MGT 3140 International Business Strategy Group Report (Starbucks) Date of Submission: 18-Feb- 2011 FINAL YEAR REPORT (MIDDLESEX 1
Mar 31, 2015
MGT 3140International Business
StrategyGroup Report (Starbucks)
Date of Submission: 18-Feb-2011
FINAL YEAR REPORT (MIDDLESEX UNIVERSITY)
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Contents
CHAPTER 1–EXECUTIVE SUMMARY..................................................3
CHAPTER 2–COMPANY PROFILE........................................................3
CHAPTER 3-EXTERNAL AND INTERNAL ENVIRONMENT.........5
PESTEL ANALYSIS.....................................................................................5
SWOT ANALYSIS.......................................................................................9
CHAPTER 4–MOTIVATION FOR EXPANSION................................11
INDUSTRY BASED VIEW..........................................................................12
RESOURCE BASED VIEW.........................................................................13
INSTITUTION BASED VIEW......................................................................14
CHAPTER 5-LOCATION DECISION....................................................15
OPPORTUNITIES......................................................................................16
THREATS................................................................................................20
CHAPTER 6-ENTRY MODE...................................................................23
CHAPTER 7-CONCLUSION...................................................................27
REFERENCES............................................................................................28
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CHAPTER 1–EXECUTIVE SUMMARY
This report aims to evaluate Starbucks’ past and present performance in order
to most importantly stipulate the future position of this largely successful
company. Being that the company’s objective centers around expansion, this
report tries to identify a likely attractive target country (India) for such plans.
The analysis uses SWOT, PESTEL, Industry Based View, Market Entry Mode and
other similar evaluative tools to reach an understandable and valid conclusion
that India provides varied opportunities for expansion that can be exploited by
Starbucks.
CHAPTER 2–COMPANY PROFILE
The current mission statement of Starbucks is “to inspire and nurture the
human spirit by one person, one cup and one neighbourhood at a time”
(Starbucks.com).
The first Starbucks store was opened in Seattle on March 30th 1971 by three
partners and the name of the store originated from the novel Moby Dick. The
firm believes in supplying and serving the best coffee possible by using the
highest standards of quality whilst adhering to ethical trading and responsible
growing practices at the same time. In 1987 the first stores were opened
outside of Seattle, in Vancouver and Chicago and in the subsequent years
stores followed the expansion were much more extensive across North
America.
Starbucks sells a variety of products which include high-quality whole bean
coffees along with fresh rich-brewed coffees, Italian-style espresso beverages
and cold blended beverages, a collection of complementary food items and
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also a selection of premium teas and beverage-related accessories and
equipment (starbucks.com).
There are conflicting reports on the overall market segment that Starbucks
possesses, although according to Mintel a global consumer research firm
Starbucks had a 73% market share of U.S. coffeehouse sales in 2005,
(usatoday.com) and this is significant because the majority of its revenue
comes from their home market which is $2.1 Billion compared to an overseas
share of just $640 Million (marketingmagazine.co.uk).
Amongst Starbucks’ many achievements is its spot of being #1 best coffee in
the fast food and quick refreshment categories and one of the “world’s most
ethical companies” (starbucks.com). Its performance as a multinational firm
has increased over time and as such led to expansion in global operations. The
recession was a major factor that impacted the company’s position because
prior to that, Starbucks was known for having a café around every street corner
(msnbc.com). However prior to the recession in 2007, their share price traded
at $38.41 and a mere two years later the price had fallen to a measly $9.91,
“profits were down for the last three months of the year from an astronomical
$158.5 million to $5.4 million” (business.timesonline.co.uk).
The turnaround for Starbucks started with the restructuring of management
where the former chief executive Howard Schultz took back the role and set the
company’s focus on core markets and utilizing technological breakthrough to
introduce Starbucks coffee in an instant form (pr-inside.com). Starbucks went
back to its roots by focusing on customer service that was neglected during
rapid expansion (Guardian.co.uk). All these decisions helped contribute to the
sales flourishing and “profits rising” to high levels once again (bbc.co.uk).
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The first location outside of north America was in Japan in 1996 which was
followed by an impressive $83 million acquisition of the UK based “Seattle
coffee company” of which there were 60 outlets at the time, all of which were
then re-branded under the Starbucks name. The global expansion continued
into the Latin American, Asian and European markets which resulted in
Starbucks presently being the largest coffee company in the world with over
16,500 stores in over 50 countries (www.starbucks.com).
