MGT 3140 International Business Strategy Group Report (Starbucks)
Date of Submission: 18-Feb-2011 FINAL YEAR REPORT (MIDDLESEX UNIVERSITY) IF THIS MA MATERIAL TERIAL WAS WAS HELPFUL, HELPF UL, PLEASE FREELY UPLOAD YOUR FINISHED WORK IN ORDER TO HELP OTHERS. ENJOY!!
1
Contents ......................................... ............................ ........... 3 CHAPTER 1²EXECUTIVE SUMMARY SUMMARY ........................ ......................................... .............................. ................ .. 3 CHAPTER 2²COMPANY PROFILE ......................... ..................... 5 CHAPTER 3-EXTERNAL AND INTERNAL ENVIRONMENT .....................
PESTEL ANALYSIS ............................................................................ 5 SWOT ANALYSIS ............................................................................. 9 ....................................... ............... 11 CHAPTER 4²MOTIVA 4²MOTIVATION FOR EXP E XPANSION ANSION ........................
INDUSTRY BASED VIEW .................................................................... 11 RESOURCE BASED VIEW ................................................................... 13 INSTITUTION BASED VIEW ............................................... ...................... ........................................... .................. 14 ........................................ ............................ ............ 15 CHAPTER 5-LOCATION DECISION ........................
OPPORTUNITIES ............................................................................ 16 THREATS .................................................................................... 20 ............................................ .................................. .................... ...... 23 CHAPTER 6-ENTRY MODE ........................ ............................................ .................................. .................... ...... 27 CHAPTER 7-CONCLUSION........................ ......................................... .............................. .............................. ............................ .............. 28 REFERENCES.........................
2
CHAPTER 1²EXEC 1²EXECUTIVE SUMMAR SUMM ARY Y This report aims to evaluate Starbucks· past and present performance in order to most importantly stipulate the future position of this largely successful succes sful company. company. Being that the company·s objective centers around expansion, this report tries 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 and valid conclusion that India provides varied opportunities for expansion that can be exploited by Starbucks.
HAPTER 2²COMPANY OMPANY PROFILE PROFIL E CHAPTER 2 The current mission statement of Starbucks is ´to inspire and nurture the human spirit by one person, one cup and one neighbourhood at a timeµ (Starbucks.com).
The first Starbucks store was opened in Seattle on March 30 th 1971 by three partners and the name of the 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, beverages, a collection collection of complementary complementary food items and also a selection 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. U. S. coffeehouse sales in 2005, (usatoday.com) (usatoday.com) and this is si gnificant because the
3
majority of its revenue comes com es from their home market which is $2.1 Billion compared comp ared to an overseas share of just $640 Million (marketingmagazine.co.uk).
Amongst Starbucks· S tarbucks· 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 companiesµ (starbucks.com). Its performance as a multinational firm has increased over time and as such led to expansion in global operations. The recess ion 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 millionµ (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 risingµ to high levels once again (bbc.co.uk).
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 companyµ 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
4
and what the future might hold it.
CHAPTER 3HAPTER 3-EXTERNAL EXTERNAL AND AND INTERNAL INT ERNAL ENVIRONMENT Businesses generally ge nerally 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 envir envir onment 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 end of 2011 (e -importz.com). -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 expans ion 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 Trade regulations : Countries belong to trading blocks such as APEC, G20 and most importantly CAIR NS 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
5
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 c ompletely pull out of Israel because of such issues thus negativel y affecting its strategy for expansion. Political influence is unfavourable in this case and presents a threat to Starbucks.
Economical I nfluences
Exchange Rates: The falling dollar rates compared to other currencies (Bloomberg.com) which was caused partly by weaker monetary policy will wil l affect imports. Most of Starbucks· St arbucks· vital supplies such as coffee beans, sugar and milk will be affected b ecause they are imported, thus incurring higher cost due to weak dollar. dollar. This raises a question q uestion 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 o f 2007 that led to to job losses, unemployment unemployme nt figures rose (to 2.5 million in Britain 2010 ² Office for National Statistics). This affected i ncome 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
6
Changing Tastes 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 g ain 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 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 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 addit ionally,, time spent on the site is over 700 billion minutes a month (facebook.com). Exploiting this trend offers companies such as Starbucks a platform platform to relate and share ideas with customers . It has already already used social networking sites such as facebook (with over 19 million ´friendsµ) and a forum which it runs, to communicate and engage with customers and communities (Economist.com). Technology has a favourable impact for Starbucks.
