Apply porter's five forces framework to the specialty coffee retail industry

Running head: STARBUCKS EXTERNAL ENVIRONMENTAL SCAN 1

Starbucks External Environmental Scan

Kenawa E. Jigba

Module 3: Assignment 2

Solutions to Organizational Challenges: A Capstone Experience | B6028 BLO | SU213 |

Argosy University, Atlanta

Instructor: Dr. Andrea Banto

Due July 17, 2013

Introduction Comment by Andrea Banto: The running head is incorrect. Repeat the title of the paper before writing your response.

The Starbucks is being affected by the environmental influences or factors and to analyze these influences, we first need to apply the analysis of Michael’s Porters Five Forces. Porter’s Five Forces represent theoretical framework that is used for industry analysis and strategy development. Specifically, the five forces shaping competition within the industry consist of the intensity of rivalry among the competitors, the risk of entry of new competitors, the bargaining power of buyers, bargaining power of suppliers and the threat of substitute products and services (Sinkovics and Ghauri, 2009).

Michael’s Porters Five Forces of Starbucks

Threat of New Competition:-Starbucks is the leading retailer, roaster and brand of specialty coffee in the world operating about 40 countries in the world. The Starbucks key success is innovating, modernizing, aggressive store openings and strong product differentiation in the coffee industry that limits the new entrant’s entrance in the coffee industry. For instance, free Wi-Fi access to enable customers to surf internet, prepaid Starbucks card, card rewards and Starbucks gold card , improving its coffee line to offer smaller, cheaper cups, using new technology that create one cup at a time individually so that the taste remains the fresh. Comment by Andrea Banto: This section should focus on new competition.

However, Starbucks has the major threats from fast food chain like McDonald’s, Burger Kings and Dunkin Donut’s where the capital requirements are not the big problem could be the potential entrants. The economies of scale within coffee industry have risen as the size of fast food chains has varied. The fast food chains (McDonald’s, Burger king, and Dunkin’ Donuts) have very low cost national distribution channels in comparison to the new entrants whose distribution system is not such developed. This group of fast food chain is able to maintain its economies of scale by negotiating long term contracts with farmer & buying the coffee beans in the large quantities at discounted prices. There is various cost disadvantages for the new entrants. For instance, the stabilized company in the market tries to get the high quality coffee beans and for new entrants to access those distribution channels are very difficult. The favorable larger metropolitan store locations have already been occupied by the current specialty coffee industry (Adamy, Venti Changes at Starbucks, 2008).

Threat of Substitutes:- The Starbucks has quite good range of competing substitutes in beverages and food product line like soda, juice, smoothies, fruit, beer, alcoholic drinks, burritos, sushi, burgers and snack food etc. It is necessary for the Starbucks to innovate and differentiate its coffee, beverage and food product line simultaneously in the competitive landscape. Whereas the majority of coffee consumer does not easily substitute away from coffee or coffee related beverages like blended drinks or espresso and the closest substitute of coffee is the tea which is being sold out by Starbucks under Tazo Tea Brand. Moreover, the Starbucks is offering its own branded coffee at many grocery stores locations to hedge the threat of substitutes. The recent study has shown the consumer preference that the beverages like carbonated soft drinks consumption has declined in contrast to the coffee. This gradually gained preference over carbonated soft drinks shows the health concerns and coffee is healthier choice (Harding, 2000). To conclude, Starbucks focus on fresh and tastier baked goods and Starbucks does not need to diversify its food selection as it’s enough to satisfy the customers (Starbucks, 2008).

Bargaining Power of Buyers/Customers:-Starbucks set the price according to the purchasing power of its customer and the prices at their competitors coffee houses. At Starbucks the prices are not negotiable due to its high product differentiation, enormous selection of coffees, uniqueness and high quality perception perceived power. This is the reason the opportunity for the Starbucks may sell at higher prices (Starbucks, 2008).

Whereas, there is no switching cost to customers to switch due to enormous selection of coffee houses except the minor indirect cost and may take away the patrons from Starbucks. Secondly, the customers have the ability to make their own coffee and Starbucks is trying to remove this threat by offering directions on how to make the perfect brewed cup of Starbucks Coffee at home, known as the “Four Fundamentals of Coffee” (www.Starbucks.com).

Therefore, it is clear that the customers bargaining power have been increased due to the availability of information in regards to market variables and Starbucks should focus on the product competition rather than focusing on the consumer demands to exist in market leadership (Starbucks, 2008).

