Macro Environment Political: * Taxation policy - high taxation imposed on farmers in those countries producing the coffee bean

will usually mean Starbucks pay a higher price for the coffee they purchase. Any fluctuations in taxation levels in the industry are almost certainly ultimately passed on to the consumer. Recently (June 13, 2003) Tanzania's Minister of Finance harmonized and rationalized local government taxation to boost rural productivity of the coffee bean. Tax was lowered for these 'small holder' farmers and this saving will have been passed on to purchasers of coffee like Starbucks. * Deregulation - A decade ago, the USA pulled out of the ICA (international Coffee Agreement) that set export quotas for producing nations and kept the price of coffee fairly stable. Coffee quotas and price controls ended. Since the deregulation farmers have suffered and their earnings have dropped. Many have struggled to make a living so have given up. * International trade regulations/tariffs - Trade issues will affect Starbucks predominantly when exporting and importing goods. When another country's government imposes a tariff it not only results in an efficiency loss for Starbucks but large income transfers can become inconsistent with equity. This extra charge can turn a bargain into a rip-off. Also, since 9/11, trade relations have been adversely affected between the USA and some other countries. * Government stability - Starbucks should thoroughly investigate the political stability of any country they plan to expand to. Changes in government can lead to changes in taxation and legislation. The forthcoming American elections may have an effect on Starbucks as new legislation or new or existing government may bring in taxes. Also, those countries in political turmoil or civil war (e.g. Zimbabwe at present) should be approached with great caution when considering new ventures. * International stability - The international economy must be brought into consideration as it can affect Starbucks' sales and markets. The aftermath of 9/11 was an example of an economic downturn that affected the world market. If the world market is in a slump it is not usually the ideal time for a business to look at grand expansion. * Employment law - A reduction in licensing and permit costs in those countries producing the coffee bean for Starbucks would lower production costs for farmers. This saving would in turn be passed on to the purchaser. Economic: * Interest rates - A rise in interest rates means investment and expansion plans are put off resulting in falling sales for Starbucks and their suppliers. Also mortgage repayments rise so consumers have less disposable income to spend on luxury products such as coffee. Low interest rates should have the opposite effect.

* Economic Growth - If growth is low in the nation of location of Starbucks then sales may also fall. Consumer incomes tend to fall in periods of negative growth leaving less disposable income. Consumer confidence in products can also fall if the economic 'mood' is low * Inflation rates - Inflation is a condition of increasing prices. It is measured using the Retail Price Index (RPI) in the UK. Business costs will rise for Starbucks through inflation, as will shoe-leather costs as they shop around for new 'best prices' of materials, menu costs will rise as Starbucks have to create new price lists. Also, uncertainty is created when making decisions not least because inflation redistributes money from lenders to borrowers. A firm that borrows L1000 during an inflation period will pay back less in 'real terms' as the value of this money will decline over the period. * Competitors pricing - Competitive pricing from competitors can start a price war for Starbucks that can drive down profits and profit margins as they attempt to increase, or at least maintain, their share of the market. * Globalization - Globalization of the coffee market has meant farmers of the bean now earn less money than they used to. This can result in a decrease of people willing to do it for a living, which will mean a decrease in coffee produced, resulting in a drop in Starbucks supply levels and probably profits. * Exchange rates - Starbucks are affected by exchange rates when dealing with international trade. If the value of the currency falls in the country of a coffee supplier this enables Starbucks to get more for their $ or L when importing the goods to their country. This saving can be passed along to the customer. Exchange rates are forever changing throughout the world in today's market. Social: * Population demographics - Population demographics are a very important factor for Starbucks as they identify what parts of the population they need to aim their products at or which parts of the population they need to encourage to visit their stores more than they presently do. Looking at the table in the case study demonstrating the percentage of the age groups that drink coffee or specialty coffee it can be seen that the age groups that Starbucks should be aiming their marketing at are the people between 35 and 54. They should consider targeting the 18-24 age group as they drink the least amount comparatively and by encouraging this segment to choose Starbucks coffee now, there is a chance they may continue to drink it long into the future. * Income distribution - Where income is distributed is another factor that Starbucks should look at as this also demonstrates the ideal place to aim their marketing or to locate their stores. Coffee is more of a luxury product so it is those people/places with the most amount of disposable income to spend that should be targeted the most intensely. * Attitude to work - Starbucks would not want to locate to an area where the local population have a poor attitude to work. Recruitment would be difficult, training arduous, and

