[STARBUCKS CORPORATION ] DSP (MRB 2223)

Michael Porters Five Forces

SUBSTITUTE PRODUCTS

SUPPLIERS

RIVALRY

BUYERS

NEW ENTRANTS

Diagram above indicates the Porters Five-forces model that represent the external analysis for such industry like Starbucks and yet its strategy development. To be precise, these five forces are function in shaping the competition within the industries. The five forces include rivalry among competing firms, potential of new entrants, potential of substitute products, bargaining power of buyers and bargaining power of suppliers.

Rivalry among existing competing firms is high within the industries because Starbucks facing with the major competitors like Caribou Coffee, Costa, McDonalds, Dunkin Donuts and other small local coffee shops
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[STARBUCKS CORPORATION ] DSP (MRB 2223)

around the world. Regarding to the annual report of Starbucks Corporation, numerous competitors in the coffee beverage business comes from quickservice restaurants like McDonalds and Dunkin Donuts, as well as other specialty coffee shops like Caribou Coffee, Coffee Bean and Costa Coffee (Ektajalan, 2013). In general, customers tend to choose in the middle of specialty coffee retailers were primarily based on product quality, services, convenience and including price. Even though Starbucks facing high rivalry, but Starbucks builds its competitive advantage by producing high quality of coffee as well as its service that serve customers like a king1.

The potential of new entrant is medium because it is require low capital to enter coffee industry compared to other industry. Other than that, there is also little product differentiation which can make difficult for the consumers to distinguish product differentiation and it will become easier for potential new entrants to enter this market. However, Starbucks has a high competitive advantage when the market to enter coffee industry is highly saturated and need substantial amount of financial resources to deal with building and properties.

The potential of substitute products is low. Substitute products for Starbucks are from other beverages industries that act as trade-off for Starbucks products. Starbucks direct substitute products were from the basic coffee that consumed by most people at home. However, basic
1

Starbucks Corporation, 2010 Annual Report (Detroit: Starbucks Corporations, 2014), p. 4.

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[STARBUCKS CORPORATION ] DSP (MRB 2223)

coffee imposed low quality compared to Starbucks that used high quality ingredients. Thus, it is not give high impact or threat to Starbucks. On the other hand, there are potential substitute products for Starbucks which are non-alcoholic beverages (tea, soft drinks, fruit juices and energy drinks) and other caffeinated drinks. However, customers are still preferred to purchase from specialty coffee like Starbucks because of its differentiation on products and brand image that differ it from others. Starbucks differentiates its products by producing an environment for customers to experience the coffee on luxurious ambience, while soft-drinks and nonalcoholic beverages company is on mass marketing by selling their products through supermarkets, retail stores and department stores. Therefore, it cannot be considered as a major threat or forces to the Starbucks.

The bargaining power of buyers is medium. Starbucks has the customer loyalty because of the quality products and services provided. Even though the price goes up, the buyers would still come because they only like quality coffee from Starbucks. Moreover, Starbucks has expanded their network of company-operated and licensed retail stores around the nation. It has make buyers can buy their coffee from various places.

The bargaining power of suppliers is high due to the fact that the demand for coffee is high in global level and coffee beans can be produced only in certain geographical areas. Starbucks rely on domestic and
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[STARBUCKS CORPORATION ] DSP (MRB 2223)

international suppliers to provide high quality products including Arabica coffee and comply with applicable laws. The main challenge is to find the finest suppliers and vendors that can provide high quality supply. These suppliers and vendors have to meet Starbucks standard and yet supply products in a timely and efficient manner2. It is beyond control to make sure they are meet Starbucks standards, to provide products supply in a timely and efficient manner and lastly to comply with applicable laws. Hence, it is high in bargaining power of suppliers.

Research and Development

Sustainability To ensure sustainability and high quality of coffee supply, Starbucks operates Farmer Support Centers in Costa Rica and Rwanda which placed by agronomist and sustainability experts to give the best practice in coffee production design. This will yet improve both quality of coffee and yields3.

Technology Starbucks has adopted new technology platforms and lean principles to increase customers satisfaction that has improved partner and customers

2 3

Starbucks Corporation, 2010 Annual Report (Detroit: Starbucks Corporations, 2014), p. 12. Starbucks Corporation, 2011 Annual Report (Detroit: Starbucks Corporations, 2014), p. 12.

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[STARBUCKS CORPORATION ] DSP (MRB 2223)

experience4. This technology includes mobile application that has launched in early 2011 and can be used iPhone, Android and Blackberry users. The application has been applied in 9,000 Starbucks location. Customers can use this application by adding the card number and then enjoy the services provided which are they can make purchases, track the reward as well as check the balance5.

Training For the employee training, Starbucks has introduced a program so called Coffee Master program to the employees. This is an extra course other than compulsory training and the so called graduates who completed this course will get a special black apron and a good sign on their business card. The course is specially to teach the employee on how to discern and subtleties of regional flavor6.

4 5

Starbucks Corporation, 2010 Annual Report (Detroit: Starbucks Corporations, 2014), p. 3. Amy Adkins., Starbucks & Its Use of Technology, Houston Chronicle, http://smallbusiness.chron.com/starbucksits-use-technology-28272.html, accessed March, 2014. 6 Source: Saving Starbucks Soul, April 8, 2007, via Bloomberg LP, accessed March 2014.

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[STARBUCKS CORPORATION ] DSP (MRB 2223)

References

Amy Adkins., Starbucks & Its Use of Technology, Houston Chronicle, http://smallbusiness.chron.com/starbucks-its-use-technology28272.html, accessed March, 2014. Ektajalan (June 20, 2013) Top 10 Largest Coffee Chains in the World [online] available from <http://listdose.com/top-10-largest-coffee-chainsin-the-world/> [March 22, 2014] Starbucks Corporation, Corporations, 2014. 2010 Annual Report. Detroit: Starbucks

Saving Starbucks Soul, April 8, 2007, via Bloomberg LP, http://www.businessweek.com/stories/2007-04-08/saving-starbuckssoul#, accessed March 2014.

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