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COFFEETALISM: How Starbucks Conquered the World?

February 27, 2010

Find out how coffee-making became a multi-billion dollar global industry…

Everybody is now looking at the amazing development of Starbucks Coffee Corporation. From being a modest nine-store

Coffeetalism in the Philippines...

Coffeetalism in the Philippines...

small-and-medium enterprise in 1987 the Seattle-based coffee empire has grown into a multinational espresso chain by year-end 2004, with over 7,000 locations around the world, more than half of which were company-owned operating in the United States. The unparalleled rise of Starbucks to claim the number one spot of the global coffee market did not just spawn the proliferation of espresso bars around the world, but also disproved the traditional business concept of many snooty conventional businessmen more than two decades ago. The Starbucks’ story is indeed a testimony that there is no such business lexicography that contains the ABCs for corporate success, and that not all practical and successful business tips are taught in school. The reason for this is that business is not just about applying all the academic aspects of it; it is but about doing the right thing.

Thus doing the right thing was effectively applied by Starbucks founder and chief global strategist Howard Schultz upon realizing that there was much more to coffee trade than just retailing ground and roasted coffee beans to java-drinkers (Thompson, Hawk and Shah 2004, p. C6). Schultz knew that the first Starbucks owners totally missed the right button, as he realized, after witnessing how espresso bar owners did their business in Milan, the bigger and brighter promise of gourmet coffee market. Totally moved by his discovery and business plan, Schultz intransigently tried to convince former Starbucks’ owners Jerry Baldwin, Zev Siegel, and Gordon Bowker to also open espresso bars apart from selling roasted coffee beans to costumers. In 1984, the company opened a 300 square feet coffee bar in Seattle although the owners had no intention to take Schultz’s proposal seriously. By the following year, the frustrated Schultz left Starbucks to open a specialty coffee company with the help of a lawyer friend.

The original company— Starbucks Coffee, Tea, and Spice— was put up in Seattle’s Pikes Place Market in 1971. Owned by three academics who shared great passion for quality coffee— Baldwin, an English teacher, Siegel, a history mentor, and Bowker, a writer, the first Starbucks was only confined to selling roasted and ground coffee beans to Seattle’s coffee-drinkers (Thompson, Hawk and Shah 2004, p. C2). The company had a successful start, as everything went well and studied thoroughly— from purchasing quality coffee beans to roasting to grinding up to selling the finished products. Schultz, who was quickly hooked on the spell of coffee, gave up his high-paying job as vice-president and general manager of U.S. operations for a Swedish maker of coffee equipment to join Starbucks (Thompson, Hawk and Shah 2004, p. C6).

With the help of a lawyer friend, Schultz was able to raise $ 1.65 million from 30 investors to put up Il Giornale, and open a 700-foot store in Seattle in April 2006 (Thompson, Hawk and Shah 2004, p. C8). Although Il Giornale had a successfully start, Schultz had to correct some mistakes in order to attract more costumers, and by 1987, the company acquired Starbucks’ stores, roasting plant, and company name to become what is now known as Starbucks Coffee Corporation. Starbucks went on to defy the conventional business mindset during that time until it became the strongest global brand in the coffee market.

Different Indicators of Strategy

Were it not for the solid determination of Schultz to ‘do the right thing’ by applying his personal business plan, Starbucks would have never become the strongest brand in the global coffee market. Schultz best exemplified the abilities and characteristics of an effective leader as he was able to win over the mostly anxious investors and board of directors of Starbucks. Perhaps this is one of his best attitudes that led Starbucks to its current stable status. On the other hand, the following are the different indicators of Strategy that might have applied by Starbucks:

Gain Sales and Market Share

Perhaps one of the weaknesses of Starbucks is the tag price of its products, which makes it accessible only to wealthy people and people who have great passion for quality coffee. Price has something to do with the capacity of a particular business to compete in the market. There has been an almost universally accepted notion in trade that the lower the prices are, the higher the chance to win the tightening competition for a bigger and wider market. This is because there are external factors that justify this notion. Two of these factors are the economic condition of nation-states and the global economic circumstances that also affect the economic performance of most countries. The economic condition of a country affects the per capita income of individual earners especially in this age of globalization wherein countries are economically attached to or interdependent on each other. Another reason is the threats posed by new entrants that offer quality yet affordable products. This is one of the factors that were carefully weighed down by Starbucks planners for the past years, when a good number of coffee companies entered the markets upon realizing that the coffee market was still in its infancy. The evidence of this came early this year when Starbucks management decided to lower its price to one dollar for small cups due to the widening competition from rivals selling more affordable cups of coffee (Associated Press1 2008). This move seeks to counter the stiff competition created by new entrants like McDonald’s and Dunkin’ Donuts that are offering 10 oz. cup of first-class roast for only $1.07 and $1.39, respectively (Associated Press1 2008).

During the early years of operation of Il Giornale, local investors feared that consumers would be unconvinced to spend $1.50 or more for a cup of java. Howard Schultz, who already made his business plan, refused to give in to such an idea and instead focused on his mission to make Starbucks “the purveyor of the finest coffee in the world” (Thompson, Hawk and Shah 2004, p. C11-17). To achieve this purpose, he convinced the board of directors accomplish the following— to “build a world-class roasting facility”, to make Starbucks the best place to work, and to satisfy the costumer by improving the delivery of services and the quality of its products (Thompson, Hawk and Shah 2004, p. C11-17). Starbucks also established a purchasing strategy to ensure that the quality of the coffee beans meet its flavor and quality standards. On the other hand, the quality of Starbucks products all depends on its world class roasting facilities. The roasting of coffee beans follows a meticulous step-by-step process and involves trial-and-error testing so to guarantee consistency of results (Thompson, Hawk and Shah 2004, p. C28).

