Read the starbucks case below and then Answer the 4 questions in this starbucks case 1.

Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets. 2. What are the major sources of risk facing the company? Discuss potential solutions. 3. Critique Starbucks' overall corporate strategy. 4. How might Starbucks improve profitability in Japan?

The Starbucks coffee shop on Sixth Avenue and Pine Street in

downtown Seattle sits serene and orderly, as unremarkable as

any other in the chain bought years ago by entrepreneur Howard

Schultz. A few years ago however, the quiet storefront made front

pages around the world. During the World Trade Organization

talks in November 1999, protesters flooded Seattle's streets, and

among their targets was Starbucks, a symbol, to them, of freemarket capitalism run amok, another multinational out to blanket

the earth. Amid the crowds of protesters and riot police were

black-masked anarchists who trashed the store, leaving its windows

smashed and its tasteful green-and-white decor smelling of tear

gas instead of espresso. Says an angry Schultz: "It's hurtful. I think

people are ill-informed. It's very difficult to protest against a can

of Coke, a bottle of Pepsi, or a can of Folgers. Starbucks is both

this ubiquitous brand and a place where you can go and break a

window. You can't break a can of Coke."

The store was quickly repaired, and the protesters scattered to

other cities. Yet cup by cup, Starbucks really is caffeinating the

world, its green-and-white emblem beckoning to consumers on three

continents. In 1999, Starbucks Corp. had 281 stores abroad. Today, it

has about 7,000and it's still in the early stages of a plan to colonize

the globe. If the protesters were wrong in their tactics, they weren't

wrong about Starbucks' ambitions. They were just early.

The story of how Schultz & Co. transformed a pedestrian commodity into an upscale consumer accessory has a fairy-tale quality.

Starbucks grew from 17 coffee shops in Seattle 15 years ago to over

19,000 outlets in 58 countries. Sales have climbed an average of

20 percent annually since the company went public, peaking at

$10.4 billion in 2008 before falling to $9.8 billion in 2009. Profits

bounded ahead an average of 30 percent per year through 2007

peaking at $673, then dropping to $582 billion and $494 billion in

2008 and 2009, respectively. The firm closed 475 stores in the U.S.

in 2009 to reduce costs. But more recently, sales revenues rebounded

to $11.2 billion in 2011, and profits reached a record $1.2 billion.

Still, the Starbucks name and image connect with millions of

consumers around the globe. Up until recently, it was one of the

fastest-growing brands in annual BusinessWeek surveys of the top

100 global brands. On Wall Street, Starbucks was one of the last

great growth stories. Its stock, including four splits, soared more

than 2,200 percent over a decade, surpassing Walmart, General

Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total returns.

In 2006 the stock price peaked at over $40, after which it fell to just

$4, and then again rebounded to more than $50 per share.

Schultz's team is hard-pressed to grind out new profits in

a home market that is quickly becoming saturated. The firm's

12,000 locations in the United States are mostly in big cities,

affluent suburbs, and shopping malls. In coffee-crazed Seattle,

there is a Starbucks outlet for every 9,400 people, and the

company considers that the upper limit of coffee-shop saturation.

In Manhattan's 24 square miles, Starbucks has 124 cafs, with

more on the way. That's one for every 12,000 peoplemeaning

that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of

10 percent or more if the company is going to match its historic

overall sales growth. That, as they might say at Starbucks, is a

tall order to fill.

Indeed, the crowding of so many stores so close together has

become a national joke, eliciting quips such as this headline in The

Onion, a satirical publication: "A New Starbucks Opens in Restroom

of Existing Starbucks." And even the company admits that while

its practice of blanketing an area with stores helps achieve market

dominance, it can cut sales at existing outlets. "We probably selfcannibalize our stores at a rate of 30 percent a year," Schultz says.

Adds Lehman Brothers Inc. analyst Mitchell Speiser: "Starbucks is

at a defining point in its growth. It's reaching a level that makes it

harder and harder to grow, just due to the law of large numbers."

To duplicate the staggering returns of its first decades, Starbucks

has no choice but to export its concept aggressively. Indeed, some

analysts gave Starbucks only two years at most before it saturates

the U.S. market. The chain now operates more than 7,000 international outlets, from Beijing to Bristol. That leaves plenty of room

to grow. Most of its planned new stores will be built overseas,

representing a 35 percent increase in its foreign base. Most

recently, the chain has opened stores in Vienna, Zurich, Madrid,

Berlin, and even in far-off Jakarta. Athens comes next. And within

the next year, Starbucks plans to move into Mexico and Puerto

Rico. But global expansion poses huge risks for Starbucks. For one

thing, it makes less money on each overseas store because most of

them are operated with local partners. While that makes it easier

to start up on foreign turf, it reduces the company's share of the

profits to only 20 percent to 50 percent.

