Starbucks competitive advantage

I. COFFEE INDUSTRY 1. INTRODUCE COFFEE INDUSTRY Coffee is an important commodity and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day. Over 90% of coffee production takes place in developing countries, while consumption happens mainly in the industrialized economies. Coffee industry more and more strongly develop with:  After crude oil, coffee is the most sought commodity in the world: Coffee is worth over $100 billion worldwide. That puts it ahead of commodities like natural gas, gold, brent oil, sugar and corn.  Coffee farms are the economic livelihood of over 25 million people: Coffee is grown in over 50 countries in Asia, Africa, South America, Central America and the Caribbean. And 67 percent of the world's coffee is grown in the Americas alone.  Coffee shops are the fastest growing niche in the restaurant business. If it seems like there are coffee shops popping up everywhere around you, you might be right — coffee shops have a seven percent annual growth rate. Starbucks, by far America's coffee giant, is the third largest restaurant chain in the U.S.

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Picture 1 This picture 1 is a U.S. coffee imports continued to rise which is the annual amount of money from 2002 is 1.5billion to 2012 is 7.2 billion and from 2002 to 2012 coffee was a total increase of 16.7% CAGR. The coffee industry has a structure or characteristics that are difficult to define or to set a boundary from which it can be differentiated with other industries (Larson 2008). Although it can be easily recognized from a single commodity, which is the coffee bean, the coffee industry’s characteristics are unique in that its scope is much larger than what it appears to be. The coffee industry can be divided into two categories, the production based segment and the retail-based segment.  The production-based segment was confined to those companies and individuals what plant and grow coffee beans.

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 The retail-based segment is confined to the specialty coffee sector, wherein the coffee beans are sold to consumers directly, either in the coffeehouses or in retails stores, department stores and supermarkets. There are Kinds of The Retail Market for Coffee Industry Instant Coffee 

Combo packing

Ready to drink coffee 

Canned Coffee

coffee 

Coffee shops 

Take coffee-based coffee shop

Triple packing coffee

Table 1 This table 1 is the coffee industry includes instant coffee, ready to drink coffee and coffee shops in three kinds at present.  First kind: refers to instant coffee combo or triple package of coffee powder, then add hot water to drink brew may immediately.  Second kind: ready to drink coffee general vacuum canned or foil packets of flavored drinks, which means that the drink.  Third kind: coffee shop is based on the major commodities for profit coffee shops. For our report, we will focus on retail-based segment, and go into detail at Starbucks- one of largest restaurant chain in the U.S, analysis its performance and its competition in this industry.

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2. COMPETITION IN COFFEE INDUSTRY Over the past several years, coffee chains have become more and more popular among customers who enjoy their coffee to go. This out-of-home retail market was dominated by the companies Starbucks and Dunkin Brands Inc. with a combined market share of almost 50 percent in 2011. The specialty coffee industry competition is, however, not price-based unlike the other industries. In this particular industry, consumption of coffee is not dependent on the price of the product or commodity but on the differentiation between each product and several value adding variables such as the quality of customer services, brand, brand recognition or image of the company.

3. WHY DO WE CHOOSE STARBUCKS? Firstly, Starbucks Coffee Company is the leading retailer, roaster and brand of specialty coffee in the world, with more than 6,000 retail locations in North America, Latin America, Europe, the Middle East and the Pacific Rim. Starbucks is everywhere. Starbucks has more than 16,000 coffee shops in more than 35 countries. Secondly, coffee industry is special industry which is not sensitive to price adjustments or movements, just depend on high-quality, the way serve coffee and image the companies bring to the customer. And Starbucks become more and more successful in coffee industry thanks to doing well all things above. Finally, the reasons why we choose Starbucks are Starbucks shows us they are one of the best global corporation and in coffee industry. Starbucks is potential case of successful in business. We can research about value chain, supply chain, logistic and etc. It is the symbol of successful process. Starbucks is very good topic to improve analysis skill and to compete with global rival or the local around the world. For all these reasons, we want to choose Starbucks. 4

II. GENERAL INFORMATION ABOUT STARBUCKS 1. INTRODUCTION STARBUCKS In 1971 Starbucks began when three friends: English teacher Jerry Baldwin, history teacher Zev Siegel and a writer Gordon Bowker opened a store called Starbucks coffee, Tea and Spice in the touristy Pikes place market in Seattle with the future aimed of providing coffee to a number of restaurants and surrounding bars and hopes of creating a « third place » between home and work. Customers are able to socialize, read, study or enjoy music while drinking coffee. Starbucks strategically positions each store with hopes of matching the specific location, helping to create a unique atmosphere. The current international situation for Starbucks seems to be an emerging part of their business and the reorganization of this is proved by their aim to become a leading global company through making a difference in people’s lives all around the word. This goal is quite close to being achieved as proved the Starbucks current locations in international markets and the successfulness of these ventures. The current countries in which Starbucks are located in are: Australia, Bahrain, Canada, Hong Kong, Japan, Kuwait, Lebanon, Malaysia, New Zealand, Oman, France, and Taiwan.... But we will focus on USA. Starbuck’s Strategy for expanding its retail business is to increase its market share in existing markets and to open stores in new markets where the opportunity exists to become the leading specialty coffee retailer. In support of this strategy, the company opened 647 new stores during the year 2001. At the end of year, Starbucks had 2,971 company-operated stores.

