International Business Strategy of Starbucks during 2006 - Essay Example

International Business Strategy Answer to Q1: Introduction: In this case study, the challenges faced by Starbucks in their business operations are deeply analysed. It is intended to find out the basic drawbacks of their business strategies and to suggest appropriate corrective measures. Long term profitability needs continuous growth in the market. It should be done by following the business concepts in the local region. The changes in business principle are favourable only after getting a firm position in the market. In order to get strong acceptance in the industry the basic culture of the customers has to be identified and combined in the business operations. Challenges in Business operation s of Starbucks during 2006: The Starbucks Corporation faced many strategic challenges in its international business operations in the year 2006. Main challenges were from the well established local players in the host countries. Business strategies of Starbucks were not supportive for satisfying the international customers for a long term. The follow up of basic principles in the translational business also was helpful only to a certain extent of time period. Business principles like self service rule and no smoking rule in the premises helped to attract the youngsters and non-smoking customers to the shop and helped to attract a large number of customers in the initial stage of the business. But it was not capable of sustaining the customers for a long term. . The quality and taste of Starbucks products is not capable of attracting and sustaining the customers in the competitive environment. Operational costs such as hiring employees and buying leases were very huge and it reduced the rate of business profit. Training of personnel and promotion of products required large amount of investment. Operational problems resulting from lack of a trained work force and suitable real estate for its stores also affected the profitability and market growth of Starbucks in international market. The volatile political environment in the Middle East region imposed restrictions over the business operations of Starbucks. The political attitude in the Middle East was against the US due to its strong relation with Israel. As a US based company, Starbucks faced boycott problems from the customers in the Middle East region. The owner of Starbucks firm is a Jewish personality and it intensified the situations. Resistance from customers as a result of the alleged close relation between USA and Israel affected the business growth in Middle East region. NGOs were also against Starbucks activities and it restricted the availability of certified coffee beans for the business. Economic recession existing in countries such as Switzerland, Germany, and Japan resulted in declining sales and revenues in these countries. Stiff competition from local firms and high business development costs in the international market imposed business loss in Starbucks’ operations. The size of the firm in the international business was not suitable in the existing business conditions. It is not ready to accept the analysts’ point of view of reducing the business size to suit the present conditions. Starbucks had the expectation that the trends among the youngsters towards the firm will be long lasting. It follows the same size in business operations by disregarding the changes in the market conditions. This imposes challenges of sharing the customers between the branches of the Starbucks themselves. The value of products of Starbucks is higher than that of local suppliers and at the same time the quality and taste is lower than the local firms. The growth of Starbucks was in rapid rate which was only the result of a short term trend among the customers. In the international market, a rapid growth is not favourable as it will not be long lasting. In localisation, production of goods and services is carried out nearer to end users. The target market in localisation policy is single community occupying specific cultural needs. The production process is carried on by integrating the cultural needs of the community. Hence close relation with the community can be ensured by business firms. (Dadhich 2006). In case of Starbucks’ products no adequate market research was followed for identifying the local customers’ needs and interests in product features. They were not prepared to follow localisation strategy in product features. In case of food products, the localisation strategy is very essential for getting long term customer acceptance in the global business operations. Conclusion: Starbucks was not ready to compromise on its basic business principles at the initial stage of the business. Follow up of the basic coffee beverage line ups and no smoking rules in the international business failed to attract and sustain the international customer groups. After learning the necessity of compromising the business principles in the new global business environment, it made changes in their business attitude. It allowed regulated non smoking in their coffee shop and introduced new products meeting the taste needs of customers. Through profitable domestic operations, Starbucks attained higher growth in business profit in 2006. The experience of the Starbucks shows that keeping up of basic principles of business without changes in translational business was not favourable for the firm in the present business conditions. Firms have to design their business operations and product features only after identifying the attitudes and customer behaviour in the specific market destination. Answer to Question 2: Using case evidence and module theory discuss the advantages and disadvantages of each of the following modes of entry to a new international business location. Licensing, joint ventures, and wholly owned subsidiaries. Which mode or modes do you recommend to Starbucks to use when entering India, Brazil, and Russia. Introduction: Firms have to follow adequate entry strategy to ensure successful entry in the competitive product market. There are different entry strategies adoptable for firm in the product introduction. The selection of entry strategy is depends up on the market conditions and specific features of the product. In these conditions, an analysis of the benefits and draw backs existing with each entry strategy is helpful for Starbucks