Bargaining Power of Suppliers:- The Starbucks being the world largest importer of the coffee beans may face the rise in prices of coffee beans due to the unmatched between the twin market forces i.e. high demand and low supply, overcrowded market and high quality coffee sought may result in favour of suppliers bargaining power. There is no substitute for the coffee beans that Starbucks may buy. For Starbucks, this is the huge threat because coffee quality sought by the Starbucks is high and previously Starbucks has paid premium on green coffee about $1.20 per pound (starbucks.com). In 2001, Starbucks announced coffee purchasing guidelines for suppliers, developed in partnership with The Centre for Environmental Leadership in Business (starbucks.com) and were based on the grounds of the quality baselines, environmental concerns, social conditions and economic issues. Recently in 2005, the company paid 23% more than the market price for the coffee xvii to abide by the rules and commitments in purchasing the Fair Trade Certified Coffee (Farmers who sells the coffee are united by an initiative known as Fair Trade Certified Coffee, organized by the Trans Fair USA to assess the farmers are paid fairly for their crops and that has exert more bargaining power over the buyers). Thus, there are more substitutes available in the competitive saturated market for the coffee beans except the technological innovations (such as automated coffee machine, latte and espresso machines has more bargaining power) if Starbucks agrees to buy at different rates and this is true that the Starbucks power lies in the hand of the suppliers.

Intensity of Competitive Industry Rivalry:- Rivalry among existing competitors is high within the industry Starbucks operates in with major competitors like Costa, McDonald’s, Caribou Coffee, and Dunkin Donuts and thousands of small local coffee shops and cafes. As the specialty beverage industry only grows more competitive, Starbucks’ dominant positioning with a large market share is continuously under pressure. Since its inception, Starbucks has stimulated the overall market, creating a positive spillover effect that increased the demand for quality coffee beverages. Therefore, even though Starbucks has rapidly expanded, so have local coffeehouses and ‘mom‐and‐pop’ stores. Thus, elasticity has increased with the variety of substitutes available to consumers offering the same product: premium coffee, friendly staff, and a comfortable milieu. For this reason, recent trends indicate industry stagnation within the domestic market as coffeehouses are now ubiquitous. Though the trend has peaked domestically, coffee and coffeehouses are still ingrained in the American culture leaving this market profitable. Comment by Andrea Banto: Good job with this section.

Key Factors and Trends in Other Areas Affecting Starbucks

The other key factors and trends in other areas that is affecting Starbucks beside Porter’s Five Forces, includes: Political, Economic, Social, and Technological factors.

Political:-The Starbucks business environment especially in Middle East and South Asia was changing rapidly and unpredictably towards worse for the company, due to the declaration of the war on Iraq in early 2003 by the United States. In July 2002, the Arab students called for a boycott of American goods and services, due to the close relationship between United States and Israel, caused the U.S Company Starbucks sales swift downwardly.

Moreover, the Starbucks was boycotted at the top list due to Shultz close relationship to the Jewish Community and the rumours sponsoring the Jewish Community against the Palestine crisis. Thus, cause the Starbucks to closed down six stores in Israel for security threats. Comment by Andrea Banto: A paragraph should have 3 or more sentences.

Starbucks had two class action suits pending since 2001. The lawsuits entitled Carr (Store Manager) and Sheilds (Assistant Manager) at California as exempt employees under California wage and hours laws. The Starbucks is ignoring all its liabilities in these cases, but the company has accepted to the settlement in regards to take care of all of the plaintiffs’ claims without involving in any protracted litigation.

Starbucks is based on importing all their coffee beans, so other possible threat could be change in import laws, could affect the various areas of process and production for the company and could finally lead to change in price, which might impact the level of consumption or sales for the company.

Economical:- The Starbucks also experienced the criticism from Non-Government Organizations that wanted the company to get certified beans and those coffee beans should be grown and marketed under some economic and social conditions. In addition, the economic recession in European countries such as Switzerland, Germany, and Japan in the early 2000s and worldwide financial crisis affected the sales and revenue declining for the company. Comment by Andrea Banto: Please revise this section.

Social: - In regard to the Starbucks Environment Mission Statement that “Starbucks is committed to a role of environmental leadership in all facets of our business” On the basis of their objective, the Starbucks has announced a list of principles that reflects the company’s willingness to make sure its impact on the environment is positive as possible. These principles are: Comment by Andrea Banto: What other social trends may influence the company?

1) Understanding of environmental issues.

2) Sharing information with our partners.

3) Developing innovative and flexible solutions to bring about change.

4) Striving to buy, sell and use environmentally friendly products.

5) Recognizing that fiscal responsibility is essential to our environmental future.

6) Instilling environment responsibility as a corporate value.

7) Measuring and monitoring our progress for each project and encouraging all partners to share in our mission.

The above Environmental principle reflects that the company is more conscious and interested in utilizing their resources in regards to the friendly environment operations.

