Coffee plays a significant role within the context of beverage. Coffee was a staple product of the Union soldier’s diets with an allotment of £ 36 of beans for every soldier during the Civil War. From the mid-1960 so far, the average of American people consume 3, 1 cups of coffee a day (Sweet 2007, p.154). In addition, the large number of consumer, from the USA to other major countries, began drinking Starbucks coffee regularly because of its unique atmosphere and high class quality of coffee (Larson 2008, p.6). This report is an attempt to look insight into Starbucks in the USA market and includes the analysis of various environmental factors and the industry in which the company operates. These political, economic and other factors have great impact over the company’s performance. . Huge experience and excellent brand image are the company’s two major strengths. Other strengths, weaknesses, threats and opportunities are properly analysed in this report. Based on this analysis some specific recommendations are made in this report.
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An attempt had been put forward to produce a report on Starbucks Company operating in retail coffee industry. All the data are collected from various secondary sources like company websites, online articles, books etc. This report provides the analysis of resources and capabilities of the company and external and internal environment factors by using some tools and theories including Pest, Porter’s five forces, Swot and Value chain analysis. At last recommendations have been provided on the basis of the findings of the analysis.
2. Brief Background of Starbucks
Starbucks started its journey in the year 1971. It was founded by Jerry Baldwin, Gordon Bowker and Zev Siegl. Prior to the period of 1971 they were involved in roasting and selling ground coffee, whole bean, tea and spices. There was only one store in the pike place market of Seattle. Today there are almost 16,706 stores throughout the world. Among these stores 8,850 are directly operated by the company and rests are licensed stores. These stores are located in over 50 countries in the world (Starbucks, 2009a). More than 120,000 people are working in the company. Starbucks employees are called partners of their company. Starbucks is mainly renowned for offering premium class coffee. In addition to coffee, the company also offers handcrafted beverages and fresh foods like baked pastries, salads, sandwich etc. Starbucks is found to be committed to running business responsibly. There are three areas that are mainly focused by the company in the process of fulfilling the responsibilities. These three are ethical sourcing, community involvement and environmental stewardship. The company’s headquarter is located in Seattle (CNN Money, 2009).
3. External Analysis
3.1. PEST Analysis
PEST analysis is a technique to view external environment and elements influencing any companies and industries (Porter, 1980). Since Starbucks is a US based company, PEST analysis is conducted focusing on the US market.
Figure1. PEST Analysis
Political: There are several political parties that can influence any decision of the company regarding recruitment, job cuts, opening and closing of stores, salaries etc. Moreover there is union in the organization. This union is called Starbucks Workers Union which has great influence over the decisions regarding working hours, wage, recruitment etc. (Starbucks Union, 2010).Also some regulation and law including taxation policy, deregulation, international trade tariff, government and international stability have a great impact on Starbucks. For instance, the USA retreated of the ICA (International Coffee Agreement) which set export quotas for producing and kept the coffee price stable. As s result of this, Price controls and coffee quotas ended. Farmer in the USA had suffered and their earnings had decreased before the deregulation was done (Heavey 2008, p.3).
Economy: As far as economy of US is concerned it is heavily affected by the recent recession. In 2009 the real GDP growth rate of the country was -2.4%. Purchasing power of most of the Americans has declined and this has resulted in decrease in overall demand of almost all the products and services. Such situation has affected the business of Starbucks also and it is reflected by the total revenue of the company (Central Intelligence Agency, 2009).
Society: As far as society is concerned most of the people in US are found to be in the age group of 15-64 years. 82% of all the Americans live in the urban areas. Population growth rate in the country is found to be as low as 0.977%. However 99% people in the country are officially educated (Central Intelligence Agency, 2009). Such society is certainly favourable for the businesses like Starbucks.
Technology: America is one of those countries where technology is an important part of daily life. Each and every organization in the country is heavy user of advanced technologies. Organizations like Starbucks always have the opportunity of using high end technologies to improve their services and facilities (Central Intelligence Agency, 2009).
