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Porter and Starbucks

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Thank You for the previous work on Porter’s Model and Starbucks. This one is a response to student based on the same response. Basically the response should be around 250 words regarding Porter and Starbucks. Below is the students response that we need to provide a response on his or her opinion based on the information read.
The Five Forces and Starbucks – Gentry
COLLAPSE
The five forces are not equal in nature in the sense they are dynamic, the weight and type of each can and will vary depending on the industry (Porter, 2008). They are, however, equal in the sense that any of them can be the strongest, weakest, or equally forceful influence on a particular industry or player therein (Porter, 2008). It is always a question of the specifics of the industry and situation in time (industries change over time due to both the five forces and players’ actions) that determines which of the five forces may predominate, or whether each is equal (a rarer case) at a given moment (Porter, 2008). Porter’s approach itself emphasizes that different entities, at different times, have found one or another of the forces to be predominant (his reference to the music industry is a prime example of threats that change over time and situation)(Porter, 2008). Another example would be the NFL, which once faced threats from new entrants into the market (other professional football leagues) but now faces primarily the threat of substitute products, namely HDTV and sports bars, which offer enhanced, and really better, visual experiences without the now very expensive admission and concession prices inherent in actually attending a game. While the NFL has some control over this, in that it sells the video rights to its product, its model is still dependent in significant part on admissions fees, which may well be threatened by the alternate experiences available to digest its product.

Even so, it might be more accurate to say that all five forces are potentially equal in force or, potentially, weight or value. If by “nature” one means the underlying type of threat then, of course, they are different in both origin and type. Some of these forces are amorphously possessed, i.e., bargaining power, while others are concrete and existent, substitute products or services, and others are looming but as yet undeveloped, such as potential new entrants (once new entrants are present and on hand they become existing competitors). Examples of the diversity of these forces can be seen in the Starbuck’s example.

Using the Starbucks example, it appears that Starbucks has carefully positioned itself using the five forces model (Ungson & Wong, 2008; Porter, 2008). In particular, Starbucks has adjusted its approach to meet the varying predominance of the forces at different periods during its growth. It is easiest to address these in sequential form, noting what the particular forces are and what Starbucks has done to address them (Ungson & Wong, 2008; Porter, 2008).

Rivalry among existing competitors: Here Starbucks faces various local rivals, none of which have its international footprint or buying power. Starbucks heeds Porter’s advice, however, and does not engage in a price war with these competitors (Porter, 2008). Rather it sells a particular product, upscale coffee in a café setting, aimed at a particular market (those with enough, though really not always all that much, disposable income), and focuses on customer discernment. In other words its competitive advantage lies in the quality and quantity (Starbucks excels at offering a differentiated menu of coffee with almost endless variations due to barista skill and training and customer imagination), not undercutting the price of a competitor. Indeed, Starbucks essentially defines its industry in a way that excludes many competitors (Dunkin Donuts, 7-11, etc.) by not offering cheap coffee and in offering a café setting. While the entrance costs to selling coffee are fairly low the entrance costs to doing so in a café setting are somewhat higher and the entrance costs of doing so on a national or international scale are immense. As a result Starbucks has no serious competition at its level of operations and faces only fragmented local competition in the area of some of its cafes. Against these competitors Starbucks has massive advantages due to economies of scale.

Interestingly, in one way Starbucks, with its oversaturation of stores, is competing with itself. This is not necessarily a bad thing, in that it keeps other competitors out of the market but, to the extent, as Porter puts it the “pie” of customers is only so large, Starbucks may be increasing its fixed costs while not increasing its customer base, or at least only marginally doing so, decreasing its profit margin (Porter, 2008).

Bargaining power of suppliers: In this industry there is a substantial bargaining power of suppliers, namely the cost of coffee beans, which are essential to the industry and really its primary good (Starbucks sells some small food items as well but they are a small part of its business and, anecdotally, customers who have partaken in them probably understand why – they do not receive nearly as much attention to quality as does Starbucks’ coffee). Starbucks has positioned itself well in this regard by removing one level of supplier, the coffee buyer, and instead undertaking that in-house. In doing so, Starbucks has eliminated one level of profit-taking, and one level of supplier power, buying coffee direct from the growers.

Similarly, operating in a non-union environment, Starbucks has limited supplier costs of employees. Starbucks program of offering healthcare and tuition reimbursement appears aimed at satisfying employee needs and has the effect, perhaps intentionally created, of limiting employees’ desire and ability (via getting enough votes) to unionize. Starbucks appears to intentionally endeavor to keep its workforce happy or at least satisfied and thus avoid any labor difficulties and increase in labor-based supplier power.