An examination of Starbucks’ internal and external environment should provide
a good basis for understanding the company’s turnaround, the foundation of its
present successes and what the future might hold it.
CHAPTER 3-EXTERNAL AND INTERNAL
ENVIRONMENT
Businesses generally operate in a network and are not entirely independent
because of the several environments that influence their activities and actions
(Zhu, 2010). Examples of factors both from the internal and external (micro
and macro) environment that could influence Starbucks includes; competitors,
customers, suppliers, financiers; political, economical, social, technological,
environment, and legislation.
The United States being Starbucks’ home market is pivotal in understanding
the internal and external environment that influences the company and its
expansion. Coffee statistics show that Specialty coffee sales are increasing by
20% per year and account for nearly 8% of the 18 billion dollar U.S coffee
market. Coffee shops across America are set to exceed approximately 50,000+
by the end of 2011 (e-importz.com). This evidently suggests that the growth of
coffee consumption and a possible maturity of the American coffee market may
have caused overcrowding and influenced Starbucks to intensify expansion
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plans (See Chapter 4).
PESTEL ANALYSIS
The following PESTEL analysis will aim to extensively evaluate Starbucks and
understand how the Political, Economical, Social Technological Environmental
and Legal issues will impact the company’s External environment since it
relatively has minimal control over such factors.
Political influences
Tariffs and International Trade regulations:
Countries belong to trading blocks such as APEC, G20 and most importantly
CAIRNS GROUP for agriculture (news.bbc.co.uk), where the main aim is to
reduce the effects of tariffs. However Global companies such as Starbucks are
still affected because it operates across borders and is in over 50 countries
therefore high tariffs might mean that Starbucks reputation and ability for
sourcing the best coffee beans; which involves importing from different
countries could be compromised, subsequently affecting its global sales and
competitiveness.
Government stability:
Political stability of countries is an important issue that firms need to consider
because other indicators may point to a country as being investor friendly,
however that could rapidly change when there is elections or political instability
(e.g. Egypt). This could lead to massive disruption in a firm’s operations and
strategy or in a worst case scenario where Starbucks was forced to completely
pull out of Israel because of such issues thus negatively affecting its strategy
for expansion.
Political influence is unfavourable in this case and presents a threat to
Starbucks.
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Economical Influences
Exchange Rates:
The falling dollar rates compared to other currencies (Bloomberg.com) which
was caused partly by weaker monetary policy will affect imports. Most of
Starbucks’ vital supplies such as coffee beans, sugar and milk will be affected
because they are imported, thus incurring higher cost due to weak dollar. This
raises a question as to whether the company will pass the extra cost to
consumer and risk making its coffee even more expensive.
Income Distribution:
After the economic crises of 2007 that led to job losses, unemployment figures
rose (to 2.5 million in Britain 2010 – Office for National Statistics). This affected
income disparity which became unequal. Hence people that were previously
able to afford Starbucks’ expensive specialty coffee now saw it as a luxury thus
leading to low sales in some locations. This in effect affects the company’s
expansion plan. In this case Economic Influences has an unfavourable impact.
Social Influences
Changing Tastes:
The changing taste in America indicates that people are consuming more
specialty coffee which amounted to about $1.3 billion in imports (Restaurant
Hospitality). This influences Starbucks because it provides an opportunity to
exploit this market and gain higher market share in the coffee market.
In India and China however, tea is still mainly preferred, so Starbucks might
have to alter its strategy there. This will not be too difficult taking into account
the trend of ‘Americanisation’ and its success across developing countries so
far.
Health consciousness:
Government’s push toward healthy eating in western countries due to concerns
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regarding obesity might influence companies such as Starbucks to update its
menu in terms of introducing new lines and healthy alternatives to be sold
together with coffee.
This in other words means that Social Influences is favourable and can provide
an opportunity for Starbucks.
Technological Influences
Wave of Technological trends:
Technological advancements have never been so fast, hence firms need to
consistently follow the trends and exploit any opportunities that may result and
implement any change required. For example, Starbucks have embraced the
new phone payments system that was introduced recently which helps cut long
queues at peak times.
Social network memberships is growing by the millions e.g. facebook has over
500 million users and users have an average of 130 friends, additionally, time
spent on the site is over 700 billion minutes a month (facebook.com).
