1.0 Overview of Starbucks and its business situation
2.0 SWOT Analysis
2.1 Strengths
2.2 Weaknesses
2.3 Opportunities
2.4 Threats
3.0 Porters Competitive Forces Model
4.0 Value Chain
5.0 Recommendations
6.0 Alternate Recommendations.
1.0 Overview of Starbucks and its business situation
Starbucks founded in 1971, is the worlds leading retailer, roaster and brand of specialty
coffee with coffeehouses in North America, Europe, Middle East, Latin America and the
Pacific Rim.
Starbucks purchases and roasts high-quality whole bean coffees and sells them along with
fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections,
and coffee-related accessories and equipment, primarily through its company-operated
retail stores. On its Web site, Starbucks runs a simple, easy-to-use store that sells coffee
beans, mugs, brewing machines and not much else.
Starbucks also provide high-speed wireless Internet connections in its stores. It now offers
wireless broadband Internet service throughout North America, offering T-Mobile HotSpot
in the U.S. and Bell Hotspot in Canada.
Music was a natural evolution in Starbucks as it had been playing music in the stores for
almost 30 years. In 2004, Starbucks barista-in-chief Howard Schultz made a big push into
music business, aiming to transform the record industry. It took innovative action to
connect quality music to the Starbucks Experience by launching a revolutionary in-store
CD burning service at the Starbucks Hear Music*„¢ Coffeehouse in Santa Monica,
California. With this innovative service, Starbucks customers can create personalized CD
compilations and burn full-length albums from a vast digital library of songs. This service
is currently available in selected location in Seattle and Austin.
Starbucks executives hesitate to put their strategic overhaul into a broader context. Can
Schultz and his team carry off a transformation like this? Is it really a smart move for a
coffee company like Starbucks to re-imagine itself as a lifestyle-entertainment enterprise
and to start by serving up music? This paper addresses this problem by using SWOT
analysis, Porters five forces model and value chain analysis. Some recommendations are
provided to the management of Starbucks at the end of this paper.
2.0 SWOT Analysis
2.1 Strengths
 Global dominance
Starbucks Company is known globally by most of the people. It is a global coffee brand
built upon a reputation for fine products and services. Starbucks has almost 9000 cafes in
almost 40 countries. Its widespread presence provides it with widespread brand
recognition and a strong customer base. Starbucks has become an extremely strong force
in the global economy as more new company facilities (such as Starbucks Coffee
International in Paris and Starbucks Coffee Agronomy Company in San Jose) popping up
all over the world. In addition, Starbucks is able to open three to four stores a day on
average, causing it to become one of the most recognized and respected brands in the
world. Furthermore, Starbucks was one of the Fortune Top 100 Companies to Work For in
2005. As a respected employer that values its workforce, it is becoming more well-known.
 Highly profitable organization
Starbucks is a very profitable organization. Starbucks has reported third-quarter net
earnings of $126 million in fiscal 2005, compared to $98 million from the same period in
fiscal 2004, which is a profit climbs of nearly 30% [1]. Net revenue rose 21 percent to $1.6
billion. In the United States which is the companys biggest market, revenue increased 20
percent to $219 million in fiscal 2005 due to new store openings and price increases that
helped push up same-store sales 7 percent. [2] This significant rise in revenues and profits
provides the company with a strong financial base and enables it to undertake new
business ventures. In fiscal 2006, Starbucks forecast earnings of $1.44 per share to $1.47
per share, excluding any impact from expensing stock options [2]. As a highly profitable
organization, Starbucks asset base is so strong that they can do things others cannot do.
 Well-developed business strategy
Starbucks is good at taking advantage of opportunities to develop innovative business
strategy. In the effort of bringing in new customers while retaining the existing customers,
Starbucks makes use of an extensive research team to come our with creative and
innovative business strategy. For instance, in spring 2004, Starbucks took innovative
action to further connect quality music to the Starbucks Experience by launching a
revolutionary in-store CD burning service at the Starbucks Hear Music*„¢ Coffeehouse in
Santa Monica, California. This innovative service enables Starbucks customers to sift
through thousands of songs stored in a computer database to create their very own
personalized, mixed-CD masterpiece. Besides, Starbucks through an agreement with XM
Satellite Radio, the 24-Hour Hear Music*„¢ XM 75 channel, featuring music
programming from Hear Music, debuted to more than 2.1 million XM Radio subscribers in
fall 2004.
