Starbucks Internal and External Analysis

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Introduction

Starbucks is the largest coffee company in the world, and has been successful in providing premium coffee and customer service. It was first founded in 1917 by 3 entrepreneurs and coffee lovers and was branched out globally ever since. In April 2010, Howard Schultz announced that Starbucks has seen considerable progress in returning to profitability and growth. Net revenues increased 8.6% in the second quarter of 2010 compared to the same quarter in 2009. Starbucks has been able to maintain a sustainable competitive advantage throughout the years, I will be doing an internal and external analysis and discuss the different frameworks used to analyze how the firm has maintained a sustainable competitive advantage.

Porters Five Forces Framework

Porters five Forces model is an effective tool used for analyzing the level of competition in an industry and to identify five important forces that shape competition in the business world.

Threat of new entrants

Threat of new entrants for Starbucks is moderate, the barriers of entry are not very high and the capital investments needed to enter the industry is not high either. New entrants may be able to compete with Starbucks locally but being as successful as Starbucks and gaining as much market share as the firm tends to be low to moderate. The cost of switching may be low so local companies may be able to use lower prices to attract consumers while improving quality while maintaining cost. However, it is moderated by its large brand image, brand loyalty, market share and profitability. The threat has increased due to the entry of McCafe offering similar products at lower costs.

Threat of Substitutes

The number of substitute products for Starbucks brand coffee is high. There are several substitutes available in the market such as juices, tea, alcoholic and non-alcoholic product. Another threat of substitute would be homemade coffee, the Keurig coffee maker is an easy substitute being able to choose any coffee flavor or brand right at your home. The cost of switching the product is low, therefore making substitutes products a moderate to large threat.

Although there is a moderate to high threat of substitutes, Starbucks does sell premium coffee, packaged coffee and coffee makers.

Bargaining power of buyers

The bargaining power of buyers is moderate to low. The coffee brand has a diverse customer base, many customers value the company and are willing to pay a higher price for the quality of the product. The prices of the products are not too high but at a reasonable price where customers are not willing to switch. Also, Starbucks sells a wide range of products from coffee, sandwiches, and desserts therefore the power of buyers remains low.

Bargaining power of suppliers

The bargaining power of suppliers remains low to moderate because Starbucks started sourcing directly from their farmers. It has its own supplier diversity policy that it uses to select the suppliers. It has developed a great relationship with tea and cocoa farming communities to educate them about better cocoa farming practice and to help them achieve the maximum profits. The number of suppliers is high Starbucks has many choices, with the strong supply chain management the bargaining power of suppliers has reduced.

PESTEL Framework

PESTEL is a strategic analysis tool which is effective in analyzing the external issues that impact a firm. It stands for 6 factors which affect businesses which are: Political, Economic, Social, Technological, Environmental and Legal.

Political

The key political issue that Starbucks faces is the concerns over sourcing its raw materials, this is the reason why Starbucks must make sure to follow social and environmental laws and to follow the “Fair Trade” practices that have been agreed upon global corporations and governments. Starbucks must also adhere to laws and regulations in the countries where they source its raw materials because of activism and political awareness. The company also faces regulatory pressures within its home market in the United States because the businesses processes that multinationals are now subject to.

Economic

The ongoing global economic recession has affected the profitability of many companies including Starbucks. Instead of consumers cutting down on coffee they choose products with a lower cost which can be an opportunity for Starbucks to cut costs while still creating value.

Socio-Cultural

Since consumers are switching to lower cost alternatives, Starbucks has an opportunity to adjust prices without sacrificing its quality. The company could expand their consumer base to the lower and middle tiers of the income pyramid.

Technological

Starbucks has worked with Apple to introduce an app to customers where they receive discount coupons and soon enough will be able to pay online through the mobile app, it is currently being tested out in the USA. The company has also made Wi-Fi available in all their coffee shops so that consumers could get their work done while having a snack or coffee. This technique increased consumer experience positively.

Environmental

Many activists, international advocacy groups and consumers have questioned Starbucks business practices, therefore Starbucks must consider these concerns to hold onto their brand loyalty.

Legal

One of the most important legal issues Starbucks must make sure of, is to abide to the laws and regulations in the countries from which it sources it raw materials as well as its home market in the United States.

SWOT Analysis

The SWOT analysis analyzes the strengths, weaknesses, opportunities and threats relative to the company it presents the internal and external factors significant to firm.

Strengths (Internal Strategic Factors)

Starbucks has the world strongest and most popular brands; its logo is well identifiable and attracts many new and existing customers. Stores around the world and located in high visibility areas were many people would be present it has a strong market existence. Also, the company offers a great customer experience, where customers can enjoy their coffee with a place to do work or relax with the addition to providing free Wi-Fi. These customer experiences attract the consumer and make it likely for them to return to the firm. Starbucks also has a diversified business through subsidiaries, not only do they sell coffee but also has subsidiaries such as Ethos water, Teavana and Cheesecake factory in their list of snacks, tea or water.

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