1.

0 INTRODUCTION

Name : Starbucks Corporation (NASDAQ: SBUX)

Headquarters : Seattle, Washington, U.S.
Employees : 176,000 in 2008
Revenue for 2008 : US$10.383 billion
CEO : Howard Schultz (Founder of Starbucks coffeehouse)

Starbucks Corporation is an international coffeehouse chain based in Seattle,

Washington, United States. Starbucks is the largest coffeehouse company in the
world, with 16,120 stores in 49 countries, including around 11,000 in the United
States, followed by nearly 1,000 in Canada and more than 800 in Japan.
Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and
cold drinks, snacks, and items such as mugs and coffee beans. Through the
Starbucks Entertainment division and Hear Music brand, the company also
markets books, music, and film. Many of the company's products are seasonal or
specific to the locality of the store. Starbucks-brand ice cream and coffee are
also offered at grocery stores. Starbucks’ Italian style coffee, espresso
beverages, teas, pastries and confections had made Starbucks one of the
greatest retailing stories of recent history and world’s biggest specialty coffee
chain. In 2003, Starbucks made the fortune 500.

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 1.1 BACKGROUND OF THE COMPANY

1.1.1 Era before Howard Schultz

In 1971, three academics, English Teacher Jerry Baldwin, History Teacher Zel
Siegel and writer Gordon Bowker opened Starbucks Coffee, Tea and Spice in
Touristy Pikes Place Market in Seattle. The three were inspired by entrepreneur
Alfred Peet (whom they knew personally) to sell high-quality coffee beans and
equipment. The store did not offer fresh brewed coffee by the cup, but tasting
samples were sometimes available. Siegel will wore a grocers apron, scooped
out beans for customers while the other two kept their day jobs but came by at
lunch or after work to help out. The store was an immediate success, with sales
exceeding expectations, partly because of interest stirred by the favorable article
in Seattle Times. Starbucks ordered its coffee-bean from Alfred Peet but later on
the three partners bought their own used roaster setting up roasting operations in
a nearby ramshackle building and developed their own blends and flavors. By the
year 1980s the company had four Starbucks Stores in Seattle area and had been
profitable every year. Later on, Siegel left the company and Jerry Baldwin took
over day-to-day management of the company. Gordon Bowker remained as an
owner but devoted most of his time in his Design Firm. In 1981, Howard Schultz,
the vice president of U.S operations for Swedish Maker of stylish kitchen
equipment and coffeemakers decided to pay Starbucks a visit. He was curious
about why Starbucks was selling so many of his company products. He was
impressed with the company management and the quality products the make.
Schultz asked Baldwin whether there was any way he could fit into Starbucks
and it took long time to decide his request. He tried many times till one day he
was given a job of heading marketing and overseeing the retail stores.

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1.1.2 Era with Howard Schultz

Howard Schultz spent most of his working hours in the four stores learning the
retail aspects of the company business; Schultz was overflowing with ideas for
the company. His biggest inspiration and vision for Starbucks future came during
1983 when the company sent him for an international house wares show to
Milan, Italy. There he spotted an espresso bar and went to take a coffee. He was
impressed with the coffeehouse services and decided to stay at Milan for a week
to explore all coffee bars and learned as much as he could about the Italian
passion for coffee drinks. He made a decision to serve fresh brewed coffee,
espressos, and cappuccinos in its stores and try to create an American version of
Italian coffee bar culture. He shared his idea with Baldwin and it took nearly a
year to convince Jerry Baldwin to let him test an espresso bar. In April 1984, the
first espresso bar was opened and it was a successful too. Yet Baldwin felt
something is wrong. After Schultz failed to convince Baldwin for the expansion of
business, he left Starbucks in 1985. Schultz started the “Il Giornale” coffee bar
chain in 1985 and the coffeehouse was very successful. In 1987 Starbucks
owner Jerry Baldwin and Bowker decide to sell the whole Starbucks chain to
Schultz's Il Giornale, which rebranded the Il Giornale outlets as Starbucks and
quickly began to expand. Starbucks opened it’s first locations outside Seattle at
Waterfront Station in Vancouver, British Columbia, and Chicago, Illinois, that
same year. At the time of its initial public offering on the stock market in 1992,
Starbucks had grown to 165 outlets. In 2009 The Company plans to open a net of
900 new stores outside of the United States.

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 2.0 STARBUCKS’ VISION, OBJECTIVES AND MISSION

2.1 Vision Statement

Starbucks vision statement is;

” To establish Starbucks as the most recognized and respected brand in
the world and become a national company with values and guiding
principles that employee could be proud of “

The vision statement clearly describes the dream or the future of the company
that is to be the worlds most well known coffeehouse and also to be the most
appreciated and positively graded brand by all levels of people around the world.
The company also focuses its vision to employee satisfactions, so that the
employees will be happy.

2.2 Objectives of Starbucks

 Is to Grow by making employees feel valued

Starbucks approach the employee with good compensation and comprehensive
benefits package. The company beliefs that sharing the company’s success with
the people who made happen will help them think and acts like an owner of the
company.

