Fluent Essays

How to analyze a case: Situation Analysis “Synopsis” – briefly summarize the case in your own words – No more than 2 pages (worth 10 points)Environmental AnalysisSWOT Analysis – in bullet format (worth 25 points)StrengthsWeaknessesOpportunitiesThreatsProblem Statement “WHY?” Keep it brief…no more than 20 words.Challenge yourself to be concise but brief. This should be written as a statement not a question. (worth 10 points)Development of Alternatives – at least 3.Your alternatives are derived from your opportunities outlined in your SWOT. (worth 25 points). Number each alternative and explain.Evaluation of Alternatives & Recommendations – Evaluate each alternative using the pros and cons of each choice.Use outside sources to back up your hypothesis.Select the best choice based on the company’s strengths and opportunities.(Worth 20 points)Recommendation:End this section with an overall recommendation/conclusion – no more than 1 paragraph. (worth 10 points)Other pointers for working on your cases….All cases are typed, contain a cover sheet, sections are labeled and are double spaced and printed in a 12-point font.Don’t forget bullet points can help the reader (professor) to follow your points.Bullets should be utilized in the SWOT analysis.Do NOT use paragraphs for this section.Suggested Reading – Read the case at least 3 times.Yes, 3 times.If you only read it once, you will only be able to detect surface problems.Each group member receives the same grade. Attached is the case study. ce1f05f9_7997_42ad_8f40_0c0d9c6b8727__1_.pdf Unformatted Attachment Preview For the exclusive use of Y. Zhang, 2020. 909A02 TROUBLE BREWS AT STARBUCKS1 Lauranne Buchanan and Carolyn J. Simmons wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2009, Richard Ivey School of Business Foundation Version: (A) 2017-05-03 Starbucks was the darling of Wall Street, with a strong balance sheet and double-digit growth since going public in 1992. By 2007, it had more than 15,000 stores around the world2 and projected that the number would eventually grow to 40,000 stores, half of them outside the United States.3 But suddenly, performance slipped so seriously that the board ousted CEO Jim Donald and brought back Howard Schultz — Starbucks’ visionary leader and CEO from 1987 to 2000 and current chairman and chief global strategist — to re-take the helm. Despite the furor, the company was hardly in dire financial straits. In 2007, it had revenues of $9.4 billion, double-digit earnings growth and 2500 new store openings.4 But its share price had fallen almost 50 per cent as Wall Street became increasingly worried that the chain had run out of room for further U.S. expansion. In November, the company reported its first-ever decline in customers’ visits to U.S. stores.5 Insiders and analysts alike questioned whether the brand had been irreparably damaged by a single-minded focus on growth and short-term profitability at the expense of the brand. It was a fear that Howard Schultz himself had written about as the “commoditization of the Starbucks experience.”6 THE BEGINNING7 The Starbucks Coffee, Tea, and Spice Company was founded in Seattle in 1971 by Jerry Baldwin, Gordon Bowker and Zev Siegl, three guys with a passion for dark-roasted, European-style coffee. Coffee, they felt, was so much more than the bland beverage offered by Folgers and Maxwell House; coffee had rich, sensuous flavors if roasted and brewed correctly. Their vision was to educate consumers about fine coffees 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Starbucks or any of its employees. 2 Janet Adamy, “Schultz Takes Over To Try to Perk Up Starbucks,” Wall Street Journal, January 8, 2008, B1. 3 Janet Adamy, “Starbucks Sets Ambitious Goal of 40,000 Stores,” Wall Street Journal, October 6, 2006, B3. 4 Jonathan Birchall and Jenny Wiggins, “The Starbucks Romantic,” Financial Times, January 12, 2008, p. 7. 5 Ibid. 6 Howard Schultz, “The Commoditization of the Starbucks Experience,” Internal E-mail, February 14, 2007, http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html, accessed December 30, 2008. 7 Howard Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997. This document is authorized for use only by Yunzi Zhang in MRKT 5500 Summer 2020 taught by Anthony Fruzzetti, Johnson & Wales University from Apr 2020 to Oct 2020. For the exclusive use of Y. Zhang, 2020. Page 2 9B09A002 the way a sommelier educates diners about fine wines. To this end, Starbucks sold only dark-roast, wholebean coffee from places like Sumatra, Kenya, Ethiopia and Costa Rica — no ground or prepared coffee. And it sold only manual coffee pots and equipment needed to grind and brew coffee correctly at home — no electric coffeemakers that would mask the coffee’s flavor. The Seattleites successfully developed a devoted, local customer base, but it took Howard Schultz, who joined the company in 1982, to see the potential for bigger things. Schultz had grown up in the Bayview Projects, federally subsidized housing in Canarsie, Brooklyn. His father had quit school to help support the family, served