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MASTER OF BUSINESS ADMINISTRATION

MGT 6798

CASE METHODOLOGY:

An Individual Assignment

Submitted to: Mr. Ayub bin Hj. Khalid Submitted by: Fakhrul Anour bin Abdullah G1136857
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CONTENTS

1- ABSTRACTS 2- INTRODUCTION 3- PROBLEM STATEMENT 4- SWOT ANALYSIS 5- CONCLUSION 6- RECOMMENDATION 7- OTHER REFERENCES

Page 02 Page 03 Page 05 Page 09 Page 10 Page 13 Page 14

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ABSTRACT
Howard Schultz began his coffee career with STARBUCKS Coffee Company in 1982, when it used to be a retailer solely of whole bean coffees. On a buying trip to Italy, in 1983, the vast number of coffee bars in Milan inspired Mr. Schultz. He returned to STARBUCKS and presented his idea to expand the whole bean retailer into a coffee bar. The Board of Directors rejected his idea and two years later, Mr. Schultz left STARBUCKS to start his own coffee bar company which he named II Giornale. After two years of great success, II Giornale purchased the STARBUCKS name and assets and changed the names of all of it retail outlets to STARBUCKS.

Twenty-five years from now, when we look back again, if we can say that we grew our company with the same values and guiding principles that we embrace today, then we will know we have succeeded.
Howard Schultz

Today, STARBUCKS is an American global coffee company and coffeehouse chain based in Seattle, Washington. It is the largest coffeehouse company in the world with 20,891 stores in 62 countries. Yet back in 1999 and five years before, STARBUCKS was facing a moment to achieve momentum in the United States for the world market. Tokyo, Japan was the first outlet it has opened outside United States and Canada in 1996. Through its established strategy and organizational culture, STARBUCKS was in its outlook of sustainable competitive advantage through global business network.
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INTRODUCTION

At stock market, coffee was the second most traded commodity next to oil. It was divided into two categories; specialty coffee and basic coffee. In 1994, it was estimated that specialty coffee industry was growing at a rate of 15% per year and that the basic coffee industry was suffering. But unlike during the era of 60s and 70s, the per capita consumption of coffee had significantly decreased from 2 or 3 cups a person per day to 1.7 cups. According to the National Coffee Association the decrease of coffee consumption derived from poor product development, packaging and position (price focused) by the industrys leading coffee producers. But until 1999, the interest of consumers in the United States especially on specialty coffee had increased resulted from these four trends: 1) The Adoption of a healthier lifestyle had led North Americans to replace alcohol with coffee 2) Coffee bars offered a place where people could meet 3) People liked affordable luxuries and specialty coffee fit the bill 4) Consumers were becoming more knowledgeable about coffee
22% United States consumers purchased specialty coffee and they are urban people with annual income over $35,000 per year. ::: Avenue for Growth 20 Year Review of the U.S. Specialty Coffee Industry.

Specialty coffee was the highest echelon of quality coffee available in the world. Many people described it as gourmet coffee (though disputable) because of higher quality than basic supermarket brand coffee. Although most consumers only saw this division at the retail level, specialty vs. basic coffee was a concept that originated with the coffee grower.

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STARBUCK was the largest coffee company that provided specialty coffee in the United States, with market capitalization about USD2.4 billion with 6% net margin of coffee chains when compared to competitors in the industry. It owned all of its retail outlets other than host licensing arrangements. However owning all of its stores, STARBUCK was faced with the prospect of depending heavily on equity and debt financing to grow. But its stock price and Earning per Share/EPS had been rapidly increasing over the last five years (1994-1999).

The first STARBUCKS opened in Seattle, Washington (at 2000 Western Avenue) on March 30, 1971 by three partners who met while students at the University of San Francisco; Jerry Baldwin (English teacher), Zev Siegl (history teacher), and Gordon Bowker (writer). The three were inspired to sell high-quality coffee beans and equipment by coffee roasting entrepreneur Alfred Peet after he taught them his style of roasting beans. But after they bought Peet, sales started to fell though the market deman on specialty coffee increased. So in 1987, STARBUCK was sold to Howard Schulz.