Respond to Shifting Market conditions and External Factors

Howard Schultz: The world's best Coffeetalist!

Howard Schultz: The world's best Coffeetalist!

Market conditions and other external circumstances have tremendous impacts on the status and performance of business organizations. In order to survive and sustain continuity, business organizations have to acclimatize themselves to market shifts and outside factors which are usually in the form of vulnerabilities, threats, and risks. Sometimes these require business organization, diversification of products and services, and improvement or acquisition of facilities and services. Starbucks’ ability to adjust to market shifts is what makes Starbucks still a strong brand until today. During its early expansion outside the Pacific Northwest, Starbucks confronted several external threats and concerns that could have countered Schultz’s business plan. The company’s entry to Chicago proved to be a big headache as the Chicagoans did not quickly embrace Starbuck’s coffee culture. As a result, the company lost money on its Chicago locations due to higher rents and higher wage rates (Thompson, Hawk and Shah 2004, p. C10). There was also a mistake with respect to the location of the company’s first Chicago store, as it was situated onto the street. This decision proved to be counterproductive as Chicagoans preferred to stay in their offices during winter and cold season rather than to go out to buy a cup of coffee. To guarantee the freshness and quality of its fresh-brewed coffee, Starbucks introduced its new packing— FlavorLock bags (Thompson, Hawk and Shah 2004, p. C10). Starbucks finally recovered its losses from its Chicago operations in 1990 when it raised its prices, hired experienced and competent managers, and when a mass of large coffee-drinkers began to appreciate Starbucks’ products and services. Legal factor also affected Starbucks operations in San Francisco, California that issued an ordinance prohibiting stores to expand their operations into restaurant and other services (Thompson, Hawk and Shah 2004, p. C10). Things went smoothly for Starbucks and other real-state and café owners when the city council was finally convinced to repeal said prohibitive law.

In 1989 Starbucks management was torn between the determination to keep its principle and a shift in the consumers’ choice, as health conscious costumers began demanding skim milk for cappuccino and latte. In their effort to give in to the demands of their costumers, Schultz and his team conducted series of tests and research on coffee made with non-fat milk, but they did not like to outcome of the test. This caused series of debate among Starbucks’ planners, as Schultz, who stressed the importance of keeping Starbucks culture and taste, found himself opposed by Howard Behar, who was hired by the company to head of retail store operations. Behar argued that Starbucks had to value what the consumers want and that management opinion did not really matter. A more intense internal debate followed, and Behar found himself in an uncertain situation after one fierce advocate for Starbucks culture and tradition called Behar’s position as tantamount to “bastardizing” what the company is all about (Thompson, Hawk and Shah 2004, p. C16). After observing a gradual decline in the company’s consumers, Schultz finally pushed the green light button authorizing Behar to conduct extensive research on coffee products made with skim milk. To cope with the technological advances in the post-millennium era, Starbucks entered into a joint venture with T-Mobile in 2002 to establish wireless connectivity in its 1,200 stores in the United States (Thompson, Hawk and Shah 2004, p. C22).

Enter New Geographic and Product Market

Expansion was the first thing in Schultz’s mind when Il Giornale acquired Starbucks. From day one, he believed that Starbucks was destined to be the strongest coffee brand in the world. Two words best describe Schultz’s expansion approach— strategic and practical. It is strategic because he needed to consider several factors that could undermine his business plan. One factor concerning expansion was the approval of the board of directors and investors. The technique was simple— he had to open first stores in Chicago and Vancouver to dispel the board of directors’ and investors’ doubt that it was not possible for a coffee business to expand its geographical operations. The kind of struggle Schultz faced was both internal and external. He always had to assure the anxious board of directors and investors that everything was under control before he could pursue his business plan. His struggle was external because he had to expect some outside factors that could affect the company’s interest and wellbeing. On the other hand, his expansion strategy is practical because they only selected big and progressive cities where they opened new locations. This is called “hub” and “spoke” technique (Thompson, Hawk and Shah 2004, p. C10). Hub refers to the big, industrial city where the company planned to strategically concentrate most of its locations. Once the city is mantled by tactically positioned Starbucks stores, the company could then open new stores in nearby places called ‘spoke’ areas. To ensure that the operations of its new stores were regularly monitored, Starbucks also created a new position called zone vice president. Zone vice presidents were in charge of all expansion processes and matters. Despite the fact that the company’s expansion operations went smoothly, Schultz needed more money to support his expansion plan, which was somehow ambitious for a new company. The plan is to open 125 stores in just five years— from 1987 to 1992 (Thompson, Hawk and Shah 2004, p. C10). Since Schultz strongly opposed the idea of franchising, the money needed for the expansion target should come from the company’s own pocket. Instead of seeing this idea as a weakness, Schultz invited venture capitalists to invest in the company, and in 1991— notwithstanding the fact that the company posted losses amounting to over $2 million—they were able to raise $15 million venture capital (Thompson, Hawk and Shah 2004, p. C10).