in World War II and worked a series of blue-collar jobs. As Schultz recalls, his father “never found himself, never had a plan for his life.”8 One of his most vivid childhood memories was when his father, then a delivery truck driver, broke his foot and couldn’t work. Without health insurance or worker’s compensation, the family had nothing to fall back on. This childhood event made an indelible imprint on Schultz, and he became determined to make something of his life. He went to Northern Michigan University on a football scholarship, where he majored in communications, taking courses in public speaking, interpersonal communications and business. After a short stint in sales at Xerox, he joined Hammarplast, a Swedish manufacturer of stylish kitchen equipment and housewares. By the age of 28, he was promoted to vice-president and general manager. While at Hammarplast, Schultz noticed that a Seattle retailer with only four stores was buying more of a particular drip coffeemaker than the department store Macy’s. Curious, he went to Seattle, visited the store — Starbucks — and was instantly hooked on the “romance” of fine coffee. The owners appreciated his conversion to the real thing, but they initially rejected his offer to join their crusade, perhaps worrying that his hard-hitting New York style was unsuited to laid-back West Coast culture and that his ideas for expansion were incompatible with their mission of enlightenment. It took Schultz more than a year to convince them, but he finally won the position of Starbucks marketing director. Schultz’s Vision for Starbucks Soon after joining Starbucks, Schultz visited Milan for a trade show. There, he saw coffee bars packed with customers on every block. Baristas and customers were laughing and talking, enjoying the moment and the espresso together. As Schultz later described it, “It was on that day that I discovered the ritual and romance of coffee bars in Italy. I saw how popular they were, and how vibrant. Each one had its own unique character, but there was one common thread: the camaraderie between the customers, who knew each other well, and the barista, who was performing with flair . . . . ‘This is so powerful!’ I thought. ‘This is the link.’ The connection to the people who love coffee did not have to take place only in their homes, where they ground and brewed whole-bean coffee. What we had to do was unlock the romance and mystery of coffee, firsthand, in coffee bars. The Italians understood the personal relationship that people could have to coffee, its social aspect. I couldn’t believe that Starbucks was in the coffee business, yet was overlooking so central an element of it.”9 But his bosses weren’t interested. Cash was tight. Besides, Starbucks was a retailer, not a restaurant or a bar; serving espresso drinks would put it in the beverage business. When Schultz pressured Baldwin to expand the Starbucks vision, Baldwin would argue, “Howard, listen to me. It’s just not the right thing to do. If we focus too much on serving coffee, we’ll become just another restaurant or cafeteria. It may seem reasonable, each step of the way, but in the end, we’ll lose our coffee roots.”10 8 Ibid., p. 13. Ibid., pp. 51-52. 10 Ibid., p. 61. 9 This document is authorized for use only by Yunzi Zhang in MRKT 5500 Summer 2020 taught by Anthony Fruzzetti, Johnson & Wales University from Apr 2020 to Oct 2020. For the exclusive use of Y. Zhang, 2020. Page 3 9B09A002 Creating His Own Story Not willing to abandon his dream, Schultz departed Starbucks and opened Il Giornale, Italian for daily. His plan was to re-create the Italian espresso bar experience. To his surprise, Starbucks was his first investor, supplying $150,000. “It isn’t a business we want to go into ourselves,” Baldwin explained, “but we’ll support you.”11 It was a start, but Schultz needed $1.7 million: $400,000 for the initial store, to demonstrate the practical operation and consumer appeal of an Italian espresso bar, and $1.3 million for eight additional espresso bars, to show that the idea would work on a larger scale. In the first year, Schultz spoke to 242 potential investors; 217 said “no.”12 Their arguments became all too familiar: “Coffee is a commodity.” “Coffee consumption in the U.S. has been trending down since the mid-1960s.” “Coffee shops are everywhere.” “Americans will never pay $1.50 for a cup of coffee.” Still, he persisted. By 1987, Schultz had acquired the seed capital and opened three espresso bars. Then, in an unexpected twist of fate, Starbucks’ owners decided to sell — six stores, the roasting plant and the name. Schultz had to go for it. He raised four million dollars, acquired Starbucks, adopted its name and began to expand. Fifteen new stores were opened in fiscal year 1988; 20 in 1989; 30 in 1990; 31 in 1991; and 53 in 1992; all company-owned.13 Schultz explained, “We’re so fanatical about quality control that we keep coffee in our hands every step of the way, from raw green beans to the steaming cup. We buy and roast all our own coffee, and we sell it in company-owned stores.