Description
This is a document about strategy analysis of starbucks.
Starbucks
Strategy Analysis
STARBUCKS PORTER’S FIVE FORCE ANALYSIS
Industry Competitors In the specialty coffee industry, Starbucks' current and direct U.S competitors are Diedrich Coffee, Barnie’s Coffee and Tea Company, and Green Mountain Coffee Inc .The competition, however, is not equally balanced. Diedrich Coffee operates 370 coffeehouses in 37 states and 11 countries. Starbucks has more than 1000 locations in over 32 markets. It is clear that Starbucks has few major competitors, and the competition has nowhere Starbucks' volume of operations. Starbucks is the leading retailer, roaster and brand of specialty coffee in the world. Smaller competitors, however, pose potential threats to the company. A slowing industry market growth is another threat facing Starbucks. No. of Starbucks stores as a percentage of total possible stores in US and Canada is 22%. Threat of Potential Entrants Starbucks, being the world leader in its industry, has controlled access to distribution channels. Starbucks has exhibited this control over distribution channels by setting guidelines for their suppliers to follow. Starbucks is constantly innovating and showing strong product differentiation in their industry. The industry, following Starbucks' lead, is becoming more differentiated. This industry differentiation is an opportunity for Starbucks, and a threat to potential entrants. Bargaining Power of Buyers Products purchased at Starbucks are highly differentiated and unique. Customers will face no switching costs in switching premium coffee suppliers from Starbucks, to, for example, Barnie’s. This is a threat to Starbucks. Another threat to Starbucks is that their customers have the ability to brew their own coffee. It is clear that Starbucks customers have some bargaining power in the industry. Bargaining Power of Suppliers Presence of several players in the coffee industry will give the coffee suppliers bargaining power. The quality of coffee sought by Starbucks is very high. There are no substitute products for the coffee beans Starbucks must buy. This is a potential threat to the company. Starbucks has stringent coffee purchasing guidelines which are based on the following four criteria: Quality baselines, social conditions, environmental concerns, and economic issues. Only
2|P a g e
suppliers who can meet Starbucks' coffee standards will be able to supply. The supplying industry to Starbucks, therefore, has few companies. This is a potential threat. Threat of Substitute Products In the premium foods and coffees industry, there are substitute products. There are obviously good substitutes to Starbucks' products like non-coffee beverages. This is where Starbucks ability to innovate and differentiate helps in mitigating large threat of substitute products in a food and drink industry. Starbucks has created an image, and has differentiated so that many of their substitute products are part of the company. Starbucks has partnered with other leading companies of their respective field like Pepsi etc. to cater to non- coffee drinkers.
CLASSIFICATION OF THE INDUSTRY FORCES BASED ON STRENGTH & CHANGE IN STATE
Porters Five Forces Industry Competitors Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products
Strength (Low/Medium/High) Medium High High High Medium
Change Increasing Increasing Steady Steady Steady
OVERALL WOULD PORTER CONCLUDE THAT THE INDUSTRY IS ATTRACTIVE?
As per Porter five force analysis, since all the forces range between Medium & High, the industry doesn’t look attractive. In addition, the strength of the forces has either increased or is in steady state.
ON WHAT BASIS SHOULD ANY ONE COMPANY COMPETE WITH THE OTHERS IN THIS PARTICULAR INDUSTRY?
A company can compete in the following ways in the industry: ? ? ? By establishing overall cost leadership in the industry by making the products available even at sub-premium locations and also with the use of technology The company can maintain a wide line of related products to spread costs and thus serve all major customer groups in order to build volume. By positioning itself to gain top of mind recall of the customer through an aggressive campaign.
3|P a g e
?
By straddle positioning, i.e. providing good quality at relatively low prices vis-à-vis the existing players in the industry.
WHAT BUSINESS LEVEL STRATEGY IS STARBUCKS IMPLEMENTING?
The business strategy employed by Starbucks is “Differentiation” which helps in creating a defensible position in the market and generating above average returns in the beverage industry. It differentiates itself from other competitors as follows: ? ? ? ? Ability to provide a unique experience i.e. “Total coffee experience” Proprietary in its roasting curve which is “imperfectly imitable” Constant innovation to provide something new to customers Highly trained associates who can give sound advices to customers on queries regarding coffee.
