5-Forces Worksheet

Student Name: Ma. Joanne B. Irabon Submission Date: December 13, 2011 Strama Class: 4ALM Version: Draft 1

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Rivalry of competition
CONCLUSION Strong meaning very intense, Medium intense, Weak not so intense BASIS FOR CONCLUSION

There is Medium (intense) competition in the coffee market amongst established coffee shops that are fighting to get customers. There are local coffee shops offering specials to lure potential customers in. Restaurants are opening earlier and closing later to accommodate customers on the go. With the 85% North American customers taking their coffee to go, convenience is a major factor. Coffee shops are investing more money in research and development to create new flavors to maintain and attract new customers.

Explain reasons for conclusions. Support quantitatively. Indicate presence or absence of the following factors that tend to increase intensity. Discuss. Support quantitatively. Increasing number of competitors. Competitors becoming more equal in size Competitors becoming more equal in capability. Industry demand declining. Price-cutting becoming common. Consumers can switch brands easily. Barriers to leaving the market/industry are high. Fixed costs are high. Products are perishable. Rival firms are diverse in strategies, origin and culture. Mergers and acquisitions are common. Cite and discuss other factors that apply to your competitive milieu that point to the degree of intensity of rivalry among firms in your industry.

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Potential for New Entrants

CONCLUSION Strong meaning highly likely Medium likely Weak not so likely BASIS FOR CONCLUSION

There is a strong risk of entry by potential competitors due to the low start up costs. McDonalds is able to add specialty coffee to their existing services to tap into the speciality coffee market. There is potential of $125,000 per year in revenue to be made by each store if they are able to successfully enter the specialty coffee market. McDonalds also has the infrastructure to enter the speciality coffee market without building new outlets. McDonalds is also able to use their drive thru to lure customers away from Starbucks. Procter and Gamble is also a potential threat to Starbucks as the have the infrastructure to distribute pre-packaged coffee to retailers. Procter and Gamble will be entering the market teaming up with Dunkin Donuts to distribute pre-packaged coffee to retailers. These products will be available at local grocery retailers, Target and Costco.

Explain reasons for conclusions. Support quantitatively. Indicate presence or absence of the following factors that increase barriers to entry and discourage new competitors. Discuss. Support quantitatively. Need to gain economies of scale quickly. Need to gain technology and specialized know-how Lack of experience Strong customer loyalty Strong brand preferences Large capital requirements Lack of adequate distribution channels Government regulatory policies Tariffs Lack of access to raw materials Possession of patents Undesirable locations Counterattack by entrenched firms Potential saturation of the market Current product offerings of very high quality. Difficult to improve on. Prices are low. Lower prices would mean unattractive margins. Current competitors have strong marketing resources. Other factors youve identified/appropriate to your industry.

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Bargaining Power of Suppliers

CONCLUSION Strong meaning very high bargaining power Medium average bargaining power Weak weak bargaining power BASIS FOR CONCLUSION

Coffee is the world's second largest traded commodity (Bruce). South Explain reasons for conclusions. Support quantitatively. and Central America produce the majority of coffee traded in the Discuss: world. Starbucks depends upon both outside brokers and direct contact with exporters for the supply of green coffee (Bruce). The If there are few or many suppliers. supply of coffee is affected by weather conditions, and the health of coffee trees. According to the article "Coffee Industry to Adopt If there are only a few good substitute materials. New Pricing Plans," the major players in the coffee industry have If the cost of switching raw materials is especially costly. seen profits decline because of over-crowding of the market (Brains Trust). An over-crowded market will give the coffee If backward integration is a commonly used strategy among rival suppliers bargaining power. According to a 1996 Starbucks Case firms in your industry. Profile, the price of the coffee bean could rise in the future due to lower supply, and heightened demand. For the industry, these are alarming threats. The quality of coffee sought by Starbucks is very high, and Starbucks has traditionally paid premium prices for its green coffee, at least $1.20 per pound (starbucks.com). There are no substitute products for the coffee beans Starbucks must buy. This is a potential threat to the company. Starbucks, however, has exhibited how little control its suppliers might actually have. In 2001, Starbucks announced new coffee purchasing guidelines, developed in partnership with The Center for Environmental Leadership in Business (starbucks.com). These guidelines are based on the following four criteria: Quality baselines, social conditions, environmental concerns, and economic issues. Only suppliers who can meet Starbucks' coffee standards will be able to supply the giant company. The supplying industry to Starbucks, therefore, has few companies. This is a potential threat. Starbucks will offset this threat by paying a premium of up to ten cents per pound of coffee to vendors based on how well their coffee meets Starbucks' standards (starbucks.com). Glenn Prickett, executive director of the Center for Environmental Leadership in Business, said, "With these guidelines, Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry." Starbucks has a degree of control over its suppliers in an industry where it is possible for suppliers of STRAMA Worksheet premium coffees to have a strong bargaining power.

