Key stand-out strategic highlights:

Starbucks, under Howard Schultz, was never a product or a service, but an experience, a rich sensory treat and extravaganza for the consumers. All strategies were aligned to keep this core in place. At a time when coffee consumption was down and coffee makers were competing on price, Starbucks introduced the speciality segment which became an instant rage. Ownership and operation of stores by the company so as to provide unparalleled quality and prevent shoddy handling of the brand image by inexperienced individuals. Focus on employee training to be sensitive to customer questions thereby providing an even richer experience. The passion for coffee was evident in every action.

Current Options and challenges facing Starbucks:

Current Products Market Penetration Strategy More retail stores. Providing better in-store experiences and better blends. Market Development Strategy Tapping international expansion opportunities in Pacific Rim and Asia. New Products Product Development Strategy In store merchandising. Starbucks logo items like coffee mugs. Diversification Strategy Grocery stores, Frapuccino, Dreyer Ice cream products.

Current Markets New Markets -

Analysis of Starbucks model using Porters Five Forces:

Barriers to Entry: Negligible. Any individual could set up a single store establishment. No significant investments were needed, neither was there any regulatory policy restriction and thus entry was free as is evident in the presence of 3485 competitors in the market.

Supplier power: Sourcing from different geographies coupled with close co-operation, training provided to plus excellent relationships maintained with exporters kept supplier power low as exporters competed to become the supplier of choice. But doubling of volumes over the next 3 years would lead to challenges in quality and quantity of procurement. Also, production was subject to the vagaries of monsoon.

Buyer Power:

Switching costs were low and therefore the challenge was to continue to maintain and differentiate on the richness of experience and newer blends of coffee provided. Network effect could be an important factor as more the number of people who frequented Starbucks, more would be the value of the experience that was provided.

Threat of Substitutes: Basic coffee, juices, colas, tea and other non-alcoholic beverages were the main threats. But specialty coffee had been making steady gains over these products and the trend was likely to continue.

Competition

There were many small players in the market who were also entering into numerous product and service alliances. Also up-coming players like Second Cup and Caribou could potentially eat into sales. Barring consistency issues, significant scope for acquisition existed on the retail side. There was need for a national level advertising strategy to beat local level competition.

The way forward: First and foremost, fit and consistency was the key. Starbucks was an experiential offering and diversification into FMCG products like bottled beverages and ice-creams would not only lead to brand dilution, but negative impression of those products will hurt Starbucks image. Also, competition in those sectors may significantly erode profitability due to margin pressures. The increased focus on non-retail sales may also be the avenue via which competitors in the local market may gain prominence. Increased market penetration through better and more retail outlets made sense. Also, strategy is about trade-offs. Too much focus away from experience goods would inevitably hamper the company. Market development was feasible as specialty coffee was an unmet and latent need internationally and could be tapped in to. Analysis of Pacific Rim data (Exhibit 5) shows a rising trend and therefore significant potential exists in adding stores internationally. 1997E 1998E 1999E 2000E No of Stores 15 45 100 200 Sales (million $) 9 30 73 150 Sales/Unit store 0.6 0.6666667 0.73 0.75 million $) Grocery sales was a good option as the focus on its core competency, coffee, would be there. Also, specialty stores would allow it to preserve its unique identity. Another option of backward integration exists, by growing its own coffee. But again, this leads to strategic mismatch and may lead to control issues by diverting focus.

Recommendation:
Starbucks should maintain its focus on coffee based products. It should focus on retail expansion in USA and as the market approaches saturation, it should also simultaneously go for international expansion. Also, in store merchandising and adding new products like music albums may be the next step. Focus on diversified products would not be advisable as it dilutes core strategy and involves straddling both legs of trade-offs. However, expansion through whole beans via grocery sales is definitely feasible and implementable.