Business Studies Case Study Paper on Starbucks Case Analysis

Starbucks Case Analysis

1.0 Company Overview

In 1971, the first Starbucks joint was opened in Seattle Washington, specializing in the retailing of whole bean coffees. In 1982, Howard Schultz joined the company (Kachra, 1997). Following his trip in Italy in 1983, he became inspired by the large number of coffee shops in Milan, Italy (Kachra, 1997). He saw this as an opportunity, and wanted to bring the same coffee environment to the United States. Starbuck`s Board of Directors did not see the viability of this idea. After two years, Schultz quit the company and started his coffee bar company, which he named II Grionale. Within two years, II Grionale had become very successful. Schultz bought the Starbucks name together with all Starbucks` assets; he rebranded all his coffee bar outlets to Starbucks (Kachra, 1997). Starbucks registered fast growth, and in 1992, it was publicly listed. By 1997, the company had grown ten times with locations across the United States, Singapore, and Japan. The company also started expanding its brand (Shultz, 1997).

1.1 Mission Statement

The company was established as a leading seller of the finest coffee globally while upholding its unbending principles as it grows. Starbucks formulated six principles that will serve as a guide in measuring the appropriateness of its decisions. These principles include:

  • Providing a great working environment and treating each other with dignity and respect
  • Embracing diversity as an integral component in the way it does business
  • Applying the highest standards of excellence to the procurement, roasting, and fresh delivery of its coffee (Kachra, 1997).
  • Developing passionately satisfied customers at all times
  • Contributing positively to its communities and the environment, and
  • Recognizing that profitability is important to the future success of the business (Michelli, 2007).

1.2 Milestones OF Company History

  • 1971 – The first coffee shop for Starbucks at Pike Place Market in Seattle as a company specializing in coffee bean roasting
  • 1985 – Howard Schultz quits Starbucks and starts II Giornale Coffee Company serving espresso beverages made from Starbucks` coffee beans
  • 1987 – Schultz acquires the Starbucks brand and changes II Giornale Coffee Company to Starbucks Corporation
  • 1992 – The company floats its Initial Public Offering (IPO) under the ticker symbol-SBUX
  • 1995 – Starbucks expands internationally by entering Japan.
  • 1996 – Through collaboration with PepsiCo, Starbucks started selling bottled Frappuccino drinks. By the end of the 1996 financial year, Starbucks has more than 1,000 retail outlets distributed across 32 different markets and two stores in Tokyo (Kachra, 1997).
  • 1999 – The company purchased two companies- Tazo Tea and Hear Music

2.0 Industry Analysis

The specialty coffee in the late 1990s was in the growth stage of its lifecycle. The decade saw many stores open up in the United States. In 1997, the U.S. market had approximately 8,000 stores, compared to 500 stores in 1992, representing an increase of 1500%. Coffee consumption among consumers was on the rise, particularly after 1995. Consumers preferred out- of-home entertainment, which was provided by coffee bars. Coffee had changed from a breakfast beverage to a drink that people could enjoy at any time. As a result, coffee houses were transformed into living rooms where people could have fun while enjoying their coffee drinks with friends or business associates (Kachra, 1997).

2.1 Porter’s Five Forces

2.1.1 Threat of New Entrants-Moderate

            The threat of potential competitors entering the industry is moderate due to low barriers to entry for a number of reasons. Firstly, specialized knowledge and technology relevant to the coffee industry are low. Similarly, raw materials used in coffee making and coffee making equipments are not patented, as a result, it is not possible to prevent new competitors from entering the industry. The industry Starbucks operates is moderately saturated, with a competitive structure resembling monopolistic competition. For new firms joining the industry, the initial capital required is not large enough to act as a barrier to entry, for example, coffee-making equipment can be leased and a business can choose to franchise instead of starting everything from scratch. In addition, at the small-scale coffee establishments are effectively competitors to established players, such as Starbucks because consumers have zero switching costs. Despite the high competitive nature of the industry, new entrants have moderate chances of succeeding in the market. Nevertheless, popular brands, such as Starbucks that benefit from the advantages of large-scale production often counter the threat of new firms entering the industry through reducing their costs, enhancing efficiency, and capitalizing on their huge market share. For the big brands, entry barriers are moderately high because they differentiate themselves in terms of the quality of coffee products offered, occupying prime real estate locations and providing memorable in-store experience. Corporations, such as Starbucks enjoy economies of scope and scale, giving them a learning curve advantage. The company has developed long lasting and good relationships with its exporters. Collectively, these factors make the entry of new entrants moderate.