2. MARKETING ACTIVITIES Marketing is usually defined as the organization wide generation, dissemination and responsiveness to market intelligence. This definition at once changes the dominant paradigm that has defined marketing for decades. Starbucks is the leading specialty coffee retailer in USA, with over 5000 locations in 22 international markets. Starbucks positions their products on a relatively simple plane. They focus on quality and experience rather than price. A comparison of specialty drinks with its competitor reveals very minor differences. Starbucks’s image is one of the key elements in their success. The company has realized that people don’t only come for the coffee: they come for the atmosphere. People socialize, read, study, or just enjoy the music while drinking their coffee. 5

Knowing this, Coffee shops try to make their stores unique in some way or another that will create an appealing atmosphere. Starbucks has less of a distinct setting for their location: instead, they focus on having plenty of comfortable seating so that people feel welcome to stay longer than they might have planned. Starbucks also positions each store individually according to the specific location it is in. This flexibility has attributed to the great success of the company in the past decade. Another important part of Starbucks’s positioning is that they are environmentally friendly. While other retailers position themselves in similar ways, no one focuses to the extent that Starbucks has. Advertising marketing which used by Starbucks has also been a key success factor. Starbucks has found more success advertising on a local level rather than to the nation whole. The company advertises a lot through print mediums as Starbucks’s target market tends to be educated people who do more reading than the average person.  Brand marketing The Starbucks marketing strategy has always focused on « word of mouth » advertising and letting the high quality of their products and services speak for themselves. For years, this has been uniquely Starbucks, and it has played a huge part in making Starbucks Coffe Company a success. As a result, a significant portion of Starbucks marketing efforts are locally driven and focus on connecting with the community through sponsorship, events and community giving programs.

3. THE USE OF IT IN STARBUCKS While well-known for its caffeinated concoctions, Starbucks has also been recognized for its innovative use of technology: Starbucks has begun to make technology a key part of the user experience to improve on brand loyalty, introduce new products to its consumers, all with the final objective of improving throughput at its stores. To do this, the company is present on:  Mobile applications A key part of the company's effort has been the move to turn its loyalty cards into mobile payment applications. In 2012, consumers have spent $500 million using mobile wallet apps with "most" of that spending being done on the Starbucks app. The company has reported that the mobile app is now used to pay for 10% of all consumer visits in the US. Total money loaded on to the app (through credit card, or PayPal with 6

an automatic reload function) is up more than 100% year over year. So, Starbucks bet on new technology to make the payments as simple by touching a phone on a scanner, hoping to encourage customers to make more impulse purchases while automatically offering coupons or rewards so they buy more. In fact, payment applications such as smartphone apps increase customer spending as the consumers often fail to equate virtual money on a smartphone to real money.  Social media : In June 2010, Starbucks was named the most popular social media brand. Starbucks social media space includes technology like its website and social media platforms, including Facebook, Twitter and Foursquare. According to a February 2010 article in "AdAge," Starbucks was able to use social technology to its advantage and bring customers back to its stores by giving them an online space to submit ideas and provide feedback on the brand and their experience with it. With 35 million members in the U.S. Starbuck community on Facebook, the brand prides itself on being one of the leading brands in this channel. Initially, Starbuck invests networks by "Starbucks Card Facebook" application to buy a Starbucks coffee visual (chocolate, coffee, milkshake) via Facebook Credits and offer his friends by posting it on their wall. Thanks to this fun way, Starbucks 'visibility greatly increases.

On October 28, Starbucks launches gift cards via Twitter. This program, called "twitted coffee" allows to purchase a gift card of $ 5 for a friend on Twitter. To encourage consumers to try the program, the first 100,000 person that link their 7

accounts with their Visa card will receive a $ 5 gift. On the eve of Christmas, would be it the beginning of a "new" practice in e-commerce?

Starbucks uses also Foursquare to increase its visibility and "making the buzz." Indeed, Starbucks organizes raffles among people that use to "check in" at Starbucks shop via Foursquare. Winners are rewarded with a $ 40 gift card. Starbucks plans to use Foursquare data less for business intelligence and, more for getting feedback about what customers like and do not like.

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 Starbucks Digital Network : Starbucks can serve as makeshift office and meeting place thanks to the free, unlimited Wi-Fi available in its stores. The digital network is a partnership of Starbucks and Yahoo, and delivers premium content from sites like "USA Today," "Wall Street Journal," ESPN, and more to laptops, tablets and smartphones. When customers connect to Starbucks' free Wi-Fi, they're greeted with the landing page for the digital network that allows to check in with Foursquare, log in to their Starbucks card and more.

4.

IDENTIFY

THE

RESOURCES,

CAPABILITIES

AND

DISTINCTIVE

COMPETENCIES OF STARBUCKS. The resource and capabilities of Starbucks can be identify and separate to tangible and intangible resource.  Tangible resources Three kinds of tangible resource can be analysis as below: a. Manpower: Base on the rapidly expanded since 1990s until now, Starbucks was accumulated thousands of well-trained employee. From level of direct counter service staff, baristas until managerial level, they are a very strong resource team owned by Starbucks. Especially their existing CEO Howard Schultz, he is one of the most successful CEO in the worldwide, was create a new coffeehouse format and implement for whole Starbucks retail store, and finally got a astounding performance and rapidly expanding for Starbucks retail store in United States and worldwide. b. Retail Store: Since 1990s, Starbucks was rapidly expanding and built up an enormous amount of retail store in the worldwide. In the same time, based on their sophisticated location strategy, many premium locations was occupied by their retail stores. The location strategic for retail store become their another main asset and resource to continue expanding, or at least maintain a leading position in coffeehouse market.

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c. Financial resources Net working capital is a measure used to help determine a company’s liquidity, which is the company’s ability to pay off liabilities when they are due. The net working capital can be found simply by finding the difference between the company’s current assets and current liabilities (Accounting-Information). For Starbucks, their current assets include everything from cash, accounts receivable, inventories and more. Starbucks’ liabilities are separated into the two common categories of current liabilities and long-term liabilities. These liabilities include accounts payable, accrued taxes, insurance reserves and more. Year

