Mr. Porter gave the 5 Forces model to understand the threats, but now we will look into those threats and options to convert them into opportunities.
1. Environmental Threats as Opportunity:
Threat is risk and an indication that there is some work and creative assessment required to neutralize or minimize that threat. Some companies recognize and turn that into opportunity, but many don't even consider to fix it. Blockbuster is one very good example, which never considered Online streaming as threat and gave away that segment to newbie of that time "Netflix".
Starbucks is the company of focus in this analysis. Starbucks established its business based on premium coffee and experience, which can be copied easily now, given all the resources are available in market, such as Coffee Beans, Roasting facilities and Processes, Trained Baristas and Employees, established supply chain, finances, and many other. Now when we look at these resourced required to compete with Starbucks, it doesn't seems any easy or lucrative any more. But why? That is what we are going to look that how Starbucks turned these threats or barriers into opportunities.
A. Entry: Like I mentioned earlier opening a Coffee shop might not be that tough, but scaling it at Starbucks levels is very challenging.
a. Erect Barriers: Although Starbucks didn't create physical barriers, but they have achieved advantage by being early movers in this direction. Starbucks spent lot of time and money in understanding customer needs and offered products suits those needs. Apart from just offering coffee they established themselves as a company with superior experience, by providing customer services and ambiance suitable for people to sit and talk. Although it was a risky investment, but it paid off and all these investments provided specific experiences to Starbucks, which other might not be able to replicate.
b. Economies of Scale: As a new entrant, it would be hard to get Coffee beans in first place, but then it will harder to get it at the price Starbucks is getting and then further reducing the brewing cost. Starbucks is spending heavily in Roasting facilities and even inventing new processes and technology to brew the beans at right temperature and right time. After brewing, Starbucks has fleets which would deliver to all the branches and timely manner so that Coffee can preserve the taste and flavor. After so many years in business Starbucks is sitting on top of lot of experiences and benefits of scale, that it would be very difficult for any new entrant to compete with Starbucks in Coffee game.
c. Product Offerings: Not all of us like Coffee or may not want to drink Coffee late in the evening. Starbucks realized this threat and started offering many other non-coffee beverages, and also started offering food items which could appeal to lot of customers or customer companions. If one family is going to Starbucks, then kids might not want to drink Coffee, for them Starbucks have other items to make that family visit pleasant. Even offer free Dog food, to appeal customers. By offering so many items, they have reduced the threat that someone else would start with those small gap items and later could be big threat to Starbucks.
d. Cost Advantage: Premium Coffee beans are not easily available, and even harder to import from large number of small farmers in South America and Middle Eastern countries, where farming resources are further scares and farmers were dependent on natural rain and water reserves. Starbucks helped those farmers financially and also opened its own research and development facility which would advanced technological information to those farmers for free. This helped Starbucks have favorable position and pricing.
B. Rivalry:
a. Cost Leadership:
b. Product Differentiation:
c. Diversification
C. Substitute: What is the substitute of Coffee, I personally think there is not much. As I am from India and there we drink lot of Chai (Tea with Milk) and this seems like a viable substitute of Coffee, as it can offered both Hot and Cold and Starbucks is offering Tea and Chai Latte since 2012. Other than that, to get the energy boost, sometime we can look for energy drinks such as RedBull, but all these energy drinks are not accepted with same enthusiasm as Coffee for two big reason, one is these energy drinks are considered bad for health, and second, Coffee has lot of heritage advantage. We are drinking Coffee since 9th Century, so our habits and taste buds are very accustomed to Coffee.
D. Suppliers: For a new entrant it is really to find reliable suppliers with sufficient quantity. Since Coffee Service business runs on Premium quality beans, it is not easy to get them in open markets and Starbucks neutralize this threat by helping farmers financially and getting long term contracts. For any new business, this would be very hard to challenge not just the contracts but also status quo as established by Starbucks by helping farmers when they needed, financially and technologically both.
E. Buyers: This is one area, where Starbucks doesn't have to compete directly with buyers as most of the Starbucks customers are individuals. It has some big buyers for "At Home" coffee offerings, such as Target, Walmart, Kroger, Amazon, etc. But no one has enough power to negotiate the buyer favorable terms as customers themselves demand Starbucks brands.
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