r Michael Porter’s 5 Forces Analysis (Past)
My analysis begins with a thorough breakdown of the competitive environment which surrounded Starbucks Corporation in 1987, when it was first acquired by Howard Schultz. Michael Porter, author of Competitive Strategy, uses a five forces model to analyze an industrial environment and to develop an optimum strategy for success within a given industry based upon specified parameters. The five variables responsible for the forces analyzed using this model are the industry suppliers, buyers, potential new 8 entrants, substitute products and the competition among existing firms. Applying this model to Starbucks’ formative years, I will concentrate on the examination of the competitive environment in which Starbucks was created and will generally omit consideration of social and macroeconomic forces that were present at the time. Industry Rivalry
At the center of the five forces model is industry competition arising from the rivalries among existing firms. Defining an industry can be described as drawing a line between the established competitors and the substitute products offered by competitors outside the industry. (Porter, 1998, p. 17) The assumption is that the relevant industry is confined to the competitors within the specialty coffee segment; thus, any reference to competition from outside of the specialty coffee segment, say from basic coffee companies such as Folgers, by definition, should be considered competition from a substitute product category. However, given the difficulty in defining the boundary of the specialty coffee industry, I will analyze the effects of some basic coffee competitors attempts to enter the specialty coffee industry not as sources of potential new entrants but rather as a force adding to the rivalry among existing firms. This general competition, created by rivalry between established competitors, ultimately drives down the rate of return on invested capital toward what economists refer to as, “the industry floor rate of return,” which occurs when the market is perfectly competitive. (Grant, 2008, p. 69) The environment in which the specialty coffee industry had to compete during the late 1980s was made up of both product based competition and retail-based competition. 9 The product based competition was primarily with the basic coffee companies, who could attempt to enter the specialty coffee segment. Some of the larger basic coffee companies, who made most of their sales in grocery chains, could have responded to rapid growth in the specialty coffee industry by introducing their own upscale versions of already popular supermarket brands. (Koehn, 2005) These potential retaliatory threats were unlikely to materialize given the high risk an established, branded company would be taking by entering an industry with speculative growth prospects. This conclusion follows based upon the much higher hurdle rates a major established company must surpass. Such established companies would have needed to achieve a far larger volume of sales than would a small company like Starbucks at that time in order to reap a sustainable and consequential profit margin. However, specialty coffee would have to confront product based competition from other non-coffee beverages, such as tea, juice, soft drinks, and alcohol. (Harding, 2000) In this context, specialty coffee was at an advantage because the consumption of most potentially competitive substitute products was declining relative to specialty coffee during the late 1980s. (Harding, 2000) The retail-based competition was divided between flavored specialty coffee retailers and non-flavored specialty coffee retailers. Flavored specialty coffee came in a variety of flavors including hazelnut, amaretto, raspberry, pumpkin spice, and others that were infused into the coffee beans during the roasting process. Although Starbucks offered its coffee in a variety of...
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