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Overview of the analysis

1. Industry identification
2. Analysis of the above industry
Porters 5 forces
PEST analysis

3. Evaluation of industry attractiveness


4. Identification of Resources, Capabilities and Core Competencies
of Starbucks: Using four criteria of comp. advantage
5. Identification of Core competencies: Using value chain analysis
6. Core competency identification using the above analyses
7. Evaluation of new ventures w.r.t core competencies identified
8. Recommendation

1. Industry identification
The industry being analysed is the
Coffee-bar/Coffee-recreation
industry.
This industry includes bars serving
basic coffee and/or specialty coffee,
regional & national players, etc
The industry revolves around the
entire social experience around
coffee rather than just coffee as a
product

2. Industry Analysis: Porters 5


forces
Jockeying for Position: Low
Parameter

Contribution to
power

Reason

Fixed Cost

Low

A player may choose to compete within city


limits with a one store establishment with the
biggies of the industry, hence low fixed costs

Number of
Competitors

High

Owing to low setup costs and availability of a


large number of suppliers, number of
competitors is high

Industry Growth

High

People have become more health conscious


and migrating to healthier
refreshment/beverage options

Exit Barriers

Low

Low fixed costs hence low exit barriers

Capacity Expansion

Low

A player may choose to expand as per its


convenience

Rivals Personality

Low

Rivals may choose to compete uniquely with


their own theme/personality. The consumers
perception may vary accordingly

Threat of new entrants: High


Parameter

Contributi
on to
power

Reason

Economies of scale

Low

Product Differentiation

Low to
Medium

Availability of a large number of suppliers from different


regions, experimentation can be done in house with
blends and spices

Capital Requirements

Low

Low when compared to heavy scale industries like


metals, automobiles

Switching costs

Low

Low CapEx hence Low switching costs

Access to Distribution channels

Low

A one store establishment can equip everything in house


without resorting to long distribution channels from
roasting to drying to serving

Cost Disadvantages
independent of scale

Medium

A player may choose to opt for basic or specialty beans.


No prior set up is necessary owing to availability of a
large number of suppliers

Government Policy

Low

The establishments are just like any other retail outlets,


hence no stringent govt. policies

Expected Retaliation

Low

Because of relatively weak barriers to entry, there are


very thin chances of a price cut or other potential threats
on account of a new entry

Suppliers Power: Medium

Suppliers: Coffee bean farmers, millers, exporters; Real-estate brokers/managers


Process/equipment manufacturers; Merchandise manufacturers
Parameter

Contribut
ion to
power

Reason

Concentration of
suppliers

Low

Multiple suppliers available

Product
differentiation;
Criticality of
suppliers goods to
industry

High

Inputs are highly specific to the products; key to


determining the quality of output

Importance of
industry to the
supplier groups

Low

The suppliers of coffee beans will always have a market to


sell to directly to consumers around the world even if the
coffee bar industry dies out. For real estate and equipment
manufacturers, this is a small and insignificant industry
that is being catered to.

Presence of
substitutes for
suppliers

High

Coffee bean suppliers can supply to direct consumers,


groceries, supermarkets, restaurants, etc; For real estate
and equipment manufacturers, this is a small and
insignificant industry that is being catered to.

Threat of forward

Low

Requires extremely expansive network across

Buyers Power: High


Parameter

Contribution
to power

Reason

Switching costs;

Low

Customers can as easily walk in to any other coffee bar

Product differentiation

Low

Multiple firms offer the same kind of products and experiences

Price sensitivity

Medium

Although basic coffee bar customers might be a little price


sensitive, specialty coffee bar customers have a wide price
range they are open to

Threat of backward
integration

Low

Requires extremely expansive network across geographies to


suppliers, highly capital intensive

Threat of Substitutes: Low to Medium

bstitutes: Beers bars, Juice bars, Lounges, Breweries, Recreational restaurants,


Snackeries, Eateries
Parameter

Contribution
to power

Reason

Lifestyle choices

Low to
Medium

Shift to a healthier lifestyle can cause buyers to shift to juice


bars, etc;
Or lesser weight to health can cause alcohol joints to increase
however this will take a long time to take effect

Price/Performance
ratio advantage

Low to
Medium

Since these are all affordable luxuries rather than necessities,


price isnt too important a factor in determining customers
choices; ALSO performance is not quantifiable because it is the

2. Industry Analysis: PEST Analysis


Factor

Opportunities

Threat

Political/Legal

Decreasing import tariffs in


countries, formation of greater
number of bi/multilateral free trade
agreements

Strict import restrictions


may curb growth across
geographies

Economic

Greater disposable income, greater


spending on away from home
experiences, inclination to
affordable luxuries like specialty
coffee

Margins may suffer when


there are too many such
outlets

Social

Serves as a social catalyst to


peoples busy lives, coffee bars
offer a place where people can
meet and relax, adoption of a
healthier life style, migration from
alcoholic drinks to beverages like
tea, coffee; consumers more
knowledgeable about coffee

Opening of too many of such


avenues will result in low
explorations towards other
modes of eating out,
saturation among the
masses

Technological

Wider expansion of social media


leading to greater reach and
publicity; proprietary technologies
gaining importance in operations

Greater interactions through


online messaging services
rather than personal one to
one interactions

3. Evaluation of Industry
attractiveness
Porters 5 Forces: Industry is attractive because degree of competitive
rivalry is low, threat of substitutes is low to medium, suppliers power is
medium. Even though threat of new entrants is high, the industry growth is
very high, so there is a huge scope for growth without difficult price wars.