Exploiting this trend offers companies such as Starbucks a platform to relate
and share ideas with customers. It has already used social networking sites
such as facebook (with over 19 million “friends”) and a forum which it runs, to
communicate and engage with customers and communities (Economist.com).
Technology has a favourable impact for Starbucks.
Environmental Influences
Environmental pressure groups:
Non Governmental Organisations and pressure groups possess incredible ability
to coerce businesses into changing their practices. They could influence
businesses through lobbying and boycotts. Such measures usually impact the
intangible assets of a firm which usually involves tarnishing a company’s brand
name. Starbucks however works with the “Fair-Trade movement”
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(Economist.com) and the accreditation that comes with such alliance massively
improved Starbucks’ image, hence Environmental influences is favourable for
Starbucks.
Legal Influences
Not all countries welcome big firms because they like to protect their
indigenous firms from unfair competition and takeover. Legal issues such as
Monopoly and national protectionist laws will affect Starbucks because of its
size and its plan of expansion. E.g. countries like India guard against such
practices with a legislation that bars external companies from owning more
than 51% in a merger (see Section 5). The more this happens in other
countries, the more Starbucks expansion plan is restricted. Thus legal
influences are unfavourable for Starbucks.
In summary, the PESTEL analysis found that External influences was altogether
balanced since Sociological, Technological and Environmental factors were
favourable, while the other factors such as Political, Environmental and Legal
factors still pose a valid threat. Nonetheless Starbucks’ strengths counteracts
some PESTEL factors because although it can’t control the external
environment, it has become more flexible to change (closing 600 stores in
order to adapt) and is quick at exploiting opportunities. As Accenture (the
consultant company) puts it; “out–thinking the competition is useless unless
you can out-execute them as well”.
SWOT ANALYSIS
Strengths
Brand Image:
Starbucks is amongst one of the very few companies that have managed to
successfully create market awareness and stir up consumer interest in
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specialty coffee while at the same time preserving brand dominance. Its focus
on consistency in delivering positive consumer experience stresses the point
about consumer visits to its cafes being an ‘Experience’ rather than just seeing
it as another coffee maker (workforce.com).
Starbucks’ recent change of Logo demonstrates confidence in public awareness
of its brand and follows the likes of McDonalds and Nike that are easily
identifiable by logo alone (marketwatch.com) See Chapter 4.
Unique Strategy:
The Ability to capture key locations and open stores in close proximity to each
other is a unique strategy for Starbucks. This ensures that franchises that don’t
meet set achievements are closed down. Therefore only the most profitable
stores that maintain high sales, and retain the most customers survive.
Valued and motivated employees:
The cafe industry is to some extent dependent on front house staff, their
attitude and their ability to make customers come back. Starbucks promotes an
environment that encourages team working and collaboration. As such it
encourages managers to follow its motto of ‘hire the personality, train the skill’.
Hence through exceptional service, customers keep coming back. Arguably,
Starbucks has one of the lowest staff turnover rate in the industry
(workforce.com).
The strengths provide a favourable impact.
Weaknesses
Over-reliance on home market:
Although the American coffee market is worth over $18 Billion (e-importz.com),
over-reliance on this market leaves Starbucks vulnerable to unforeseen
changes that might occur in such market. E.g. recession affects disposable
income for customers and subsequently, profits. Thus the management
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decision to focus mainly on the US market makes it a weakness.
Aggressive Expansion:
Due to the takeover and acquisition of local community coffeehouses and
buildings, Starbucks has been labeled the ‘Tesco of coffee’ after a backlash
from local residents due to closures of local shops. This has lead to boycotts
and increasing membership of sites like ihatestarbucks.com. They see
Starbucks’ aggressive expansion as an erosion of their local environment and
culture. This in effect means that weakness is an unfavourable impact.
Opportunities
Entry into new markets:
Global companies that plan for expansion usually seek out attractive countries
with such opportunities. In a bid to increase its world wide presence, Starbucks
has opened a range of stores and operates in over 50 countries with 16,000
coffee shops (Starbucks.com). Starbucks is currently on its way to exploiting
potentially lucrative markets such as India (marketwatch.com) that will provide
it with opportunities of revenue growth.
