Going International: The Starbucks Way
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Starbucks has come a long way from a coffee bean retailer to one of the world’s most recognized coffee houses. All throughout the years, Starbucks have expanded both domestically and internationally. Starbucks has evolved into a firm known for its coffeehouses, where people can purchase beverages and food items as well as packaged whole bean and consumer coffee. Starbucks has changed the way people around the world consume coffee. This paper is about the international market entry strategy that Starbucks employed and continues to employ. The aim of the paper is to analyze the strategies of Starbucks in entering new markets and expanding internationally.
Going International: The Starbucks Way
International Business Expansion Strategies
In 1995, Starbucks established as subsidiary called Starbucks Coffee International Inc. The subsidiary is responsible for all Starbucks business development outside North America, including developing new businesses, financing and planning stores, managing operations and logistics, merchandising, and training and developing Starbucks international managers (Kotha and Glassman 2003). Starbucks international, as a wholly owned subsidiary, manages the international expansion programs and strategies of Starbucks coffee. Starbucks International, in entering new markets combines two strategies. These are joint venture and licensing.
International Joint Venture
International joint venture is a strategy in which two or more firms create a new business entity with shared ownership and managerial responsibilities. This entity is often created with limited objectives and limited life. One example of international business that employs such strategy is Starbucks (Briscoe and Schuler 2004). International joint ventures (IJVs) are legally and economically separate organizational entities created by two or more parent organizations that collectively invest financial as well as other resources to pursue certain objectives (Schuler et al 2003). Shenkar and Zeira (1987) defines an international joint venture as a separate legal organizational entity representing the partial holdings of two or more parent firms, in which the headquarters of at least one is located outside the country of operation of the joint venture. This entity is subject to the joint control of its parent firms, each of which is economically and legally independent of the other.
Joint vestures are often part of combination market entry strategies such as licensing and joint venture; franchising and joint venture; and foreign manufacturing and joint venture. Starbucks International have been reported to combine licensing and joint ventures. Most Starbucks stores in the United States are corporate-owned, and all of the stores outside the United States are either corporate-owned or partially company-owned joint ventures (Alexandrides and Bowers 2005).
Combing licensing and joint venture strategies has proven advantageous for Starbucks. The reason why Starbucks combine these two strategies is in order for them to work with companies that have local business expertise, cultural knowledge and skills in finding local real estate (Alexandrides and Bowers 2005).
Licensing the rights to manufacture and/or market one’s product(s) is an option for internalization of business. In this strategy, the firm usually locates foreign firms that have the experience to manufacture and to market its products with minimal technology transfer, in order to bypass import duties and to provide the simplest avenue to local sales (Briscoe and Schuler 2004). One of the primary methods of participating in new markets through cooperative contractual means is by licensing the firm’s products, services, or technology to another company. Under this arrangement, the firm sells a limited right to produce and market the product in return for royalty payments. The typical limit is a specified geographic area in which the original firm does not market, at least to any significant degree (James Jr. and Weidenbaum 1993). One of the advantages of licensing is Starbucks do not need to invest money on the partnership. Using licensees, Starbucks can enter different foreign markets simultaneously. Starbucks can also benefit from granting license to a licensee that is more familiar with the market. Through licensees, Starbucks are also given opportunity to enter markets with high trade barriers. Although Licensing has proven to be an effective expansion strategy for Starbucks there are also threats or disadvantages that will endanger the company. One disadvantage is the risk that the licensee may become a competitor one the term of the agreement concludes, by using the licensor’s technology and taking their customers. Another disadvantage is the risk that licensee will underreport sales to lower the royalty payment (Alexandrides and Bowers 2005).
Starbucks’ licensees are often their partners in a joint venture. Starbucks International is using licensing agreements in order to penetrate markets where it has no ability to open its own stores. In markets outside North America, the strategy of Starbucks is to license a local company that is reputable and possess retailing expertise. Often times Starbucks enter in joint venture partnerships with these local companies. Starbucks Coffee International is the subsidiary that manages Starbucks’ overseas expansion.
Entry Strategies in Action
Starbucks in Korea: Licensing to Joint Venture
The entry strategy for used by Starbucks in Korea is licensing. First, it coordinated with a licensee and then opened stores in Korea. Starbucks gave licence to ESCO Korea to operate stores in South Korea. In the year 2000, Starbucks entered into a joint venture with Shinsegae Department Store Co. the parent company of Starbucks International’s licensee in South Korea. This is move was driven by the success of the success of Starbucks in South Korea.
We can see that Starbucks International’s entry mode in South Korea was through licensing. When the licensing strategy became successful Starbucks entered into a joint venture agreement with the parent company of the licensee. The mode of entry used by Starbucks in Korea was licensing. After the licensing strategy has been successful, Starbucks entered into a joint venture agreement with a local company. This strategy has proven effective and efficient considering the characteristics of the Korean market. The Korean economy can be considered hostile to Multinational companies from other countries. In entering the Korean market, it is advisable that a multinational company look for a Korean partner with market knowledge and expertise. The strategy was advantageous for Starbucks.
Starbucks in Argentina: International Joint Venture
In 2007, Starbucks entered into a joint venture with a Mexican company called Alsea. The partnership gave birth to Café Sirena, a venture that will focus on the Argentine market. This move is a part of Starbucks’ expansion strategy in Latin America. Café Sirena will operate coffee shops throughout Argentina. Alsea and Starbucks are also in the process of creating a new venture that will be focused in Chile. In entering the Argentine market, Starbucks entered into an International Joint venture agreement with Alsea. This strategy was advantageous for Starbucks because it was able to build a strong relationship with a big company in Latin America with the knowledge and expertise of different markets in the region. The partnership has proven successful as Starbucks and Alsea are now in the process of creating another joint venture that will focus on Chile.
