Threat of substitutes starbucks

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.