staff turnover would be high. Attitudes to work are important in other ways. A large number of workers in large cities now go out for their lunch rather than use an internal canteen. Starbucks can use this to their advantage and promote the shop as a place where people can meet up and so it will mean that they will get a larger amount of people in their stores at this time of the day. * Standard of education/skills - When Starbucks are deciding upon new premises they must look at the standards of education and skills locally. They must be sure there are people who live there with sufficient skills to ensure successful operation of the business, or at least the potential to learn that comes with a good education. * Working conditions/safety - Those people with the most disposable income, e.g. young single professionals etc, will be accustomed to high standards. Starbucks must ensure it's shops are clean and comfortable, service is of the highest order and health and safety issues are fully addressed * Location - Transport needs to the premises must be considered for both staff and customers. Easy access is vital to ensure there is no excuse for staff to arrive late or for customers not to visit. * Age distribution - Research shows the average age of the population is getting older and birth rates are stagnating. Starbucks is presently aiming it's product at young people but maybe these views will change in the long-term as the market proportion for young people diminishes. The most profitable way forward may be to widen their target market despite the risk of alienating present customers. * Health consciousness - Good health and foodstuffs associated with healthy living are important I today's market place, as this is a trend that is occurring at the moment in western societies. Starbucks can use this information when deciding the additional products to sell, as well as coffee, as a large number of their customers are looking for healthy alternatives to cakes and biscuits, which have been associated with coffee in the past. Technological:

* IT development - Starbucks is always looking to develop and improve its Internet facilities. Starbucks launched its first-generation e-commerce Web site in 1998. In late 1999, Starbucks decided the site needed a major upgrade to enable new functionality and prepare for long-term growth. To achieve these goals, Starbucks upgraded to Microsoft Commerce Server 2000, one of the key Microsoft .NET Enterprise Servers. As a result, scalability and performance have improved, and the company now has the tools it needs to profile and target customers, analyze site data, and deliver new features to the market in the shortest time possible. * New materials and processes - Developments in the technology of coffee making machines and the computers that Starbucks use to run their cash registers will enable their staff to work more quickly and efficiently. This will result in customers being served quicker and create the potential to serve more customers in a day. This will prevent customers from having to

wait around for long periods thus improving customer relations along with increasing the customer base. * Software upgrades - In the short-term, Starbucks must identify the most efficient software upgrades to use to keep up with the competition. This applies to the improving the accessibility of their website (www.starbucks.com) and also improving the speed and quality of the service provided on the shop floor. * Research and Development activity - As a multi-national business empire, Starbucks has the budget and the resources to have a cutting-edge R+D department. The website is very accessible, the facilities are state of the art but more importantly new ideas are consistently being tried in terms of a constantly updating menu. * Rate of technological change - The rate of technological change in the current world market is high, much higher than, say, thirty years ago. Much of this is down to the Internet and the speed with which information can be communicated around the globe. Starbucks will need to invest heavily just to stand still in their ever expanding and developing market, and even more so to try to stay ahead of competitors. Legal: * Trade and product restrictions - Starbucks need to be aware of the trade laws in the various countries they occupy and do business with. They need to ensure they are not in violation of e.g., religious laws. Also, certain countries impose a tariff that has to be paid when goods are imported/exported so this must be taken into account. * Employment law - Each country has varying employment laws. Some may have a Sabbath day, some may have a limit on the number of hours an employee may work per week, all will have varying levels of minimum wage. Starbucks should consider these factors when deciding on relocation. * Health and Safety regulations - Starbucks may find these regulations are not as stringent or well enforced in certain countries. It would be wise though to enforce a universally high standard of health and safety throughout all its shops to maintain a good global image and ensure all laws are abided by. Also, by not maintaining high standards they will be liable for a large amount of civil cases as it is a legal requirement for them to enable that their staff and customers are safe when they are in their stores. * Monopolies commission - If Starbucks consider expanding their operations further to control an even larger percentage of the market than they already have they will have to consider the possibility of breaking monopolies legislation as they may have a share of the market that is too large. This would mean that they would have unfair advantage over other companies in the same market. This would mean that they could benefit from economies of scale and would also be able to charge prices that were not competitive in the market and get away with it due to the lack of competition. The Competition Commission are in place to try and prevent these situations occurring [e.g. CC (back then the MMC) block BskyB attempted takeover of Manchester United in 1999].