 Is to Recognize that every dollar earned passes through employees’

hands
Starbucks will always appreciate the employee as the revenue which is
increasing every year is by the efficient and hardworking employees. This drastic
increase in profit is not recognized without the support of the employees who
attracts the customers to a long term relationships with the coffeehouse.

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 Use the pays, benefits and opportunities for personal development to
help gain employee loyalty and become difficult to imitate.
Paying scale and fringe benefit package allowed it to attract motivated people
with above average skills and good work habits and also to make the employee
to be loyal with Starbucks.

2.3 Mission Statement

Starbucks Mission Statement is;

“Establish Starbucks as the premier purveyor of the finest coffee in the
world while maintaining our uncompromising principles while we grow.”
The six principles are:
1. Provide a great work environment and treat each other with
respect and dignity.
2. Embrace diversity as an essential component in the way we do
business.
3. Apply the highest standards of excellence to the purchasing,
roasting and fresh delivery of our coffee.
4. Develop enthusiastically satisfied customers all of the time
5. Contribute positively to our communities and our environment
6. Recognize that profitability is essential to our future success.

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2.3.1 Analyzing the Mission Statement Component
Starbucks mission statement is needed to be analyzed to see the total number of
mission component it has.

NO COMPONENT YES/NO

1. Customers Yes

2. Products or services Yes

3. Markets Yes

4. Technology No

5. Concern for survival, profitability and growth Yes

6. Philosophy Yes

7. Self-Concept Yes

8. Concern for public image Yes

9. Concern for employees No

This is a good mission statement. This mission statement lacks of 2 components:

Technology and Concern for employees. The company must evaluate whether it
is technologically advanced and even though the company’s vision is concern to
employee, it still have to add it in mission statement.

2.3.2 Proposed Mission Statement

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Establish Starbucks as the premier purveyor 1 of the finest coffee in the world and
also to be established as the most employee valued company while maintaining
our uncompromising principles as we grow together with technological advances.
The six principles are:
1. Provide a great work environment and treat each other with respect
and dignity.
2. Embrace diversity as an essential component in the way we do
business.
3. Apply the highest standards of excellence to the purchasing, roasting
and fresh delivery of our coffee.
4. Develop enthusiastically satisfied customers all of the time
5. Contribute positively to our communities and our environment
6. Recognize that profitability is essential to our future success.

3.0 SITUATIONAL ANALYSIS

1
Purveyor means provider

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3.1 External analysis
3.1.1 PEST Analysis

Political
Globalization today has changed worldwide trend of doing business. Companies
find it difficult to survive by relying solely on domestic market. The borders
between various countries are getting invisible. Companies are nowadays
creating business in various countries without boundaries. Advertisements are all
over the world for many products. Company strategists find it not an easy task to
expand the business beyond borders. The basic need for globalization is to learn
the different cultures of the country they plan to start business. Taking all aspects
including tax rates, law and legislation is important in globalization.

Economic
People are nowadays looking for more income to continue their luxurious life.
The number of two income households is getting increased all over the world.
People are looking forward for products which reduce their time to be spent on.
Improved customer service, immediate availability, trouble free operation of
products is becoming more important. Since the world is facing crisis, people are
looking forward for cheap and quality products. Price is becoming priority to
customers. Increase in the inflation rates and increase in unemployment is also a
factor for demand in lower priced products.

Social, Cultural, Demographic and Environmental

According to these analyses, it creates different type of consumer and
consequently needs for different products, different services, and different
strategies. In the view of social, employees should have benefits.

Consequently, after retirement for the group of baby boomer, there must be an
allocation of funds for the retiree to support there families in life long. Provide

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benefits such as Medicare and Medicaid retirement beneficial. Next, products are
produced in globally must convenience and attractive to be used by any
customers. A cultural connection is created, among customers because
producing the products with quality flexible price for the rich and middle class
family. People are also looking forward for free chemical products. This means
that the product is free from chemical or additional flavor mix and it is made from
natural products.

Technological
Mass communication and high technology are creating patterns of diverse
cultures worldwide. Revolutionary technological changes and discoveries are
having a dramatic impact on organization. Internet is the world information
spread machines that have covered an interaction from one user to another user.
In contrast, advertising through have brought high achievement into marketing
strategy. For example, advertising products into facebook so that the users can
consume on their products .Online purchasing, this option it will create less
hassle to customer for purchasing the products which they needed.
Advancement of the technology can cause the life cycle of the product changed
and increased in the distributing of the products. High technology of the
Machineries can increased the supply of the products while achieve a better
profits for the organization.