3.2. Competitor Analysis
Starbucks face tough competition from Dunkin Donuts, Panera Bread, Steattle’s best coffee and McDonalds. However, any specialty coffee shop or quick service restaurant can be considered as a main competitor of Starbucks. In the US market the company faces heavy competition from Dunkin Donuts and McDonalds. Different players have different ways of gaining competitive advantages. For example, price cuts, expansion of production to increase their market share. It is true that McDonalds is a main competitor of Starbucks, but Starbucks’s offerings are entirely different from that of McDonalds. Starbucks offer a lifetime experience that changes customers’ way of viewing their lifestyles. It offers premium quality coffee at a premium price (Pitek, 2009).
On the other hand, McDonalds is a quick service restaurant that is very popular throughout the world. It has redefined the world of snacks and burger. Starbucks also offer snacks, but that is not its main offering. Dunkin Donut, however, deals with coffee and it is famous for that. The company was established almost 21 years before the set up of Starbucks. Dunkin faced tough competition after the arrival of Starbucks and forced to modify its offerings. For instance it came up with frozen coffee and debit coffee card after they were introduced by Starbucks (DiCarlo, 2004).
3.3. Porter’s Five Forces Analysis
According to Michael Porter, the five forces that influence the structure of an industry are buyers’ bargaining power, suppliers’ bargaining power, competition among the rivals, threat of new entrants and threat of substitutes (Fulton et al 2008, p.2-6).
Competitive Rivalry within an Industry
Bargaining Power of Supplies
Bargaining Power of Buyers
Treat of New Entrants
Treat of New Substitutes
Figure2. Porter Five Forces Analysis
As far as specialty coffee industry is concerned buyers have strong bargaining power as they have several options. There is large number of specialty coffee shops and quick service restaurants where people can come and spend quality time. In order to attract more and more customer each of these shops need to have some uniqueness in their offerings. Starbucks is renowned for its unique coffee and in-store atmosphere. As long as such uniqueness is maintained customers are expected to stick with the brand (Fulton et al 2008, p.2-6).
Suppliers are having medium bargaining power as the industry deals with specialty coffee. Companies like Starbucks depend heavily on their suppliers who supply all the inputs like coffee, milk, equipments etc. It is very important to have high quality raw materials at a cost that can be afforded by the company. Moreover these materials should be supplied in time. As a result suppliers have significant amount of bargaining power. However, being a globally renowned brand, Starbucks also has some power with which it can negotiate with its suppliers regarding price, quality and time (Fulton et al 2008, p.2-6).
The US market is full of specialty coffee shops and quick service restaurants. As a result competition is found to be intense in nature. Each and every player is trying to improve their offerings in order to attract more and more customers.
Threat of new entrants is found to be moderate to high. This is mainly because it is not very difficult to start a specialty coffee shop or a quick service restaurant in US. However it requires lot of efforts to become a globally renowned chain of coffee shop that offers premium class coffee along with various other services (Fulton et al 2008, p.2-6).
Threat of substituent is found to be low as it is very difficult to come up with product that will replace coffee. Over the past century world has seen several new drinks and beverages, but none of them has been able to replace coffee and its taste. As a result Starbucks and other companies should be very little worried about the threat of substituent (Fulton et al 2008, p.2-6).
4. Internal Analysis
4.1. SWOT Analysis
Swot Analysis is used for finding out strengths and weakness of any company and looking at opportunities and threats of any company (Mindtools, 2010). These figures are the following (Datamonitor 2009, p.17-21):
Table1: Swot Analysis
Huge brands and established logo
Excellent production diversification: coffee, baked food cds etc.
Wide geographic presence
Strong research and development capabilities
Dependent on the USA market
Dependent on coffee business
Expansion into retail operation
Opportunity of integrating vertically
Licensing partnerships and distributions
Dependent on discretionary spending
Awareness of health risk
Resources: Datamonitor, 2009
Major strength of Starbucks is its unique atmosphere which is found at each and every store of it. Most of the customers visit Starbucks stores either because of this atmosphere or because of excellent quality of Starbucks coffee which is another major strength of the company (Heavey 208, p.11).