The above point directly links to Political factors in the External Environment
analysis where on a global scale more countries are embracing open door
policies to foreign companies rather than protectionism. This is favourable for
Starbucks in its expansion plan and will assist it in securing the finest coffee
beans due to countries being more welcoming.
Growth in coffee market:
The general taste of coffee drinkers in America is shifting towards the more
expensive organic coffee which accounted for $1.3 billion in imports
(Restaurant hospitality).This links to the Social factors identified in the External
analysis and relates to changing tastes. This is favourable because it provides
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an opportunity for Starbucks to expand its customer base with the possibility of
higher profit margins as a result. Opportunities is favourable for Starbucks
Threats
Competition:
Although the competitive threat from the specialty coffee sector is minimal,
competition from other sectors such as restaurants and other big coffee shops
still remain. The dominant threat from other competitors such as dunk’n
donaughts and especially McDonalds which was recently found to sell good
coffee for better value is damaging for Starbucks (digitaljournal.com). In other
words this is an unfavourable influence
The SWOT analysis however also shows Starbucks as being balanced as well
because it’s Strengths and Opportunities are favourable while it’s Weaknesses
and Threats are unfavourable. On closer analysis it could be said that
Starbucks possesses more Strengths than weaknesses and although all
companies do have weaknesses, the fact that this is within their internal
environment means that it can change its practices in order to turn its
weaknesses into strengths. Nevertheless for the threats, constant scanning of
its environment and monitoring close rivals should assist it in developing
strategies in order to remain competitive and maintain (or if possible) increase
it’s market share.
CHAPTER 4–MOTIVATION FOR EXPANSION
One of the best ways to increase market share is to internationalize. After
analyzing the company’s PESTEL and SWOT analysis, a range of opportunities
and threats have been identified. However Starbucks has more strengths than
weaknesses that make the company more competitive in the coffee industry.
The motives to go abroad can be analysed from three different perspectives:
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Industry-based, Resource-based and Institution-based views.
INDUSTRY BASED VIEW
For every coffee shop in New York, there were 365 customers therefore proving
market saturation in the US (nytimes.com). This difficulty meant looking
beyond the American border in order to increase profitability and thus resulted
in internationalisation.
The target countries that are chosen usually have real potential due to
population sizes and the amount of people with high disposable income and
with a high interest in ‘Americanization’. In the years of Starbucks’ expansion,
America was the most developed and innovative country. Western nations had
a great interest in American products and culture, which motivated managers
to bring in well known brands to other countries.
After the huge success in Japan (first Starbucks’ coffee shop outside US), the
motive to expand to other regions and countries became stronger.
This motivated the firm to implement first mover advantage or follow the main
competitors such as McDonald’s and Dunkin’ Donuts. McDonald’s was
spreading out American way of life which provided Starbucks with an
advantage in its innovative strategies of healthier snacks that would give an
advantage in other countries where the healthy life style was popular.
With technological influences, all countries become a part of the ‘global
village’, where people have the same preferences and tastes. (McLuhan,
Marshall 2003). This lowered the risk of backlash from cultural awareness and
motivated Starbucks to meet customer needs and expand globally.
However to get into the target market Starbucks needs to follow the host
countries government regulations, which are not always favourable for the
company. However USA are members in NATO, APEC, NAFTA and Pacific
Community trading blocks. This makes the supply of raw materials cheaper and
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allows Starbucks to provide the high quality service for a lower price. This
advantage motivates the firm to enter new marketplaces
(economywatch.com).
RESOURCE BASED VIEW
After an evaluation of external market and the making of industry-level
decisions, internal strengths and weaknesses need to be considered. The firm’s
distinctive competences are built from tangible and intangible assets, and
organizational capabilities.
The tangible assets are most easy to identify as they include financial
resources, raw materials, production facilities and real estate. Starbucks
purchases only the highest quality of coffee beans from ideal coffee-producing
climates. Throughout the promotion of equitable relationships with farmers,
workers and communities as well as protection of the environment, the firm has
improved its marketing ability and upgraded its supply chain that turns basic
resource to an advantage for meeting customer expectations of quality roasted
coffee. This move secures the company’s supply-level. Furthermore it makes
Starbuck’s price and quality more competitive (Differentiation strategy) in the
new markets and worldwide coffee industry (gsb.stanford.edu).
Starbucks’ unique strategy of key locations helps it to attract foreigners. This
promotes Starbucks’ brand image and raises prominence. This makes
foreigners familiar with the service, quality and products that Starbucks is
offering.
