Hello and welcome.
Our case for this module is on the coffee house chain, Starbucks Corporation.
Starting from just a single location in Seattle in 1987,
Howard Schultz, the CEO of Starbucks took the company through an explosive period of
growth to the point where the company now has nearly 25,000 stores worldwide.
This case introduces you to the business of coffee and
the internal details of Starbucks as a company.
And in my tutor explore how this company has become so successful.
As it happens, I have a personal connection to the coffee industry.
So let me give you a short personal tour of how coffee is made,
from growing all the way to brewing.
I grew up in the large bustling metropolis of Mumbai in western India, but my parents
now own and operate a coffee farm in a region of southwestern India called.
Globally coffee is mostly grown on farms like this one in developing countries,
and coffee growing employs tens of millions of people in these countries.
In virtually all coffee is shade-grown.
Coffee bushes are planted in between tall indigenous trees
that are found in the tropical forests of this region.
Shade-grown coffee preserves the habitat of many wild animals and birds.
The bird sounds you can hear in this video were recorded by me on my parents' farm.
As you might know, habitat destruction is a major factor threatening the survival of
many species on the planet.
So I encourage you to buy shade-grown coffee if at all possible.
In farms such as this one, the coffee plants are maintained as tall bushes and
must constantly be pruned and cared for.
A healthy coffee plant will flower once a year and
soon afterwards begin to bear coffee berries.
The berries are at first small and green, but in seven to eight months they grow and
ripen to a bright red color.
Once the coffee berries are ripe, they're picked and collected.
Coffee picking is hard, manual work, which is also true for
most of the work on a coffee farm.
Once picked, the ripe berries are processed in one of two ways.
The first process is a wet process called pulping, where the outer skin and
the pulp of the berries removed, as I'm showing with my hand here, but
in practice it's done mechanically with water.
When pulped, a coffee berry typically produces two beans covered with a membrane
like layer called parchment.
This parchment covered bean is then dried and sold on to coffee traders.
The other common method to process coffee berries is to dry them in the sun in
drying yards like this one.
The berries are frequently turned over and
mixed together to ensure that they dry evenly.
The dried berries are then sold onto traders.
After buying parchment or
dried berries, coffee traders separate the outer layers through mechanical hulling,
followed by polishing, cleaning, and grating the green coffee beans.
I removed the parchment and dried skin of these coffee beans by hand.
Do you see their wonderful deep green color?
It's an indicator of their excellent quality.
Most coffee around the world is traded in this form as dried green coffee,
which is quite stable, and doesn't easily lose flavor, or spoil, when stored a ship.
A critical step in the making of coffee is roasting.
Here I'm roasting the green coffee beans in a home coffee roaster.
That uses hot air to roast the beans evenly.
As they roast, the beans increase in volume, lose weight, and
get progressively darker.
Their aromatic oils are released and
the room smells of the familiar aroma of coffee.
Commercial roasters are, of course, much bigger and typically
in the shape of a horizontal drum that's constantly rotated while roasting.
Coffee roasting is both an art and a science and different recipes and
extensive roasting can be used to produce different flavored coffees.
Once roasted as you might know the beans are ground and ready to be brewed.
I hoped this little introduction helped you understand where your
coffee comes from.
You might be interested to know that the coffee growers make very little money in
this value chain.
For the packaged ground coffee you buy in the store, less than 8 to 10%
of the retail price goes to the grower of the three plus dollars you pay for
a cup of coffee in Starbucks, only about $0.03 goes to the farmer.
For all this, you might be wondering what makes for a good cup of coffee.
First, the variety of coffee is important, generally the arabica variety
is used to produce more premium, flavorful and acidic tasting coffees.
The other major variety, robusta, produces coffee with more body and
is often used in blends especially for making a good espresso.
But not all arabica and robusta coffees are created equal.
The Robustas in where my parents live, for
example, are considered to be a very good quality.
In general, coffee takes on the character of it's growing region,
the soil, the climate, the air.
Just like with wine, adds a unique flavor and taste to the coffee.
That's why you see coffee often sold by region, Colombia, Ethiopia,
Sumatra, and so on.
But this doesn't mean that all coffee farms in a region produce identical
A lot depends on the care and methods used in farming.
Some of if it can also be luck.