POTENTIAL
DEVELOPMENT OF
SUBSTITUTE
PRODUCT

BARGAINING BARGAINING
POWER OF RIVALRY AMONG POWER OF
SUPPLIERS COMPETING FIRMS CONSUMERS
3.1.2 Porters five Forces

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POTENTIAL ENTRY 9
OF NEW
COMPETITORS
The Radial Diagram above is Porter’s Five-force model. It helps the Company’s
strategists to evaluate the industry growth, market development and organization
Strategy accompanied with the good intuitive judgment. The big corporation firm
such as Starbucks needs a systematic and effective external-audit system
because external forces among foreign countries vary so greatly. The analysis of
the Competitive can be divided into Porter’s Five-Forces. The five forces are as
follows:
1. Potential entry of new competitors
2. Potential development of substitute products
3. Bargaining power of suppliers
4. Rivalry among competing firms
5. Bargaining power of consumer

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 Potential entry for new competitors shows a balance between different
firms competing in a market. It also refers whenever a new partner enter into a
market, they may become threat for one and opportunity for other competing
partners. As all the new entries and existing firms are competing with each other
so the new entry will definitely make an effect on every one transacting in the
market. Starbucks new competitor is the McDonalds’ “McCafe”. There is a great
deal of risk of entry by potential competitors due to the low start up costs.
McDonalds is able to add specialty coffee to their existing services to tap into the
specialty coffee market. There is potential of $125,000 per year in revenue to be
made by each store if they are able to successfully enter the specialty coffee
market.
A potential development of substitute products also develops an
environment of competition in the market among the competing partners. As all
firms want to compete in term of quality and substitute will lasts for longer in the
market if the quality of the substitute will be greater than the existing alternate.
Nowadays coffees are being canned or bottled. The option to buy bottled coffee
is also inexpensive compared to coffee in a mug at the Starbucks store. With the
focus on time management, canned product is the ultimate choice .
Other factors also have a major impact on the substitutes. Collective
bargaining power of supplier is if vendors are less in the market and the
organizations that have to purchase from those vendors is high. The demand for
those suppliers will be more as the firms have to purchase from that less
suppliers. The bargaining power of supplier affects the intensity of competition in
an industry. It is best to have a mutual agreement between the supplier and the
buyer. Starbucks have gone through this situation when the world coffee bean
price increased by the suppliers in 2001. Starbucks have no choice but to buy at
expensive price from the suppliers.

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 Later on, Starbucks decided to prepare an agreement document regarding
to purchase coffee beans at a fixed price. There is more bargaining power for
suppliers of technological innovations such as automated coffee machines, latte
and espresso machines, etc because there are not as many suppliers for such
equipment as there are for coffee beans. Starbucks may pursue a backward
strategy to gain control or ownership of suppliers.
The rivalry among the competing firms is the most powerful of the 5
competitive forces. Starbucks primary competitors were restaurants, specialty
coffee shops, doughnut shop, supermarket and all other stores selling hot and
cold coffees. In 2003, there was 14000 specialty coffee outlets in U.S itself.
Starbucks also faced competition from nationwide coffee manufactures that
distributed their coffee through supermarkets pricing them cheaper compared
with Starbucks. Anyway, Starbucks feels that their excellence services and the
high quality of their coffee is the biggest strength of them. Other than this
Starbucks may lower their prices or add more features in their stores and may
also increase their advertising all around the world.
Last but not least is the bargaining power of consumer. When customer
are concentrated or large or buy in volume, they bargaining power represent a
major force affecting the intensity of competition in an industry. This may arise
when the consumers can inexpensively switch to competing brands. Customers
did not really have bargaining power when it came to premium coffee such as
Starbucks. The sheer scale of Starbucks’ business reduces the bargaining power
of any single group of buyers.

Porter’s Five Forces Table

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 Porters Details Industry
five profitability
Forces

Rivalry Among Competing Firm There is intense competition in the coffee

market amongst established coffee shops that
are fighting to get customers. There are local
coffee shops offering specials to lure potential
HIGH customers in. Restaurants are opening earlier LOW
and closing later to accommodate customers on
the go. With the 85% North American
customers taking their coffee to go,
convenience is a major factor
Potential of new competitors There is a great deal of risk of entry by potential
competitors due to the low start up costs.
McDonalds is able to add specialty coffee to
HIGH their existing services to tap into the specialty LOW
coffee market. There is potential of $125,000
per year in revenue to be made by each store if
they are able to successfully enter the specialty
coffee market.
Potential development of Water is a substitute which is healthy for us and
substitute products HIGH it is free. The option to buy bottled water is also LOW
inexpensive compared to coffee. With the focus
on healthier living, water is the ultimate choice.
Bargaining power of suppliers There is more bargaining power for
suppliers of technological innovations such
as automated coffee machines, latte and
HIGH LOW
espresso machines, etc because there are
not as many suppliers for such equipment
as there are for coffee beans
Bargaining power of consumers Customers did not really have bargaining power
HIGH when it came to premium coffee such as LOW
Starbucks. The sheer scale of Starbucks’
business reduces the bargaining power of any
single group of buyers.