Threat of substitute products or services: Obviously enough, most any restaurant or gas station can sell coffee and related drinks. Starbucks, however, focuses on high-end coffee that does not have a retail level equivalent, due to its choice of higher quality beans. While other competitors could endeavor to sell similar high quality coffee this threat would be better analyzed as either an existing competitor or threat of new entrants, as applicable.

Starbucks does face one attempted national threat of substitution, namely the McDonalds’ McCafe approach to coffee and related drinks, complete with café styled restaurants, free wi-fi, etc. Thankfully for Starbucks, McDonalds does not have a reputation for quality and the entire cache of Starbucks, an entry way for the masses to partake in the most elite of coffees, is largely the opposite of McDonalds’ reputation and approach.

One other threat would be efforts to substitute the café part of the experience that Starbucks offers (comfortable seats, free wi-fi, an expectation that customers can stay as long as they like and do their work, socialize, etc.) This is something that Panera Bread, with a far more diverse and higher quality line of food products, has attempted. Starbucks’ efforts to expand its food menu items could be seen as a direct response to Panera’s threat, though this threat is also limited by the paucity of coffee products Panera serves in comparison with Starbucks’ near limitless variety.

The most serious threat of a substitute product might well be a consumer level device that allows the brewing of Starbucks level drinks. The Keurig machine’s success demonstrates there is such a market for this device but, at its current level of development, it is a poor substitute for Starbucks’ products. Even so, Starbucks even sells its lower level products for these devices, limiting the level of threat they pose.

Threat of new entrants: While this is always a concern for Starbucks, given the relatively low cost of selling coffee and even opening a restaurant , the ability to achieve a national or international footprint that would rival Starbucks would be much more costly and, particularly in the short term, require the ability to stomach massive losses as the effort to draw customers from Starbucks was undertaken. Additionally, as Starbucks is largely immune to price wars, as the cost of its products is actually part of its niche and attractiveness, it is unclear even how a competitor could expect to draw large numbers of customers from Starbucks.

Starbucks current foray into selling alcohol seems to be a diversification to avoid threats as well. Starbucks is essentially endeavoring to create another niche market, café based alcohol and/or coffee/alcohol drinks, something that currently has no real competitors. That said, it is not clear if this market, which does not exist, can be created, and Starbucks is taking a risk by increasing its structural costs in the face of an uncertain market.

Similarly, Starbucks expansion into Barnes and Noble bookstores seems to be an effort to expand in a manner to limit bookstore based competitors, with Starbucks being sold in a café setting with the added attraction of a large number of books that can, essentially, be read for free in the cafes (even though this is not the customer conduct Barnes and Noble really hopes for; it would far prefer customers actually buy the books). Starbucks expansion into university spaces would seem to fit into a similar category.

Bargaining power of buyers:

Starbucks buyers possess a decent amount of buying power, as they can easily find less expensive coffee, but Starbucks neuters this by making the elitist status of its drinks part of its niche and attractiveness. Buyers could go elsewhere but Starbucks essentially says it does not want those buyers, it wants the buyers who choose to buy the best. Such buyers inherently forego much of their bargaining power when they tie themselves, as many Starbucks buyers do, to a particular business. Starbucks novel drinks have developed a strong, if not sometimes cult-like, following, which effectively limits buyers’ bargaining power by tying them to the company.

Ultimate threat:

Using these forces as a base it is difficult to discern an ultimate threat to Starbucks. There is no competitor, existing, or newly entering, that can force Starbucks to immediately close or divorce its current business model. Similarly while buyers might suddenly choose to limit their purchases of expensive drinks and thus assert bargaining power if, for example, an economic recession or depression were to occur, they would not completely depart the field. While there are many substitute products or services, none at present can substitute for the Starbucks experience. The development of a consumer level device that makes Starbucks level coffee at home would be a massive threat, but would not compete with the café ambiance and social/work space Starbucks creates.

Probably the only true ultimate threat would come from the bargaining power of supplies power, and this would require a massive change in the current market place. If, for example, global coffee bean production were to dramatically decrease (and suddenly so) due to disease, climate change, etc., then it is possible this would undermine Starbucks’ model sufficiently, by pricing it out of customers’ range, to require an abandonment of Starbucks’ current business model (perhaps a lower end coffee and café would replace it, or perhaps the alcohol café would become predominant.

Even so, it seems that Starbucks has positioned itself in such a way that the number of threats it faces, while existing across all five powers, have been largely limited by the company’s proactive approach. Starbucks may face limits in its own expansion, from governmental factors to over-saturation (which increases costs and thus decreases profits) but it has successfully navigated itself to a level of industry leader and one which is largely dominant in a market that it created itself. Kevin

References:

Porter, M.E. (2008, January). The five competitive forces that shape strategy. Harvard Business Review, 80-93.

Ungson, G.R. & Wong, Y.Y. (2008). Global strategic management. New York, NY: M.E Sharpe.

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