In terms of international expansion, Starbucks adopted a two-system technique— either open company-operated store or offer licenses to reputable and stable local companies. To guarantee that its name in the international market was best protected, Starbucks set requirements and standards that should be meet by any company applying for licenses. To be qualified as a licensee or partner, the company must have good track record in restaurant business and in handling possesses business values and tradition well-suited with Starbucks, and must be competent at costumer service, brand building, and in training people. In other words, the partners/licensees must be able to follow the corporate goals and comply with the standards and corporate cultures set by Starbucks. To better monitor in global spreading out, Starbucks created a new subsidiary called Starbucks International, a crucial entity tasked with international operations and establishing corporate connections with different partners all over the world. To Howard Schultz, global development did not only mean the exponentiation of Starbucks stores across the world but its entry into new product market and corporate alliances as well. Starbucks became more obsessed with offering new products by the advent of the dot com era. In 1995, the company started selling musical CDs in Starbucks locations (Thompson, Hawk and Shah 2004, p. C20). This was followed by corroborative partnerships with multinational corporations that diversified Starbucks’ products offering.

Merger or Acquisition of Rival Companies

To protect its wellbeing and to pursue its expansion target, Starbucks had to acquire or merged with its rival companies. When the first Starbucks owners decided to sell the company, its roasting facilities, and the company name, Schultz knew he had to raise money to purchase said company. The acquisition led to the formation of Starbucks Coffee Corporation that soon became the world’s number one coffee retailer brand. In 1998, Starbucks also acquired a coffee retailer based in San Francisco— Pasqua— to boost its competitive edge in the coffee market (Thompson, Hawk and Shah 2004, p. C21). The following year, another rival company based in Portland, Oregon, was purchased— Tazo, and this lead to a new product offering of Tazo tea to the company’s regular menu. In 2003, Starbucks widened its market projection after acquiring two rival companies— Seattle’s Best Coffee and Torrefazione Italia (Thompson, Hawk and Shah 2004, p. C21). Acquired rival companies have many strategic purposes. Purchased stores in strategic sites can be converted into company stores, while others can be used to rival other competitors in the market, thus protecting the mother company against growing stiff competition. The acquisition of competitors is also an indicative that the dominant company is doing well and is geared for inevitable market as well as product expansion. Furthermore, the acquired companies will serve as smokescreen to protect the mother company against resolute competitors. If business competitors are confused, they would not be able to map and carryout competent strategic moves (Starbucks Coffee 2008)

Strategic Alliances and Corroborative Partnerships

Expansion without alliances can be likened to a motor vehicle without fuel. A company may have all the money, resources, and competent people to carryout an expansion target, but it would falter in the end if it failed to muster corporate partnerships and alliances. Corporate partners and alliances will serve as additional reinforcement in combating determined rivals in the market. Howard Schultz made it sure he would not miss this technique, as he carefully positioned Starbucks in various tactical sites, corporate venues, and attractive markets like airports, universities, malls, supermarket, books stores, and many others. The following is the timeline that details Starbucks’ alliances and partnerships with several multi-national companies in the United States and abroad (Starbucks Coffee 2008):

  • 1991 – Forges business alliance with CARE, an organization engaged in global relief and development.
  • 1993 – Commences partnership with Barnes and Noble, Inc., the biggest bookstore in the United States, to offer fresh-brewed coffees inside the company’s bookstores.
  • 1994 – Starbucks is awarded ITT/Sheraton, now known as Starwood Hotels, account.
  • Establishes partnership with Chapters, Inc., a multinational bookstore chain based in Canada.

Enters into partnership with Dreyer’s Grand Ice Cream to offer first ice-cream product— Starbucks superpremium ice cream.

Inks joint venture with a Japanese SAZABY Inc. to sell Starbucks coffee in Japan.

  • Starbucks and PepsiCola entered into a corroborative business tie up to sell bottled Frapucino coffee drinks in supermarkets.
  • 1998 – Creates Urban Coffee Opportunities LCC, a business partnership with Earvin “Magic” Johnson’s Johnson Development Corp., to open Starbucks stores in areas that do not offer premium brands.

Inks a licensing contract with Kraft Foods, Inc., to offer Starbucks products to groceries and department stores across the United States.

  • 1999 – Enters into partnership with Conservation International to encourage conscientious ways of growing coffee.

Signs agreement with Albertsons, Inc.

Signs agreement with Host Marriott International

Enters into licensing contract with TransFair USA to retail Fair Trade Certified coffee in the United States and Canada.

  • 2000 – Establishes business relationship with Hyatt Hotels Corp.
  • 2002 – Inks MOU with Fairtrade Labelling Organizations International (FLO) giving Starbucks the opportunity to sign licensing agreements with national fair Trade organizations to vend Fair Trade Certified coffee in countries that that have Starbucks stores.

Corroborates with United Nation Global Compact, a global network of corporations, U.N. agencies, trade unions and NGOs that advocate for environmental principles, human rights, and labor.

Extends partnership with United Airlines

Creates Conservation Coffee Alliance affiliation with the United States Agency for International Development and Conservation International

Pursue New Market Opportunities and Combat Corporate Threats

Expansion and entry into new markets became Schultz’s and his corporate planners’ best strategy in making Starbucks the most profitable coffee company in the world. He never missed the opportunity to enter into new markets that would strengthen the company’s competitive edge against other coffee brands. Apart from selling brewed coffee, Starbucks also started selling musical CDs in 1990s in an effort to blend music with coffee. As mentioned above, the advent of the Internet age gave Starbucks several business opportunities, as it put money in different Internet investments, such as Living.com, Inc., Cooking.com, Kozmo.com, Inc., and Talk City, Inc. (Thompson, Hawk and Shah 2004, p. C30-31).

