third place. References

Adamy, J. (2008). Starbuck Tests $1 Cup of Coffee. The wall Street Journal. Retrieved June 24, 2011, from

http://articles.moneycentral.msn.com

Allison, M. (2007). Starbucks Must Find Lost Soul, Schultiz says. Seattle Times. Retrieved Retrieved June 24, 2011, from

http://seattletimes.nwsource.com

Harris, C. (2006). Starbucks wants to open 40,000 new stores. Seattlepi. Retrieved Retrieved June 24, 2011, from

http://seattlepi.nwsource.com/business/287643_sbuxgrow05ww.html

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