Starbucks is a huge brand throughout the world. Moreover the company has huge experience in the specialty coffee industry as it is in the business for almost three decades. In addition to this Starbucks has excellent relationship with its suppliers who are mainly responsible for the premium quality of the coffee. This is also a major strength of the company (Datamonitor 2009, p.17).
Starbucks not only offers coffee, but it offers handcrafted beverages and fresh foods like baked pastries, salads, sandwich, cds etc. Such a wide range of offerings keeps the company much ahead of its competitors (Heavey 2008, p.12).
Starbucks has begun operating outside the USA since 1987. Starbucks operated 1.979 operated retail stores and 3.134 licensed retail stores in 2008 and continues to expand its presence through licensing partnerships. It is clear that a strong geographic presence can reduce the business risk in terms of specific markets and expand the revenues of company (Datamonitor 2009, p.18).
Starbucks has a strong research and development capabilities which ensure product quality. The quality of its production is the core strength behind of Starbucks’ brand. It has well-built research and development team and focus on quality and product innovation which helps sustain the company brand value (Datamonitor 2009, p.18).
Starbucks is found to be heavily dependent on the US market. Most of its stores are located in this country. This is a major weakness of the company because if tomorrow anything wrong happens in US, the company will struggle to survive (Heavey 2008, p.12).
Starbucks is mainly renowned for its coffee. In other words the company is too much dependent on coffee business. This is another major weakness of the company (Datamonitor 2009, p.18).
Starbucks charges their coffee at premium price which is higher than the average of market price where competitors try to reduce their price to gain advantage of competition (Heavey 2008, p.12).
Starbucks has the opportunity to focus more on the developing countries like India where there is no Starbucks stores. Developing countries like South Africa, Brazil should also be given more importance by the company (Heavey 2008, p.12).
Starbucks is mainly into the roasting of coffee. As a result it has the opportunity of integrating vertically. The company can invest in producing coffee (Heavey 2008, p.12).
Starbucks licenses the rights to market and produce its products through partnerships both internationally and domestically. For instance, in partnership with Unilever and PepsiCo entered a licensing agreement for marketing and manufacturing of Starbucks Tazo Tea ready-to-drink beverages. Starbucks also licenses the right to distribute its brand products (Datamonitor 2009, p.19).
Intense competition and powerful competitors are the main threat for Starbucks. There are several local players who offer or try to offer the same services that are offered by Starbucks. In addition to this there are competitors like McDonalds and Dunkin (Heavy 2008, p.12).
The global economic downturn is the other threat for Starbucks because of depending on its customers’ discretionary spending. As a result of this, consumers have less money for these discretionary purchases due to job losses, decreased access to credit (Heavey 2008, p.13).
There is increase in consumer awareness of health risks including obesity in the USA. Starbucks’ products contain dairy products, sugar, caffeine and other active compounds which can lead to a variety of adverse health effects. This increase in health awareness within American consumer could decrease significantly the demand for the Starbucks’ food products and beverages (Datamonitor 2009, p.20).
4.2. Analysis of Resources & Capabilities and Competitive Advantages of Starbucks
Distinguish between the resources and the capability of the firm is important. According to Grant, “resources are the productive assets owned by the firm; capabilities are what the firm can do” (Grant 2008, p.130).
The resources of Starbucks can divide into four categories: Human, Physical, Financial and Intellectual capital. The shop that they own for serving services and goods, any vehicles that they own for transporting goods and all equipment that is used to create products are physical resources of Starbucks. These resources are younger and a very good condition that allow Starbucks to retain its current success. The knowledge, worker adaptability and skills are human resources for Starbucks. Staffs who work for Starbuck from CEO to waiter become a company’s “most valuable asset” (Heavey 2008, p.8). These staffs play significant role in creating the famous and unique atmosphere in all the Starbucks stores (Starbucks, 2009b). In addition, financial resources are cash, capital, creditors or debtors. Starbucks believe “the less debt they are in, the more positive their resources audit looks” (Heavey 2008, p.8) and also have a great many of working capital including foodstuffs, variety of whole coffee beans, equipment etc. Intellectual capital including patents, brand, customer databases etc. can create value for companies. Starbucks always protect this intangible information. One of the few ways used by Starbucks is to ensure its employees sign confidentiality agreement to prevent any leak of knowledge to its competitors (Heavey 2008, p.8).
