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Starbucks International Entry Methods and its Global Marketing

Starbucks, from a SME to today’s global coffeehouse, has successfully become one of the best coffee chains and providers in the world. Back in 1971, 3 friends (Jerry, Zev and Gordon) were passionate about the idea of selling fresh coffee beans and accessories in Seattle. Things started to change when Schultz wanted to develop this business into coffee serving with friendly sitting environment. Schultz’s idea of serving coffee along with sitting culture made a hit and from then on, Starbucks started its own development in a fast-paced way.

According to the statics showed, Starbucks are operating 16,706 stores in more than 50 countries across the world, with 8850 company-operated and 7856 licensed stores. (Starbucks Profile, 2010). People are used to have a cup of coffee in Starbucks while they need a place to sit, relax and talk. For young generations, they prefer sitting, drinking coffee with wi-fi. And that is what Starbucks is trying to create in the near future: coffee, newspaper, wi-fi with a hyper-local niche website on a national scale. (Stefanie, 2010)

1.2. Aim

What makes Starbucks successful in home country as well as overseas? What marketing strategy it has adopted among different countries: adjusts its business or performs same standards in that local market? These are the questions will be answered in this report. The aim of the report is to find out:

Q1: What Entry Modes have Starbucks used when they began coffee business in the foreign countries ?

Q2: What is the marketing strategy of that foreign country, by adaptation or standardizatoin?

1.3. The methodology

A qualitative approach is used to gather the data. Data is gained from the secondary sources which includes on line resources, academic journals and articles to understand the entry modes and international marketing strategy of Starbucks. The theories will be explored in order to understand factors influence entry modes, entry modes strategies, and theory on standardization v.s. adaptation. These can give a good idea of how and why Starbucks operate successfully globally.

1.4. Limitations

As data is gathered mainly from the secondary resources. Indeed it is difficult to trust a data from unreliable sources. Even if it is reliable or official source, there can be a possibility that data is defective as it is only a record with validity and reliability.

2. ENTRY MODES OF STARBUCKS

Globalization in recent ten years enabled big organizations to develop and expand their businesses outside their home country: Asia, Latin America or European nations. This is because at certain point of time many firms realize a limited growth in its current market. And this leads a firm to think about going global. Starbucks felt the same in North America and they started expanding its brand overseas. However, a good entry mode strategy can decide how good business can go. According to Root (1994), he stated that a mode for entering or expanding in a foreign market - is one of the most crucial strategic decisions that an international firm has to make. (Osland, etl, 2001) However, factors influencing the entry modes is another key element for choosing an entry mode. In this chapter, factors influence the entry modes will be discussed as well as entry modes strategies will be presented, finally an analysis of Starbucks’ entry modes used in foreign countries will be explored.

2.1. Entry Mode Factors

According to Hollensen(2007), there are four major factors that influence the decisions of entry modes. A table will be presented to describe the factors influence the entry mode strategy and why they influence Starbucks entry mode strategy:

Factors

Description

Why these factor influence Starbucks entry mode

1.Internal Factors

Firm Size

The size of a firm decides its entry mode. The bigger the firm is, the ability to control business is higher. Generally, export is suitable for SMEs. Starbucks is a comparatively large firm. With its enriched assets and years of international experience, Starbucks have the ability to expend resources and absorb high risks with full control on the profits and full responsibility. Hence, this two factor has made Starbucks’ entry modes more on the intermediate and hierarcharic entry modes.

International Experience

Product/Service

Product/Service’s characteristics has decided what type of entry mode is suitable for companies. As Starbucks is selling soft drinks in coffee industry, and it belongs to a soft industry, the best way to enter foreign market is licensing or contract manufacturing. And this is Starbucks prefers at this stage.

2.External Factors

Sociocultural distance between home country and host country

Sociocultural difference can influence the operation of the company. Due to the distant location, local government policies, culture issues, Starbucks prefers partnership on the global expansion. They believe this can help them to understand better of local people and its culture.

Country risk/demand uncertainty

Starbucks’ have faced with ant-globalzation issue and community push back, this made its decision of opening a store withdrawn. However, country risk/demand uncertainty is a reason behind this. They have to consider it and balance properly. Starbucks adopts majority joint-ventures or company owned operation due to foreign market’s size and potential to growth.