3.1.3 Competitive Profile Matrix

Starbucks Caribou coffee Gloria Jean’s coffee

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 CRITICAL WEIGHT RATING WT RATING WT RATING WT
SUCCESS FACTOR (WT) SCORE SCORE SCORE

Advertising 0.10 4 0.40 4 0.40 3 0.30

Product Quality 0.20 4 0.80 3 0.60 2 0.40
Price 0.05 2 0.10 3 0.15 3 0.15
Competitiveness
Management 0.08 3 0.24 2 0.16 3 0.24
Financial position 0.05 3 0.15 3 0.15 2 0.10
Customer loyalty 0.10 3 0.30 2 0.20 2 0.20
Global expansion 0.15 4 0.60 2 0.30 2 0.30
Employee benefits 0.10 4 0.40 2 0.20 2 0.20
Customer Service 0.17 3 0.51 2 0.34 2 0.34
TOTAL 1.00 3.50 2.50 2.23

Starbucks shown highest score and the second highest were Caribou Coffee and
Gloria Jean’s coffee shows the lowest Score. The competitive profile matrix
(CPM) weighs product quality. The product quality (0.20) and is the most
important item on the list of critical success factors. Starbucks score on this
factor as the highest in comparison to their two chief competitors, Caribou and
Gloria and reflecting a distinctive competitive advantage in the market. Customer
service 0.17, Employee benefits 0.10 and global expansion 0.15 replicates a high
level of importance on the CPM. The advertising weight, 0.10, on CPM does not
reflect a high level in ranking the critical success factors, but does release
valuable information in comparison to their competitors on the CPM. Starbucks
rates and scores the lowest on the price competitiveness factor.

3.1.4 External Factor Evaluation Matrix (EFE)

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Key External Factors
Opportunities Weight Rating Weighted
Score
Globalization makes it easy to enter 0.15 4 0.60
international market
People are looking for cheap internet 0.10 3 0.30
connections.
Express foods are getting famous to reduce 0.10 2 0.20
time to be spent.
Demand for non-chemical and healthy 0.10 3 0.30
products.

Threats
Increase in the inflation rates creates a 0.15 3 0.45
demand in lower priced products.
Many companies are pricing their products 0.20 3 0.60
cheaper to impress customers.
Increase in hypermarkets and economical 0.10 2 0.20
supermarkets
1.00 2.55

Weight of TWSO=0.6+0.3+0.2+0.30
=1.40/0.45
= 3.11
Weight of TWST=0.45+0.60+0.20
=1.25/0.452
= 2.78

External Evaluation Matrix comprises of 2 lists. Both are important for the
company. It’s identified as the opportunities and threats of the company. The
factors are rated from 1 till 4, where 1 is the lowest and 4 is the highest. The
highest weight is assigned to the most important factors or several very important
factors. The most important factors maybe a threat or an opportunity. In this
case, it is an opportunity.

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 Based on the key external factors, the most critical factors are that many
companies are pricing their products cheaper to impress customers. Increase in
the inflation rates creates a demand in lower priced products comes along as the
most critical threats to the company.
Anyway, there are still opportunities to increase the growth of the
company. It is known that the factors which carries most weight is the factor that
most to be address. Globalization makes it easy to enter international market is a
good opportunity for Starbucks. Since the total weighted score is 2.78 generally
Starbucks is not so effective in addressing its CFS which exists in its current
environment. It needs to upgrade its effectiveness.
However, this is subject to further analysis of individual weighted score of
opportunities (TWSO) and weighted score of threats (TWST). Based on the
calculation, as shown in the table above, is more effective in addressing the
Opportunities .Still, Starbucks must find the way to reduce the threats to focus on
the future challenges.

3.2 THE INTERNAL ANALYSIS

3.2.1 Financial Analysis

A) Projected Income Statement
Fiscal Years 2003-2005

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 Oct 2 % Oct 3 % Sept 3 % Diff. Diff.
2005 2004 2003 between between
2005 2004
and and
In dollar’ 000, except per share amounts 2004 2003

Net revenue:
Retail $5391927 $4457378 $3449624 21 29
Specialty 977373 836869 625898 17 34

Total net revenue $6369300 100 5294247 100 4075522 100 20 30

Operating expenses:
Store operating expenses 2165911 34 1790168 34 1379574 34 21 30

Other operating 197024 3 171648 3 141346 4 15 21

Depreciation and
amortization expenses 340169 5 289182 6 244671 6 18 18

General and
administrative 357114 6 304293 6 244550 6 17 24
development
Income from equity 76745 1 59071 1 36903 1 30 60
venture

Operating income 780615 12 606587 12 420850 10 29 44

Gain on sale of - - - - - - - -
investment
Net earnings $494467 8 $388973 7 $265355 7 27 47
Net earning per share-
diluted $0.61 0 $0.49 0 $0.34 0 24 44

Analysis summary

The Total net revenue for the Starbucks shows steadily increased from 2003
until 2005.The big increase from 2003 to 2004 could be due to the major
customer demand and customer royalty for the product. Total net revenue can be
divided into retail and specialty. Retail is meant by selling food beverage directly

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to customer and specialty means customer royalty. The sale for 2004-2005
periods is less then 10% from 2003 to 2004 which is 20%.

Another significant observation from the statement is the operating income. It is

shown that from 2003 to 2005 the income is increased. It could be because of
the performance of the company is going concern. Operating income from 2003
to 2004 is increased by 44%.This drastic increase is because of the purchase of
Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises, bringing the
total number of Starbucks-operated locations worldwide to more than 6,400.

