For the analysis of Starbucks I will be using different ...



Introduction

The bid to internationalize most companies is a very difficult process. The biggest reason for this is the adding the international branding and policy to their existing company strategy.

Most companies view their expansion into the international scene as mere extension of the existing business. This can be dangerous because of the difference in socio-cultural environment and the other factors such as politics etc. Some other companies will however copy the international strategy of their rivals which is equally not good because of the difference in company policy and marketing strategy.

There are 3 steps in initiating a company’s international strategy

1. Determining if the company is prepared to launch an international operation or market.

2. Determining how the company will launch their operation or product.

3. Developing their Organizational Structure to suit the market strategy.

Starbucks: Starbucks is a multinational which its headquarters is based in the United States. It is the leading coffee drink store in the world. They have a combined 13000+ stores in the world. 40% of the stores are licensed stores while the rest are company owned.

Some of the products sold by Starbucks are

• Brewed Coffee

• Espresso

• Cappuccino

• Coffee beans

• Snacks

• Mugs

Purpose: The purpose of this project is to analyze the real life situation of Starbucks in the international scene, its strategic options and options.

Aim: Is to make sure that we understand the international issues facing Starbucks. It is also necessary to evaluate the Strategic options that Starbucks is faced with and study there environment.

Frameworks to use for analysis

For the analysis of Starbucks I will be using different analytical framework to provide an in-depth analysis into the Company and its Strategic Growth methods. The frameworks will be shown below: To start with I will use the International Strategy framework. ‘‘International strategy is a means by which a firm sells its goods or services outside its domestic market’’ (Hill 378). One of the main reasons for initiating International Strategy (as opposed to a strategy focused on the domestic market) is that international markets yield potential new opportunities. ().

These frameworks will be broken down and its different parts explained and used for the appropriate evaluation.

Market Drivers Global Sourcing

Government Drivers Porters Diamond

Competitive Drivers

Cost Drivers

Simple Export

Multi Domestic

Complex Export

Global

Exporting

Joint Ventures & Alliances

Licensing

FDI

Strategy Methods and Evaluation

To analyse the various ways a company can enter a market, I will be using strategy methods together with the framework for mode of entry to explain it.

Modes of entry can differ in terms of the degree of resource that will be committed to a particular market and the extent to which an organisation is going to be operationally involved in a particular location. Selection of an entry mode depends on the stages of organisational development. Moving into international markets means organisations are moving into new and often unknown territory, requiring them to learn new ways of doing business. “Internationalisation is traditionally seen as a sequential process whereby companies gradually increase their commitment to newly entered markets, accumulating knowledge and increasing their capabilities along the way” (Johnson & Scholes). The four types of market entry modes are: Exporting, Joint ventures and alliances, Licensing and Foreign direct investment.

The other mode of entry used is through strategic method, which is a means by which a strategy can be pursued. These methods are divided into the following three types: organic development, acquisition (or disposal) and alliances.

To determine a company or an industry’s potential in the global market, the framework that should be used for this analysis is George Yip’s drivers of globalisation framework. This framework provides a basis for the diagnosis of the strength and direction of trends in particular markets. George Yip’s drivers can also be called simply ‘Internationalisation drivers’. An insight from Yip’s driver’s framework suggests that there is variability in the internationalisation potential of industries. The drivers are divided into four namely:

➢ Market drivers

➢ Competitive drivers

➢ Cost drivers

➢ Government drivers.

There are many different factors that can support or inhibit it, and an important step in determining an internationalisation strategy is a realistic assessment of the true scope for internationalisation in the particular industry.

To determine an organisations national and international source of competitive advantage, the framework to use is Michael Porter’s Diamond and global sourcing.

Porter’s Diamond suggests that there are natural reasons, why in some nations competition is more than others, and why competition in an industry within a nation is more than others. Porter’s Diamond suggests there are four interacting determinants of national or home base, advantage in particular industries and they are Factor conditions, Home demand conditions, Related and supporting industries and Firm strategy, industry structure and rivalry. Together they form a diamond shaped figure.

Global sourcing on the other hand is a source of competitive advantage that can be achieved through both joint ventures and foreign direct investment, by purchasing services and components from the most appropriate suppliers around the world regardless of their geographical location. The advantages that can be derived from different locations are, Cost advantages, unique capabilities and National characteristics.

