Starbucks Foreign Direct Investment - Literature review Example

?Starbuck’s Foreign Direct Investment Expansion through Licensing Format Starbucks was founded in 1971 as a small coffee store in Seattle’s Pike Place market. By 1992, when it went public, it had become a national phenomenon and was expanding at a break-neck pace (Pride, Hughes & Kapoor, 2009). Patterson et al. (2010) write that the two main reason Starbucks was able to become an international phenomenon are: Firstly, unlike any other coffee brand Starbucks was able to Americanize the European coffee-drinking tradition. Secondly, Starbucks did not just sell coffee, they sold an experience (2010, p. 41) Starbucks has laid significant emphasis on consistency of product, atmosphere and services across their stores globally. In other words a customer can visit any Starbucks store in the world and essentially get the same products, atmosphere and be able to buy coffee to their exact preferences. In order to ensure such a high degree of consistency, Starbucks employees including managers undergo intensive 13 week training to not only understand the product line but also to fully embrace the customer service experience (Patterson et al, 2010). Initially Starbucks was able to manage their tremendous growth through financing by selling their own stock. This enabled the company to open new stores, expand menus and purchase new roasting facilities to cope up with increased demand. Pride, Hughes & Kapoor (2009, p. 562) write that the company managed to borrow more than $160 million to finance their national and international expansion. By the time the company went public in they had grown to 5800 cafes with WiFi systems available. This growth was stalled by 2008, when there was economic recession, rising costs, declining consumer spending and increasing competition from more cost-effective coffee options from Starbucks and Dunkin Donut. The approach of international licensing appealed to the company because it offered growth in international markets without putting a significant burden on the company’s finances in terms of operating costs and initial outlay investments. In international markets, Starbucks used the strategy of issuing licensing agreements to reputable and capable domestic companies. The concept was that these domestic operators had expertise in the retailing business of the host country. These licensees would be responsible for developing and operating new Starbucks stores. For effective execution of this strategy, Starbucks created a new subsidiary “Starbucks Coffee International (SCI)” to overlook their international expansion through global licensing agreements (Thompson & Gamble, 1999). The main attractiveness of international licesing is that the parent company manages to expand very vastly into the international markets without having to finance this growth itself. Generally international licensing is used in industry where the cost of transportation is high or the goods are bulky. Essentially this concept did not fully apply to coffee stores because they might be saving some insignificant amounts on cost of transportation but were suffering from disadvantages of licensing. The main disadvantages include the lack of control over the industry property, the quality of goods and the loss of profits to licensees (Gilles, 1996, p265). Another risk that the firm faces is the loss of proprietary to the domestic competition, which could easily be observed in case of Starbucks. These perhaps are the main reasons Starbucks became disenchanted with the licensing strategy. Strategic Role of HRM in International Expansion Howard Schulz of Starbucks considers their human resources as a strategic asset that needs to be managed in accordance with their organizational objectives (Jackson et al, p.24). Starbucks is a company that takes pride in their customer service, thus for a company that is service-oriented training, retaining and motivating employees that are able to serve clients well day in and day out even to very difficult customers, is imperative. There are various factors that contribute to the success of a company but according to Jackson et al. (2011) success is not manageable without managing human resources. The rapid internationalization of some brands holds a major challenge of managing a multicultural workforce (Shen et al., 2009, p 236). Shen et al. (2009) further suggest that there is a positive relationship between employee development and minority representation. Internationally Starbucks can achieve this by ensuring that they address issues of demographic representation in HRM and encourage participative decision-making. By means of deploying a diverse workforce, organizations can gain a distinctive competitive advantage in the international markets. By effective diversity management, organizations can accomplish various objectives such as; comply with legal requirements of EEO and AA requirements, higher degree of creativity and innovation, better marketing potential, higher employee attraction and generally higher ability to outperform competition that lacks diversity (Shen et al, 2009). Starbucks holds a significant share of specialty coffee shops outside of North America in Western Europe, Asia Pacific and Latin America. These international operations are responsible for significant market share for the brand. Interestingly Starbucks has outperformed competition in many of these countries where coffee drinking was not even part of the culture. One such country is Japan, the first Starbucks store outside of US opened in Tokyo in 1996, and since then the Japanese market has become the best performing market for the brand outside of US (Patterson et al, 2010). Staffing Approaches in Japan Starbucks in thriving in Japan, they started off with 50/50 joint venture with the Japanese upscale retailer Sazaby in 1996. They used a similar strategy as that in US, of opening multiple stores in a small geographic area so the Japanese consumers would have high exposure to the brand. The competition from domestic brands has been tough too; brands like Doutor used the copycat