7
Environmental Influences
Environmental pressure groups: Non Governmental Organisations and pressure groups possess incredible ability to coerce businesses into changing changing their practices. They could influence influence busin esses through lobbying and boycotts. Such measures usually impact the intangible i ntangible assets assets of o f a firm which usually usually involves tarnishing a company·s brand name. Starbucks however works with the ´Fair-Trade ´Fair-Trade movementµ (Economist.com) (Economist.co m) and the the accreditation that co mes 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 mo re than 51% 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, summary, the PESTEL analysis found that External influences was al together 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; ´out²thinking the competition is useless unless you can out-execute them as wellµ.
8
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 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 Ni ke that are easily identifiable by logo alone (marketwatch.com) (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 e employees: mployees: 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, Arguably, Starbucks has one of the lowest staff turnover turnove r rate in the industry (workforce.com). The strengths provide a favourable f avourable impact.
Weaknesses
Over-reliance on home market: Although the American coffee market is worth over $18 Billion (e-importz.com),
9
over-reliance on this this market leaves Starbucks vulnerable to unforeseen unforeseen changes th at might occur in such market. E.g. recession affects disposable income for customers and subsequently, profits. Thus the management decision to focus mainly on the US market makes it a weakness.
Aggressive Expansion: Due to the takeover and acquisition o f local community coffeehouses and buildings, Starbucks has been labeled the ¶Tesco ¶Tesco of coffee· after a backlash from fro m local residents r esidents 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 u nfavourable impact.
Opportunities
Entry into new markets: Global companies that plan for expansion usually seek out attrac tive 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 l inks 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 f avourable 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 fa ctors identified in the External analysis and relates to changing cha nging tastes.
10
This is favourable because it provides 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 u nfavourable 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 S trengths 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 HAPTER 4²MOTIVATION 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: Industry-based, Resource-based and Institution-based views. INDUSTRY BASED VIEW
11
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 s tronger.. 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 s tyle was popular. 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 fro m cultural awareness and motivated Starbucks S tarbucks 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, NATO, APEC, NAFTA NAFTA and Pacific Community trading bl ocks. This makes the th e supply of raw materials cheaper and allows Starbucks to provide the high quality service for a lower price. This advantage motivates the firm to enter new marketplaces (economywatch.com).
12
RESOUR CE BASED VIEW
After an evaluation evaluation of external e xternal 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 m arketing 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· (Starbucks · CEO) learnt about the the Italian 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
13
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 recruitm ent 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, -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 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
14
market, the high potential of new emerging markets, brand recognition recogn ition 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 5HAPTER 5-LO LOC CATION DEC 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 business strategy, strategy, to assume the roles of Starbu cks management in order to make a plan for its next foreign expansion in terms of: where to enter, enter, how to enter and on what scale.
Starbucks· current strategy involves exploring retail growth outside the United 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 S tarbucks had opened stores in most of them. them . However, However, India , the world·s second populous populous country, country, still was untouched by Starbucks. Our curiosity lead us to investigate the reasons further fur ther..
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 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 IIndia ndia will be analyze d by scanning its environmental factors, as PEST
15
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), (2010) , to decide if one country is suitable for entry, entry, the country long-run economic profit and growth potential should be assessed. This 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 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, Four, comprising comprisi ng Brazil, Russia, India and China;
16
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 activit y of foreign ownerships ow nerships in India·s domestic economy. According Accordin g to UNCTAD·s World Investment Prospects Survey 2010-2012, which tries to find out future trends of FDI by asking the largest transnational corporations (TNCs), (TNCs ), India was placed the second most important FDI destination for TNCs. TNC s. Moreover, 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 Socioocio -cultural (lifestyle and demographic) 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, Report, published by
17
Euromonitor
International (2010), which states that although India is traditional a tea -drinking country, country, coffee drinking has become an essential part of the daily daily routine amon g 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 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 instant coffee towards the the total total consumption consumption of coffee in India. India. This This
shows an
increase from 2005 to 2010 and forecast also shows this trend will continue for the following 5 years.
18
In summary, the prospect of India·s coffee industry is great. Furthermore, the strong coffee consumption trend provides a big potentially increasi ng market for Starbucks.