Current assets

Current

Networking

Number

liabilities

capital

increase

of

working capital 2010

$2.76

$1.78

$0.98

2011

$3.8

$2.06

$1.74

$0.76

2012

$4.2

$2.21

$1.99

$0.25

Over the course of one year from 2010 to 2011, Starbucks increased its’ working capital $760 million. And from 2011 to 2012, Starbucks also increased its’ working capital $250 million. Two of the main goals of effective management of working capital are maintaining a balance of inventories, accounts receivable, cash, and other forms of revenue to provide profitability and making sure that a company can remain operational after paying off current assets. These are the two goals that Starbucks most likely focuses on when it comes to the effective management of working capital. If Starbucks did not vigilantly keep track of its product inventory, as well as the individual store inventory, it could suffer in delivering its product to its customer, which is the base of its 10

business. This inventory directly relates to accounts receivable and cash flow, which Starbucks needs to closely monitor in order to ensure that they are hitting certain benchmark numbers they need in order to remain profitable and operational. It seems as though Starbucks has been working towards achieving these goals. Starbucks seems to understand the importance of effectively managing its net working capital, which is why they employ over 500 employees on their finance team, which includes everything from accounting, auditing, corporate development and more (Starbucks Corporation). Also, seeing the noticeable improvement in net working capital over the course of one year, it is apparent that Starbucks is concerned with maintaining its profitability and ability to pay its liabilities. Also, having working capital in excess of $977 million demonstrates that Starbucks is very liquid and maintains healthy balance sheets along with accounting measures.  Intangible resource For intangible resource and capabilities portion, the continuous growth for brand equity is Starbucks’s one of the most valuable resource and capabilities while facing many imitators appear in the coffeehouse market. The unique Starbucks Experience concept, with an innovative product display and cozy atmosphere, free Wi-Fi service provided , seasonal themes, promotions etc. makes Starbucks a strong brand that allows for brand recognition and consumer retention. Base on the world’s most popular coffee brands, Starbucks also will be deserve many privilege during new market exploiting time, especially countries outside the United States. Lastly but not at least, Starbucks had important intangible that made Starbucks become stronger and stronger is relationship between coffee suppliers, partnerships and customers. Starbucks also approached loyalty program to get customers to visit more often and spend more on revamped sandwiches and other food.

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 Distinctive competencies For distinctive competencies of Starbucks, market entry and key success was in providing high-end quality coffee drinks at affordable prices. This clever blend of unique quality drinks with a great ambiance and an excellent service made their pricing reasonable and fair. III. PERFORMANCE ANALYSIS OF STARBUCKS 1. 3C’S ANALYSIS a. Company Starbucks is the largest coffeehouse company in the world. There are more than 13,100 Starbucks store in the word, spanning 40 countries. The stores all sell drip coffee, espresso drinks, tea, blended drinks, coffee mugs and other accessories. Interestingly enough, the prices found at Starbucks coffee are significantly higher than the market average. The higher prices are a direct result of their ingenious marketing strategy. Starbucks Corporation engages in the purchase, roasting and sale of whole bean coffees worldwide. It offers brewed coffees, Italian-style espresso beverage, cold blended beverage, various complementary food items and a selection of premium teas, as well as beverage-related accessories and equipment, through its retail stores. In addition, Starbucks Corporation produces and sells ready to drink beverage, which include bottled beverages, espresso drinks, chilled cup coffees and ice creams. Starbucks has been a target of protests on issues such as fair trade policies, labor relations, environmental impact, political views and anti-competitive practices. Starbucks can be found in many popular grocery chains in the USA as in many airports big shopping mall metro station and street. The member of the company’s board of director are : Howard Schultz, Jim Donald, Barbara Bass, Howard Beahar, Bill Bradley, Melody Hobson, Olden Lee, James Shennan, Javier Terul, Myron Ullman and Craig Weatherup.

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b. Main competitors Starbucks main competitors are quick-service restaurants and specialty coffee shops. There are an abundant amount of competitors in the specialty coffee beverage industry. The company believes that its customers choose among retailers primarily on the basis of product service, service, price, and convenience. Starbucks, in recent times, has experienced drastic direct competition from large US competitors from quickservice restaurants. These restaurants have significantly greater marketing and operating resources than they do. Starbucks is also faced with well-established competitors in the International markets with increased competition in the U.S. ready-to-drink coffee beverage market. While there are many competitors in the specialty eateries industry, Dunkin Donuts, McDonalds, and Panera Bread are the main players in the industry. Dunkin Donuts

The first Dunkin Donuts was opened in 1950 in Quincy, Massachusetts by William Rosenberg. Today, there are over 13,000 Dunkin Donuts located in 50 countries worldwide with sales of $6.4 billion in 2006. Dunkin’s headquarters is located in Canton, Massachusetts. Dunkin Donuts is known for their doughnuts and coffee. Over the years, Dunkin has introduced new products such as bagels, muffins, breakfast sandwiches. In order to compete with the lunch crowd, Dunkin expanded their product menu to include pizzas and sandwiches. In order to compete with the specialty coffeehouses, Dunkin expanded their coffee offerings to include flavored coffees, lattes, coolattas, flavored hot chocolate and teas. McDonalds

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The first McDonald’s restaurant was opened in 1940 in San Bernardino, California by two brothers named Dick and Mac McDonald. As of December 31, 2007, there were 31,377 McDonald's restaurants in 118 countries serving 54 million people each day. McDonald’s is the world’s largest fast-food chain restaurant. While Starbucks is the leader in the specialty coffeehouse market, McDonalds is becoming an emerging competitor when it first upgraded its coffee in 2006. McDonald’s coffee sales increased 15% in 2006, and plans to grow coffee sales with the plan to install coffee bars in all 14,000 U.S. locations. The McDonald's new specialty drinks, which are now in about half of the company's nearly 14,000 US stores, already, have a following among some former Starbucks customers. McDonalds has a larger customer demographic than Starbucks. Starbucks coffee is considered to be a luxury for the affluent, while McDonald’s caters to families with children, teenagers, adults, and senior citizens with it well-established menu offerings. Like Starbucks, McDonalds has a strong brand recognition and loyal customer base. The advantage McDonald’s has over Starbucks is that is has a considerably larger volume of traffic compared to Starbucks. While customers are stopping for a quick breakfast, lunch or dinner, they may get a specialty coffee to go too. Panera Bread

