Tax and Its Implications

Pick a leading company. Now use the Resource-Based-View to analyze that company. How does this analysis differ from Porter's Five Competitive Forces model?

In this essay, I will set the scene for Starbucks Corporation, henceforth referred to as Starbucks and mention briefly its origins and some up to date financial information. I will apply the Resource-Based-View (RBV) approach to Starbucks, to identify its core competencies and strengths which have enabled it to grow. I shall compare and contrast the RBV with Porter's Five-Forces (FF) model, finally drawing conclusions to what has helped Starbucks the most to remain ahead of the field in the coffee bar industry, and reap considerable profits.

I have chosen Starbucks as a leading company because it has demonstrated a phenomenal rate of growth over the last decade. Since starting out in 1971, there are now more than 8000 stores in over 30 countries (www.starbucks.com). The company's success could be credited to a solid business strategy, which will be analyzed subsequently using RBV.

RBV is a relatively recent approach to competitive advantage, which focuses on the firm's specialized traits. There has been a lot of literature about RBV, and many ambiguities and difference of terminology, which Peteraf tried to reconcile with his 1993 article on "The cornerstones of competitive advantage: a resource-based view". I will use her interpretation of RBV, because it covers most of the significant research and standardizes authors' works and ideas.

Porter's (1979) FF model, on the other hand, is arguably a central concept to industry structure analysis. This is also the key difference regarding RBV; that FF applies to the industry, and not the firm itself. Porter (1979) implies that to render the highest rents, the industry must be taken into consideration, and the implications of the five competitive forces in the industry (Threat of entry, Powerful suppliers, Powerful consumers, Substitute products and Jockeying for position) should be examined to ensure that the firm in question takes the best stance against them. This can be shown in the diagram below:

Fig 1, Porter, M. E. (1979) How competitive forces shape strategy. Harvard Business Review, Vol. 57 (2), p 141

Whilst strategy following Porter (1979), focuses on positioning firms in concentrated, rentable industries, there have been examples which have shown that this is not enough to guarantee success. Prahalad and Hamel (1990) present cases where Porter's model failed to maintain high profits. RBV, on the other hand, enables the firm to find its traits and to capitalize on them and to sustain these profits over time regardless of its position in the market.

Peteraf (1993) suggested that there are 4 central conditions to RBV which must be attained. These conditions can be seen in her model below:

Fig 2: Peteraf, M.A (1993:186), The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal, 14 (3)

I will now apply this model to Starbucks. Heterogeneous resources can be observed in competing coffeehouses, and include locations, staff, and most importantly, coffee. Starbucks aims to distinguish itself from its competitors by concentrating on the excellence of its coffee blends, as the mission statement clearly shows:

"Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow."

(www.starbucks.com)

Therefore the company, since 1971, has been all about coffee. It still advertises the House Blend Coffee, which was the original blend right in the beginning when the company was a coffee roaster and blender. Other superior resources include trained staff and strategically placed coffee bars (in cities, bookshops, supermarkets, hotels etc).

Starbucks coffees are also tailored to customer needs, as the company, though adopting a customizing method drinks creation. The phrases "Tall skinny mocha" and "Grande cappuccino" are standard at Starbucks coffeehouses, and the coffees therefore appeal to a wide range of customers, who can choose exactly what they want. The variety of espresso based coffees (latte, mocha, cappuccino, espresso, etc) also enables Starbucks to capitalize on bespoke espresso machines and specific staff training, because the drinks are based on one core ingredient. The company could therefore save on its production and training costs due to the spreading of the overheads.

As for coffeehouse venues, Starbucks acquired some cafes from rivals, for example in the UK, "[Coffee Republic] has sold huge parts of its estate, much of it to Starbucks and Nero, to combat debt." (www.allegra.co.uk). Starbucks coffeehouses are comfortable and atmospheric, catering for business meetings and relaxation alike, which attracts customers and develops their loyalty. Starbucks's popularity therefore brings an inflow of customers who are willing to pay a marked up price for their coffee, thereby generating profits for the company. To maximize customer loyalty, Starbucks launched loyalty cards, and is innovating ways in which to capitalize on them (1), and to stay ahead of competitors.

This is similar to the FF concept of product differentiation and branding to stay above existing competitors, but also to the suggestion combating threat of entry, as brand image and customer loyalty are barriers to entry. However, these barriers are linked to the Starbucks core competency: fresh quality coffee, and not unrelated. Porter (1979) does not distinguish between the types of entry barriers which would be the most efficient at protecting the firm from new entrants.

As for ex post limits to competition, Starbucks sustains its profits by enhancing the coffee experience. This goes hand-in-hand with imperfect resource mobility, as other firms would be unable to recreate Starbucks, due to the unique combination of furnishings, music, jargon and specialized coffee blends. Even if a new coffee bar entrant purchased Starbucks music, this by itself would not render as much rent as it does for Starbucks, because of co-specialized assets (Teece, 1986; as mentioned in Peteraf, 1993). This means that the music is only a part of complementary assets of the company, and that separated from the network of additional enhancing resources would not be as profitable. Also, in 1999, Starbucks correctly deduced that 70% of its customers were internet users(1), and planned in advance