Market size and growth

Direct and Indirect Trade Barriers

Due to various regulations, tariffs, and policies of different nations, Starbucks have to consider what modes is the proper one in that local market.

Intensity of competition

Starbucks has to consider the local competitors when enter into a new market. For a coffee shop in European countries, it comes with a lot of local competitors due to people’s existing preferences to coffee culture. Competitive pressures drive MNCs to perform shared-control modes, franchising, licensing, or others when the market could be assumed to be operating under perfect competition. (Chen and Mujtaba 2007).

Small number of relevant intermediaries available

Favor of Hierarchical modes;

3. Desired Mode Characteristics

Risk Averse

Starbucks in the process of global expansion, it is mainly in favor of joint venture and company-owned due to some reasons: risk sharing by each partner, have a control of the market with resource commitment, and its adaptation and standardization strategy to the local market.

Control

Flexibility

4. Transaction-Specific factors

Tacit nature of know-how and opportunistic behavior;

Starbucks looks for the partnership in the foreign market, and they care for the other party sharing the same value, vision and common aim together, and this will keep them loyal to the company, and there is no necessity to monitor other side tightly. This makes Starbucks’ preference toward licensing agreement.

2.2. Entry Modes

According to Hollensen(2007), there are three modes to be analyzed: Export mode, intermediate entry modes and hierarchical modes.

Different Modes of Export

Starbucks Mode

Export Mode

Company’s products are manufactured in its local market or by a third country and then transfer the products to the target market directly or indirectly. (Hollensen, 2007)

NO

Intermediate

Mode

different from Export mode as its main aim is to share the knowledge and skills to the host country though export sometimes is a part of it

Contract manufacturing is outsource the production or technology lines to the third party. Products can be sold by contractor in home country, manufactured country or other foreign markets. (Hollensen, 2007)

NO

Licensing is a non-equity, contractual mode with one or more local partner firms. (Osland, etl, 2001) Licensing involves licensee and licensor connected together by an agreement to benefit both sides. The uncertainty of the culture, policy, government regulations etc, company often chooses licensing to enter foreign market with low risk of losing the benefit. (Beatriz & Ni, 2008) Most of the well-established businesses prefer to use licensing.

YES

Franchising is by giving full business including know-how, business contacts, intellectual rights. It is suitable for those small business enterprenuers without a lot of experience but having business capitals.

NO

Joint ventures combines two or more companies that share the ownership, management, risks and rewards of the newly formed entity. (Osland,etl,2001)

YES

Hierarchical Modes

Considered as a main arrangement

Wholly-Owned

acquisition (adopt an existing firm )

YES

greenfield investment (start new business from scratch).

NO

2.3. Advantages and disadvantages of Entry Modes

The chart below represents the advantages and disadvantages of main entry modes:

Entry Mode

Advantages

Disadvantages

Export

- Low risk and less investment

- Speed of entry

- Added costs: trade barriers & tariffs

- Transportation

- Limited access to local information

Licensing

- Low cost and risk

- speed of entry

- High ROI

- Difficult to control

- High risk of losing know-how

Franchising

Low cost and risk

Hard Control and Monitor

Joint Ventures

Share cost and risk

Benefit from local partner

- difficult to manage and control

- high risk

- knowledge sharing

Wholly-owned Subsidiary

- 100% profits

- High Control over products and technology

- Culture Barrier

- full responsibility of the cost and risk

Source: (Hill, 2007), (QuickMBA)

2.4. Starbucks’ Global Entry Modes

Starbucks’s global expansion focuses on three entry modes: Joint Venture, licensing arrangements with prominent retailers and company-owned operations. The main concern of the expansion is to create a market presence and market share. By the fiscal year of 2000, statistics showed that Starbucks have expanded 154 stores in Japan, 47 in Taiwan, 28 in China, 28 in Singapore, 27 in the Philippines, 20 in Hawaii, 15 in New Zealand, 14 in Malaysia, six in South Korea, five in the United Arab Emirates, four in Kuwait, three in Lebanon, and one in Qatar. (Tony, 2005) The fast speed of entry also decides the factor that they are in favour of choosing partnerships as they believe local connection can get everything in a right format to move on. Starbucks have faith in partners who can lead them into the progress of starting up in a foreign market. (Anonymous, 2002)

