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Starbucks: Sector Industry Analysis

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Executive Summary

The purpose of this report is to critically analyse the business environment of Starbucks

within premium coffee shops industry. In order to present this analysis, the report covers

different aspects of its international business, particularly focused at its marketing strategies in

European nations. The report includes the journey of Starbucks, since its foundation along with

its vision and mission and captures the key trends till recent times. A section of this report

performs environmental analysis, external and internal in order to identify opportunities and

threats for this business entity in European market. For undertaking a study on external and

internal business environments, PESTL and Porter’s Five Forces have been performed

respectively In addition, it also capture the business strategies of Starbucks with the help of

VRIN and Ansoff Matrix analysis. In the end, on the basis of these audits and analysis, a few

recommendations have been given to the company, so that it can consolidate its business gains

and maintain its glory in coming days

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Table of Contents

Company Overview.........................................................................................................................5
Vision Statement..........................................................................................................................5
Mission Statement.......................................................................................................................5
Analysis of the External Market Environment................................................................................6
Political factors:...........................................................................................................................6
Economic Factors:.......................................................................................................................6
Social Factors...............................................................................................................................7
Technological Factors..................................................................................................................7
Environmental Factors.................................................................................................................7
Legal Factors...............................................................................................................................8
Porter’s Five Forces.........................................................................................................................8
Rivalry among existing competitors in the market: High to Moderate.......................................9
Bargaining power of customers: Moderate to Low.....................................................................9
Threat of Substitutes: High........................................................................................................10
Bargaining power of suppliers: Low.........................................................................................10
Threat of New Entrants: Moderate............................................................................................10
Competitor Analysis......................................................................................................................10
Internal Analysis............................................................................................................................12
Resources...................................................................................................................................12
SWOT Analysis.........................................................................................................................13
Strengths................................................................................................................................13
Weaknesses............................................................................................................................13
Opportunities.........................................................................................................................14
Threats...................................................................................................................................14
Strategy Evaluation........................................................................................................................15
Business Strategies....................................................................................................................15
Corporate Strategies...................................................................................................................16
Marketing Strategies..................................................................................................................17
Ansofff Matrix Analysis for Starbucks..........................................................................................17
Recommendations..........................................................................................................................19
Conclusion.....................................................................................................................................20
References......................................................................................................................................22
Appendixes:...................................................................................................................................24
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Appendix 1: Barriers to Entry Checklist...................................................................................24

Appendix 2: Detailed VRIO Analysis of Starbucks..................................................................25
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Company Overview
Starbucks Corporation was established on 4th November, 1985 in Seattle, Washington as

a roaster, retailer and marketer of organic coffee and is presently operating in over 16000

locations all around the world. In addition to its handcrafted tea, coffee and other beverages,

company also purchases and roasts the coffee and other fresh food items which are being sold at

company owned stores (Pahl 2009). Starbucks has been able to achieve the position of most

leading market player in ready to consume coffee business and this is the reason it has been able

to attract millions of coffee lovers from throughout the world (Pahl 2009).

The company is constantly running on the path of innovation by introducing various

innovative products such as ‘Starbucks Express’ through which customers are provided with the

privilege to order through phone call or online modes before reaching the coffee shop (Bussing-

Burks 2009). Apart from this, company values the time of its potential customers and therefore

with a view to reduce transaction times and provide speedy services, it has introduced the

customer card that works on installed automatic espresso machines.

Vision Statement
“To inspire and nurture the human spirit-one person, one cup and one neighbourhood at a

time”.

Mission Statement
The mission statement of Starbucks Company is framed as “the premier vendor of the

world’s finest coffee while maintaining stable principles in growth”. These uncompromising

principles of the company continue to increase its presence around the world ultimately leading

the retail coffee market and increasing its overall revenue. Company has been able to maintain its

position in the competitive market due to its over-aggressive and prevailing marketing strategies.
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Starbucks employees are paid comparatively higher wages along with the health insurance and

other stock options that are helpful while making their heavy workload flexible and easy going

(Pahl 2009). As per the Starbucks marketing strategy, word-of-mouth is the major advertising

tool that helps the company to attract large group of customers.

