Porter's Model - Starbucks

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Case Study: Starbucks

• Analyze Starbuck’s industry environment using Porter’s Five Forces Model. Is it attractive or unattractive overall? Which of the five forces is the most important threat to Starbucks and why?

Industry Definition – this is an industry of specialty coffee retailing.

Threat of Entry

Cost Advantages – Yes (since profit margins can be improved based on the point at which the business defines the transfer of the good to the customer – for e.g. for a retail store creating the entire coffee drinking experience, that would increase the overall profit margin as compared to selling the coffee powder to the supermarket or a grocery store – this flexibility of investment versus return presents a high cost advantage. Also cost advantages can be created through expertise in getting good deals on business essentials such as retail space lowering lease costs, supplier long-term contracts that lower the cost of procuring coffee beans…etc).

Government Policy – Not a factor (though price confirmations and, to that extent, availability depends on political and regulatory environments, it is still not a major enough factor with regards to coffee and its retailing since it operates under near-to-free market conditions.)

Economies of Scale – Moderate (this is pretty much dependant on the business model of whether it is an one-store establishment or a targeted chain for regional, national, and eventually international presence. A network of coffee outlets would result in the business being a high volume buyer of coffee eligible for price discounts from the suppliers but still it is not significant enough to prevent small start-ups from entering the market since they can possibly provide more focused, customized service and unique character, thereby charging a premium on their value-additions that could not be otherwise obtained in a standardized chain of outlets run by the big players.)

Capital Requirements – Moderate (this could be a deterrent if firms intend to own all of its retail outlets but the option of initially establishing the brand and then expanding through franchising served to minimize the effect of this particular dimension to entry.)

Product Differences – Yes (since this is a specialty coffee retailing, heightened consumer awareness made it essential to maintain distinct identities for the product.)

Brand Identity – Important (since this is a business that survived on repeat business, it was critical to put emphasis on the brand in order to maintain that critical mass of subscribers irrespective of whether it was a single store or a chain of outlets.)

Switching Costs – Low (the end consumers drinking the coffee, the supermarkets and the grocery stores can easily switch to competition that has a better value proposition.) Access to Distribution – High (for a retail outlet serving coffee, the location is extremely important in order to be seen and promote itself to the targeted market segment.)

Expected Retaliation – Moderate (it is possible for other established players to match up to anything novel offered by a new firm but, to an extent, it takes time to perfect the alternative coffee experience even by them since it is not so much of a straightforward process. Also price wars are not a likely response in a specialty industry so new firms are greatly insulated against this tactic by the big players.)

So the overall assessment of the rating for the threat of entry is high since barriers to entry above are mostly low.

Threat of Substitutes

Substitutes – Many (relevant substitutes include water, sports drinks, juice, tea, beer, wine, hard liquor, and pretty much all other beverages. In terms of the ‘drinking experience’ which is also to be perceived as part of the coffee product that is being sold, pubs, clubs and sandwich hangouts can also serve to be the community gathering places.)

Relative Prices – Similar (though...
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