* Land use - Starbucks may have to abide by local planning regulations when building shops or altering purchased sites, as certain areas of land may be protected or unsuitable. All matters would be addressed by the local government. Environmental: * Pollution problems - Starbucks customers create a lot of waste as they often leave the shop with their cup of coffee and then dispose of it in the street. The packaging for this cup must be carefully considered to make it as biologically degradable as possible. Certain other materials can be very harmful to the natural environment. * Planning permissions - Planning permission may not be granted if Starbucks wish to build in an area that could be harmful to the environment. The land may be protected. * Work disposal - Starbucks need to carefully consider the methods in which they dispose of their waste as there are strict laws in most countries to ensure a firm trading in their country disposes of the waste that is created in their business in a specific and efficient way. If they do not follow these laws they may find themselves being sanctioned, which not only affects them financially but also tarnishes the reputation of the brand name, as most of the waste created will bear the logo of Starbucks. * Environmental pressure groups - Starbucks should be aware of the physical and influential power of groups such as Greenpeace and Friends of the Earth. Any violation of animal or environmental rights by a company is usually followed by a swift and attention-drawing protest from one of the groups. Brand image and customer bases are often irreconcilably tarnished due to the actions of these groups.

Micro Environment
Porter's five forces analysis is an important tool for analyzing an organizations industry structure in strategic processes. It helps the marketer to contrast a competitive environment. It tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. Porter has identified five competitive forces that shape every industry and every market. These are: The threat of entry, the power of buyers, the power of suppliers, the threat of substitutes and Competitive rivalry. The threat of entry: The threat of entry covers: Economies of scale, the high or low cost of entry, Ease of access to distribution channels, Cost advantages not related to the size of the company, whether competitors will retaliate? Government action and how important differentiation is. There will always be a continuous

pressure for Starbucks to react and adjust to these new entrants. The easier it is for new entrants to enter the market the more competition there is within the market. Although this really should not pose too much of a problem for Starbucks as they have a very large share of the market that will be relatively immune to the threat of new entrants. Starbucks is a company that have years of experience in roasting specialized coffee, if a company was to enter the coffee industry it would be extremely difficult for them to offer the same quality of coffee at a competitive price. As a company's volume increases, so does its experience and knowledge which tends to decrease the cost of their products The power of buyers: Buyer power is likely to be high if a number of conditions are in place. There is a concentration of buyers, particularly if the volumes of purchases of the buyers are high, the supplying industry comprises a large number of small operators, there are alternative sources of supply, the component or material cost is a high percentage of total cost, the cost of switching a supplier is low or involves little risk, there is a threat of backward integration by the buyer. This is high where there a few, large players in a market If there are a large number of undifferentiated, small suppliers The cost of switching between suppliers is low for Starbucks. The power of suppliers: If the market is dominated by few large suppliers rather than numerous fragmented sources, a suppliers bargaining power is likely to be high. Although suppliers do have certain amounts of power, it is limited. With Starbucks being 'the most famous specialty coffee shop chain in the world' reaching sales of $3.28 billion in 2002 and still expanding they should still be requiring coffee beans for some time. It is safe to say that the Suppliers need Starbucks, just as much, if not more so than Starbucks need their supplies. Fortunately for Starbucks they buy their coffee beans directly from producing countries: Latin America (50%), Pacific Rim (35%) and East Africa (15%). The threat of substitutes: This occurs where there is product-for-product substitution, where there is a substitution of need e.g. a bald head reduces the need for hair gel, where there is generic substitution and finally the attitude 'we could always do without ...'. An example for Starbucks would be if an alternative to coffee was offered e.g. a customer switching from coffee to tea. Competitive rivalry: Numerous factors contribute to intense rivalry between existing competitors in an industry. This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is found in the centre of the diagram. The extent to which competitors are in balance, this is where competitors are of an equal size which creates intense competition as one of the competitors tries to gain dominance over the other, high fixed costs in an industry may result in price wars, differentiation is important as in a commodity market where products or services are undifferentiated there is little to stop customers switching between competitors. Starbucks do not really have any competitive rivals that are of similar size to them so there are