Analysis of the External Market Environment

It is highly essential for an organization to analyse its external environment before

entering the market with a view to be successful in achievement of its objectives related to long

term sustainability and growth. PESTEL analysis is considered as one of the most powerful and

effective tool for analysing the impacts of external factors to the company’s business operations.

PESTLE analysis include following elements:

Political factors:
Extraction of US market from the International Coffee agreement may set a limit of

coffee exportation on the company ultimately having a major impact on Starbucks business

operations (Davies 2003). In addition to this, the instability as well as price fluctuations in other

coffee producing countries may have significant impact on the company largely affecting its

buying behaviour and production process.

Economic Factors:
Inflation rates of the countries wherein Starbucks is operating usually results into lower

sales performance of the company. Due to the negative effects of inflation, customers may

become incapable of affording the cost of buying coffee from the company’s store which is

ultimately the major reason for constantly decreasing sales of the company. The impact of

economic crisis and increased recession may cause the customers of the company to set priorities

for their expenditures where the important needs would be placed first while making day to day
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expenses. Slow rate of economic growth and demographic factors such as taste and culture may

also result into poor spending of the customer henceforth impacting the sales of Starbucks

Company.

Social Factors
Brand image of Starbucks company is increasing at a faster pace in many countries

around the globe with the viewpoint of its potential customers are of high social class. To cope

up with this consumer perception, company has to patronize itself so as to make them meet

people matching their social status. Although Starbucks can easily offer cheaper options to the

customers but the company has offer all those alternatives without compromising with the

quality of ingredients utilized in the production (Thomson, and Baden-Fuller 2010). This is the

major socio cultural challenge that is faced by the company with a view to expand its operations

and attract customers belonging to lower and middle tiers of the income pyramid of a particular

economy.

Technological Factors
There are numerous technological factors that may affect the routine business operations

of an organization such as Starbucks. Not only the company itself is presently operating through

online modes but also it has already initiated the Wi-Fi options in its outlets through which

customers can surf the web anytime while sipping coffee in any of the Starbucks outlet (Lussier

2014). This facility is indeed a value added to Starbucks brand image and is something that can

enhance the customer experience while visiting the Starbucks coffee house. Therefore, it is

highly essential to for Starbucks to check the network availability and internet connectivity

options in the particular country before starting its business operations.

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Environmental Factors
Starbucks Company sometimes faces environmental problems related to pollution and

waste management policies and procedures of the diverse countries in which they operate their

business. Company also sometimes faces challenges while obtaining authorization or permission

to institute brewing plants with a view to manage production waste in an effective manner

(Lussier 2014). These environmental issues mainly arise due to the implementation of strict

environmental rules and policies by some countries for specific businesses such as Starbucks.

Legal Factors
Sometimes legal factors such as Health and safety rules and regulations imposed by

different governments pose assured restrictions on business operations of Starbucks that may

sometimes affect its turnover in different countries severely (Thomson, and Baden-Fuller 2010).

Therefore, company has to make sure that it does not run its business afoul of legal rules and

regulations of the countries where its business is being operated. European Union has enforced

may law relating to environmental protection and compels an organisation to follow the

sustainable practices of agriculture and food sourcing to be operative in their markets.

Porter’s Five Forces

Porter’s five forces is a theoretical framework that is usually applied for the purpose of

industry analysis and strategy development. The five forces that are shaping competition for

Starbucks in the food industry are depicted in the figure below:

Figure: Porter Fiver Forces

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(Source: Hill and Jones 2012)

Rivalry among existing competitors in the market: High to Moderate

Above figure clearly shows that Starbucks Company operates in such a competitive

industry where its major competitors are Costa, Caribou Coffee, and Dunkin Donuts and many

other small coffee shops and cafes (Dudovskiy 2014). The strong presence of all these

competitors indicates that there is high rivalry among the existing competitors within the

industry where Starbucks is operating. The industry is becoming mature and this subsequently

affected the level of competition as there are limited choices for competitors to attract new

customers.