Moreover, Starbucks must cope with some predictable challenges of becoming a mature company in the United States. After

riding the wave of successful baby boomers through the 1990s, the

company faces an ominously hostile reception from its future consumers, the twenty- or thirty-somethings. Not only are the activists

among them turned off by the power and image of the well-known

brand, but many others also say that Starbucks' latte-sipping

sophisticates and piped-in Kenny G music are a real turnoff. They

don't feel wanted in a place that sells designer coffee at $3 a cup.

Even the thirst of loyalists for high-price coffee cannot be

taken for granted. Starbucks' growth over the early part of the

past decade coincided with a remarkable surge in the economy.

Consumer spending tanked in the downturn, and those $3 lattes

were an easy place for people on a budget to cut back.

To be sure, Starbucks has a lot going for it as it confronts the challenge of regaining its fast and steady growth. Nearly free of debt, it

fuels expansion with internal cash flow. And Starbucks can maintain

a tight grip on its image because most stores are company-owned:

There are no franchisees to get sloppy about running things. By relying on mystique and word of mouth, whether here or overseas, the

company saves a bundle on marketing costs. Starbucks spends just

$30 million annually on advertising, or roughly 1 percent of revenues, usually just for new flavors of coffee drinks in the summer

and product launches, such as its new in-store web service. Most

consumer companies its size shell out upwards of $300 million per

year. Moreover, Starbucks for the first time faces competition from

large U.S. competitors such as McDonald's and its new McCafs.

CASE 1-1 StarbucksGoing Global Fast

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Cases 1 An Overview

Schultz remains the heart and soul of the operation. Raised in

a Brooklyn public-housing project, he found his way to Starbucks,

a tiny chain of Seattle coffee shops, as a marketing executive in

the early 1980s. The name came about when the original owners

looked to Seattle history for inspiration and chose the moniker of

an old mining camp: Starbo. Further refinement led to Starbucks,

after the first mate in Moby , which they felt evoked the seafaring romance of the early coffee traders (hence the mermaid

logo). Schultz got the idea for the modern Starbucks format while

visiting a Milan coffee bar. He bought out his bosses in 1987 and

began expanding.

The company is still capable of designing and opening a store

in 16 weeks or less and recouping the initial investment in three

years. The stores may be oases of tranquility, but management's

expansion tactics are something else. Take what critics call its

"predatory real estate" strategypaying more than marketrate rents to keep competitors out of a location. David C.

Schomer, owner of Espresso Vivace in Seattle's hip Capitol

Hill neighborhood, says Starbucks approached his landlord and

offered to pay nearly double the rate to put a coffee shop in the

same building. The landlord stuck with Schomer, who says: "It's

a little disconcerting to know that someone is willing to pay twice

the going rate." Another time, Starbucks and Tully's Coffee Corp.,

a Seattle-based coffee chain, were competing for a space in the

city. Starbucks got the lease but vacated the premises before the

term was up. Still, rather than let Tully's get the space, Starbucks

decided to pay the rent on the empty store so its competitor could

not move in. Schultz makes no apologies for the hardball tactics.

"The real estate business in America is a very, very tough game,"

he says. "It's not for the faint of heart."

Still, the company's strategy could backfire. Not only will

neighborhood activists and local businesses increasingly resent

the tactics, but also customers could also grow annoyed over

having fewer choices. Moreover, analysts contend that Starbucks

can maintain about 15 percent square-footage growth in the United

Statesequivalent to 550 new storesfor only about two more

years. After that, it will have to depend on overseas growth to

maintain an annual 20 percent revenue growth.

Starbucks was hoping to make up much of that growth with

more sales of food and other noncoffee items but stumbled

somewhat. In the late 1990s, Schultz thought that offering $8

sandwiches, desserts, and CDs in his stores and selling packaged

coffee in supermarkets would significantly boost sales. The specialty business now accounts for about 16 percent of sales, but

growth has been less than expected.

What's more important for the bottom line, though, is that

Starbucks has proven to be highly innovative in the way it sells its

main course: coffee. In 800 locations it has installed automatic

espresso machines to speed up service. And several years ago, it

began offering prepaid Starbucks cards, priced from $5 to $500,

which clerks swipe through a reader to deduct a sale. That, says

the company, cuts transaction times in half. Starbucks has sold

$70 million of the cards.