While the shareholder is important to any company, the net earnings per share
are equivalently important to the shareholders. As observed, the net earnings of
share diluted of the company increased from $0.34 in 2003 to $0.49 in 2004,
reaching $0.61 by 2005. This is because of the company performance in
achieving target. The net earnings per share increased by 44% from 2003 to
2004 and increased by 24% from 2004 to 2005.

B) Projected Balance Sheet

Fiscal years 2003-2005

In millions, except Oct 2 Different Oct 3 Different Sept 30

For per Share Items 2005 Between 2004 Between2004 2003
2004 and2003
and2005 %

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 %

Current assets $1209334 (11) $1350895 46 $924029

Current liability 1226996 64 746259 23 608703
Working Capital (17662) 604636 80 335767
Total assets 3514065 4 3386541 22 2776112
Long-term
debt(including
current portion) 3618 17 4353 (14) 5076
Shareholders equity $2090634 (15) $2470211 19 $2068689

Analysis summary

As observed in the above table current assets increased for 2003-2004 by 46%.It

could be because of company activations and reloads on Starbucks Cards, but

for the year 2004-2005 is dropped by 11% because of the advertising Starbuck

coffee

Besides, the shareholder Equity increased due to the increases in net earning for

the company. While the shareholder equity decreased for about 15% in

comparison of 2004-2005. However shareholder equity increased by $2090634

in 2005 it’s because of the stability net earning.

Long term debt shown in the table dropped 14% from 2003 to 2004 previously it

was known company’s net earning increases, thus it could mean that the

company has extra earnings to pay off debt. Since this is a long term debt, the

amount is tremendously big and by reducing it by 14% within a year shown that

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the development new shops really has a big impact on the company’s

performance.

C) Financial Ratio
1. Liquidity ratios
2005 2004

Current ratio = $1209334 = $1350895

$1226996 $746259

= 0.99 x = 1.81 x

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The Current ratio is another test of a company's financial strength.  It calculates
how many dollars in assets are likely to be converted to cash within one year in
order to pay debts that come due during the same year. Liquidity can be
measured through current ratios and quick ratio. An acceptable current ratio
varies by industry.  The more liquid the current assets are, the smaller the current
ratio can be without cause for concern.  For most industrial companies, 1.5 is an
acceptable current ratio and Starbucks current ratio is 0.99x for the year 2005
compared to 1.81 x for the year 2004. This can be considered as a decline and
should be seriously concerned and still enough to cover up current liability or
short-term debt.

2. Leverage Ratio
2005 2004

Long term = $3618 = $4353

Debt-to-total-assets ratio
$2090634 $2470211

= 0.0017 = 0.0018

The Debt-to-total-assets ratio Shows the proportion of a company's assets which

are financed through debt. If the ratio is less than one, most of the company's
assets are financed through equity. If the ratio is greater than one, most of the
company's assets are financed through debt.

Companies with high ratios are said to be "highly leveraged," and could be in
danger if creditors start to demand repayment of debt and for Starbucks, the ratio
is very low at both years. The ratio is 0.0017 at 2005 and 0.0018 for the year
2004 respectively and the ratio drop slightly. This means that most of the
Starbucks assets are financed through equity and is safe if creditors start to
demand repayment of debt.

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3. Activity Ratio
2005 2004

Fixed assets turnover = $6369300 = $5294247

$2304731 $2035646

= 2.76x = 2.6x

2005 2004

Total assets turnover = $6369300 = $5294247

$3514065 $3386541

= 1.81x = 1.56x

Activity ratios show how effectively a firm’s assets are being managed. Activity
analysis, together with the leverage ratios are the key factors in determining
profitability. Fixed Asset turnover ratio is one of the measures of activity. Another
activity measure is the Total Asset turnover ratio. Based on the above tables,
Starbucks has a bigger asset turnover which means that the company is using its
assets more efficiently than other competitors in the industry. Company’s “no-
inventory” policy has significant effects on its superiority. In both ratios , there is a
slide increase which shows the company’s efficiency on using assets has
increased too.

4. Profitability Ratios
2005 2004

Gross Profit Margin = $6369300-2605212 = $5294247-2191440

$6369300 $5294247

= 0.59 (59%) = 0.58 (58%)

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Profitability ratios measure and explain the ability of the firm to generate income.
Gross profit margin has increased. This shows that the company has a greater
margin to cover the operating expenses and yield a profit.

2005 2004

Net Profit Margin = $494467 = $388973

$6369300 $5294247

= 0.078 (7.8%) = 0.073 (7.3%)

There is a small increase in the profit after tax. This shows that the company’s
profit has increased. Yet, the percentage of profit compared with the sales is
small which is 7.8% from total sales is the net income of year 2005.

2005 2004

Return on Total Asset( ROA) = $494467 = $388973

$3514065 $3386541

= 0.14 (14%) = 0.12(12%)

The ratio is considered an indicator of how effectively a company is using its

assets to generate earnings before contractual obligations must be paid. The
greater a company's earnings in proportion to its assets, the more effectively that
company is said to be using its assets. Starbucks ROA ratio shows that in year
2005 the efficiency of using assets to generate earning has increased from 12%
to 14%.