to make an accurate entry strategy for their new market entry. Entry Strategies: Three different ways for starting business internationally are discussed here with their advantages and disadvantages. Licensing: “Licensing is a relatively flexible working arrangement that can be tailored to the needs of both the licensor and the licensee. It is a popular method for profiting from a foreign market without committing sizable funds.” (Luo 1999, p.151). In licensing, company grants the rights of intangible property like patents and trade marks to another company for a specified period of time. Earnings are by way of royalty fees. Licensing involves low development costs and risks when compared with other entry modes. Company having unique and advanced technology can adopt this mode of entry strategy in international business expansion. It suffers certain disadvantages. In this model of entry, the control over technology and operating costs are not possible for the firm. Joint ventures: Joint venture is an effective strategy for successful business launching in foreign countries. “A domestic company should have the following home country advantages; it is familiar with local customer needs and local product features, it has long standing relationships with customers, it may have a cost advantage because of simpler product design and lower operating, overheads and transportation costs.” (Miltenburg 2005). Joint ventures with the local firms provide opportunity for foreign firms to acquire local firms’ experience and knowledge in the expansion program. The huge development costs and risks can be shared with the local partners through joint venture formation. Political restriction from the region also can be avoided through this strategy. In joint venture, the sharing of technology is involved and it will result in lack of control over technology and firm cannot be able to engage in their global strategic co-ordination. It requires more direct investment, training, managerial assistance and technology transfer. Wholly owned subsidiaries: In this approach the operating firms in the launching countries are selected for expanding the business through supply of products, promotion and sales. Protection of technology is possible in this approach. Firms can engage in global strategic business co-ordination and this will be supportive for the sustainability of the firm. Location and experience in economies can be attained through this approach. However, the higher costs and risks related to this approach are required to be considered while expanding the business in the international market. “When a firm’s competitive advantage is based on technological competence, a wholly owned subsidiary will reduce the risk of losing control over that competence. Companies with technology-intensive goods and services would normally prefer the wholly owned subsidiary route. It offers maximum global control over operations.” (Jonnard 1997, p.37). As a part of its international expansion strategy, Starbucks started its business operation by following three different strategies consisting of joint ventures, licensing, and wholly owned subsidiaries. Licensing was adopted as business strategy for entering in the Chinese coffee market and in the Middle East region. In China, business operation was started under license by Mei Da Coffee Co. Ltd and it attained success in attracting the youngsters. It helped them to follow independent business operations by respecting the culture. In China and the Middle East region, Starbucks attained only nominal profit. In case of its business expansion in Japan, the firm followed joint venture strategy with the local coffee firm, Sazaby Incorporates. Its local partner, Sazaby’s knowledge about the Japanese coffee drinking habits helped Starbucks to introduce new products in the market, meeting the taste needs of customers and it became popular. Starbucks was unable to earn more revenue from its international operations due to its complex joint ventures and licensing agreements. In France, Starbucks entered 50-50 joint venture with the local firm, Madrid restaurant and retail firm, Group VIPs. It provided strength to overcome the competition from existing more than 50000 traditional French cafes. These cafes served traditional strong French coffees, and unlike Starbucks most of them allowed smoking. Sharing of high real estate and labour costs also became possible through this approach. In case of business experience of Starbucks it can be seen that the firm earned only a percentage share in total profits and royalty fees in licensing. Which mode or modes do you recommend to Starbucks to use when entering India, Brazil, and Russia? To enter in the countries such as India, Brazil and Russia; it is better to follow the strategy of joint venture with existing well established business firms. “The joint venture is a form of staggered divestment or acquisition. This approach may be useful in avoiding loss of face for the divesting firm and in minimising the risk of unfavourable political reaction when the acquiring firm is a foreign one.” (Casson 1995, p.153). Through this, the knowledge of the local firms about the taste and trend in each particular location can be combined in the business successfully. The risk relating to profitability and huge investment costs can be shared with the local partners. So the joint venture strategy with potential firms is more adoptable for the Starbucks for its expansion in India, Brazil and Russia. Conclusion: Selection of an effective entry strategy is essential for attaining successful entry and market share in the industry. In case of Starbucks, the experience in business operations reveals that joint venture with well established local firm is most suitable in the coffee market. By creating business combination with the local business firms, their market experience can be effectively used for the successful business operations. As a way for expanding the business operations, Starbucks can adopt joint venture strategy effectively. This will be helpful for competing with the existing firms in the industry. Answer to Question 3. How far and in what ways do you think Starbucks Corporation is a learning organisation. Using module theory explains how the firm can use learning to sustain and develop its competitive advantage. Introduction: A learning organisation is always makes continues improvement in business operations