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Porter's Value Chain Analysis

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Hayden Johnson

on 16 September 2014

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Transcript of Porter's Value Chain Analysis

Industry and its competitors
Porter's Value Chain
Value chains organises all of the activities a company performs in bringing a product or service to the market

'A firm's value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves' (Porter, 1985)
Human Resource Management

Staff not happy with wage/salary, morale decreased
In US, employees were being paid $7 an hour
Quality of service fell
Underpaid and overworked
In 2001, 470 California stores sued Starbucks for refusing to pay legally mandated overtime
Starbucks' business model calls for a lot of low-wage workers, much like all fast food chains

Firm infrastructure

Very strong and experienced management team - Management trio: H2O.
In the US, they believed clustering stores increased total revenue and market share
Capable of designing and opening a store in 16 weeks or less
Recoup the initial investment in three years
Aggressive strategy – “predatory real estate”
Would rent out spaces just so competitors could not move in

Which are strategically important?
Outbound Logistics
- very important for the eateries industry. The quality of their coffees and drinks greatly affect their overall appeal and customer base


ability to create a good product. Although popular in America, product not seen as good in Australia

Marketing and Sales

important in the industry, but Starbucks do not put additional resources towards this


even though Starbucks pride themselves on their service, generally not up to the level of an independent cafe.

Profit and Loss?
Profit Generating Activities
significant value adding in this activity for Starbucks

Loss Generating Activities
purchasing inputs such as coffee beans etc. Costly in terms of human resources and time.

In the late 1990's, Schultz thought offering $8 sandwiches, desserts, CDs and packaging coffee would significantly boost sales, but growth had been less than expected.
Expanding into Australia has caused a huge loss, closed 61 stores
Very hard to analyse their Australian expansion because:
Starbucks US reportedly failed to pay any tax in Australia, “royalty payments” to funnel cash from the Australian operation back to Seattle
In 2011, reportedly made a profit of $572,000, but more than $2m in “royalty payments” to the US led to recording a loss and thus was not eligible to pay tax

Competitive Advantages

Starbucks' version of ‘lifestyle cafes’ provide a competitive advantage as it provides an overall experience, rather than just a coffee.
Saturation of industry (not in Australia)
Large revenue base
Technological Development (has not been exploited properly in Australia)

Too stubborn when coming to Australia. e.g. first Melbourne store opened in Lygon St

Australian Market
Porter's Value Chain Analysis
Case Study: Planet Starbucks

Roger Kong & Hayden Johnson
First Starbucks opened in Seattle, USA
Currently have more than 15,000 stores in 63 countries
Howard Schulz joined Starbucks. He left for a brief period to start his own coffee house, but returned in 1987 to purchase Starbucks with the help of local investors.
Starbucks hits Australia
First store opened in Sydney's CBD (Hyde Park)
Overview of Starbucks
Mission Statement

Primary Activities
Are the activities involved in the physical creation of the product and its sale and transfer to the buyer as well as after sale assistance.

Inbound Logistics
Involves the relationships with suppliers and include all the activities required to receive, store and distribute products.
Operations are all the activities required to transform inputs into outputs (products and services), such as machining, packaging, assembly, equipment maintenance, testing, printing, and facility operations.

Purchase materials at a cost so that they maintain/increase profit margins.
Includes coffee beans, also purchasing of raw food items and also fixed assets such as buildings, machinery etc.
World’s fifth-largest buyer of coffee
Guidelines so they would pay farmers a premium price if they met certain environmental, labour and quality standards
Coffee surplus has resulted in years of low prices

Marketing & Sales
Outbound Logistics
Selling their products at Starbucks stores
No intermediaries, however some supermarkets in US began selling their 3-in-1 sachet coffees
Effective integration of IT
Technological Development
Used to increase efficiency and to cut costs
Computerised coffee roasters
Wi-Fi in stores – Mobile International
Starbucks Express - trial app to pre-order on your smartphone
Automatic espresso machines to speed up service
Marketing and sales are activities that inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase.