2.1.2 Threat of Substitutes-High

Specialty coffee has a number of substitute products by other coffee manufacturers and vendors that include Nestle, Kraft General Foods, and Procter & Gamble. The products offered by these brands are sold in supermarkets and many other convenience stores. With regard to the coffee product itself, it can be replaced by numerous other beverages, including soft drinks, tea, water, energy drinks, alcoholic beverages, and juices. In addition, restaurants that sell specialty coffee and coffee machines that sell cappuccino, espresso, and latte among other brands are equally substitutes for specialty coffee sellers such as Starbucks. Furthermore, pubs and bars that serve both alcoholic and non-alcoholic drinks can substitute the Starbuck`s social experience. Furthermore, consumers could equally prepare their home-made coffee at a lesser cost compared to purchasing premium coffee from retailers such as Starbucks. Moreover, consumers do not face any switching costs when switching from one coffee product to the other, which makes the threat high. Although Starbucks and other premium coffee sellers have attempted to counter this threat by for example, introducing their brands in supermarkets, the threat of substitutes still puts high pressure on their profits (Kachra, 1997). 

2.1.3 Bargaining Power of Buyers- Moderate to Low

            There are many customers who are increasingly knowledgeable about coffee products, costs and prices. For Starbucks, its employees were always tasked by customers to explain the coffee tastes and other pertinent information to customers. In addition, the customers can switch between brands at moderately low cost. However, the existence of many buyers in the industry implies that no single customer can demand for a price concession. In addition, the industry provides coffee products that are vertically differentiated with many customers, with each customer purchasing a relatively small volume of coffee. This has eroded the power of the buyers. For premium brands such as Starbucks, customers are moderately sensitive because they pay the high price to get a higher quality of coffee. However, they keep a watchful eye on any excessive prices that do not match the quality of product offered.

2.1.4 Bargaining Power of Suppliers-Low to Moderate

            The raw materials that suppliers provide that include roasted coffee and coffee beans are typical commodities sold on the open market. Coffee is highly available, and as indicated in the case, it comes only second to oil in terms of volume traded (Kachra, 1997). The existence of many suppliers (exporters), switching from one exporter to another is easy. This explains why Starbucks could reject the consignment even when the coffee beans were already on transit, if they did not match the quality requirements. However, specialty coffee makers are not the only buyers of coffee beans. Other industries such as ice-cream and candy also use coffee beans as raw material, and as a result, provide alternative markets to suppliers (exporters). The price of coffee is equally volatile, which reduces the bargaining power of suppliers. Some of the factors affecting coffee prices include weather conditions, political and economic environment, as well as regulations from the exporting country in the form of export quotas and other restrictions. For Starbucks, its main raw materials are high quality Arabica coffee grown in selected regions of the world (Latin America, Pacific Rim, and East Africa). Because the company looks for a particular quality and quantity of coffee, the switching costs between suppliers (exporters) is moderate. The strategic partnerships that Starbucks has entered into with its suppliers, coupled with its scope and size makes it an integral component of the suppliers` business, thereby reducing the bargaining power of suppliers. Collectively, the pressure posed by suppliers to industry players ranges from moderate to low.

2.1.5 Intensity of Competitive Rivalry- High to Moderate

            The number of coffee bars in the United States rapidly increased from just 500 in 1992 to more than 8,000 specialty coffee houses by 1997. With the large number of coffee shops, customers find it easy to switch from one outlet to another.

Source: (Kachra, 1997, p.23).