2005 2004

Return on equity ( ROE) = $494467 = $388973

$2090634 $2470211

= 0.24 (24%) = 0.16 (16%)

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Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have
invested.  The ROE is useful for comparing the profitability of a company to that
of other. Starbucks shows a drastic increase from 16% to 24% for the year 2005.
This shows that the company is generating a good profit from the shareholders
money. This will, increase the shareholders amount in future.

EPS
Year 2005 2004
Earning per share $0.61 $0.49
The earnings per share are a good measure of profitability. When compared with
EPS of similar companies, it gives a view of the comparative earnings or
earnings power of the firm. EPS ratio calculated for a number of years indicates
whether or not the earning power of the company has increased. Starbucks EPS
has increased and thus showing that the earning power has increased.

3.2.2 Internal Factor Evaluation Matrix

Key Internal Factors Weight Rating Weighted Score

Strengths
1. Huge market expansion to China, 0.21 4 0.84

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 Brazil, India and Russia
2. Provide a great work environment 0.10 4 0.40

3. Apply the highest standards of 0.10 3 0.30

excellence in services.

4. Starbucks has monopolistic 0.10 3 0.30

advantages over its competitors.

5. Purchased Ethos healthy water for 0.12 4 0.48

8 million and also does not use
chemical flavor for coffee.
6. Launching the sales of 0.08 3 0.24
Frappuccino in Japan and Taiwan.

Weaknesses
1. Price of coffee is high at Starbucks 0.10 2 0.20

2. less marketing and advertising its 0.07 2 0.14

product
3. Starbucks products are not 0.12 2 0.24
available at supermarket

TOTAL 1.00 3.14

TOTAL WEIGHTED SCORE FOR STRENGHT / TOTAL SCORE FOR STRENGHT

TWSS: 0.84+0.40+0.30+0.30+0.48+0.24 /0.21+0.10+0.10+0.10+0.12+0.08
: 2.56/0.71
: 3.60
TOTAL WEIGHTED SCORE FOR WEAKNESS / TOTAL SCORE FOR WEAKNESS
TWSW: 0.20+0.14+0.24 / 0.10+0.07+0.12
: 0.58/0.28
: 2.00

Strategic Management PMS 3393 25

 Internal Factor Evaluation (IFE) Matrix is a summary step in conducting an
internal strategic-management audit. This strategy-formulation tool summarizes
and evaluates the major strengths and weaknesses in the functional areas of
business, and it’s also provides a basis for identifying and evaluating relationship
among those area. Based on key Internal Factor, the most advantage factor is
Starbucks' company is expanding its market to china, Brazil and Russia. These
are very big markets and will definitely increase its growth.
The strategic of Starbucks' services provided, quality of coffees and management
of the company makes strength became as very important factor. It is because
Starbucks' provide a great work environment and treat each other with respect
and dignity. Besides of that, other than that, Starbucks Purchase Ethos healthy
water for 8 million and also does not use chemical flavor for coffee. This is also a
great strength to it as its coffee’s are free from chemical flavors and it blends and
mix the real hazelnuts to the coffee.
Since the total weighted score is 3.14 generally Starbucks is effective in
addressing its CFS which exists in its current environment. But still, its weakness
is also high. 2.00 is very high, this means that Starbucks is still weak in
identifying its weakness.
Since Starbucks' has its own strength to increase the growth of the company,
there is also has weaknesses. The prices of coffees sold at Starbucks are higher
compared with other stores. This is a major strength for other competitors.

Other than that, Starbucks does not interest in marketing its products through
advertisings a lot. It focuses on its quality coffee which has the power to attract
customers.
Anyway, this is subject to further analysis of individual weighted score of
strength (TWSS) and weighted score of weakness (TWSW). Based on the
calculation, as shown in the table above, is more effective in addressing the
Strength, still, Starbucks' must find the way to overcome weaknesses to focus on
the future challenges.

Strategic Management PMS 3393 26

.

STRENGTHS WEAKNESSES
S1. W1
Huge market expansion to China, Price of coffee is high at
Brazil, India and Russia Starbucks
S2.
W2
Provide a great work environment
S3. less marketing and
Apply the highest standards of advertising its product
excellence in services. W3
S4.
Starbucks products are
Starbucks has monopolistic advantages
not available at
over its competitors.
S5 supermarket
Purchased Ethos healthy water for 8
million and also does not use chemical
flavor for coffee.
S6
Launching the sales of Frappuccino in
Japan and Taiwan

Strategic Management PMS 3393 27

OPPORTUNITIES SO Strategies WO Strategies
O1.
Globalization makes it easy to enter S1,S3,O1,O2,O3 W1,W2,O1,O3
international market
O2. Do advertisements about the FREE Reduce the price and Advertise the
People are looking for cheap internet internet connections and the excellent products all over the places.
connections service they provide.
O3. W1,W3,O3
Express foods are getting famous to S5,O4
reduce time to be spent Do R&D to sell products at
O4. Starbucks shall increase the healthy supermarkets without reducing the
Demand for non-chemical and products into market as the demand quality with cheap price
healthy products for it is high.

