Starbucks Micro and Macro Environment Analysis

Executive Summary

1: Introduction

Business environment refers to the total of all organizations, people, and other forces which are out of the control of the business although the business remains to be dependent upon them since they impact the overall performance as well as the business’ sustainability (Camilleri, 2018). The business environment comprises; internal and external environments. The forces which make up the business environment are the business’ suppliers, media, competitors, market conditions, consumer groups, trends, economic conditions, technologies, investors as well as other institutions associated with the business. In essence, these forces affect the business albeit being outside the business (Camilleri, 2018). The business environment is a very crucial aspect of every business. The business environment enables a business to know the trends of changes and also enable the business to adjust and adapt to changes and transformations as well as to utilize them as opportunities. Every business, its business environment possesses both threats and opportunities. The success of a business is mostly attributed to its business environment. Therefore, it is important to understand the business environment in order for the business to remain to be competitive and successful. Essentially, the business environment facilitates the identification of opportunities as well as obtaining the first mover advantage in the industry it operates. It also enables a business to identify its threats as well as the early warning signs and enables the business to tap useful resources (Camilleri, 2018). Understand the business environment also enable the business to cope up with spontaneous changes as well as to assist in planning and policy implications, improving performance and building image of the business. Every business has to thrive in the market and grow according to the business environment forces. Because business organizations do not have control over these forces, they have to adapt themselves to these forces. This paper will analyze Starbucks’ business environment. Starbucks’ business micro-environment is analyzed using Porter’s Five Forces framework to determine the strategic position that Starbucks occupies. It will also help in identifying key factors that have shaped the competition within the industry that Starbucks operates. Its macro-environment is analyzed using PEST analysis too. It is clear that Starbucks success is attributed to its understanding of their business environment. Starbucks has ensured that it understands both its micro-environment and macro-environment in order to attain success and remain competitive in UK region.

2: Description of Starbucks

Starbucks Corporation a reputable coffee company that operates internationally. It started from a single shop in Seattle and current has several chain stores globally. It is headquartered in Seattle, Washington. (“Starbucks Coffee Company,” n.d.). Starbucks is considered as a successful coffee company today. Starbucks successfully got into the European market-base in May 1998 via its acquisition of sixty-five Seattle chain stores in the United Kingdom (“Starbucks Coffee Company,” n.d.). All Starbucks store share a collective culture, aiming at a big dedication to customized coffee, same organizational values as well as mutual respectfulness to the environment and the people. Moreover, Starbucks has made significant influence in the manner in which people drink coffee. It has also developed a slogan of a “Starbucks lifestyle” whereby people embrace in UK and other countries.

Starbucks mainly operates in the coffee retail and snacks store industry. It tops in this industry having a competitive advantage over its competitors such as McDonald’s. The main product that Starbucks sells is coffee comprising of thirty blends as well as single-origin premium Arabica coffees (“Starbucks Coffee Company,” n.d.). It also sells handcrafted beverages, snacks, and fast foods. Starbucks is an international company therefore; it sells its products both in the domestic market in the UK and international market because it operates in various countries worldwide. In the UK, Starbucks has the second largest market share of 25% after Costa which has a 39% market share (Sisson & Bowen, 2017). This company initially began as a coffee retail shop only which only sold coffee then later changed to sell other products such as snacks and fast foods. Currently, it has transformed into a fast food retail shop.

3: Business micro-environment analysis

Business micro-environments are the internal forces within the immediate surrounding of a business which influences the business strategy, overall performance as well as the decision making. These are the initial aspects to work on in order to model a robust and reputable brand image of the business in the macro-environmental context (ÖZTOPÇU, 2017). Micro-environment consists of employees, suppliers, the media, customers, competitors as well as the shareholders. These components significantly influence business operations. Therefore, it is important to consider these components in order to achieve the objectives of the business. In analyzing the business micro-environment, a Porter’s Five Forces Framework is used. This is an analysis tool utilized to analyze the competition. This model determines and evaluates five competitive forces shaping every industry and also assists in finding out both the industry’s strengths and weaknesses (ÖZTOPÇU, 2017). The framework draws from the industrial business economics to establish five forces determining the competitive intensity as well as the attractiveness of the industry with regards to profitability. It is mostly utilizing it in identifying an industry’s structure in determining business strategy and can also be used in other aspect of the economies when searching for attractiveness as well as profitability. In this case, we will use Porter’s Five Forces framework to analyze Starbuck’s micro-environment so as to identify the strategic position that Starbucks occupies and also aspires to occupy (ÖZTOPÇU, 2017). It will also help in identifying key factors that have shaped the competition within the industry that Starbucks operates in.

3.1.1: Competitive Rivalry

Starbucks in the UK is facing a high competitive rivalry both in the domestic and international markets due to the unreasonably high rates of fast food chains both in the UK and internationally. The competitive rivalry is very high because of the high number of branded coffee shops exists in the UK and also the high number of new coffee shops entering the industry (Ferreira, 2017). Starbucks faces big competition from McDonald’s as well as other fast food chains which are its main competitors which are currently expanding their beverage menu. Costa coffee, as well as Café Nero, are its most direct competitors competing on most significantly along with Starbucks than other fast food chains since they are attracting similar customer base as well as offering same products in the manner in which Starbucks offers theirs. This competition puts Starbuck in a very competitive position such that it needs special attention in order to keep up with the tough competition and remain at the top.

