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Michael Porter's Analysis of Starbucks

Essay by   •  September 9, 2010  •  Case Study  •  2,744 Words (11 Pages)  •  3,090 Views

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Michael Porter, a Harvard Professor introduces his ideology of the Five Forces model that shapes the competition in the industry. Each force is interrelated and therefore leads into the other to show the elements directly involved in the further success or ultimate success of the firm.

Starbucks Coffee Co. throughout its existence since 1971, with its great management team, innovative style of thinking and strong will to succeed in compliance with its mission and vision statements has and continues to overcome its barriers by recognizing such strategic planning as those included in Porter's five forces model. The model includes such components as Barriers to Entry, Supplier and Buyer Power, Threat of Substitutions, and most importantly the Industry Competitors. Starbucks throughout its existence has addressed each and every one of Porters forces with a positive edge that has greatly contributed to the success of the company. Starbucks took many risks and spent capital that it really did not have. To build a corporation based on intuition and a trip to Italy has undoubtedly paid off in the long run which is evident throughout the year that Starbucks has been in operation. Howard Schultz, CEO and founder of the company, has stuck to his conviction not to "sacrifice long-term integrity and values for short-term profit." He knew if he played his cards right and stuck to his guns it would only be a matter of time that Starbucks would become the world largest coffee industry in the world. He wanted the company to become and international outlet for coffee consumers which not only included men and woman but also addresses the needs and wants of those of all ages and nationalities, children, students and any other category of people that have and interest in Starbucks diverse product line. With constant dedication to the company's vision and mission statement and believing in the value of market share and name recognition and how critical they are to the success of the company, he was able to achieve his goal within a few years. During this time of course he has been able to open a total of 1,100 stores and continues to do so until this day.

Starbucks Coffee Co. continues to address the issues introduced in Porter's Five-Force Model as such:

New Entrants (Barriers to Entry in to the Coffee Industry):

There are many barriers to entry such as economies of scale where new firms entering the market will have to contend to the competition in the area of price and costs. The aspiring new firm may have to conform to the economic scales already set for them which may mean high cost and high pricing or may have to result to a cost disadvantage. These disadvantages may effect production, marketing, research and development and many other elements directly related in the determined success of ones company. Product differentiation which ties in brand identification that can and will result in new firms having to spend a lot of capital earnings to break the customer loyalty that has already been established. Brand identification is a result of costly advertising and customer service that a companies plays out to gain the market share needed to bring in a profit. Capital is a must for all startup companies for investment and survival purposes. Capital can create barriers for new entrants because it may not exist for them to make up the lost expenses used to contend to the many other barriers that were previously introduced. Starbucks because it was always Starbucks took a major risk starting up which costs a lot of capital which of course was made back through much profit and undoubted success. Yes, Starbucks did have to overcome the may barriers listed and it was costly and time consuming but it did pay off in the long run because of the management team and the leadership and eagerness of Schultz. Another barrier may include the access a company has to the distribution of its products. It becomes a major concern when considering how to get the product out to the public to obtain the publicity necessary for increased market share. Starbucks produced a mail-order strategy that delivers the products to consumers all over the country.

Starbucks since its kick off has always followed the concept of complete domination. Starbucks would dominate the area by opening up numerous chains of the company but in doing so would always maintain direct ownership of all stores opened. Many stores did not follow this because they would basically sell their franchise rights to the stores in order to expand rapidly with limited capital. When entering a market one must identify all that is around them and to what extent they are to be considered a threat to the company. This is precisely what Starbucks did. When entering a new area their goal was to introduce their diverse product line, dominate a large portion of the market share by creating relationships and customer loyalty and from there once successful in the acquisition, move on to the international expansion of the company. By expanding the company, further diversification through new innovative ideas for the product line can occur and increase the amount of market share. Higher coffee costs have also cut into margins, intensifying the competition in what has now become a crowded market.

Suppliers (Bargaining Power of the Suppliers):

Starbucks believes that consumers choose among retailers primarily on the basis of quality and convenience and to a lesser extent on price (58-7). This brings us into the next force identifying the power of the supplier. Starbucks maintains loyalty not only from its consumers but also its suppliers. Starbucks is a unique type of company because it realizes the value of every aspect of its company and the importance of the contributions of its employees, customers and suppliers most importantly. Suppliers in this case play an extremely important role because they supply the very thing that is keeping Starbucks in business. That important material would be the raw material they seek to make their product, which is the coffee bean. Starbucks only buys from the best because they have identified the substitutes that exist that will be discussed further.

As stated further, consumers tend to determine which retail supplier they will buy from depending on the quality of the product and the service. Starbucks takes these things seriously and why shouldn't they if the consumers are the ones keeping them in business. With this said, Starbucks only buys the Arabica Bean for its coffees because it is only the best. Through much study by the Starbucks team it was noticed that Americans were raised on and therefore used to a commodity-like coffee composed of Arabica beans mixed with less-expensive filler beans. Because



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