Starbucks Corporation (also known as Starbucks Coffee Company) successfully grows through management effectiveness in addressing the impacts of the five forces (Porter’s model) in the global coffee and coffeehouse industry environments. Through Michael E. Porter’s Five Forces analysis model, Starbucks’s industry environment is evaluated based on external factors that define the competitive landscape. This external analysis model provides information for the coffee company’s 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. Starbucks operates in a business environment that involves strong competition. Competitors include food service businesses like Dunkin’, McDonald’s, Wendy’s, Burger King, and Subway. The SWOT analysis of Starbucks Corporation shows strengths for countering the competitive forces described in this Five Forces analysis. However, the company needs continuous improvement to maintain its competencies and its industry and market position despite the negative effects of competitive dynamics.
This Porter’s Five Forces analysis of the coffeehouse chain highlights some of the most notable external factors that the company’s strategies must consider. These strategies focus on competitive advantage while fulfilling Starbucks’s corporate mission statement and corporate vision statement.
Overview – Porter’s Five Forces Analysis of Starbucks Corporation
The strong force of competition is the combined effect of the external factors identified in this Five Forces analysis of the coffeehouse industry environment. The most significant forces for Starbucks’s strategic consideration are competitive rivalry, the bargaining power of customers, and the threat of substitutes. The other forces also influence the coffee company’s business performance, but to a lesser degree. In summary, the following are the intensities of the Five Forces impacting Starbucks Coffee Company:
- Competitive rivalry or competition – Strong Force
- Bargaining power of buyers or customers – Strong Force
- Bargaining power of suppliers – Moderate Force
- Threat of substitutes or substitution – Strong Force
- Threat of new entrants or new entry – Moderate Force
Addressing the external business environment described in this Porter’s Five Forces analysis, Starbucks’s strategic goal must focus on maximizing its strengths and competencies. For example, the coffeehouse business can implement strategies to make its brand even stronger. This recommendation is intended to address the strong forces of competitive rivalry, buyer power, and substitution threat against Starbucks. Specific to the force of competition depicted in this Five Forces analysis, a recommendation is to boost the coffeehouse chain’s competitive advantages. For instance, the company can improve the diversity of its supply chain to enhance access to resources and the stability of coffee processing and production. Changes in the supplier network may require related changes in Starbucks’s operations management strategies. In addition, this analysis of the Five Forces points to the recommendation that the coffee company increase its marketing aggressiveness to attract and retain more customers despite the force of substitution, competition, and new entry.
Competition or Competitive Rivalry (Strong Force)
Starbucks Coffee Company faces the strong force of competitive rivalry. In the Five Forces analysis model, this force pertains to the influence of competitors on each other and the coffeehouse industry environment. In this case, the following external factors contribute to the strong force of competition against Starbucks:
- Large number of coffeehouses and food service firms (strong force)
- Moderate variety of businesses (moderate force)
- Low switching costs between coffeehouses (strong force)
The large number of coffeehouses and food service firms is an external factor that intensifies competitive rivalry in the context of this Five Forces analysis. Starbucks has many competitors of different sizes, including multinational businesses and small local cafés. In relation, competitors are moderately varied in terms of specialty and strategy. For example, some coffeehouses focus on local coffee varieties only. In this Five Forces analysis of Starbucks, such moderate variety strengthens competition by dividing the market into segments based on business specialty or strategy. Moreover, competition is strengthened because of the low switching costs between coffeehouses. In the Five Forces analysis model, low switching costs reduce barriers when customers switch from Starbucks to its competitors. Based on this component of the Five Forces analysis, competition is among the coffee company’s top-priority challenges. Starbucks Corporation’s generic strategy for competitive advantage and intensive growth strategies reflect strategic responses to such competitive challenges.
Bargaining Power of Customers or Buyers (Strong Force)
Starbucks experiences the strong force or bargaining power of buyers or customers. In Porter’s Five Forces analysis model, this power is based on the influence of individual customers and their groups on the coffeehouse business environment. The following external factors contribute to the strong bargaining power of customers relative to Starbucks:
- Low switching costs between coffee shops (strong force)
- High availability of substitute foods and beverages (strong force)
- Small size of individual buyers (weak force)
The bargaining power of consumers or buyers is among the most significant forces affecting the coffeehouse industry determined in this Five Forces analysis. With low switching costs, customers can easily transfer from Starbucks to other brands. In addition, the high availability of substitutes means that customers can easily stay away from the company’s products, and opt for substitutes like instant beverages from vending machines and home-brewed coffee from local roasteries. These strong external factors overshadow the fact that individual purchases are small compared to Starbucks’s total revenues. In the Five Forces analysis context, small individual purchases mean that individual consumers have weak or insignificant influence on the business. However, low switching costs and high substitute availability lead to the overall strong force of the bargaining power of customers against Starbucks. Such a strong force in 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 can support brand strengthening to partially address the bargaining power of consumers.