Panera Bread was founded by Louis Kane and Ron Shaich in 1981. It was originally name Au Bon Pain Co., Inc., and later changed its name to Panera Bread Company in 1998. Today, there are more than 1160 Panera Bread bakery-cafes in 40 states in the U.S and the headquarters is located in Richmond Heights, Missouri. Panera’s Mission Statement, “A loaf of bread in every arm.” Their strategy is to compete successfully in the breakfast, lunch, evening and take-out dinner restaurant segments. Panera’s product line consists of baked goods, artisan and specialty breads, custom roasted coffee and espresso drinks, soups, salads, made-to-order sandwiches 14

and gourmet pizzas. In order to compete with the breakfast competitors, Panera will be offering breakfast sandwiches in addition to bagels and muffins in March 2008. Panera’s ambiance of casual dining is the closest competitor to Starbucks. Like Starbucks and Caribou Coffee, Panera Bread offers free WiFi to its customers. Panera’s pricing is designed so customers perceived good value with high quality food at reasonable prices which will hopefully encourage repeat customers. Starbucks

Dunkin Donuts

Mc Donald’s

Panera Bread

Origin

in 1971 in Seattle, Washington

In 1950 in Quincy, Massachusetts

In 1940 in San Bernardino, California

In 1981

Number of stores

Over 12500

Over 13000

Over 31,000

Over 1160

Product

Coffee, Pastries, Muffins, Cakes, Sandwiches, Crisps, Cookies, Biscotti, Bars

Coffee

Coffee

bagels, muffins, breakfast sandwiches

Simple meal

coffee and espresso drinks, soups, salads, made-to-order sandwiches and gourmet pizzas

Price

4USD

1USD

1.89USD

3.05USD

Consumers ages

20 up age

All range

All range

20 up age

Distribution area

Worldwide

Worldwide

Worldwide

Worldwide

Main Product

coffee

Donuts

Fast food

bread

Mark

Ice cream

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c. Consumers needs Starbucks holds around 33 percent of the market share for coffee in the U.S. It sells almost as much coffee as do fast food and convenience stores combined, even though it the bulk of its consumers are in cities or upscale suburban areas. Starbucks has been able to gain such a large share of the market by catering specifically to a welldefined target audience. Starbucks’ primary target market is men and women aged 25 to 40. They account for almost half (49 %) of its total business. Starbucks’ appeal to this consumer age group through hip, contemporary design that is consistent in its advertising and decor, and working to keep its products current as status symbols. Customers tend to be urbanites with relatively high income, professional careers and a focus on social welfare. This target audience grows at a rate of 3 percent annually.

Starbucks creates a third place for customer. Not home, not work, but someplace that customers can relax and talk. We use Marketing Strategy (4 P’s) to analysis Customer needs. Product: While coffee remains the core product and focus of Starbucks, the introduction of various new products has expanded the Starbucks product portfolio. Also, as part of the marketing campaign, Starbucks is making a push for its store employees to provide customer with exceptional customer service. Now, in Starbucks shop, they also introduce many kinds such as tea, hot and cold beverage or food. That will make customers have many choices. Pricing: Starbucks has always offered a range of products that vary in price. With the economy slowing starting to gain momentum, Starbucks’ main objective must be to keep prices on par with competitors. In addition, a market opportunity presented itself 16

during the recession – at home coffee drinkers. In order to capitalize on this market segment, Starbucks must price there at home coffee selections closely to competitors such as Dunkin’ Donuts, while also balancing economic factors such as distribution costs, fair-market costs, and more. Pricing maybe is the weakness of them. But still make customers feel their standard will not be lost, the pride still have. Holding Starbucks cups make you feel success. Promotion: Starbucks will continue to adopt new promotional outlets in order to reach consumers. An active participation on Web 2.0 platforms, televisions advertisements, and email marketing will all be utilized to promote products and initiatives. Initiating contests for customers to participate in will be a main focus. These can range from coffee bag design contests, to social media contests integrating platforms such as Twitter. Make customers feel more comfortable convenience when they come to Starbucks shop. Placement: The traditional methods of distribution will continue to operate the placement of Starbucks products to consumers. One area which shall be investigated further is how to better penetrate alternate retail outlets such as grocery stores, in order to attract the market of at home coffee drinkers. Also, other potential sites for warehouses shall be scouted and considered in order to anticipate for potential growth. And since 1987, Starbucks has opened daily 2 stores. 2.

SUPPLY CHAIN OF STARBUCKS

A. Their Activity 1. Local communities:  Africa: Rwanda, Tanzania, Zambia, Ethiopia, Kenya and Burundi. 17

 Latin America: Guatemala, Costa Rica, Mexico, El Salvador, Honduras, Nicaragua, Panama, Peru, Bolivia and Brazil.  Asia: China, Papua New Guinea, Indonesia and East Timor. 2. Suppliers: Through Farmer Support Center and Planned Farmer Support Center Rule 1. Starbucks is required to have the submitted material tested for contamination before it is disposed of, after receiving shipping containers of coffee beans at the roasting plant with the customer seals in place. Rule 2. Starbucks implemented GPS tracking devices on some coffee shipment to monitor their progress from farm regions to shipping ports, ensuring that coffee has not been stolen or tampered with en route. Rule 3. Starbucks implements rigorous quality control procedures, the coffee is inspected at various points, sampled at several points, and tested numerous times to ensure that what arrives in stores is the same coffee that buyers found at the point of origin. Rule 4. Starbucks coffee buyers have to travel the world in search of the best coffees available, even in regions where economic or political instability create hazards for travelers. 3.

Transportation: Using oceans containers to ship green beans to USA and

Europe. 4.

Organization:

Step 1: Roast the green beans 

The green coffee beans will be roasted and packaged.

Step 2: Move to Distribution centers (DCs). 

Finished products will be trucked to the regional distribution center (DCs).



After the coffee is roasted, it will be placed in the warehouse until

required by the production schedule. The coffee is sampled, roasted and cupped to

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make sure it is the same coffee that was purchased. 10% of the bags will be sampled and compared to the flavor profile that was established from the point of origin. 

Starbucks runs 5 DCs in USA and two more DCs in Europe



Starbucks operated with third-party logistics companies (3PLs): 2 in Europe

and 2 in Asia. 

Depending on geography, Starbucks use central distribution centers (CDCs)



Starbucks has 33 CDCs in USA, 7 in Asia/ Pacific region, 5 in Canada and 3

in Europe 

CDCs carry: dairy products, baked goods and paper items like cups and

napkins. 5.

