INDUSTRY ANALYSIS OF

STARTBUCKS

Submitted by:

Ronald Allan V. Miranda Jr.

Submitted to:

Dr. Ma. Teresa S. Alvarez

Philippine Business Environment

 I. Introduction

Starbucks Company has been referred to as a global coffee enterprise as well as a coffee
house chain located in Seattle, Washington. Starbucks have been nominated as one of the largest
coffee houses all over the globe. It has approximately 21,000 + stores located in 61 countries all
over the world. Some of the relevant figures regarding the same are 14,000 stores in United States,
1,300 in Canada, 1,000 in Japan, 500 in South Korea, 800 in United Kingdom, 750 in China, 300
in Taiwan, 350 in Mexico & 170 in Thailand. The very first store of Starbucks coffee houses was
opened in Seattle Washington in the year 1971. This store was opened by three partners i.e.
Bowker, Baldwin & Siegl. These three partners were inspired by one of the leading coffee
entrepreneur namely Alfred Peet. Alfred Peet was dealing with high end coffee equipments and
coffee beans. The initial years of Starbucks i.e. 1971 – 1976 were accomplished at 2000 Western
Avenue & soon shifted to 1912 Pike Place. Initially the company sold only roasted coffee & did
not start the brewing process due to lack of equipments etc. In the first year, Starbucks purchased
green coffee beans from Peet and then started to buy the same directly from the growers (Starbucks
Corporation, 2012).

Market Position

Starbucks has been referred to as one of the largest coffeehouses within the coffee market.
Starbucks is a single coffee shop that does not has a single direct competitor. Its closest competitor
is Caribou coffee house with less than 5% number of stores as compared to more than 11,000
stores of Starbucks situated in United States. Starbucks hold a dominant position within
coffeehouse market (Starbucks Corporation, 2012).

Market Strategy

In order to attain high levels of success every enterprise needs to adopt some marketing
strategy. Same way, Starbucks opted for various marketing strategies which would help to expand
& grab one of the highest shares within the brewery industry. Some of the strategies opted by
Starbucks were to buy the competitors leases, intentionally operate under losses & make its
presence felt in several locations. For example, Starbucks took its first mover advantage in the UK
market by buying the Seattle Coffee House but after sometime they realized opening of stores at
such prime locations have led to financial loss (Starbucks Corporation, 2012).
The United States Segment

Starbucks has been doing very well in The United States of America (USA) for the past many
years as of now. It has been evaluated that, the revenues earned by Starbucks in US was in double
digits even in the initial years of its establishment. It has been reported that, there are approximately
14,000 stores in United States (U.S.).During 1980, the total sales of coffee in USA were falling
but at the same time, sales for specialty coffee were on roll. It comprised of 10% of the total market
in the year 1989.
 II. Macro Environment (PESTEL)

Starbucks Company has been referred to as a premier coffee house marketer or a retailer. In
order to study its macro environment, a detailed Political Economical Social Technological
Environment & Legal (PESTEL) analysis shall be done.

Political Aspect: The first factor which shall be kept in mind while studying the macro
environment of Starbucks is the political aspect. It has been seen that, Starbucks has significant
levels of presence in the coffee market. Starbucks consists of various types of products for
government offices, corporate offices, etc. In the year 2011, Seattle Coffee has been reported a
growth double digit. It shall be taken into consideration that, the volume of growth in the overall
coffee market has declined by 2.5% whereas the volume at which Starbucks has increased is by
more than 12% (Schrage, 2004).

Economic Aspect: The second factor to be kept in mind while studying the macro environment
of Starbucks is the economic aspect. For the financial year 2010 & 2011, the leading coffee retailer
closed approximately 70 company operated stores all across the globe. United States (US) has been
referred to as one of the largest contributor of coffee; closure of the stores in the recent past has
led to a decrease in the overall profits earned by the same (Schrage, 2004).

