Porter's Five Forces Analysis

Porters Five Forces Analysis of the Retail Coffee and Snacks Industry:

Threat of New Entrants: Moderate

• There is a moderate threat of new entrants into the industry as the barriers to entry are not high enough to discourage new competitors to enter the market. (Appendix 2 shows Barriers to Entry Checklist).
• The industry’s saturation is moderately high with a monopolistic competition structure.
• For new entrants, the initial investment is not significant as they can lease stores, equipment etc. at a moderate level of investment.
• At a localized level, small coffee shops can compete with the likes of Starbucks and Dunkin Brands because there are no switching costs for the consumers. Even thought it’s a competitive industry, the possibility of new entrants to be successful in the industry is moderate. 
• But this relatively easy entry into the market is usually countered by large incumbent brands identities like Starbucks who have achieved economies of scale by lowering cost, improved efficiency with a huge market share. There is a moderately high barrier for the new entrants as they differentiate themselves from Starbuck’s product quality, its prime real estate locations, and its store ecosystem ‘experience’.
• The incumbent firms like Starbucks have a larger scale and scope, yielding them a learning curve advantage and favorable access to raw material with the relationship they build with their suppliers. 
• The expected retaliation from well-established companies for brand equity, resources, prime real estate locations and price competition are moderately high, which creates a moderate barrier to entry.

Threat of Substitutes: High

•  There are many reasonable substitute beverages to coffee, which are mainly tea, fruit juices, water, soda’s, energy drinks etc. Bars and Pubs with non/alcoholic beverages could also substitute for the social experience of Starbucks
•  Consumers could also make their own home produced coffee with household premium coffee makers at a fraction of the cost for buying from premium coffee retailers like Starbucks.
•  There are no switching costs for the consumers for switching to substitutes, which makes the threat high.
• But its important to note that industry leaders like Starbucks are currently trying to counter this threat by selling coffee makers, premium coffee packs in grocery stores but this threat still puts pressure their the margins.

Bargaining Power of Buyers: Moderate to Low Pressure

• There are many different buyers in this industry and no single buyer can demand price concession.
• It offers vertically differentiated products with a diverse consumer base, which make relatively low volume purchases, which erodes the buyer’s power.
• Even though there are no switching costs with high availability of substitute products, industry leaders like Starbucks prices its product mix in relation to rivals stores with prevailing market price elasticity and competitive premium pricing.
•  Consumers have a moderate sensitivity in premium coffee retailing as they pay a premium for higher quality products but are watchful of excessive premium in relation product quality.

Bargaining Power of Suppliers: Low to Moderate Pressure

• The main inputs into the value chain of Starbucks is coffee beans and premium Arabica coffee grown in select regions which are standard inputs, which makes the cost of switching between substitute suppliers, moderately low.
• Starbucks, with its size and scale, has the power to take advantage of its suppliers but it maintains a Fair trade certified coffee under its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair partnership status, which yields them some moderately, low power.
• The suppliers in the industry also pose a low threat of competing against Starbucks by forward vertical integration, which lowers their power.
• Starbucks also forms a highly important part of the suppliers business, due its size and scope, which make the power of the suppliers lower. Given these factors, suppliers pose a moderately low bargaining power.

Intensity of Competitive Rivalry: High to Moderate

• The industry has a monopolistic competition, with Starbucks having the largest markets share and its closest competitors also having a significant market share, creating significant pressure on Starbucks.
• Consumers do have any cost of switching to other competitors, which crates high intensity in rivalry.
• But its important to note that Starbucks maintain some competitive advantage as it differentiates its products with premium products and services, which cause a moderate level of intensity in competition.
• The industry is mature and growth rate has been moderately low which cause the intensity of competition among the companies to be moderately high due to all of them seeking to increase market shaper from established firms like Starbucks.
• This industry does not have over capacity currently and all these factors contribute to the intensity among rivals to be moderately high.

Looking at the Porters five forces analysis, we can get an aggregate industry analysis that the strength of forces and the profitability in the retail coffee and snacks industry are Moderate.

References:
http://research-methodology.net/starbucks-porters-five-forces-analysis/
https://prezi.com/fiiecwjmqz7n/starbucks-porters-five-forces-analysis/

Competitive Advantage of Starbucks

Starbucks Corporation, doing business as Starbucks Coffee, is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffehouse company in the world ahead of UK rival Costa Coffee, with 20,737 stores in 63 countries and territories, including 11,910 in the United States, 1,496 in China, 1,442 in Canada, 1,052 in Japan and 772 in the United Kingdom.

