Starbucks Corporation is an international coffee company and coffee house chain headquartered in Seattle, Washingston. Starbucks was founded in 1971, when three academicians, began a specialty coffee store called Starbucks Coffee, Tea and Spice in Seattle (Starbucks Corporation, 2009). In 1996, Starbucks operated its first international store expansion in Tokyo, Japan. With current approximately 19,500 stores in 58 countries (Location xcelerated, 2012), Starbucks is quickly becoming one of the best known brands and the largest specialty coffeehouse company in the world.
The Market Demand of Coffee
The demand of coffee in the United States has rose 2 percent in 2011(Perez, 2011). Americans drank 77.4 billion cups of coffee during a year (Perez, 2011). A statistics showed that “the average consumption among coffee drinkers in the United States is 3.1 cups of coffee per day” (E-Imports, 2012). With gathering the information and statistics, it has proved the demand of coffee market in the US is extremely high. Also, the coffee market is the potential market for rivals entering into. Hence, Starbucks has to attain strong competitive advantages and market demand with its resources and capabilities.
Starbucks’s Resources and Capabilities
An organization has the ability to identifying and determining the competitive power of their resources and capabilities to create competitive advantage. Business resources are the productive input or competitive asset that is owned or controlled by the organization (Thompson, 2012). In the case of Starbucks, the resources and capabilities are coffee bean, store ambience, employee culture, and brands and reputations.
Coffee beans are the natural resources of Starbucks. They are one of the most valuable resources for coffee industry. Starbucks was a purveyor of specialty coffee – it has seemed top-notch coffee beans to produce high quality of coffee. High quality of coffee beans was usually sourced directly from coffee-producing countries, for instance Kenya, Guatemala and Indonesia. Starbucks was usually acquired the coffee bean at a premium price for suppliers who suited the Starbucks’ standards, socially and environmentally responsible farming. Starbucks has committed the long term contracts with the supplier in order to protect both party with the price and quality of coffee beans. The Starbucks’s coffee beans provided a sustainable competitive advantage in the face of active competition. It is due to the high quality and premium coffee beans sourced from other country were uncommon and costly to imitate for competitors.
Store Design and Ambience
Starbucks was positioned as a “third place” between beyond home and work with the store design and relaxing ambience. The design of store is provided a comfort and relaxing environment for its costumer. Each detail of likes the style of fixtures, the edges of countertops and the texture of slate floors was examined to enhance the unique ambience and mood of the Starbucks store. With blended the colorful banners and artworks, the merchandise displays, the music and the aromas, Starbucks has created an attractive, consistent and stimulating environment that provided comfort of a home for customer, excellent customer service and quality products as the concept of “third place theme” (Moon & Queich, 2003) cited by (Harveywallbanger, 2012).
These elements made the Starbucks experience key in retaining its customers with the competitive advantage and capture new markets. The store design is valuable by providing a third place theme, a relaxing and conform atmosphere. Besides, it was rare design in United States as Starbucks is the first mover to replicate the Italian style coffee store. Competitors are difficult and costly to imitate as the Starbucks has exclusive In-House architects and designers to ensure the right image and character for each store. Read also where in business writing, the main idea of a written work should be located
A vital dynamic in Starbucks’s growth was the human resources, its employee. Starbucks has provided a great work environment around its employees, one of its most important resources and sources of sustainable competitive advantage (Gates et al., 2011). Schultz believed that a plentiful employee benefits package was a key competitive advantage. Starbucks was the first company to offer all employees, even part-timer, were qualified to get healthcare benefits, participate in the Bean Stock program for stock option grants. Besides that, Starbucks has offered an extensive training program to each employee that includes a commitment to customer service experience and the knowledge of products (Balaban et al., n.d). All employees of Starbucks were trained to have good customer experiences for retaining customers.
