PRINCIPLES OF MANAGEMENT

CASE STUDY:
Starbucks − Planning
Summary
Planning is the foremost need of every business organization. It is done at all levels of
management. No matter what type or extent of planning a manager does, the important thing
is that planning takes place.

Starbucks has many stores in almost 37 countries. Starbucks long term goal is 15,000 US stores
and 30,000 stores globally and to earn a good amount of revenue of 20 to 25% from them.

Starbucks has an even “glitzier” goal which takes it beyond its coffee roots and in helping define
society’s popular culture menu.

Starbucks is considered as the most dynamic retail brand. It has been able to become a “Global
Brand Leader” by reinventing the coffee experience. Starbucks gave US the “Café life” which
didn’t existed before. Starbucks has changed our tastes, our lifestyles and penetrated in us by
becoming part of the popular culture. Starbucks covers a broad base of customers from urban
professionals to clerical assistances; Starbucks has found a way to appeal everyone despite of
its high prices.

Starbucks broad “strategy” is to grow into a global empire and any new change is done with
great care and planning. Growth strategies are made to exploit customer connection.

Starbucks sells a lot of items and has grown beyond coffee into related businesses and they do
so by developing these products with other companies. Company also launched the “Prepaid
cards” as well and it was very successful because the company has made it easy to purchase,
reload and use for the customers. The company is finding innovative ways to get the prepaid
cards into potential customers.

Company’s another successful brand extension was music. Schultz thought that the music has
always been a part of café house experience. The company launched the Hear Music Café in
Santa Monica, California.

At these stores, customers burn their own compilation CD’s. Starbucks then decides to
selectively link Star bucks brand with certain kinds of movies.

Despite many successes, Starbucks encountered some failure as well like its magazine, a
carbonated coffee beverage called Mazagran and some Italian cafes which didn’t meet the
goals it set for them.

Starbucks is still coming up with some new & innovative ideas.

Discussion Questions
Q.1) Star bucks have some pretty specific goals it wants to achieve. Given this, do you think
managers would be more likely to make rational decisions, bounded rationality decisions or
intuitive decisions? Explain.

Specific goals are goals that are clearly defined and leave no room for interpretations. There’s
no ambiguity because the objectives are clearly defined. There are three ways managers can
make decisions:

1. RATIONAL DECISIONS:

In these decisions, managers make consistent, value−maximizing choices where the problem is
clear & unambiguous. Simple, well defined goal is to be achieved. Preferences are clear,
constant and stable. Managers know all possible alternatives & consequences and the decisions
made are in the best interest of an organization.

2. BOUNDED RATIONALITY:

They make decisions rationally but are limited (bounded) by their ability to process information.
The managers satisfice, rather than maximize. That is, they accept solutions that are “good
enough”.

3. INTUTION:

It is the decision making on the basis of experience, feeling and accumulated judgments. Such
a manager doesn’t go for systematic analysis of problem or evaluation of alternatives but
instead uses his experiences & judgment to make decisions.

From my point of view, managers in Starbucks are more likely to make bounded rational
decisions instead of rational or intuition because they cannot possibly analyze all information
on all alternatives and know all outcomes. They accept decisions that are good enough. They
make decisions rational, but are limited by their ability to process their info. Any growth that
Starbucks pursues is done with great care and planning but they are being rational within the
limits.
Q.2) Give example for decisions that Starbucks managers might make under conditions of
certainty, under conditions of risk and under conditions of uncertainty?

Certainty

Under the condition of certainty, the manager can make accurate decisions because outcome
of every alternative is known to him. In this situation the Starbucks manager will be certain
about the result on acting upon every available set of alternatives. Routine decisions which are
mostly systematic can come under this category like banking decisions, inventory keeping, staff
recruitment and other daily operational decisions etc.

Risk

The most common situation which managers usually face is of risk conditions. It is where the
manager can estimate the likelihood of certain outcomes on the basis of past experience or
secondary data. In this case the managers of Starbucks have to keep their decisions flexible
because of the risk factor. Decisions such as launching of new brands and products of relatively
similar nature as previously launched products or its kind, investment in similar ventures,
expansion within the same country or city where Starbucks already operates etc. can come
under this heading.

Uncertainty

Under condition of uncertainty a manager has no certain idea about the outcomes and can’t
even make reasonable probability estimates to outcomes. In such conditions, the choice of
alternatives is influenced by the limited amount of information available to decision makers.
Investing in completely new areas and ventures and expanding into new territories whose
political and economical variables are unstable or different from places where Starbucks is
already established and launching of new and unique products can be some examples.

Q4). Discuss the types of growth strategies that Starbucks has used. Be specific.

The two main growth strategies that Starbucks has used include growth by concentration and
diversification.

Concentration Strategy

In concentration Strategy Company focus on their core business and want to expand their core
business as Starbucks did when it went global and opened thousands of stores in US and
worldwide. They focused on their primary business by expanding more outlets each year.
Diversification Strategy

Starbucks used both related and unrelated diversification. The example of related
diversification is when it entered from coffee beans to food items, flavored coffee ice cream,
ready to drink beverage. And the example for unrelated diversification is when it launched
prepaid cards, launch of music café, cobranded with yahoo, a breakfast product with Kellogg
and magazine called Joe with Time.