3.1.2: Supplier Power

Actually, Starbucks buys its coffee straight from the producing nations like East Africa, Latin America as well as the Pacific Rim. In essence, the bargaining power for the suppliers definitely tends to be higher suppose the market is occupied by only a few suppliers. Because Starbucks which is coffee specialty retail continue to make sales and as well is growing and expanding, it still requires supplies form its supplies in order for it to continue growing (Ferreira, 2017). Starbucks takes good advantage of its size and as well reap benefits out of the economies of scale, though this does not assist Starbucks to increase its suppliers because of the situation within the Starbucks market. Basically, prices are normally pre-determined on the basis of the demand and supply ratio, therefore, increased competition levels create availability of substitute suppliers suppose Starbucks may want to purchase coffee at a different price from a different supplier. Regardless of the supplier conditions, it still manages to hold a better and good relationship status with its suppliers as compared to other competitors.

3.1.3: Threat of Entry

Starbucks faces a threat from new entrants like cost advantages, economies of scale, and easy accessibility to distribution channels which might be unrelated to the company’s size. Compared to other countries which Starbucks operate in, the threat of new entrants appears to be a bit low in the UK because the coffee retail market is actually saturated. Also, substantial capital requirements are wanted mostly for rental and leasing purposes (Velásquez & Meunier, 2017). Since this company has a larger market share as well as well-established, entry of new entrants does not possess much threat to it. Additionally, Starbuck more experience due to its more years of specialization in coffee roasting; for a new organization, it would be quite hard to provide similar specialized coffee at an affordable price and also establish itself within the industry and the market. The rational reason behind this is that the cost of products declines as organizations grows bigger both knowledge and experience.

3.1.4: Buyer Power

The buying power is high in the UK because the number and diversity of offers within the coffee retail industry are beyond the demand. This is to mean that in the specialty coffee industry, people have extensive access to various products at varying prices with better and improved quality services (Velásquez & Meunier, 2017). There is a minimum or no switching expenses to other organizations at all. Practically, individual consumers have the preference of easily switching from product to another product, of their own choice. Starbucks takes advantage of this by deciding on the coffee prices they offer to their customers, by considering the price-elasticity that is significantly affected by loyalty to the company brand, as well as current prices for the rival, retail store (Velásquez & Meunier, 2017). Because Starbucks is recognized for being an up-market coffee shop characterized with high quality, on the basis of the view and also providing vertically differentiated services and products; it is probable that Starbucks is capable of selling its products at higher prices, thus leaving no space for customers to negotiate about the price.

3.1.5 Threat of Substitution

The emergences of several companies that produce similar products to those of Starbucks and also satisfy similar customer needs are causing a big threat to Starbucks in both the local and international market. Moreover, there is an increasing variety of energy drinks. There are a lot of substitute drinks to coffee that is available which include; juices, water or soda, which have to be critically considered by Starbucks. But, this is not a big concern for Starbucks because it sells a wide variety of such beverages in its stores. The business substitute drink that is a threat to Starbucks is tea, which is a direct substitute for coffee. However, Starbucks has taken a step to absorb and sell this substitute product by naming it TazoÂ® Tea brand (“Starbucks Coffee Company,” n.d.). Furthermore, there is more concern about the threat of consumers substituting away to direct rivals of Starbucks like Costa Coffee and also Café Nero which is taken into consideration. However, this does not have any effect on the target customer base for Starbucks.

4: Macro environment Analysis

A business macro-environment refers to conditions existing within the economy at large, rather than a specified region. Macro environment encompasses changes in aspects like inflation rates, monetary and fiscal policies, gross domestic product, spending rates as well as employment rates. Essentially, macro-environment is diligently attributed to the overall business cycle instead of the performance of just the single business segment (Sisson & Bowen, 2017). It is essential for a company to analyze its macro-environment in order to improve its overall performance. PEST analysis can be used to analyze a business macro-environment. This is an analysis tool which enables companies to make better decisions as well as to make improvement in business efficiency through studying diverse factors which may be influencing the business (Alava & Mu, 2018). These influential factors entail; political, economic, social as well as technological factors. Therefore, PEST analysis is utilized in analyzing Starbucks’ macro-environment.

