Starbucks Analysis - Case Study Example

Starbucks Analysis Student’s Name Code + course name Professor name University name City, state Date Institutional Affiliation Introduction Starbucks started its operation in early 1971 at Seattle’s Pike place market with an aim of providing coffee to surrounding restaurants and bars. Howard Schultz was recruited and contributed a lot in the marketing of Starbucks. The company took a further step by expanding its service provision with the opening of the new roasting plant. The company established its name by opening of more stores as well as providing more products such as compact discs(Fellner 2008). The company made further progress by stretching its services to Japan, Hawaii and Singapore. This was boosted by the joint venture that included the one formed by Saza, which pushed the development of a coffee house in Japan. By 2008, the Company had progressed with the opening of 3,330 stores ranging from China to Australia and England and the total international stores added up to 5113. Throughout the year, the company has led in the industry in promoting conservation in its daily doings and preached the message to the rest of the world. Due its quality products, the industry has surpassed all competition in the market(Fellner 2008). 1. Identification of Strategic Issues and Problems. Starbucks has implemented the competitive analysis strategy that helps it to identify the various threats’ level as a result of competitors in the market. The different forces are referred to Porter’s five forces which include; internal rivalry, entry, substitution and complements, supplier power and buyer power(Frey 2009). By use of this strategy, the company has faced an increased market share in the market. Porter’s five forces for Starbucks a) Internal rivalry The beverage industry has grown more competitive meaning that the Starbucks’ dominant position in a large market is under great pressure. Since it was formed, Starbucks has dominated the overall market, hence creating a spill- over effect that has increased the demand for quality coffee beverage. This has led to increase of “mom-and pop” stores and coffee houses with different brands for consumers. The variety of substitute available for consumers has also increased its elasticity. Though the trend has increased domestically, coffee houses and coffee are still fixed in American culture leaving this market profitable. The key national competitors within U.S include McDonalds, Dunkin Donuts, and other fast food chains sprucing up. Therefore, the Starbucks Company should be keen in setting its prices so as to include too many potential patrons(Frey 2009). Due to the sheer size and business model, Starbucks can compete within the market. Starbucks Company can structure its cost than other corporations in the entire market due to the advantage of scale and scope. For example, Starbucks can buy its raw materials such as dairy goods, paper goods and syrups in bulk. For this reason, the company receive a higher margin within its speciality drinks that also help it to distinguish itself from other coffeehouses(Frey 2009). Starbucks is also able to distinguish its self from other industries through its increased effort in reducing its environmental impact. b) Barrier to entry Starbucks faces a great challenge in the entry of other firms in the market as the goods from the competitors are the same and there is no barrier to entry. Although this is a challenge to the company, on the other hand, its is advantage to the independent company such as “mom-and-pop” as it can compete with other large brands like such as McDonald because, on a local level, coffee is coffee. Due to easy entrance in the market, it indicates that on a long-term, profit margin increases in the industry(Schultz & Gordon 2011). Starbucks has also felt the pressure on the competition and has had to change its strategies in the market. For example, the company is currently changing its coffee line by offering cheaper and smaller cups and also introducing a new machine that individually create one cup of coffee to make it taste fresh. c) Threat of substitutes and compliment. There are large varieties of beverages available in the market ranging from soda pop, energy drinks to juice or water. However, to avoid this challenge, Starbucks sells a large section of these kinds of beverages in their stores. Starbucks offers food selection within its store location so as to complement beverage purchases. In addition to edible complements, Starbucks has also retailed coffee related complements such as coffeemakers, mugs and other merchandise. However, this is not enough considerable factors as such compliments do not boost the demand for speciality beverages(Schultz & Gordon 2011). d) Supplier power Starbucks can purchase the raw materials from any supplier and like the sell commodity market; demand and supply determine the price of those raw materials. e) Buyer power Starbucks decides on setting a price it sells its goods based upon the price elasticity of its consumer and also the current price fixed by the rival stores. Since the company offers a vertically differentiated product, the company can sell products with higher quality at higher price point. Thus, price is non-negotiable as the customers have no bargaining power with the company(Schultz & Gordon 2011). Summery for Starbucksof the threat to profitdue to porter’s five forces Acting force Level of threat to profit Internal rivalry Mid Entry Low-mid Substitute and complements Mid Supplier power Low Buyer power Low Problems faced by the Starbuck Company The company is facing some problems that affect its daily operation. Such problems include: i. Increase in the price of the Coffee Coffee price is increasing due to number of factors and this price increase would affect the operating cost and margins. A lot of coffee used by the company is sourced from South America Brazil and Vietnam. The price of the coffee has also been affected by the local political environment as well as poor crop yield due to weather change. To curb this challenge, the company has been making aggressive pursuing strategy to help farms to mitigate the impact of climate change in the firms(Frey 2009). ii. Environmental problems The company is facing a problem on financial constraint in order to expand it business by environmental sound opening more stores and increasing more facilities. The company is also looking for innovations and collaborating with other like-minded organization in order to reduce their cups as well as the packaging waste(Frey 2009). 