The intangible resources are the brand name, reputation, knowledge,
experience, etc. The basic ideas for Starbucks creation were taken from Italian
coffee shops, where Mr. Schultz (Starbucks’ CEO) learnt about the Italian
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culture of coffee drinking, which had not existed in the US before. This
knowledge and the experience gained throughout the decades in the US
market provided Starbucks with the unique know-how, which raises
competitiveness in international markets.
The Starbucks brand has elements of uniqueness and differentiation that are
essential to create positive associations in the minds of the consumers (Perera
et al, 2009). This level of brand inimitability and quality is vital for international
buyers. Starbucks brand name is recognizable in most countries around the
world; this makes customers pay a higher price for the brand name. Starbucks
has joined the big league of no-name logo, which could assist it in expansion
into the countries which not only have different languages but different writings
e.g. Arabic (Guardian.co.uk).
Starbucks being one of the companies to have the lowest rate for employee
turnover also has a high employee satisfaction quota. This makes international
recruitment much easier as they are seen as attractive to work for
(Money.cnn.com).
Starbucks has a reputation for being a good socially responsible firm. It is eco-
friendly, and encourages customers to use recyclable cups. It has incorporated
green designs in its stores and helped farmers reduce carbon emissions. All
these build up its brand image throughout the world and increases customer
loyalty around the globe (Starbucks.com).
INSTITUTION BASED VIEW
The main stakeholders in Starbucks are the employees, owners, suppliers and
the customers. Individual stakeholders do not have a lot of influence on the
firm’s performance, due to insufficient power as a single unit. The influence can
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occur if stakeholders share their expectations and objectives within a
stakeholder group.
As a result of shareholder group pressure the firm needs to maximize the value
of shares, through increasing profitability and growth rate. To achieve these
goals, managers implement the strategies that lower the costs or add more
value to firm’s products, thus allowing the company to raise prices. Managers
can increase the rate at with profits grow over time by pursuing strategies to
sell more products in existing markets or to enter new markets (Zhu, 2010).
Due to Starbucks’ home market yielding low growth as mentioned before, this
acts as a reason why managers are pressured by shareholders to
internationalize thus analysing the coffee industry in order to leveraging their
core competence.
In conclusion, the main motives for internationalization are; the saturation of
the US market, the high potential of new emerging markets, brand recognition
in many countries, customer loyalty and security in the supply-chain. These
motives provide encouragement for Starbucks to expand and grow very rapidly
while surpassing its rivals, especially if the right countries are chosen for
expansion.
CHAPTER 5-LOCATION DECISION
Picking out a target country to enter certainly seems tough after considering
over 200 nation-states all over the world. Based on chapter 5 and chapter 6,
we will use our extensive knowledge in international business strategy, to
assume the roles of Starbucks management in order to make a plan for its next
foreign expansion in terms of: where to enter, how to enter and on what scale.
Starbucks’ current strategy involves exploring retail growth outside the United
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States (Trevino, 2010). In the past two decades, emerging markets has been a
hot topic, especially after the banking crisis. While searching for countries in
these emerging markets, we found that Starbucks had opened stores in most of
them. However, India, the world’s second populous country, still was
untouched by Starbucks. Our curiosity lead us to investigate the reasons
further.
In fact, as early as in July 2007, Starbucks considered entry into India, but it
withdrew its application from the Indian Department of Industrial Policy &
Promotion, Ministry of Commerce & Industry. The delay of their India plan was
mainly because Starbucks could not find suitable or agreeable local companies
at that time. However, in January 2011, Starbucks expressed its intention of
preparations to re-enter India, hence we decided to choose India as the target
country to write an entry plan for Starbucks. A systematic analysis of the
reasons why Starbucks decided to enter the Indian market twice will be given
as following:
The attractiveness of India will be analyzed by scanning its environmental
factors, as PEST analysis and SWOT analysis imply, to identify whether it is an
opportunity or threat for Starbucks.
OPPORTUNITIES
The following parts will investigate opportunities in India for Starbucks, by
focusing on both Economic Outlook and Industry Outlook.
Economic Outlook
According to Zhu (2010), to decide if one country is suitable for entry, the
country long-run economic profit and growth potential should be assessed. This
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potential could be interpreted as a function of several factors, such as Trends in
GDP and Foreign Direct Investment, etc.