… Why? The answer can be found in the last cup of lousy coffee you drank. Unlike shoes, or books, or soft drinks, coffee can be ruined at any point from its production to consumption…. Coffee is a product so perishable that building a business on it is fraught with peril. The minute we hand our coffee over to someone else, we’re extremely vulnerable to its quality being compromised.”14 But Starbucks wasn’t just about the coffee. It was also about recreating the Italian coffee bar culture. Schultz wanted Starbucks to become the “Third Place,” the place between home and work where people gather, relax and interact with one another. To encourage customers to linger over a cup of coffee, Starbucks paid a great deal of attention to the details of the store — everything from the layout, to the furniture, to the music. Even more important were the baristas, whose ability to engage the customer was the heart of the Starbucks experience. Understanding the difficulty of managing human capital, especially when two thirds of workers were part-time, Schultz felt he had to make employees “partners” in his vision. He had to infuse them with the Starbucks culture, reward them with a sense of personal security and give them a reason to be involved in the success of the business. To instill the requisite coffee knowledge in recruits, Starbucks developed a 24-hour training program covering Coffee Knowledge (four hours), Brewing the Perfect Cup (four hours), Customer Service (four hours) and basic retail skills. To provide personal security, Schultz fought with his board to offer health insurance to all partners, even the part-timers. “Treat people like family, and they will be loyal and give their all. Stand by people, and they will stand by you,” he argued. The math made sense; at the time, it cost $1,500 a year to provide an employee with full benefits, compared with $3,000 to train a new hire. 15 And to increase involvement in the success of the business, he offered Bean Stocks — a pseudo stock option plan for partners with at least six months at the store.16 As “stock holders,” store partners had an incentive to participate in decision-making, to suggest cost-cutting measures to increase profitability and to 11 Ibid., p. 66. Ibid., p. 73. 13 Ibid., p. 114. 14 Ibid., pp. 171-172. 15 Ibid., p. 127. 16 Ibid., p. 134. 12 This document is authorized for use only by Yunzi Zhang in MRKT 5500 Summer 2020 taught by Anthony Fruzzetti, Johnson & Wales University from Apr 2020 to Oct 2020. For the exclusive use of Y. Zhang, 2020. Page 4 9B09A002 help maintain the integrity of the brand. If they felt that management was straying from the Starbucks vision, they had the right and responsibility to call them on it. The result of these initiatives was a more satisfied partner base. For baristas, turnover averaged 60 to 65 per cent, compared to 150 to 400 per cent in the average retail or fast-food chain. For store managers, turnover was around 25 per cent compared to 50 per cent for other retailers.17 Starbucks Goes Public With just over 100 stores in four states and Vancouver, British Columbia, Starbucks went public in 1992. Initially priced at $17 a share, the stock jumped to $21 at the opening bell. By the end of the day, the initial public offering (IPO) had raised $29 million for the company — $5 million more than expected — and Starbucks’ market capitalization stood at $273 million.18 Being a public company took Starbucks into the big leagues; it made millions for the believers who invested in the company, provided critical funds for future expansion and helped attract talented new people. But Wall Street can be a fickle master. As Schultz described it, “Alongside the exhilaration of being a public company is the humbling realization, every quarter, every month, and every day, that you’re a servant to the stock market.… Running a public company is an emotional roller coaster. In the beginning, you accept the congratulations as if you really deserve them. Then, when the stock price falls, you feel you have failed. When it bounces back, it leaves you dizzy. At some point, you have to divorce yourself from the stock price and just focus on running the business.”19 EXPANDING THE BUSINESS MODEL To satisfy Wall Street and stave off competitive threats, Starbucks made growth its mantra. Starbucks was in a race to establish national dominance before other emerging specialty coffee bars and yet trying to fly under the radar of the “big boys” — such as Procter & Gamble, who had purchased Millstone Coffee, the largest whole-bean supplier to grocers. To grow and claim leadership in the category, Starbucks focused on a strategy of new products, a stronger connection with customers as the Third Place and expanding store locations in the United States and abroad. Developing New Products One of the first additions to the management team after the company went public was Howard Behar, who had 25 years of retail experience in the furniture business and in resort development. While many people inside Starbucks have had a lasting impact on its success, it was Behar who actually changed the way the company thought. Time and again, he argued that it wasn’t just about the coffee or about the brand, it was about the customer. Behar’s crusade was not always met with open minds, as Schultz recalled in his book, Pour Your Heart into It: Howard had been at Starbucks less than a month when he came to me one day and asked, “Have you been reading the customer comment cards?” “Sure,” I said, “I read them. I read them all.” 17 Ibid., p. 128. Ibid., p. 185. 