Advantages: Buyer lacks comparable alternatives, Higher margins as buyers are less price sensitive
WHAT ARE THE RISKS FACED BY STARBUCKS IMPLEMENTING THE ABOVE STRATEGY?
The risks associated with a differentiation strategy include ? ? ? ? ? Imitation by competitors Change in customer tastes Firms pursuing focus strategy might be able to achieve greater product differentiation. If a differentiated firm gets far behind in cost due to technological change, the low cost firm can pose as a threat. Achieving differentiation sometimes may preclude gaining a high market share.
WHAT CORE COMPETENCIES ARE USED TO IMPLEMENT THESE STRATEGIES? IS ITS STRATEGY SUCCESSFUL? IS IT SUSTAINABLE? (DISCUSS IN LIGHT OF STARBUCKS GROWTH PLANS)
The Starbucks strategy was based primarily on its coffee, its employees, merchandising, ownership philosophy, real-estate approach, image and innovation. Starbucks strategy for the future was to consolidate its firmly established leadership position by means of its rapidly expanding growth. They also prided themselves on the sourcing of the finest beans in the industry and the best trained employees in the business. They want to be known for the coffee experience that they offer and for their fine quality. They also want to venture into bigger product innovations after their success with Frappuccino. Another strategy
4|P a g e
of theirs was to invest heavily in state-of-the-art roasting and manufacturing technology and thereby become a world class logistics and manufacturing organisation. They developed new channels of distribution to target new audience. So far its strategy has been successful. This is demonstrated in the following: 1) Frappuccino’s sales were good, lived up to the expectations of the company. 2) Their new strategic tie-ups enabled them to reach supermarket customers, business houses, airline customers, bookstore customers and college campuses thereby broadening their customer base. 3) Their roasting expertise enabled them to develop signature roasting curves and their heavy investments in research and technology enabled them to develop the oneway valve technology. 4) Their relationships with their suppliers were so good that they were always given first preference over competitors. 5) They were known world over for their unique coffee experience at their speciality outlets. 6) Their aggressive real estate approach enabled them to set up around 20-40 stores per month in prime locations. Sustainability None of Starbucks competences are sustainable in the long run and most of them are vulnerable to change in the course of time. Starbucks has the upper hand now but it will not be able to sustain this position for long. The only way it can stay a market leader is constantly innovate to stay ahead of the competition.
WHAT COMPETITIVE TOOLS CAN BE USED BY STARBUCK'S COMPETITORS TO DETHRONE IT FROM THE POSITION OF THE INDUSTRY LEADER?
Starbucks was the numero-uno brand as far as speciality coffee was concerned in the North American territory. However, they had certain weak points which could be exploited by their competitors to gain competitive advantage over them. These can be listed as follows1) No active advertising, relying on word of mouth. 2) Not utilising the size of the organisation to their advantage, limited distribution channels. 3) Relying on debt finance for expansion purposes. Competitor’s probable moves:
5|P a g e
1. Advertising: Competitors can leverage on the fact that Starbucks doesn’t indulge in heavy advertising. They can publicize heavily and in the process build up their brand image. 2. Attractive Promotional offers: Challengers can develop creative promotional schemes offering freebies and coffee merchandise thereby promoting their brand. 3. Price cuts: Starbucks offers premium coffee at higher prices. Competitors can cut their prices and offer their products at lesser prices. 4. Product Introduction: Competitors can expand their product range offering more variety in coffee flavours and branded merchandise. They can also offer a wide range of snacks and other gourmet food products. 5. Franchises and Acquisitions: Competitors can rely on franchises. This will enable them to expand their growth rapidly into various regions. They can also resort to acquisitions of other brands which will enable them to become one of the largest players in the market. (eg: Second Cup’s acquisition of Gloria Jean) 6. Research and Development: Competitors can invest heavily in research and development which has always been one of the strong points of Starbucks. They can constantly come up with new developments and technology that aggressively competes with Starbucks.
