Starbucks External Analysis

SWOT -Opportunities One of the opportunities presented to Starbucks is the growth in coffee market. In the United States, specialty coffee sector accounts for approximately 15% of the total retail coffee market which is equivalent to $21billion. In 2005, the retail coffee market was valued to be around $23billion and specialty coffee accounted for nearly 45% of the market and was still expected to grow. Starbuck has a 40% market share in the specialty coffee sector which provides an indication that anticipatory growth in the following category will provide Starbucks with opportunity to expand and grow in the US.Furthermore, Starbucks has the opportunity for major expansion in to Asia Markets such as China. Starbucks plan to focus on current markets such as Beijing and Shanghai along with expansion in to new cities.

Threat One of the threats that present itself to Starbucks is raising dairy cost. Dairy prices have been on the rise and have significantly affected Starbucks profit margins. Milk and other dairy products represent a total of 4-5% sales in Starbucks, and continual increase in prices that lower the company’s profit.Further threats Starbucks will face is the Slowing US retail sales. The company faces long-term concerns regarding its US store growth potential. If the current growth rate is sustained, the North American retail division will saturate within 5 years.

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This proves to be a big issue for Starbucks given the fact that domestic retail has been the source of 75% of the company’s revenue and profit growth. Sales and growth of its domestic retail will be stagnant and decline over the next 3-5 years before reaching saturation point.Another threat to Starbucks is that Seattle’s Best Coffee is using Starbucks consumer education to create consumer awareness of its gourmet coffee, behind expanding nationally. The next threat is in regards to the rising costs in coffee beans and furthermore farmers are growing more profitable crops, hence Starbucks has lower profit margin and exist a scarcity of coffee supplier. Porter’s Approach to Industry Analysis Threat of New EntranceThough the threat of new companies entering the picture is possible, Only few companies have the financial capability and human resource not to mention the willingness to go head on with Starbucks.

Over the years, Starbucks has forced a number of its competitors out the business, for example, Boston’s Coffee Connection chain, which Starbucks acquired in 1994, and forced Brother’s Gourmet Coffee to ceases any expansion plans due to the fact that its potential market was already crowded by Starbucks (Tran, 2003).Apart from being the industry leader, Starbucks has managed to secure exclusive right for the Narino Supremo Bean crop, which purportedly is one the best coffees in the world(UW); this ultimately enables Starbucks to raise the entry barrier for quality coffee that much higher, thus making it harder for any would be competitors entering the market. In addition to the following, big players in the coffee industry enjoy economies of scale from its huge international chain of outlets as well as strong customer loyalty. With all the following factors, the threat of new entrance is low.Threat of Substitute The threat of substitute is relatively high because of convenience stores and supermarket’s offering of premium coffee product that is virtually available anywhere and anytime that comes in a variety of brand.

Starbucks prides itself by offering quality coffee but where it comes down to convenience. Starbucks loses out despite arduous effort to establish its outlet at every corner (Tran, 2003). Furthermore Tea is also a substitute for coffee and though Starbucks does offer tea, it specialty still remains in quality gourmet coffee.Lastly, switching cost is low thus customer will switch to those who can fulfill their coffee demands. Bargaining Power of Supplier The bargaining power of supplier is relatively low in the coffee industry.

The fact that coffee is a commodity renders a lack of supplier power (Tran, 2003). Furthermore the supply of coffee is not monopolized by few companies but produced by thousands of farmers across the globe. Barging power of supplier can only be increased through cartelization such as OPEC, International Coffee Organization or human-rights activist groups.Bargaining Power of Buyers The bargaining power of buyers is moderate. There involves no switching cost in switching premium coffee suppliers from Starbucks to Coffee Bean, Seattle’s Best,etc.

Furthermore buyers can simply choose to brew coffee at home. However, Starbuck’s products are highly differentiated and unique. In addition that “Starbucks experience” can only be obtained in Starbucks. Rivalry among Existing Firms The rivalry among existing firms in the industry is high. All companies offering the same products such as quality specialty coffee.

Starbucks main competitors are Caribou Coffee, Gloria Jeans’s, New World Coffee, Brew Haha and Bad Ass Coffee. Basically Starbucks compete with restaurants, specialty coffee shops, doughnut shops, supermarkets, convenience stores; anything that is related with hot coffee or specialty coffee drinks. Furthermore some of the companies offers coffee in a relaxing environment making it undifferentiated from Starbucks offering.. Furthermore the, the market is slowing down; compound growth from 1997 to 2001 was 57%, from 2002 to 2004, growth was an estimated 14% and was expected to get lower each year.This shows that the rivalry will only get more intense.

Big conglomerates such as McDonald’s and Procter and Gamble are also getting involved in the coffee business; indicate competition will only get worst. Mackenzie’s Seven Stars Strategy Starbuck has an aggressive strategy which revolves around market domination and global expansion. The tactics that Starbucks employ creates a workplace that ensures employees satisfaction, quality products, and happy customers. The aim of the strategy is to expand rapidly in to a market and have total domination before moving on to their next target.Through this tactics, Starbucks hope the following expansion would create a higher barrier to entry which would deter competitors from expanding and if possible to drive competitors into submission so acquisition is possible Structure The Organizational structure stirs away from being hierarchical. This indicates a lack of structure which sometimes causes overlaps to occur in division resulting in many employees reporting to division heads.

This flawed system creates only confusion and redundancy. SystemsStarbucks utilized a special process to roast its bean in to the perfect coffee bean. This bean have to scrutinized by the roaster who uses smell, sight and hearing and with the aid to determined if the beans are on par with the quality. Furthermore, the color of the beans has to be test in Agtron blood-cell analyzer; any imperfection will only result in the entire batch being discarded. The company is also arranged into functional and production division such as human resources, accounting, etc to ensure things goes smoothly.

5,000 individuals are working under Starbucks to operate its retail stores and its offices. Style The management style in Starbucks is very informal and laidback. Employees are encouraged to think of themselves not as an employee but as a business partners. Furthermore empowerment enables employee to deal with situations concerning customer satisfaction without upper level authorization. This provides the employees a sense of being important and feels more involved. In addition, employees are also encouraged to give ideas that will improve the company.

All and all Starbucks has a very low turnover rate compared to other companies Staff Staff working in Starbucks consists mostly of college-educated individuals whose average age is 26. This indicates that the working environment that is excellent, for young potential individuals who have opportunities elsewhere chose instead to come to Starbucks. This is a clear indication that its employees are happy not only with its salary and benefits but also the culture and the way they are treated in the organization.Skills Every employee in Starbucks regardless of position has received at least 24 hours of training from Starbucks; the things covered in the training are coffee history, drink preparation, coffee knowledge, customer service and retail skills. Additional training available is for example the Coffee Masters Program, Servant Leadership Workshop, Career Power and Career Power for Coaches workshop. Each partner has to be qualified, for every single employee reflects upon the Starbucks.

Shared ValuesHoward Schultz’s vision for Starbucks has been transferred to everyone in the organization. From valuing customers and employees to being philanthropic, Starbucks created a unifying culture that is liked by many. For example, stock options were often to all employees back in the days when Starbucks was still a private company, full time and part time employees were provided benefits and care programs, employees with Aids are ensures a JOB and health insurance is still provided to him/her even after he/she leaves the organization.In addition, Starbucks also values its indirect employees, suppliers and coffee farmers establishing guidelines for minimum wage, living condition and child labors. This shows how much Starbucks care for the well being of all its employees. All this shows that Howard Schultz believe that its employees is the source for competitive advantage.