Starbucks Case Study

Starbucks Case Study - Jeremy Knighton Policy and Strategy...

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Jeremy Knighton Policy and Strategy Professor Bruce November 7, 2007 Starbucks Case Study Since 1971, Starbucks has dominated the specialty coffee market with little resistance from other competitors and has been one of the most rapidly growing companies in the United States. Originally, Starbucks started selling whole beans in a Seattle market and within ten years they had five stores of their own along with a lucrative wholesale business in which local restaurants would purchase their coffee beans. It was in this phase that the three creators Jerry Baldwin, Zev Siegl, and Gordon Bowker were introduced to Howard Shultz who eventually purchased the company in order to create a chain of Italian style coffee shops all over the country. After taking some heavy initial loss due to rapid expansion, Schultz weathered the poor returns unwilling to “‘sacrifice long-term integrity and values for short term profit’” (Kotha & Glassman, 2003, 557). In 1991, the company saw an 84 percent increase of sales, making it the first year of profitability. Once Starbucks was able to get over its preliminary growth phase and develop product recognition, their revenue increased by 20 percent every year from 1992 until 2001. The next year their revenue increased by 30 percent, becoming the highest grossing year in the company’s history, passing Wal-Mart, GE, Pepsi, Coke, and Microsoft (Kotha & Glassman, 2003, 557). Their goal is to provide a superior quality product and remain committed to their established values that are laid out in their mission statement. They have continued to embrace the strategic model that Schultz started with his devotion to rapid expansion and are now selling coffee in 28 countries and employ
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close to 100,000 people world wide (Kotha & Glassman, 2003, 559). Their growth strategy is unique in the sense that they aim to completely saturate a geographical region with their stores, ignoring the fact that often times new locations will steal business from existing ones. However, this is seen as a good thing because ultimately the company saves on delivery and management costs, shortens the wait time in the stores, and increases sales. This tactic of saturation has led to a lack of need to advertise, on which Starbucks only spends 1 percent of their annual revenue. They face little competition and have been able to dominate the specialty coffee market with a few exceptions. There are companies such as Dunkin Donuts and Green Mountain Coffee Roasters that have been beginning to make a name for them selves but have yet to come close to making themselves a viable threat to seemingly unstoppable behemoth that Starbucks has become. An effective method used to analyze Starbucks and their competitive environment is Porter’s Five Force Model. The first of these forces is the threat of new entrants. In the specialty coffee market, is a very difficult industry to break into due to economies of scale, product differentiation, and capital requirement. In this particular industry, the
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