Mgmt 495 Week 5 Case Study Starbucks

Cory Gump
MGMT 495
Case Study: Starbucks
August 7, 2007

Before Howard Schultz joined Starbucks, they were a small company in the market of selling fine quality coffee beans. Howard Schultz's strategic vision was to modify the format of Starbucks' stores, incorporating an American version of the coffee bar culture. His vision was met with great initial resistance by Starbucks' management, which was eventually quelled by strong sales performances. Also included in Schultz's strategic vision for a new Starbucks was a plan for massive expansion. Before Schultz implemented his vision of expansion he wanted to make sure his employees were devoted to the Starbucks brand. Schultz developed a strategy to make Starbucks a great place to work. By adding employee health benefits, a stock option plan, a stock purchase plan, and improving the overall workplace environment, Schultz executed his strategy for employee satisfaction. In the early 90's Schultz shifted his strategic vision again, this time towards store expansion. Starbucks'
strategy was to blanket major metropolitan areas with stores even if some stores cannibalized another stores business. In international markets, Starbucks had a two-pronged store expansion plan: either open company owned and company operated stores, or license a company in the host country to operate Starbucks' stores. Starbucks created a new subsidiary, Starbucks Coffee International and began to build the brand globally. Now that Starbucks has become a more established firm moving towards the mature stage in its life cycle its strategy has shifted again towards one of social responsibility. Schultz is now able to shift his focus from rapid expansion and growth to one of contributing positively to the community. Starbucks has very high social and environmental values. During Starbucks corporate rise, they have always been a leader in promoting environmental and social stewardship. Starbucks' coffee sourcing strategy is to help conserve the environment. Starbucks promotes coffee cultivation methods that protect biodiversity and maintain a healthy environment. A growing percentage of their coffees are grown organically. Starbucks also values and takes extremely good care their suppliers. They make sure to pay prices high enough that coffee grower's were able to cover their production costs and provide for their families. Starbucks is also very committed to giving back to the communities in which they operate. They also sponsor health education and humanitarian aid programs in almost all of third world countries in which they do business. Starbucks' social responsibility strategy is not just all talk. They participate in numerous promotions and in cooperation with many philanthropic organizations to initiate this strategy. Starbucks provides substantial financial aid to community literacy programs. Starbucks formed an alliance with Appropriate Technology Inc. to help poor, small-scale coffee growers in Guatemala increase their income. Starbucks has an Environmental Committee that looks for ways to reduce, reuse, and recycle waste as well as contribute to local community environmental efforts. Starbucks also participates regularly in local charitable projects of one kind or another donating books, drinks, and proceeds from store opening benefits. Starbucks financial performance between the years 2000 and 2005 has been good.
Starbucks has experienced a consistent earnings growth over this period. Starbucks has also managed to decrease long-term debt over the period also, which indicates less risk of going into bankruptcy. The most recent year on the financial statement raises some red flags. Starbucks' Current assets to current liabilities ratio is considerably low at a mere .986. Current liabilities have risen above current assets which means that Starbucks may be paying its bills more slowly and borrowing more from the bank. There is a chance that this low ratio is due to low inventories, which would cause the current assets to be low. This could mean one of two things: Starbucks is implementing an efficient JIT inventory system, or that the firm is missing shipments and losing sales. Since inventories is not listed in the book this would be hard to
tell. Starbucks debt ratio for 2005 is 40 percent, which is equivalent to the industry average. Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors' losses in the event of liquidation. Stockholders on the other hand, may want higher debt ratios because it provides more leverage and magnifies expected earnings, which will increase the stock price. Starbucks' profit margin is 9.2 percent, which means it earns 9.2 cents for every dollar of sales. This is a generally good profit margin. Starbucks' stock performance has been a steady increase in stock price since 1994. Since the goal of any firm should be to maximize the wealth of its shareholders through increased stock prices and current income provided by dividends Starbucks' has been relatively successful.