For example, they were trained “just say yes” to customer requests. Starbucks’ approach towards employees benefited to company has maintained the turnover rate at 60-65 percent, while the other national industry turnover is about 150-400 percent a year. The plentiful employee benefit package provides a sustainable competitive advantage to Starbucks. It is added value to Starbucks because employees will have the better job performance due to the motivation and courage. It was rare as the Starbucks was the first company provided healthcare benefits and stock option plan. And also, it is costly to imitate for Starbucks’s competitors.
Brand and Reputation
Brand recognition and reputational are essential resources and capabilities to Starbucks’s competition advantage. According to Starbucks Strategy Fortune, “Starbucks store traffic has risen between 6 percent and 8 percent a year even in a down economy”. Starbucks reputation was growing mostly by word of mouth rather than spending on advertising. Schultz believed that opening numerous stores helped to build the brand to Starbucks by increasing awareness of the brand. On the other hand, Starbucks also strengthened its brand and reputation with Fair Trade Certified coffee and corporate social responsibility (CSR). The company collaborated with CARE and Conservation International to encourage environment responsible methods of growing coffee. These activities would be created the attention and attraction of its customers on the brand of Starbucks. Due with the strength of brand and reputation, Starbucks was achieved sustainable competitive advantages in the specialty coffee segment.
Michael Porter’s Five Forces Model
One of the powerful and widely assessment tools of an organizations industry’s competitive forces is the five forces model, created by Michael Porter. This model embraces that the competitive forces affecting industry success go beyond rivalry among competing sellers and include four coexisting sources (Thompson, 2012). The Michael Porter’s five forces are the threat of entry, the threat of substitutes, the bargaining power of buyers, the bargaining power of supply and rivalry among competing sellers. I will identify the competitive environment of Starbucks in coffee industry by using Michael Porter’s Five Forces Model.
1) Industry Rivalry
The industry competition among the existing firms is positioned at the center of Porter five forces model. Rivalry is gradually growing against Starbucks each year as the growing of industry. The growth of industry rivalry has increased due to introduce the new products into the market and differentiate products based on quality, service and selection (Gamble & Thompson, Jr., 2011) cited by (Brown, 2011). With this point, Starbucks has introduced a new way of having premium coffee and new product of Frappuccino, was greatly differentiated from the competitors. Starbucks also served coffee with the highest freshness standards with FlavorLock bags. Starbucks compete to against two strong orgationation in the fast food industry who have operated coffee beverages and stepped into coffee market, McDonalds and Dunkin’ Donuts.
The competitive threat distributed by McDonald’s to Starbucks was referring to the Consumer Reports magazine in 2008 , which rated that the McDonald’s the quality of coffee is better and the price is cheaper as compared to Starbucks. The industry’s growing has slowed down while the industry competition is increasing among existing firms. In short, the force of industry rivalry formed by the competition among coffees industry is characterized very strong.
2) The Threat of New Entrance
The second competitive force of Porter’s model has significant differenced in the late of 80s and the recent competitive environment of Starbucks, is no barriers to entry. According to Porter (2008), barriers of entry are low in the specialty coffee industry. The coffee houses in the United States were about 585 in 1987 and 25000 in 2007. It showed that the new entrants of specialty coffee market was increasing speedily in 20 years. Besides that, the specialty coffee market had grown from $11.5billion (2005) to $12.27 billion (2006) in the United States. Due to the market demand growing rapidly, it was attracted a number of fast-food retailers, such company as McDonald and Dunkin’ Donuts. In addition, the product differentiation (included coffee selection, roasting and brewing) is considered weak. With these elements, it can be established that the threat of new entrants in coffee industry is moderate. However, Starbucks has a strong competitive advantage with a well-known brand and image, the quality service and diversity products, and a strong market in the segmentation.
3) The Threat of Substitutes
Another competitive force of Porter’s model is the threat of substitutes. The force of substitutes is significant decreased in the coffee market. This is because, there are only little of substitutes product, such substitute as soft drinks, energy drinks and fruit juices. The principal substitution of products has posed a slight threat to coffee industry were carbonated soft drinks which introduced by the Pepsi and Coca-Cola company. In the past few years, studies have done that coffee has increasingly obtained the preference of consumer more than carbonated soft drinks. This is probably concentrated the healthy related with carbonated soft drinks, and evidenced that coffee is a relatively healthy preference.(Harding, 2000) cited by (Larson., 2008) Based on the information and evidence, the threat of competitive substitute products is considered to be weak for Starbucks Corporation.