(see Appendix 1 and Appendix 2, chart of entry modes by Starbucks and licensing stores by the end of 2002)

One character for Starbucks’ entry strategy to be considered is that they are in preferences to work in a direct relationship with host country and to understand people in the foreign market. Normally, Starbuck will operate directly or through a subsidiary, or enter into a business agreement with a company or group of individuals. Starbucks considers China as one of the most powerful marketplace to grow business. It co-operates with Mei Da Coffee as a licensing entry while as it adopts joint venture with President Coffee in China to expand coffee shops in main cities. Take Japanese market as another example, Starbucks operates as 50/50 joint venture format to enter into the Japanese market by co-operating with a Japanese restaurant to develop its own retailer stores due to the particularities of Japanese culture. (Anonymous) For an entery into a U.K. market, Starbucks acquired a well-established company – Seattle Coffee to develop its own coffee chains. Through acquisition, Starbucks has reduced the main competition as well as gained the good locations of the coffee shops in U.K. (Beatriz,etl, 2008)

To summarize, there are two strategic rules in which Starbucks is using in entering a foreign market:

1. Markets where need to consider economic scale, politics, culture difference, Starbucks will operate its business through joint venture by searching a popular and enriched local firm;

2. Markets where do not exist high risk like cultural difference, Starbucks prefer to invest directly like wholly-owned subsidiary which operated by Starbucks Coffee International.

(Anonymous, 2009)

3. STARBUCKS GLOBAL MARKETING STRATEGY

Entry mode is not the only element to be considered when entering a host country, however, another challenging task in international marketing will be on operation keeping same (standardization) or different (adaptation) from domestic market. This is important as it influences how firm operates in the market and how it competes with others. (Zhi & Peter, 2007) Therefore, in this chapter, a literature review of standardization and adaptation will be explored while as Starbuck’s global marketing strategy will be outlined in the latter part.

3.1. Debate of Adaptation and Standardization

Debate in standardization and adaptation has never been stopped with the time being. Standardization involves the offering of identical product line at identical prices through identical distribution systems, supported by identical promotional programmes in several different countries. (Deirdre, 1999) Adaptation concerns the completely “Localized” marketing strategies which contain no common elements whatsoever. (Bradley, 1995)

Levitt(1983) believed that standardization is based on the improved technology, increased world-wide communications, and homogenization of culture preferences and tastes. According to Levitt, “global competitor will seek constantly to standardize his offering everywhere… He will never assume that the customer is a king who knows his own wishes.” Therefore, it is not necessary to adapt to local needs since human needs are same everywhere. Researchers who are in favor of adaptation believe that the best option for an firm’s efficient strategy in a foreign country is to adapt to the environment of the market. (Lemak and Aruthanes, 1997)

With the globalization pace, Wang (1996), states that the “decades-long debate about standardization and adaptation has recently reached the general consensus that the real issue is not whether to standardize but rather to what degree of standardization…” (Hise & Choi) Quelch & Hoff (1986) also stated that there is a certain degree to the standardization. Chung (2007) also outlined the need to identify the degree of standardization is a vital key for the firm.

Factors influence the decision between standardization and adaptation have to be considered in which relate to the pressures for cost reduction and market responsiveness. (Appendix 3) In the report of Hise & Choi, they stated out the factors influencing the decision of standardization/adaptation. Internal factors include Company objectives, operations and performance while as external factors fall into competition, host-country factors and international markets. Nanda and Dickson (2007) summarized three factors which influence the decision: homogeneity of customer response to the marketing mix, transferability of competitive advantage and similarities in the degree of economic freedom.

To summarize on the decision mixture of standardization/adaptation, the theory of Vrontis and Kitchen (2005) will be outlined here: the goals of reducing costs and market complexity lead companies to consider standardisation, while customer orientation may sway them toward product adaptation.

