BCG Matrix & Decision Trees: Starbucks (DP IB Business Management)

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The Purpose of the Business Management Case Study Below

The business management toolkit is a set of situational, planning and decision-making tools. These tools should be to analyse and evaluate the syllabus content in terms of a real world example
This suite of decision-making tools is designed to help business leaders assess their current situation and implement strategies for the future
To evaluate these tools, you can
- Consider the reliability of the data fed into these tools
- Comment on the the subjectivity of their outcomes
This evaluative approach will help you to apply your knowledge and to engage with decision-making as a process and a skill
You will be assessed on your knowledge of important contemporary business topics through the the analysis of a fictitious or real business. The case study below provides an example of how to effectively use the business Management Toolkit

BCG Matrix & Decision Trees: Starbucks

Starbucks Corporation is an American multinational chain of coffeehouses with its headquarters in Seattle. It is the largest chain of coffeehouses in the world, with more than 34,000 stores in 80 countries, including almost 16,000 in the United States and over 2,500 in Europe.

Starbucks offers hot and cold beverages including whole bean and micro-ground instant coffees, teas with and without leaves, juices, frappuccino drinks, pastries and snacks. Some offerings are seasonal or specific to the store location.

Despite widespread scepticism, the first Starbucks opened in Italy in 2018 and 25 stores now operate in the country, selling its best-selling portfolio of products as well as a popular Oleato range of olive oil coffee drinks, amongst many other Italian specialities. Some senior Starbucks Europe managers have suggested that the business should focus on strengthening its product range in Italy - a strategy that was undoubtedly a key feature of Starbucks’ rapid growth in the UK - by investing $4 million later this year in above the line promotional activity to increase sales of a selection of drinks brands.

Starbucks Italian portfolio of products is separated into categories using the BCG matrix — **Starbucks Italy’s drinks portfolio illustrated in the BCG Matrix**

Alternatively, following its success in Italy, leaders at Starbucks’ US headquarters are looking to expand the brand to one the few remaining European countries where it does not presently operate, with coffee-culture Croatia at the top of its list. They are keen to open a flagship city-centre store in Dubrovnik in time for the next summer season at a cost of $8 million. Extensive market research over a number of years has revealed some significant issues with this idea:

Starbucks menu items and cafe layouts are designed for high traffic and rapid customer turnover whilst, for Croatians who love to linger, enjoying coffee with friends is something over which time is taken
Cafes already exist all over the country including much loved chains such as Quahwa, D16 Coffee and Cogito Coffee, each of which enjoy strong customer loyalty
On average, a medium-sized cup of coffee in Croatia costs less than one Euro, half the price Starbucks typically charges in other European countries

In order to help senior managers decide which strategy to pursue in Europe a decision tree diagram has been devised.

The decision tree helps Starbucks to make a decision to launch a new promotional campaign in Italy or open a new flagship store in Croatia — **A decision tree diagram detailing Starbucks Europe's two strategic choices**

Questions

(a) Define the term product portfolio. [2 marks]

(b) Explain one advantage and one disadvantage to Starbucks of using decision trees in determining business strategy. [4 marks]

(i) the promotional campaign in Italy

(ii) the opening of a flagship store in Croatia [4 marks]

(d) Using the BCG Matrix of Starbucks' drinks portfolio in Italy, as well as further information from the case study, recommend the products that Starbucks should select as its focus for increased promotional spending. [10 marks]

Exam Tip

Remember, a group of business decision-makers may look at the same data and make different judgements. When you make use of the business toolkit, try to avoid assumptions because they can confuse the end users of the analysis and encourage (or discourage) a particular view.

In general, analysis doesn't belong within the tools - it is what managers do afterwards, when presented with data in these powerful forms.

Solutions to the Questions: Starbucks

(a) Define the term product portfolio. [2 marks]

Model Answer	Guidance & Commentary
A businesses product portfolio is its complete range [1] of goods and services currently available for customers to purchase [1].	Define questions require you to provide a full definition that demonstrates good knowledge and understanding The model answer is awarded 2 marks because it is precise and uses related business terminology correctly

(b) Explain one advantage and one disadvantage to Starbucks of using decision trees in determining business strategy. [4 marks]