To combat market threats, Starbucks used its subsidiaries or acquired rivals to compete against other coffee brands in the market. It converted some acquired stores into Starbucks stores to rival existing competitors in various sites. One particular strategy Schultz adopted that contributed much to the company’s success was his efforts to make Starbucks a company that respected its employees and valued their contribution to its success (Thompson, Hawk and Shah 2004, p. C11). Everything about the company’s operations was planned and studied well. The company monitored and made it sure that only those competent, knowledgeable, responsible, and enthusiastic applicants would be admitted to work at Starbucks stores. Several programs, training, including benefits, were also considered and offered during the actual employment. This is to ensure that the employees were kept abreast of the changes within the company and that they would continue to learn more about coffee and the nature of their work. To make Starbucks the best place to work, Schultz convinced the board of directors and investors to include the part-timers in health benefits package but the latter disagreed since the company kept losing money in its early years of operation. The unfazed Schultz did his best to make them understand that the company badly needed the services of part-timers who either worked early in the morning or late at night. He also contended that part-timers comprised one-third of the company’s workforce and that their inclusion in the coverage of health benefits would prove that the company really valued its workers and appreciated their contributions to its success (Thompson, Hawk and Shah 2004, p. C11). In the end, the board agreed to include part-timers working 20 hours or more in the health benefits package. In 1991, Schultz, after seeing positive results like more profits and wider costumer base, thought of the opportunity to offer stock option plan to the employees in order to give them a chance to be company partners (Thompson, Hawk and Shah 2004, p. C11). Schultz believed that the plan would have long-term positive impact on the performance of the employees and on the continuity and expansion of the company. By 1995 the stock option plan proved to be effective to the extent that the Starbucks management decided to put forward stock purchase plan. The plan enabled the company to offer some of its stocks to employees at up to 10 percent of their base take-home pay. This resulted in about 5.7 million shares issued since the plan was offered to employees, and more than eleven thousand active employees out of about 35,000 eligible to avail of the stock purchase plan acquired more than one million shares per year (Thompson, Hawk and Shah 2004, p. C11). These strategies, along with other business techniques, made Starbucks the most envied and the most formidable coffee brand in the world.

Research and Development, Production, and Marketing Strategy

Starbucks spent much on research during its early years of operation. In fact, Schultz warned the company’s reluctant board of directors that Starbucks’ shaky situation in the late 80s would never be solved if they failed to acquire world-class roasting facilities that would complement his business plan. To give emphasis on this aspect, one of Starbucks’ mission statement states: “Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee” (Starbucks website 2008). Like the company’s first owners, Schultz and his team also devoted their time and resources to research and development. This aspect helped ensure that the company would not forego of its business principles, taste, and corporate culture when its costumers began requesting for skim milk in 1989. After realizing that Starbucks needed to give in to the demands of the costumers and changing market trends, Schultz ordered his team to conduct a research on coffee products made with non-fat milk. This decision both save company’s clientele and its goal to offer quality coffee to its valued costumers. As mandated by Starbucks’ mission statement, quality and excellence must be observed from purchasing of coffee beans to roasting and to offering the finished product to costumers. These aspects must be well-balanced and monitored by the company if it wanted to establish consistency and quality. To ensure the quality of coffee products, roasting operations must be given much emphasis. In Starbucks, the roasting process is an art itself in that it requires meticulous processes, involves trial and error testing, and a series of experiments (Thompson, Hawk and Shah 2004, p. C28). Only the most competent and highly qualified roasting employees could carryout and observe the process, applying all senses of smell to ensure that the end result is of good quality. Because of its widening store operations, Starbucks constructed a number of roasting plants in some strategic parts of the United States, such as Seattle, Kent, Washington; York Pennsylvania; Minden, Nevada; and the Netherlands (Thompson, Hawk and Shah 2004, p. C29). On the other hand, Starbucks did not spend much in advertising since there are more effective and cheaper means of promoting the company and its products. The promotional method being applied by Starbucks is through alliances or partnership with international organizations like United Nation and CARE, labor groups, cause-oriented groups, and environmental organizations, among others. It also engages in philanthropic activities, foundations, and in some efforts that support the interests and livelihood of coffee farmers from coffee-growing countries. As a result, it received numerous awards from both local and international organizations.

Strengthen Competitive Capabilities and Correct Weaknesses

Howard Schultz knew how and when to fortify and brace Starbucks’ competitive edge in the market. His primary business plan actually consisted of three strategic areas that needed thorough and absolute attention. They are management team, facilities, and Information Technology (Thompson, Hawk and Shah 2004, p. C11). From the very beginning, Schultz was fully aware that they had to address these three tactical aspects in order to equip Starbucks with competitive backbone it needed to compete in the market. He told the board of directors that they had to form a competent management team whose capability was way beyond the expansion goal of the company, to acquire world-class roasting facilities to support its goal to be “the purveyor of the finest coffee in the world, and to wire the company and its operations so to monitor daily sales in all its locations across the world (Thompson, Hawk and Shah 2004, p. C11-19). Apart from this Schultz deeply believed they had to provide health and other benefits and programs to thousands of company employees. He believed that if the company valued its people by giving them what they deserved, they would be better motivated to perform their respective works well and the company would be able to attract enthusiastic and competent people to join the company. Starbucks’ competitive capabilities also lie on its capacity to establish linkages with various multinational companies. This strategy provided more competitive advantage and market opportunities for Starbucks, thus combating possible external threats and risks of competition.