Bargaining power of customers: Moderate to Low

It can be analysed through the above figure that customers of Starbucks Company

possess large amount of bargaining power. The major reasons for this include minimum

switching costs for customers and the demand of products that exceeds the number and variety of

offers provided by the companies within the industry. Starbucks also manufacture and sales

products for diverse consumer base and low sales volume, resulting in low bargaining power for

consumers.
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Threat of Substitutes: High

The threat of substitute products and services for Starbucks is considerable as there are

large number of substitute products and services in the market which include juices, tea, soft

drinks, energy drinks and many more (Dudovskiy 2014). There are various pubs and bars in

every country that can be pointed out as substitute place for the customers to fix meetings and

spend time outside their home and work environment.

Bargaining power of suppliers: Low

Above figure reveals that the bargaining power of suppliers in the coffee market is very

high due to the fact that the demand of coffee is constantly increasing on the global level and

there are very few geographical areas that can be considered for production of coffee beans.

Threat of New Entrants: Moderate

The threat of new entrants to the coffee market to compete with such a global coffee

brand such as Starbucks is very low (Dudovskiy 2014). The major reason behind this low risk of

new entrants is that the market is highly flooded and considerable amount of financial resources

such as buildings and properties are essential for entering into this industry. The entry barriers

for this industry are high, reducing the changes to an easy entry for a new organisation. This

factor has been highlighted in appendixes 1 of this report.

Competitor Analysis
Key Factors Nestle McDonalds Dunkin Donuts
Product Quality High High High
Price of the product Medium Low Low to medium
Sales USD $102.86B USD $28.20B USD $723.93M
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Mission Nestlé’s mission is to To characterize the The mission of

become one of the quality and taste of a Dunkin Donuts is to

most dominating coffeehouse with serve the basic

nourishment and expediency and necessities of its

health concerned affordable price list customers by

companies in the of McDonald’s providing fresh and

world by offering delicious donuts and

Better life and Better coffee in its well-

product to its maintained modern

potential customers stores.

Markets covered Africa, Europe, Australia, Africa, Europe, Australia,

America, Australia, America, Europe, America and so on.

Middle East Asia and Middle east Serves 32 countries

in total. Head Office:

Massachusetts
Business Strategy Product Cost leadership Product

Differentiation Differentiation
Products Nescafe Cappuccino Mochas, Lattes, and Hot Chocolate

Nescafe Classic Cappuccinos in a Bakery Products

Nescafe Gold variety of flavours Espresso

Nescafe 3 in 1 that comprises of Sandwiches

Nescafe Dolce Gusto Iced, Caramel and Vanilla Chai

Nescafe Collection Vanilla Mint Hot Chocolate

Nescafe Ricoffy Premium, Coffee, Dunkaccino

Roast and Hot Salted Caramel

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Chocolate. Iced Coffee

And a rage variety of

frozen beverages

(Starbucks Corporation (SBUX) 2014), (Dunkin Donuts 2014), (Nestle 2014), (McCafé 2014)

Internal Analysis
Resources
Table 1: Resources

Tangible Resources Intangible Resources

Material Reputation

 Company owned stores  Quality based product and customer

 Investments services

 Plants and Equipments  Marketing

 Sponsorship

 Goodwill

 Branding
Technology Human Resources

 Licensing  Management abilities

 Patent Rights  Global workforce and departments

 Organizational culture and structure.

Organizational (stores)

 17,009 (as on January 2011)

 8870 (Company owned)

 8139 (Licensed stores)

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SWOT Analysis
Strengths
 Starbucks has a huge market share in the international market and deals in more than 60

countries and it is the most renowned brand in the coffee market and has scored 91 st

position in the best international coffee brands of the world.

 Starbucks makes use of the best quality products in their business and satisfy their

consumers with standardized products.

 They are also familiar with the technology and provide mobile application named

“Starbucks App” to their customers to know more about the company (Gillespie, Jeannet,

and Hennessey 2009).

 Starbucks is enjoying a huge success because of its efficient and potential staff as they

are the main assets of the company and put their best for the growth of their organization.

 The company also allows its customers to give their feedback about the services of

company on their website “MyStarbucksIdea.com”.

