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CASE 2
Starbucks Corporation, May 2015
TEACHING NOTE
■ SYNOPSIS ■
Howard Schultz’s leadership of Starbucks’ transformation from a single Seattle coffee shop to a global chain of
over 20,000 outlets is a tale of remarkable commercial achievement that has become part of American
The case requires students to identify Starbucks’ strategy and to explain why this strategy has achieved such
remarkable success. In diagnosing the sources of Starbucks’ outstanding performance, students are forced to
address the extent to which the strategy fits both with the business environment in which Starbucks operates and
■ TEACHING OBJECTIVES ■
The case is intended as an introductory case in the identification and analysis of firm strategy. The
learning outcomes are:
Expertise in the identification and articulation of a company’s strategy
Expertise in the appraisal of a firm’s strategy in terms of:
o Assessment of the success of the strategy in terms of financial performance
■ POSITION IN THE COURSE ■
Partly because of the familiarity of most students with Starbucks, and the fact that this is a relatively simple
■ ASSIGNMENT QUESTIONS ■
1. What is Starbucks’ strategy?
2. Assess Starbucks’ strategy in relation to:
3. Does Starbucks operate in the interests of its shareholders or its stakeholders?
4. What threats does Starbucks face; how should it counter these threats?
■ READING ■
■ CASE DISCUSSION AND ANALYSIS ■
I organize class discussion around the above assignment questions:
What is Starbucks’ strategy?
My experience with students at all levels (including executives) is that they often struggle to articulate the
strategy being pursued by companies that they are familiar with (including their own!). Using a company’s own
descriptions of its strategy risks vagueness and incompleteness. For example, the case identifies:
Starbucks’ mission: “to inspire and nurture the human spirit—one person, one cup and one
neighborhood at a time”
In terms of Starbucks’ positioning
Where is Starbucks competing? (I.e. What business is it in? What are its product offerings? In
which geographical markets is it located?)
How is it competing?
The key, however, is to recognize how the various elements of Starbucks’ strategy fit together into a coherent
whole. This is where the concept of the “Starbucks Experience” plays a central role.
The performance slump of 2007 to 2009 offers some insights into the importance of this Starbucks Experience.
Schultz identified several ways in which the Starbucks Experience had been undermined: the central role of the
coffee (including its aroma) masked by that of different food products, the de-skilling of baristas by the use of
automatic coffee machines, the compromising of core values in the quest for rapid growth.
Schultz’s recent initiatives, however, and his “Blueprint for Profitable Growth” offer some clear indications of
Starbucks’ strategy for the future. Starbucks’ growth may be “disciplined”—but it’s also highly ambitious in
relation to:
International growth: a heavy focus on expansion in Asia—especially China
Assess Starbucks’ strategy in relation to: (a) Starbucks’ financial performance
To assess Starbucks’ strategy, it is useful to establish an understanding of the company’s overall performance.
Starting with the financial numbers also has the benefit of refocusing students’ attention away from “big picture”
notions of strategy down to the nitty-gritty of profit metrics.
Useful indicators of the financial health of Starbucks include the following:
(from Table 1)
2014
2013
2012
2011
2010
2009
2008
2007
Sales growth (%)
10.7
12.0
13.7
9.2
9.6
(5.9)
10.3
20.9
Over the past six years, Starbucks has combined strong sales growth with high profitability: its ROE during
2007-14 places the company among the top quartile of the Fortune 500 companies. Interestingly, even when
Starbucks was experiencing its “crisis” during 2008-9, its ROE and operating margins were still at levels which
many companies would regard as highly satisfactory! (For instance: the 13.2% ROE in 2008 was probably close
to double Starbucks’ cost of equity capital.) Following Schultz’s return, profitability exceeded the levels achieved
before the financial crisis—remarkable in a world with excessive debt and subdued consumer spending.
Additional observations:
To explore the basis of Starbucks’ stellar performance, let us look more closely at its strategy.