When Starbucks was still the purely Italian Il Giornale, several blunders were immediately corrected by Schultz like the never-ending Italian opera music, Italian décor, lack of tables and chairs, and Italian words on the menu, among others (Thompson, Hawk and Shah 2004, p. C8). Starbucks also now offer coffee made with non-fat milk to respond to the changing demands and health needs of its clientele. Today one of the external threats that confront Starbucks and espresso businesses is the worsening health conditions of people around the world that has a great impact on their daily sales. Health advisories in regard to the caffeine content of coffee products may also have effects on the operations of coffee companies. This is the reason why many coffee-makers are now offering decaffeinated coffee products to suit the needs of some coffee-drinkers. Several illnesses like diabetes also have a negative impact on the wellbeing of espresso companies, as people with diabetes were advised to regulate their sugar intake.

Diversification by entering new businesses

As already mentioned above, diversification was simultaneously carried out with expansion. There were a number of businesses Starbucks entered into in order to maximize its assets and resources. To diversify, Starbucks needed to enter into business alliances and partnerships with multinational corporations like Dreyer’s Grand Ice Cream, PepsiCola, Kraft Food, etc. It also joined the dot com market by investing in some websites that that engaged in e-tailing. Musical CDs are still being offered in all Starbucks’ stores to cater to music lovers. By the advent of computer age, Starbucks was one of the companies that offered Wi-Fi services to its costumers, thus expanding its market opportunities and boosting its profits. Diversity is one thing that Starbucks is popularly known for, be it in business or in doing it. That is why Orin Smith, Starbucks former President and CEO said (Starbucks2 2002):

“Embracing diversity is not only the right thing to do socially or ethically, it’s good for business. As the world becomes more end more complex, having a diverse work team helps us be more adaptive as a company. This is especially critical because we are expanding internationally. Diversity helps us make better decision. It is definitely a part of our value system.”

Starbucks’ Strategy in 2004

Several developments were carried out in 2004, signaling its more aggressive marketing campaign and expansion strategies for the years to come. These developments, if carefully analyzed, were all intentioned to grease its more diversified and more forceful spreading out for the next several years, as Starbucks management envisioned to see 15,000 locations by 2005 and 25,000 stores by year 2013 (Thompson, Hawk and Shah 2004, p. C2). But things changed now that it is faced with more intense competition with more aggressive new entrants in the coffee market. Having about 16,000 stores worldwide today, Starbucks Company still maintains its intention to have 40,000 locations, albeit there was no elaboration as to the timeframe (Associated Press2 2008). In 2004, Starbucks engaged itself in two strategic aspects— diversification and more Information Technology endeavors. It also extended and established deeper alliances and partnerships with international bodies and multinational corporations like Conservation International, United Nations, United Airlines, and United States Agency for International Development (Starbucks 2008). It also engaged in philanthropic activities like the Starbucks Farmer Support Center that benefited coffee farmers in San Jose, Costa Rica, promoted environment awareness in some company-operation locations, offered $1 million loan to Calvert Community Investment that sought to tender inexpensive credits to the Fair Trade Certified coffee farmers, and gave $500,000 grants to America SCORES to support literacy and youth welfares (Starbucks 2008). All these social and environmental initiatives are all effective forms of PR campaign as they have great positive impacts on the perception of the buying public. This shows that Starbucks focuses more on PR and other cause-related activities than on promotional advertising and other conventional advertising methods. This method is in line with the Starbucks strategies during its early building years, when Schultz was deeply committed to inculcating the cores values and principles of the company into its employees in the effort to “build a company with soul” (Thompson, Hawk and Shah 2004, p. C15-16). To boost its marketing campaign, Starbucks also established a marketing partnership with XM Satellite Radio to promote the company itself as well as Starbucks Hear Music channel (Starbucks 2008).

During that year, Starbucks diversified its business forging an alliance with Concord Records to release Ray Charles, Genius Loves Company CD, and offered CD-burning services in its stores to costumers. Further, Starbucks also expanded high-speed Wi-Fi connectivity services to over 3,000 company stores (Starbucks 2008). Thus, it can be said that year 2004 provided much cudgel to Starbucks’ corporate capabilities to carryout its business plans and expansion in the future. Through diversification, Starbucks was able to expand its market base by entering into new product lines and corroborative alliances with several multinational companies and international and well-known organizations. In view of this, it can also be concluded that vertical expansion or expansion by number of stores is not enough to make the company safe from vulnerabilities, business risks, and external threats. What is needed is diversify the business capabilities of the company by forging corporate partnerships, by offering new products, and by investing in new kinds of business. This technique guarantees strong brand, strategic position in various markets, and profitability. On the other hand, Starbucks was able to explore the use of Information Technology in its line or nature of business. Before, IT was just the means to keep track with the sales made in all its stores across the United States; today, IT is the product and asset itself that is making positive changes and difference in the company.