Another means of entry for organisations is through international strategies, because it helps organisations determine what kinds they want to pursue in their markets. There are four main types of international strategies and they vary according to the extent of coordination and geographical configuration. The four types of international strategies are Simple export, Multidomestic, Complex export and Global strategy. Organisations may often move back and forth or alternate between and within the four strategies and their choices will be influenced by changes in the internationalisation drivers.

Market selection is an integral part of an international strategy and after organisations have decided on their cost drivers and their sources of competitive advantage, they need to examine the countries they would want to enter. For organisations to examine market attractiveness they can use a framework developed by Pankaj Ghemawat, which is the CAGE framework, this can be used to analyse competitive characteristics of an organisation. Ghemawat used this framework to argue that distance still matters, by using each letter of the acronym to highlight the different dimensions of distance. C- Cultural distance, A- Administrative and political distance, G- Geographical distance and E- Economic.

An organisation has to decide on a choice of innovation to follow, either through first-mover advantage or late mover-advantage. First mover advantage exists where an organisation is better off than its competitors as a result of being the first significant organisation to the market with new product, process, or service. There are five potential types of first-mover advantage and they are Experience curve benefits, Scale benefits, Pre-emption of scarce resources, Reputation and Buyer witching costs. The types of late-mover advantage are, Free-riding and learning. Also a Niche market is a way organisations can use to push their innovated products and services, because they are focusing on an area where other goods and services providers have neglected or have not yet gotten into.

Background of the Company and the International issues it’s facing

Starbucks was founded in 1971 by three men from Seattle, by the names of Jerry Baldwin, Zev Ziegler and Gordon Bowker who loved coffee and wanted to bring to coffee lovers in Seattle what Peet’s coffee provided to residents in the San Francisco Bay Area. They even named it after another coffee lover Starbuck in a novel.

They started off by selling primarily whole bean roasted Arabica coffee, tea, spices and some gourmet kitchen supplies in their first store. Alfred Peet agreed to sell Starbucks coffee under the stipulation that as soon they got too big they will have to roast their own bean, Alfred agreed to these because the founders had been longstanding, loyal mail-order customers of his.

After a decade Starbucks had four stores bringing great coffee to the Seattle area. And In 1984 the former vice president and general manager of Hemmerplast, Howard Schultz joined Starbucks as the director of operations and marketing and he brought a new vision to the company.

Change of ownership

In 1985, Schultz left Starbucks to pursue his vision, starting up an espresso bar called Il Giornale, which proved to be a tremendous success. Schultz left Starbucks because after his trip to Milan, Italy in 1983, he came up with the idea that Starbucks should have something like the Italian coffee bar, but the founders of Starbucks resisted this idea saying it doesn’t fit with the whole idea of Starbucks store that it was more of a concept for a restaurant. By 1987 Schultz was operating 3 cafes similar to Il Giornale, and in that year Bowker and Baldwin were looking to sell Starbucks, with Zielgler having sold his interest in 1980. Il Giornale acquired the assets and the name “Starbucks Coffee Company” and became the Starbucks Corporation.

Growth, Success, Location and Strategy

Schultz hired Howard Behar to the position of stores director and together both of them began a rapid expansion, believing that building recognition is the only way to fend off competition. A key part of this was building more stores. Starbucks was unprofitable in its first three years, and in 1992 it became a publicly traded company, raising the necessary capital to fund its continued expansion. Their initial expansion period was undertaken solely through organic growth. Schultz believed that the only way to ensure success was by building only company-owned stores to maintain full control of customer experience. This was the sought of differentiation strategy employed by Starbucks, by building a strong brand, a unique culture and a distinctive customer experience.

Starbucks initial strategy was to purchase and roast high-quality whole bean coffees and sell them along with fresh rich-brewed coffees and Italian-style espresso beverages, primarily through company-operated and licensed retail stores. The average Starbucks offered a range of product diversity, asides from their known freshly roasted whole bean coffees, they offered fresh pastries, sodas, juices, and coffee-related hardware products and equipment. Beginning in 2007, Starbucks continued with its extension of its food offerings, by including warm breakfast sandwiches, dessert selections and pre-packaged launches, but they never deviated from selling “the finest whole bean coffees and coffee beverages.” As a means of maintaining control of quality and to ensure that rigorous standards are complied with, Starbucks used vertical integration, by controlling its coffee sourcing, roasting and distribution through its retail stores.

