International Operation Management: Case of Starbucks Corporation - Essay Example

International Operation Management: Starbucks Corporation Introduction Starbucks Corporation is a Washington based company having coffeehouse chain globally. The company achieved an incredible growth rate during the last two decades, and currently it has spread its business operation across more than 55 countries. Evidently, Starbucks is the world’s largest coffeehouse company with majority of the stores situated in United States, United Kingdom, and Turkey (Dinesh.com, n.d). As Sehgal (2011) points out, the firm offers a range of product lines including drip brewed coffee, different hot and cold drinks, pastries, snacks, salads, and espresso based hot drinks. The company has recently announced its plans to expand its business worldwide and a series of store closures in the United States. In economics, the term internationalisation indicates the process of increasing a firm’s involvement in global market operations. Economists hold the view that organisations mainly focus on economies of scale and scope by dealing with the process of internationalisation. Although, the Starbucks is present in many part of the globe, it still strives to internationalise its business operations. Globalisation and associated industrial and technological developments raised a series of potential opportunities to global players. This situation evidently has motivated Starbucks to internationalise it business segments extensively. As James (2008) reports, in 2008, the company decided to close its 600 underperforming stores in United States. This worse condition also necessitated wide global expansion to survive market difficulties. The firm has structured its international strategy to meet the needs and requirements of different international market segments by respecting their cultures and traditions. This paper will analyse Starbuck’s internationalisation strategies. It will also suggest a country that the company can expand its business to, and the mode of internationalisation that is relevant to the context. Internationalisation of Starbucks According to Hill and McShane (2008, p. 76), Starbucks’ mode of internationalisation can be grouped into three such as joint venture, licenses, and wholly owned subsidiaries. While analysing the internationalisation strategies of the company, it seems that some external as well as internal factors affect the company’s entry mode decision. According to Santamaria and Ni (2008), the external factors include culture distance, market potential, market barriers, and degree of competition whereas the overseas country’s characteristic features of macro business environment, resource availability, management’s attitude towards risk, and global management efficiency constitute external factors. According to Burrone (2006), licensing is an agreement by which a licensor and licensee are tied together by certain contractual obligations. Under this agreement, the licensor will sell his knowledge or intangible properties such as formulas, processes, and designs to licensee, for a particular period of time. In turn, the licensee pays the licensor the royalty fee. At the initial stages of the internationalisation process, a firm generally prefers licensing strategy due to lack of foreign market knowledge and other business uncertainties. Since the licensor timely gets royalty fee for his services, he is free from the risk of capital accumulation and a new market entry. Obviously, the Starbucks Corporation followed a licensing internationalisation strategy for establishing its subsidiaries in countries like China, Indonesia, Malaysia, New Zealand, and Philippines (Starbucks Corporation, 2011). The strategy provided the company with economies of operation. According to the transaction cost theory, multinational companies are developed since they tend to internalise transaction costs for which market transaction cost is high (Oxford University Press, 2010). The process of internationalisation assists multinational companies to trim down transaction costs to a large extent by carrying out those transactions within the same company rather than between individual firms. It is identified that the licensing strategy has greatly assisted the company to open a way for subsequent global expansions. Moreover, this mode of strategic alliance aided the company to observe foreign market trends without risking its resources. In short, the Starbucks aimed cost effective global expansion by following a licensing internationalisation strategy. Therefore, the transaction cost theory could be linked to the internationalisation policy of Starbucks in its early phases of global development. As Larson (2009) points out, the Starbucks Corporation conducts numerous quantitative market analyses before entering a new market segment or a country. The company has also developed comprehensive focus group interview tactics to clearly understand the pulse and potential of the targeted marketplace. These prior market research policies provide the firm with an opportunity to find out the tastes and specifications of a particular market in advance. In short, the internationalisation process assists Starbucks to acquire extensive market knowledge regarding different countries across the globe (Online Resource Centre, n.d). This knowledge acquisition process is well supported by the learning theory of internationalisation. The learning theory defines “internationalisation as an incremental process of knowledge creation and foreign market commitment” (Krist, 2009, p. 131). More precisely, the learning theory states that knowledge exploitation and development are the major contributions of the internationalisation process. Hence, by pointing to the elements of learning theory, it can be argued that Starbucks acquires global market knowledge and promotes gradual business expansion through the process of internationalisation. According to Bernardin (2008), as part of knowledge creation, the company adopted joint venture business as its major internationalisation strategy in countries like Australia, Germany, Greece, Hong Kong, South Korea, and Spain (p.497). The learning theory specifically describes that a firm has many limitations in absorbing and integrating new information. Hence, this theory suggests that even a large company needs external help to achieve its goals in an overseas country. Throughout the history of Starbucks, it is observed that the company has sought for the help of another organisation or entrepreneur in order to share financial risks. Under a joint venture business strategy, two or more independent firms contractually join together to achieve their predetermined business goals. Historically, the joint venture approach has been practiced by firms to attain better position in the market. As Campbell (2009, p. 