Two Operational Competencies

Although there are a lot of operational competencies and strategies applied by Starbucks to reach its current status, there are two best corporate strategies Starbucks effectively turned into corporate strengths that helped build the company. However, above these corporate techniques that spiraled Starbucks into a formidable global brand is the leadership style applied by Howard Schultz. Schultz, who returned to his post as CEO, best exemplified humility, skills, competence, individuality, compassion, and sense of responsibility. These good qualities of a corporate leader tore down the corporate leadership in practice about 30 or more years ago, when most business leaders subscribed to totalitarian, centralized, and traditional corporatism. Schultz was just among those visionary business leaders who emerged in the modern corporate world after proving their worth as capitalists who rely only on their rational judgment, and who value reason and competence. Thus, without such brand of leadership— that type of leadership that ought to live and succeed in whatever kind of business or endeavor; that leadership that will build global companies, reach great heights, and value human skills, talents, and competence— Starbucks would never reach its stable status it achieved today.

Build a world-class management team: A visionary business leader, Schultz had to calm down his reluctant and worried board of directors and investors during the early years of Starbucks when the company incurred millions of dollars of losses in three years, but such losses were already predicted in his business plan. He warned them that instead of worrying, they had to follow his three-pronged business strategies designed to pull Starbucks out of its jittery start. One of his three business techniques sought “to attract a management team well beyond our expansion needs” (Thompson, Hawk and Shah 2004, p. C11). His first battles actually started inside the board room as he had to face or calm down his mostly impatient and apprehensive investors and board of directors. Indeed, every business has to attract talented, skilled, experienced, competent, and enthusiastic workforce who would work on the objectives and goals set by the company management. Without such kind of workforce, it would be impossible to support any business plan even if the company had enough resources and facilities. What are being referred to here are the soft skills that must complement hard skills existing in every business firm. Soft skills refer to the human factor of a business. They involved everything that business people are required and ought to do at workplace like planning, evaluation, teamwork, group effort, team building, presentation, performance of individual work, and other skills critical for the achievement of a particular corporate objective (Noll and Wilkins 2002, p. 2). Soft skills are very important in this age of information technology because works have now become more complex and interconnected to and interdependent on other works. Because of the changing conditions in the corporate world, employers now demand better skills and more qualifications from job applicants. In this present age, the following are three factors that affect the thinking of employers: a) growing competition in the local and global market, b) the need to develop the business, and c) globalization (Bancino and Zevalkink 2007, p. 20).

These are actually the reasons why Schultz was so eager to have good and competent people to work for Starbucks. There is a need to put so much emphasis on the three stages of employment— hiring or recruitment, actual employment, and termination of contract. After the grueling hiring process, all admitted baristas are required to undergo 24-hour training for two weeks (Thompson, Hawk and Shah 2004, p. C19). They have to complete the required training topics, such as “coffee history, drink preparation, coffee knowledge, costumer services and retain skills” (Thompson, Hawk and Shah 2004, p. C19). After completing the basics of the training package, baristas will be required to do a hands-on exercise called “Brewing the Perfect Cup” (Thompson, Hawk and Shah 2004, p. C19). In other words, the trainees are required to know all the basics as well as the detailed aspects of the company, its operations, actual work, retailing, dealing with costumers, satisfying the clientele, and many others. A harder and more complicated set of training package is allotted to management trainees who will attend 8 to 12 weeks of sessions to be conducted by store managers. In this training, qualifications are higher because once they fulfilled the training period they will be tasked with managerial jobs which require better soft skills.

Diversified expansion: This term better describes the development of Starbucks from being a nine-store operation in 1987 to more than 16,000 locations by year-end 2007. Starbucks expansion did not just entail increase in the number of its stores, but increased and broader alliances and products offering as well that led to wider maker and its entry into new market opportunities. Since Starbucks management never considered franchising as a way to expand its store operations, the company had to rely on its profits, more venture capital, and stock option plans offered to its employees to raise money for its expansion target. For international expansion, there are two options— company-operated stores or offer licenses to reputable local companies to operate Starbucks in their respective localities. Expansion strategies were carefully laid down to minimize possible blunders. What Starbucks did was designate zone vice president to each store to monitor and manage core store operations. As Starbucks developed, several horizontal developments were also put in place, such as alliances and partnerships with multinational companies and cause-oriented organizations, offering new products, and entering into new business opportunities. This strategic move made Starbucks more attractive to the buying public, and more immune to vulnerabilities, market risks, and external threats.

Starbucks’ Aggressive Local and International Expansion

Control is something that Starbucks is very particular about. Business control is of great important to Howard Schultz because of his desire and unyielding goal to make Starbucks “a company with a soul”, and a company that respects and rewards the ability and skills of its own partners, and values the choice, demands, and continued patronage of its costumers (Thompson, Hawk and Shah 2004, p. C16). In Starbucks, the word franchising is being frowned upon, because of the concrete and permanent goal of its management to control the superiority of its products and services, the choice and character of its stores, and the corporate culture and sense of professionalism that made Starbucks the most respected and patronized coffee brand in the world. Its expansion at home started outside the Pacific Northwest, targeting states like Vancouver and Chicago, and then Portland, Oregon, California, and so on. Today, the United States is now blanketed with Starbucks company-operated stores and licensed outlets. It is now operating in 50 states, including District of Columbia, with 7,087 company-operated stores and 4,081 licensed locations as of February, 2008. Globally Starbucks is doing business in 43 countries, a proof of its secure position in the coffee chain industry worldwide.