In terms of location, Starbucks stores where clustered in high-traffic, high-visibility locations in each market. In choosing retail locations, Starbucks looked for stores that were convenient for pedestrian street traffic, which is why they could be found in variety of settings such as retail centres, office building, kiosks, university campuses and airport terminals.

When it comes to product supply, Starbucks regularly negotiates fixed price purchase commitments to secure an adequate supply of quality green coffee, seeing as the supply of the special type of coffee they require can be unpredictable, this helps bring greater certainty to the cost of sales in future periods.

Starbucks being the one that purchases the highest amount of high-quality coffee in the world, exporters of this coffee are always anxious to be their suppliers, this therefore gives Starbucks an advantage in its selection process and it’s sampling for quality standards.

In terms of competition in the beverage market it was generally fragmented. Starbucks competed directly against speciality retailers, speciality coffees sold at retail through supermarkets, and a growing number of speciality coffee stores, also they were competing against espresso stands, carts and stores. Starbucks believe was that customers chose a retailer because of quality and convenience and rarely on price.

Starbucks prided itself in its company’s culture; it says that at the heart of the company’s continuing success lie the company’s two cornerstones, coffee and the people. Starbucks had a very good reward system for its employees; by giving all employees irrespective of if they were part-time or full-time stock options, healthcare benefits and an allotment of free coffee per week.

Starbucks Growth Modes

Starbucks growth was pursued through these three avenues: Existing product lines and distribution channels, increasing domestic penetration of stores, and international expansion. When Starbucks decided to increase its food offerings prior to 2003, it did not meet customer expectations and they had to pull the products. In 2007, Starbucks decided again to expand its food offerings and this time focusing on quality.

In terms of expansion, Starbucks was focused on domestic growth up to 1996, in areas within the United States and Canada. By 1997, Starbucks stores were heavily concentrated on the West Coast with 34 of the 54 states.

Starbucks started its international expansion in the mid 1990s.

Starbucks Existing Growth Choice Modes

Starbucks used a combination of organic growth, acquisition, joint venture and franchise to grow their chain of specialty coffee stores.

In the United States, they pursued organic growth model: Starbucks was unable to fuel its expansion with acquisitions and had to build its empire store by store, because it was offering U.S consumers a relatively new value proposition. By 1991, Starbucks had 105 stores, and with the help of the money raised from trading the company publicly in 1992, Starbucks could be found in 725 U.S./Canadian locations by 1995. From 1996-2008, U.S./Canadian company operated Starbucks stores grew from 926-7969, while its licensed U.S./Canadian stores grew from 75-4560.

In Japan, Starbucks pursued a joint venture strategy. Japan was Starbucks first international venture. With an attractive market and a pre-existing taste for coffee, Japan was selected as the logical entry point for the region with them being the second-largest economy in the world and consistently among the top five importers of coffee in the world. Starbucks entered the Japanese market by entering into a 50-50 joint venture agreement with Sazaby Inc, operators of upscale retail and restaurant chains who had approached Starbucks earlier. Once the Starbucks stores in Japan were launched it boasted the single largest number of Starbucks outside North America.

In the United Kingdom Starbucks pursued acquisition as the mode of entry. The U.K market was entered in May 1998, through the acquisition of the Seattle Coffee Company. Through this purchase, Starbucks acquired 56 retail units. By end of 2000, the units had grown to 156units and by end of 2008, it had 664 units. Seattle Coffee Company was choosing by Starbucks as its target acquisition because of its focus, its relatively small valuation, and its established retail units.

In China Starbucks entered the market through the use of licensing. Expansion into China was through licensed stores, 9 in 1999 and 28 in 2000. China was one of the most risky markets that Starbucks entered into. By 2008 in China there were 178 Company operated stores and 269 licensed stores.

Future of Starbucks

By 1998 Starbucks was seen to be on its way to becoming the Coca-Cola of specialty coffee segment by industry analysts. This was due to the fact that it was the only company close to national market coverage. The company’s immediate objective is to have 2,000 stores by year 2000 in operation, but its long term objective is to become the most respected and recognised brand of coffee in the world. Schultz way of reinventing the company involved going into joint ventures, Licensing agreements and FDI. Schultz also believed that for the company to continue to grow it had to be innovative, take risks, invest in its employees and always put its customers needs first, all this are to be done by getting the right people, acquiring the right location, having the right design in place for its stores and investing in customer-focused initiatives.

