Table of Contents
Michael Porters Framework: An Introduction
Substitutes are a threat
Buyers’ bargaining power
Suppliers’ bargaining power
Rivalry in competition
An opening sentence
Starbucks Cooperation, a global leader in coffee roasting and retailing speciality coffees. Starbucks has expanded rapidly and strategically since 1971 when it opened its first store downtown Seattle. Starbucks opened 29,324 coffee shops in 2018, with 15,041 being located within the United States. Starbucks’ dominance in the American coffee and snack retail sector gives them significant influence over industry trends. Starbucks balances customer loyalty with premium coffee and a homey atmosphere in its stores to beat its competitors and succeed among the American populace. It is important to remember that strategy encompasses how an organization achieves its premeditated goals. Businesses and organizations must have a clear strategy if they want to be successful in implementing their objectives, goals, and targets, regardless of whether they’re customer or profit oriented. It is important to understand the strategic position and goals of an organisation, and then formulate a strategy that will guide the company.
Michael Porters FrameworkAn IntroductionWe can use Michael Porters Five Forces Framework in order to evaluate the competitive environment and to develop a successful strategy. The five forces are the following: power of the suppliers, threat from new competitors and entry, industry rivalry and threat of substitutes, and lastly, power of the buyers. We can investigate Starbucks’ external environment by applying Porter’s Five Forces.
Porters framework of 5 forces also includes the threat posed by new entrants. This area deals with the threat that a potential new entrant can pose to the existing competition in the industry. It is claimed that the retail coffee sector in the United States is highly competitive, and therefore new competitors are a moderate risk. The reason for this is that the investment required to enter the coffee industry is only a moderate one. Starbucks may perceive a threat in the form of smaller coffee retailers, who can establish quickly and easily on a small scale. This is because they are less dependent on supply and have no switching cost for their customers. Starbucks leads the market due to its extensive brand development, advanced economies-of-scale and long history. Starbucks is a good example of this because they are a large and established brand with a global reach. They have developed their distribution system and the funds to expand beyond the localised area and therefore, outside the United States. Starbucks holds an advantage in this market, as their customer service is more developed. Starbucks is able to retain customers who are loyal and return often.
Porter’s framework includes the threat of substitutes within an industry. This considers the fact that when there is a near-identical product within a given market, consumers are more likely to switch to an alternative retailer for a cheaper option or buy other commodities. If established companies charge more than newcomers to reduce the threat level, it can lead to a loss in profits and customer migration. Starbucks faces a high threat from competitors, as the popularity of products like caffeinated sodas and canned energy drinks is on the rise. These products, which are sold at a cheaper price in supermarkets, pose a significant threat to Starbucks. This is because these alternatives are easier to use and more convenient. Customers don’t have to wait in queues to buy them, nor do they need to interact with Starbucks staff. Starbucks and PepsiCo have created their own canned ready-todrink drinks to follow this trend. For example, their Nitro Cold Brew. These products are marketed as a ‘premium experience’ and can be enjoyed anywhere. Starbucks has a strategy to counter threats from new competitors by increasing their product range and keeping up with the market trends. Starbucks purchased Teavana Holdings Inc, a tea retailer in the United States that produces and markets premium teas. Starbucks has taken this step to further retain their customers, by offering other products under Starbucks’ brand. Starbucks faces the challenge of rivals who offer substitute products, which puts pressure on its margins.
Bargaining Power of BuyersBargaining power is the ability of consumers to influence firms and exert pressure on them in order to get a lower price or a higher quality product/service. This power is a factor that can influence the competitiveness of an industry by influencing its ability to generate profits. A buyer’s bargaining ability can be determined based on factors such as their bargaining leverage, and how sensitive they are to price. The higher the bargaining lever, the greater the price sensitiveness of the buyer. This can be detrimental to their business as the products are marketed at lower prices, resulting in a loss of profits and a higher consumer surplus. Starbucks’ bargaining power with suppliers makes it difficult to negotiate on the price with primary customers. Due to its size, it is not possible to charge customers different prices. There are many coffee take-away retailers in the USA. This allows customers to choose a retailer who offers the same coffee at a more affordable price. Starbucks 25? discount allows their customers to negotiate prices. In 2018, Starbucks introduced a discount for reusable cups. This discount encourages customers to bring reusable cups of coffee and they will receive a 25 percent discount. This discount encourages consumers to bring their reusable coffee cups and in return they receive a 25? Starbucks also offers their own brand of plastic coffee cups that can be reused to encourage consumers. Starbucks has made a strategic decision that gives consumers bargaining power while also allowing them to benefit from the scheme.