Social Factor: The third factor which shall be kept in mind while evaluating the macro
environment for Starbucks refers to the social factor. Lately, Starbucks have been reported with
increased instances of product recalls. In the year 2011, the department of Agriculture Food Safety
inspected Listeria bacteria in the chicken to be used at Starbucks. In order to be on the safer side,
the Department of Food & Safety recalled all the Chicken Chipotle Wraps and Chicken Hummus
boxed meals (Schrage, 2004).

Technological Factor: The fourth factor which shall be kept in mind while evaluating the macro
environment for Starbucks refers to the technological aspect. Starbucks being one of the reputed
coffee houses had a robust distribution strategy which helped them to stay ahead of the
competition. In the recent years, Starbucks had opted for various types of distribution strategies in
order to reach maximum number of customer in a stipulated time frame (Schrage, 2004). The
company has been trying to opt for various technological advancements such as use internet & the
mobile applications. Starbucks launched a mobile payment system. This technological
advancement helped the customers to pay while sitting at the store with the help of their smart
phones. In the later years, Starbucks also launched an I-phone mobile payment application. With
this application, the customers would be able to have an access of their favorite Starbucks card
application. With the use of various technologies, the organization was not only masses but also
offered a convenient way of dealing with the transactions. The use of technology will help the
enterprise to break through the various distribution channels & be a step ahead of its immediate
competitors.
 III. Micro Environment (Porter’s 5 forces model)

In order to study the micro environment or Starbucks, Porter’s 5 forces model shall be used.
The Porter’s 5 forces model will help to analyze the industrial environment for the same as well
as highlight the key strategy for its success in a given industry. The five factors discussed are as
follows:

New entrants: In order to study the industry environment for Starbucks, the potential for new
entrants shall be kept in mind. It has been noticed that, the barriers to entry in the coffee industry
is quite high. The main reason for high barriers to entry is product differentiation, capital
requirements & limited choices of locations. The high levels of differentiation in the specialty
coffee houses has made the established brands to act as a barrier to entry (Porter, 1998).

Substitute products: The second aspect to be kept in mind in the porter’s five forces model refers
to the threat from the substitute goods. Some of the substitute goods which might act as a potential
threat for the Starbucks coffee refer to the aerated drinks, mock tails, soft drinks such as Coca
Cola, Pepsi & other beverages such as different types of tea (lemon tea, black tea, green tea, etc).
The coffee industry would be referred to as an industry which possesses little threat of substitution.

Bargaining power of suppliers: The main role played by the supplier is to either raise the prices
of the commodity or threat to reduce the quality and quantity of the same. Although there is no
direct substitute of the Arabica beans used to make a cup of coffee therefore, there is little
collective bargaining power of suppliers.

Bargaining power of buyer: The bargaining power of the buyers plays a crucial role in studying
the micro environment for Starbucks. The main role played by the buyers is to reduce the prices
& fight against the high levels of competition. In the specialty coffee market, there is reduced
barraging power of buyers (Porter, 1998).

Industry Rivalry: The last aspect to be kept in mind while studying the micro environment for
Starbucks refers to the industry rivalry. It is quite a difficult task to define a boundary for the
competitors within the coffee industry. Therefore, it would be a difficult task for the potential new
entrants to enter in the specialty coffee industry.
 IV. Critical Success Factor (CSF’s)

Some of the Critical Success Factors (CSF’s) which has made Starbucks one of the most
successful coffee houses in United States of America are highlighted as under. They are as follows:

First Mover Advantage: Starbucks has been referred to as an organization that opted for various
aggressive strategies so as to attract many customers within the coffee industry. The main reason
Starbucks had a well-established future in all parts of the globe was due to the strategic decision
decisions made to move & expand its stores.

The Catalog: Another critical success factor for Starbucks is to send the orders via Catalog. The
catalog provides the customers an opportunity to order packed coffee beans from all across the
globe. Catalog provided Starbucks an opportunity to build a loyal customer by entering into new
market or locations.

Employee satisfaction: One of the major success factors for Starbucks in the coffee industry refers
to the satisfaction of employees. It has been seen that, at Starbucks high levels of cost & time has
been invested to attain highest quality employees.