Analysis of Starbucks

Company’s current situation:

➢ Starbucks is currently in a situation where there is high market saturation, which is leading them to close some of their stores, although the closure of these stores by Starbucks is not just because of market saturation it has to do with the company looking ahead at its future prospect. According to the Internal Memo Schultz sent to then CEO Jim Donald in 2007, he was concerned the Starbucks experience was becoming diluted. Schultz stated an example in terms of the purchase of the automatic espresso machine which solved problems of efficiency and speed of service but it eliminated the interaction the customers got from employees when their coffees were been made and the height of the machines blocked customers view. Also the fact that that baristas didn’t have to start grinding coffees fresh in front of customers caused a loss of aroma in the store which was one of Starbucks trade marks.

➢ Starbucks design is no longer in line with the older designs which reflects a neighbourhood store now its just like a chain of stores, even though this new concepts where done in order to gain efficiencies of scale and too satisfy the financial aspect of Starbucks it was detrimental to the company’s overall vision.

➢ Also Starbucks was focusing more on infrastructure ahead of growth curve, and it also focused on innovation and creativity, rather than customer-facing initiatives. This led Starbucks to be bureaucratic and the atmosphere in the stores were reflecting this.

Starbucks situation was one where rapid growth was leading to problems for the company; Schultz therefore decided that the best strategy was for the company to slow down its growth process, there will still be expansion in some areas internationally and locally, but underperforming stores will be closed, so that attention can be focused on store-level unit economics.

The current state of Starbucks business will be improved by providing store partners with better training and tools, launching new products and introducing new store design concepts.

Also Schultz said he intends to re-ignite the emotional attachment customers had with Starbucks coffee, brand and stores, and by focusing on the Starbucks experience, there will be a renewed sense of differentiation and separation between Starbucks and competitors in the market.

Also Schultz believes Starbucks needs to build for long term, and to do this they will need to: Re-aligning Starbucks organisation and streamline the management of the organization to better support customer-focused initiatives by ensuring support and planning functions. As well as all of these Starbucks still needs to expand its presence around the world, by building a profitable business outside the U.S., and by capitalizing on the untapped potential in other markets internationally.

Analyzing Starbucks Foreign Market Drivers

This analysis requires the identification of factors in the coffee industry that helped Starbucks with its internationalisation. The factors to be considered are competitive forces in the coffee industry, the coffee market, the conditions in the market and market regulations.

Market Factors:

The market factor shows how attractive the industry is and how the brand is appealing in the market. The following shows how the international branding is attractive.

1. In various countries there is diversity of needs which will offer opportunities in the market but the market needs do not vary completely which makes transition easy.

2. There are a lot of coordination problems when customers are widely dispersed.

3. Starbucks is well known universally and can build on its well known brands and previous advertising campaigns.

4. It is easier to access the international market because of the distribution channel that is already created. This also reduces costs.

Starbucks use an unconventional means of advertising rather than using the television, media etc. Although Starbucks buys full page advertisement in the New York Times, they really does there advertisement from their shops. According to Brad Stevens, Starbucks’ lead marketing executive, “So much of the relationship with the company exists between you and that barista behind the bar. We haven’t been able to conceive of a way for TV advertising to repeat that, to capture the heart and soul of the company,” (Allison).

In 2005, Starbucks spent 1.5% of their revenue on advertising which is a far distance from Coca Cola and Nike who spent 11% of their revenue.

Starbucks can now offer their products in residential area because they now sell espresso machines etc. to consumers. Part of their advertisement is to make the service fast. Starbucks also strive to perfect the relationship between them and the customers.

Competitive Factors:

Under this we need to take into consideration the company’s key rivals in the international market operations. Other company’s internationalise there company when their rivals move into the international market to remain relevant and competitive and internationally viable.

If there is success in one market requires participation in other markets, the company will want to participate in other markets. This reliance on the other market is the source of innovation and economies of scale for Starbucks.

As far back as 1997, there were 8000 coffee outlets in the United States. Because of Starbucks domination in the market, other competitors started to scale up their expansion plans. The biggest competitor they had was a Canadian franchisor; Second Cup was one third the size of Starbucks. At least 20 other chains are aspiring to be as big as Starbucks but none of them is as more than 250 stores in the United States. Some of them are New World Coffee, Java Centrale, and Coffee People etc. Some Restaurants are also installing espresso machines to attract customers.

