Starbucks Corporation (Starbucks Coffee Company) successfully grows through management effectiveness in addressing the impacts of the five forces in the global coffee industry and coffeehouse industry environments. The company deals with external factors, such as the ones outlined in this Five Forces analysis of the business. Michael E. Porter’s Five Forces analysis model evaluates the industry environment through relevant external factors that define the competitive landscape. The analysis model provides information for strategic management to address the five forces, namely, competitive rivalry, the bargaining power of customers or buyers, the bargaining power of suppliers, the threat of substitution, and the threat of new entrants. In this external analysis case, Starbucks operates in a business environment that involves strong competition with other coffeehouse companies, as well as food and beverage businesses like Dunkin’ Donuts, McDonald’s, Wendy’s, Burger King, and Subway. The SWOT analysis of Starbucks Corporation shows sufficient strengths to counter the force of such competitors, although the company needs to continue strengthening its competencies to continue growing despite the competition.
In the strategic management of Starbucks Coffee Company, it is crucial to account for the effects of external factors on the multinational business. This Porter’s Five Forces analysis of the coffeehouse chain highlights some of the most notable factors that the company’s strategies must consider. These strategies are focused on ensuring competitive advantage while fulfilling Starbucks’s corporate mission and vision statements.
Summary & Recommendations: Porter’s Five Forces Analysis of Starbucks Corporation
Summary. The strong force of competition is the combined effect of the external factors identified in this Five Forces analysis. In this regard, the most significant forces for Starbucks Coffee Company’s strategic consideration are competitive rivalry, the bargaining power of customers, and the threat of substitutes. Still, the other forces also influence the company’s business performance. In summary, the following are the intensities of the Five Forces in Starbucks Corporation’s industry environment:
- Competitive rivalry or competition – Strong Force
- Bargaining power of buyers or customers – Strong Force
- Bargaining power of suppliers – Weak Force
- Threat of substitutes or substitution – Strong Force
- Threat of new entrants or new entry – Moderate Force
Recommendations. In general, addressing the external business environment based on the results of this Porter’s Five Forces analysis, Starbucks’s strategic goal must focus on maximizing the strengths and related competencies of the coffeehouse business. For example, the company can implement strategies to make its brand even stronger. This recommendation is intended to address the strong force of competitive rivalry, the strong bargaining power of buyers, and the strong threat of substitution. Specific to the force of competition, a recommendation is to boost Starbucks Corporation’s competitive advantages. For instance, the company can improve the diversity of its supply chain as a way of increasing resource access and production stability. It is also recommended that Starbucks increase its marketing aggressiveness to attract and retain more customers.
Competitive Rivalry or Competition with Starbucks Coffee Company (Strong Force)
Starbucks faces the strong force of competitive rivalry or competition in the food service and coffeehouse industries. In the Five Forces analysis model, this force pertains to the influence of competitors on each other and the industry environment. In this case of Starbucks Coffee Company, the following external factors contribute to the strong force of competition:
- Large number of firms (strong force)
- Moderate variety of firms (moderate force)
- Low switching costs (strong force)
The large number of firms is an external factor that intensifies competitive rivalry. Starbucks Corporation has many competitors of different sizes. In relation, the population of competitors is moderate varied in terms of specialty and strategy. In this Five Forces analysis of Starbucks, such moderate variety further strengthens the level of competition in the industry. In addition, competition is strengthened because of the low switching costs, which are the disadvantages to consumers when shifting from one provider to another. For example, this case involves minimal disadvantages to consumers who transfer from the company to other coffeehouses. Based on this component of the Five Forces analysis, competition is among the company’s top-priority challenges. Starbucks Corporation’s generic strategy and intensive growth strategies are a reflection of strategic responses to competition.