Bargaining Power of Buyers

CONCLUSION Strong meaning very high bargaining power Medium average bargaining power Weak weak bargaining power Starbucks' customers are the buyers. The Preferred Office Coffee Provider is a plan developed by Starbucks in which companies can buy the ingredients and tools necessary to brew "the perfect cup of Starbucks Coffee," in large quantities for their offices (starbucks.com). This is the only opportunity found in Starbucks.com for a customer to buy large quantities of their products. Starbucks' typical customer buys small quantities of their products. Products purchased at Starbucks are highly differentiated and unique. From personal experience, we know that there is an enormous selection of coffees at a Starbucks' coffee shop. At Starbucks.com, it is possible to buy a large number of products, from coffees, ice cream and Frapuccino , to music and coffee mugs. This is an opportunity for Starbucks. Customers will face no switching costs in switching premium coffee suppliers from Starbucks, to, for example, Seattle's Best. This is a threat to Starbucks. Another threat to Starbucks is that their customers have the ability to brew their own coffee. Starbucks has tried to offset this threat by offering Preferred Office Coffee Providers as well as directions on how to make the perfect cup of Starbucks Coffee at home, called the "Four Fundamentals of Coffee" (starbucks.com). The perfect cup of Starbucks Coffee includes, of course, Starbucks' ingredients! It is clear that Starbucks customers have some bargaining power in the industry. BASIS FOR CONCLUSION

Explain reasons for conclusions. Support quantitatively Indicate presence or absence of the following factors that increase consumer/customer bargaining power Discuss. Support quantitatively. Customers are concentrated or large Customers buy in volume Products are undifferentiated.

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Potential for Substitutes

CONCLUSION Strong meaning very high potential Medium some potential Weak little or no potential Water is a substitute which is healthy for you and it is free. The option to buy bottled water is also inexpensive compared to coffee. With the focus on healthier living, water is the ultimate choice. It is very easy to get a hold of water bottles due to the number of vending machines in public places. In the premium foods and coffees industry, there are substitute products. According to Mary Coulter, the best way to evaluate this threat is to ask whether other industries can satisfy the customer need that this industry is satisfying (Coulter). Other beverage industries can satisfy the customer's need for a drink, and other food industries can satisfy the customer's need to eat. There are obviously good substitutes to Starbucks' products. This is why image is very important for Starbucks, as well as the company's ability to innovate and differentiate. Starbucks has added a line of tea, Taza teas, to their menus, and will be adding beer to their menus in the future. The article "Hot Prospects," notes Starbucks fashionable image. "Frapuccinos are a kind of badge; People like to be seen with them," said the author (hoovers.com). There is a strong threat of substitute products in a food and drink industry. Starbucks has created an image, and has differentiated so that many of their substitute products are part of the company. At a Starbucks coffee shop, a customer can eat ice cream, and drink a Pepsi, while his friend drinks tea while eating a pastry. BASIS FOR CONCLUSION (choose only the most relevant & significant basis from below guide)

Explain reasons for conclusions. Support quantitatively. Discuss competitive pressures from substitute products: Their market shares Their marketing aggressiveness Their capacity expansion plans

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