When Starbucks launched Starbucks Express, its boldest experiment yet, it blended java, web technology, and faster service. At

about 60 stores in the Denver area, customers could pre-order and

prepay for beverages and pastries via phone or on the Starbucks

Express website. They just make the call or click the mouse before

arriving at the store, and their beverage would be waitingwith

their name printed on the cup. The company decided in 2003 that

the innovation had not succeeded and eliminated the service.

And Starbucks continues to try other fundamental store

changes. It announced expansion of a high-speed wireless Internet

service to about 1,200 Starbucks locations in North America and

Europe. Partners in the projectwhich Starbucks calls the world's

largest Wi-Fi networkinclude Mobile International, a wireless

subsidiary of Deutsche Telekom, and Hewlett-Packard. Customers

sit in a store and check e-mail, surf the web, or download multimedia presentations without looking for connections or tripping over

cords. They start with 24 hours of free wireless broadband before

choosing from a variety of monthly subscription plans.

Starbucks executives hope such innovations will help surmount

their toughest challenge in the home market: attracting the next

generation of customers. Younger coffee drinkers already feel

uncomfortable in the stores. The company knows that because it

once had a group of twentysomethings hypnotized for a market

study. When their defenses were down, out came the bad news.

"They either can't afford to buy coffee at Starbucks, or the only

peers they see are those working behind the counter," says Mark

Barden, who conducted the research for the Hal Riney & Partners

ad agency (now part of Publicis Worldwide) in San Francisco. One

of the recurring themes the hypnosis brought out was a sense that

"people like me aren't welcome here except to serve the yuppies,"

he says. Then there are those who just find the whole Starbucks

scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal,

is put off by Starbucks' Italian terminology of grande and venti

for coffee sizes. She goes to Dunkin' Donuts, saying: "Small,

medium, and large is fine for me."

As it expands, Starbucks faces another big risk: that of becoming a far less special place for its employees. For a company modeled around enthusiastic service, that could have dire consequences

for both image and sales. During its growth spurt of the mid- to

late-1990s, Starbucks had the lowest employee turnover rate of any

restaurant or fast-food company, largely thanks to its then unheardof policy of giving health insurance and modest stock options to

part-timers making barely more than minimum wage.

Such perks are no longer enough to keep all the workers

happy. Starbucks' pay doesn't come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former

store manager in West Hollywood, California: "If I were making

a decent living, I'd still be there." Shay, one of the plaintiffs in

the suit against the company, says she earned $32,000 a year

to run a store with 10 to 15 part-time employees. She hired

employees, managed their schedules, and monitored the store's

weekly profit-and-loss statement. But she was also expected to

put in significant time behind the counter and had to sign an

affidavit pledging to work up to 20 hours of overtime a week

without extra paya requirement the company has dropped

since the settlement.

For sure, employee discontent is far from the image Starbucks

wants to project of relaxed workers cheerfully making cappuccinos. But perhaps it is inevitable. The business model calls for

lots of low-wage workers. And the more people who are hired as

Starbucks expands, the less they are apt to feel connected to the

original mission of high servicebantering with customers and

treating them like family. Robert J. Thompson, a professor of popular culture at Syracuse University, says of Starbucks: "It's turning

out to be one of the great 21st century American success stories

complete with all the ambiguities."

Overseas, though, the whole Starbucks package seems new

and, to many young people, still very cool. In Vienna, where

Starbucks had a gala opening for its first Austrian store, Helmut

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Part 6 Supplementary Material

Spudich, a business editor for the paper Der Standard, predicted

that Starbucks would attract a younger crowd than the established

cafs. "The coffeehouses in Vienna are nice, but they are old.

Starbucks is considered hip," he says.

But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on

indefinitely. In Japan, the company beat even its own bullish

expectations, growing to over 900 stores after opening its first in

Tokyo in 1996. Affluent young Japanese women like Anna Kato,

a 22-year-old Toyota Motor Corp. worker, loved the place. "I don't

care if it costs more, as long as it tastes sweet," she says, sitting

in the world's busiest Starbucks, in Tokyo's Shibuya district.

Yet same-store sales growth has fallen in Japan, Starbucks' top

foreign market, as rivals offer similar fare. Meanwhile in England,

Starbucks' second-biggest overseas market, with over 400 stores,

imitators are popping up left and right to steal market share.

