Financial Accounting Analysis

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Case 1.1
Industry and Strategy Analysis
a. Apply Porter’s five forces framework to the specialty coffee retail industry. 1. Rivalry among Existing Firms. Direct rivalry among existing firms is often the first order of competition in an industry. Starbucks competes with a broad scope of coffee beverage retailers, including fast-food chains, doughnut chains, and convenience stores associated with many gas stations. Also, there are a number of companies that were growing chains of retail coffee shops that could be compared to Starbucks, such as Panera Bread. However, these types of outlets offer an experience that is very different from what Starbucks offers. Thus, how to make “Starbucks experience” stand out among competitors is a key issue regarding to Starbucks’ success. Rivalry among firms appears to be moderate. 2. Threat of New Entrants. Starbucks had developed a global brand that was synonymous with the quality of the “Starbucks Experience”, which is estimated worth of 3 billion. Also, Starbucks has a larger numbers of retail store both in domestic US and in the international market. Thus, brand name and large number of retail stores becomes the main entrance barrier. The threat of new entrants which will offer the similar retail concept is fairly low. However, whether other existing firms can add specialty coffee service like “Starbucks experience” to compete is still unknown. 3. Threat of substitutes. Starbucks faced intense direct competition. There are numerous beverage substitutes to specialty coffee, which will make the threat of substitutes high. However, very few companies were implementing a business strategy comparable to that of Starbucks, with emphasis on the quality of the experience, the products, and the service. Thus, the threat of substitutes is moderate to high. 4. Buyer power. Consumer views specialty coffees as high quality and more unique. This will increase consumers’ willingness to pay more for such coffee. They are happy to spend more to enjoy “Starbucks experience.” Thus, they become less price sensitive. Therefore, the buyer power is relatively low. 5. Supplier power. Starbucks purchases green coffee beans from coffee-producing regions around the world under fixed-price purchase contracts with various suppliers, with purchase prices reset annually. Since the suppliers come from all over the world, the source is large. Supplier power is moderate.

b. How would you characterize the strategy of Starbucks? How does Starbucks create value for its customers? What critical risk and success factors must Starbucks manage? The Company’s goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products, and by providing each customer a unique Starbucks Experience. Customers can feel comfortable and welcome through friendly and skilled customer service in clean and personable retail store environments. This combination has make the company differentiate from its competitors and make Starbucks successful. Starbucks also enjoy a rapid growth in the number of licensed retail stores. It increases the number of channels to distribute its product, selling coffee beans and ground coffees through grocery stores, warehouse clubs, and food distributors. It also forms partnerships with other established, brand name firms to sell various high-quality beverages in order to maintain high growth rate.

Balance Sheet
c. Describe how Cash differs from Cash Equivalents.
Cash includes cash on hand and in checking accounts. Cash equivalents are assets that are readily convertible into cash, such as Treasury bills, commercial paper, and money market funds. Cash equivalents usually have maturity duration about less than three months at the time of purchase, so that changes in interest rates have an insignificant affect on their market value.

d. Why do investments appear on the balance sheet under both current...
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