Starbucks's International Success - Essay Example

? Starbucks - International Business Introduction In the modern world, the brand “Starbucks” has become synonymous to quality, diversity and exquisite experience among millions of coffee lovers and people who prefer to eat refreshingly tasty food items. In such context, Roby (2011) stated that technically, Starbucks should never be able to attract customers for day after day with its overpriced coffee but in practical situation, millions of people across different parts of the world visit Starbucks to enjoy the holistic experience despite paying high price. Although, previous researchers like Roby (2011) conducted research on international expansion strategy of Starbucks but these researcher focused more on marketing aspects of international expansion strategy of iconic coffee retailer but strategic dimensions of Starbuck’s international expansion remain scarcely discussed by scholars. In order to fulfil scarcity of research regarding strategic dimensions of Starbucks international expansion, this essay will try to shed light on pertinent issues regarding international expansion of Starbucks. Key objective of this paper will be to answer three questions, 1- how internal resources capabilities are supporting Starbucks to achieve success internationally, 2- how Starbucks has addressed challenges during international expansion and 3- what are the strategic initiatives that are taken by Starbucks to achieve success while expanding business internationally. In such context, business background Starbucks will be discussed in order to develop background for strategic analysis. Back Ground Analysis: Business Matrix of Starbucks Starbucks Corporation was established by Zev Siegl, Gordon Bowker and Jerry Baldwin during the year 1971 and the company is headquartered at Seattle, Washington, U.S (Starbucks, 2012). The company started its operation through opening single store in Pike Place Market of Seattle while in the next 42 years; Starbucks Corporation has expanded its operation over 61 countries (Starbucks, 2012). According to annual report published by Starbucks Corporation for the financial year ended 31st December, 2012, the company maintains distribution channel containing more than 10,000 stores (including licensed and owned stores) within USA and more than 20,000 stores across the world (including licensed and owned stores). Starbucks Corporation specializes in offering various coffee drinks, beverages, different types of hot drinks, side dishes, salads etc (Starbucks, 2012). Market capitalization Starbucks close to US$38 billion while sales revenue of the company hovering over US$ 12 billion. Starbucks Corporation faces competition from not only same segment players but also from competitors who offer cross segment products. For example, Starbucks offer similar kind of offering as Dunkin' Brands, Green mountain coffee while in domestic and international market; Starbucks Corporation faces intense competition from cross segment players like Nestle, McDonalds, Kraft Food and Wendy's International. Why Starbucks has been so successful to penetrate in distant markets while its competitors are gasping for maintain margin product differentiation equilibrium? Lee (2010) pointed out that competitive advantage for Starbucks lies on its ability to customize its product portfolio and service mix in accordance with the macro environmental requirements. Lee (2010) identified three strategic moves that have helped Starbucks Corporation to achieve success in international market such as, 1- establishing licensing and partnership with distribution partners that can reduce dimensions of risks and contingency factors associated with expansion in international context, 2- differentiating in terms of product portfolio and service customization as per socio-cultural divergence in international countries and 3- customizing its integrated marketing communication as per socio-cultural divergence in international countries. In such context, Boston Matrix of Starbucks product portfolio can be used in order to understand how Starbucks has achieved competitive advantage against competitors like Dunkin' Brands, Green mountain coffee, Nestle, McDonalds, Kraft Food and Wendy's International. Figure 1: BCG Matrix of Starbucks Product Portfolio (Source: Lee, 2010) It is evident from BCG matrix of Starbucks Corporation that the company maintains large product portfolio while each product segment is diversified to many offerings. For example, at present, Frappacinos and Starbucks line is most profitable (cash cow) product portfolio for the company while in international market, the coffee retail chain recently introduced VIA instant coffee as low price offering to price sensitive market. Starbucks is still not sure about the future outcome of VIA instant coffee hence it can be referred as question mark for the company. In many international locations like China, Chile, Brazil, Peru (Peru) etc, the largest coffee retailer even mixed local flavours and coffee beans in order penetrate in the market and such type of hybrid product portfolio can be referred as Star for the company. However, Seattle’s Best of Starbucks has passed its previous charms and can be classified as dog. High degree of product differentiation of Starbucks has been created competitive barriers for competitors to copy the product portfolio of Starbucks while hybrid (mix of owned and licensed stores) distribution channel has further increased the magnitude of competitive barriers for competitors. For example, in price sensitive emerging market, Starbucks has developed instant coffee range of VIA (a low cost variant) which can compete with local coffee brands at similar price point (Lee, 2010). Consideration of research paper of Lee (2010) reveals the fact that in developed economies, the coffee retailing giant even goes for focus differentiation strategy by allowing loyal customers to witness real time coffee making in brewing utensils or offering free gifts to them (Lee, 