6|P a g e
doc_101877143.docx
This is a document about strategy analysis of starbucks.
Starbucks
Strategy Analysis
STARBUCKS PORTER’S FIVE FORCE ANALYSIS
Industry Competitors In the specialty coffee industry, Starbucks' current and direct U.S competitors are Diedrich Coffee, Barnie’s Coffee and Tea Company, and Green Mountain Coffee Inc .The competition, however, is not equally balanced. Diedrich Coffee operates 370 coffeehouses in 37 states and 11 countries. Starbucks has more than 1000 locations in over 32 markets. It is clear that Starbucks has few major competitors, and the competition has nowhere Starbucks' volume of operations. Starbucks is the leading retailer, roaster and brand of specialty coffee in the world. Smaller competitors, however, pose potential threats to the company. A slowing industry market growth is another threat facing Starbucks. No. of Starbucks stores as a percentage of total possible stores in US and Canada is 22%. Threat of Potential Entrants Starbucks, being the world leader in its industry, has controlled access to distribution channels. Starbucks has exhibited this control over distribution channels by setting guidelines for their suppliers to follow. Starbucks is constantly innovating and showing strong product differentiation in their industry. The industry, following Starbucks' lead, is becoming more differentiated. This industry differentiation is an opportunity for Starbucks, and a threat to potential entrants. Bargaining Power of Buyers Products purchased at Starbucks are highly differentiated and unique. Customers will face no switching costs in switching premium coffee suppliers from Starbucks, to, for example, Barnie’s. This is a threat to Starbucks. Another threat to Starbucks is that their customers have the ability to brew their own coffee. It is clear that Starbucks customers have some bargaining power in the industry. Bargaining Power of Suppliers Presence of several players in the coffee industry will give the coffee suppliers bargaining power. The quality of coffee sought by Starbucks is very high. There are no substitute products for the coffee beans Starbucks must buy. This is a potential threat to the company. Starbucks has stringent coffee purchasing guidelines which are based on the following four criteria: Quality baselines, social conditions, environmental concerns, and economic issues. Only
2|P a g e
suppliers who can meet Starbucks' coffee standards will be able to supply. The supplying industry to Starbucks, therefore, has few companies. This is a potential threat. Threat of Substitute Products In the premium foods and coffees industry, there are substitute products. There are obviously good substitutes to Starbucks' products like non-coffee beverages. This is where Starbucks ability to innovate and differentiate helps in mitigating large threat of substitute products in a food and drink industry. Starbucks has created an image, and has differentiated so that many of their substitute products are part of the company. Starbucks has partnered with other leading companies of their respective field like Pepsi etc. to cater to non- coffee drinkers.
CLASSIFICATION OF THE INDUSTRY FORCES BASED ON STRENGTH & CHANGE IN STATE
Porters Five Forces Industry Competitors Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products
Strength (Low/Medium/High) Medium High High High Medium
Change Increasing Increasing Steady Steady Steady
OVERALL WOULD PORTER CONCLUDE THAT THE INDUSTRY IS ATTRACTIVE?
As per Porter five force analysis, since all the forces range between Medium & High, the industry doesn’t look attractive. In addition, the strength of the forces has either increased or is in steady state.
ON WHAT BASIS SHOULD ANY ONE COMPANY COMPETE WITH THE OTHERS IN THIS PARTICULAR INDUSTRY?
A company can compete in the following ways in the industry: ? ? ? By establishing overall cost leadership in the industry by making the products available even at sub-premium locations and also with the use of technology The company can maintain a wide line of related products to spread costs and thus serve all major customer groups in order to build volume. By positioning itself to gain top of mind recall of the customer through an aggressive campaign.
3|P a g e
?
By straddle positioning, i.e. providing good quality at relatively low prices vis-à-vis the existing players in the industry.
WHAT BUSINESS LEVEL STRATEGY IS STARBUCKS IMPLEMENTING?
The business strategy employed by Starbucks is “Differentiation” which helps in creating a defensible position in the market and generating above average returns in the beverage industry. It differentiates itself from other competitors as follows: ? ? ? ? Ability to provide a unique experience i.e. “Total coffee experience” Proprietary in its roasting curve which is “imperfectly imitable” Constant innovation to provide something new to customers Highly trained associates who can give sound advices to customers on queries regarding coffee.