Transportation Out: They create a global map to deliver the coffee and

corporate with their 3PLs 6.

Recycling Facilities: Starbucks coffee cups are reusable. It helps Starbucks

to reduce the cost and doesn’t effect to the environment. 7.

Customers: Starbucks provide their product through their owned store or

through the supermarkets. B.

Their Problems

Starbucks is one of the top successful coffee retailers in the world. At the peak of Starbucks’s growth, they open 2 coffee shops per day in 51 countries. Before they get this success, Starbucks already get their own problems. Something comes have to comes, two significant events effect their business 

The financial crisis



The quality options from the purveyors



The higher “cost of goods sold” is the significant performance of declines

in sales of Starbucks

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Starbucks began to examine every detail of its supply chain, and found that its organization had become very siloes and divergently independent. Performance metrics and objectives differed by organization within the supply chain. In some cases, this led to competing activities that created unwarranted complexity and performance deficiencies. Starbucks faced four key issues: 

It lacked a supply chain strategy focused on delivering

enterprise value. 

It lacked organization calibration of benefits.



It lacked focus on the right supply chain metrics.



It needed to increase investments in talent enhancement

and acquisition C.

Facing with these problems, Starbucks make plan to remake the strategy. Starbucks developed a strategic framework that it applied to all aspects of its

supply chain strategy. It identifies the areas of focus for each division, as well as the level of maturity expected. Further, the company recognized that enhancements to the way it manages and acquires talent would return significant benefits. The retailer transformed its supply chain strategy to move from a traditional logistics mindset to an organization purpose-built to deliver value. The company wanted its supply chain to accelerate speed to market and enable sales growth. Starbucks' management challenged the supply chain organization to compress its cost to serve and elevate its service, while obtaining, training and retaining the best talent in the business. Starbucks initiated a series of changes that aligned business practices with activities, as well as organizational changes that allow for a focus and direction to be placed on each, while avoiding the issues of "silos of excellence".

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Starbucks infused a change in leadership concepts that encouraged change within its organization. The company's traditional approach led to covering problems and resolving issues with as little attention as possible. Its shift in leadership direction now focuses on highlighting problems. Employees understand that their job is to know what's broken and what needs to be improved, changed or fixed. Finally, when Starbucks' partners are faced with a challenge they don't know how to handle, they're encouraged to ask for help. Asking for help isn't looked down upon. Instead, it's rewarded and encouraged. D.

Reformulating supply chain metrics Starbucks learned through its transformational process that some metrics

mattered. However, the company also learned that not all metrics mattered, nor could all metrics lead to improved decisions that would lead to improved performance. A key metric for Starbucks is ‘on time in full’ (OTIF), which the company defines as the state when everything ordered is on time and complete as ordered. This metric fell to a very low score at the apex of Starbucks' supply chain issues. Starbucks reports OTIF to be one of the single most important indicators of cumulative success. When this number moves down, a host of additional metrics will point to the source of the supply chain's inefficiencies. As the number rises, so do the improvements to COGS. E.

Training employees Starbucks employees are encouraged to engage in conversations with

customers while taking their order, while at the same time ensuring that customers don't have to wait in lines for very long. The idea was to increase the number of drinks each Starbucks employees can make in an efficient manner, thus reducing the number of store employees leading to cost savings for the company. The article highlights how 24% of the annual revenue for the company is in store labor and 21

there was room for improvement to lower that number. The following techniques were employed at a Starbucks location resulting in the reducing the time to make coffee from more than a minute to 16 seconds. 

Moving items closer reduced the movements behind the counter



Altering the order of assembly of the coffee also helped.



Commonly used syrups were stacked away in an easily reachable location



Whipped cream, chocolate, caramel drizzles where moved closer to the

delivery area since it was the last step before serving up the coffee F.

Talent enhancement and acquisition An area of significant focus for Starbucks is the training, well-being and

productivity of its people. The company has invested in its people for decades, and increased formalized training and mentoring for supply chain associates to enhance and accelerate the level of people development. Many companies can make the same claims. However, Starbucks lifted its efforts beyond typical human resource (HR) programs and activities. A key enhancement to its training and recruitment is found in its work with specific university programs. Starbucks works with a limited number of universities to help craft and enhance the supply chain curriculum. Several benefits have occurred through relationships with these universities. As Starbucks case studies are used in the curriculum, graduating students are familiar with the company, and may have developed affinities to the brand and aspirations of joining the organization. This allows the company to attract top talent through these programs. The students are better prepared to meet the demands of advanced supply chain practices. Starbucks knows the programs and the education that graduating students attained at these select universities. Further, through these efforts, Starbucks benefits from interacting with academic thought leaders as they exchange ideas regarding the next waves of innovation. 22

G.

My opinion Starbucks was built depend on successful process. That process is learning

from the failure, Building short-term plan combines with long-term plan. Building supply chain process depends on experience and capabilities can warrant fluency process.

3. VALUE CHAIN Human Resource Management: The Starbucks workforce is duly perceived to be the most valuable resources; they are motivated by tangible and intangible incentives.

Technology development: Starbucks relies on technology for cost-saving purposes and ensure the consistency of the quality of products and offering a high level of customer experience in general.

Procurement: Purchasing items such as green beans, raw materials, machinery and etc. for the production of final products and offering services.

Infrastructure: Starbucks infrastructure includes a range of general support activities are required to support the work of the entire value-chain”

Inbound logistics: They choose the best quality of coffee by their standard mainly from Africa. They establish relationships with suppliers and organize the supply-chain management

Operations: It is conducted in the world by two ways: operate directly their stores and through their represents with license

Service: High level of customer services is the main objectives of Starbucks. Staffs are encouraged to ensure the high level of customer satisfaction

Outbound logistics: Starbucks has traditionally sold directly their products through its store. But now a range of their products are being sold through supermarkets or retailers.

Marketing and Sale: Starbucks heavily invest in marketing relying on the high quality of products and high level of customer services.

