What Is The Porter's Five Forces Of Coffee Industry

The specialty coffee industry had seen steady growth for years and the trend was expected to continue until at least 2015. Of the various segments within the specialty coffee industry, most of the growth was attributable to beverage retailers “Coffee and kiosks”. In 1979 there were approximately 250 specialty coffee retailers. The number quadrupled by 1989 to approx 1000 outlets, and it exploded to roughly 15000 by 2002. Nationally, specialty coffee sales totaled over $ 10 billion in 2005.

External Environmental Analysis of Starbucks and the Coffee Industry Harold Brown Strategic Management March 3, 2011

Threat of new entry is low because the barriers to entry are high. Newcomers to the industry would require an enormous amount of up front capital to set up the distribution networks and infrastructure, such as establishing hubs, and acquiring aircraft and a large amount of ground transportation vehicles (vans, trucks, ect). Economies of scale are significant and would deter new firms from entering because initial sales volumes would be low do to the fact that existing brands already have strong brand identification, and there are no cost advantages to entering, like government

The specialty coffee market is intensely competitive, including with respect to product quality, innovation, service, convenience, and price, and we face significant and increasing competition in all these areas in each of our channels and markets.

Strong brand identity (+) Low entry barrier e.g. special knowledge and capital requirement (-) Competitors: Saturated market Many competitors with little differentiation (Starbucks and Nero) Suppliers

These companies with large economies of scale like Walmart and Target are both able to arrange contracts with suppliers with developed relationships already in place along their supply chain. (Mintel Academic) New entrants may also have a hard time creating a following as reputation in this industry backs the major competitors. Current businesses also have an edge as their learning curve is much more adept with cost advantages. Incumbents will use the barriers to entry to their advantage in creating a stronghold against entry.

On the other hand, Starbucks pricing strategy is based on, differentiation, quality and authority value. Starbucks deliver high value to the customer through buying quality coffee beans, assuring their staff to be well trained, and create an environment for customer to enjoy coffee. Although the price of a cup of coffee in Starbucks is higher than other coffee shop, but customers are ready to pay more for the coffee and luxurious image with all the facilities inside the store.

The current market is divided between a few powerful competitors that can relatively easily attract customers from one another as the switching costs are low and practical absence of product differentiation contributes to the easy loss of market share.

ENTRY BARRIERS Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Proprietary learning curve Access to necessary inputs Proprietary low-cost product design Government policy and international treaties Expected retaliation RIVALRY DETERMINANTS Industry Growth Fixed (or storage) costs/value-added Intermittent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers Strategic alliances (domestic & international)

If new entrants to your industry are forced to come in on a large scale and face retaliation from existing firms, this raises barriers to entry. If new firms must spend heavily up front to build a brand name, this investment is significant and discourages entry. If the use of anew company’s product requires potential users to make massive changes in their business – large investments in new equipment, extensive retraining, complete product redesign, etc., this discourages entry. High up-front costs such as advertising, research, or capital equipment will discourage entry. If the stakes are very high, entrance is limited to a few large companies having deep pockets. If distribution is limited, competition can be fierce for shelf space, etc. New entrants may have to offer price breaks and allowances to break in, or be willing to create new distribution channels. New entrants who lack experience must expect high unit costs until the firm becomes more efficient. Policy and economic treaties may influence a company’s ability to enter the market.

The Porter’s five forces is a competitive position analysis and business strategy format created by Michael Porter in 1979. The premise behind the format is to provide them with five forces that shape every industry. Mr. Porter 's theory is that if a company analyzed the information received from reviewing the five forces, the company would be able to compete in a higher fashion against its competitions. Following the five forces would allow a firm to determine the type of market or industry it is operating in. Each of the five works as an individual factor in the microenvironment, but one force could not exist without the out force in a stable economy. The five forces are Supplier Power, Buyer Power, Threat of substitutes, the threat of new entrant and Competitive Rivalry. Three forces affected the market horizontally while two affected, it vertically from each side. A review of the movie rental market from the Porter’s five forces.

Starbucks ' pricing strategy also depends on how it positions itself as an authority on coffee, which is allowing the company to charge premium prices. Thus, when Starbucks introduces new products at higher prices, consumers are willing to pay extra without even having tried the products because they associate the Starbucks name with high quality (O 'Farrell, n.d.).

If we are to fully understand competition within a market, we must identify how business dynamics evolve over time and know the conditions that encourage or deter entry within a market. Entry is defined as the beginning of production and sales in a market (Besanko et al), with new firms incentivised to enter by the potential profits available within an industry. However this threat of entry is limited through the structural and strategic barriers embedded in the market, which limit the profitability of newcomers within an industry.

This Michael Porter 's five force analysis of Starbucks coffee shows the intensity of the five strengths of the firm, and the bases of these powers. Starbucks coffee 's prosperity shows its viability in tending to these outside elements in its industrial surroundings. However, this five forces investigation highlights current industry conditions that force present and developing concerns significant to Starbucks Coffee 's business. Following are the five forces of Michael Porter 's model. These five forces have different intensities or powers on the basis of the market position of Starbucks.

Price determinations will impact profit margins, supply, demand and marketing strategy. Starbucks has always offered a range of products that vary in