 Strong customer loyalty
Starbucks has many years of experience in its business. Such experience is defined by
what they have characterized for a long time as Starbucks really becoming this “Third
Place” between home and work. Because of this experience, customers develop trust
towards Starbucks, leading to strong customer loyalty. In addition, Starbucks has close
relationships with their customers. They talk to their customers all the time in nature of
focus groups or exit surveys. Since they own and operate their own stores, it facilitates
intimate conversation with their customers without any formality. As a result, customers
would have good feelings and impression towards Starbucks, leads to increase in customer
loyalty.
 High Visibility Locations to attract customers
Starbucks retail stores are typically located in high-traffic, high-visibility locations. Its
stores are located in a variety of settings, including airports, downtown and suburban retail
centres, office buildings and university campuses. While the company selectively locates
stores in suburban malls, it focuses on stores that have convenient access for pedestrians
and drivers.
 Valued and motivated employees *€“ low employee turnover
Starbucks business model uses part time workers or partners. They offer fringe benefits to
all of their employees, including medical insurance and stock options. Employees also get
perks like a free bag of coffee every month. Starbucks also offers opportunities for
advancement with in the organization. This experience has illustrated the importance of
rewarding employees as well as how best to attract and retain high quality workers. The
entry level employee has the most contact with customers and can have the greatest effect
on a companys reputation.
2.2 Weaknesses
 Expensive price
Comparing to the price of a regular cup of coffee sold by other local coffeehouses,
Starbucks coffee is considerably more expensive. This may not be affordable by people
with lower income. As a result, the market for Starbucks will become smaller, focusing on
people who can afford the price of the coffee. In Starbucks, besides paying for the
wonderful cup of coffee, a customer is also paying for the experience Starbucks owns. This
leads to Starbucks charging higher price than others. When there comes one day whereby
other local coffeehouse can produce a coffee with the same quality as Starbucks, but with a
cheaper price being charged, the existing Starbucks customer will tend to switch to the
particular local coffeehouse, creating customer defection problems to Starbucks.
 Reliance on United States market Starbucks, headquartered in Seattle, has a strong
presence in the United States of America with more than three quarters of their cafes
located in the home market. In this context, the business risk is higher as the company
entire business performance would be significantly affected should there be any
unpredictable situation occurs, such as bad economic conditions. In addition, there is an
enthusiasm of health consciousness growing in the United States, whereby people are
cutting down on caffeine. This switching of lifestyle would affect Starbucks business as
less people would purchase coffee from Starbucks. Therefore, it is good for Starbucks to
look for a portfolio of countries, in order to spread business risk.
 Clustering of too many shops in a small area
With the continued growth of the coffee market, Starbucks has looked to expand its
business, including those areas where it has an established presence. As a result, there
maybe several Starbucks stores being established in a particular area, which is more than
enough. This is known as clustering. The consequence is that the Starbucks stores which
are close to each other may take business away from each other, resulting in unfavorable
business performance in both stores.
 Changing market
In the coffee industry, the price of inputs may affect the price of a cup of coffee. At
Starbucks, inputs to a cup of coffee may include the coffee beans, sugar and dairy
products. Unpreventable aspects such as bad weather would affect the plantation of coffee,
which leads to decrease in the supply of coffee beans. As a result, there is an increase in
the price of a cup of coffee at Starbucks. Similarly, if the prices of other inputs like sugar
and dairy products increase, the cost of producing a cup of coffee also increase, this leads
to an increase in the coffee price. An increase in the price of coffee may affect the sales of
coffee in Starbucks.
 Reliance on beverage innovation
An important long-term risk to the companys stock is a lower valuation caused by a
slowdown in US sale store growth. Starbucks store sales growth has been largely driven by
