External Analysis of Starbucks - Case Study Example

?Introduction Starbucks is the world's premier coffee roaster and retailer. It runs a chain of stores in the United s and over 50 other countries around the world. Starbucks grew from a very modest beginning as a coffee outlet by a group of people who had a genuine passion and interest in coffee. However, it grew steadily in the 1990s to become one of the biggest food related corporate giants in America. It now controls numerous interests in different parts of the world. Starbucks is a leader in the coffee retail sector in America. It seeks to open branches and outlets at strategic locations. Aside that, Starbucks is a major corporate entity that seeks to maintain a strong grip through vertical integration. Starbucks maintains a strong hold on the coffee-related products and goods in America and around the world. Starbucks has acquired several processing plants and manufacturing entities that supply other corporate bodies with coffee and snack products which helps to boost the brand image. Stakeholders are the major entities who affect and are affected by the activities of an organisation (Freeman, 2004). In the case of Starbucks, the main stakeholders are employees, customers, the community, coffee producers and shareholders. In the mission statement of Starbucks, it seeks to satisfy the needs and aspirations of all these groups of stakeholders. The mission of Starbucks promises to provide a great work environment for the employees of Starbucks where diversity and excellence are at the core of their vision. They also seek to provide absolute customer satisfaction through excellent products. Also, Starbucks seeks to give back to the community and provide good arrangements and agreements with the coffee producers in different parts of the world. On the side of the shareholders, Starbucks seeks to provide the highest possible profits year-in-year-out for them. Starbucks' core strategy is 'to build a company with a soul'. This means it desires to set up a socially responsive organisation that seeks to provide the best results for all classes of stakeholders. It focuses on common values, common purpose and respect of people as well as shared success to create a bond between employees, suppliers, shareholders and management. Starbucks has different types of outlets found in several forms and systems thorough which they serve world class premium coffee. The growth of the Starbucks brand is an important element of the strategy. So Starbucks continues to provide high quality services and create a conducive atmosphere for coffee lovers. It embarked on an expansion drive in the 1990s by selling in top restaurants and hotels. It also entered joint ventures and strategic alliances with food manufacturers and CD manufacturers to create a unique brand that could be used to sell products around the world. Starbucks also expanded into other markets through strategic acquisition drives. They continue to spread their coffee brands through licensing and international expansion. However, Starbucks is going through some strategic challenges. The focus on the US markets seem to be proving less profitable due to the recent financial crises. Starbucks is therefore focusing on expanding to other foreign markets. They also seek to diversify and continue the vertical integration drive which seeks to acquire different business concerns related to the coffee industry. External Analysis External analyses refers to the points or situations where an organisation's activities interacts with the elements in the wider society; naming governmental, international, macroeconomic and socio-cultural and technological trends relevant (Scott, 2009). Political The years 2007 – 2009 were tough times for the United States in general. The War in Iraq and the global financial crises created a strong impact on the nation as a whole. The US Congress passed 3 stimulus bills in the period (The New York Times, 2012). These bills were meant to provide recovery to the financial system. It provided tax cuts as well as an unemployment fund to support the social security of laid off workers. Starbucks has most of its operations sited in the United States. They were therefore hit by the reactionary position taken by the US government to provide much needed support for the American people who were hit by the economic conditions. As a business, Starbucks had to lay off some more workers and also close down some branches as a result of the government's policies. Economic The global financial crises caused serious problems for American businesses. The Obama administration's take over from the Bush administration meant that there was a major turnaround for the American economy between 2008 and 2009. The corrective actions of the democratic government of Obama led to some financial obligations and cuts that had a significant adverse effect on businesses throughout America. The Bush government signed a $158 billion bill that was meant to support American businesses in 2007 (The New York Times, 2012). The Obama administration pushed up for a further $787 billion cut to support unemployment benefits that was meant to prevent the financial problems that the unemployed went through. Clearly, the unemployment and financial challenges led to more people staying off work and commercial areas since they were unemployed. It also changed the focus from luxuries (which include several Starbucks products). This is evident in the fact that sales declined in Starbucks throughout the American operations. Some more branches had to be folded up simply because they were not making sufficient branches throughout their operations. Sociological The market and demand for coffee and other top quality products declined in the United States between 2007 and 2009. However, there were some important changes that occurred in the sociological trends. Duvalier (2010) identifies that the credit crunch and global financial crises caused North American and Western European businesses consider expanding into new markets around the world. This means that there were important markets in South East Asia and other traditional markets like Europe, Australia and other parts of the world that created tastes and preferences for coffee