In 1986 STARBUCK started to sell espresso coffee at its 6 outlets in Seattle which also included 1912 Pike Place Market. But in 1987, because of losing sales when the market demand for specialty coffee increased, the founders sold STARBUCKS to their former employee, Howard Schultz who was then in 2 years great success with his coffee bars, II Giornale.

Howard Schultz came from rather humble beginnings. He remembered how his father used to work hard for little money and no respect. He said his upbringing instilled in him not a fear of a failure but a fear of mediocrity. He was the first in his family to get a college degree and had always been an over-achiever.

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PROBLEM STATEMENT

About a third of the coffee farms in the world were less than three acres and the farmers did not have the desire, the volume, the money, the expertise, or the connections to export coffee themselves because most countries regulated coffee sales. How the specialty coffee companies got their supply was through the exporters instead. The price of certain coffee was a direct reflection of the quality and quantity of a coffee available at a particular time. It was very difficult to get price confirmations because a

successful coffee harvest was dependent different on factors so many as

such

weather conditions, health of the coffee trees, harvesting practices, disease and

infection caused by insects, and the social, and political, economic

regulatory

environments of the coffeeproducing countries.

Typically, coffee was moved from the farmer, to the collector, to the miller, to the exporter, to the importer, and finally, to the specialty coffee seller.

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Looking at the limited sources for specialty coffee but yet with increasing demand from consumers, STARBUCKS under the command of Howard Schultz (Chairman and CEO of STARBUCKS Corporation) assembled a business system that would increase its value strategy. Each component of the system was advised to deliver expectation at best quality to enhance confident not only to the shareholders but also the stakeholders.
35% Pacific Rim 15% East Africa 50% Latin America

SOURCING BUSINESS SYSTEM ROASTING AND BLENDING SUPPLY CHAIN OPERATIONS Employees RETAIL SALES Real-estate Approach SPECIALTY VALUES VENTURES MAIL ORDERS Domestic vs. International Retail Image

THE RETAIL STORE UNITS

THE SPECIALTY SALES AND WHOLESALE CHANNELS

THE MAIL ORDER BUSINESS

THE GROCERY CHANNELS

Through sourcing, STARBUCKS maintained close relationships with its exporters by working directly with them and providing them with training. Exporters of high quality coffee were very anxious to become STARBUCKS suppliers because it purchased more high quality coffee than anyone else in the world. Over the next three years, STARBUCKS hoped to double volumes but this would effect on its requirement of quality coffee against quantity. And despite STARBUCKS large supply needs, growing its own high-quality coffee was an option that was never seriously considered.
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STARBUCKS tried to build its supply chain operations in order to eliminate redundancy and maximize efficiency based on its four business units. STARBUCKS formula was firmly based in its coffee, its employees, its merchandising, its ownership philosophy, its real-estate approach, its image, and its innovativeness.

Quality upon quantity is the best deal of process that STARBUCKS offered to its customers to ensure eternal confident on the purchasing power. Through roasting and blending of coffee, STARBUCKS held quite a detailed research and development (R&D) of how to gain a better serve for its choice of specialty coffee. The one-way valve technology packaging extended the shelf life of coffee to 26 weeks. No stocks on shelf last for more than 3 months at STARBUCKS and what was in store for beverages, the shelf life only limited keep to 7 days.

As STARBUCKS grew; finding enough good people that could replicate the values, culture and service experiences was an ongoing challenge for STARBUCKS. Because developing coffee knowledge and service expertise demanded a great deal of effort from employees. In terms of merchandising, STARBUCKS faced challenges related to the design of a nationally consistent merchandising program, since many of its stores dealt with individual suppliers. Having baristas (STARBUCKSs store employees) that had strong coffee education was essential because STARBUCKS consumers were becoming more and more knowledge about coffee.