Starbucks locations serve hot and cold beverages, whole-bean coffee, microground instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell pre-packaged food items, hot and cold sandwiches, and items such as mugs and tumblers. Starbucks Evenings locations also offer a variety of beers, wines, and appetizers after 4pm. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. 

 

A Connected Customer Experience

Starbucks seeks to provide a connected customer experience to build and maintain a long term relationship. More than just offering fine coffee, the coffee giant provides the “Starbucks Experience” which makes customers feel at home, forming a strong emotional attachment. Starbucks stores are designed with great ambiance in mind in accessible locations. Schultz believes that employees are the key to building a positive customer experience. A host of benefits such as health care, stock option plans, stock purchase plans, training and recognition has been implemented. Starbucks was ranked 7th in Fortune’s annual list of “100 Best Companies to Work For” in 2008.

 

Starbucks Rewards Card

Starbucks also introduced the Starbucks Rewards Card that provides a host of benefits. This entices customers returning to make purchases, building loyalty. Starbucks also launched the Starbucks Customer Experience Survey which allowed customers to share their thoughts about their experience at Starbucks. This is evident that Starbucks is committed to establishing long term relationships with the customer.

 

Mastrena Espresso Machine

Source: Gizmodo

 

The Finest Coffee Beans

Starbucks’ uses the finest beans its coffee. Company personnel often travel frequently in search of suppliers that meet its standards. In addition, Starbucks also purchased Certified Organic coffee and Fair Trade certified coffee. In 2009, 14 million pounds of certified organic coffee was purchased. Coffee is also brewed with Mastrena, a sophisticated Swiss-made espresso machine. When you visit a Starbucks cafe overseas, you will be greeted with that familiar taste no matter where you are.

Competitive Advantages

Starbucks maintain competitive advantage by new ideas. For example, in the beginning Starbucks didn’t provide free wi-fi facility. But today because of so many coffee have free wi-fi facility so they make they coffee shop have that facility too, so that the customers can feel more comfortable.

New products. For example, Starbucks make a coffee sachet. It almost the same like coffee which Nescafe produced.It provides new experiences for guests.  For example,Starbucks hires it’s own designers to make artwork for commuter mugs. 

 

Strategy

Starbucks strategy is a simple saturate the market. By spreading out the outlet location it makes one store not cut the profits of another store. Usually, the stores would be placed on locations based on demographics, traffic patterns, the location of competitors as well as the location of its own stores.
However, the Starbucks strategy went against the grain. Instead of following the trend, CEO Howard Schultz had a different idea. He decided that the Starbucks strategy would be to blanket an area completely. Siding matter about one store cut the profits of another store, the Starbucks strategy focused on heavily increasing the foot traffic in one specific part of town. They think this will reduce the company’s delivery and risk, also the customer doesn’t need to stay in the waiting line for a long time. Schultz knew that his Starbucks strategy was a risk, but it was one he was willing to take.
For the result of this strategy. Starbucks quickly achieve market dominance. They have more than 20 million customers per week, this is the highest frequency of visiting customers. Since the company went public, sales have risen roughly 20% each year. Even when the rest of the economy seems to be in a slump, loyal patrons keep returning to Starbucks for their regular cup of Joe.
Starbucks using many kind of entry mode for expanding its business to another country. These include joint ventures, licensing, and wholly owned subsidiaries. Starbucks gain advantage of providing access to local partner knowledge by using joint venture. Starbucks also shares development costs and risks with Sazaby in addition. Starbucks use licensing way to enter the Middle East because with this mode it allow Starbucks to minimize capital outlays for marketing research and decrease local market expertise. And for the wholly owned subsidiaries it offers technology protection and ability to engage in the global strategic coordination.

 

Porter's Generic Strategies

According to Michael Porter, three general types of strategies can be used to achieve a sustained competitive advantage. They are cost leadership, differentiation and focus.
Porter describes the strategy of differentiation as the delivery of quality products or services that are perceived to be unique and valued by consumers. Product differentiation is the core of Starbuck’s strategy to gain a sustained competitive advantage. Starbucks offers such differentiation through an excellent customer experience and quality coffee The “Starbucks Experience” is achieved through its well-designed stores with good ambiance and well trained staff. According to a study conducted by Daily Mail, Starbucks stores provided a more welcoming decor with friendlier baristas compared to independent coffee houses.
The differentiation strategy of being a premium and unique coffee drinking provider has allowed Starbucks to achieve a sustained competitive advantage.

References


http://en.wikipedia.org/wiki/Starbucks
http://unrealist.hubpages.com/hub/Sustained-Competitive-Advantage-of-Starbucks
http://www.ukessays.com/essays/marketing/strategy-and-competitive-advantage-of-starbucks-marketing-essay.php