Emphasis on service
Bantering with customers and treating them like family
Making the experience more personal
Free Wi-Fi
Customer loyalty card/new app

Our Starbucks Value Chain Analysis
Which should be outsourced?
Coffee beans are outsourced
Likelihood of Starbucks outsourcing is slim
Key value adding activities in their value chain are performed/need to be performed in-house
Relying on external contractors would create significant risk
Possibility of procurement being outsourced

Who drinks coffee?
If there were more Starbucks stores locally, would you go? Why/why not?
Links must be made to the Australian coffee culture.
Only three outlets in Melbourne.
One outlet per 9400 people in Seattle and one per 12000 people in Manhattan.
Starbucks represents a fast-food chain not dissimilar to McDonalds
Starbucks failed in Australia in part "because they didn't understand and respect the unique and differing characteristics of the Australian coffee consumer"

Starbucks have lost $143 million since they have opened in Australia 14 years ago, however other reports suggest these losses have reached up to $200 million
61 stores were closed of its then 84 Australian stores in 2008
Australians seen as ‘coffee snobs’
Starbucks more low level coffee
When they entered Australia, they met resistance by customers as they were not offering local brews such as flat whites, but rather sweeter and more syrup based flavours.

Starbucks goes public
Sales were climbing 29 percent annually
Starbucks currently operate 24 stores in Australia (Sydney, Brisbane, Gold Coast and Melbourne)
500+ staff in Australia
US Starbucks has recently pulled out of Australia and has sold their stores under a licensing agreement to Withers Group.
Withers Group also own 7-Eleven in Australia
In the US: Dunkin’ Donuts, McDonald’s McCafé
In Australia: McDonald’s McCafé, Coffee Club, Gloria Jeans, independent cafés
6613 independent cafés in Australia, Starbucks has 24 stores
$4 billion industry annually
5.3% annual growth 2009-14

Company agents choosing their coffee bean suppliers
Developing relationships with them, communication of standards of quality expected, organising supply chain management etc.
Coffee bean suppliers are struggling
Joined Trans-Fair
"Our long time suppliers couldn't make it if we weren't doing any of this"
Supplier Diversity Program

Includes all the activities required to collect, store, and distribute the output, such as finished goods warehousing, material handling, delivery vehicle operation, order processing and scheduling.
Reliance on word-of-mouth marketing
Saves a lot of money on marketing
Spend just US$30 million annually on advertising
Most consumer companies its size spend upwards of US$300 million per year
All the activities required to keep the product or service working effectively for the buyer after it is sold and delivered, such as installation, repair, training, parts supply, and product adjustment.
The acquisition of inputs, or resources, for the firm.
Consists of the activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel.

All activities related to know-how, research and development, product design, process improvement, and IT development.
Serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.
‘Differences among competitor value chains are a key source of competitive advantage’
(Porter, 1985)
Australian Coffee Culture
Australian Market
Secondary Activities
Secondary/Supporting activities support the primary activities and each other by providing purchased inputs, technology, human resources, and various firmwide functions.
IBIS Report. (2014). Cafes and Coffee Shops in Australia. Retrieved August 27, 2014, from http://www.ibisworld.com.au/industry/default.aspx?indid=2015
IFM. (2013). Porter's Value Chain. Retrieved August 21, 2014, from http://www.ifm.eng.cam.ac.uk/research/dstools/value-chain-/
Mindtools. (2013). Porter's Value Chain. Retrieved August 20, 2014, from http://www.mindtools.com/pages/article/newSTR_66.htm
Patterson. P. G., Scott. J., Uncles. M. D. (2010). How the local competition defeated a global brand: The case of Starbucks. School of Marketing, Australian School of Business. 18, 41-47.
Porter. M.E. (1985). Competitive Advantage. The Free Press. New York, 11-15.
Research Methodology. (2014, January 10). Starbucks Value Chain Analysis. Retrieved August 20, 2014, from http://research-methodology.net/starbucks-value-chain-analysis-2014/
Starbucks. (2014). Annual Report. Retrieved August 27, 2014, from http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual
Starbucks. (2014). Starbucks Australia. Retrieved August 20, 2014, from www.starbucks.com.au
YouTube. (2014, June 2). Starbucks Failure in Australia. Retrieved August 21, 2014, from https://www.youtube.com/watch?v=DSerk5urTs
Starbucks overestimated their points of differentiation and customer perceived value of their supplementary services
Declining service quality
Starbucks ignored some golden rules of international marketing
Expanding too quickly and forcing themselves upon an unwilling public
Entering late into a highly competitive market
Failing to communicate the brand
Unsustainable business model (primarily coffee, not enough food)

Why they Failed
Have 8 Manufacturing and Distribution plants in the US: include roasting plants, bakeries
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