3.2. Starbuck’s Choices

Starbucks has built its global image through various expansion scheme year by year. International experience has already led them into the combination of standardization and adaptation. To sustain the success of coffee business, it has to consider the experimentation and innovation into the account. In the expansion of Starbucks’ global market, the generic strategy revolves around standardization whereas it has blended its products with localization. For example, Starbucks is very rigid about the coffee quality and service in which means applying the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee. (Business Week). It is believed at starbucks that the core product must be geniuen and comply with the standardization whereas other elements can change its shape according to the local environment. Going to Starbucks in China, Japan, France, Greece or Kuwait and you will drink the same espresso, but the food will have a local flavor. But where adaptation is needed to fit cultures, Starbucks adapts—green tea frappuccinos in Asia, the division into men-only and family areas in the Middle East (John Simmons, 2005). Also starbucks believe in keeping the local staff and managers as they can build a good relationship with customers.

Once entering into a new market outside U.S, there will be a Starbucks way. According to the Business week: Starbucks’ coffee lineup doesn't vary, but Starbucks does adapt its food to local tastes, for example, the award of Britain’s mince pie and Asia’s curry puffs and meat buns. Sometimes, the building structure is also similar to the local decoration due to its importance. It is clearly that culture factor impacts the decision of a global company’s operation. Take China as an example, Starbucks adjusted its operation into a Chinese formula – culture adjustment. People do not want to just have a cup of coffee in the shop, instead, they would prefer to go with cake or some food. And it will be a rare phenomenon if there is only one person drinking coffee alone as they would always have someone sit by and talk. Moreover the busy time for Starbucks’ operation is between afternoon to the evening. It is not like in Western culture that people grab a cup of coffee in the early morning time before they head for work. Based on this, Starbucks’ increased the products lines according to locals preferences and business time is till late evening. And the sales on per customer is always higher than any other country since they do not just drink coffee; (Kristen, 2005) Use Starbucks’ saying that global expand always mixed up with local issues. The way to success is to understand what people really like and prefer.

However, Starbucks still have a long way to go in the process of markets’ expansion. Future challenge is not only on the question of adaptation or standardization, but more of the competition among similar industry’s penetration in the market. By mixing of adaptation and standardization, Starbucks needs to figure out more strategies on how to run the business in a foreign market.

4. CONCLUSION

The main purpose of this report is to find out different entry modes and marketing strategy used by the branded company –like Starbucks in an overseas market. Primarily internal and external factors were analyzed in order to understand the factors which have an impact on Starbucks’ entry mode decesion. After analyzing online journals and resources data on line, it turned out that Starbucks prefer three operational entry modes in overseas market: joint venture, licensing agreement, company-owned operations/wholly owned subsidiary. This is mostly due to the factor that Starbucks is away from the market and is supportive of the local market’s taste.

In the second part, It was a review of marketing strategy of starbucks: Adaptation v.s. Standardization. This is to understand when Starbucks enter into a new market, what type of marketing strategy they would like to use in that specific market. However, more and more companies looking to global prefer a mixture of Adaptation and Standardization, same for Starbucks. Starbucks is very particular about the products quality lines whereas never say no for adaptation to the local market by understanding local preferences and taste, etc.

To conclude, Starbucks’ global expansion had successfully developed with market share in various cities in the world. For global company like Starbucks, it is very vital to decide its entry modes when enter into a new market as it impacts a long-term operation in the foreign country. Therefore, by combining internal and external factors, Starbucks does make the right choice of entry modes for international expansion. Moreover, in the course of marketing strategy in overseas market, Starbucks also selects the proper way: mixture of standardization and adaptation. Keys to enter into a new market for any company ready for expansion in the foreign country: proper selection of entry modes and marketing strategy.

5. RECOMMENDATIONS

Starbucks is still in the progress of building global brand with its expansion scheme in its own way at this moment. However, not everything is perfect for each single company when they enter into new market on a global scale. Here, there are two recommendations for Starbucks’ operation in international sites:

Due to the speed of expansion in the global market, there is a concern of high concentration and economy downturn. Once facing with recession in some part of the world, Starbucks will feel the heat of the competition from the local competitors. As they might focus on low price strategy. This will not only impact its own profit but also its brand image.

Adaptation to the local market is a good option, therefore, Starbucks should learn more to understand what people really like, to add more products lines into the store to maintain its brand and sustain its business with the local competitors. This needs more innovation and creation into their products and service. Penetration of other coffee houses is a fact which Starbucks has to face in the future.

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APPENDIXES:

Appendix 1:

(Beatriz & Shuang, 2008)

Appendix 2:

Licensed Starbucks International Stores (as of September 2002)

(Business week, 2002)


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