It is well known that the bargaining power of suppliers is similar to what producers have with their consumers. Suppliers are able to influence profit potential and the competitiveness of a particular industry. They can raise the price of goods and modify their quality. Starbucks published their 2018 annual reports, which included the Starbucks Global Social Impact Strategy. Starbucks Global Social Impact Strategy aims to source coffee sustainably while also contributing to the local community. Companies have to differentiate products to maintain competitive advantage due to the large number of specialty coffee retailers and Arabica coffee bean suppliers. Starbucks and other retailers are therefore looking for better quality goods to set themselves apart from the competition. These farmers can negotiate because they have a lot of customers. This gives them a strong bargaining position with the producers. A large part of Starbucks’ financial commitment to its suppliers is due to their size and demand in the USA. The suppliers are therefore disadvantaged as they depend on Starbucks for their livelihood.
Competition RivalryIn Porter’s 5 factors, the intensity with which an industry competes is included. It is based on the competition between industries and their environment. In a highly-competitive market, there are fewer opportunities for companies to negotiate their prices. Profit margins can also be reduced. Due to the fierce competition on the US specialty coffee market, this is a very competitive sector. Starbucks is a monopolistic competitor. This means that the company is operating in a competitive market with many sellers of similar products/services. To compete, retailers offer differentiating products. Starbucks is the leader in the United States market with a 39.8% share. While this number is larger than that of other players in the coffee specialty industry, one could say this places pressure on Starbucks to maintain their influence and find new and creative ways to both retain existing clients and also attract more. A second argument is that despite this high pressure being placed on Starbucks, the company still dominates their industry by offering high-quality products and services. Starbucks’ service has been extended by UberEats since 2018. Starbucks has 15 million monthly users in more than 500 US cities. This venture gives Starbucks a competitive edge within the industry because it increases convenience for customers and allows Starbucks to increase their operating cash-flow margins outside of drop-in shops. Starbucks is able to maintain their competitive edge in the industry through their strategic branding and high-quality customer service. This results in a high level of customer loyalty.
To be able to assess the strategic decisions made by Starbucks, it’s important to know what the future options are for the company. This can be done by using a SWOT-analysis. This strategy incorporates all the opportunities, threats, strengths and weaknesses of the competitive environment in the USA as well its internal planning. Starbucks Company’s strengths are internal factors that have an impact on their success. Starbucks has succeeded in developing a highly successful business model. Starbucks’ core values are at the heart of every decision they make. Starbucks has created a unique coffee experience that sets them apart from their competition. Starbucks maintains its profitability by focusing on service and quality. Analysing internal factors can help identify any flaws at Starbucks. Starbucks relies heavily upon the US market. 49.8% Starbucks outlets are currently located in the USA. Starbucks could be affected by economic fluctuations, which would lead to instability. The second part focuses on factors external to the company that may promote growth. Starbucks Corporation’s sales can be boosted by expanding into emerging markets. Starbucks has invested in drive-thru hubs instead of the usual dine in outlets. Starbucks expects to have drive-through options in 80% of its current stores by the end 2019. Starbucks was threatened by the Superior Court of Los Angeles in California in March 2018. The court ordered that all coffees produced in California must be labelled with a cancer warning due to the presence of carcinogens. In March 2018, the superior court in California, Los Angeles ruled that producers of coffee in the state must have a cancer warning label on as a cause of carcinogens found in drinks.
ConclusionStarbucks continuously strives to lead the retail industry of coffee in the United States. It is due to the strategic decisions they have made that has allowed them to expand their market outside the US, into emerging markets such as Asia. Starbucks has to be aware of the factors affecting their business both internally and externally in order to maintain this success. They must also know how to adapt to the changing climate and stay at top. Starbucks’ biggest flaw is its pricing strategy. To stay on top they need to have more competitive prices, as competitors are now offering similar drinks at fractions the price of Starbucks. Starbucks can attract more clients and increase profits by implementing this change. Starbucks is a strategic success because of the global impact it has had on the specialty coffee industry.