that was brewed and sold through specialized outlets like Starbucks. Technological In terms of technology, the number of Internet users increased throughout the world. Based on the model proposed by Johnson (2009), Internet usage increases between 1% and 12% per annum. This provided a greater option for businesses to open up more e-commerce outlets and systems throughout the world. The Internet users gave the impetus for more people to buy things over the Internet rather than through traditional outlets. Environmental More environmental and health consciousness came up in the early 21st Century (Dinur, 2003). Health consciousness has given the impetus for businesses to focus on the important elements of developing their processes and systems. The new environmental and health concerns of businesses provided some advantage to entities that had the infrastructure in the past rather than those that were trying for the first time. This implies that most businesses that had a history of being involved in health and environmentally conscious systems have a head start. Legal Legally, 2007 – 2009 focused more on financial laws that affected taxation and other economic matters. In 2009, New York and several states passed laws that required chain restaurants to show the calorical value of everything they serve (Herrington, 2011). Internal Analysis Financially, Starbucks has several requirements. First of all, they have the responsibility to pay for their operations. This include payment of employees and other relevant bills, improve the usage of assets and continue to declare high profits that can guarantee an attractive return on investment for its shareholders. The ratios of Starbucks provide a picture of the internal financial strength of the company. Return on Assets This shows how efficiently assets are being used to generate wealth for the owners of the business. It is calculated by the formula: Net Profit/Total Assets. The figures for Starbucks in 2009 was 390.8/5,576.8 = 7.0076% This shows that the asset base of Starbucks earns about 7% during the year. This does not seem very encouraging because as a major corporation in the United States, the returns on the volume of investments which is in several billions of dollars should have yielded more than 7%. In 2006, Starbucks earned over 15% returns on its assets. This shows that the profitability of Starbucks has fallen continuously over the past years. Return on Equity This is calculated by comparing Net Profit after Tax with Total Equity. The figure for 2009 was 390.8/3,055.7. This was about 12.8% of what Starbucks investors had put into the venture. Although this was closer to the average in most industries, the position of Starbucks had deteroriated significantly from over 20% in 2006 and 2005. This shows that Starbucks is returning less on the capital invested in it. Gross Profit Margin Gross profit margin shows how much profits are made in a given period in relation to the cost of sales. Starbucks made 5,4497/9,774.6 shows that profits was about 55.7% above the cost of sales. This shows that the cost of sales was still quite high and they should find slightly cheaper methods and systems for production and other affordable materials. Net Profit Margin This examines the Net Profit/Sales. In the case of Starbucks, the Net Profit margin was 390.8/9,774.6 which is approximately 4%. This shows that only 4% of sales are ever declared as profits! This is extremely low and Starbucks is clearly running at extremely dangerous levels. They are very close to incurring losses. Current Ratio The current ratio matches current assets with current liabilities. It gives a picture of the relationship between the current assets and the current liabilities used in the period. An ideal position of 2 shows that the business kept twice the current assets in relation to the current liabilities. In Starbucks, 2,035.8/1,581. This is 1.287. This shows that the volume of current liabilities used in 2009 was almost as much as the current assets that were employed in the period. This again shows that there are signs of overtrading in Starbucks. Debt/Assets This shows the relationship between external funding and the use of assets owned by the business. In the case of Starbucks in 2009, it was close to 10%. This shows that Starbucks is relatively acquiring high levels of external funding. Summary of Financial Position It is quite apparent that financially, the profitability position of Starbucks in 2007 – 2009 are not so healthy. They seem to have extremely difficult and tough situations that stand in its way from the acquisition of its objectives. They will need to make sufficient changes to meet the real challenges in the financial sense. CEO's Analysis of Internal Matters The CEO of Starbucks identifies that the main internal problems are: 1. Decline of the customer base 2. Stronger competitors and 3. Complacency on the part of management. Stores Starbucks continues to run several stores throughout America and more around the world that have unique architecture and ambiance. However, most of the stores are located in the United States where demand has fallen significantly. Product Offering Starbucks has continued to add up to the products that it offers. The new products that are available provides stronger competition and diversification of resources. The control of strategic alliances gives hope for new options and opportunities in the acquisition of profits for the company. Acquisition Relationships The Coffee Purchasing Group and other links to coffee producers in other countries provides a strong control over the cheap importation of high quality coffee in a sustainable manner. Starbucks also observes strong environmental standards and ideas that provide assurances for the sale of high quality coffee that will be acceptable to purchasers. Employee Relationship The profit sharing arrangement as well as other stock purchasing options and high wages provide a strong internal relationship that exists between employees and the company. It enhances loyalty. Shareholder Confidence The earnings per share reduced in 2008 by almost 50% from the previous year. Although it improved in 2009, it is still not close to previous earnings per share. Shareholders are not likely to be so much impressed by the rate of earnings. Current Issues and Challenges Diagnoses From the analysis made above, the following issues are eminent: 1. The US economy has continued to shrink and the financial crises has caused more problems and troubles for businesses in America in general. 