The figure above indicates the attractiveness of the industry not only to Starbucks, but also other U.S. and Canadian companies, with all of them registering positive net margins apart from Second Cup and Brothers. This highlights the high level of competitive rivalry in the industry. The industry has monopolistic market structure, with Starbucks having the largest market share. However, its competitors are equally doing well, and given that consumers incur no in switching from Starbucks` coffee to another brand, the intensity of rivalry is high (Porter, 1998). Nevertheless, it is important to note that Starbucks has some level of competitive advantage because its coffee products are differentiated. The brand is known for its premium quality, which reduces the intensity of competitive rivalry from high to moderate. From the analysis, we can conclude that the strength of the porter`s five forces is moderate (Porter, 1998).

2.2 Key Success Factors (KSFs)

There are numerous key success factors for Starbucks in the areas of skills, organizational capacity, and marketing as discussed below.

KSFs related to skill– Starbucks has unmatched work talent. The baristas are highly professional in their conduct; they love what they are doing and have product knowledge skills. Secondly, the company has the ability to develop innovative products and services. For example, in 1997 it introduced its Frappuccino drink, followed by Chai Tea Latte in 1998. The company has also developed its signature roasting curves and developed the same into proprietary computer software.

Organizational capacity– the company has some of the best managers in the industry who have the technical knowhow on how to make business succeed. In addition, the company has sufficient capacity to utilize electronic commerce in its business. For instance, the company offers mail order deliveries to its customers and offers an e-commerce platform for customers to purchase its products online.

KSFs related to customer service and geographical presence– the partners offer courteous and exemplary customer service. In addition, the company offers a wide range of quality products that meet the unique tastes and preferences of different customers. Other than service, the company has secured convenient store locations through collaborations with real estate agents. In 1992, Starbucks only had 165 coffee shops in North America (Schultz, 1997). However, by 1997, the number had increased to 1,364 stores (Schultz, 1997).

2.3 Attractiveness of the Industry

The specialty coffee industry was largely unexploited prior to Starbuck`s entry in 1987. By 1997, the industry had become so profitable. In 1997, estimates by the Specialty Coffee Association of America indicated that by 1999, there would be room for approximately 10,000 new coffee houses in America and Canada (Kachra, 1997). This indicates the huge market potential that was not yet exploited (Fabricant, 1992).

As indicated in the figure above, between 1990 and 1994, specialty coffee registered the highest retail sales, indicating the significant market potential for the industry. From 1990 to 1994, sales in the industry grew by 12.0%. Furthermore, it was estimated that the industry would register further growth of 5.6% over the period 1994 to 1998. It is therefore evident that the industry is attractive, particularly for firms that can distinguish their products from those of competitors such as Starbucks. 

                                                       3.0 Business-Level Strategy

3.1 Focus Strategy

Porter (1998) argues that there are three generic strategies that a business can use to gain a competitive advantage in the market- differentiation, cost leadership and focus. The generic focus strategy targets a particular section or segment of the consumers and combines with either cost leadership strategy or the differentiation strategy. As at 1997 when the case was written, Starbucks was using a focus strategy in conjunction with the strategy of differentiation. The target market for Starbucks is made of educated and wealthy coffee drinkers who are able and willing to pay premium prices for quality coffee and exemplary customer services. Starbucks targeted a particular segment of customers in the coffee industry. As a result, Starbucks` products and services are particularly designed to satisfy the needs and wants of this customer segment. With regard to combining the differentiation strategy with focus, the company presents the Starbucks brand with unique characteristics. Whereas the company mixes its coffee with other ingredients, it maintains the credibility of high taste associated with high quality Arabica coffee (Motley, 2007). Similarly, the company mainly uses Italian names for its products such as Frappuccino. Despite the fact that the names are difficult for customers to pronounce, they appear attractive to their target market. However, one of the main differentiating features of the Starbucks brand is its reputation and image, which have been developed since its inception by management and staff who deliver high quality customer experience. Starbucks key differentiators are those linked to the manner in which its stores are managed (Motley, 2007). As a result, the generic strategy of focus has been successfully mingled with the differentiation strategy.