strategy and opened “Excelsior”. The extension was so similar in fact that Starbucks went ahead with a lawsuit against them to change their sign and layout (Fulford, 2000). Other than that Starbucks has had competition from other international brands like Tully’s Coffee. Expansion through Local Joint Ventures Griffin (p.58) writes that Starbucks is very specific about entering markets that are more accepting f the American culture and avoids countries with majority of low-income individuals. Aside from picking specific regions to invest, Starbucks is also particular about the method they opt for to enter the markets either through strategic partnerships or through direct investments (Hinkin & Tracey, 2010). Within the United States at least two-thirds of the stores are company-owned, so far they do not franchise but choose to have strategic partnerships with universities, offices, hotels and airports. Internationally Starbucks has used a slightly different policy, globally only about one-third of their stores are company-owned and the rest are all strategic alliances. This strategy has been beneficial to the company because it enables them to keep the operating costs to a minimum, reduce exposure to risk and gain the local expertise (Griffin, p.58). Holmes (2003, p.24) criticizes the joint venture approach of the Starbuck’s international expansion and says that it is one of the main reasons that they have not been as successful aboard as compared to domestically. The company does get significant revenues from joint ventures as well as licensing fee but it has become increasingly hard o curtail costs outside of the US. In Japan in particular the real estate cost and the labor costs are much higher, which have put a significant dent on the profits. However not all researchers agree, they believe that joint ventures are still key to success as long as the company manages to price their product competitively in a tough economy. Having standardization for each location would be cost-effective for the company but Starbucks respects the local tastes, culture and laws that govern the host countries. For this reason having joint ventures have been extremely beneficial because they provide the company with the local consumer insight as well as lower cost of direct investment. Starbucks Strategy in the UK Unlike the Starbuck’s strategy of partnerships in the Middle East and Japan, the company chose to enter the United Kingdom through acquisitions rather than partnerships. The main reason behind this approach was that acquisitions provided greater speed of entry, as the acquired business had an already established market and would provide a platform for introducing the brand into the lucrative UK market. The labor laws, market, culture, language and the management practices in the UK were similar to that of the United States which provided an insight to the company what to expect from the consumers in UK (Kluyver, 2010, p. 112). Thus a fully company-owned store similar to the pattern as that of the United States made marketing and financial sense to the company. In 1998, Starbucks acquired the Seattle Coffee Company which already had presence in the UK markets. The acquisition of the company was a lucrative option for Starbucks because it enabled the brand o quickly penetrate the UK market and make use of supply chains of an established brand. The growth of Starbucks in the UK was phenomenal; in 2005 UK was the third largest country that served Starbucks coffee after the United States and Japan (Kluyver, 2010, p. 112). Strategies used in China and Japan have been very different from that adopted in the UK. In these markets Starbucks used the minority share licensing agreements with experienced local partners to minimize the risk to the brand. Under these agreements the local partners were responsible to purchasing the store equipment, real estate as well as operating costs; this eliminated the unnecessary administrative and capital costs for the company. The enabled the companies to minimize the initial losses occurred due to high capital costs; and enter the Japanese markets with greater speed than it would otherwise have been possible on their own. Another major reason that the company chose local partners was the fact that the Japanese culture, language, management practices and laws are very different from those in the United States. Having local licensing agreement enabled Starbucks to reduce the high risks associated with making marketing blunders and observation of local laws. Over the years the company did realize that having agreements with local partners was a low-risk venture but resulted in lack of control over the stores as well as a lower percentage of profits. References Fulford, B 2000, 'Smell The Beans', Forbes, 166, 6, p. 56, Health Business Elite Gilles, G.L. 1996. Global business strategy. Edition Illustrated. London: Cengage Learning EMEA Griffin, R.W. 2007. Fundamentals of Management. Edition 5. Boston: Cengage Learning Hinkin, T., & Tracey, J. (2010). What Makes It So Great? Cornell Hospitality Quarterly. 51, 158-170. Holmes, S 2003, For Starbucks there is No Place Like Home.  Businessweek, 3836, p. 48, Jackson, S.E, Schuler, R.S and Werner, S. 2011. Managing Human Resources. Edition 11. Mason: Cengage Learning Kluyver, C. 2010. Fundamentals of Global Strategy: A Business Model Approach. New York: Business Expert Press. p.112-114 Patterson, P.G., Scott, J. & Uncles, M.D. 2010, "How the local competition defeated a global brand: The case of Starbucks", Australia Asian Marketing Journal, vol. 18, no. 1, pp. 41-47. Pride, W.M, Hughes, R.J, Kapoor, J.R. 2009. Business. Edition 10. Mason: Cengage Learning. P.562 Shen, J. Chanda, A. D'Netto, B and Monga, M. 2009. Managing diversity through human resource management: an international perspective and conceptual framework. The International Journal of Human Resource Management.P 235-251. Thompson, A.A and Gamble, J.E. 1999. Starbucks Corporation. The McGraw-Hill Companies. Available at : http://www.mhhe.com/business/management/thompson/11e/case/starbucks-2.html [Accessed 1 April 2013] Read More