Pest Analysis: Ample opportunities available due to shifting lifestyle choices,


consumer awareness about coffee & quality, rising need for outside-thehome social recreation
2500

Specialty and Ready-to-drink are in the growth phase still.


The others have gone past growth and maturity to reach decline.

2000

1500

1000

500

0
1990

1994

1998

Ground
regular
Ground
Decaf
Ground
Secialty
Instant
Regular
Instant Decaf
Whole bean
Ready to
drink

4. Four criteria of sustainable comp.


advantage
(the ones highlighted in red satisfy all four criteria and can be called core competencies)
Resource
Capability
Valuab Rar Costl Nonle?
e?
y to
substitut
imita able?
te?

Proprietary
computer software

Signature roasting curves

One-way valve
technology; Closed
loop system

Freshness ensured; high


shelf life

Transportation Rate
Sound forecasting
model
Complex bakery
distribution model

Operational excellence;
integrated supply chain

Fully integrated
manufacturing &
distribution process
Relationship with realestate
managers/brokers &
street-sniffers

Best retail locations; Store


clustering

Shelf-life policy
Close-relationships
with exporters

Ability to serve high-quality fresh


coffee, variety of blends;
Perceptions of product quality

4. Four criteria of sustainable comp.


advantage
(the ones highlighted in red satisfy all four criteria and can be called core competencies)
Resource
Capability
Valuab Rar
Costl
Nonle?
e?
y to
substitu
imitat table?
e?

Vision &
Leadership in the
form of Howard
Schultz
Social capital
Quality
recruitment
procedures
Company
policies :
hospitality,
production,
education
Company values:
Passion, Integrity,
Competitive
Spirit, Respect,
Entrepreneurial
spirit

Very positive reputation


amongst suppliers preferred
customer; Partnerships with
different companies

Unique brand image and


reputation amongst the
general population: Signature
Starbucks lifestyle

Premium social experience,


consistent customer service

Training procedures
Flat organizational
structure

Excellent customer service

5. Value Chain Analysis


(the ones highlighted in red are unique and can be called core competencies)
Support
function\Val
ue-adding
function

Sourcing

Operations

Distribution

Marketing

Service

Procureme
nt from the
best
sources,
Excellent
reputatio
n
amongst
exporters,
Stringent
three-level
quality
checks

Signature
roasting
curves,
open-valve
technology,
closed loop
system

Transportation
Rate, Sound
forecasting
model,
Complex
bakery
distribution
model, Fully
integrated
manufacturin
g&
distribution
process

Brand equity,
Premium
quality image

Starbuckscoffee-social
experience
stemming from
brand image,
Great people,
First-rate music,
Comfortable &
upbeat meeting
place, Sound
advice on
brewing

Company
Policies,
Values

Policies: Hospitality, Production , Education


Values: Passion, Integrity, Competitive Spirit, Respect, Entrepreneurial
spirit

Human
Resources

Motivated, Passionate, Involved, Educated employees

Social
Capital
Financial

Excellent relationships & reputations amongst suppliers, distributors


and customers
Rated as BUY consistently, Highest market cap.; Highest net margin; P/E ratio
projected to be approximately 30 for year 1998

6. Core competencies identified


Proprietary technology: Patented roasting curves,
open-valve technology, closed loop system
Social Capital: Positive reputation amongst
suppliers, real-estate agents
Brand Image: Passion for quality coffee, Signature
Starbucks lifestyle
Common company values & spirit : Consistent,
premium social experience & service

7. Evaluation of new ventures w.r.t


core competencies identified
Business
Venture

Performa
nce of
venture

Proprietar
y
Technolog
ies

Social
Capital

Brand
Image:
Signature
Starbucks
lifestyle &
passion
for
quality
coffee

Company
values,
spirit:
Consisten
t,
premium
social
Starbuck
s
experienc
e

Verdict

Contract
with
Dreyers
Ice-Cream

Continue

Bottled
Frappuccin
o with
Pepsi Co.

Continue

Penetrating
the grocery
market

Discontin
ue

Introductio
n of

Discontin
ue

7. Evaluation of new ventures w.r.t


core competencies identified
Business
Venture

Performa
nce of
venture

Proprietar
y
Technolog
ies

Social
Capital

Brand
Image:
Signature
Starbucks
lifestyle &
passion
for
quality
coffee

Company
values,
spirit:
Consisten
t,
premium
social
Starbuck
s
experienc
e

Verdict

Introductio
n of
Doppio
Coffee
carts

Discontin
ue

Mail-order
business

Barnes &
Nobles
bookstores

Continue

Red-Hook
Breweries

Continue

8. Recommendation
Starbucks should continue with its ideas of
bottled Frappuccino, Starbucks ice-cream,
collaboration with Barnes& Nobles and Red
Hook Breweries as they are aligned with
almost all of Starbucks core competencies.
The others should be discontinued even if
they might be performing well because
they are not aligned with the core
competencies that the company stands for.