Weaknesses
 Though Starbucks provide quality products to their customers but its products are quite

expensive and therefore, they are not always affordable for middle class and lower

middle class families.

 The company highly depends on the U.S market for its revenue system which is not

lucrative for company expansion.

 The company is criticized over its poor efforts to become greener company and bad

treatment of some suppliers and had to deal with negative publicity which affected

company’s image (Gillespie, Jeannet, and Hennessey 2009).

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 Starbucks is still struggling in some countries such as Europe to get the renowned

position and raise the profit of the company.

Opportunities
 Starbucks is having huge opportunities to invest in some new product lines such as other

beverages like tea and other soft drinks.

 The company can expand its activities in many other countries and raise funds through

the expansion policy.

 Starbucks can generate more updates in its mobile application and can attract consumer

in masses with the help of technology (Hill, and Jones 2012).

 The company can also increase its revenues and make it popular through brand extension.

Threats
 The company is facing huge competition from other companies such as McDonalds,

Costa Coffee, Dunkin Donuts and Pete’s Coffee which is the biggest threat for Starbucks.

 The company is mainly popular for its coffee but the perception of the people is rapidly

changing and they are switching to healthy drinks instead of caffeine products like tea

and coffee which is also a threat for company (Hill, and Jones 2012).

 Starbucks is unable to control the rapid price fluctuations of high quality coffee beans

which make the company ingredients more costly.

Strengths Weaknesses

 Top most brand and strong market  High cost

position  Overdependence on U.S market

 Quality products  Faulty publicity

 Utilization of technology  Not popular in Europe

 Efficient management
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 Feedback service
Opportunities Threats

 Expansion in new product line  Competition

 International expansion  Changing customer choices

 Technology enhancement  Price fluctuation in the global coffee

 Brand extension market

Strategy Evaluation
Business Strategies
Starbuck’s company applies product differentiation strategy in the form of free Wi-Fi and

digital network that allows the company to provide remarkable experience to its customers and

higher tendency for increasing the sales. This strategy has contributed a lot in the increase of

company sales by 4 % in the year 2010 after several months of continuous decline the company

sales. Company utilizes this strategy mainly due to its unique attributes that are appreciated by its

customers and also strategy is helpful for the customers while examining the product specialty in

comparison to other competitors (Hill, and Jones 2012). Starbucks is very much concerned

about the inputs utilized in its production process and therefore it has constantly been looking for

the best coffee growing area for fulfilment of its input requirements. The company utilizes only

high quality coffee beans with a view to maintain its product quality while offering a distinctive

cup of coffee to its customer base.

The company is constantly on the path of training its employees to be focused towards

improvement of customer experience with a view to create better human relations with them.

The company, by providing differentiated products and services to its customers, has achieved

success with regard to sustained competitive advantage and high level differentiation.

Differentiation strategy of Starbucks has helped the company while become global leader and
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achieving a strong market position (Gerhart 2008). Although it has been examined that the

company is facing tough price competition from its major competitors such as McDonald’s,

Dunkin Donuts that provide high quality products and services to the customers at a very low

price but still company is on the path of success due to its differentiation strategy.

Corporate Strategies
Starbucks Company conducts operations with a fresh image in a fair and ethical manner;

which differentiates it from its competitors and lead to rapid growth. Starbucks attained an

enormous growth from its onset till the year 2007, in terms of both expansion and revenues. The

total number of company owned stores are continuously rising on both national and international

level to provide quality product and services to the customers (Ball, et al. 2003). The high

quality coffee drinks provided by the company in different style, variety and specialty are the

contributors of company’s growth and the major factor that has led to the continuous success of

company.

The reflection of Italian style in its coffee drinks delivered a unique taste to its customers

and is responsible for repeated visits of the customers. Another important factor that has

contributed to the success of Starbucks Company is the relaxing environment, where customers

can enjoy their coffee in a smoke free environment. Additional to this, company’s predictability

or accessibility factor, stores located nearby retail or tourist areas, has also been helpful for the

company while attracting customers in masses (Hill, and Jones 2012). Company also offers

product such as ice creams and other supplements such as cake, muffins, sandwiches, etc. in its

own name.