Every employee, even those that were hired for executive positions, went through the same training programs, which included a two-week term in store.

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STARBUCKS had a very flat organizational structure where everyone from the CEO to a barista was a partner and not an employee. It placed a great deal of effort into seeking the thoughts and opinions of its barista, because they were in direct contact with customers. The head office managers had sessions with people in the field, standard mission reviews where they collected questions from anyone about any topic and then responded and open forums where they heard from and listened to the partner base. THE PRINCIPLES OF SERVICE SYSTEM at STARBUCKS

HOSPITALITY

PRODUCTION

EDUCATION

With these principles, baristas were expected to be a customer-service oriented. This demanded a great deal of effort at their behalf.

Meanwhile, to meet its growth needs, STARBUCKS had approximately 20 real estate managers across the country. These managers worked with street sniffers to identify the best retail locations and their commissions were paid either by the landlord or by STARBUCKS . As it grew and the number of A sites in A markets decreased, one of the key challenges faced by STARBUCKS was to constantly motivate its real estate staff to continue generates 20 to 40 solid stores per month. This challenge has to be met if it was going to meet its goal of 2000 stores by the year 2000. Howard Schultz and the senior management at STARBUCKS were committed to the companys strategy. How the company should react to all of these opportunities was one of Mr. Schultzs key concerns. Was STARBUCKS growing in the best way possible? Or was it overextending in its quest for growth?

Of key concern at marketing department in STARBUCK was its brand equity. The retail business had historically been its source of brand equity. This had meant that STARBUCKS was never just about the coffee; it was about a place, an experience.

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SWOT ANALYSIS
OPPORTUNITES
1) The demand for specialty coffee had increased 2) The second largest stock market after oil 3) The increasing potential of urban lifestyle 4) People are becoming more knowledgeable about coffee

THREATS
1) Strong competitors in the market 2) Coffee beans prices fluctuated through time 3) People became more and more health conscious 4) Demand for specialty coffee increasing but low sources 5) Easy access to specialty coffee

STRENGTHS
1) Leading brand on specialty coffee 2) Diversified portfolio to offer coffee variety and customization 3) Defined focus on quality and taste 4) Convenience and easy to find its stores 5) Huge number of talented & well-trained employees

S-O
Being the leading brand of high specialty coffee in an increasing demand market is a safe to win situation. All STARBUCKS needed to ensure was to maintain its quality, performance and production at a sustaining level through expanding and market sharing such as merger and acquisitions.

S-T
The growth of competitors was considerably impressive. With limited sources for raw materials, being the leading brand proved to have more potential on buyers and sellers strong business relationship, which at good spot would surpass all other competitors in the market share.

WEAKNESSES
1) Flat organizational structure 2) Supply of coffee came from second-hand suppliers not first-hand 3) Limited sources for good quality coffee at short distance

W-O
The unique quality of STARBUCKS could be upon its weakness as a flat organizational structure to increase opportunity of bargaining power. As second largest stock market, demand should increase supply.

W-T
With low supply but high demand, STARBUCK should start looking at new market approach of realestates by cultivating its own coffee as a standby for any circumstances in short of supply. This would help preservation at long-run.
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CONCLUSION

Looking at the financial performance of STARBUCK within the five years period, it is a fair consideration to define it as a workable status for long-run business. Unlike its competitors, STARBUCKS used internal financing to roll out stores, but with new ventures in the mainstream of strategy, financial stability i convinced. Three of STARBUCKS newest business ventures included its contract with Dreyers Ice Cream, its bottled Frappuccino product with Pepsi and its penetration into the grocery channel.