R esource esource Availability
India has a long history of planting coffee bean trees. Besides, India is the only country that grows all of its coffee cof fee under shade. Based on the statistics data from the Coffee Cof fee 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).
19
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 ed Tape R isks isks R ed
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 India·s bureaucracy is ineffective and and inefficient. It also mentions that the civil civil se rvice 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·. 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 R isks isks
Another concern in India is political corruption. According to published C orruption Perceptions Index (CPI) 2010 by Transparency International, India was ranked the 87 178 countries with a score of 3.3. Compared with CPI 2009 with 3.5 (rank 84
th
th
of
), it indicates
that corruption in India is worsening.
Since Starbucks is a member me mber of the UN Global Compact, in which members s hould obey 10 universal principles, including working against corruption in all its forms, extortion and
20
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.
egulation/ Law R isks isks R egulation/L
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.
Cultural Difference Starbucks is an American-based 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 s tudy,, as shown in Figure Figu re 5.6 and Figure 5.7, the differences of the U. S and India are clear to make deductions from.
21
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 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 and ultimate ly 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 i dentified in chapter 3 & 4.
22
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 and return/profits, will be analysed to help us make a final decision for Starbucks.
External External factors
Country specific factors The limited holding of up to 51% 5 1% 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 b y choosing an entry mode m ode with high investment/commitment.
Firm specific factors Starbucks is not familiar with the Indian market and cul tural 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.
23
Product specific factors Coffee is a common commodity which doesn·t really provi de uniqueness as such compared to having technology, hence could be easily learned or copied. This indicates that Starbucks need an entry mode with at least a medium control.
Internal Factors
Internal factors influencing entry mode is highly dependent 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 outcom es 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 S tarbucks should have learnt from that failure ( Indian Wine Academy, Academy, 2007): Firstly, this time when writing a proposal to hand over to the India Ministry of Commerce
& Industry, Industry, Starbucks should s hould draw a clear picture of its expansion intentions in India Indi a (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 S tarbucks 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 give a clear picture of every entry criteria used in each step.
24
Step 1: Ask ourselves if Starbucks need an equity mode, or a non -equity mode.
Our answer is Yes, Yes, that it needs an equity mode m ode.. 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 w holly owned subsidiary subsidi ary..
Step 2 : Ask ourselves if Starbucks Starbu cks needs an entry 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 Chapter 5 , India·s India·s government only allows foreign firm s to hold no more than 51% equity in 34 industrial sectors, including the retailing industry in 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.
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. econdly, Starbucks must open its own coffee stores to operate its main business of Secondly,
running coffeehouses across India.
25
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 ven ture as the preferred form of entry, 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 disaster s 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/objective s on each other and their their cultural differences as identified in Chapter 5.
Secondly, Secondly, the nature of a joint venture determines that Starbucks must share s hare profits with wit h its partner which is uncharacteristic of the company. company.
ecommendation R ecommendation
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, partner, to avoid any petty p etty and unnecessary conflicts in the future.
26
CHAPTER 7-CON ONC CLUSION In conclusion, having assessed the evidence concerning Starbucks· decision to internationalise, the internal and external environment environ ment and its impact on the company co mpany,, 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 next country for its subsequen t expansion since it provides a very good opportunity opportuni ty for potential high profitability, profitability, increased market share and strategic placement in terms of resources for Starbucks.