3.2 How the Strategy Builds on Resource and Capabilities

3.2.1 Value-Chain Analysis

According to Porter (1998b), a firm can acquire competitive advantage by analyzing its value chain. Porter (1998b) defines business` value chain as “a system of interdependent activities which are connected by linkages” (p. 78). A business can create extra value for its services or products and increase the price charged on the same without increasing the cost of producing such services or products, and the consumers will be willing to pay for the extra value added. A company`s value chain has two components. The first category represents the primary activities that include the physical development of products, marketing, delivery, support activities and after sales services. The second category comprises of secondary activities, which includes the business inputs and infrastructure that permit the primary activities to be undertaken (Porter, 1998b).

As at 1997 when the case was prepared, Starbucks` value chain was creating addition value on its products, and the company`s customers were willing to pay for them. This explains why Starbucks charged premium prices on its coffee products. Evidently, Starbucks` customers are not searching for prices, but rather for the quality of coffee and the brand image that Starbucks offers. To see how the company uses its value chain to build on its resource and capabilities, it is important to analyze the primary and secondary components of Starbucks` value chain. For Starbucks, the primary components of its value chain include coffee beans (raw materials) procured from exporters, the storage of the coffee to keep them fresh and the company’s inventory system that maintains stocks and distributes and distributes coffee to all coffee shops while maintaining the freshness of the coffee beans. These are primary activities because they involve creating, selling, marketing, and distributing the coffee and maintaining close relations with consumers and customers through services such as installing coffee machines, repairing and upgrading store equipment and managing inventory for all the shops to ensure continuous supply of coffee beans. On the other hand, Starbucks` secondary activities include the management functions, legal and accounting work. It also incorporates HR management, determining the employees` salaries and benefits, and technological research. It is these activities that provide support to the primary activities, resulting in the creation of value. Starbucks has been effective in coordinating the primary and secondary activities of its value chain and managing them carefully, which has resulted in the creation of value added coffee products. The company`s outbound and inbound logistical activities, service and marketing activities are all fully supported by its good HR management, procurement, and technological development. For instance, the setting of Starbucks`s stores is well planned for. As indicated in the case, the company has the discipline to wait for a store that may produce $1 million in sales rather than go for an available store that will only generate $750,000 (Kachra, 1997). Each of the company’s locations is cautiously studied, with consideration given to every detail, including population density, traffic flow, parking space and workers to be deployed in each location. Starbucks undertakes all these activities with the goal of supporting its primary activities to deliver quality coffee products to its customer base. As part of its primary activities, Starbucks cautiously selects its coffee bean suppliers and carefully plans how the coffee beans are distributed to its various outlets to ensure that the freshness of the beans is guaranteed. In addition, each of its coffee shops is designed to offer comfort and luxury to its customers- answering a lifestyle need (Kachra, 1997). In this integration of value chain activities that eventually made the company a leading player in the specialty coffee segment. 

3.2.2 Tangible and Intangible Resources

The following table summarizes Starbucks` tangible and intangible resources that the focus strategy builds on.

Tangible Resources Physical resource   Retail stores       Good locations       Specialty coffee equipment
Human resources   Professionally trained employees   Best management team    
Financial resources Investments Stocks Acquisitions
Intangible Resources Intellectual capital Brand   Patents Good relationship with employees
Reputation Organizational culture Ambience
Good partnership Techniques design

3.2.3 The Firm’s Core Competencies

Starbucks` core competencies are those that give it a competitive advanatge over its rivals. These core compertencies are valuable, rare, immitability and non- substitutable. The table below gives a summary of Starbucks` core competencies