Based on International Monetary Fund’s published data, India has become the
world’s fourth economic entity by 4001bn GDP (PPP) in 2010, following United
States, China and Japan. Figure 5.1 depicts real GDP in India advancing in a
strong upwards trend since 1995 to 2009, and forecast for the following five
years (2010-2015) indicates Indian economy will continually follow the previous
pattern.
Besides, India is also one of the BRIC - Big Four, comprising Brazil, Russia, India
and China; argued by Goldman Sachs to be a collective grouping of emerging
markets that would dominate world economies by 2050 (Wilson &
Purushothaman, 2003). As O’Neill & Poddar (2008) stated, Indian has the
potential to be 40 times bigger by 2050.
To show India’s growing economic globalization, Foreign Direct Investment (FDI)
could be used to measure the activity of foreign ownerships in India’s domestic
economy. According to UNCTAD’s World Investment Prospects Survey 2010-
2012, which tries to find out future trends of FDI by asking the largest
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transnational corporations (TNCs), India was placed the second most important
FDI destination for TNCs. Moreover, Figure 5.2 shows FDI Inflows to India has
been on the upturn in financial years 2000 to 2009.
Figure 5.2 enhances India’s strong economy in the view of attracting more
foreign direct investments in the past ten years. Based on the above analysis of
its economic prospects, it is arguable that India has a positive economic
outlook and attractive future growth forecast that is suitable for Starbucks to
invest in.
INDUSTRY OUTLOOK
Socio-cultural (lifestyle and demographic)
The growing domestic coffee consumption in India will be proved by the
following factual data, combined to consider related demographic factors.
According to the Indian Consumer Lifestyles Report, published by Euromonitor
International (2010), which states that although India is traditional a tea-
drinking country, coffee drinking has become an essential part of the daily
routine among people living in Southern India. Also coffee has been often
consumed by those in the urban areas most especially by the younger
population. Although cafes are appearing all over India, Indians still regard
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visiting a café or bar as a special outing, and has become very popular among
young, urban Indians who visit coffee shops from once a week to once a day
and consume more than a drink, together with their friends, partners or
business associates.
Some recent data support the trend of coffee’s increasing popularity in India:
1. According to GlobalTGI Productbook 2011, its latest study indicates 52% of
31,000 respondents in 15 urban cities drank instant coffee.
2. In India, Coffee is currently competing against tea to increase its per capita
consumption. According to 2009 India Profile published by International
Coffee organization, the per capita consumption is 0.08 kg.
3. Figure 5.3 draws a clear picture of India domestic consumption of coffee
from 1995 to 2008 which shows gradual increment. This indicates, to some
extent that Starbucks could attain long-run benefits from India.
4. Figure 5.4 below indicates the contribution of fresh coffee sold in coffee
shops and instant coffee towards the total consumption of coffee in India.
This shows an increase from 2005 to 2010 and forecast also shows this
trend will continue for the following 5 years.
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In summary, the prospect of India’s coffee industry is great. Furthermore, the
strong coffee consumption trend provides a big potentially increasing market
for Starbucks.
Resource AvailabilityIndia has a long history of planting coffee bean trees. Besides, India is the only
country that grows all of its coffee under shade. Based on the statistics data
from the Coffee Board of India, the production volume of coffee forecast for the
next crop year 2010-2011 is placed at 299,000 million tons (MT). Figure 5.5
depicts the increasing production volume of coffee in India. The country is also
the fifth largest exporter of coffee beans (Euromonitor International, 2010).
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In summary, India being a coffee planting and exporting country, makes it a
good target country that matches Starbucks’ sustainable development.
Starbucks could achieve vertical integration through its sourcing and roasting
coffee business in India.
THREATS
The following parts will discuss whether Starbucks will face potential threats, in
terms of Political/Legal (red tape, corruption, and regulation issues), Cultural
Differences and Competition.
Political/ Legal
Red Tape Risks
According to a released survey report by Hong Kong’s Political and Economic
Risk Consultancy (PERC) in June 2010, India’s red tape is the worst in Asia. It
explains that India’s bureaucracy is ineffective and inefficient. It also mentions
that the civil service has frustrated most Indians and foreign investors alike.
Besides, another survey conducted by Mathaba in early 2010, indicated that
the majority of respondents thought Indian bureaucracy was a ‘complete
failure’.