19 Ibid., pp. 188-189. 18 This document is authorized for use only by Yunzi Zhang in MRKT 5500 Summer 2020 taught by Anthony Fruzzetti, Johnson & Wales University from Apr 2020 to Oct 2020. For the exclusive use of Y. Zhang, 2020. Page 5 9B09A002 “Well,” he replied, “how come you’re not responding?” “Responding to what?” “Look at all the people who want nonfat milk.” “Well,” I explained, “I did a formal tasting a number of times this year of lattes and cappuccinos made with nonfat milk and they just didn’t taste good.” “To whom?” Howard was clearly growing impatient with my answers. “To me…” “Well, read the customer comment cards. Our customers want nonfat milk! We should give it to them.” I answered — and Howard never lets me forget it — “We will never offer nonfat milk. It’s not who we are.”20 The nonfat milk question led to one of the biggest debates in Starbucks’ history. Coffee purists were scandalized. Store managers were frustrated — how could they handle more than one type of milk without slowing store operations? Still Behar persisted, eventually getting Schultz to authorize an in-store test. The stores didn’t fall apart, customers got what they wanted and Starbucks stopped losing sales to more accommodating competitors. Nonfat milk was in. The Frappuccino story is similar. Starbucks management refused to consider a cold blended beverage on principle — it wasn’t a true coffee drink. This time, it was a couple of store managers in southern California who took the initiative after seeing their afternoon and evening customers defect to competitors who offered cooler, more refreshing coffee beverages. They began experimenting with different recipes and ingredients; they varied the blending time; they changed the ratio of ice to liquid. They tested their concoction with customers, and again, customers approved. Corporate came around. Within a year of rolling out Frappuccinos nationally, store sales of Frappuccinos were $52 million, seven per cent of total annual revenues.21 The success of the Frappuccino inspired more new products, many developed at local stores, then refined and disseminated nationally by corporate. Seasonal offerings, such as a strawberry and cream Frappuccino in the summer and gingerbread latte at Christmas, were introduced. Food items, such as cookies and pastries, began to make their way into the store. “Food is a big part of where we are going…” said Orin Smith, a member of Starbucks’ senior management team. “It is not going to be a lot of any one thing. It will be food that makes sense and complements the customers and their choice of beverages.”22 Starbucks would later introduce cold sandwiches and salads for lunch as well as hot breakfast sandwiches. As the company became more comfortable in expanding beyond its traditional roots, it developed products with other companies — a bottled Frappuccino with Pepsi, a coffee-flavored ice cream with Dreyer’s and a coffee liqueur with Jim Beam. The extensive distribution networks of these companies afforded Starbucks access to supermarkets and restaurants with their broader customer base. But even in negotiations with much larger and more experienced partners, Starbucks took care to protect its brand. The partnership with Pepsi — a company 100 times the size of Starbucks at the time — was a fifty-fifty arrangement, in which Pepsi ceded Starbucks a high degree of control over its brand equity and product formulas.23 20 Ibid., pp.166-167. Ibid., pp. 208-209. 22 Sarah E. Lockyer, “Full Steam Ahead,” Nation’s Restaurant News, May 3, 2004, p. 4. 23 Howard Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997, p. 222. 21 This document is authorized for use only by Yunzi Zhang in MRKT 5500 Summer 2020 taught by Anthony Fruzzetti, Johnson & Wales University from Apr 2020 to Oct 2020. For the exclusive use of Y. Zhang, 2020. Page 6 9B09A002 Location, Location, Location At the same time, Starbucks was adding new stores at a rapid clip. Its sophisticated model for store expansion was based on a matrix of regional demographic profiles and an analysis of how best to leverage operational infrastructure. For each region, a large city was targeted to serve as a “hub,” where teams of professionals could be located to serve as support for new stores. Markets were entered with the goal of expanding out to 20 or more stores in the first two years. From the core, it branched out to nearby “spoke” markets, including smaller cities and suburban locations with demographics similar to the typical customer mix. Starbucks didn’t advertise when entering a new marke ... Purchase answer to see full attachment