A study made for the Consumer’s Choice Council revealed that coffee was one of the most in demand commodities worldwide, next only to petroleum products, benefiting 20 million families in 70 nation-states (Rice and McLean 1999, p. 4). The fact that in 2004 Starbucks only cornered 1 percent of the coffee-drinking market worldwide and 7 percent in the United States gave Schultz an idea that there were still miles of unfilled open spaces in the coffee market (Thompson, Hawk and Shah 2004, p. C19). The reason why Starbucks stores are heavily concentrated on the United States is the attractive figure of the country’s coffee-drinking market, with about 130 Americans who patronize coffee (Rice and McLean 1999, p. 11).

Starbucks’ United States Operation

With all the figures mentioned above, the United States is still the best market for Starbucks. The busiest stores operation of Starbucks was in North America, wherein an average of 22 million Americans per week patronized its products in 2003 (Thompson, Hawk and Shah 2004, p. C25). During that time the biggest coffee chain had widened its cult-like coffee followers who frequented its stores 15 to 25 times and spent 50 to 75 dollars per month (Thompson, Hawk and Shah 2004, p. C25). This is perhaps the reason why there are more than seven thousand stores operating across the United States. It is still undeniable that more than half of Seattle-based biggest coffee chain’s profits come from its domestic operations. Since most of the money come from the United States, Starbucks has to protect its business at home, in order to maintain its survival in case international operation turned out not that profitable and effective. During the early years of Starbucks operations in Japan, the company registered losses, and things only stabilized in 2004 when the Japanese began to appreciate coffee (Center for Management Research 2007). Apart from maintaining its corporate culture, choice and character of location, business operations, among others, the following are the possible reasons why Starbucks management seeks to fully operate its stores at home.

In view of the fact that the United States still remains the market territory of the biggest coffee specialty, there is a need to have full control of domestic operations. Indeed, Starbucks still has a long way to go in its United States’ operations since it only covered 7 percent of the U.S. coffee-drinking market in 2004 (Thompson, Hawk and Shah 2004, p. C19). The biggest coffee chain registered increase in shares at 8.7 percent in the United States last year. Another reason that made Starbucks more attentive is the entry of new established competitors in the coffee market, such as McDonald’s and Dunkin Donuts. McDonald’s Corp., which has over 14,000 stores in the United States, has been expanding its subsidiary McCafe after an increase in coffee sales last year. This year, Starbucks’ Chief Executive Office Jim Donald was replaced by Schultz, who is the company’s chief global strategist and chairman, to address the challenges that confront the world’s biggest coffee chain (Goncalvez 2009).

As evidenced by the number of licensees in the United States mentioned above, it is not really true that all stores in the U.S. are fully owned and operated by the coffee chain company. Over one-third of stores are licensed, perhaps because of the need to expand quickly due to the increasing number of costumers. Since 1991, the company granted license to Host Marriott to manage stores in airports (Starbucks 2008), and this was followed by Safeway, Barnes & Noble, among others.

Starbucks’ International Operation

Today Starbucks is doing business via company-owned and –operated stores or licenses in 43 countries. A total of 1,796

Coffee lifestyle...

Coffee lifestyle...

company-operated locations are situated in several countries like China, United Kingdom, Australia, Chile, Thailand, Canada, Germany, Puerto Rico, and Singapore (Starbucks2 2008). On the other hand, there are 2,792 licensed and joint venture stores in Austria, Bahamas, Bahrain, Brazil, Canada, China (Shanghai/Eastern China), Cyprus, Czech Republic, Denmark, Egypt, France, Greece, Hong Kong, Indonesia, Ireland, Japan, Jordan, Kuwait, Lebanon, Macau S.A.R., Malaysia, Mexico, the Netherlands, New Zealand, Oman, Peru, Philippines, Qatar, Romania, Russia, Saudi Arabia, South Korea, Spain, Switzerland, Taiwan, Turkey, United Arab Emirates and the United Kingdom (Starbucks2 2008). In terms of International operation stores are either licensed or company-operated. As can be seen above, there are only a handful countries where the coffee chain company fully operates its stores. Most stores outside the United States are licensed to reputable, stable, and profitable companies abroad.

This factor alone sets Starbucks apart from McDonalds whose stores abroad are mostly franchised. Franchising was never considered by Schultz for it removes the company’s full control over its stores particularly those located in the United States. In licensing, the coffee chain company still has the control in terms of choosing its company partners abroad. Local partners are useful to Starbucks in terms of recruiting skilled and competent local employees, looking for suitable and strategic locations, and establishing supplier partnerships (Thompson, Hawk and Shah 2004, p. C18). There are a number of requisites that must be met by all local company-partners before it could Starbucks to costumers. To be given a license a company-partner must have long experience in retailing and food business, it must posses the right values and corporate culture well-suited with Starbucks, has efficient and prolific management and stable financial capabilities, it must be excellent at providing costumer service, and has proven product and brand-building capabilities (Thompson, Hawk and Shah 2004, p. C18). To monitor and ensure the efficient and effective operations of its stores abroad, Starbucks created a new subsidiary called Starbucks International. Despite its tremendous success at home, Starbucks lost money in some of its stores in countries like Japan and Great Britain (Thompson, Hawk and Shah 2004, p. C18).

