Starbucks Coffee in American
Starbucks Coffee is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks. Porter’s Five Forces represent framework that is used for strategy development and industry analysis which include rivalry among existing competitors, bargaining power of customers/buyers, bargaining power of suppliers, threat of substitute products, and threat of new entrants. Rivalry among existing competitors is the strength of competition in the industry. Buyer power is the power of your customers to drive down your prices. Supplier power is the power of suppliers to drive up the prices of your inputs. The threat of substitution is the extent to which different products and services can be used in place of your own. The threat of new entry is the ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).
Starbucks rivalry among existing competitors is high due to lack of genuine product differentiation which leads to a fiercer competition. Starbucks major competitors are Dunkin Donuts, Caribou Coffee, McDonald’s and thousands of other small coffee shops around the world. Also, many competitors are starting to pick up on the growing popularity of specialty coffees and have installed machines to serve customers similar Starbucks drinks. Starbucks also has challenges against competition nationwide such as Kraft General Foods and Nestle. There are manufacturers serving their coffee through supermarkets and specialist coffee companies. Because many consumers usually purchase their coffee supplies while at supermarkets, it is easy for them to choose these products instead of Starbucks.
The bargaining power of buyers when purchasing coffee is high because there is so many other options to choose from like McDonald’s, Costa, Dunkin Donuts and other small coffee shops who claim to offer premium roast coffee with reasonable quality for lower price, buyers now have slightly more bargaining power than they have had in the past. All coffee companies use the same product, coffee beans and competition is based on quality, variety and excellence of service. In the end, it is easy for customers to switch between competitors. Buyers have the power to make the choice because people have learned to distinguish between the taste of good coffee.
The bargaining power of coffee suppliers is low. Starbucks have contracts in place that secure them exclusivity to the coffee suppliers, which means there is a reliable continuous flow of supplies without the threat of potential competition for resources. Due to the importance of Starbucks’ business to any individual supplier, and the fact that Starbucks probably accounts for a large percentage of any individual supplier’s sales, this gives Starbucks the ability to dictate the price of coffee bean sales. Similarly, suppliers of paper and plastic products, such as cups or napkins etc. have very little bargaining power due to the large amount of alter native sources Starbucks could draw from.
The threat of substitute products to Starbucks coffee is moderate. Premium coffee products available in the supermarkets are an example of substitute product. Because of convenience and cost, most customers turn to the substitute product. Another threat can be the non-coffee related products like juices and soft drinks.
The threat of new entrants for Starbucks is low because the start up cost for new businesses are high. Starbucks is a well established brand for coffee lovers and it is not easy for a new business to try to imitate it. When the economy is doing well, threat of new entries could be slightly high and some business will start up. But if the economy isn’t doing well, new businesses most likely will have a harder time starting up. Since Starbucks has such a amazing reputation, new entrants will be intimidated. Starbucks has a cost and performance advantage. It is well-established and has already learned how to continually lower costs and improve performance. Starbucks has a large market share and strong brand identities within the industry.
Porter’s three generic strategies are cost leadership, differentiation, and focus. “Overall cost leadershipimplies the pursuit of cost reductions in all areas of a firm through tightly controlling overhead, avoiding marginal, less profitable consumers and sacrificing research and development, customer service, advertising and other areas not pertinent to the direct manufacturing of a product. The generic strategy of differentiation involves the creation of something that is perceived by the industry as being unique. This can take on many different forms including but not limited to brand image, technology, features, dealer networks and customer service. The last generic strategy mentioned is focus, which targets a particular group, geographic market, or segment of a given product line. (Porter, 1998, p. 38)”
Starbucks Coffee today would fit the generic strategy of differentiation. But the original strategy used by Starbucks is closer to the generic strategy of focus with an emphasis on differentiation within the particular target consumer segment. Usually when a firm focuses on the generic strategy of differentiation, they would demonstrate strong marketing abilities but Starbucks didn’t run a television advertisement until 1998. Another common characteristic in a company using the generic strategy of differentiation is a strong and established understanding of basic research and development. Starbucks had to conduct its research and development through trial and error within company stores.
All of the characteristics of the differentiation strategy seem to suggest that Starbucks originally used a generic strategy of focus which involves a combination of the characteristics of the differentiation strategy directed toward a specific consumer segment. Starbucks’ consumer base was narrow. Their target consumer was a wealthy, educated, coffee drinker who preferred quality and customer service over a discounted price.
Porter describes the strategy of differentiation as the delivery of quality products or services that are perceived to be unique and valued by consumers. Product differentiation is the core of Starbuck’s strategy to gain a sustained competitive advantage. Starbucks offers such differentiation through an excellent customer experience and quality coffee The “Starbucks Experience” is achieved through its well-designed stores with good ambiance and well trained staff. According to a study conducted by Daily Mail, Starbucks stores provided a more welcoming decor with friendlier baristas compared to independent coffee houses.
The differentiation strategy of being a premium and unique coffee drinking provider has allowed Starbucks to achieve a sustained competitive advantage and viability.
In conclusion, Starbucks uses the differentiation strategy when they provide a high quality coffee and unique experience in the convenience of a large volume of locations, which separates them from their competition. VIA, the new instant coffee line is straddling differentiation and low cost- leadership. While it will be a low cost and convenient alternative to Starbucks regular coffee, it is still unique from other products in the market. The in-store gifts and brewing utensils are in the focused differentiation category as they cater to the coffee lover, and are unique items found only in the Starbucks stores.