Has Starbucks Selected the Appropriate Development Method?
Starbucks have chosen the right development method that aligns with its goals, strategies and practices. Starbucks believes that looking for licensees in markets that are unknown to company and where there are restrictions that may hinder success and growth is the most appropriate strategy for international expansion. Licensing is an effective strategy given that Starbucks needs to uphold its service and product quality. Starbucks also employs an international joint venture strategy in which Starbucks builds partnership with local companies in order to enter different markets. In Starbucks’ business expansion we can see that Starbucks builds partnerships with local firms. This is effective as these local firms have more knowledge regarding the market and the demands of the local consumers saving Starbucks time and effort. Starbucks also maintain its high standard in every aspect of the business. This is what makes Starbucks’ strategy a success its ability to combine the market knowledge and local expertise of its partner or licensee with Starbucks’ operational expertise, management excellence and quality products.
Starbucks employs a market spread approach to market development. It is evident from the given examples that even of Starbucks has different entry mode for the Korean and the Argentine markets, the company has no concentrated efforts on a few areas. The market development method of Starbucks can be considered appropriate. Because of the licensing and joint venture strategy, Starbucks has developed partnerships with local firms that posses the capabilities and expertise to operate Starbucks stores.
What other Methods might be Suitable for the Company?
Franchising is an entry method that Starbucks can consider in the future. Franchising is somewhat similar to licensing. Perhaps the difference lies in Starbucks’ use of licensing strategy. Compared to McDonald’s that uses franchising, Starbucks uses a licensing strategy that coincides with a joint venture, the partner also serving as the licensee. In McDonald’s, the original firm grants franchising rights to existing business entities to produce and market its products. The difference is that Starbucks’ licensing strategy coincides with joint venture strategy. None of Starbucks’ store outside North America is wholly owned, whereas McDonald’s has corporate-owned and franchises in other countries.
Franchising can be considered by Starbucks. Franchising according to Culpan (2002) is a special form of licensing in which the franchisor grants the use of brand name, trademark, business system, and other property rights to a franchisee that agrees, in return, to pay a fee based on the volume of sales. Franchising works similarly to licensing except that franchising is considered a more continuous type of relationship between franchisor and franchisee. Also, the franchisor usually exerts more control over the franchisee to assure product or service quality.
Should different Methods be used in Different Markets?
Different markets call for different modes of entries there are many factors that affect the entry strategy of a company. Differences among markets must be considered before a company chooses to expand to a new market. In entering different markets, a company needs to choose the most appropriate entry mode(s). External and internal factors must be considered. In the case of Starbucks, the country’s political, economic, social, industrial and other conditions are assessed. Determinants of foreign market entry strategies are classified into three groups of factors. These are business environment, home country business environment, and company specific factors. Host country business environment includes host country political stability, macroeconomic conditions, resource potential, market size, internal economic relations consistent with the requirements of a market economy, external economic relations consistent with Western standards, cultural dimensions, five forces of industry, and relations with a company’s home country. Home country business environment involves such factors as market conditions, regulatory environment, and governmental encouragement and support of foreign economic expansion. Company specific factors are company resources, capabilities and core competencies. Favorable combination of these three groups of factors is a condition for successful foreign market entry and operations. In the case of Starbucks, different factors have been considered in choosing the right mode of entry.
Should the Development Mode be combined with other Expansion Methods?
In the case of Starbucks, it combines different strategies in order to achieve higher success. In order to achieve success and to make sure that the standard and quality of the service and products are maintained, the company uses licensing as the entry strategy. When the agreement between Starbucks and its local licensee has been completed, the company then enters a joint venture agreement with the licensee and they create a separate entity that will produce and market Starbucks’ products. The expansion method is licensing while the development method is joint venture. The market development strategy used by Starbucks is market spread, which is very effective for a multinational that seeks to expand its operations in different countries simultaneously.
In the case of Starbucks, the company analyzes the external environment factors and the foreign market entry strategies are developed. Depending on the host and home country as well as company conditions they may chose equity- or non-equity based foreign market entry strategies. Starbucks develops alternatives for each country under consideration. Based on country ratings obtained during country analysis, target countries are chosen. After a company has chosen the most attractive country to do business with, it conducts entry operations. This task is conditional upon procedures of registration, governmental loyalty, and company expenditures: transaction costs, operational costs for creation of new facilities, joint ventures, regional offices, and alliances. The actual entry must be cost efficient and strategically effective. Overall foreign market entry effectiveness depends to some extent on successful entry operations. Successful entry operations depend not only on favorable local context, but also proper entry operations, planning, and financing. Successful entry operations are function of the local context and a company’s entry arrangements: resources, organization, coordination, and commitment. Companies use different business and corporate level, as well as specific international strategies there. Corporate and business level strategies usually match with their strategies in the home country.
Root (1987) summarizes the mode of entry modes that organizations can choose from. These include:
1. Export Entry – Indirect or Direct Agent/Distributor; Subsidiary
2. Contractual Entry – Licensing; Franchising; Technical Agreements; Service Contracts; Management Contracts; Turnkey Contracts; Co-Production
3. Investment Entry – Direct Entry; Acquisition; Joint Venture
The case of Starbucks has presented an International Business that uses different entry modes in entering foreign markets. Starbucks has been successful in its market development strategy. Through market spread, Starbucks was able to simultaneously expand its operation outside the United States. The internalization of Starbucks can be attributed in its effective choice of entry mode.
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