Bargaining Power of Starbucks’s Suppliers (Moderate Force)
Starbucks Coffee Company faces the moderate force or bargaining power of suppliers. Porter’s Five Forces analysis model considers this power as the influence that suppliers have on the coffeehouse chain business and its industry environment. The following external factors contribute to the moderate bargaining power of suppliers on Starbucks Corporation:
- Moderate size of individual suppliers (moderate force)
- Limited variety of suppliers (moderate force)
- Supply shortages (strong force)
The moderate size of individual suppliers is an external factor that imposes a moderate force on Starbucks. In the Five Forces analysis framework, larger suppliers have stronger bargaining power on the coffee business. On the other hand, the limited variety of suppliers provides them with only moderate bargaining power relative to Starbucks. For example, different suppliers may have similar supplies if they source their coffee beans from the same region or country. In the Five Forces analysis model, this condition enables Starbucks to shift from one supplier to another with moderate ease because of these suppliers’ similarities. The bargaining power of coffee suppliers is partially strengthened because of supply shortages. Such shortages are linked to issues like droughts and frosts that damage crops, among the other ecological concerns presented in the PESTEL/PESTLE analysis of Starbucks Coffee Company. Shortages enable suppliers to impose their demands, such as by increasing the prices of coffee beans, thereby strengthening their bargaining power in the context of the Five Forces analysis. Overall, the external factors enumerated in this section create the moderate force of suppliers in the coffeehouse chain’s business environment.
Threat of Substitutes or Substitution (Strong Force)
The strong force or threat of substitution affects Starbucks Corporation. In the Five Forces analysis model, this threat pertains to the impact of substitute goods or services on the coffee business and its external environment. The following external factors contribute to the strong threat of substitution against Starbucks:
- High availability of substitute foods and beverages (strong force)
- Low switching costs between coffeehouses and substitutes (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 the coffeehouse chain business. The high availability of substitutes makes it easy for consumers to buy these substitutes instead of Starbucks’s products. There are many substitutes, such as ready-to-drink beverages, instant beverage powders and purees, and foods available from various outlets. These outlets include fine-dining restaurants, vending machines, supermarkets and grocery stores, and small convenience stores. The Five Forces analysis framework considers this high availability as an external factor that strengthens substitutes against Starbucks’s products. In addition, the low switching costs further strengthen the threat of substitutes to coffeehouse products. This external factor is viewed in the Five Forces analysis as an enabler of consumers in switching from Starbucks to substitutes. Moreover, many of these substitutes cost less than the company’s foods and beverages, thereby strengthening the threat of substitution. Starbucks Corporation’s organizational culture can help address the threat of substitutes by providing warm and high-quality service that reinforces customer loyalty. In relation, Starbucks’s corporate social responsibility strategy and stakeholder management initiatives can help retain customers based on emphasis on sustainable business practices.
Threat of New Entry/New Entrants against Starbucks (Moderate Force)
The moderate force or threat of new entry imposes challenges to Starbucks Corporation. In Porter’s Five Forces analysis model, this threat refers to the effect of new players or new entrants in the coffeehouse 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 costs (moderate force)
- High cost of brand development (weak force)
The moderate cost of doing business refers to the cost of establishing and maintaining operations in the coffeehouse industry. For example, the cost of operating a small coffeehouse is lower compared to that of a coffeehouse chain. Also, smaller cafés have lower supply needs and corresponding supply chain costs. Despite their relatively small sizes, many new entrants can reduce Starbucks’s market share and revenues. Thus, in this Five Forces analysis, this external factor leads to the moderate threat of new entrants in the coffeehouse industry. In relation, the high cost of brand development is viewed in the Five Forces analysis framework as an external factor that reduces the threat of substitution against Starbucks Corporation. Small local coffeehouses typically do not have the resources to develop their brands to directly compete with the Starbucks brand. Also, brand development takes years to reach the level and strength of the Starbucks brand. The external factors enumerated in this part of the Five Forces analysis establish the threat of substitutes as a moderate force and, thus, a significant but limited issue in the multinational coffeehouse chain’s strategic management decisions.
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