Technological:-The Starbuck, to earn the profit rapidly and serve more customers quickly rather than focusing on the quality enables the management to replace labour operated machine La Marzocco (which required barista’s to grind & press coffee for every cup) with the Verismo automatic machine (where the barista’s work was reduced to pressing a button) and later barista’s grinding complained of being de-skilled. Thus, the coffee quality result in poor coffee house experience, customer experience and overpriced coffee than competitors led existing and potential customers coming through its doors felt down rather than rising. Shultz to achieve the best result spend ten millions of dollars on new coffee machine namely “Clover” (for making brewed coffee that requires both more beans and more labour) and another machine namely “Mastrena” (smaller and prettier than the Verismo machine, for making espressos where baristas are still required to push a button for grinding and for each fresh cup of the coffee). The Starbucks needs to re-evaluate what the brand stands for, what it sells and what the consumer experience and values should be. Comment by Andrea Banto: Not caps.

SWOT ANALYSIS Comment by Andrea Banto: Only the opportunities and threats were required. These should be very specific to the company. Some of the items indicated are too broad.

Strengths:

Expansion of Products and Services

· Starbucks gift cards: The surge in the sales of Starbucks gift cards is developing into a

very promising ordeal for the company. For the first quarter of 2007, the aggregate volume stored on Starbucks Cards was 40% higher than the first quarter of the previous year.

· Expansion of food items: Starbucks is further expanding their lunch menu which includes

prepackaged sandwiches and salads.

Strong Financials: Starbucks’ net revenues increased 22% in 2006 fiscal year for a total of $7.8 billion. Their earnings increased 18% from the previous year from $494 million in 2005 to $581 million.

Brand Image:- Over the years , Starbucks has developed a brand image that has transitioned customers into the “coffeehouse culture.” It offers its customers a “third place to go after work and home.

Weaknesses

Higher Cost of Sales A mixture of increasing costs of distribution, and increased rent related to a growth in store openings has recently lowered Starbucks’ EBIT margins. In fact Starbucks’ cost of sales increased 26.6% in the first quarter of 2007 versus the first quarter of 2006.

Uncontrolled Expansion As much as the expansion and increase of its retail stores is good for profits, they must make sure that they have initiated a rapid growth plan in place in order to manage existing operations and maintain consistent performance.

Opportunities

Overseas Expansion As of the first quarter of 2007 Starbucks has 13, 168 locations worldwide. Their management team sees long term potential for over 40, 000 locations worldwide. According to Robert W. Braid & Co,, it is expected that the near –term growth of their locations will be 17-20% per year.

Product Line Extension Starbucks ‘commitment innovation and invention has not gone unnoticed and unrewarded. Product line expansion is crucial to the company’s growth and success.

Threats

The World Economy The state of the economy, particularly consumer spending, may pose a threat to Starbucks’ overall sales growth. Some factors include the increased debt service levels resulting from adjustable-rate mortgages and interest rates, the slowdown in the housing market, and the potential spike in gas and oil prices. Factors such as these will affect discretionary spending.

Consumer Preference and Health Concerns: Health –related concerns regarding caffeinated beverages could easily dampen the demand for coffee.

Competition from Fast –Fast Services: In recent statement, McDonalds announced that it will be piloting the addition of espresso and cappuccino machines in locations throughout New York, New Jersey, and Michigan. Dunkin Donuts was recently labeled as “the hottest coffee chain” in a customer loyalty survey performed by major marketing firm brand key. Fast food chains are aiming to gain market share in the market for coffee and coffee-products such as espresso and cappuccino, and with substantial financial, marketing and management resources, they could be very successful.

Conclusion

Starbucks is still the leading retailer, roaster and brand of specialty coffee in the world. Regardless of the fact that there are external environmental factors affecting the organization, the potential for growth remains remarkable. With proper strategic planning, marketing, and management, the sky will be the limit for the potential expansion and strength Starbucks have as a company to combat the weakness and as well as the threat.

References:

Adamy, J. (2008), Venti Changes at Starbucks http://knowledgeputeri.wordpress.com/articles/starbucks-corporation/ ‎

Sinkovics, R. & Ghauri, (2009), P, 277-319. New Challenges to International Marketing

Starbucks, (2008), www.studymode.com/subjects/starbucks-2008-page3.html

View shared post

Applied Sciences

Architecture and Design

Biology

Business & Finance

Chemistry

Computer Science

Geography

Geology

Education

Engineering

English

Environmental science

Spanish

Government

History

Human Resource Management

Information Systems

Law

Literature

Mathematics

Nursing

Physics

Political Science

Psychology

Reading

Science

Social Science

Home

Blog

Archive

Contact

google+twitterfacebook

Copyright © 2019 HomeworkMarket.com