Starbucks are also facing competition from coffee makers such as Nestle, Procter and Gamble, Kraft etc. which supply supermarkets their coffee beans and other coffee products. Consumers are used to purchasing there coffee beans from the supermarkets so they happy to substitute that for Starbucks.

Considering the Mode of Entry

There are several ways that you can use to enter the international market. It depends on the financial clout and the experience in the area of establishment.

The rate of growth went staled in North America. They then used two specific strategies to manage risk and deal with country specific issues.

1. In areas where Starbuck taught there will be socio cultural, political and economic challenges, they went into partnership with local stores that were already doing the same business rather than go full fledge into the area.

2. On the other hand, where less challenges is perceived Starbucks decided it is worth starting their own operations by establishing a subsidiary.

In 1996, Starbucks opened a store in the Ginza area in Tokyo. It became a very successful venture which matched Starbucks in the United State. They went on to have a joint venture of over 600 stores in Japan.

In the United Kingdom it was difficult for Starbucks to penetrate the market and they therefore settled to acquire a popular brand called Seattle Coffee Company. There entry into the market was greeted with a lot of resistance because of the way the negotiation and eventual purchase of Seattle was perceived. In 1998 they eventually opened over 200 stores that started operations. Starbucks had to use a very aggressive advertising machine to launch Coffee products in the United Kingdom. In 2008 Coffee eventually replaced tea as the choice of hot drink in UK. Also London has more stores than New York after 2008.

Initially, the company may rely on exporting activities to gain a foothold in an international market. Next, with increased international expertise, the company may use licensing agreements to broaden its market reach. Alternatively, the company may engage in franchising by authorizing others to use its products, services, and logos in new markets. The company may enter a joint venture with foreign partner(s).

Exporting

Exporting was initially used for some international operations of Starbucks. It had so many advantages including:

1. It enables Starbucks to learn and develop the necessary factors of the international market.

2. It reduces the business risk associated with the market in the local location.

3. An economy of scale is achieved due to the increase in production.

4. It helps in keeping the cost down because it does not have an initial cost associated with the start up of the venture.

There are internal and external factors that can either improve or impede Starbucks exporting activities. Some of them are cost of export, location and socio cultural factors.

Personal Learning Statement

According to the learning outcomes of this module, I should have acquired new knowledge of different approaches to strategic management and how to apply them. This has been achieved through my ability to analyse the case study using different frameworks and knowing where it applies.

Also it states that different strategic circumstances exist in certain industries and I should have learnt them. This ability has been displayed with my understanding of the different modes of entry available to companies and the mode of market selection available to companies in different markets. Also my ability to comprehend the choice companies make to gain advantage either through first-mover or last-mover advantage and also decisions companies face when they want to expand locally or internationally.

Finally, the learning outcomes states that I should have learnt the implications of technology and e-commerce on strategy and I should have developed the concept mapping skills. An implication of technology and e-commerce on strategy is apparent in this case study and I have been able to analyse it properly using the skills I learnt from the chapters in the text book and showing that technology is important in terms of innovation and competitive advantage. I have developed a good sense of concept mapping skills by been able to learn the relevant frameworks to use for different case study and how to use the frameworks to analyse the case.

Conclusion

Starbucks as obviously grown from strength to strength due to the internationalization of the brand.

My analysis shows that the Market factors needs to put into consideration for firms before moving into a new area outside your domestic presence. It also shows that competition can put your investment at risk.

This essay as highlighted the frameworks for the internationalisation, the analysis of the framework. It also talked about the history and background of Starbucks and eventually looked at the transition into the international market.

It also showed that the pace and scope at which Starbucks international market assisted the performance in recent years before the recession put the company in a significant upper level to its competitors.

The reason why the Company used the 3 modes of entry subsidiaries, licensing and joint ventures is due to the fact that they want to adapt to the different environments and there local needs which is influential in every area.

It is therefore noted that the entry mode in the most the most relevant strategy in the internationalisation of Starbucks.

REFERENCES

1. 06P.pdf

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8. Exploring Corporate Strategy 8th edition, Johnson, Scholes and Whittington

9. Case Study provided by Lecturer

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International Strategy

Source of Competitive

Advantage

Mode of Entry

Market Selection

Internationalization Drivers

Methods to pursue Strategies

Organic Development

Strategic Alliances

Mergers and Acquisitions

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