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Even though the Indian government claimed to improve its administrative
bureaucratic system (David and Ganz, 2010), Starbucks in its best interest
should prepare to face possible lengthy applications for planning permissions,
licenses etc.
Corruption Risks
Another concern in India is political corruption. According to published
Corruption Perceptions Index (CPI) 2010 by Transparency International, India
was ranked the 87th of 178 countries with a score of 3.3. Compared with CPI
2009 with 3.5 (rank 84th), it indicates that corruption in India is worsening.
Since Starbucks is a member of the UN Global Compact, in which members
should obey 10 universal principles, including working against corruption in all
its forms, extortion and bribery. Starbucks’ anti-corruption is also shown within
its Business Conduct. After entering India, a dilemma will confront Starbucks,
whether to engage in corrupt practices to smoothing out its business dealing,
or insist on its principle.
Regulation/Law Risks
Even though the Indian market has been liberalized, some industries maintain
approval requirements to foreign investment. For example, foreign investment
proposals in 34 high-priority industrial sectors can not exceed 51% as directed
by the Indian government. Besides, in recent years, especially after the 2008
financial crisis, Indian government increased taxations in order to support a
huge deficit in its budget (ISH Global Insight, 2009).
Starbucks’ entry mode therefore is limited in relation to Indian laws, which will
be addressed in Chapter 6. Also, Starbucks could possibly suffer if regulations
are tightened up in the future.
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Cultural Difference
Starbucks is an American-based firm hence If it enters India, it should be aware
of possible problems caused mainly by cultural differences. According to the
famous Greet Hofestede cultural dimensions study, as shown in Figure 5.6 and
Figure 5.7, the differences of the U.S and India are clear to make deductions
from.
In this case, Starbucks should choose a suitable way to learn more about the
Indian market and consumer expectations as the chart above shows the need
for it. Nonetheless, no matter what entry mode Starbucks might choose to
enter India in the future, dealing with the relationship and management of
Indian employees is going to be a tricky task.
Competitive issues
Table 5.1 shows the intensive competition of coffee retailing industry in India.
The two leading coffee brands on a national scale are Hindustan Unilever and
Nestlé India. If Starbucks enter India, it may have to face high entrancing costs
24
set by these already well-established firms. Bearing in mind the already heated
competition, Starbucks should choose a suitable entry strategy.
In conclusion, even though Starbucks faces some threats from political/legal,
cultural differences and competitive areas, there also are a lot of opportunities
for it to enter India. Therefore, to further support its strategic global expansion
and ultimately achieve its No.1 goal, Starbucks should go ahead with a correct
entry model with enough awareness of these above threats. At the same time,
Starbucks should explore as much opportunities as possible by using its core
competencies and brand reputation identified in chapter 3 & 4.
CHAPTER 6-ENTRY MODE
After detailed analysis from the previous sections above concerning the
company’s motive to go international, its strengths and weaknesses;
evaluating the attractiveness and risks of the Indian market; this section will
explore market entry mode.
Some external and internal factors, which may influence or determinate
Starbucks’ expectations on entry speed, control, risk, commitment/investment
25
and return/profits, will be analysed to help us make a final decision for
Starbucks.
External factors
Country specific factors
The limited holding of up to 51% equity for foreign investment clearly indicates
that Starbucks will give up the idea of wholly owned subsidiary, which entails
high risk.
Industry specific factors
The current coffee retailing industry in India is crowded and consists of many
local and foreign competitors (Hopenow, 2010). This indicates that if Starbucks
wants to break through the close siege, it should use a high scale of entry by
choosing an entry mode with high investment/commitment.
Firm specific factors
Starbucks is not familiar with the Indian market and cultural differences
between the U.S. and India also exists. In other words this indicates that
Starbucks need to choose an entry mode that provides a good learning
opportunity.
Product specific factors
Coffee is a common commodity which doesn’t really provide uniqueness as
such compared to having technology, hence could be easily learned or copied.
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This indicates that Starbucks need an entry mode with at least a medium
control.
Internal Factors
Internal factors influencing entry mode is highly dependent on the decision
maker in this case, Starbucks’ Management in its Headquarter since this
information needed for such analysis is unavailable for us. However using the
famous Greet Hofestede’s cultural study to explain the internal factors, the Risk
Avoidance Tendency will be examined by Uncertainty Avoidance Index (UAI).