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Starbucks has various capabilities. More important ones of these that allow Starbucks to stand apart from its competitors are their market leadership, superior retail location and atmosphere and their supply chain operations. Starbucks has the large market share that provides Starbucks the capability to set industry trend. Also superior retail locations provide Starbucks powerful capabilities over its competitors. Stores are exposed with good local demographic compositions and higher foot traffic and operated with good atmosphere including music, magazines and wireless internet etc. Supply chain operations are superior to its competitors in coffee industry in terms of the quality of raw materials should be supplied in time and transformation rate (Larson 2008, p.55).
According to Karami (2007, p.121) Strong and sustainable resources and capabilities allow to companies gain competitive advantages. Porter value chain analysis and VRIO framework are used in this report to identify Starbucks core competences that provide companies with a ‘competitive advantages’ (Gates et.al 2009, p.10).
Resources: Gates et.al. 2009 p.10
The VRIO analysis based on Porter value chain illustrated above indicates Starbucks core competences. These areas are human resources management, marketing and retail location.
Human resources management: Employee is one of the most significant sources of sustainable advantages. As a result, Employees are equal within organization and trained, developed and rewarded by Starbucks (Heavey 2008, p.9). The empowering culture and employee stock ownership programme help to craft exceptional workforce. It means that employees are encouraged to look themselves as a part of business and are empowered by manager to take decisions without the permission of manager (Gates et.al. 2009, p.10).
Marketing: Starbucks has created its brand which is well known all over the world by understanding people’s lifestyle, values and needs. Starbucks spends important percent of its revenue on marketing and advertising including online advertising, billboards. These creative marketing will continue to provide sustainable advantaged (Gates et.al 2009, p.10).
Sales/Retail Location: Service is significant factor that sets Starbucks apart from its competitors. All Starbucks stores are located in much higher foot traffic and have good storefronts. Important thing is that about 85 percent of Starbucks revenue comes from its retail storefronts (Gates et.al 2009, p.11). Starbucks is such an organisation that realised the importance of club-like atmosphere in a coffee shop where people can have a cup of premium quality coffee with beautiful music, magazine, wireless internet etc. It is a unique experience, a different lifestyle. It is often said that “people do not buy coffee at Starbucks; rather they buy the unique Starbucks experience” (Kirbyson, 2004). Such unique atmosphere and premium quality have helped Starbucks to gain competitive advantages.
While there are competitors that may able to hire much the same people, the combination of employee empowerment, good quality work atmosphere, passion for brand and reputation excellence makes Starbucks’ sales strategy a continuous competitive advantage (Gates et.al. 2009, p.11).
Starbucks should give more importance to the emerging countries in Asia, Africa and Latin America. Countries like India and South Africa should be chosen for opening new Starbucks stores. Economies of these countries are growing at a high rate. Today, people of these countries have more money to spend and their spending capacity is increasing day by day. Moreover they are very much aware of the brand name of Starbucks. As a result it can be expected that people in these countries will welcome any decisions regarding the opening of Starbucks stores. Initially the company can start with licensed stores in these countries. Once it has clear understanding about the consumers’ tastes and various environmental factors, it can start running its own stores.
Starbucks should vertically integrate. The company can start producing coffee. This will certainly reduce the extent of dependency of the company on its suppliers. Starbucks can form strategic partnerships with some of its important suppliers.
Since Starbucks is a financially strong organization, it can start new businesses. For instance, the company can start a fast food retail chain like McDonald or KFC. If this can be done successfully, then the company will be financially stronger and far ahead of its competitors.
Starbucks is one of most successful companies in the world. It is a US based company that has adopted some extremely effective strategies and implemented them more effectively. It is a financially sound organization that has presence in most of the important markets in the world. Several macro-environmental factors that are likely to have great impact over the business of Starbucks are political factors, economic factors, technological and social factors. Starbucks should capitalize on various opportunities that it has in order to retain its success in the long run. It should work on its weaknesses and try to convert them into strengths.
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