Spotlight: Starbucks Strategy

Starbucks is one of the world’s most successful brands with a comprehensive, international strategy supporting their growth.

They’ve made a series of smart strategic decisions such as improving brand image through good social corporate reasonability and creating a network of resellers for their coffee branded products.

Making good strategic decisions comes from paying close attention to the environment you operate within, and Starbucks is a great example of how a strategy can align to external activities. For example, would their CSR be so environmentally focused if not for the environmental concerns within society?

With stores in Europe, Africa, Middle East, Americas and Asia, Starbucks has to keep a lot of factors in their strategic reviews. Their brand extension strategy means coffee products are sold to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and selected retailers.

Complicated businesses such as Starbucks may have a Five Forces or PESTLE Analysis for their numerous departments, but keeping it high level we’ll take a look at some of the external analysis that will factor in their strategic planning.

Porter’s Five Forces Analysis for Starbucks Coffee:

Threat of New Entrants: Medium

The threat of new entrants depends on the section of business. One could argue that it is low, as Starbucks have dominated the coffee making industry for a number of years and hold the number one position as coffee speciality retailer in the world. With more than 12,000 retail outlets in 35 countries, it would be hard for a company to enter this space in the same magnitude as Starbucks. However, on a local level, it’s relatively easy for smaller coffee chains or independents to open and challenge the local Starbucks. The threat at the local level is medium. We’ve seen similar in the bread industry for Warburtons, with the sliced bread company coming under threat from independent, local bakers.

Threat of Substitutes: Low

In the case of new substitute products, the threat is relatively low as coffee has long been and continues to be a mainstream product. While there is innovation within this space, producing different types of coffee product, the core offering of a caffeinated drink remains the same. Therefore, Starbucks could continue to grow a successful global retail coffee chain, through little or no threat of substitute beverages.

Where there are alternatives, such as tea, Starbucks is positioned well to quickly move and offer the alternative products, thus remaining competitive. Smoothies, juices, water, tea and soft drinks are all examples of potential replacements to coffee that are now commonly sold at Starbucks.

Power of Buyers: High

The power of Starbucks and similar companies to choose where the source of suppliers is high. Within the coffee industry, coffee beans were grown in 70 tropical countries and are one of the most-traded commodities in the world. Most of the world’s coffee is grown by some 25 million small famers, many of whom lived on the edge of poverty.

This gives Starbucks an opportunity to have fairly low supplier switching costs, where there is a diverse choice of suppliers. Starbucks have been able to strengthen their power of buying further through good coffee sourcing strategies. For instance, one of the key strategies Starbucks have as part of their CSR was to to ensure that small farmers were able to cover their production costs and provide for their families based on the price paid.

Power of Suppliers: Low

Within the coffee making industry the power of suppliers is relatively low. It is hard for suppliers to stipulate prices that Starbucks or other brands should pay for the raw materials, as the market is full of potential coffee suppliers. One example of the ease of movement between suppliers for Starbucks was their appointment of Baxy as its new milk supplier in China, after milk products from its original supplier, Mengniu, were tainted by melamine.

Competitive Rivalry: High

In recent years competitive rivalries have become increasingly higher. In the case of Starbucks, newer entrants from companies such as McDonalds or Pete’s Coffee has resulted in tougher trading conditions, initially hurting the stock price of Starbucks. Increasing independent coffee chains and choice from consumers will maintain a high competitive rivalry.

Want to create your own Porter’s Five Forces? Check out our Ultimate Guide to Five Forces.

SWOT for Starbucks:

Strengths

• Expanding in different product markets
• Partnerships for services (like iTunes with Apple and free Wi-Fi with Google)
• Brand strength
• Loyal customers as a core value
• Historic strategic decisions
• Cost analysis
• Employee satisfaction/culture

Weaknesses

• Saturated market with too many outlets making it hard for each to grow
• Negative publicity on conditions for workers
• Coffee supply pricing
• Easy to compete against core product
• Expensive

Opportunities

• Win customers from other food outlets such as McDonalds
• Continue to develop food and services in addition to coffee
• Develop more interactive stores like Starbucks NYC hub
• Develop their supplier groups to reduce price risk
• Form further partnerships
• Expand product development around coffee and merchandise

Threats

• Continued growth of competitors such as McDoanlds McCafe brand
• Outlets not keeping the required standard of Starbucks and damaging reputation
• Environmental impacts on price of coffee
• Alternatives to coffee rising such as smoothies
• Low barrier to entry for independent coffee shops to impact outlets

Want to develop your own SWOT? Read the Ultimate Guide to SWOT Analysis.

VRIO Analysis for Starbucks

The VRIO analysis identifies that Starbucks have been able to use a number of resources to sustain a competitive advantage over time.

Learn more about the VRIO framework here.

Summary

Starbucks has historically been a master of strategic decisions, ensuring it on the whole maintained position as the number 1 coffee brand in the world. Whilst new challenges, such as McDonalds or indy coffee, are arising, and new demands, such as environmental concerns, are growing, Starbucks is well positioned to adapt to the market changes by successfully balancing the trade-offs between effectiveness and efficiently.