Maintaining the quality of Arabica Beans: In order to provide best of the Arabica beans,
Starbucks opted various types of strategies in order to secure the supply chain. In spite of enjoying
a dominant market share in the coffee industry, Starbucks has never tried to utilize its power by
reducing the prices of the beans or compromising on the quality of coffee. Instead they tried to
form a strategic alliance to encourage social change.

The Third Place: In a dynamic environment, it is an important task to develop a feeling of

community. At Starbucks, tries to provide a feeling of community when the customers enter
through the doors. Starbucks tries to provide a ‘third place’, where in the people can sit & get away
from their daily routine. Starbucks provides an ambience which offers casual social interactions.
 V. Opportunities & Threats

The opportunities & threats which can be seen with respect to value chain analysis and
measuring the strategic capability have been discussed in this section of the report. They are as
under:

Opportunities

 The critical success factors discussed in the above section of the report will act as a major
opportunity at Starbucks.
 Introduction of new products or up gradation of the menu will act as one of the major
opportunity for Starbucks.
 Opening more number of stores in other parts of world (excluding USA)

Threats

 Threats from the immediate competitors such as Costa Coffee, Dunkin Brands, and coffee
served at McDonalds, etc.
 High levels of competition from one of the leading brands i.e. Panera in terms of food,
ambience & number of stores.
 VI. Strategic Capability

Starbucks has strategic capabilities which can be seen in terms of the following i.e. location,
number of stores, market leadership and supply chain operations. It shall be taken into
consideration that, Starbucks has been enjoying highest market share in case of the coffee market.
Starbucks have been setting trends by serving its customers with different variants of coffee such
as Frappuccino (specialty for Starbucks), etc. The locations at which Starbucks are located provide
them sustainable competitive advantage as compared to the immediate competitors. The stores are
located where the footfalls are higher & are better in terms of demographic compositions.
Starbucks strongest strategic capability can be seen in terms of supply chain management it offers
(Schnaars, 2000). The supply chain management provides Starbucks an edge over its competitors
due to the following reasons such as firstly; the transportation cost for the same are best as
compared to the competitors. Secondly, they provide on time deliverables to their customers.
Thirdly, the complex manufacturing system will help Starbucks to maintain strong & effective
inventory system within the coffee industry. The key to success for Starbucks can be seen with
respect to the following six steps such as:

 Embraced diversity
 Applying high standards in operations
 Satisfied customers
 To portray respect & integrity
 Recognize the levels of profit earned
 Contribute towards the environment.

The value chain analysis for Starbucks consists of two main activities such as Primary and
Support activities. The primary activities refer to the type of activities which would be linked
directly to provide the product or services to the customers. On the other hand, support activities
refer to the type of activities which would help Starbucks to earn competitive edge as compared to
its competitors.
Primary Activities:

1. Inbound Logistics – Starbucks inbound logistics takes into consideration the following
activities such as to establish strategic relationship with the suppliers, choosing the
coffee beans, dealing with the suppliers, etc.
2. Operations – Starbucks carries out its operations in two forms i.e. direct operation by
the company or direct operation by licensing. There are approximately 8870 company
operated stores & 8200 stores operated by the way of licensing (Quelch, 2006).
3. Outbound Logistics – The outbound logistics at Starbucks takes into consideration
selling of the products such as coffee beans, etc excluding the intermediaries.
4. Marketing & Sales – Starbucks believe in Word Of Mouth marketing rather than
applying any type of marketing strategy.
5. Services – Starbucks have been referred to as a service organization which provides
high levels of satisfaction to the customers (Quelch, 2006).