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Starbucks’ value chain system, in the beginning, created additional value on its products, which the customers are willing to pay for. Hence, the firm is not reluctant to charge above-market prices for its products. In fact, its customers are not looking for the prices of the coffee but they are seeking for the quality of the products and brand image that the company offers. Let us then examine the Starbucks value chain and how it contributed to the company’s current downfall In the Starbucks value chain system, its primary activities include raw materials (coffee beans) procurement from suppliers, storing the coffees to keep it fresh, and an inventory system to maintain stocks and distribution to all outlets whilst maintaining the freshness of the beans. It also includes the management of stores/coffeehouses, marketing and promotional activities, sales and delivery and customer service/customer relations. These activities belong to the primary activity in the value chain in that it involves the creation of the product, selling, marketing and distributing the product to the consumers, and ensuring the continuing relationship with customers and consumers through service activities such as installation of equipment in stores/coffeehouses, repair and upgrading of these equipment’s and managing inventory to ensure continuous supply of the materials (coffee beans). All of these involve the physical activities that are necessary to perform in creating and selling its products to consumers and enhancing its brand image/ reputation The secondary activities, on the other hand, include the firm infrastructure to support these activities. These are corporate management functions (i.e. management or administrative planning), accounting and legal work. Also included in the secondary activities are human resource management (such as personnel skills development and training), determination of employee salaries, benefits and other emoluments, technological development (research and development activities, design, automated

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processing system, etc.) These are secondary activities that are necessary to support the primary activities and to provide inputs and services to manufacture the products. In the case of Starbucks, as earlier stated, its value activities were at first effective in that the co-ordination between its primary and secondary activities are carefully managed, resulting in the creation of added value to its brand or products. Its inbound and outbound logistics activities, operations, marketing and service activities are supported with a good corporate management planning, human resource management, technological development, and procurement activities. For example, the setting up of stores is well planned. Each location is carefully studied, taking consideration of even minute and seemingly irrelevant details such as traffic flow, density of people and demographic characteristics of an area, and careful selection of personnel to be deployed in each outlet . These are done to support the primary activities that aim to deliver good quality coffee products to consumers. In the primary activity component, suppliers are cautiously selected, the distribution of coffee beans to each outlet is carefully planned to maintain freshness, and each store are designed to exude an ambience of luxury and comfort for its consumers .Hence, creating the “Starbucks Miracle” that made the company a leader in the specialty coffee industry for almost two decades. Indeed, strategic marketing activities can create additional value to an organization’s product or brand in that it sets direction to the organization’s relationship with its customers. Without a strategic marketing plan, a company cannot create more value to its products or sustain its competitiveness in the long run. As such, Starbucks’ strategic leadership and competitiveness is now being challenged by its rivals who are more experienced in marketing such as Dunkin’ Donuts and McDonald’s.

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4. PORTER’S 5 COMPETITIVE FORCES MODEL Michael porter, author of competitive strategy, uses a five forces model to analyze an industrial environment and to develop an optimum strategy for success within a given industry based upon specified parameters. The five variables responsible for the forces analyzed using this model are the industry suppliers, buyers, potential new entrants, substitute products and the competition among existing firms. And this is a diamond framework: The five strategy element of Starbucks.

Threat of new entrants:  LOW barrier to new entrants, except for high product differentiation and cost disadvantage.  Entry of big companies in US such as McDonald’s, Dunkin Donuts. Bargaining power of suppliers

Industry rivalry

Bargaining power of buyers

LOW

HIGH

LOW

 Large number of potential suppliers to replace existing ones.  Less concentrated suppliers.  Threat of substitute products.

 Competitive industry with thousands of small local coffee shops and cafes.  Several large rivals like McDonald’s, Dunkin Donuts.

 Consumers are individual buyers.  Consumers are not price-sensitive.  High degree of product differentiation dilutes buyer power.

Threat of substitute products Moderate  High degree of differentiation offers less attraction to other products.  Brand image and recognition are an important factor.

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 The rivalry between existing sellers in the market Rivalry among existing competitors is high within the industry Starbucks operates in with major competitors like McDonald’s, Dunkin Donuts and thousands of small local coffee shops and cafes. The rivalry among existing competitors is relatively high, due to the lack of genuine product differentiation which leads to fiercer competition. Among the strongest competitors of Starbucks are Mc. cafe, Dunkin Donuts, Gloria Jean’s and Florida-based coffee chain Brother’s Gourmet Many of the local and regional chains merge in efforts to grow and better position themselves as an alternative to Starbucks. In addition, restaurants are picking up on the growing popularity of specialty coffees and have installed machines to serve espresso, cappuccino, latte, and other coffee drinks to their customers. Starbucks also faces competition from nationwide coffee manufacturers such as Kraft General Foods (the parent of Maxwell House) and Nestle, which distributed their coffees through supermarkets and specialty coffee companies that sell whole-bean coffees in supermarkets. Because many consumers habitually purchase their coffee supplies at supermarkets, it is easy for them to substitute these products for those of Starbucks.  Bargaining Power of Buyers Another threat to Starbucks is that their customers have the ability to brew their own coffee and this is a threat for Starbucks but it is not significant. In the specialty coffee industry, the largest fraction of buyers is the individual consumers, and they do not act in unison (Larson 2008). In the specialty coffee industry, individual consumers compose the largest purchasers of the product and these buyers tend to be less 27

concerned with the price of the product (Larson 2008). This decreases their bargaining power further. Product differentiation in this industry is so high that consumers tend to look more for the quality of services and the image of the brand than the price of the product or where did the product’s raw materials come from, or what is the price of the raw materials, etc. hence, the bargaining power of the buyers are low.  Bargaining Power of Suppliers: The quality of coffee sought by Starbucks is very high. In 2001, Starbucks announced new coffee purchasing guidelines for control the power of suppliers. These guidelines are based on the following four criteria: Quality baselines, social conditions, environmental concern, and economic issues. But when the famer became Starbuck’s suppliers, Starbucks has done many ways to keep long-term relationship with their farmers. They know their long-term success is linked to the success of the thousands of farmers who grow their coffee. That’s why they work on-the-ground with farmers to help improve coffee quality and invest in loan programs for coffee-growing communities. It's not just the right thing to do; it’s the right thing to do for their business. By helping to sustain coffee farmers and strengthen their communities, they ensure a healthy supply of high-quality coffee for the future. They’ve established many support centers to provide local farmers with resources and expertise to help lower the cost of production, reduce fungus infections, improve coffee quality and increase the production of premium coffee. Besides, they also have been giving loan programs to coffee growers, which will help them sell their crops at the best time to get the right price. The loans also help farmers to invest in their farms and make capital improvements. Over the years, they’ve committed over $15 million to a variety of farmer loan funds. Starbucks also has new plan to help coffee farming communities around the world mitigate climate change impact, and support 28