3.3 TOWS Analysis

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 ST Strategies WT Strategies
THREATS
T1. S2,S3,S4,T1,T2 W1,W2,T1,T2
Increase in the inflation rates
Starbucks needs to change its Create new complementary products
creates a demand in lower
market strategy by reducing the which contain good quality and lower
priced products.
price to compete with the price to attract more customers.
T2.
competitors.
Many companies are pricing
W3,T3
their products cheaper to
impress customers.
Starbucks needs to analyze the way
T3.
to reduce the risks of selling its coffee
Increase in hypermarkets and
products at supermarkets as
economical supermarkets
customers are demanding for it.

3.4 Space Matrix

Strategic Management PMS 3393 29

FINANCIAL STRENGTHS

RATING
1. A Starbucks asset is financed through equity and is safe if creditors start
to demand repayment of debt. Long term debt-to-equity ratio is only
5
0.0017.

2. Starbucks Return on Asset ratio shows that in year 2005, the efficiency of
using assets to generate earning has increased from 12% to 14%. 4

3. Starbucks net income increased to $494.5 million in the year 2005

compared with $388.9 million in 2004. There is an increase of 21.3% 4
in the income of Starbucks.

13

INDUSTRY STRENGTHS

RATING

1. Starbucks Coffee Liqueur was the top selling new spirit product, grossed
sales over $8million annually. 4

2. Starbucks agreed to serve Starbucks Coffee in all United flights.

3

3. “Starbucks Everywhere” approach has increased foot traffic for all the
stores in area. This makes customers easy to fine Starbucks all the 5
places in town.

12

+6 = best +1= worst

ENVIRONMENTAL STABILITY

Strategic Management PMS 3393 30

 RATING

1. Starbucks products prices are high compared with competing coffee

houses. They price their products several dollars below then Starbucks -4
price.
2. Demand for Starbucks products to be supplied in supermarkets increase.
But, doing that will put Starbucks business in risk as customers don’t -2
know the way to brew the coffee.
3. Increase in world coffee bean price in 2001, forced Starbucks to increase its
beverages and coffee sold at retail. -3

-9

COMPETITIVE ADVANTAGES

RATING

1. Starbucks coffee and beverages are high in quality brewed by well trained
employees. -1

2. Starbucks teamed up with T-mobile WI-Fi service to provide internet access

to all over Starbucks Coffeehouse -1

3. There are 16,120 Starbucks coffeehouses worldwide and plan to open

another 1800 stores. -2

4. Starbucks is a customer oriented Coffeehouse.

-2

-6

-1 = best -6= worst

CONCLUSION

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 FS Average is 13/3 = 4.3
IS Average is 12/3 = 4.0
ES Average is -9/3 = - 3.0
CA Average is -6/4 = - 1.5
Directional Vector Coordinates: X- axis: 4.0 + (-1.5) = 2.5
Y- axis: 4.3 + (-3.0) = 1.3
SPACE MATRIX
FS
+6 -
CONSERVATIVE AGGRESSIVE
+5 -

+4 -

+3 -

+2 -

+1 - (2.5, 1.3)
CA IS
I I I I I I I I I I I I
-6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6
-1 -

-2 -

-3 -

DEFENSIVE -4 - COMPETITIVE

-5 -

-6 -
ES

Starbucks must pursue a strategy that is Aggressive. The strategies that include in aggressive strategies is
backward integration, forward integration, horizontal integration, market penetration, market development,
product development and diversification which include related and unrelated diversification.

3.5 BCG Matrix

Strategic Management PMS 3393 32

 HIGH MEDIUM LOW

HIGH
 Backward, Forward, or  Market Penetration
Horizontal Integration  Market Development
 Market Penetration  Product Development
 Market Development  Divestiture
 Product Development

STARS QUESTION MARKS

II I
MEDIUM STARBUCKS

 Product Development  Retrenchment

 Diversification  Divestiture
 Retrenchment  Liquidation
 Divestiture

CASH COWS DOGS

III IV
LOW

SUMMARY

The Boston Consulting Group (BCG) matrix is enhancing a multidivisional firm’s

efforts to formulate strategies. This matrix allows a multidivisional organization to
manage its portfolio of businesses by examining the relative market share
position and the industry growth rate each division relative to all other divisions in
the organization. Starbucks are measured to identify the stores strategic position
in the Boston Consulting Matrix. The BCG matrix, were included 4 divisions
which is Question Marks, Star, Cash Cows, and Dogs. In division quadrant I,
shows low relatives market position, high growth industry. Firms cash needs are
high and cash generation is low.