Bargaining Power of Starbucks’s Customers/Buyers (Strong Force)
Starbucks Coffee Company experiences the strong force or bargaining power of buyers or customers. In Porter’s Five Forces analysis model, this force is based on the influence of individual customers and groups of customers on the international business environment. In Starbucks Corporation’s case, the following external factors contribute to the strong bargaining power of customers:
- Low switching costs (strong force)
- High substitute availability (strong force)
- Small size of individual buyers (weak force)
In this component of the Five Forces analysis model of the business, the bargaining power of buyers is among the most significant forces affecting the company. Based on the low switching costs, customers can easily shift from Starbucks to other brands. In addition, the high substitute availability means that customers can stay away from Starbucks if they want to, because there are many substitutes like instant beverages from vending machines. These strong factors overshadow the fact that individual purchases are small compared to the company’s total revenues. The small size of individual purchases equate to the weak influence of individual buyers on the business. Despite such weakness, the other two external factors strengthen the bargaining power of customers. Thus, this component of the Five Forces analysis shows that the bargaining power of customers is a top-priority strategic issue. Starbucks Corporation’s marketing mix or 4Ps provide support for brand strengthening to partially address the bargaining power of consumers.
Bargaining Power of Starbucks Coffee’s Suppliers (Weak Force)
Starbucks Coffee faces the weak force or bargaining power of suppliers. Porter’s Five Forces analysis model considers this force as the influence that suppliers have on the company and its industry environment. The following external factors contribute to the weak bargaining power of suppliers on Starbucks Corporation:
- Moderate size of individual suppliers (moderate force)
- High variety of suppliers (weak force)
- Large overall supply (weak force)
The moderate size of individual suppliers is an external factor that imposes a moderate force on Starbucks. However, the high variety of suppliers weakens their bargaining power. For example, suppliers have various strategies and competencies that they use to compete against each other, with the aim of gaining more revenues by supplying more materials, such as coffee beans, to Starbucks Corporation. The bargaining power of suppliers is further weakened because of the large overall supply. For instance, there are many suppliers of coffee and tea around the world. This external factor limits the influence of individual suppliers. The overall effect of the external factors in this component of the Five Forces analysis is the weak force or bargaining power of suppliers on the company. Another consideration is the company’s policy of diversifying its supply chain as a way of addressing the trends identified in the PESTEL/PESTLE analysis of Starbucks Coffee Company. Such policy weakens suppliers’ power. As a result, suppliers’ bargaining power is a minor strategic issue in managing the business.
Threat of Substitution or Substitutes to Starbucks Products (Strong Force)
Starbucks Corporation experiences the strong force or threat of substitution. In the Five Forces analysis model, this force pertains to the impact of substitute goods or services on the business and its external environment. The following external factors contribute to the strong threat of substitution against Starbucks:
- High substitute availability (strong force)
- Low switching costs (strong force)
- High affordability of substitute products (strong force)
This component of the Five Forces analysis indicates that substitutes have strong potential to negatively impact Starbucks Coffee’s business. The high availability of substitutes makes it easy for consumers to buy these substitutes instead of Starbucks products. For example, substitutes like ready-to-drink beverages, instant beverage powders and purees, and food and other beverages are readily available from various outlets, such as fast food and fine-dining restaurants, vending machines, supermarkets and grocery stores, and small convenience stores. In addition, the low switching costs further strengthen the threat of substitutes, as it is easy for consumers to buy substitutes instead of Starbucks products. Moreover, many of these substitutes are affordable and cost less than the company’s products. Thus, this Porter’s Five Forces analysis of Starbucks Coffee Company determines that the threat of substitutes is a high-priority strategic management concern.
Threat of New Entrants or New Entry (Moderate Force)
Starbucks Corporation faces the moderate force or threat of new entry. In Porter’s Five Forces analysis model, this force refers to the effect of new players or new entrants in the industry. In this business case, the following external factors contribute to the moderate threat of new entrants against Starbucks:
- Moderate cost of doing business (moderate force)
- Moderate supply chain cost (moderate force)
- High cost of brand development (weak force)
The moderate cost of doing business is associated with the variability of the actual cost of establishing and maintaining operations in the coffeehouse industry. For example, the cost of operating a small coffeehouse is lower compared to the cost of operating a coffeehouse chain. In relation, smaller cafés have lower supply needs and corresponding supply chain costs. These external factors enable smaller firms to do business and compete against Starbucks Corporation. On the other hand, brand development is costly. In the context of the Five Forces analysis model, this condition reduces the threat of substitution. For example, small coffeehouses do not have enough resources to develop their brands. Also, brand development typically requires years to reach the level of strength of the Starbucks brand. The combination of these external factors imposes the moderate force or threat of substitutes against the company. Thus, this Five Forces analysis shows that the threat of substitution is a significant but limited issue in Starbucks Corporation’s strategic management.
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