4) The Bargaining Power of Suppliers
The bargaining power of supplier has changed in several ways through the widely growing in the coffee industry. Starbucks was purchased it premium coffee beans from the farmers that were numerous, small and unconnected during the late 1980s. In the recently years, coffee beans suppliers were joint by Fair Trade Certified coffee and acted like a large entity. Specialty coffee companies were making the coffee beans suppliers gradually important by seeking greater quality of coffee to compete the competitors in the market. The coffee beans suppliers today are more power, with increased joint and increased importance upon high quality coffee beans. Starbucks has
work out with the coffee beans suppliers into continuing fixed-price commitments in order to ensure an adequate supply, which decreased the supplier bargaining power. (Larson, 2008)
5) The Bargaining Power of buyers
The last element of five forces model is the bargaining power of buyers. The force of the buyer’s bargaining power is defined to the buyer’s capability to force down prices, and seek for higher-quality products and services (Porter, 1998, p. 24) cited by (Larson, 2008). The bargaining power of buyer in specialty coffee segment is considered high, since two strong competitor of Starbucks, McDonalds and Dunkin’s Donuts have offered the lower prices. However, Starbucks has introduced the several new products and high quality of coffee, highly differentiated to maintain consumers satisfied and away from competitors in the coffee market. Thus, the buyer bargaining power has offset and became moderate.
The Summary of Michael Porter’s Five Factor
In summary, the coffee market faces very strong forces from the industry rivals but it obtains weak forces from the threat of substitutes. Besides, the other three forces are considered as moderate. Generally, the impact of the five forces is moderate in the specialty coffee industry. Therefore, Starbucks is able to obtain the ideal revenues in the coffee market with operated effectively and efficiently.
Starbucks’ Generic Strategy
There are three successful generic competitive strategies that organizations can apply to achieve their competitive strategies, included overall cost leadership, differentiation and focus, defined by Michael Porter. Overall cost leadership strategy implies an organization to apply lower overall costs to attract consumers. The differentiation generic strategy contains the creation of service and product as being valuable and unique for the industry. Focus is the last generic strategy, which aims a certain market of a product line (Porter, 1998, p.38) cited by (Larson, 2008).
However, Starbucks are suitable the broad differentiation strategy of the five generic competitive strategies nowadays. This strategy allows Starbucks to serve a broader customer base with the differentiation of product and service (Grant, 2009) cited by (Brown, 2011). This approaches to retain and attract as many consumer with the generally product mix. Starbucks had the unique skills, products and services reputation with the distribution segment of specialty coffee industry. For instance, Starbucks was developed an icy-blend of dark-roasted coffee and milk, named Frappuccino. This drink was a hit with $54 million sales in the first year on the national market. In addition, the high-quality standards and strong employee culture of Starbucks were known well in the specialty coffee industry. The high-quality coffee beans are purchased from Fair Trade Certified, considered a differentiation product to other competitors. The employees of Starbucks were also trained to have strong customer experience. In the differentiation strategies, Starbucks have strengthened the brand and reputation for quality and creative flair.
Starbucks’ Strategy Options
Starbucks is able to create three strategic options for sustaining competitive advantage and further growing the business by having evaluated its forces. The three strategic options for Starbucks are that diversification, expansion and merger.
The diversification of a business is that introducing new products and offering new services to the industry. There are two way of diversification for business, be related or unrelated. Starbucks is suited to attempt related diversification, reflecting more association with the specialty coffee industry. Schultz believed that the company has lacked on blockbuster products, only the variations of products. Starbucks has a successful product diversification in the history with launched coffee and tea beverages, brewing and serving equipment, roasted coffee beans, music and gifts. The introduction of savory products such as cake, donut and muffin is a successful diversification as it can be combined with the existing product and core product, coffee. The diversification strategy is a good option for enhancing Starbucks’ growth and competitive advantage.