2. Analysis and Evaluation Starbucks economic analysis YEAR Ratio 2011 2010 2009 2008 2007 2006 Gross profit margin 1.36 1.41 1.26 1.24 1.35 1.05 Operating profit margin 0.15 0.13 0.06 0.05 0.11 0.12 Net profit margin 0.13 0.12 0.05 0.02 0.01 0.1 Return on total sales 0.21 0.2 0.08 0.07 0.18 0.18 Longterm-debt-to-equity ratio 0.13 0.15 0.18 0.22 0.24 0.00 Working capital 549.5 549.4 549.3 -162.7 -159.4 -697.3 3. Recommendations Net profit margin Net profit margin is an important indicator used to measure the profitability of company’s activities, excluding the fixed cost. Gross profit margin also assists the company to measure its distribution and manufacturing efficiency in the production process. A high gross profit margin shows that the firm is making reasonable profit as long as there is control of the overhead cost(Frey 2009). In my analysis, it indicates that the company is making an increasing net profit across the years. The result to this may be because of favourable seasons that lead to high demand of the product. In the lower profit margin, the company should increase its marketing tools in order to attract more customers. In my analysis, the company should increase its gross profit margin at a higher level as this indicates increased competition to its rivals in themarket(Fellner 2008). An increase of this net profit margin increases different economies of scale in the company. The company indicates that it is performing well in profit realization. Operating margin Operating margin measures what portion of the company’s revenue remains after deducting the overhead and direct costs and other indirect costs such as interest. Operating margin profit margin ratio is used to measure company’s operations and the pricing strategies. That is, it can give ideas on how much the company is making on every dollar of sales before the deduction of taxes and interest. A high operating margin indicates that the company is earning more on each sale per dollar(Fellner 2008). In my analysis above, it shows that the Starbucks Company is increasing its operating margin cost hence increase of the company’s portion of earning every manufactured product. Therefore, the company’s strategies on pricing are positively been accepted by the consumers of the product(Schultz & Gordon 2011). Long-term debt-to-equity Long-term debt-to- equity ratio shows the balancing on the equity and debt in the long term capital structure of the firm. A low ratio indicates the great capacity of the company to borrow additional funds to inject more cash in the company if needed. In my analyses, it shows that the long-term debt-to –equity in the company was poor in 2006 with 0 results. This shows that the company could not have access to external borrowings to increase it funds. The strength of long-term debt-to—equity increases in 2007 but declines across the years. The analysis shows that the company is facing a poor direction on strengthening its borrowing capacity(Schultz & Gordon 2011). The company should try to adjust strategies on the long-term debt-to-equity ratio so as to increase the borrowing capacity that is greatly required in times of business expansion. Working capital Working capital is a financial measurement showing the operating liquidity accessible to the firm. A positive working capital shows that the firm can pay or clear its short term liabilities. A high working capital in a business helps the company expand its operations in the manufacturing and distributing process. A company facing a negative working capital shows that the business is unable to clear its short-term liability with the available current assets in the firm. This can be avoided by increased sales and capital injections into the firm in order to increase its operation in the market. Working capital can also be an important indicator of the firm’s efficiency(Frey 2009). In my analyses, the company is facing a poor working capital ratio in 2006 to 2008 because there are negative values of the ratio. This shows that there are unbalanced liabilities and the current assets available in the company. Conclusion The paper shows that the positive performance success of the firm or company depends or relies on the management and the strategies applied in the business. Schlutz has high skill on management and when the company is formed, he builds it up despite the various challenges that he faces. He later withdraws himself from the company and the company faces poor performance. His comeback revives the company back to good performance and even competes with large companies in the market. The paper also shows that ideas matters, but the people to implement this ideas matter more. The customers were able to realize that the stores were less special than before even with the expansion of Starbucks Company. The main problem was the designs used and the weakening of the culture as people working in the company did not receive enough training. When Howard returned, he shuts down all the companies for three and half hours in order to drill the workers into company’s values and mission. Reference Fellner, K. 2008. Wrestling with Starbucks conscience, capital, cappuccino. New Brunswick, NJ, Rutgers University Press. Frey, D. E. 2009. America's economic moralists a history of rival ethics and economics.Albany, NY, SUNY Press. Schultz, H., & Gordon, J. 2011. Onward: how Starbucks fought for its life without losing its soul. West Sussex [England], Wiley & Sons. Read More