Q5). Evaluate the growth strategies Starbucks is using. What do you think it will take for
these strategies to be successful?

As we can clearly see Starbucks has been quite successful in implementing concentration
growth strategy as it has open 11,377 stores in 37 countries worldwide and has receive
immense success. Starbucks’s CEO Jim Donald says “all company growth is governed by
whether quality can be maintained if there is any uncertainty about quality a new strategy
won’t fly. No matter how good it might seem”. Starbucks has to maintain and ensure high
quality at all times while expanding their business in order to reap the success from its
concentration growth strategy.

In related diversification Starbuck received success on introduction of coffee flavor ice cream
with Dreyers and with Pepsi−Cola in ready to drink coffee beverages. At the same time
Starbucks failed on introduction of carbonated coffee beverage called Mazagran. Similarly in
unrelated diversification Starbucks received success on introducing prepaid card and hear
music café but it also faced failure on introduction of magazine Joe.

Starbucks in order to implement diversification growth strategy has formed strategic alliances
various companies like Pepsi−Cola and Deryers. Using the strategic alliances, has given
Starbucks a synergy effect to dominant the market. Alliances are a way of reaping the rewards
of team effort − and the gains from forming strategic alliances appear to be substantial. Rather
than take on the risk and expense that expansion into new markets can demand, one can enter
new markets by finding an appropriate alliance with a business operating in the market one
desires to enter. The goal of alliances is to minimize risk while maximizing ones leverage and
profit.
Q6.) What competitive advantage(s) do you think Starbucks has? What will it have to do to
maintain that (those) competitive advantage(s)?

Competitive advantage is what sets an organization apart—that is, its distinctive edge. That
distinctive edge can come from the organization’s core competencies by doing something that
others cannot do or doing it better than others can do it. Listed below are the competitive
advantages of Starbucks.

• Customer responsive culture (It hires service-oriented and friendly employees who are
not bound by rigid customer relation rules. In its customer-responsive culture, Starbucks
employees are clearly conscientious in pleasing their customers and are willing to go out
of their way just to satisfy the needs of their customers. (Robbins, 2005))
• Valued employees (Starbucks Corporation has a servant leadership approach, in which
the company highlights the importance of caring for employees as a way of optimizing
employee morale)
• Finest coffee (Starbucks offers many unique and satisfying coffee beverages that other
competitors do not offer on a regular basis. Starbucks also includes calorie information for these
specialty coffees on their menus in order to appeal to a variety of customers.)
• Strong brand management (Having a strong global presence is an important asset for a
company trying to increase their size, sales, and market share. It is a great way to gain more
revenues from new and existing consumers)
Starbucks can maintain the competitive advantage by being aware of five competitive forces
introduced by Michael Porter.

• Starbucks uses a large variety of channels to promote their product

from social media to TV spots and ads. It’s their mix of marketing media
that makes their brand recognizable, and it’s the consistent message that
comes across every time that makes them stand out.
• Focus on their customers and maintain good relationships with them and make sure
they do not price their products too high that they might lose customers because the
customers of Starbucks value their money and would want to have their money’s
worth – in terms of quality, cleanliness, and satisfactory customer service. It is the
company’s primary objective, therefore, to meet all of these customer requirements.
• Getting ideas from customers has allowed Starbucks to innovate and
roll out new products, improve in product experience and kept the
customers engaged
• In Starbucks, every employees are considered as “partner” The
company provides them with healthcare benefits and education
opportunities. For many employees, Starbucks is their first professional
job, where with these opportunities and benefits, the company has
created a culture where the partners are creating good habits that can
translate to other aspects of their lives.

Q10.) Describe Howard Schultz as a strategic leader.

“We aren’t in the coffee business serving people. We are in the people business serving
coffee”

Howard Schultz since he bought Starbucks back in 1987 has played the role of a Strategic
Leader for Starbucks. His passion for coffee business and his vision translates into what
Starbucks is now. Since the day he visited the Italian Espresso bar, the community life that
Schultz witnessed there continues to shape the culture of Starbucks. In his own words:

“ Being a great leader means finding the balance between celebrating success and not
embracing the status quo, identifying the path we need to go down and creating enough
confidence in our people so that they follow it. The art of leadership is making sure we don’t
allow the scale and size of company to change the methodology of how we conduct
ourselves. We have to careful not to let our values be compromised by an ambition to grow. “

Since inception Howard Schultz has led the company in a way that has allowed Starbucks to
successfully grow, meet and exceed its goals and to do so ethically and responsibly. From the
creation of company’s guiding principles to the various innovative strategic initiatives like the
launching of many products, expansion into the international markets, decision to integrate
Starbucks and the musical culture to entering into legislative lobbying for company’s future and
prioritizing employees (partners), Schultz has never veered from his belief about what
Starbucks could be and should be. For a good Strategic Leader the thing of utmost importance
is the success and wellbeing of the Company which can be only ensured through new ideas and
continuously improving leadership strategies, Schultz started grooming Orin Smith, the then
president of Starbucks coffee in U.S to succeed him and in 2001 Schultz himself decided to
move into the chairman position and Orin was promoted to CEO thus ensuring the running of
innovative and new blood in Starbucks.