not any rivals in the market that would be considered in balance with them. However, they must maintain their excellent standards and always be on the lookout for new innovations in order to stay as the market leader. Competitor Analysis: Competition is steadily growing against Starbucks each year as the industry grows. Competitors look to gain an advantage by price cuts, launching a rival product, aggressive expansion of production to increase market share or inclusion of significant modifications to a product that other competitors must also undertake to keep up. The following are the current figures showing the market share of companies in the coffee industry. 35% Starbucks 20% Local Coffee Outlets 14% Internet Cyber Cafes 13% Caffe Nero 10% Costa Coffee 8% Coffee Physical resources: The physical resources of Starbucks are the shops that they own, any vehicles they own for transporting goods and all the equipment that is used to create the cup of coffee (or pastry etc). Those resources that are younger and in better condition are deemed more useful to Starbucks. In 2002 Starbucks had 5689 outlets around the world, which at the time was still increasing at a 'breakneck speed' and at the end of the 1990's the company was opening an average 2 stores per day. In January 2004 the company opened their 8000th store Human Resources: The human resources are the knowledge, skills and adaptability of the workers at Starbucks. Staffs who work to their potential in these areas often become a company's 'most valuable asset'. Schultz, the founder of Starbucks, believes every member of staff plays an equal part in the 'customer experience' regardless of whether they be CEO or waiter. Financial Resources: These are the capital, cash, debtors & creditors, and suppliers of money (e.g. shareholders) of Starbucks. Obviously for Starbucks the less debt they are in, the more positive their resource audit looks. Starbucks have a lot of working capital tied up in the business. Some of this capital includes varieties of whole coffee beans, foodstuffs, teas, coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers and other accessories. Intellectual capital: These are the intangible/immeasurable resources of Starbucks. This is the information captured in brands, patents, customer databases, business systems and relationships with business partners. All these can contain great value and when a business is purchased these values fall under the price-tag marked 'goodwill'. One of the few ways Starbucks can protect this intangible information is to ensure employees sign confidentiality agreements to protect any leaks of knowledge to competitors. The value system is the inter-organizational links that are vital in the creation of the product or service of a company. It follows the production of the service/product from raw material stage right through to the customer purchase. Each instruction for the

development of the product is detailed and explained at each stage of the value system. The 'firm value chain' It is the most important to a manager because that is their company, however, a good manager will understand the whole process and how to manage each individual link and relationship to maximize customer value. Managers should also need to learn the whole value system because most of the cost and value creation occurs in the supply and distribution chains. For Starbucks, the 'supplier value chain' It deals with where they get the coffee beans from that they use to create their end product - a cup of coffee. Starbucks buy all their beans direct from the farmers in the producing countries cutting out any middle-man therefore keeping prices to a minimum. The countries that supply them can be found in Latin America, East Africa and on the Pacific Rim. Starbucks fully appreciate the need to oversee all aspects of the value system and we can see an example of this in their determination to obtain the highly sought Narino Supremo crop in 1992. This acquisition ensured some of the highest quality coffee supplies in the world would be reaped by Starbucks. The company has close relationships with their coffee exporters. They maintain this by working directly with them and training them. A good relationship here is essential and needs to be maintained. The Firm's infrastructure It is about the ways in which Starbucks want their organization to run and how it is best to implement systems of planning, finance, quality control and information management, it is also where they have made the decision to make high quality coffee from the best coffee beans as this is involved with the quality control. -Human Resource Management It is concerned with the activities involved in recruiting, managing, training, developing and rewarding people within the organization. For Starbucks this is where they have made decisions about the fact that all employees are equal, even those on the shop-floor that are working over 20 hours a week receive bonuses like free coffee and health care coverage, this was to make sure that the members of staff felt as if they were valued by the company and would continue to provide a good service. Another implemented scheme is for all Starbucks store staff to have a comprehensive 24 hour training scheme before they were allowed on to work directly with customers. Technology development; Starbucks has a large number of areas where it uses technology from regulating their stock levels to the cash registers. There is also technology to enable customers can to order their coffee over the internet and then pick it up from the store when they get there. Some stores now also contain computers where customers can access the internet.