2010). Behind the International Expansion Strategy of Starbucks - A Resource Based View Kraatz and Zajac (2001) and Adner and Zemsky (2006) pointed out that a company can achieve competitive advantage by deploying its resources successfully. In such context, the concept of resource based view (RBV) can be used to understand resource capabilities of Starbucks which have helped them to go for international operation. Tangible Resources- Roby (2011) pointed out that international expansion strategy of the company is backed by its sufficient access to tangible resources like warehouse property, logistics infrastructure, state of art brewing technology, financial liquidity, low debt to capital ratio, cash assets etc. Financial capability of the company can be shown by depicting continuous rise in sales revenue and store sales growth for the company. Figure 2: Financial Resource Growth of Starbucks (Source: Starbucks, 2012) Intangible Resources- strong brand image across the globe, Quality of service, intellectual property right regarding brewing mechanism, trained human resource pool and goodwill among financial institutions and investors are major intangible asset for the company and Starbucks deliberately use the mentioned intangible resources in order penetrate in international market. Capabilities- having financial capabilities to access latest technological facilities has increased capability of Starbucks to customize products as per requirements of customers in cost efficient manner in case price sensitive market. Efficient and responsive human resource pool backed by staff at front desk of service point, product engineer, marketing departments and logistic partners help the company to maintain the quality benchmark for responsive services in different international locations. Behind the International Expansion Strategy of Starbucks – SWOT Analysis SWOT analysis can be used in order to understand internal strategic context of Starbucks Corporation that have helped the company to expand its internal operation. Strength Consideration of annual report of Starbucks (2012) reveals the fact that the company has expanded its operation in more than 60 countries while global distribution portfolio of the company exceeds more than 20,000 stores. None of the competitors have been able to copy such expanded their distribution channel portfolio of Starbucks Corporation across the globe. Even during economic recession in 2008 to 2009, the company maintained steady revenue rise and growth rate while most of its competitors failed to maintain top line growth during economic hard times. High level of brand equity, loyal customer base and market leadership position are core marketing strength of the company. On the other hand, financial liquidity, low debt capital ratio, access to financial capital to invest in strategic initiatives, technological capabilities to cope with changes etc are strategic strength of the Seattle based coffee retailing giant. In international context, Starbucks uses all the mentioned strengths in order to penetrate in markets which are being characterized with unorganized coffee retailing and dominance local coffee restaurants. Weakness Major weakness for the company is it inability to reduce price across all the product portfolio while cross segment competitor McDonald directly competes with the coffee retailing giant by offering 30% to 40% cheaper product portfolio (Roby, 2011). Although, Starbucks offers variety of product portfolios such as coffee drinks, beverages, different types of hot drinks, side dishes, salads etc but almost 80% of the revenue being earned from coffee product portfolio. Such high degree of dependency on coffee product portfolio exposes Starbucks to risk of volatility in terms of coffee bean prices across the globe. Such weakness has already dampened the growth of the company in developing countries (Roby, 2011). Opportunity Starbucks has already taken initiatives to expand its global operation in BRICS (Brazil, Russia, India, China and South Africa) nations but they have the opportunity to start fully fledged operation in the BRICS due to two reasons, 1- with the growth of industrialization, disposable income of upper and middle class segment of BRICS is growing which fuels their desire to enjoy branded coffee items. Murphy (2011) reported that Brazil is the world’s largest coffee market when it comes to coffee production while demand for coffee has been increased significantly among Gen Y working class in China and India. For example, Starbucks signed agreement with Tata coffee of India in order to start operation in the country (Bose, 2011). Expanding business in BRICS nation would provide 2 types of benefits to Starbucks such as, 1- the company would be able to decrease cost of value chain by accessing low cost coffee supply and low cost labour of India, China and Brazil which would help the company to design price buffer as against global coffee price volatility and 2- Starbucks has the opportunity to drive growth in emerging market by diversifying its product offering in terms of local culture and this would help the company to reduce its extensive dependency on coffee items (Roby, 2011). Threat Existing markets for Starbucks in UK and USA are getting saturated due to entry of new players and product diversification of existing players. To be precise, for last 5 years, more than 27% of revenue has been earned by the company from its international operation while profit margin is shrinking for its USA and UK based operation (Roby, 2011). In UK, Starbucks was even accused for corporate tax fraud and recently, the coffee giant was being forced by UK government to pay ?5m as corporation tax (BBC, 2013). In USA and Europe, McDonald’s has already started opening McCafes franchisee stores which are being direct low cost competitor to Starbucks (Roby, 2011). Due to such threat factors like saturation of coffee market for Starbucks in USA and Europe and external government pressure on bottom line, Starbucks needs to bank on