Q11.) Is Starbucks “living” its mission? Explain.

The company’s mission is:

“To establish Starbucks as the premier purveyor of the finest coffee in the world while
maintaining our uncompromising principles as we grow.”

The six Guiding Principles behind the success of Starbucks are:

✓ Provide a great work environment and treat each other with respect and dignity.

✓ Embrace diversity as an essential component in the way we do business.

✓ Apply the highest standards of excellence.

✓ Develop enthusiastically satisfied customers all of the time.

✓ Contribute positively to our communities and our environment.

✓ Recognize that profitability is essential to our future success.

Starbucks culture emphasizes keeping employees motivated and content. At Starbucks

employees are not just employees but partners in business even in the literal sense as many of
them have shares in Starbucks. Employees are considered heart and soul of the business and
Howard Schultz personally visits many of Starbucks stores to ensure the satisfaction of his
employees. Starbucks workplace polices provide for equal work opportunities for all. 65% of its
total US workforce and 34% of total are women and 14% of company’s top executives are
people of Non−American background. Despite of the company’s rapid growth strategy, in the
words of CEO Jim Donald all company growth is governed by whether quality can be
maintained, if there is any uncertainty, a new strategy won’t fly, no matter how good it may
seem. Some 24% Starbucks customer visit it 16 times a month− a number that no other fast
food chain even comes close to. As a global company with revenues over $6 billion Starbucks
jointly fulfills its social responsibility by getting involved with partners to help build stronger
communities and conserve natural resources by donating to local charities and working to
protect rainforest, using recyclable paper cups etc. Hence in every possible manner we can say
Starbucks is living its mission.

Q6.) Do a brief SWOT analysis of Starbucks.

SWOT Analysis for Starbucks:

Strengths

➢ Strong brand name recognition

➢ Large retail distribution system
➢ Quality product
➢ Extensive product list
➢ Good supplier relationships
➢ Strong human resource

Weaknesses

➢ Dependence on single source of businessƒincome

➢ Prices are high relative to competition
➢ Some of the innovations may fail over time
➢ Increase expansion makes it complex to handle the operations

Opportunities

➢ Brand Extension
➢ Emerging international markets
➢ Continued domestic expansion
➢ Expansion into retail operations
➢ Strategic alliances with other manufacturers
Threats

➢ Increasing number of competitors in the growing market

➢ Consumer trends toward more healthy ways and away from caffeine
➢ Economic conditions may make consumers unwilling to pay high prices
➢ Political conditions abroad may limit expansion

What mangers can learn from this case

study?
The future you see is the future you get

Setting up goals and making plans are the first things that an organization must do because this
is what gives an organization a direction of where to go in the future. Without goals and
planning managers will have nothing to organize, lead or control. So it’s very important for
managers to first develop long term and short term goals of the organization and make
appropriate plans, as these goals and plans set the foundation for success of any organization.

Growth is a way of life and we have to grow at all times

Most of the successful companies may it be Dell, Apple or Starbucks or any other started out
small and then grew and became one of the most successful companies in the world. Starbucks
started out with just one store in Seattle and as of April 2006 it had 11,377 stores in 37
countries and it continued to grow and expand. It’s very important for managers to plan and
look for opportunities to expand their business and keep growing. Otherwise the business may
become stagnant and the competitors will move ahead and take over the market.

“l think that our fundamental belief is that for us growth is a way of life and we have to grow
at all times.” − Wukesh Ambani

Expansion drives diversity and diversity protects and strengthens

Starbucks is the number one specialty coffee retailer. It sells coffee drinks, food items, coffee
beans and coffee related accessories and equipment. Starbucks did not stop there and grew
beyond coffee into related business such as coffee flavored ice cream and ready to drink coffee
beverages. It also extended its business into music and plans to launch an online dating site and
a breakfast product. There is a famous saying “Don’t put all of your eggs in one basket!”
Diversifying business can save it from financial catastrophe. For example if something really bad
happens in the coffee industry and the coffee industry begins to see a decline, Starbucks won’t
run out of the business as it has diversified into various other businesses which are generating
revenue for them.

Alliances have become an integral part of strategic thinking

Starbucks launched the Frappuccino and DoubleShot with Pepsi−Cola, Coffee flavored ice cream
with Dreyers and plans to launch the online dating site with Yahoo and a hot breakfast product
with Kellogg.

"Companies should expand beyond their existing resources through licensing

arrangements, strategic alliances, and supplier relationships." − Business Week

One of the fastest growing trends for business today is the increasing number of strategic
alliances. Alliances are a way of reaping the rewards of team effort − and the gains from forming
strategic alliances appear to be substantial. Rather than take on the risk and expense that
expansion into new markets can demand, one can enter new markets by finding an appropriate
alliance with a business operating in the market you desire to enter. The goal of alliances is to
minimize risk while maximizing your leverage and profit.