Just as you can have a good or
bad year in wine, the taste of coffee can also vary from year to year.
Coffee quality can also be affected by the processing of berries.
there's a highly prized variety of coffee from India called monsoon coffee.
Which is made from the processing of green coffee beans
in the human monsoon area of India.
At the same time inadequate or poor storage of beans can also worsen quality.
How coffee beans are roasted is also very important to its ultimate quality.
Master roasters and tasters can not only roast coffee expertly to different
recipes, but they also know how to blend coffee beans from
different sources in regions, to obtain a specific distinctive taste.
After roasting and especially after grinding,
coffee can quickly lose its taste and flavor due to oxidation.
For this reason, airtight packaging and quick consumption are important.
And last but not least, brewing a good cup of coffee from ground coffee
requires skill and equipment as well.
Imagine the challenge of selling and serving high quality coffee from
the perspective of a large coffee house chain like Starbucks.
There are just so many steps from farm to cup.
So one of the central challenges for a company like Starbucks is managing its
entire value chain to ensure an excellent coffee experience for every customer,
every time and to do it at very high volume and at thousands of outlets.
Another integral and
very important part of Starbucks' business is the in cafe experience.
Starbucks' success coincides with and is partly responsible for
the spread of cafe culture in the United States.
As shown in the TV series, Friends, at the center of this culture change was the idea
of a cafe as a third place, besides work and home, where people spent their time.
While I focus this video in explaining how coffee is made,
the company in case handout tells you more about the operation of cafe locations as
well which is also critical part of the Starbucks story.
For your case assignment, you should write a short memo containing
an internal analysis of Starbucks addressed to the CEO Howard Schultz.
Include an activity analysis, look at the value chain and or the value network and
a resources and capabilities analysis to clearly identify 2K issues.
Or what internal features or strengths Starbucks competitive advantage built.
And second, what will ensure the Starbucks is competitive advantage
will be sustained in the long run?
Take advantage of the case handout accompanying this video as well as
Internet links to additional online articles.
Some online research is highly encouraged as is posting and discussing particular
topics about Starbucks that are of greater interest to you.
I'm very aware that Starbucks has not succeeded equally everywhere,
that many people have mixed feelings about the company.
hope you like working with this case in Starbucks corporation.
Let me give you a quick outline of the kinds of analysis that I frequently get
from my students.
First, it is quite natural to think about Starbucks as a value chain,
from sourcing beans to roasting and making coffee.
Many of my students comment on how the different elements of the value chain
are all building on each other to produce and deliver a high quality coffee.
And that is certainly an important part of the success of Starbucks.
But also recognize that many aspects of the in-store part of the business
do not easily fit with the idea of a value chain.
Instead, a value network may make more sense there.
Second, when thinking about the company's resources and
capabilities, my students often focus on things like the company's brand name,
coffee sourcing capabilities, and roasting technology and expertise.
These are all very important for the ground coffee business, but
in the coffeehouse business there are other capabilities that are equally,
if not more, important.
Among them, the management of the company's human capital and
the routines and processes set up to deliver a great customer experience
are vital for the company's success.
A particular challenge here is that these capabilities are hard to build and
employ on a consistent basis in a very large company like Starbucks,
which is why it has been a major focus for Howard Schultz in recent years.
In terms of what makes Starbucks competitive advantages sustainable,
you could look for imitation barriers of different kinds, such as legal and
other barriers preventing the replication of Starbucks' brand name and
proprietary roasting knowledge.
Human resource policies that keep the company's best talent from going
elsewhere, and the complexity of the company's entire operation that makes it
difficult for others to replicate.
But perhaps more important than these barriers to imitation
is the culture of customer orientation and innovation the company seems to have.
Essentially it is this culture that'll ensure that the company's valuable
capabilities are durable and that the company remains relevant in the future.
Starbucks is a remarkably innovative company,
constantly coming up with new ways to serve its customers and
its associates, which is what it calls its employees.
So what do you think about cool stirrers like this one, that double a seals for
cups, Internet ordering from its cafes, or online education for its employees?
Starbucks has been constantly innovating and adapting.
This dynamism is key for
the company to sustain its competitive advantages into the future.
I hope you enjoyed learning about Starbucks and
analyzing its internal advantages and sources of competitive advantage.
I look forward to seeing you again soon.