Based on Greet Hofestede’s results, The United States got 46, compared to the
world average of 64, which indicates that Americans do not attempt to control
all outcomes and results. In other words, American managers in Starbucks’
headquarter seem not to have a risk avoidance tendency and would accept an
entry mode with a high risk.
As stated in Chapter 5, Starbucks’ first attempted entry into India in 2007
failed. There are two lessons Starbucks should have learnt from that failure
(Indian Wine Academy, 2007):
Firstly, this time when writing a proposal to hand over to the India Ministry of
Commerce & Industry, Starbucks should draw a clear picture of its expansion
intentions in India (which it failed to do in 2007), by obeying India laws exactly
and carefully.
Secondly, this time when finding and negotiating with possible partners,
Starbucks should take a step back in terms of its usual high expectations and
requirements in the contract, to avoid leaving India without accomplishing
anything again.
Nevertheless after analysing the possible external and internal factors and
learning from its previous failure, a feasible entry mode will be suggested. The
procedure of filtering several entry modes through a Hierarchical Model could
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give a clear picture of every entry criteria used in each step.
Step 1: Ask ourselves if Starbucks need an equity mode, or a non-equity
mode.
Our answer is Yes, that it needs an equity mode. Even though Starbucks used
licensing to; hotels, airports, tourism places, schools/universities in some
countries, this way will not be suitable in the case of India. This is because India
provides many opportunities for Starbucks, which it will surely want to
participate in order to secure a certain amount of equity and high profit in
India. Therefore, licensing, franchising and exporting could be excluded here.
Then the step is towards joint venture and wholly owned subsidiary.
Step 2: Ask ourselves if Starbucks needs an entry mode that requires holding a
100% stake, or not.
Our answer is No. The restriction for Starbucks in this step is highly dependent
on Indian laws. As it has been mentioned in Chapter 5, India’s government only
allows foreign firms to hold no more than 51% equity in 34 industrial sectors,
including the retailing industry in which Starbucks will operate (Russ Thai,
2009). Therefore, a wholly owned subsidiary by acquisition or Greenfield
investment is impossible for Starbucks to choose at this stage. Hence, the next
step is towards joint venture.
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Step 3: Ask ourselves if Starbucks needs to build up a new firm with its
partner, or not.
The answer is not that simple. Firstly, Starbucks has a need to source and
roast coffee beans, controlling the upper value chain sections and achieving
vertical integration. Secondly, Starbucks must open its own coffee stores to
operate its main business of running coffeehouses across India.
Therefore, considering Starbucks’ two business requirements mentioned above,
a joint firm would need to be built up between Starbucks and its local partner
for example Starbucks India Ltd. Hence, a strategic alliance is inadequate for
Starbucks.
Finally, through the process of elimination, our solution suggests that Starbucks
should enter India through a joint venture in which it holds the majority stake
(51%-49%).
After identifying Joint venture as the preferred form of entry, it is important to
assess the benefits and downsides of such entry mode.
Advantages
Firstly, potential risks, such as unseen future regulations, political risks or
natural disasters for coffee growing, could be shared with its partner.
Secondly, Starbucks could gain more knowledge about the Indian coffee
growing, roasting and retailing industry from its partner during their work
together.
Disadvantages
Firstly, even though Starbucks holds a majority role in the venture, it means
Starbucks cannot have total control and may face some conflicts related to
decision and management issues, which could possibly result from their
different expectations/objectives on each other and their cultural differences as
identified in Chapter 5.
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Secondly, the nature of a joint venture determines that Starbucks must share
profits with its partner which is uncharacteristic of the company.
Recommendation
No entry mode is perfect and all has its downsides, but Joint Venture seems the
most suitable in for Starbucks’. One final precaution for Starbucks can be made
here in that all controversial details during negotiation should be clearly stated
in the contract with its partner, to avoid any petty and unnecessary conflicts in
the future.
CHAPTER 7-CONCLUSION
In conclusion, having assessed the evidence concerning Starbucks’ decision to
internationalise, the internal and external environment and its impact on the
company, it is fair to conclude that the company is in a strong position to
expand especially after successfully scaling through the effects of the financial
crisis while learning to be lean and efficient in the process. India should be the
next country for its subsequent expansion since it provides a very good
opportunity for potential high profitability, increased market share and
strategic placement in terms of resources for Starbucks.
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