27
REFERENC REFERENCES Starbucks Starbucks ( 2010) Company Profile [Online].Available from: http://assets.starbucks.com/assets/company-profile-feb10.pdf [Accessed 11th January 2011] Starbucks Starbucks ( 2010) Recognition [Online].Available from: http://assets.starbucks.com/assets/starbucks-recognition-jan2010.pdf [Accessed 23rd January 2011] Iwata (2006) Owner of small coffee shop takes on java titan Starbucks [Online]. Available from: http://www.usatoday http://www.usatoday.com/money .com/money/industries/food/2006 /industries/food/2006 -12-20-starbucks-usat_ -12-20-s tarbucks-usat_x.htm x.htm [Accessed 1st Febuary2011] Reynolds, J. (2011) via·s Christmas performance boosts Starbucks' revenue [Online].Available from: http://marketingmag http://marketingmagazine.co. azine.co.uk/news/1 uk/news/1051724 051724/Vias /Vias -Christmas-performance-b -Christmas-performance-boosts-Sta oosts-Sta rbucks-revenue/ [Accessed [Accessed 3rd February 2011 ] Jagger (2008) Starbucks profits dive by 97% [Online].Available from: http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article512726 7.ece[Accessed 23rd January 2011] Linn (2008) Starbucks to close 600 stores in the U.S. [Online].Available from: http://www.msnbc.msn.c http://www.msnbc.msn.com/id/2 om/id/254822 5482250/ns/b 50/ns/business usiness -retail/[Accessed -retail/[Accessed 28thDecember2010] Thompson (2008) Starbucks blames UK for weak performance per formance [Online].Available from: http://www.independent.co.uk/news/business/news/st http://www.independent.co.u k/news/business/news/starbucks arbucks -blames-uk-for-weak-per -blames-uk- for-weak-per formance-1012568.html [Accessed 3rd February 2011] Bowers (2010) Starbucks losses in UK rise to £10m [Online].Available from: http://www.guardian.co.uk/bus http://www.guardian.co.uk/business/2010/jul/09/starbucks iness/2010/jul/09/starbucks -losses-rise-recession[Acces -losses- rise-recession[Acces sed 6th February 2011] Guardian.co.uk (2010) Starbucks triples profits to $240m [Online].Available from: http://www.guardian.co.uk/business/ http://www. guardian.co.uk/business/2010/jan/21/starbucks 2010/jan/21/starbucks -triples-profits-coffee -triples-profi ts-coffee th [Accessed 14 January 2011 2011 ] BBC.co.uk (2010) Starbucks' profits jump as s ales climb [Online].Available from: http://www.bbc.co.uk/news/business-11699561 [Accessed 19 th December2010] E ²imports (2011) Coffee Statistics [Online].Available [Online].Available from: f rom: http://www.e-importz.com/Support/specialty_coffee.htm [Accessed 19 th December2010]
28
Andrejczak (2011) Starbucks unveils new logo [Online].Available from: http://www.marketwatch.com/story/starbucks-unveils-new-logo-2011-01-05-1433150 [Accessed 17 th December2010] Facebook.com (2011) Press room logo [Online].Available from: http://www.facebook.com/press/info.php?statistics [Accessed 16 th December2010]
Weber (2011) Preserving the Starbucks Counter Culture [Online]. Available from: http://www.workforce.com/section/recruiting-staffing/feature/preserving-starbucks-co unter-culture/[Accessed 16 th December2010] Starbucks (2011) Investor Relations [Online].Available from: http://investor.starbucks.com/phoenix.zhtml?c=99518&p http://investor.s tarbucks.com/phoenix.zhtml?c=99518&p=irol =irol -irhome [Accessed 3rd February February 2011 ] Dobson (2011) Dollar to Fall on Fed Rates, Deficit, Bagguley at Barclays Says[Online].Available from http://www.bloomberg.com/news/2011-01-28/dollar-to-decline-on-low-fed-rates-u-s-d eficit-barclays-bagg eficit-barclays-bagguley-says.html uley-says.html [Accessed 10th February 2011 ] www.statistics.gov.uk (2011) Employment [Online].Available fromhttp://www.statistics.gov.uk/cci/nugget.asp?id=12 [Accessed 10th February 2011] Andrejczak (2011) India: Here comes Starbucks [Online].Available from http://www.marketwatch.com/story/india-here-comes-starbucks-2011-01-13[Accessed 30th February February 2011] 2011 ] Starbucks Starbucks ( 2010) Company Profile [Online].Available from: http://assets.starbucks.com/assets/company-profile-feb10.pdf [Accessed 20th January] Hoovers.com (2011) Starbucks Corporation [Online].Available from http://www.hoovers.com/company/Starbucks_Corporation/rhkchi-1.html [Accessed 13th January 2011] Coffee Watch Full Text Text Available Available By: Rowe, Megan . Restaurant Hospitality , Sep2009, Vol. 93 Issue 9, p52-52, [Accessed 13th January 2011] Economist.com (2008) Not enough Froth [Online].Available from: http://www.economist.com/node/10490218 [Accessed 14th January 2011] Starbucks (2011) Newsroom [Online].Available from: http://news.starbucks.com/article_display.cfm?article_id=200 [Accessed 28th January 2011] Economist.com (2009) Woke up, smelled the coffee [Online].Available from: http://www.economist.com/node/14536977 [Accessed 1st February 2011]
29
Perera, L. C. J. Et. Al. (2009) Case Cas e study: StarbucksStarbucks - adding value to brand equity through an innovative brand image. Journal of the Academy of Business & Economics. [Online] (9) p 174-185 Available from: www.ebscohost.com [Accessed 22 January]. The New York York Times (1999) McDonald's M cDonald's Corp. Betting That Coffee Is Britain's Cup of Tea [Online]. Available from: http://www.nytimes.co http://www.nytimes.com/1999/03/28/world/mcdonald m/1999/03/28/world/mcdonald -s-corp-betting-that-coffee-is -s-corp-betting -that-coffee-is-bri -bri tain-s-cup-of-tea.html [Accessed: 10th January 2011]. Economy Watch (2011) (2011) Traiding groups and country groups [Online]. Available from: http://www.economywatch.com/country-grouping/ [Accessed: 10th January 2011]. Duda, James, Mackwani, Munoz, Volk (2007) Starbucks Corporation building a sustainable supply chain [Online]. Available from: http://www.gsb.stanford.edu/scforum/login/abstracts/documents/GS54.pdf [Accessed: 10th January 2011].
Apple in the big league of no-name logos [Online]. Clark (2011) Starbucks joins Nike and Apple Available from: http://www.guardian.co.uk/bus http://www.guardian.co.uk/business/2011/jan/09/starbucks iness/2011/jan/09/starbucks -new-logo-no-name -new-lo go-no-name [Accessed: 22th January 2011]. Waste ste [Online]. Available from: Starbucks (2011) Recycling & Reducing Wa http://www.starbucks.com/responsibility/environment/recycling [Accessed: 22th January 2011]. Starbucks (2011) Tackling Climate Change [Online]. Available from: http://www.starbucks.com/responsibility/environment/climate-change [Accessed: 22th January 2011]. Kramer (2007) After Long Dispute, a Russian Starbucks [Online]. Available from; from ; http://www.nytimes.com/2007/09/07/business/worldbusiness/07sbux.html?_r=1&adxnn l=1&oref=slogin&adxnnlx=1296419036 l=1&oref=slogin&ad xnnlx=1296419036 -urxfcuOvOMaoQFddv+zjrg -urxfcuOvOM aoQFddv+zjrg . [Accessed: 22th January 2011]. Karolefski (2002) Conquering new grounds [Online]. Available from: http://www.brandchannel.com/features http://www.brandchannel.com/features_effect.asp?fa_id=78 _effect.asp?fa_id=78 [Accessed: 22th January 2011]. Yi, Z. (2010) International Business Strategy , 3rd ed., UK: McGraw-Hill McGraw-Hill Custom Publishing. Publishing. Trevino (2010) Starbucks Outlines Blueprint for Multi -Channel Growth . [Online]. Available from: http://starbucks.tekgroup.com/article_display.cfm?article_id=476 [Accessed: 2nd January 2011]
30
Fawkes (2011) Beyond the New Starbucks Logo: Interview with Mike Peck, the Senior Design Manager . [Online]. Available from: http://www.psfk.com/2011/01/starbucks-new-logo.html [Acceessed 10th January 2011] Kowitt (2009) For Mr. BRIC, nations meeting a milestone , CNN Money [Online]. Available from: http://us.ft.com/ftgateway/superpage.ft?news_id=fto110620061008293518 [Acceessed 15th January 2011] Wilson & Purushothaman (2003) Dreaming With BRICs: The Path to 2050 , Goldman Sachs[Online]. Available from: http://www2.goldmansachs.com/ideas/brics/book/99-dreaming.pdf [Acceessed 21st December 2010] O·Neill & Poddar (2008) Ten Things for India to Achieve Its 2050 Potential , Goldman Sachs{online}. Available from: http://www2.goldmansachs.com/ideas/brics/ten-things-doc.pdf [Accessed 20th December 2011] United Nations Conference on Trade Trade and Developm ent (UNCTAD) (UNCTAD) (2010), World Investment Prospects Survey 2010-2012 2010-2012 [Online]. Available from: http://www.unctad.org/en/docs//diaeia20104_en.pdf http://www.unctad.org/en/docs//diaeia20104_en.pdf [Accessed 27th January 2011]. Department of Industrial Policy & Promotion, Ministry of Commerce and Industry (2011), India FDI Fact Sheet-November 2010 [Online]. Available from: http://dipp.nic.in/fdi_statistics/india_FDI_Nove http://dipp.nic.in/fdi_statist ics/india_FDI_November2010.pdf mber2010.pdf [Accessed 20th January 2011] Indian Population Population ¶to be biggest· (2004) BBC News [Online]. Available Available from: http://news.bbc.co.uk/1/hi/3575994.stm http://news.bbc.co.uk/1/hi/3575994.st m [Accessed 20th Dececember 2010]
Country and Areas Ranked by Population: 2050 (2010), International Data Base (IDB), Population Division, U.S. Census Bureau [Online]. Available from: http://sasweb.ssd.census.gov/idb/ranks.html [30th December 2010] Coffee per capita consummation consumma tion in India (2009), International Coffee Organisation [Online]. Available from: http://www.ico.org/countries/india.pdf [Accessed 27th January 2011] Coffee Consumption in India (1999-2008), (1999 -2008), the Coffee Board of India [Online]. Available Available from: http://www.indiacoffee.or http://www.indiacoffee.org/indiacoffee.php?page=CoffeeData g/indiacoffee.php?page=CoffeeData [Accessed 12th January 2011] Consumer Lifestyles in India:Café Culture (2010), Euromonitor International: Country Sector Briefing [Online]. Available from: http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 20th January 2011]
31
Retail Sales of Coffee in India (2011) , Euromonitor International: Country Sector Briefing [Online]. Available from: http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 22nd January 2011] Prediction Prediction of 2010-2011 2010-20 11 coffee production in India, the Coffee Board of India [Online]. Available from: http://www.indiacoffee.org/india http://www.indiacoffee.org/indiacoffee.php?page=CoffeeData coffee.php?page=CoffeeData [Accessed 2nd January 2011] Total Coffee Production in India (1990 -2008), World Resource Institute [Online]. Available Available from: http://earthtrends.wri.or http://earthtrends.wri.org/searchable_db/index.php?theme=8 g/searchable_db/index.php?theme=8 [Accessed 15th January 2011] Political and Economic Econom ic Risk India·s Red Tape Worst in Asia, Survey Says, Hong Kong·s Political Consultancy (PERC) [Online]. Available from: http://www.2point6billion.com/ne http://www.2point6billion.com/news/2010/06/03/india%E2%80%99s ws/2010/06/03/india%E2%80%99s -red-tape-worst-in-a -red-tape-wors t-in-a sia-survey-says-5879.html [Accessed 15th January 2011]
India: Steel Frame of Indian Indian Bureaucratic System Needs Revamping (2010), Mathaba [Online]. Available from: http://www.mathaba.net/news/?x=623624 [Accessed 17th January 2011] David, R. and Ganz, K. (2010) Reducing Red Tape in India's Courts, Bloomberg Businessweek [Online]. Available from: http://www.businessweek.com/magazine/content/10_30/b4188016347519.htm [Accessed 11th January 2011] Corruption Perceptions Index 2010 (2011) ( 2011) Transparency Transparency International [Online]. Available from: http://www.transparency http://www.transparency.org/policy_research/surv .org/policy_research/surveys_indi eys_indi ces/cpi/2010/results [Accessed 21st January 2011]
Statement on Industrial Policies (1991) , Ministry of Industry, Government of India [Online]. Available from: http://siadipp.nic.in/publicat/nip0791.htm http://siadipp.nic.in/publicat/nip0791.h tm [ Accessed 30th December 2010] Budget 2009/10: 2009/10: Defici t-Financed Expenditure Rises in India in Support of G rowth (2009) ISH Global Insight [Online]. [O nline]. Available Available from: http://www.ihsglobalinsight.com/SDA/SDADetail17230.htm [Accessed 23rd January 2011] Coffee Company Shares by Retail Retail Value Value (2011), Euromonitor International: Country Sector Briefing [Online]. Available from: http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 22nd January 2011]
Greet Hofstede Cultural Dimensions [Online]. Available from: http://www.geert-hofstede.com/ [Accessed 22nd December 2010]
32
