Introduction: This case is about the Starbucks, who succeed to introduce Italian Coffee culture in states.

The case revolves around how Starbucks changed the coffee consumption in states into the commodity. The philosophy of the company is much stronger than the culture of America. Customers are loyal towards the Starbucks brand; it is more than a brand because Starbucks provides experience. The scenario starts when company is celebrating its 11 th consecutive growth of 5% even in recession. One of the senior management of the Starbucks believes that they are in Recession Proof business. But the senior vice president, Day looks weird about the continuous expansion before according to the marketing research report with the expansion they are facing the tradeoff of customer satisfaction. She had a plan with $ 40 Million investment per annum, now we have to look does this 40 Million solve the problems of Starbucks or not. Key Terms:
1. Baristas: A barista (from the Italian for "bartender") is a person, usually a coffee-house

employee, who prepares and serves espresso-based coffee drinks. 2. Value Proposition: A value proposition is a promise of value to be delivered and a belief from the customer that value will be experienced. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services. 3. Brand Mantra: Mantra is the brand slogan; mostly it is 2-5 words.
4. Bottleneck: A bottleneck is a phenomenon where the performance or capacity of an

entire system is limited by a single or limited number of components or resources.

5. Cannibalization: Cannibalization refers to a reduction in sales volume, sales revenue,

or market share of one product as a result of the introduction of a new product by the same producer.

Quantitative Data: 1. Investment Analysis

Investment Analysis Each store is equally important $40,000,000 4500 8888.888889 52 weeks

Assumption Investment Per Annum Total # of Stores Investment in one store 1 year 1 week investment 1 week. 1 hour

170.9401709
20 hour addition plan

8.547008547

This analysis clearly shows that addition of 40 Million will add only 1-2 more baristas in the Starbucks. If the hourly wage rate is $9 than 1 baristas will be hired.(Exhibit # 3) But there is a big question that the baristas will solve the problem of customers satisfaction. Are they sure about the capacity utilization of the machinery? 2. EPS Analysis:
EPS Analysis 40,000,000 Earnings 0.07

571428571.4

It is clearly mentioned in the case that the $40 Million is the 7 cent of the EPS. Giving 7 cent annually in the customer satisfaction means you are giving the shareholders wealth. But this analysis is incremental only if the 7 cent will generate multiple effects for the shareholder.

3. Exhibit # 1: Financial Highlights:

Financial Highlights 2000 Gross Margin 55.8 2001 58.0 2002 59.0

Net Profit Margin 4.3

6.8
33.1 7

6.5
34.1 7

Expense Ratio
Operating Ratio 7 cent versus NPM

51.5 51.2 52.4

32.4 7

Difference

-2.7

-0.2

-0.5

Net profit margin of the company is only 6.5% but the investment cost 7% which clearly shows the negative or loss in the financial statement. Financial Highlights also shows that about half sales of the company is covered by expenses. 4. Exhibit # 2: Starbucks Store Growth:
2000 Total North America Company Operated Licensed Stores Total International Company Operated Licensed Stores 2001 2002

85
70 15

80
63 17

78
59 18

15
5 10

20
6 13

22
7 16

5. Exhibit # 3: Incremental Analysis:

Exhibit # 3: Add-on Analysis Average Hourly Wage Total labor hr./ week 9 360

Total Labor cost per Week

3240

Average weekly 15400 store volume Increment

After 20 hour
Average Hourly Wage Total labor hr./ week Total Labor cost per Week Average weekly store volume 9 380 3420 15400

12160

addition

Incremental Benefit

11980

Satisfaction Cost/ Store

Incremental Analysis:

180

This analysis shows that satisfaction cost per week is around 180$ per store. Because if we add 20 hours to the operations of the store for the satisfaction than it cost 180. Here we have to analyze that this 180 will satisfy the customers properly or not? The assumption in this analysis is that this cost only satisfies the customers not add volume of profits to the store because store is operated on its full capacity despite of the cannibalization they failed to handle all of their customers properly. The incremental cost currently is 12160 but after addition of 20 labor hours it will decrease to 11980. 6. Exhibit # 9: Break-Even Analysis:
Breakeven Analysis

Unsatisfie d

Satisfied

Highly Satisfied

Number of Visits/Month Average ticket size Average customer life Customer life time Value Incremental Benefit from Unsatisfied to

3.9 $3.88 1.1 $200

4.3 $4.06 4.4 $922

7.2 $4.42 8.3 $3,170

Satisfied Incremental Benefit from satisfied to Highly Satisfied

$722

$2,24 8
$40,000,0 00

Investment Per Year

Break-Even

5539 1779 9 4

Analysis: This analysis clearly shows that $40,000,000 breakeven points from unsatisfied to satisfied and satisfied to highly satisfied customers. The main purpose of the 40 Million is to satisfy the customers. If through this investment unsatisfied customers will satisfied than breakeven point is 55399, this shows that 55399 unsatisfied customers must be satisfied to break even the investment if the customer will not satisfied than all the investment is in vain. On the other hand side 17794 customers must be satisfied so that investment will be breakeven.

7. After the IPO, annual sales growth was 40% and Net Earnings growth was 50%. 8. Starbucks is serving 20 Million customers in 5000 stores. 9. Average store opening is 3 per day. 10. Starbucks has 60,000 employees out of which 50,000 are in North America. 11. Total Market of the coffee in US was 161 Million out of which 109 million drink coffee regular and 52 million occasionally. 12. The goal of the Starbucks is to have 15,000 international stores. 13. Satisfaction Rate: 80-90%. 14. Fortune Magazine: 47th best place to work. 15. Internal Hiring: About 70% of the company store managers were ex-baristas and about 60% of its district managers were ex-store managers. 16. Turnover: Starbucks has only 70% turnover rate where in industry is 300% Qualitative Data: 1. Starbucks is not always meeting the customers expectations in the area of customers satisfaction. 2. Starbucks converted simple coffee into the America culture. 3. Positioning: Third place for Americans life after home and work. 4. Ideology: A place where people can relax, enjoy and it is separate from work and home. 5. Target Audience: Customers from the age of 25-44, white collar patrons, well educated and affluent class. 6. Brand Mantra: Live Coffee.