Competency Valuable Rare Immitability Non- Substitutable
Strategic and prime store locations Store locations are highly visible and located in areas with high traffic and close to different settings such as university campuses, office buildings, suburban retail centers, and downtown YES YES NO NO
International brand recognition Starbucks has developed into one of the most popular brands in the coffee house business Because of its brand recognition, its revenues are projected to hit $1.5 billion by 1999The company has leveraged on its strong brand equity by effectively licensing its brand and merchandising its products   YES YES YES YES
Store Concept and aesthetic appeal Starbucks stores are have an appealing appearance and  are associated with a ‘cool’ factorStarbucks offers comforting music, warm atmosphere, great customer service, and offers a social meeting point for the community, which is a significant component of the ‘Starbucks Experience’Its store concept  is that of ‘third place’ that gives its customers the peace of mind away from work and homeEach store location is uniquely designed to match the neighborhood served and the stores are environmentally friendly    YES YES YES YES
Large size and international presence Starbucks operates over 1000 retail stores in 32 markets across North America plus an additional two stores in Tokyo, JapanIt enjoys scale economies due to its well developed distribution network and supplier relationships YES YES YES YES
Organization Culture and HR management Starbucks pays relatively higher wages to its employees than the competitors. In addition, its employees receive health insurance, life and disability insurance. Most of its employees are either in university or college and the company gives them training on coffee making them more knowledgeable and promotes a healthy corporate culture Shared values by all members of the organization that include integrity, fairness, equity, and operating ethically These values coupled with its corporate culture leads to superior customer service YES YES YES YES
Customer loyalty and cult-like status The company has a strong customer base comprising of loyal customers who are willing to pay extra more to enjoy high quality coffee YES YES YES YES

4.0 Cooperative Strategy

4.1 Supplier Relationships

Starbucks worked with exporters who supply the company with coffee beans. The company maintained close working relationships with the exporters. It also gave its suppliers the requisite training. To Starbucks, its supply chain was one of its most important competitive tool and one of the business` most important assets. Its network of reliable and competent exporters ensured that the company received coffee bean supplies even when demand was higher than the supply. Many exporters of high quality beans were eager to secure a contract with Starbucks because it purchased high quality coffee more than any other competitor. Starbucks was not only competing on its high quality coffee products, but also on its supply chain. Starbucks carefully supervised its suppliers to ensure that they were effective in terms of product quality and quantity and its suppliers fully cooperated (Galbreath, 2002).

4.2 Co-petition (with Competitors/Complementors)

As a strategy to boost its specialty sales, Starbucks entered into partnerhips with companies that were well established in their respctive fields, businesses that had good reputation for quality and success. Some of the companies that Starbucks co-opted with include:

  • United Airlines– its coffee served on board
  • Nordstrom– starbucks created a special blend for this company
  • Barnes & Nobles– starbucks opened up its stores at Barnes & Nobles locations
  • PepsiCo– Starbucks and PepsiCo collaborated and created the Frappuccino cold coffee beverage
  • PriceCostco– starbucks created a unique brand name-Meridian- for this company
  • Red Hook Breweries– Starbucks developed a coffee concentrate that was used by Red Hook Breweries as an ingriedient for Double Balck Stout beer
  • Dreyers` Ice Cream– through collaboartion with Dreyers` Ice Cream, Starbucks was able to have its ice-cream brand sold in Dreyers` grocery stores
  • ARAMARK– through partnership with ARAMARK, Starbucks was able to sell its coffee in more than 100 ARAMARK locations (Kachra, 1997).

5.0 Corporate Strategy

5.1 Product Diversification Strategy

As at 1997, over 95% of Starbucks`s revenues came from a single product offering- its high quality specialty coffee. The company`s corporate level strategy was to establish the company as the best seller of finest coffee in the globe. Based on Rumelt’s Typology of diversification, it is evident that Starbucks had not diversified; the company had only a single product-coffee. Its principles support only a single product, which are to provide the highest standards of coffee while maintaining diversity, customer satisfaction and a great working environment. Although Starbucks developed some adapted to products to target different market segments, these products were still within the specialty coffee product line. Some of the adapted products that the company produced include a broad range of bottled cold caffeinated drinks such as Frappacino and Meridian. The company equally set up take away coffee kiosks in office buildings and book stores, but all these places were serving coffee, which justifies the fact that the company had a single product line. The company`s diversification can best be described as concentric diversification, where it produces new but related products.