It was estimated that this ventured would perhaps reach $40 million at retail and contribute at least $500,000 to earning during fiscal 1997. Although the return was somewhat limited, it opened STARBUCKS to an entirely new customer base, reinforced its premium quality image, and built its reputation with supermarket chains. Bottled Frappuccino was STARBUCKS attempt to introduce a quality ready-to-drink coffee beverage into the North American market place. STARBUKCS viewed this bottled beverage as $1 billion opportunity. These estimates were from Pepsi who, who said that it had never seen a product test quite as well as bottled Frappuccino, where 70% of testers became repeat purchasers. This product was currently being offered in all STARBUCKS retail stores and had begun to be distributed via PepsiCos national distribution channels.

Presence in supermarkets is not essential to STARBUCKS survival or prosperity. However, in the interest of being a major player in coffee for the home, we have to be available in supermarkets. This is because convenience plays a key role in decision to purchase coffee for the home.
Mr. Orin Smith (President & COO of STARBUCKS)

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Specialty sales in the business system of STARBUCKS were agreements with retailers, wholesalers, restaurants or service providers to carry its coffee brand. It was not only provided STARBUCKS with revenue growth potential buat also with increased name recognition. It was the benchmark strategy for new ventures. Some of these partnerships involved serving STARBUCKS coffee, some where for product development and others were for store development. STARBUCKS was actively increasing its participation in specialty sales contracts.

Among many different companies that had been partnered with STARBUCKS.

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Another way in which STARBUCKS hoped to reach new customer base was through the introduction of its new espresso carts or kiosks. By introducing STARBUCKS Espresso Carts, the company had succeeded in branding the coffee cart, which had always been a brandless, grassroots type of specialty coffee retailer. STARBUCKS was in the initial stages of its carts strategy that called as Doppio. It would allow the company to take advantage of sales areas such as train stations, street corners, malls, etc.

STARBUCKS called its version of the espresso cart as Doppio. The Doppio was an 8 x 8 cube that unfolded into a larger stand with sides, counters, and STARBUCKS trademark finishes.

When it comes to human resource, STARBUCKS took great care in recruitment, from its baristas to its senior managers. For baristas, turnover rates, were about 60%, this was less than half of the industry average (150% to 300%). To prepare them for the challenge, they all underwent 24 hours of training before they were allowed to serve a cup of coffee to a STARBUCKS customer.

We have very educated consumers. So we have to give the baristas some kind of a basis and background so that they can answer these difficults questions.
Mary Williams (SVP Coffee for STARBUCKS)

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RECOMMENDATION

STARBUCKS decision to enter the international market place to prevent competitors from getting a head start was considerably a perfect plan for the future long-run of its business. It was a way to build upon the growing desire for Western brands, and to take advantage of higher coffee consumption rates in different countries. It was expected that in the next five to ten years, international retails contribution would be sizeable. Another recommendation that could grow the marketing potential of STARBUCKS was to gain more ventures through its specialty sales by going into the fast-food market like McDonald, KFC and Pizza Huts. This kind of venture would only extend brand marketing but also expand awareness on specialty coffee. Last but not least, with its strong business system and wise-oriented strategies on a flat organizational structure that had been proven effective, sustaining it was recommended. It was believed that STARBUCKS had already build a strong structure of strategy for specialty coffee business.

Provide a great work environment and treat each other with respect and dignity. Embrace diversity as an essential component of the way we do business. Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time. Contribute positively to our community and our environment. Recognize that profitability is essential to our future success.

SIX GUIDING PRINCIPLES

With a strong presense of its organizational culture that followed six guiding principles, it helped STARBUCKS to measure the appropriateness of its decisions.
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OTHER REFERENCES

http://inkdrawing.blogspot.com/2011/0 4/howard-schultz-ceo-ofstarbucks.html

http://www.starbucks.com/

Howard is very creative, he is very inspiring, he is exceptionally demanding, he is tremendously competitive, exceptionally ambitious, has very high standards in everything we can do and he is always ratcheting the bar up. He really cares about people; anything anyone would do to damage the culture he would be right on it.
Orin Smith (COO of STARBUCKS)

Ink illustration of Howard Schultz for Worth magazine by Graham Smith.

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