Entering other big markets may be tougher yet. The French

seem to be ready for Starbucks' sweeter taste, says Philippe Bloch,

cofounder of Columbus Cafe, a Starbucks-like chain. But he wonders

if the company can profitably cope with France's arcane regulations and generous labor benefits. And in Italy, the epicenter of

European coffee culture, the notion that the locals will abandon

their own 200,000 coffee bars en masse for Starbucks strikes many

as ludicrous. For one, Italian coffee bars prosper by serving food

as well as coffee, an area where Starbucks still struggles. Also,

Italian coffee is cheaper than U.S. java and, say Italian purists,

much better. Americans pay about $1.50 for an espresso. In northern Italy, the price is 67 cents; in the south, just 55 cents. Schultz

insists that Starbucks will eventually come to Italy. It'll have a lot

to prove when it does. Carlo Petrini, founder of the antiglobalization movement Slow Food, sniffs that Starbucks' "substances

served in styrofoam" won't cut it. The cups are paper, of course.

But the skepticism is real.

As Starbucks spreads out, Schultz will have to be increasingly

sensitive to those cultural challenges. For instance, he flew to Israel

several years ago to meet with then Foreign Secretary Shimon

Peres and other Israeli officials to discuss the Middle East crisis.

He won't divulge the nature of his discussions. But subsequently,

at a Seattle synagogue, Schultz let the Palestinians have it. With

Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and

Saudi Arabia, he created a mild uproar among Palestinian supporters. Schultz quickly backpedaled, saying that his words were taken

out of context and asserting that he is "pro-peace" for both sides.

There are plenty more minefields ahead. So far, the Seattle coffee company has compiled an envious record of growth. But the

giddy buzz of that initial expansion is wearing off. Now, Starbucks

is waking up to the grande challenges faced by any corporation

bent on becoming a global powerhouse.

In a 2005 bid to boost sales in its largest international market,

Starbucks Corp. expanded its business in Japan, beyond cafs and

into convenience stores, with a line of chilled coffee in plastic

cups. The move gives the Seattle-based company a chance to grab

a chunk of Japan's $10 billion market for coffee sold in cans, bottles, or vending machines rather than made-to-order at cafs. It is

a lucrative but fiercely competitive sector, but Starbucks, which

has become a household name since opening its first Japanese

store, is betting on the power of its brand to propel sales of the

new drinks.

Starbucks is working with Japanese beverage maker and distributor Suntory Ltd. The "Discoveries" and "Doubleshot" lines

are the company's first forays into the ready-to-drink market

outside North America, where it sells a line of bottled and canned

coffee. It also underscores Starbucks' determination to expand its

presence in Asia by catering to local tastes. For instance, the new

product comes in two variationsespresso and lattethat are less

sweet than their U.S. counterparts, as the coffee maker developed

them to suit Asian palates. Starbucks officials said they hope to

establish their product as the premium chilled cup brand, which, at

210 yen ($1.87), will be priced at the upper end of the category.

Starbucks faces steep competition. Japan's "chilled cup" market is teeming with rival products, including Starbucks lookalikes.

One of the most popular brands, called Mt. Rainier, is emblazoned

with a green circle logo that closely resembles that of Starbucks.

Convenience stores also are packed with canned coffee drinks,

including Coca-Cola Co.'s Georgia brand and brews with extra

caffeine or made with gourmet coffee beans.

Schultz declined to speculate on exactly how much coffee

Starbucks might sell through Japan's convenience stores. "We

wouldn't be doing this if it wasn't important both strategically and

economically," he said.

The company has no immediate plans to introduce the beverage

in the United States, though it has in the past brought home products launched in Asia. A green tea frappuccino, first launched in

Asia, was later introduced in the United States and Canada, where

company officials say it was well received.

Starbucks has done well in Japan, although the road hasn't

always been smooth. After cutting the ribbon on its first Japan

store in 1996, the company began opening stores at a furious pace.

New shops attracted large crowds, but the effect wore off as the

market became saturated. The company returned to profitability,

and net profits jumped more than sixfold to 3.6 billion yen in 2007,

but declined again to 2.7 billion yen in 2009.

Most recently in Japan, the firm has successfully developed a broader menu for its stores, including customized productssmaller sandwiches and less-sweet desserts. The strategy

increased same store sales and overall profits. The firm also added

175 new stores since 2006, including some drive-through service.

But McDonald's also is attacking the Japanese market with the

introduction of its McCaf coffee shops.