Procurement This refers to the processes for acquiring the various resource inputs to the primary activities. For instance, the method of obtaining the grade A coffee beans from suppliers to use in the Starbucks coffee. Inbound logistics For Starbucks this means receiving the coffee beans and other products that they need to make the products in their stores from their suppliers and storing these until they are used to make the product that they are going to sell. Operations This is the stage where Starbucks make the coffee in the store and package the other subsidiary products. Outbound logistics This is collection, storage and distribution of coffee. A customer actually purchasing a cup of Starbucks coffee from the store. -Marketing and Sales; this is how consumers become aware of Starbucks coffee and purchase it. Starbucks is a worldwide company and their brand is recognized all over the world, which means that marketing, is not as necessary as it once was. Most people now recognize the name and associate the brand-image with high quality products. -Service; this includes all the activities that enhance or maintain the value of the product, e.g. installation, repair and training. This area is concerned with the members of staff that deal with the customers, it focuses on the need to ensure the 'customer experience' of visiting a Starbucks store is all the more enjoyable due to the friendliness and efficiency of staff and consistently high quality product on offer. The 'channel value chain' Deals with the outlets Starbucks uses to enable consumers to purchase their product. Starbucks should know everything that is sold under their banner and also the sales methods used to customers. They should know the location of every store along with its surrounding area so it can generate an idea of the surrounding customer demographics, e.g. students, young professionals, etc. Starbucks should know in detail all information regarding any business partners they are involved with, be they retail estate agents - used to obtain premium retailing sites - or foreign suppliers

'Customer value chains' Illustrate how value is added by the end buyers of the product. Customer value can be increased by Starbucks by ensuring the store environment is how it should be, the coffee is consistently up to a high standard, the menu is broad and varied enough to cater for most tastes, value for money is achieved and most of all the service is exemplary. Through training and research and development all these factors are achievable and maintainable for Starbucks and

should ensure a bright and prosperous future.

SWOT Analysis Starbucks Strengths.

Starbucks Corporation is a very profitable organization, earning in excess of $600 million in 2004.The company generated revenue of more than $5000 million in the same year. It is a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries. Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The company is a respected employer that values its workforce. The organization has strong ethical values and an ethical mission statement as follows, 'Starbucks is committed to a role of environmental leadership in all facets of our business.'

Weaknesses.

Starbucks has a reputation for new product development and creativity. However, they remain vulnerable to the possibility that their innovation may falter over time. The organization has a strong presence in the United States of America with more than three quarters of their cafes located in the home market. It is often argued that they need to look for a portfolio of countries, in order to spread business risk. The organization is dependent on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should the need arise.

Opportunities.

Starbucks are very good at taking advantage of opportunties. In 2004 the company created a CD-burning service in their Santa Monica (California USA) cafe with Hewlett Packard, where customers create their own music CD. New products and services that can be retailed in their cafes, such as Fair Trade products. The company has the opportunity to expand its global operations. New markets for coffee such as India and the Pacific Rim nations are beginning to emerge. Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.

Threats.

Who knows if the market for coffee will grow and stay in favour with customers, or whether another type of beverage or leisure activity will replace coffee in the future? Starbucks are exposed to rises in the cost of coffee and dairy products. Since its conception in Pike Place Market, Seattle in 1971, Starbucks' success has lead to the market entry of many competitors and copy cat brands that pose potential threats.