The expansion of an organization can be within a country and into an overseas market. Starbucks should reduce their expansion efforts in the United States and focus to expand its business into new countries to further internationalize it. The Economist stated, “While Starbucks has expanded so have its rivals. The firm’s home market seems to have reached saturation point.” With the rapid expansion, Starbucks is oversaturated in the United States. Therefore, this strategy option is suitable for Starbucks as the United States coffee market is reaching saturation point. If Starbucks has to go further growing and expanding, the international expansion is one of the best strategies for Starbucks. Read also about related and unrelated diversification
3) Merger and Acquisition
According to Investopedia, it defined as “a merger is an alliance of two organizations while an acquisition is the attaining of one organization by another.” The strategy of merger and acquisition sets out to accomplish the same goal, by increased broad customer base, market share and corporate strength of business. In the history, Starbucks has merged with Dreyer’s Grand Ice Cream to develop super premium ice cream and acquired a premium tea company, Tazo LLC. In the case study of Starbucks, there states that there were about 25000 coffee houses in the United States in 2007. The merger and acquisition of small specialty coffee retailers will enhances the market position, market share and competitive advantage of Starbucks. This is a strategy that will exploit opportunities whilst avoiding threats to further growing and expansion of Starbucks.
The first and most important process which Starbucks should take is to diminish the efforts expansion in the United States. According to Starbucks’ strategy Fortune, a new store will often cannibalize about 30% of the sales of a nearby Starbucks. The continuing aggressive of expansion in the United States by opening as many new stores of the same area is an act to cannibalize store sales. The reason why Starbucks should diminish their expansion plan is the coffee market has reached the saturation in the US. The overcapacity of expansion plans in a location will be met with failure to an organization. On the basis of all the evaluation and evidence referred for the strategy options, the recommendation is to further expand internationally.
Starbucks can convey the remained investment into international development plans by reducing the expansion plans in United States. The expansion of international market offers a supreme target with three fundamental objectives. The first reason is the lack of awareness of coffee market in many countries which represent the prospective market share. For instance, Starbucks currently opens approximately 20,000 stores with 13,000 in the US and 7000 in foreign countries. The total coffee consumption per person in the US has lowered much than many countries, such country as Finland and Italy. With gathering the information, this proves that expand internationally, there is a massive coffee drinking population and potential market share to be selected. (Starbucks Corporation, 2008) cited by (Larson, 2008).
Another reason that international expansion offers an ideal prospect is that the expansion of product innovation. For example, Starbucks has announced their Tazo tea brand into the Japanese market. And, Tazo was brought into the United States market as it was a successful trial in Japan. Tazo green tea has brought a success to Starbucks as it was a national drinks and showed that the power of brand in North America. Starbucks could have to evade the risk of brand reputation as more innovative products should run a trial in international markets. Since the markets have yet visible to Starbucks for a period time, it is possible to avoid a great risk with affecting the brand reputation. Therefore, Starbucks has great competitive advantage in the markets with expand intentionally.
The last reason of international expansion is to increase the brand reputation. Building brand image is key factor to an organization as the brand will affects an organization’s sales and position in the market. For example, in case of Starbucks, the company has increased revenue from $7.8 billion in 2006 to $9.4 in 2007, along with an increase in brand value. In order to recover the exclusivity of Starbucks brand, Schultz would focus the expansion of international countries and slow down the expansion of the United States. Therefore, the international aggressive expansion will help to strengthen its brand image and regain a strong competitive advantage for Starbucks.
In a nut shell, I am highly recommended a strategy decision to Starbucks is that expanding into international markets. International countries have represented the ideal potential market shares with the high demand of specialty coffee. By applying this strategy, Starbucks will continue to be the leader in the specialty coffee industry and further regain and strengthen its competitive advantage. Furthermore, it also gains the customer satisfaction in the international markets. International expansion is the way to move forward.