This division decides to strengthen on pursuing an intensive strategy. Division

quadrant II, identifies best long-run opportunities for growth and profitability. Star

Strategic Management PMS 3393 33

division is high relative market share and high industry growth rate. In convince
of substantial investment to maintain or strengthen their dominant positions. Next
in quadrant III, Cash Cows with high relative market share position but compete
in a low growth industry ,while this division will be managed to maintain strong
position for as long as possible.
Finally, in quadrant IV Dogs have low relative market share position
and compete in a slow or no market growth industry. This divisional are weak
into internal and external position and often liquidated, divested or trimmed down
the retrenchment. Retrenchment can be best strategy to pursue because many
dogs bounced back, after strenuous asset and cost reduction, to become viable,
profitable divisions. In contrast, the highest scored is 3.5, and it determinant that
relative share position is HIGH.
Besides that, Starbucks Income Statements shows the Net Revenue
were consecutively increased between the years 2003 until 2005. The revenues
on the year 2003 is $4075,000, while $2191,000 in year 2004, $6369,000 in year
2005. Moreover, the industry sales growth rate between year 2004 and 2005is
56.3%.It determinant HIGH position of industry sales growth rate. In conclusion,
Starbucks were identified in STAR division. This division represents the
Starbucks long-run opportunities for the growth and profitability. While, this
division is in high relative market share and industry growth rate and
subsequently they received substantial investment. The divisions are forward,
backward, and horizontal integration, market penetration, market development
and product development are will be considered.

4.0 MAJOR ISSUES

4.1 Corporate Level

Strategic Management PMS 3393 34

  Starbucks’ coffees price much expensive than other market competitor
product, it is because Starbucks’ purchased only high quality coffee
beans, This will increase the quality of the product as well as the price of
the product. As Starbucks have many competitors, this will be an
advantage of the competitors. People are also nowadays looking forward
for cheap products. Even though Starbucks has its own customer who
spends their money to get the quality coffee, it still has to look for the other
people who are running to the next store.

4.2 Functional Level

 Starbucks have poor marketing strategy on advertising. They prefer to

build the brand by promoting the drinks cup-by-cup with customers. In this
way, the advertisement ends until they drink the coffee, while some
groups of people willing to support the advertisement for timing just to
taste the drink for free. The chances to attract valuable customers are very
low. Therefore, it also affects gross profit of Starbucks, the study does not
show drastic increased between year 2004 and 2005. The percentages of
the profit increased from 58% in year 2004 to 59% in year 2005. This
would because of lack of marketing strategy in advertising. The company
spent total of $87.7 million on advertising in fiscal 2005, up from $49.6
million in fiscal 2003. It show Starbucks does not emphasize on funding
the money into advertisement.

 Starbucks does not emphasize in distributing their products to

supermarkets. They are very concern on quality of the coffee; if the

Strategic Management PMS 3393 35

coffees were packaged into plastic bags the mixing of the beans will not
be as accurate. It will cause the taste of the coffee will be different and the
coffee beans would not be fresh as grinded beans. In addition, the
organization did not show a proper guideline to mix the coffee to
customer. Therefore, the packaging coffee in supermarket did not have
same taste as coffee which mixed in the Starbucks. Customer’s
satisfaction on the coffee will badly affect and as well as demand of the
Starbucks coffee.

5.0 RECOMMENDATION

Strategic Management PMS 3393 36

5.1 CORPORATE LEVEL
Reduce their price by producing a new product of coffee using cheaper beans or
may come out with special discounts promotions to increase the sales.
Starbucks’ coffee is world’s preeminent global brand. Starbucks’ should decrease
price of the coffee to face competition from nationwide coffee manufactures.
They also can do promotion or promote packages of coffee set to impress
customers, such as McDonald promoting their product. If the challenge was met
successfully, in all likelihood company’s best years lay on the strategic road
ahead.

5.2 BUSINESS LEVEL

Large companies like Starbucks can effectively pursue Focus-Based Strategy in
conjunction with differentiation or cost leadership based strategy. Being a lower
cost store will increase the difference between Starbucks and other stores. At
present, Starbucks competitors are attempting to specialize in the coffee
business, therefore Starbucks must pursue focus strategy to increase its
strength.

5.3 FUNCTIONAL LEVEL

Advertisement can develop through internet that services convinced for users to
access, give the brochures, do road shows, so that public come to know more
about Starbucks details. Market penetration and market development will help to
increase the sales and reduce the weakness in Starbucks. Distribute packaging
of Starbucks instant coffee will definitely increase the sales as it is a demand
from customers.

Introducing accurate mixing level of the coffee in a tea bag style will increase the
sales at supermarkets. Packing it together with the guidelines on mixing coffee
beans and sugars with milk to result same taste of coffee will never reduce the

Strategic Management PMS 3393 37

quality of the coffee. Providing proper steps to customer will make a better quality
of coffee indeed.

6.0 CONCLUSION

Strategic Management PMS 3393 38

Starbucks success is achieved through a few factors.
 Outstanding Quality of the coffee brewed
 Excellent service provided at the stores
 Fast growth of new stores all around the world
These factors not only have increased the sales but also the reputation among
the coffee lovers. Starbucks encounters aggressive competition in all areas of its
business activity. The market for each of their business segments are
characterized by vigorous competition among major corporations with long
established positions and a large number of new and rapidly growing firms.
Anyway, as Starbucks have a good financial capacity with good strategies; it can
overcome all the competitors to shine high as the first class coffee purveyor.

Strategic Management PMS 3393 39