5.2 International Strategy

By 1997, Starbucks` international strategy was smaller scale. The company had plans to expand to the Asian Pacific Rim, and it had already established its stores in two locations in Tokyo, Japan. Although aggressive expansion was Starbucks main growth strategy in the 1990s, the company was more focused in creating a strong presence in North America before expanding globally. This explains why it had a large of stores in the North American region (1000 locations in 32 markets) compared to only two stores internationally (only in Japan). The domestic growth strategy worked to the benefit of the company as it blocked most of its competitors and allowed Starbucks to serve high quality coffee at a premium price thereby increasing its profit margins.

5.3 Leveraging on Core Competencies

The company has leveraged on its core competencies particularly in the areas of HR management, operation of its retail stores and marketing. In terms of human resource management, the Starbucks business is centered on its employees and they are viewed as the company`s most important assets. This has resulted in the business having an exemplary workforce, who are proud of their work and treat everyone with dignity. As a whole, this has translated to happy customers and more profits for the business. In terms of marketing, the Starbucks brand exemplifies an understanding of people`s needs, values and lifestyle. The Starbucks experience has been fundamental to the company`s success (Schultz, 1997). Similarly, the services provided in its stores differentiate it from its competition. The company`s consistency in service delivery coupled with its casual but pleasing experience has made its stores the best meeting joint for people from all walks of life. To sustain this competency, the company has a very rigorous recruitment process. The company ensures that it recruits the right people who understand what it means to have great customer experience. These baristas are ethical, passionate about their work and have a personal connection with the clients.

6.0 Strategy Implementation

6.1 Key Tactical and Strategic Decisions

The company has made key tactical and strategic decisions. Beginning back in 1985, Schultz decided to quit the original Starbucks and create II Giornale Coffee Company, which later purchased Starbucks. Secondly, in 1992, the company made a strategic decision to go public, with its shares floated in the New York Stock Exchange. IN 1995, the company made key tactical move to expand its operations beyond the U.S. borders, establishing its first two stores in Tokyo, Japan. In addition, the company partnered with 20 real estate partners, a decision that allowed the company to secure prime locations and open between 20 and 40 stores every month.

6.2 People (Human resource, Knowledge, Leadership), Culture Issues

Starbucks` workforce is its most valuable resource. According to Schultz (1997), the employees are Starbucks` public image and every dollar the company generates comes through their hands. As a result, the company employs and recruits the right people, give them training, give them knowledge on coffee, motivate and retain them. In terms of leadership, management tasks are developed in such a manner that they motivate and help the organization`s employees attain their goals and the shared goals of the company (Schultz, 1997). As part of the company`s culture, the rituals at Starbucks that every employee participates in, which includes coffee tasting and training, helps the employees in communicating and reinforcing Starbucks values.

6.3 Key Structure and Incentive Issues

            The company operates a flat organization structure, which has been instrumental in its success. One of the most important strategic decisions by the CEO was to decentralize decision making within the company. Each Starbuck location is unique and serves diverse customers. With a decentralized structure, employees are better positioned to make key decisions without waiting for directions from the head office. Decentralization is defined as a systematic move to delegate authority to subordinates, except for those responsibilities that can only be exercised at a central level. Centralization cannot work for an organization such as Starbucks because upper management cannot make day-to-day operational decisions 1,000 and store locations because they lack specific store location experience to effectively make important operational decisions that will eventually affect the company and its profitability in the future. The flat structure is best for Starbucks because workers at the store level feel part of the company and motivated because they are given the freedom to make operational decisions based on the existing customer needs. Starbucks` store locations are opened to address the needs of a particular market. As a result, these branches should be given operational control so that they make decisions relevant to meeting the needs of the particular customer segments that they serve (Reilly, Minnick & Baack, 2011).

