HOSP 4060: HOSPITALITY STRATEGY DESIGN & EXECUTION SEMINAR

Porters Five Forces Analysis

Company Name: Starbucks

Potential Entry of New Competitors

Strength: Moderate

There is a moderate threat of new entrants into the industry as the barriers to entry are not high enough to discourage new competitors to enter the market

The industry’s saturation is moderately high with a monopolistic competition structure.

For new entrants, the initial investment is not significant as they can lease stores, equipment etc. at a moderate level of investment.

At a localized level, small coffee shops can compete with the likes of Starbucks and Dunkin Brands because there are no switching costs for the consumers. Even though it’s a competitive industry, the possibility of new entrants to be successful in the industry is moderate.

The incumbent firms like Starbucks have a larger scale and scope, yielding them a learning curve advantage and favorable access to raw material with the relationship they build with their suppliers.

Potential Development of Substitute Products

Strength: HIGH

There are many reasonable substitute beverages to coffee, which are mainly tea, fruit juices, water, sodas, energy drinks etc. Bars and Pubs with non/alcoholic beverages could also substitute for the social experience of Starbucks

Consumers could also make their own home produced coffee with household premium coffee makers at a fraction of the cost for buying from premium coffee retailers like Starbucks.

There are no switching costs for the consumers for switching to substitutes, which makes the threat high.

But it’s important to note that industry leaders like Starbucks are currently trying to counter this threat by selling coffee makers, premium coffee packs in grocery stores but this threat still puts pressure their the margins

Bargaining Power of Consumers

Strength: Low to Moderate Pressure

There are many different buyers in this industry and no single buyer can demand price concession.

It offers vertically differentiated products with a diverse consumer base, which make relatively low volume purchases, which erodes the buyer’s power

Even though there are no switching costs with high availability of substitute products, industry leaders like Starbucks prices its product mix in relation to rivals stores with prevailing market price elasticity and competitive premium pricing.

Consumers have a moderate sensitivity in premium coffee retailing as they pay a premium for higher quality products but are watchful of excessive premium in relation product quality

Bargaining Power of Suppliers

Strength: Low to Moderate Pressure

The main inputs into the value chain of Starbucks is coffee beans and premium Arabica coffee grown in select regions which are standard inputs, which makes the cost of switching between substitute suppliers, moderately low

Starbucks, with its size and scale, has the power to take advantage of its suppliers but it maintains a Fair trade certified coffee under its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair partnership status, which yields them some moderately, low power

The suppliers in the industry also pose a low threat of competing against Starbucks by forward vertical integration, which lowers their power.

A Starbucks also forms a highly important part of the suppliers business, due its size and scope, which make the power of the suppliers lower. Given these factors, suppliers pose a moderately low bargaining power.

Rivalry of Competing Firms

Strength: Moderate to High Pressure

The industry has a monopolistic competition, with Starbucks having the largest markets share and its closest competitors also having a significant market share, creating significant pressure on Starbucks.

Consumers do have any cost of switching to other competitors, which crates high intensity in rivalry.

But it’s important to note that Starbucks maintain some competitive advantage as it differentiates its products with premium products and services, which cause a moderate level of intensity in competition.

The industry is mature and growth rate has been moderately low which cause the intensity of competition among the companies to be moderately high due to all of them seeking to increase market shaper from established firms like Starbucks.

This industry does not have over capacity currently and all these factors contribute to the intensity among rivals to be moderately high.