Marketing Strategies
The marketing strategy of Starbucks was designed with the aim of providing its

customers with exquisite products and services as compared to its competitors. As per the
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marketing strategy of Starbucks, it is the most important task to maintain personal relationship

with its customers as its major target audiences were middle and high income earners desiring to

buy similar products and similar social lifestyle (Ball, et al. 2003). Company therefore designs

different products for targeting different segments based on prices or additional quality of

services.

Another strategy that helped the company to achieve enormous growth during last few

years is its unique selling proposition which was mainly derived due to the strong requirement to

differentiate its products from those of competitors with a strong focus on its customer (Gerhart

2008). The success of all these strategies was only possible due to the factors such as employee

engagement, use of attractive furniture and customer’s viewpoint of social status.

Ansofff Matrix Analysis for Starbucks

Ansoff Matrix helps a business organisation in performing an analysis regarding its

performance of products and markets. It enables an organisation to identify and study the

performance of existing products in exiting market and new products in the same market. On the

other hand, it also enables an organisation to look for the performance of new and existing

product in the new and existing market. The purpose behind this audit goes beyond

understanding the current market demand, as it includes taking decision on the basis of all these

relevant information (McDonald and Wilson 2011). As the analysis could supply ample of

information to launch a product or explore a new market for the same product.

Figure: Ansofff Matrix Analysis

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(Source: McDonald and Wilson 2011)

After a huge success in the USA market, the company has launched its products in other

markets of the world and its existing product has got positive responses in South Asian market,

particularly in India. As a part of new product development for existing market, the company has

been able to successful expand its offering to flatbreads and bacon-wrapped dates. Besides this,

the company has also included salads and sandwiches to its menus in order to boost afternoon

sales and this has a positive impact upon fetching existing customers with a distinct need, at the

stores. This has helped the firm to boost its sales after the morning rush war and ensures an

adequate footfall throughout the day (BBC 2014). As a part of diversification, the company has

started sales of alcohol in the USA market.

The USA is a domestic market for the firm and it has planned to turn more of its stores

into beer and wine purveyors, from an estimated 11, 000 locations of the firm. The company first

offered alcohol in 2010, after 4 PM at Seattle, and after a huge positive responses, it repeated the

same for more than 26 locations in the USA (BBC 2014). This would bring new customers to the

store and would help in diversification of the business. It would also help the company in

generating more revenues during evening hours, which could have otherwise missed by the
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company. As it is evident through study that the company has reached to its saturation in its

domestic market, it would be quite a prudent decision to implement these marketing strategies in

other part of the world, in this case for European nations. In Europe, the company can easily

introduce tea and fresh juice beverages in its menu and this can be seen as market penetration

strategy for this market (Reuter 2014). The biggest advantages of adding these items in its menu

can be seen as leveraging to its resources at the minimum possible input cost, as the company has

its complete set-up for coffee production and tea is a more of extension of the same product line.

Recommendations
Starbucks got its biggest growth in the international market segments. The nations such

as China, Brazil, India, Mexico and South Africa with their growing middle class population are

continuously offering substantial opportunities to open new stores and serve more of the

customers (BBC News 2014). The company has already put its feet in the market of china but

still there are lot of unused potential growth in the market. To grow significantly in these

markets, the company should win the locally and need to be relevant to the consumers to grow.

 The management teams of Starbucks should be given the freedom to operate within their

framework. They could tailor the format of the stores or introduce the local product mix,

can bring price points, tastes according to the need of that market.

 According to the European market strategy of Starbucks, the company should transfer its

core competencies and its capabilities from country to country and then slowly build

drivers of the profit in various nations as it is continuing with the aim of global expansion

in organic way (Geereddy 2013).

 Starbucks has great opportunities to grow in the market of Tea and fresh juice and should

build up these products along with their core produce i.e. coffee products. This is due to
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the reason that most of the consumers now days have taken a shift towards snacks and

beverages.