7.0 Performance Evaluation

Table 1: Financial Ratios Computed from the income statement and balance sheet figures

SBUX Financial Ratios and Industry Comparisons          
           
SBUX profitability ratios 2009 2010 2011 2012 2013
Operating profit margin Starbucks 5.75% 13.26% 14.77% 15.02% -2.19%
Operating profit margin industry 7.18% 8.69% 9.13% 8.85% 9.13%
Net profit margin SBUX 4.00% 8.83% 10.65% 10.40% 0.06%
Net profit margin Industry 4.37% 5.14% 5.53% 5.21% 5.83%
Return on equity (ROE) 12.83% 25.73% 28.41% 27.09% 0.19%
ROE industry 12.36% 13.88% 15.92% 15.63% 17.78%
Return on assets (ROA) 7.01% 14.81% 16.92% 16.84% 0.07%
ROA industry 5.62% 6.44% 6.83% 6.49% 7.34%
           
SBUX liquidity ratios 2009 2010 2011 2012 2013
Current ratio SBUX 1.29 1.55 1.83 1.90 1.02
Current ratio industry 1.2 1.28 1.25 1.23 1.17
Quick ratio SBUX 0.59 0.98 1.17 1.14 0.71
Quick ratio industry 0.56 0.66 0.63 0.67 0.63
           
Efficiency ratios 2009 2010 2011 2012 2013
Net fixed asset turnover 3.85 4.43 4.97 5.00 4.65
Net fixed asset turnover industry 3.51 3.50 3.59 3.67 3.70
Total asset turnover 1.75 1.68 1.59 1.62 1.29
Total asset turnover industry 1.29 1.25 1.23 1.25 1.26
Equity turnover 3.21 2.91 2.67 2.60 3.32
Equity turnover industry 2.83 2.7 2.88 3 3.05
           
Leverage Ratios 2009 2010 2011 2012 2013
Debt to equity 0.18 0.15 0.13 0.11 0.29
Debt to Equity industry 0.53 0.49 0.56 0.59 0.62
Debt to capital 0.15 0.13 0.11 0.10 0.22
Debt to capital industry 0.35 0.33 0.36 0.37 0.38
Interest coverage 15.32 44.94 55.39 63.97 -7.18
Interest coverage industry 6.93 8.53 9.51 9.31 10.23

Source: computed based on figures sourced from NASDAQ. (2014).

7.1 Liquidity Ratio Analysis

Source: produced by the Author from the liquidity ratios in table1

Starbuck`s current ratio for 2009 was 1.29 times, this implies that the company can afford to pay $1.29 in current assets for each $1.00 of current liabilities. Similarly for 2010, 2011, 2012, and 2013, Starbucks` current ratio remained above 1.02 times, implying that the company`s current assets were sufficient to cover its short-term obligations. When compared to the current ratio for the industry, it is evident that SBUX had a competitive advantage over the period 2009 to 2012. It was only in 2013 that the company was at a competitive disadvantage with the industry current ratio slightly above that of Starbucks by 0.15 times. The notable downward trend in the company`s current ratio from 2012 to 2013 which implies that although the company can repay its current liabilities, its ability in doing so is declining. Collectively, Starbucks has good liquidity and presents less risk for investors.

The quick ratio equally measures liquidity, but using a much strict method that only considers liquid assets. In 2009, Starbucks quick ratio was 0.59 times. In 2010, the figure increased to 0.98, then to 1.17 in 2011 and 1.14 in 2912. However, in 2013, it dropped to 0.71. When compared to the industry current ratio, SBUX has a competitive advantage for the entire period. However, it is worth noting that it is only in two years (2011 and 2012) that the company`s liquid assets were sufficient enough to cover its short-term obligations.

7.2 Efficiency Ratio Analysis

Source: produced by the Author from the efficiency ratios in table1

The net fixed assets turnover indicates SBUX ability to generate sales using its fixed assets. From 2009 to 2013, the company has had a high turnover with a high of 5.00 in 2012 and a low of 3.85 in 2009. For the entire five-year period (2009-2013), the company`s net fixed asset turnover has outperformed that of the industry implying that the company was operating at a competitive advantage. SBUX total assets turnover have equally been higher than the industry average for the five-year period indicating a competitive advantage. However, there is a notable decline in the company`s total assets turnover from 2009 to 2011 and again from 2012 to 2013. The same trend is also evident in the industry`s total assets turnover. In terms of equity turnover, the company had a competitive advantage in 2009, 2010 and 2013. However, in 2011 and 2012, the company was at a competitive disadvantage because its equity turnover was below the industry average. Both the net fixed asset turnover and the total asset turnover indicate that the company is effectively utilizing its assets to generate sales because of the competitive advantage the company had over the entire five-year period.  

