Porters' five forces

Five Competitive Forces (Five Forces Analysis) Five Forces and Life Cycle: An evaluation of the collective strength of the Five competitive forces and the life cycle stage of the industry (Starbucks) Porters five forces network is used here to analyse and evaluate the attractiveness of coffee production industry in terms of five competitive forces, such as threat of new entrants, bargaining power of buyers and suppliers, competitive rivalry and threat of substitutes. Starbucks operates in premium coffee and snacks retail industry. The threat of entry to this market may be considered as low, despite of the fact that this industry may seem relatively easy to enter. However, closer analysis of excisting entry barriers has shown that the greatest entry barriers here are scale and experience. A few major operating companies in this industry (Starbucks, Dunkin Donuts and McDonalds) have reached economies of scale and high operational efficiency. In this oligopoly market Starbucks and Dunkin Donuts have almost 60% of market share.Therefore it is difficult to the new entrants to compete against these coffee giants. The bargaining power of buyers For Starbucks is high to moderate. There are a few concentrated buyers, which distribute Starbucks coffee, such as Pepsi, Barnes and Noble, Nordstrom, Starwood Hotels and United Airlines which can negotiate their discounts and conditions. (Altmann, 2007). Nevertheless, the fact that company is mainly oriented onto individual customers diminishes the power of buyers. However, due to the low switching costs for buyers they can easily switch their preferences to other coffee retailer which operate in premium coffee market as well. Despite of an introduction of various loualty programs, they often cause more complaints then result in improving of the brand loyalty. (Dowling & Uncles, 1997) Besides that, buyer competition threat is significant too, as it is easy to prepare the coffee at home or in the office. The power of suppliers is moderate. Despite that most of the companies in premium coffee industry avoid concentrated suppliers and rather cooperate with individual coffee farms, their amount is decreasing due to the natural causes and political instability. For instance, the biggest specialty coffee producers, such as Brazil and Costa-Rica will produce less coffee beans in 2014 due to the severe weather conditions. Coffee suppliers become scarce. (Rudarakanchana, 2013). This increases bargaining power of suppliers. However, Starbucks avoids the suppliers competition threat by purchasing its coffee beans from the suppliers directly, so, there is no opportunity for applying forward vertical integration for coffee producers. Besides that, in order facilitate strong relationships with suppliers, Starbucks supports coffee farmers and invests into their equipment and development (Starbucks.com). This helps to maintain strong relationship with the coffee suppliers. On the other hand, it increases switching costs for the company. Competitive rivalry in the coffee retail industry is rather high. Due to the fact that market is saturated and coffee retail industry reached maturity phase, the growth is in the expense of competitor. There are 3 major competitors in this market: Starbucks, Dunkin Donuts and McDonalds with its premium coffee brand Mc Café. Despite of the fact that this industry is not considered as capital intensive, Starbucks is facing rather high fixed costs due to operating through company-owned and licenced stores. Besides that, high investments are required to create and facilitate Starbucks experience. (Weil, 2005). At the same time, McDonalds, which operates through franchising network has shared risks and fixed costs, but also faces difficulties in upholding consistency. Despite of the fact that rivals in this industry are trying to differentiate their products as much as possible, their products are easily copied by competition. For instance, Dunkin Donuts started positioning itself in the premium coffee market since 202 and McDonalds since 2009. (Brizek, 2010). Moreover, high exit barriers are quite, due to the large investments, required for purchase of equipment are an other factor which stimulates the rivalry. (Starbucks Cash Flow Statement) The threat of substitutes is very high. First of all coffee can easily be replaced energy drinks. Here, the price-to performance ratio is quite high. Energy drinks contain almost same amount of caffeine and various minerals and vitamins in addition. (The coffee and energy drink double standard, n.d.) . Due to the caffeine content carbonated drinks, such as Coca-cola and Pepsi might be considered as substitutes by customers as well. Besides that, traditional home-brewing of coffee still remains popular. In conclusion, this industry is quite attractive for existing company to operate in. Due to the high entry barriers, there are fewer risks of new entrants. However, this is a saturated oligopoly with the few major companies with it. Therefore, companies operating in the industry always need to pay attention to the action of theircompetitors. The bargaining power of buyers is high, due to the limited diversification and bargaining power of suppliers is moderate despite to the decrease of the coffee production. Threat of substitutes is rather high due to the amount of substitutes available on the market. Coffee industry has reached its maturity stage. As evaluation of Porters Five Forces has shown, barriers of entry in this stage are high due to the established experience and economies of scale. For instance, the major competitors in the coffee retail industry in USA operate in this market more then 40 years (Brizek, 2010). As it was already stated above, despite of competitors efforts to diversify their products, they are being followed by the competition very fast what leads to product standartization. This makes its easier to swich between the products for the buyers as their choices are mostly defined by the factor of convinience. Understanding this threat, competitors in this market try to increase their market share, by opening more stores each year. Besides that it helps the companies to increase their economies of scale what results in saving costs. (Johnson, (2010) References: Altmann, M. (2007). Strategic Management Coffee Shop Industry - A Strategic Analysis. Katz – Graduate School of Business – Pittsburgh/USA. 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