4.1: Political Environment

Starbucks sales are significantly affected by extensive political aspects both directly and indirectly. Essentially, the arrays of acquiring raw materials have transformed into a substantial political factor affecting the business directly. Particularly, currently, it is now mandatory for Starbucks as well as other global businesses to initiate their engagement in acquiring raw material to ensure that they conform to the environment as well as social norms which continue to be more strict (Nielsen, 2015). Neglect of such norms either intentionally or unintentionally are probable to stir political pressure upon the company. The government’s attitude towards businesses specifically the coffee retail business is a vital political factor that affects organizations. For instance, the Tax scandal that Starbucks encountered in the UK demonstrates the impact caused by the political factor. When it was identified that Starbucks had not made payments for its corporation tax for fifteen years of its operations since its conception till 2014, UK Government through its Public Accounts Committee initiated an investigation whereby questions emerged in Parliament destroying Starbucks’ brand image (Nielsen, 2015). Even though, as per Starbucks management, they had not broken any rules, the government made it to pay a mandatory GBP 20 million. Furthermore, Starbucks UK’s performance may also be influenced by the kind of relationship they have with the United States and other coffee beans producing countries and also the countries that Starbucks operates in (Nielsen, 2015). More political factors that affect the business entail the country’s political stability, the influence of the domestic market lobby groups and also various non-governmental organizations. Even though the external political factors exceed the company’s control, Starbucks makes engagement in political lobby activities with the aim of contributing to the formulation of a political environment that is suitable for its business.

4.2: Economic Environment

Various economic factors can influence the buying power of prospective customers as well as the company’s capital cost. At the moment when Starbucks started its new coffee retails shop in the UK, it has always been affected by the currency exchange rates fluctuations, interest rates, inflation rates as well as the regional economic growth rate in the UK (Sisson & Bowen, 2017). When Starbucks started its new coffee shop in UK, it was affected by UK’s currency exchange rates, interest rates, regional economic growth and the inflation rate. These economic factors have a big impact on the way businesses operate and also the manner in which they are making the decision for their company. For instance, the interest rates influence the cost of capital resulting in the business’ growth and expansion to some extent as well. Similarly, the currency exchange rate impacts the cost of exportation of products, product supplies as well as prices for goods imported into the country (Sisson & Bowen, 2017). The exchange rate is very crucial for Starbucks due to its importation of coffee beans from African and Asian countries. Moreover, an increase in the cost of raw materials, particularly, coffee beans is a main substantial external economic factor for the organization. In 2016, Starbucks increased the prices of certain goods by thirty cents due to the increasing coffee costs.

4.3: Social Environment

Social factors contribute a lot to business effectiveness when starting a new product into both domestic and international markets. Starbucks entered the UK targeting young people while considering the population and demographic trends in the country. Studying and evaluating the demographics enabled Starbucks to identify its target group as its potential customer (Ferreira, 2017). The UK has a bigger consumer market with a population of 65.6 million. Moreover, the birth rates continue to outdo the death rates while the population is anticipated to be 74 million by the year 2039 (Ferreira, 2017). Understanding the demographics enables Starbucks to identify its targeted potential customers. Income distribution is another important aspect that Starbucks takes into consideration in its marketing. It should target a place that has a lot of people with substantial disposable income since coffee is considered to be a luxury product. The working conditions have to be of the highest standards by ensuring cleanliness, safety as well as comfort (Ferreira, 2017). This is due to the fact that most of the customers of Starbucks are people having high living standards and expectations. Starbucks also takes into consideration its location and ensuring that its location is accessible and has convenient transportation means.

4.4: Technological Environment

Technological factors enable businesses to minimize the number of barriers or reduce the intensity of barriers to enter a market. The UK is among the top countries worldwide that are technologically advanced. Actually, London is a big hub for technological institutions. Such advanced technologies provide companies with unlimited opportunities to conduct businesses efficiently (Sisson & Bowen, 2017). Starbucks has therefore developed new technologies to provide the best solutions to their consumers. For instance, Starbucks uses coffee making machines to make high-quality coffee for its customers. Starbucks is also struggling to find new technologies which are aimed at serving customers better (Sisson & Bowen, 2017). Starbucks has come up with a card which ended up attracting more customers which made them visit Starbucks quicker. They are also using biodegradable materials in carrying out the recycling. They have also adopted the online coffee store to whereby customers can place their orders online.

5: Conclusion

To sum it all, it is evident that a business micro and macro environment plays a bigger role in contributing to business success both in the domestic and international market. It is essential for a company to understand its business environment since it enables a business to know the trends on changes and also enable the business to adjust and adapt to changes and transformations as well as to utilize them as opportunities. For every business, its business environment possesses both threats and opportunities. The success of a business is mostly attributed to its business environment. Therefore, it is important to understand the business environment in order for a business to remain to be competitive and successful. Essentially, the business environment facilitates the identification of opportunities as well as obtaining the first mover advantage in the industry it operates in.

Starbucks success is attributed to its analysis and understanding of their business environment. Starbucks has ensured that it understands its microenvironment by identifying its competitors and finding ways to overcome the competition from these competitors. It also has identified the supply power in the UK and finds itself an adequate number of suppliers. Furthermore, it has identified the existing treats of new entrants and taken appropriate measure in order to survive. It has also determined its imminent threat of substitution to be tea and therefore, it adopted the production of tea into their list products.

In its macro-environment, Starbuck has considered all the political, economic, social and technological factors affecting their business. It has established a proper political relationship with the UK Government and remained flexible to the economic fluctuations in the country. In terms of social factors, Starbucks has ensured that identifies its target market through the demographics and developed and adopted technologies that improve customer service and which are cost effective.