2. Starbucks relies heavily on North American operations and as such, they are hit strongly by the financial crises in the United States. 3. Starbucks continues to rely on numerous underperforming stores. 4. There is a low Return on Capital requirement for all shops and it must be increased 5. New shops have been recently opened in wrong locations around the United States. 6. The options of customers are limited only to coffee, this closes Starbucks' income stream to other consumers with different needs. 7. The employee options and other motivators are not made available to Starbucks branches in other nations around the world, except America. Generation of Strategic Options. There are several options that exists in addressing the issues identified above. They include: 1. Cutting down on the number of stores opened in the United States. 2. Raise the expectations and returns required of Starbucks stores 3. Close down stores that are not presenting good returns 4. Invest in other profitable ventures other than coffee eg real estate. 5. Change store layouts and reduce cost of store buildings and enhance diversity for customers. 6. Implement logistics and motivation packages for employees in worldwide branches. 7. Expand to new markets around the globe eg. Australia, New Zealand, China and South Africa. The Ansoff Matrix gives important options that can be applied to this issue: Market Penetration - Identification of new appropriate positions and places where new stores can be set up. - Closure and sale of less productive stores. - Continue acquiring new businesses with strategic importance in the sale of coffee. Product Development - Identification of new products and services - Creation of new brands that are more affordable and easier to sell to non-coffee users. - Introduction of other basic necessities in Starbucks stores. Market Development - Identification of new locations in Australia, New Zealand and South Africa - Establishment of licensing arrangements with international partners. - Sale of less productive US branches and establishment of international branches and operations. Diversification - Acquisition of new income generation lines like real estate. - Blending of risks and diversification of financial portfolios. - Acquisition of more joint ventures. Also, from the internal and external analysis, a TOWS matrix can be created to give a fair view of the strategic analyses. Opportunities - Health requirements by public authorities - Increase in technology and E-Commerce - Opening up of International Markets Threats - Serious economic crises in the United States, the main market of Starbucks. - Presence of competitors who are fighting on strongly. Strengths - Strong store base - Strong employee relationships - High health and environmental standards - Strong asset position - Presence of strong ICT tools - Fairly diversified portfolio. - Promote health and environmental responsibility of Starbucks - Increase online outlets and advertising. - Establish new branches and arrangements in foreign markets - Close local US branches and open up branches elsewhere. - Rebrand he image of Starbucks. Weaknesses - Decline in customer base - Complacency on part of managers. - Declining profitability and loss of investor confidence. - Launch new products that are steeped in in abilities of Starbucks. - Establish cheaper outlets and effective advertising systems through the Internet. - Cut down costs and increase revenue. - Cut down on spending in the United States. - Increase return requirements of US stores. - Protect the market share from competitors. Description of Selected Strategy The chosen strategy will involve the penetration into new markets. This will involve some degree of scouting to find appropriate alternatives in foreign countries around the world. Once this is done, there will be the need to close down some US branches and open up new branches in more profitable countries. Existing Starbucks products need to be developed further to include the strengths and abilities based on the Starbucks image and also cut down on costs of production. Also, markets that exists in foreign countries must be developed further. New arrangements like franchising and licensing could be considered to get more foreign branches of Starbucks to open up and operate to earn more profits. Additionally, new income generating activities need to be identified to grow the income base of Starbucks and diversify risks. There is the need to identify new brand strengths and enhance the brand image of Starbucks. This can be done by incorporating the environmental and financial competencies of the brand. Also, cheaper methods of operation that cuts down costs like online sales should be considered. Conclusion Starbucks needs to consider its survival and growth. The survival elements involve the need to close down some US branches and open up branches overseas. In terms of growth, the diversification and establishment of more cost effective systems of trade should be considered by Starbucks. References Dinur, T. (2002) Organic Foods Hoboken, NJ: John Wiley & Sons Duvalier, F (2010) International Business and Emerging Markets Royale Publishing. Freeman, E. (2004) Stakeholder Analysis. Hoboken, NJ: John Wiley & Sons Publishing. Herrington, A. (2011) Calorie Posting and Impact. Available online at: http://www.law.upenn.edu/blogs/regblog/2011/08/calorie-posting-and-its-impact.html Johnson G., Scholes K. & Whittington R. (2005) Exploring Corporate Strategy. Financial Times Prentice Hall. Johnson F. (2009) Internet Business and Modern Business Silverman Press. Popkova S. (2010) Business Analysis. Berlin: Springer Verlag. Scott, S. (2009) Strategic Planning Edinburgh Business School. Stern P. (2008) Strategic Planning. Mason, OH: Cengage. The New York Times (2012) “Economic Stimulus – Job Bills” Times Topics Available online at: http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html Accessed: 29th March, 2012. Read More