26) opines, cost sharing and equal distribution of risk elements are the major advantages of a joint venture business expansion policy. While analysing the corporate history of Starbucks, it seems that the firm’s partners have greatly aided this coffee company to enter a new market and easily launch its products and services in that market. In addition, this strategic alliance policy has greatly added to Starbuck’s competitiveness in the marketplace. The company’s internationalisation strategy was helpful for the firm to cop up with varying market trends and rapid technological changes. Anyhow, the joint venture operation assisted the Starbucks to minimise its risk levels of internationalisation process to a great extent, because the company could acquire deep global market knowledge from its partners. According to Johanson and Mattson, the network approach of internationalisation states that “international business opportunities and decisions are driven primarily from relationship considerations” (as cited in Prashantham, 2008, p.80). The network approach elucidates that the process of internationalisation assists companies to obtain new expansion opportunities, market information, and timely advices on different business matters on the strength of strategic alliances between firms. The internationalisation strategies of Starbucks are also designed on the basis of the concept “relationship considerations” proposed by the network approach. It seems that the company greatly values its international business partners and it has framed comprehensive policies to choose ‘International Partners’. The company management influences its local partners to share the company’s values and commitment in order to provide Starbucks experience to customers globally. While planning a new market entry, the company selects locally leading business partners and they jointly integrate their business traditions to match their corporate culture with the particular local market. For instance, Starbucks stores in Spain maintain outside terraces whereas its stores in Japan have more seats than those in other countries. The internationalisation strategies of Starbucks vary only in degree; but all of them keep in touch with operators so as to stay informed about market trend changes. In addition, the company’s percent of shareholding in a joint venture noticeably varies from region to region. Recently, the Starbucks tends to minimise its shareholding in a joint venture so as to make their local partners more responsible for market operations. Finally, the wholly owned subsidiaries approach is another internationalisation strategy by which a firm owns 100 percent shareholding of the overseas entity. There are two distinct modes of wholly owned subsidiary approaches in practice. Under the first method, a firm enters a foreign market by establishing a new structure of operational tactics and legal entity. In contrast, the second method refers to business acquisition. In an acquisition process, a firm acquires an existing overseas firm in order to easily and directly enter a foreign market. The Starbucks’ corporate history reflects that the firm maintains wholly owned subsidiaries only in a few countries. Mainly, the company has wholly owned subsidiaries in United Kingdom. The network approach of internationalisation can be applied to explain why Starbucks does not wish to maintain wholly owned subsidiaries. The network theory states that the idea of internationalisation is evolved from relationship considerations. When Starbucks operates wholly owned subsidiaries abroad, it does not get the opportunity to jointly work with other firms or to acquire extensive market knowledge. Recommendation Although, Starbucks Corporations has coffee stores across the world, the company still does not operate its stores in Italy, which is the Europe’s third largest economy on the basis of nominal GDP. It is widely believed that pricing issues, customer impatience, and regulative government policies are the major factors keeping Starbucks out. While analysing the economic landscape of Italy, it is clear that the Starbucks can take advantages of the Italian market if the company establishes its coffee stores in the region. Italy is one of the most popular tourist destinations in Europe and hence a large number of tourists visit the country every day. Hence, it is recommendable for the Starbucks to plan Italian market entry. Evidently, it seems that a joint venture strategy would be effective for the company to enter Italian coffee market. Currently, there are a number of well established coffee companies operating in Italy including Illy, Lavazza, and Molinari. When the Starbucks jointly operates with either of these companies, it can get rid of the troubles associated with a new market entry product positioning. In addition, it is also advisable for the company to hold less than 50 percent of the shares in this joint venture. By adopting such a strategy, the company can greatly motivate its local partner to dominate the Italian coffee market. The company (Starbucks) may completely acquire this joint venture in future if the Italian coffee market positively responds to Starbucks products. Conclusion In total, the Starbucks Corporation has travelled a long distance in internationalisation. Companies mainly follow licensing, joint venture, and wholly owned subsidiary approaches in order to internationalise their diverse product lines. The corporate culture of the organisation reveals that Starbucks mainly use joint venture strategies while it rarely practices wholly owned subsidiary policy. The company has nowadays planned to minimise its shareholdings in joint ventures. It is recommendable for Starbucks to enter Italian market at the earliest since the country’s coffee market offers potential opportunities to the company. Finally, it would be better for the company to practice joint venture approach in Italy. References Burrone, E 2006, ‘Intellectual property rights, part 5: Licensing and franchising’, CBI News Bulletin, pp.6-8, Viewed 17 December 2011, Bernardin, HJ 2008, Human Resource Management: An Experimental Approach, Tata McGraw-Hill Publishing Company, New Delhi. Campbell, D & Netzer, A 2009, International Joint Ventures, Kluwer Law International, Netherlands. Dinesh.com n.d, ‘Starbucks logo-design and history’, Viewed 17 December 2011, Hill, CWL & McShane, SL 2008, Principles of Management, Tata McGraw-Hill, New Delhi. James, A 2008, ‘Starbucks plans to close 600 stores across U.S’, Seattlepi, Viewed 17 December 2011, Johanson, Mattson & Prashantham, S (Ed) 2008, The Internationalization of Small Firms: A Strategic Entrepreneurship Perspective, Routledge, New York. Krist, M 2008, Internationalization and Firm Performance: The Role of Intangible Resources, Gabler, Germany. 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