Indicative content	Guidance
Advantages of decision trees include Decision trees may reveal options that haven't previously been considered Managers have to consider risks associated with their choice ahead of implementation Disadvantages of decision trees include Constructed using estimates which rarely include all possible eventualities Qualitative elements such as human resource impacts are not considered	In this type of explain question you can be awarded one mark for each correct advantage or disadvantage identified A further two marks can be awarded if you apply both the advantage and disadvantage to the business You should ensure that your response refers to determining business strategy
Model Answer
An advantage of using decision trees to determine business strategy is that it allows two choices, such as Starbucks' proposal to spend $4 million on promotional activity or $8 million opening a flagship store in Croatia to be compared, even though they require very different levels of investment [1 mark + 1 mark]. However it takes a lot of time to construct and accurately interpret decision tree diagrams as it requires significant amounts of research to ensure it is as reliable as possible and, as Starbucks wants to embark on both of the two options very soon, there is little time to carry out this research which may mean that the decision tree is misleading and an inappropriate strategic decision is made. [1 mark + 1 mark].

Indicative content

Guidance

Advantages of decision trees include
- Decision trees may reveal options that haven't previously been considered
- Managers have to consider risks associated with their choice ahead of implementation
Disadvantages of decision trees include
- Constructed using estimates which rarely include all possible eventualities
- Qualitative elements such as human resource impacts are not considered

In this type of explain question you can be awarded one mark for each correct advantage or disadvantage identified
A further two marks can be awarded if you apply both the advantage and disadvantage to the business
You should ensure that your response refers to determining business strategy

Model Answer

An advantage of using decision trees to determine business strategy is that it allows two choices, such as Starbucks' proposal to spend $4 million on promotional activity or $8 million opening a flagship store in Croatia to be compared, even though they require very different levels of investment [1 mark + 1 mark].

However it takes a lot of time to construct and accurately interpret decision tree diagrams as it requires significant amounts of research to ensure it is as reliable as possible and, as Starbucks wants to embark on both of the two options very soon, there is little time to carry out this research which may mean that the decision tree is misleading and an inappropriate strategic decision is made. [1 mark + 1 mark].

(i) the promotional campaign in Italy

Step 1: Multiply the expected value of success of the promotional campaign by the probability

$$ 13.5 m \times 0.7 = $ 9.45 m$

Step 2: Multiply the expected value of failure of the promotional campaign by the probability

$$ 1.2 m \times 0.3 = $ 0.36 m$

Step 3: Add these two values

$$ 9.45 m + $ 0.36 m = $ 9.81 m$

Step 4: Deduct the cost of the promotional campaign to identify the expected value

$$ 9.81 m - $ 4 m = $ 5.81 m$

The expected value of the promotional campaign in Italy is $5.81m

(ii) the opening of a flagship store in Croatia

Step 5: Multiply the expected value of success of the flagship store by the probability

$$ 22.0 m \times 0.5 = $ 11.0 m$

Step 6: Multiply the expected value of failure of the flagship store by the probability

$$ 3.0 m \times 0.5 = $ 1.5 m$

Step 7: Add these two values

$$ 11.0 m + $ 1.5 m = $ 12.5 m$

Step 8: Deduct the cost of the flagship store to identify the expected value

$$ 12.5 m - $ 8 m = $ 4.5 m$

The expected value of the flagship store in Croatia is $4.5m

[4 marks]

(d) Using the BCG Matrix of Starbucks' drinks portfolio in Italy, as well as further information in the case study, recommend the products that Starbucks should select as its focus for increased promotional spending. [10 marks]

Exemplar structure

Part	Knowledge & Application	Balanced Analysis	Judgement
Introduction	Define BCG matrix and its elements Identify suitable 'star', 'question mark' or 'dog' products
Recommendation 1	Suggest a suitable product Describe its position in the Boston Matrix	Provide a developed advantage and disadvantage Make use of evidence from the case study in your chains of analysis
Recommendation 2	Suggest a second suitable product Describe its position in the Boston Matrix Compare its position to the first recommendation	Provide a developed and advantage and a developed disadvantage Make use of different evidence from the case study within chains of analysis	Consider why this recommendation may be better (or worse) than the first
Recommendation 3	Suggest a third product recommendation from a separate matrix quadrant Describe its position in the Boston Matrix Compare its position to the first and second recommendations	Provide a developed and advantage and a developed disadvantage Make use of different evidence from the case study within chains of analysis Consider the validity of evidence	Consider why this recommendation may be better (or worse) than other recommendations Weigh up aspects such as risk and cost
Conclusion	Identify other tools that may aid decision-making in this instance	Develop chains of applied reasoning to support your choice(s) Provide a further chain of reasoning to justify rejected option(s)	Make a clear decision, using the case study Consider the other factors that may impact the final decision managers may make

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