 Other than that the company should modify its menu and need to offer more healthy

products. It can offer packaged coffee packets with ice beverage products. The company

should focus on building relationships with big retailers to increase the efficiency of their

distribution channel.

 While going through the profile of company, one could clearly understand that they are

investing very little on the marketing and advertising. Therefore, it is recommended that

the Starbucks are required to make significant investment in the marketing and

advertising to the face the competition in the market.

 The company the can build up the loyalty of the consumer by offering home delivery.

They can also build up the mobile apps, as these applications are now increasing the sales

European market.

Conclusion
On the basis of above discussion and analysis, it can be stated that Starbucks have has

been a able to executive a successful business model, as it followed differentiation strategy with

regard to premium pricing, supreme customer experience, coffee beverages reputation and

developing a premium brand. In international market, the company has rather preferred to

operate through company oriented stores and joint venture over franchising model. When the

strategies of Starbucks are studied with a focus on European Nations, it can be stated that the

company has been quite impressive in expanding its business as a result of its supreme quality

and a unique customer experience. In European market, the company has a good image for its

quality and customer care, which work as strength for this organisation. On the other hand, rising
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cost of coffee beans can pose a threat to Starbucks. However, the company has been able to

introduce new products like salad and sandwiches, which have a positive impact upon overall

strategic success and competence of Starbucks.

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References
Ball, D.A. et al. 2003. International Business: The Challenge of Global Competition. Boston:
McGraw-Hill/Irwin.

BBC News. 2014. Starbucks to expand sales of alcohol across the US. [Online]. Available at
http://www.bbc.com/news/world-us-canada-26676655 [Accessed on: 23 November
2014].

BBC News. 2014. Starbucks to move European HQ to UK.[Online]. Available at

http://www.bbc.com/news/business-27046286 [Accessed on: 23 November 2014].

Bussing-Burks, M. 2009. Starbucks: Corporations that changed the world. New York: ABC-
CLIO. Pp 54-59.

Davies, G. 2003.Corporate Reputation and Competitiveness. Psychology Press. Pp 97-104.

Dudovskiy, J. 2014. Starbucks Porter’s Five Forces Analysis. [Online]. Available at:
http://research-methodology.net/starbucks-porters-five-forces-analysis/ [Accessed on: 21
November, 2014].

Dunkin Donuts. 2014. [Online]. Available at:

http://www.dunkindonuts.com/content/dunkindonuts/en/company.html [Accessed on: 24
November 2014].

Geereddy, N. 2013.Strategic Analysis of Starbucks Corporation.[Online]. Available at

http://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf
[Accessed on: 23 November 2014].

Gerhart, B. 2008. Cross Cultural Management Research. International Journal of Cross Cultural
Management, 8(3), pp. 259-274.

Gillespie, K., Jeannet, J. and Hennessey, H. 2009. Global Marketing. New York: Dreamtech
Press.

Hill, C.W.L. and Jones, G.R. 2012. Strategic Management Theory: An Integrated Approach.
Cengage Learning.

Holt, D.B., Quelch, J.A. and Taylor, E.L. 2004. How Global Brands Compete. Boston: Harvard
Business Review.

Lussier, R. N. 2014. Management Fundamentals: Concepts, Applications, & Skill Development:

Concepts, Applications, & Skill Development. SAGE Publications. Pp 81-86.

McDonald, M., and Wilson, H. 2011.Marketing Plans: How to Prepare Them, How to Use

Them (Google eBook). New York: John Wiley & Sons.
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Pahl, N. 2009.The Idea Behind the Starbucks Experience. BoD – Books on Demand
Publications. Pp 43-48.

Reuters. 2012. Starbucks focuses on Europe after U.S. turnaround. [Online]. Available at
http://www.reuters.com/article/2012/03/27/starbucks-europe-idUSL1E8ELY2020120327
[Accessed on: 23 November 2014].

Thomson, N. and Baden-Fuller, C. 2010.Basic Strategy in Context: European text and cases.
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Appendixes:
Appendix 1: Barriers to Entry Checklist

(Source: IBIS World Report)

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Appendix 2: Detailed VRIO Analysis of Starbucks

(Source: Geereddy 2013)