7. Brand Character: An experience that people could weave into the fabric of their everyday lives. 8. Locational Strategy: All of the stores are located in highly dense areas. 9. All the Starbucks employees were called Partners. 10. HR Policies: The Company has a generous policy of giving health insurance and stock options to even the most entry level partners.

11. Experiential Branding Components:

12. Distribution Channel:

Issue: 1. Starbucks spends NOTHING on the marketing where in industry 3-6% was spending on marketing budget. 2. Gap between the customers expectations and customers satisfaction. 3. Minimal Product Differentiation: There is very less product differentiation in the minds of consumers compared to small coffee houses. 4. Product Proliferation: Starbucks added many flavors under coffee umbrella, which becomes harder to handle in the terms of time. 5. Role Conflict in Baristas duty: Either to provide 3 minute service to the regular customers or to go for the customers intimacy. 6. They should focus on consolidation rather than aggressive expansion. 7. For Starbucks Cannibalization is the opportunity to attract more customers. 8. Customers think that they are focusing on the MONEY rather than customers due to aggressive expansion. 9. At the start of the business Customers go to Starbucks but now Starbucks go to Customers.

Core Problem: Dramatically change in Demographics and aggressive retail expansion of Starbucks resulted in changing the norms of So called Starbucks Culture. Justification: Now you will find the Starbucks at every corner of your neighborhood. This aggressive strategy of retail expansion kills the true ideology of Third place. Now Starbucks is the convenience coffee shop where you can grasp a cup of coffee and go to the office. Secondly the change in the demographics and primary target customers of the Starbucks also changed. At start, Starbucks only targets the affluent class but now the large number of lower end consumers is also a part of Starbucks audience. Baristas are now confused between the primary/regular customers and customers intimacy of the Starbucks. To whom they gave more preference, and due to which the customers dissatisfaction is also increasing. At the start of the business customers go to the Starbucks but now it seems like Starbucks go to customers. Starbucks culture of relax and refreshment is changing into the business and normal life of the customers. Now customers are habitual to the coffee and they grasp the coffee and leave the Starbucks. Now the Starbucks has to mold itself with the demographic change take place in the American society. The main problem arises when the Customer Base in the Starbucks increased and they dont have any plan how to cater with that problem. Customers are the king. So now customers are at the door of Starbucks, they want their coffee in 3 minutes but Baristas dont have time to respond all of the customers. In many cases problem arise when there is NO customer but in that case there are so many customer.

Decision Alternatives 1. Make the $ 40 million investment in Labor. 2. Invest more money in Capacity enhancement. 3. Develop an internal strategy where they can train their Partners about customers handling. 4. Introduce a Takeaway service for time conscious customers. 5. Focus on the large Mass Customization. Decision Criteria: 1. Decision must integrate with the corporate strategy of the Starbucks. 2. Decision must cover all aspects of Starbucks ideology. 3. Decision must be financial viable. 4. Through the decision the problem of customers dissatisfaction must be solved. 5. Decision must cover the Demographics aspects of changing environment.

Alternative # 1: Make the $ 40 Million investment in Labor. Analysis: It is very easy to say about the investment of $40 million per year for customer satisfaction but in the financial term this amount is the 7 cent of the EPS. How can you invest 7 cent of the EPS per year when your earnings are less than 7% of the sales. Furthermore in the breakeven analysis it is clearly shows that if the 55000 unsatisfied customers are satisfied they can breakeven the investment or 17700 satisfied customers converted into the highly satisfied customers. Alternative # 2: Invest more money in Capacity Enhancement. Analysis: This alternative is based on the assumption that customers are coming to Starbucks but they are operating in the full capacity. So Starbucks has to place more machinery and espresso in the outlets so that they can easily satisfy their customers. Alternative # 3: Develop Internal Strategy: Analysis: Starbucks has to develop internal strategy to address the problem of dissatisfaction. They should train their employees according to the customers satisfaction and how to handle more customers in the rush hours. They have to build the Cycle time customers system where they can now in how much time the table will be free. So in that way they can easily address the problem.

Alternative # 4: Introduce Takeaway Service: Analysis: Through the takeaway service, they will easily handle the customer rush but it contains a total new positioning of the brand. Takeaway will solve the problem but it will require more money, machinery, and labor to implement in the Starbucks. Also image of the Starbucks will distort through this because Third Place culture will fully eliminated into the ideology of the Starbucks. Alternative # 5: Mass Customization Analysis: This problem is arising due to the high mix of product variety in the Starbucks. Mass customization will easily fasten up the processes and customers service will easily be achieved. But how to achieve mass customization is the point? I think through postponement technique it will be more appropriate because when the customers come in, Starbucks has the product mix of the entire ingredient which will fasten the operation of the Starbucks. Through mass customization, customers will make their coffees by themselves it can easily solve the problem of dissatisfaction of the customers.

Recommendation: 1. We select the mix strategy, which covers internal strategy and mass customization. 2. For internal Strategies, they have to build cycle time of each customers:

3. Build takeaway stores near the offices and schools. 4. Focus on the mass customization through postponement so that they can easily handle the product mix. 5. Focus on consolidation rather than expansion.