Support Activities:

1. Human Resource Management – Human Resource Management refers to one of the crucial
aspects for any organization. High levels of training & development programs have been
used at Starbucks to serve the customers at its best (Quelch, 2006).
2. Infrastructure – Starbucks takes into consideration in depth planning, staffing, and
organizing, directing & controlling functions as a part of its infrastructure.
3. Development of the technology – Use of technology has helped Starbucks to ensure
consistency in the quality of products offered to the customers. Introduction of the
computerized coffee roasters has helped Starbucks to provide a consistent taste of coffee
(Quelch, 2006).
4. Procurement – This means to purchase items so as to provide one of the best services within
the industry. In case of Starbucks the items would be coffee beans, machinery, furniture,
etc.
 VII. Identify the strengths & weakness

The strengths & weakness which can be seen with respect to value chain analysis & measuring
the strategic capability have been discussed in this section of the report. They are as under:

Strengths

 Starbucks is a profitable organization, generating high levels of revenue.

 Starbucks critical success factors (CFS’s) mentioned in Task A would be referred to as one
of the key strengths.
 The key to success at Starbucks can be seen with respect to the six steps mentioned above.
 Starbucks has been referred to as a global coffee house with approximately 9000 coffee
houses across the globe.
 Starbucks has strong market presence in USA with more than three quarter of coffee shops
situated there. It shall try & open more stores in other parts of the globe.
 The competitive advantage of Starbucks can be seen in regards to retailing coffee. It shall
try to diversify its operations in other areas as well.

Weakness

 Starbucks lacks creativity & innovation in terms of new product development.

 VIII. Strategic Fit Analyses

The strengths, weaknesses, threats & opportunities discussed in the report above highlights
the fact that, Starbucks is one of the leading brands within the specialty coffee industry. Some of
the opportunities & threats discussed in the report above are directly proportional to the strengths
and weaknesses.

For example, one of the major opportunities enjoyed by Starbucks is to expand its operation
in other parts of the globe excluding United States of America (U.S.). This means that, opening
more number of stores at different locations will act as one of the strengths for Starbucks. Opening
more number of stores will provide Starbucks with sustainable competitve advantage (Michelli,
2007). The critical success factors (CSF’s) opted will act as an opportunity & strength at Starbucks.
The critical success factors have been followed at Starbucks which adds to the strength of
Starbucks. Implementation of various aggressive strategies, use of catalogs in order to attract more
number of customers, maintaining the quality of the Arabica beans and satisfying the customers in
monetary & non monetary terms would act as an add on for Starbucks. It has been seen that,
application of all the factors mentioned above has helped Starbucks to be one of the leading coffee
shops all over the world (Harding, 2000).
 IX. Recommendations for further growth of Starbucks have been highlighted as follows:

Increase international expansion: The first & foremost recommendation for Starbucks would be
to increase its existence in international countries (excluding United States of America).
Aggressive marketing strategies shall be followed at Starbucks to expand its operations. Starbucks
shall try to reduce its marketing strategies in U.S. as it has entered the matured stage of Product
Life Cycle (PLC). Further expansion efforts will lead to failure of the Starbucks coffee (Burn,
2008).

Technology friendly atmosphere: Starbucks shall try to build a technology friendly atmosphere.
With the rise in internet facilities an increasing shifts have been made from consumer’s work
locations to home offices. Starbucks shall be regarded as a meeting space where in an additional
facility apart from Wi-Fi would be provided to the customer. Printers shall be made accessible to
the customers at subsidized prices (Holmstorm, 2012).

Become environment friendly: Many efforts have been made by Starbucks to improve their
image as an environment friendly store; still there is scope for further improvements. Some of the
ways which shall be followed by Starbucks to become an environment friendly store would be to
recycle the porcelain cups, encourage the customers not to waste the food products & recycle the
plastic Starbucks cards. All the employees would be required to suggest initiatives which might
benefit the environment at large (Gulati, 2007).

Continuous Improvements in the coffee: It would be quite an important task for Starbucks to
continually improve the taste of the coffee. In order to improve the quality of coffee, Starbucks
shall analyze its brewing systems on timely basis and consider renovations. They shall patent &
copyright their way of accomplishing the brewing process. This will add as a competitive
advantage for Starbucks (Amazon, 2011).