by correcting the defaults in ongoing business operations. In order to get success in business operations, learning of the market situations and the customers is essential for any business firm. Along with this the restricting factors in the adopted strategies also to be considered for overcoming the restrictions and achieving the business objectives. Starbucks as a learning organisation: The case study of Starbucks Corporation shows that it is a learning organisation in the international business. Starbucks launched its business operations internationally with detailed information about the market conditions. Possibility for success was ensured by them prior to the launching of business by market research. This helped them to attain successful entry in almost all of its trans-national business entries. Selection of local partners was done by identifying their capabilities in the market. “ To deliver maximum customer value, customisation, and satisfaction all while reducing inventory, trimming lead times, and reducing costs, companies must be able to identify their core competencies and trim away the excess fat of processes impacting company performance and profitability. Companies must meet today’s business challenges quickly and efficiently.” (Tompkins 2005, p.13). At the initial stage of the business, possibilities in the market were tested by Starbucks through opening few trendy stores in the market. This helped them to learn the actual situations in the market and the possibilities for their business growth. But most of the strategies followed by the firm were not capable of providing long term profitability and business growth in the industry. Starbucks learned the correct way of doing business internationally from its own faults in previous business operations. Most of the expansion program of Starbucks was not successful in long term. The initial boom trend in sales and revenue was not long lasting. The learning from loss in business forced Starbucks to make necessary changes in the business operations and this helped them to attain success in the international business expansion. .The short term profitability in its business in the Asia Pacific region mainly related to the eagerness of younger generation to imitate the western lifestyles. Growing consumerism in this region also helped the firm to enter in the industry successfully. Most of the business strategies adopted by Starbucks in international business are profitable only for a short term. In the initial stages of business in Europe and China, Starbucks was very popular with the unique business principles and mode of operation. Self service system and no-smoking rules were new in these markets. But it was also a short term trend. Tough competition from local players necessitated changes in business principles. From the market research it identified the real taste needs of customer and by following these taste needs, product diversification was applied by Starbucks in its operations. Starting of too many stores in a single location without any product differentiation is not profitable for any business firm. Starbucks learned this lesson from its own operations in Japan. For expanding the business rapidly Starbucks adopted the strategy of starting too many stores in a particular destination without changes in products. This led to sharing of the customers among the branches of a single firm. By identifying the faults in this strategy, Starbucks took steps to close its unprofitable business units and this helped to get short term remedy to the existing problems. Starbucks was not conscious about the quality of the food products and it was not competitive in the industry. The pricing of products was not matching with the pricing of local firms. To attain superiority over well-established local players, quality and pricing are very important. After identifying the required changes in business policies and products, Starbucks adapted them to suit the local tastes by introducing modified food items and several new items in the market. Adoption of basic principles such as no smoking rule restricted the business growth of Starbucks in its international business. The drawbacks with adoption of basic principles of no smoking rule were identified by Starbucks from the experience in the real market. Hence it diluted the rule by arranging pavement seating and service for people to smoke in the shop. The company got profitable launching in countries like China whereas it faced problems in countries like Germany and France. Japan is one of the biggest markets of Starbucks, outside the United States. Analysis showed that international operations of Starbucks were not as well planned as its US operations. As a result of globalisation, firms want to supply their products with minimum cost and top most quality. With the development in communication technology, consumers became the controller of the market. The entire decision making in business operations should be subjected to the needs and interests of consumers. The competition between well established business firms on a global basis necessitates higher efficiency of production process and management of business. (Case Studies and Management Resources: Managements of Multinational Corporations. 2008). Conclusion: To achieve real success in international market, pricing and product quality is essential. Entry strategy is also very important for successful launching of business in other countries. Volatile political and business environments across the world have to be considered while starting translational business. By identifying these requirements in business operations, Starbucks rearranged their business polices and strategies. Their operating costs were much larger than the native firms. To reduce the operating costs, effective cost control measures were implemented in the organisational operations. Operating costs are reduced by contracting with new suppliers from low cost countries rather than importing from US. These strategies helped Starbucks to overcome the faults in operation and make profit. Their business growth is also ensured through the rearrangement in production and marketing strategies. This reveals that Starbucks Corporation can be considered as a learning organisation because most of its changes in international business operations resulted from their experience. 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