long-term crop stability, Starbucks is expanding the company’s $70 million comprehensive ethical sourcing program with a new farming research and development center in Costa Rica. These programs are part of Starbucks ongoing billion-dollar commitment to ethically sourcing 100 percent of its coffee by 2015. However, in the specialty coffee industry, suppliers generally have less bargaining power due to the number of coffee farms and plantations spread across several continents, namely Latin America, the Pacific Rim and East Africa. Whilst there is only one variety of coffee needed for the industry, Arabica, there is however practically thousands of plantations and individual coffee growers growing this particular type of coffee bean, giving the coffeehouse companies more choices to replace existing suppliers should the latter demand higher prices for their coffee beans.  Threat of potential entrants: The specialty coffee industry today is undoubtedly dominated by Starbucks, having no equal or larger company in size that competes directly against the company. Starbucks is constantly innovating and showing strong product differentiation in their industry that is one of Starbucks’ success key. So the threat of new entrants to the industry to compete with Starbucks is low, because the market is highly saturated and substantial amount of financial resources associated with buildings and properties are required in order to enter into the industry. However, the industry is open to all potential rivals, especially to large companies engaged in the consumer products and retail chain business. For example, the new entrants in the coffeehouse business today are McDonald’s and Dunkin’ Donuts and Burger King, three large companies which are challenging Starbucks’ dominance in the industry. These new entrants can equal Starbucks capabilities in the aspects of distribution channels, marketing and other areas. They have the capacity to bring new 29

resources that can cause a shake-up in the industry, but not yet enough to topple Starbucks from its current dominant position. With the three big companies’ entrance into the specialty coffee retailing segment, Starbucks’ position is definitely shaken.  Threat of substitute products: The threat of substitute products to Starbucks coffee is moderate. An example of a substitute product would be the premium coffee products available in the supermarkets. Customers usually turn to substitute products because of convenience and cost. However, from the coffee quality point of view, Starbuck’s coffee is better. Competitive threats can also originate from non-coffee related products, such as tea, juices and soft drinks. People who are coffee-lovers will always stick to coffee, but people who drink coffee to combat fatigue will drink non-coffee related products interchangeably. Since there are no natural substitutes for coffee beans, the actual specific threat is considered to be moderate Substitute products can be those non-alcoholic beverages such as tea, soft drinks, fruit juices and energy drinks and other caffeinated drinks. These are sources of substitute products which the consumers can purchase in place of coffee. However, the only true direct substitute for specialty coffee is the basic coffee, but the basic coffee is considered to be a substantially lower quality than specialty and as such does not present threat to specialty coffee. On the other hand, whilst there are several potential substitutes, a cup of specialty coffee is still what consumers prefer to purchase. Product differentiation and brand image plays an important role in this industry. The specialty coffee products are different in many aspects from the substitutes. Coffeehouses offer not only a cup of coffee but the experience of sipping the specialty coffee on a luxurious ambience, such as what Starbucks is offering. Soft drinks companies and non-alcoholic beverage 30

producers are on a mass marketing, selling their products in retail stores, supermarkets and department stores. Coffeehouses, on the other hand, offer an exclusive place for its consumers to enjoy their coffee. Hence, the threat of substitute products is not significant or is not considered a major force in the specialty coffee business. The best way to evaluate this threat is to ask whether other industries can satisfy he customer need that this industry is satisfying. This is why image is very important for Starbucks, as well as the company’s ability to innovate and differentiate.

5. SUSTAINED COMPETITIVE ADVANTAGE OF STARBUCKS a. COMPETITIVE ADVANTAGE OF STARBUCKS There are 10 things that we think is competitive advantage of Starbucks 1. Brand and image: Premium coffee beans 2. Well-trained employee. From level of direct counter service staff, baristas until managerial level, they are a very strong resource team 3. Proximity and Location: Real estate team 4. Social media: Facebook and Twitter 5. Affordability: Paying premium prices for the experience 6. Local market adaptation: Trying to satisfy local preferences through localization. 7. The Finest Coffee Beans 8. A connected customer experience with Starbucks Rewards Card 9. Awareness with 4 factors: Brand, culture, loyalty and innovation. 10. Store ambiance with an unique design, an innovative product display and cozy atmosphere, free Wi-Fi service provided, seasonal themes, promotions.

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b. STATUS OF STARBUCK IN USA COFFEE MARKET 1.

Market share of coffee and snack-shop market in US (2012)

As you can see in the pie, Dunkin' Donuts, who operates nearly 7,000 stores nationwide, has a market share of 23% within the coffee and snack-shop market. On the other hand, their leading competitor Starbucks controls 32.6% of the market share while operating roughly 11,000 stores nationwide and generating approximately $13.2 billion in sales a year. Dunkin' Donuts and Starbucks both hold large market shares within the U.S coffee and U.S. industry. The third one is McDonald’s with 13% market share. Although percent market of McDonald only accounts for less than Starbucks and Dunkin’ Donut but years in the future, McDonald's will become real competitors to Starbucks and Dunkin’ Donut. Now, McDonald's is the most successful fast-food in the world with thousands of stores. McDonald's also has about 4,200 separate McCafes that are either sectioned off from the main restaurant or stand-alone locations. And the others gain a small market share are direct competitor with StarbucksGreen Mountain Coffee Roasters (Keurig) with market share of 8.4%, Panera Bread with 32

7% market share, Caribou coffee with 5% market share. Last 11% market share belong to Krispy Kreme (which is an international retailer of premium-quality sweet treats, including its signature Original Glazed® doughnut) and small local coffee shops in USA. 2.