Assess Starbucks’ strategy in relation to: (b) The overall coherence of Starbucks’ strategy in
terms of its fit with the company’s external and internal environments and the internal
consistency of the strategy
Fit with the external business environment
Identifying an underserved market. Despite the US being a large and mature market for coffee,
Schultz’s insight was to see a potential market opportunity characterized, first, by quality
Fit with Starbucks’ resources and capabilities
In the three decades since Schultz bought out the original Starbucks company, Starbucks has established a closely
integrated set of capabilities that encompass the sourcing of coffee beans, the design and formulation of beverage
Internal coherence of the Starbucks strategy
The key to the effectiveness of the Starbucks strategy is the way in which the multiple components of the strategy
fit together into a consistent differentiation strategy. The “Starbucks Experience” is a multifaceted differentiation
strategy that combines the physical products—coffee and other drinks and food items; the physical environment
The importance of this coherence is seen in the evidence of declining financial performance between 2007 and
2009. Schultz’s diagnosis of this period of “crisis” is that Starbucks’ eagerness to expand resulted in
compromising some key elements of the “Experience.” For example: the masking of coffee aroma by breakfast
foods, the de-skilling of baristas with the introduction of automated coffee machines, and the weakening of
relationships with customers.
Does Starbucks operate in the interests of its shareholders or its stakeholders?
The typical response I receive from students is that Starbucks is a stakeholder-focused company. When I ask
“How do you know?”, the answers are typically:
The company says it is—Schultz claims to have created “a different kind of global company” that
“makes profit but also…demonstrates a social conscience”
The company takes account of the interests of its stakeholders in ways that other companies in its
True, McDonalds and Domino’s Pizza are more parsimonious in their offer of benefits to stakeholders. However,
is this the result of different objectives but because the competitive positioning is different? Starbucks charges a
price premium of about 60% over the price of McDonalds’ coffee. The customer is paying for the “Starbucks
Experience”—having the satisfaction of drinking coffee produced by a happy, prosperous grower, being served
by employees who are not worrying about the costs of their next doctor’s visit, and with the pleasure of knowing
that Starbucks is active in protecting the environment. A key question is whether Starbucks would increase its
What threats does Starbucks face; how should it counter these threats?
1. Is the US market oversaturated and over- competitive?
Market saturation. Starbucks had about 12,000 US stores (both owned and licensed) at the beginning of
2015: is this excessive—especially given the growing number of outlets serving quality coffee, both
independents and chains?
Competition. Starbucks pioneered the mass marketing of gourmet coffee. Yet making good-tasting
coffee is not a scarce capability. Not only have there been many Starbucks imitators, but also other
catering chains have added gourmet coffee to their menus. Of these, the case mentions Dunkin’ Donuts
2. Starbucks’ product diversification. Starbucks’ core business is supplying coffee through its US retail
stores. However, as it has extended its brand to a broad diversity of products, its Consumer Products Group
3. Overseas expansion. Schultz has established ambitious goals for overseas expansion (especially for China,
and Starbucks has also entered India). Despite Starbucks being a very American phenomenon, its overseas
4. Compromising the “Starbucks Experience”. For all Schultz’s emphasis on returning to Starbucks’ core
values and principles, some aspects of Starbucks’ strategy sit uneasily with the “Starbucks Experience” as it
5. How relevant is the “Starbucks Experience”? Lack of fidelity to the Starbucks’ concept raises the issue
of whether the appeal of the “Starbucks Experience” exists more in the mind of Howard Schultz than in the
experience of customers. Starbucks provides a highly standardized, systematized retail experience where a
large proportion of sales are take-away. Are the Starbucks ambiance, its values and principles, its corporate
■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
1. Identifying strategy
The approach outlined in Chapter 1 of Contemporary Strategy Analysis offers a systematic and comprehensive
approach to identifying a firm’s strategy. It, first, distinguishes between strategy as current positioning and
to synthesize these various elements in a way that reveals the logic (what Prahalad and Bettis describe as
2. Assessing strategy
[A] Financial performance. A starting point for evaluating a firm’s strategy is an assessment of its overall
performance. Growth and profitability are the primary indicators of financial performance. For evaluating
3. Distinguishing between the pursuit of shareholder and stakeholder goals
Current convention is for companies to proclaim that they operate in the interests of all stakeholders. But
4. Identifying challenges for the future:
Firm’s strategy may fit with its external and internal environments currently—but what about the future? To
identify challenges and formulate responses to them, the key questions are:
--How can the strategy change in order to adapt to emerging circumstances?