7.3 Leverage Ratio Analysis

Source: produced by the Author from the leverage ratios in table1

            The leverage ratios measure how the company finances its assets. The company`s debt to equity ratio was 18%in 2009, 15% in 2010, 13% in 2011, and 11% and 29% in 2012 and 2013 respectively. Debt to capital was equally lower than the industry average for the five-year period. Both debt to equity and debt to capital are lower than the industry average for the five-year period which indicates the company`s competitive advantage, meaning that the company has a low debt level than its competitors. Finally, in terms of interest coverage, SBUX was at a competitive advantage over the period 2009 to 2012. It is only in 2013 that the company was at a competitive disadvantage an indication that the company may have borrowed more. Starbucks had a high interest coverage of 63 in 2012 indicating that the company`s net income could repay its interest expense 63 times.

7.4 Profitability Ratio Analysis

Source: produced by the Author from the profitability ratios in table1

            The company`s operating profit margin is far above that of the industry over the period 2009 to 2012 indicating competitive advantage. However, in 2013, the company was at a competitive disadvantage, with its operating profit margin standing at -2.19%. Similarly, it in terms of net profit margin, Starbucks has outperformed the industry over the period 2010-2012 (competitive advantage). However, in 2009 and 2013 the company was at a competitive disadvantage with regard to net profit margin. In terms of return on equity, SBUX operated at competitive advantage from 2009 to 2012. However, in 2013 it was at a competitive disadvantage. Finally, in terms of return on assets SBUX had a competitive advantage between 2009 and 2012. It is only in 2013 that the company`s ROA was at a competitive disadvantage. As a whole, the figures indicate that the company generates sufficient profits on its assets and for its investors.

8.0 Learning Experience

8.1 Lessons Learned

I have gained a number of insights from the case study. To begin with, the case has enabled me to confront real world scenarios that businesses face in their day to day operations. I have to appreciate the importance of decision making in an organization context. In particular, I have learnt that decision making within companies is in most cases confrontational because people have divergent viewpoints. For example, when Schultz comes up with the idea of coffee shops in the United States, Starbucks` Board of Directors rejected the idea. The case also highlights the fact that managers are there to make decisions. The decision that a manager makes has a direct influence on the company`s revenues, costs and profits. Most importantly, the case has provided me with a unique opportunity to apply classroom knowledge to real business problems. As a result, I am now able to make decisions much easily and I am able to enhance the analytic quality of decisions. Finally, my most important discovery is that approaching a case study requires a different approach from the ordinary take home assignments. Handling a case requires more time in terms of preparing the solutions.

8.2 Good Decisions

The decision by the company to expand internationally was a good move considering the fact that it had already established itself in the U.S. market through the development of its own stores and partnering with other businesses to enhance its presence. The decision to treat employees and suppliers as partners was equally good as it set the foundation for Starbucks` success. Other good decisions include introduction of Starbucks products in supermarkets and groceries.

8.3 What Starbucks Could Do Differently

The level of innovation at Starbucks as reflected in the case is low. There is need for the company to continuously innovate, develop and sustain a unique environment where customers will continue to enjoy their premium coffee. Secondly, the company could improve on its image even more by capitalizing on its core competencies- maximizing customer satisfaction and enhancing the quality of all products it offers. The company can achieve this by extending the training period for the baristas, increasing the quality of its coffee beans and milk, and enhancing its efforts in advertising these competencies. In addition, other than focusing on a single product- specialty coffee, the company should introduce products that appeal to non-coffee drinkers. In addition, even the coffee drinkers should be given a wide variety to choose from by providing them with different types of beans. 

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