STARBUCKS

The Starbucks Corporation (NASDAQ: SBUX) is a dominant player in the

convenience restaurant business. The coffee shop turned iconic brand
can be found in 68 countries with more than 23,000 locations. Its logo is
practically synonymous with coffee, although it does serve a broad range
of beverages and food items, such as tea, smoothies, hot sandwiches and
baked goods. The company has a large, loyal following, but that does not
mean Starbucks does not have competition.

The Porter's five forces were identified by Michael E. Porter, a Harvard

Business School professor, in 1979. He used them to explain competition
in an industry and to help understand a company’s profitability – and the
analysis framework is still used today. In the case of Starbucks, it
competes with direct rivals, such as Dunkin' Donuts, as well as
competitors that make products that its customers could substitute for
something in Starbucks’ product portfolio. Also, Starbucks is impacted by
the bargaining power of its customers and the bargaining power of its
suppliers. The company has to manage the threat of new entrants as
well.
Market Saturation
Realistically, the threat of new entrants is moderate at best. The
convenience food industry is heavily saturated, and so is the market.
Opening a new coffee shop means competing with the likes of Starbucks
and Dunkin' Donuts as well as McDonald's McCafé and fair-trade lattes
from locally owned cafés. It seems like coffee is served everywhere, and
that makes it difficult to form a unique product offering. Now that
convenience coffee and restaurants have become familiar, most people
have established favorites and routines. The cost of a customer changing
preferred coffee shops is minimal, but changing their habits and
associated brands is a more complex and nuanced choice. In a saturated
market, this tendency becomes more pronounced and it becomes
difficult for a new entrant to make an impact.

Economies of Scale
There are also economies of scale that would make competition difficult
for a newcomer. Starbucks has over 23,000 locations. It has more
negotiating power than a new brand with a handful of coffee shops; that
means lower prices, higher profit margins or a combination thereof. For
example, a locally owned coffee shop may have to charge $5 for a large
latte to cover the cost of premium coffee beans, milk, equipment and
overhead, but Starbucks may be able to exploit economies of scale and
buy its supplies in bulk to bring the cost down to $3.50. From there, the
company can charge the $5 going rate and make an extra $1.50 per
customer than its smaller counterpart, or it can charge $4.50, be 10%
less than the competition and still make an additional $1 per latte in
profit. While the smaller coffee shop may be able to compete, Starbucks
can generate an exceptional profit.
Diseconomies of scale.
DEOS is defined as an increase in costs of production due to
overexpansion by firms. It has the total number 15011 outlets worldwide
as at November 2007. In the 1990s, it opened up a new outlet every
workday & this pace continue until 2000s. When the US economy slowed
down around that time, they expanded outside US with an average of 7
new outlets a day. Its aggressive expansion locally & internationally has
led to various management inefficiencies. Problems such as difficulty to
monitor such a huge number of outlets & workers, coordinating the
marketing effort & communication failure are responsible for its increase
in costs of production
 Institute Of Management Studies
DAVV, Indore

Assignment File
Topic: STARBUCKS
(Economies and Diseconomies of Scale)
MBA (Full Time) Section A

Submitted To: Submitted By

Ms. Avaneet Kaur Narang Manoj Kumar Ahirwar