Advantages: Buyer lacks comparable alternatives, Higher margins as buyers are less price sensitive
WHAT ARE THE RISKS FACED BY STARBUCKS IMPLEMENTING THE ABOVE STRATEGY?
The risks associated with a differentiation strategy include ? ? ? ? ? Imitation by competitors Change in customer tastes Firms pursuing focus strategy might be able to achieve greater product differentiation. If a differentiated firm gets far behind in cost due to technological change, the low cost firm can pose as a threat. Achieving differentiation sometimes may preclude gaining a high market share.
WHAT CORE COMPETENCIES ARE USED TO IMPLEMENT THESE STRATEGIES? IS ITS STRATEGY SUCCESSFUL? IS IT SUSTAINABLE? (DISCUSS IN LIGHT OF STARBUCKS GROWTH PLANS)
The Starbucks strategy was based primarily on its coffee, its employees, merchandising, ownership philosophy, real-estate approach, image and innovation. Starbucks strategy for the future was to consolidate its firmly established leadership position by means of its rapidly expanding growth. They also prided themselves on the sourcing of the finest beans in the industry and the best trained employees in the business. They want to be known for the coffee experience that they offer and for their fine quality. They also want to venture into bigger product innovations after their success with Frappuccino. Another strategy
4|P a g e
of theirs was to invest heavily in state-of-the-art roasting and manufacturing technology and thereby become a world class logistics and manufacturing organisation. They developed new channels of distribution to target new audience. So far its strategy has been successful. This is demonstrated in the following: 1) Frappuccino’s sales were good, lived up to the expectations of the company. 2) Their new strategic tie-ups enabled them to reach supermarket customers, business houses, airline customers, bookstore customers and college campuses thereby broadening their customer base. 3) Their roasting expertise enabled them to develop signature roasting curves and their heavy investments in research and technology enabled them to develop the oneway valve technology. 4) Their relationships with their suppliers were so good that they were always given first preference over competitors. 5) They were known world over for their unique coffee experience at their speciality outlets. 6) Their aggressive real estate approach enabled them to set up around 20-40 stores per month in prime locations. Sustainability None of Starbucks competences are sustainable in the long run and most of them are vulnerable to change in the course of time. Starbucks has the upper hand now but it will not be able to sustain this position for long. The only way it can stay a market leader is constantly innovate to stay ahead of the competition.
WHAT COMPETITIVE TOOLS CAN BE USED BY STARBUCK'S COMPETITORS TO DETHRONE IT FROM THE POSITION OF THE INDUSTRY LEADER?
Starbucks was the numero-uno brand as far as speciality coffee was concerned in the North American territory. However, they had certain weak points which could be exploited by their competitors to gain competitive advantage over them. These can be listed as follows1) No active advertising, relying on word of mouth. 2) Not utilising the size of the organisation to their advantage, limited distribution channels. 3) Relying on debt finance for expansion purposes. Competitor’s probable moves:
5|P a g e
1. Advertising: Competitors can leverage on the fact that Starbucks doesn’t indulge in heavy advertising. They can publicize heavily and in the process build up their brand image. 2. Attractive Promotional offers: Challengers can develop creative promotional schemes offering freebies and coffee merchandise thereby promoting their brand. 3. Price cuts: Starbucks offers premium coffee at higher prices. Competitors can cut their prices and offer their products at lesser prices. 4. Product Introduction: Competitors can expand their product range offering more variety in coffee flavours and branded merchandise. They can also offer a wide range of snacks and other gourmet food products. 5. Franchises and Acquisitions: Competitors can rely on franchises. This will enable them to expand their growth rapidly into various regions. They can also resort to acquisitions of other brands which will enable them to become one of the largest players in the market. (eg: Second Cup’s acquisition of Gloria Jean) 6. Research and Development: Competitors can invest heavily in research and development which has always been one of the strong points of Starbucks. They can constantly come up with new developments and technology that aggressively competes with Starbucks.
6|P a g e
doc_101877143.docx