Annual Sales/Revenue for Starbucks Corporation

Looking at the graph, the data on revenue’s Starbucks continued to increase each year. Starbucks is a coffee house which offers unique and high quality coffee around the world. Today at least one in a hundred cups of coffee served every day. What has contributed to Starbucks's sustained competitive advantage and success over the past few decades? As we know, in 1991, Jay Barney established four criteria that determine a firm's competitive capabilities in the marketplace. These four criteria for judging a firm's resources are: 

Are they valuable? (Do they enable a firm to devise strategies that

improve efficiency or effectiveness?) 

Are they rare? (If many other firms possess it, then it is not rare.)



Are they imperfectly imitable (because of unique historical conditions,

causally ambiguous, and/or are socially complex)? 33



Are they non-substitutable? (If a ready substitute can be found, then this

condition is not met?) When all four of these criteria are met, then a firm can be said to have a sustainable competitive advantage. We will analysis whether Starbuck is sustainable competitive advantage or not in next part. c. STARBUCK IS SUSTAINABLE COMPETITIVE ADVANTAGE OR NOT For 4 questions above, we can answer that: valuable, rare, costly to imitate and non-substitutable. All four of these criteria are met at core competencies of Starbucks. We have done a table about analyzing core competencies related to these criteria. STORE AMBIENCE Design Music Atmosphere Wi-Fi

AWARENESS Brand Culture Loyalty Innovation

Valuable: Considered the third place for its customers Rare: Unique store atmosphere Costly to imitate: More than money to imitated Non-substitutable: High degree of DIFFERENTIATION offers less attraction to other products.

Valuable: A connected customer experience with long term relationship- loyalty Rare: Just a few companies have the same reputation Costly to imitate: Time, Know-How, Financial support and experience. Non-substitutable: Brand image and recognition are an important factor.

For all analysis that we made, show that Starbucks acquires attributes that allow it to perform at a higher level than others in coffee industry. Starbucks can obtain a competitive advantage by implementing value-creating strategies, not simultaneously being implemented by any current competitor. Their strategies are rare, valuable, and non-substitutable. Sustainable, competitive advantages are advantages that are not easily copied and, thus, can be maintained over a long period of time. The competition 34

must not be able to do it right away or it is not sustainable. Developing a sustainable, competitive advantage requires customer loyalty, a great location, unique merchandise, proper distribution channels, good vendor relations, a reputation for customer service, and multiple sources of advantage. There are all things are always on Starbucks strategy. So, Starbucks will have an advantage in the marketplace which will last until the criteria are no longer met completely and also earn higher profits than other competitors with which it competes.

6. SWOT ANALYSIS External environment  Opportunities New markets : The opportunities of attending in new markets is one of biggest opportunities of Starbucks. While Starbucks now operates in more than 50 countries, they are still in the early stages of international growth. New products and services : New products and services can be retailed in their cafes, such as fair trade products. These are some examples which Starbucks gained profit out of them. In 2004 the company created a CD, and customer can create their own cd now. Co-branding : co-branding with other manufacturers of food or drinks is an opportunity  Threats New entrants : there can be new competitors which would sell coffee with lower not original coffee beans but also with lower price and that can reduce Starbucks sell Rises in the cost of coffee beans : there can be rises that can affect Starbucks business Natural Disasters : that can affect the coffee price US market saturation : there are a high number of Starbucks there so the market become saturated Internal environment  Strengths Profitability : it’s a very profitable organization. Brand Recofnition : It has established logo, highly developed brand, intellectual property, strong internet and media presence. 35

 Weaknesses Sustainability : Starbucks has a reputation for new product development and creativity. However they remain vulnerable to the possibility that their innovation may falter over time due to the lack of internal focus and diversity in innovations. High Operating Cost : The organization has very high expenses to maintain their operations Product pricing : Starbucks is considered to be an expensive option when compared to their competition and this is directly influencing their success.

IV. CONCLUSION Starbucks strategy is fairly simple: increase the perception of high quality of a commodity product, adapt stores to the consumers’ lifestyle, and covers its existence areas completely. Starbucks demonstrated in the past its strength and ability to sustain growth even during recession, and while analysts believe that Starbucks growth will slow down with regard to its past, but the company still growing. Starbucks continues to keep its customers happy and rely on non-traditional means of attracting new customers; that is the Starbucks strategy. Weaknesses ans Threats are consequences of any natural business but Starbucks is still on the top and it has proved that they are qualified to stay as the best coffee producers till the moment. Their main strength was the huge profit and their main weaknesses were about product pricing. Competitors are not affecting Starbucks that much since Starbuks is still in the top and it knows the right flow and strategy to stay on the top. Starbucks has to find a strategy to build the foundation of products with lower prices to ensure productivity and customers’ loyalty.

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V. RECOMMENDATION 1.

Starbucks should continue to open new locations worldwide, especially

developing country. 2.

Increasing using marketing from 1% to 10% at least.

3.

Reduce the perception of there is no competition out.

4.

Extend its menu selection to include drinks related to particular cultures.

5.

Increase selection for children’s drinks.

6.

Starbucks should continue in its path of utilizing social media in

communicating with customers 7.

In order to save mother earth out from current situation, Starbucks may

try to sell coffee with cup which can be reused again, encourage consumer to bring back the cup by giving them a small discounts or some free snack. This can protect the world from continuously become warming; Starbucks can also improve the image and increase the profits too 8.

Starbucks has to think about new product/services, they should use their

brand name which is attractive for most of the people to establish new products and services as well

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VI. REFERENCES 1. Wikimedia: The free Encyclopedia http://en.wikipedia.org/wiki/Economics_of_coffee http://en.wikipedia.org/wiki/Starbucks 2. The Statistics Portal http://www.statista.com/topics/1248/coffee-market/ 3. Yahoo!FINANCE http://finance.yahoo.com/news/Competition-Coffee-Industry-wscheats3771514415.html 4. Starbucks http://www.starbucks.com/ 5. Google information

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