There are many factors why Starbucks had to license its stores abroad. One of them is financial factor. When Starbucks was still working on its expansion in the United States, the money it used for the goal mostly came from venture capital, profits, and purchase plans offered to its employees. Since it rejected the idea of franchising, Starbucks had to rely on its capacity to raise money. This cannot be fully fulfilled in the international market considering some other factors aside from money. To do so, it must be ready to shell out a huge amount of budget, to borrow money from financial institutions, and to face the consequences of such decision. Needless to say, it would be enormously dangerous for the company to allot and borrow money to finance all its international expansion without considering many negative risks and threats in the global market. Thus, it had to give out licenses to qualified and stable local companies or enter into joint venture. Another reason is the volatility of the global corporate environment. The conditions in many countries where Starbucks do business are not exactly the same as those in the United States. In Japan, the company registered losses as the Japanese did not quickly embrace the coffee culture that Starbucks sought to popularize.

Another factor is culture gap, which was the reason why Starbucks ceased operation in Beijing’s Imperial Palace (Forbidden City 2008). The Seattle Company was faced with several problems in its early years of operation in China with more than 200 Starbucks stores. One of its biggest challenges was that most Chinese consumers were not that brand conscious (Adamy 2006). Another problem is that most of the 1.3 billion Chinese people are not coffee-drinkers due to their tea-drinking customs (Adamy 2006). Starbucks is now relying on local Chinese executives to find ways on how to lure Chinese consumers and focusing on its tea products since coffee is unpopular in the world’s most populous country. Apart from culture barrier, the coffee company was also faced with fierce competition with traditional tea-houses that have been doing business for generations (Adamy 2006). Legal is another factor that might affect Starbucks operation internationally. Due to political instability in some countries, laws are not fully implemented and easily disregarded, a situation that is not suitable for business. Strict and prohibitive laws also have impacts on foreign company ownership, control, and operation. In this case, it is better to give licenses to local companies than to lose money due to the country’s unstable political and legal condition.

Rising Competition in the Global Market

Coffee business has now become a promising venture for both established companies and new entrants into the billion dollar coffee market. There are now a good number of specialty coffee companies hoping to do well in the market or beat the Seattle-based company. Undeniably, the now more popular coffee culture in the world is due to the success of Starbucks. In United States alone, there were about 14,000 specialty coffee locations in 2003 (Thompson, Hawk and Shah 2004, p. C31). Among the biggest competitors of Starbucks in the United States are Gloria Jeans, Tully’s Coffee, New World Coffee, Bad Ass Coffee, Brew HaHa, Second Cup Coffee, Qwiky’s, and Caribou.  Apart from the new entrants, there are a lot of restaurants that also ventured into gourmet coffee market like Dunkin Donuts and McDonalds. Since 2003 McDonald’s new store McCafe has been offering premium coffee and other specialty coffee to consumers. Apart from the increased in the number of coffee products and pasties, both McDonald’s and Dunkin Donuts also lowered the prices of their coffee products to almost $1 per cup with free refill (Associated Press1 2008).While Howard Schultz blamed the weak economic condition in both the United States and the rest of the world that caused decline in Starbucks sales, he also pointed to the company’s too much focus on growth that led to less contact to its costumers.

In order to bring back the company’s focus on its costumers, the coffee company’s chief global strategist is now maintaining a regular message board on the Starbucks official website called “Howard Schultz Communication” (Schultz 2008). In one of his communications, Schultz discussed about the “Three Innovative Beverage Platforms” will make Starbucks more unique than any other coffee stores. The platforms are composed of “energy beverage category,” “health and wellness platform,” and a new type of beverage that will surely hook on coffee-drinkers.  Thus, Schultz (2008) said: “Even though we are experiencing some difficulties as a result of the tough operating environment in the U.S. and other factors, I am very proud of our accomplishments thus far and I am sure that we are on the right track to transform our customers’ experience.”

References:

Associated Press1 2008, Starbucks Tests Out $1 Coffee, Free Refills in Seattle, Fox News website, 23

February. Retrieved May 5, 2008, from http://www.foxnews.com/story/0,2933,325043,00.html

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Bancino, R & Zevalkink, C 2007, “Soft Skills: The New Curriculum for Hard-Core Technical Professionals,”

Techniques, Acteonline.org. Retrieved May 5, 2007, from http://www.acteonline.org/members/techniques/2006-2007/upload/May07_Thm3.pdf

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Noll, C and Wilkins, M 2002, “Critical Skills of IS Professionals: A model for Curriculum Development,”

Journal of Information Technology Education, Vol. 1, No. 3, p. 1-10.  Retrieved on May 5, 2008, from http://jite.org/documents/Vol1/v1n3p143-154.pdf

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http://news.bbc.co.uk/2/hi/asia-pacific/6898629.stm

Goncalvez, I 2008, “Starbucks’ Schultz back as McDonald’s Increases Competition,” International Business

Times, 7 January. Retrieved on May 5, 2007, from http://www.ibtimes.com/articles/20080107/starbucks-schultz-mcdonalds.htm

Rice, P and McLean, J 1999, ‘Sustainable Coffee at the Crossroads,’ A White Paper Prepared For: The

Consumer’s Choice Council, United States of America, pp. 1-11. Retrieved on May 5, 2007, from http://www.greenbeanery.ca/bean/documents/sustainableCoffee.pdf

Schultz, H 2008, Howard Schultz Communication # 15- Earnings and the Continuing Path Forward, Press

Room, Starbucks Coffee Website, 30 April. Retrieved May 5, 2008, from http://www.starbucks.com/aboutus/pressdesc.asp?id=865

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Starbucks1 (2008). Company Timeline, Starbucks Coffee Website.

http://www.starbucks.com/aboutus/Company_Timeline.pdf

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