its opportunity and focus more on expanding business in emerging market. International Business Operation of Starbucks Why Global One must not illusion that a global brand name like Starbucks can eradicate all its strategic challenges by expanding business overseas rather took the global expansion agenda in order to achieve business growth and decrease risk associated with market saturation. From strategic viewpoint, product driven global expansion options of Starbucks can be explained by using Ansoff (1987) matrix Figure 3: Ansoff Matrix (Source: Ansoff, 1987) According to the above model, Starbucks had four option to achieve business growth such as, Option 1- increasing penetration for in USA market by customizing the marketing strategy but strategy could not help the company to achieve sustainable business growth due inevitable market saturation with the entry of new players, Option 2- diversifying product portfolio in existing licensed and owned retail stores in USA but again, the strategy cannot help the company to achieve sustainable growth, Option 3- entering new market or expanding business in internationally by offering new products but Starbucks is hot drinks and beverage company, hence there was very little scope for the company to enter in international market with new product portfolio and Option 4- entering international market by developing and diversifying the food offerings in accordance with culture, trend, economic condition and social value of customers of the international countries. Due to sustainable growth and flexibility aspect of the option 4 and shortcomings other 3 options, internationalization was become key growth drivers for Starbucks. The main objective for pushing Starbucks to expand internationally was to reach out large retail consumer coffee market, achieve high revenue growth and decrease risk associated relying on single market. In such context, in 1987, Howard Schultz (Retail Operation Director of Starbucks Corporation at that time) opened the first international store of the company in Vancouver, British Columbia (Roby, 2011). In the next 26 years, the Seattle base coffee retailing giant expanded business in more than 60 countries through different alliances and joint ventures. For example, in 1996, Starbucks and Pepsi-cola signed North American Coffee Partnership in order to sell coffee products of the company in bottled format through convenience and discount stores (Roby, 2011). Another thing is that Starbucks used hub and spoke distribution channel in order to sell their products in cities which do not have Starbucks store (United States Securities and Exchange Commission, 2011). Entry Mode in International Market & Challenges in Partnership From Internationalization perspective, a company can expand business in international countries through six primary ways such as, 1- exporting goods from home country to foreign country, 2- using turnkey project where foreign contractor handles operation on behalf of the client, 3- licensing where parent company (licenser) grants permission to a foreign company (licensee) to use intangible property such as process intelligence, trade mark etc for specific period of time, 4- franchising where franchiser grants permission to franchise to not only use intangible property but also follow all the business policy of client for longer period of time, 5- Joint venture, in which the parent company establishes partnership with foreign player and participate directly in operation in foreign countries and 6- Foreign direct investment (FDI), in which the company has 100% control over its operation in foreign countries and invest directly (without any partner) in expanding operation in foreign countries (Deresky, 2006). In case of Starbucks, used FDI for less risky international market, joint venture international market having future growth potential and licensing for international market where magnitude of business, political and economic uncertainties is pretty high. Following diagram can be used to substantiate above claim. Figure 4: International Entry Mode of Starbucks (Source: Deresky, 2006) For emerging market and BRICKS nation, Starbucks Corporation alternatively uses joint venture or FDI as per government norms and market risk factors (Roby, 2011). For example, in China, Seattle has used FDI model to enter while in case of India, as the government norm allows 50% ownership, Starbucks signed agreement with Tata coffee to enter in the country (Bose, 2011). Figure 5: Financial Investment of Starbucks during Internationalization (Source: Starbucks Corporation, 2010) According to the above diagram, Starbucks annually invest more or less US$500 million in different joint ventures, licensing and FDIs. 50% of the investment goes to establishing joint venture with foreign partners to market accompanies with high growth opportunity and macroeconomic risk factors. Apart from North America, the coffee retailing giant shows the reluctance go for wholly owned subsidiary model or FDI policies in order to avoid risks related to increased cost of operation due to rise of sourcing and logistic cost and starting operation in a country whose culture and consumer preferences differ significantly in contrast to USA or Canada. According to Gulati, Huffman and Neilson (2008), certain problems have been faced by the coffee retailing giant while banking on partnership model to expand business internationally such as, 1- in case of joint venture, Starbucks Corporation looses the control over value chain in some countries due to dominance of the partner in local market, 2- government policies in foreign countries have even increased cost partnership and 3- lack of cooperation from partner has even created perplexity among Starbucks regarding international strategy. For example, in Israel, Seattle based coffee retailer established joint venture with Delek Group to start operation but the partner company provided wrong strategic information regarding demand of USA based coffee items among Israeli consumers (Deresky, 2006). Due to such wrong information, Starbucks failed miserably to work out the partnership model to expand and finally closed down operation in Israel in 2003 (Deresky, 2006). In case Russia, Starbucks Corporation faced government policy hurdles while entering in the country through partnership with Kuwait's MH Alshaya. Cultural Adjustment & Quality of Supplier Tang and Liou (2010) pointed out that resources should be dynamic in nature otherwise companies cannot achieve sustainable competitive advantage by deploying such resources in changed macro environment condition. The same arguments hold true for Starbucks when it comes to expanding international countries by recalibrating resource capabilities and strategies in accordance with cultural shift. The study has found that success of Starbucks in different countries depends heavily on its ability to alter product/service mixes in accordance to national culture. For example, in Japan, Starbucks unsuccessfully tried to use their USA based product offerings to attract Japanese customers and it had failed miserably. In such context, Starbucks realized the need for incorporating local culture in product offering and store setting and to understand Japanese culture, Starbucks Corporation established partnership with renowned Japanese coffee player Sazaby Inc. It has been found by the researcher that Starbucks tries following standard international product offerings in countries which have cultural similarity with USA but focuses heavily on product differentiation emerging economies and BRICS whose culture significantly differs from culture of USA (Roby, 2011).. Therefore, it can be said that emphasizing on national culture is as important as international environment and Starbucks Corporation use its dynamic resource capabilities in order to recalibrate its strategy as per cultural requirement (Roby, 2011). In future, Starbucks Corporation has the opportunity to decide optimal entry mode after understanding cultural differences and extent of product diversification is needed in order to balance the cultural shift. It has been found by the researcher that Starbucks Corporation focuses heavily on ensuring high ethical standard for sourcing the supply from suppliers. To ensure standardization of high quality of supply from supplier, almost 90% of coffee beans are sourced through Fair trade coffee certified supply. In Fair trade certification, certain quality issues of coffee supply being addressed by Starbucks such as, 1- ensuring protection of interest of farmers by helping them to quote economically sustainable prices for the supply and diminish the intervention of middle man, 2- providing additional fund to farmers so that they can use latest technology to harvest high quality coffee beans, 3- providing training to farmers in order to help them to harvest high quality coffee beans and 4- developing community and restricting child labour among farmers who are working as supplier for the company (Fairtrade Foundation, 2009). Using Fair trade certification has not only increased quality of supply for Starbucks Corporation but also increased their credibility among customers and investors. Suggestions It has been found by the researcher that international business portfolio covers less than 35% of revenue for Seattle based coffee retailing giant while of 2/3rd of the revenue still comes from their USA centric operation (Roby, 2011). Such dispersed international business portfolio is not only increasing vulnerability of the company to risks hyper saturation USA coffee retailing but also negatively affecting bottom line growth of the company. In such contingent situation, the study will offer 3 suggestions to the company that can increase their penetration in global market. Suggestion 1- increase numbers of stores in emerging markets like Vietnam, Peru, Indonesia and BRICK and use Joint Venture and licensing as probable entry mode in these region. Suggestion 2- eradicate redundant value chain steps in order to achieve cost optimization at every phase of value chain and doing so, the company would be able to compete with low cost rivals in international market. Suggestion 3- in international context, the company should provide equal importance to coffee and other product portfolio. Therefore, such parity should be incorporated while diversifying product as per culture and consumer trend in international countries. It is expected that by deploying the mentioned strategic suggestions, Starbucks Corporation would achieve sustainable competitive advantage in international context. Conclusion Throughout the study, the researcher has focused mainly on international expansion strategy of Starbucks and found the flexibility of international business model of the company as quite surprising. According to Roby (2011), Starbucks is hardcore USA based MNC which offers Americanized food items then how it has become able to achieve so much success across different countries in the globe? It has been found by the study that Starbucks never tried to rely only on its high priced product portfolio in order to remain successful in different countries except USA but the company has always banked on mixing upbeat environment within store, responsive services of staff and status symbol associated with the brand in order to penetrate in global market (Roby, 2011). Although, Starbucks has never tried to change mission and vision statement while penetrating in global market but they have tweaked their existing product portfolio and business model while penetrating in international context. In conclusion, it can be said that success of Starbucks in its international strategy is being directed by its ability to customize every phase of value chain as per customer requirements and cultural divergence. Reference List Adner, R. and Zemsky, P. A., 2006. Demand-based perspective on sustainable competitive Advantage. Strategic Management Journal, 27(3), pp. 215-39. Ansoff, H. I., 1987. 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