The Strategic Challenges Confronting Starbucks Corporation - Case Study Example

Supervisor Identify and assess the strategic challenges confronting Starbucks Corporation in 2006. Use your findings to critically evaluate the firm's decision not to compromise on its "basic principles" (Case Page 303) as its expands internationally. Using case evidence and module theory, discuss the advantages and disadvantages of each of the following modes of entry to a new international business location: Licensing, Joint Ventures and wholly owned Subsidiaries. Which mode or modes of entry do you recommend Starbucks to use when entering India, Brazil and Russia and why Compare and contrast the influence upon Starbucks strategic development of a range of stakeholders including non governmental organization (NGOs) in your view. How should Starbucks manage the paradox of profitability and responsibility January, 2009 1.0Introduction Andrews (1997: p. 52) defines corporate strategy as "the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organisation it is or intends to be and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities". Corporate strategy in effect maps out the businesses in which an organisation intends to compete in a way that focuses resources to convert distinctive capabilities into competitive advantage. (Andrews, 1997). Economists are not in agreement as to a common definition of multinational or transnational enterprises (MNE/TNC). Multinational corporations have many dimensions and can be viewed from several perspectives (ownership, management, strategy and structural, etc. (Root 1994, Hill 2007). According to Ghoshal. et al (2002), A multinational Entreprise (or transnational corporation) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Most multinationals have budgets that exceed those of many countries (Ghoshal et al. 2002). This paper addresses some of the pertinent issues that affected Starbucks in 2006. The paper further discusses the advantages and disadvantages of the different models of entry used often adopted by Multinationals. The last section of the paper looks at Stakeholder mapping of Starbucks and how each of its Stakeholders affected its strategies 2.0Identify and assess the strategic challenges confronting Starbucks Corporation in 2006. Use your findings to critically evaluate the firm's decision not to compromise on its "basic principles" (Case Page 303) as its expands internationally. Today's business environment is increasingly becoming more turbulent, chaotic and challenging than ever before and to survive, it is vital that a firm understands the strategies underpinning the success of rival firms and try to emulate, or do something better than the rivals. This study is initiated to investigate the core features underpinning H&M success when compared to it competitors. Within the context of today's global competition, businesses and firms no-longer compete as individual companies but try to corporate with other businesses in their activities (Wu & Chien 2007:2). These researchers went further to argue that, this strategy has become quite common in many businesses including the retail clothing chain stores. The conventional vertical integrated company based business model is gradually being replaced by collaborative relationship between many fragmented, but complementary and specialized value stars and constellation (Wu & Chien:1). The problems and challenges that Starbucks faced in 2006 can be explain inline Porters five forces. Porter (1985:4) contends that the Five Forces define the rules of competition in any industry and at the same time marks the bases for understanding a company's success. Porter (1985) went further and argues that, competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry's attractiveness. The researcher further claims that, "The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firm's behaviour." (1985: 4) and through their own strategy a firm can take hold of these five forces. Unfortunately, most of the problems faced by Starbucks in 2006 were due to its basic principles as its failed to think globally and act locally. For example, in France were it faced stuff competition from traditional French coffee shop, it emphasized non smooking, where as in traditional coffee shops, this was a French culture. Again, Starbucks again faced higher operational costs, higher prices because of its lack of control in the value chain. Resources were being sorted from America were as the were cheaper alternatives. Well established coffee shops offered specialty coffee at lower prices. It over reliance of American culture in foreign market failed the corporation. In Germany, local coffee shops, were fast at imitating the Starbucks experience. Also, the company faced political problems due to the state of events in the Middle East and central Asia at the time. The American Invasion of Iraq and Schultz personal address to Jewish American student went contrary to its corporate social responsibility report. Most stores were closed in Israel and in the Middle East, Arab student pushed for the boycott of American goods. Sustitutes product in the market were attractive as Starbucks one size fit all strategy in other market was unsuccessful. Because suppliers bargaining powers in market such as France and Germany were high, operational costs became quite expensive for Starbucks in these markets. The low cost of entry for the creation of traditional coffee shop also increased the number of niche players in this market. In markets such as France and the United Kingdom, Starbucks faced increasing customer's loyalty to traditional coffee brand. And the free smoking environment that they offer gave them an added advantage. The researcher further claims that, "The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firm's behaviour." (1985: 4) and through their own strategy a firm can take hold of these five forces. Here, Starbucks failed to take control of the five forces. 3.1 Advantages and Disadvantages of different Entry Mode Which Entry Method should Starbucks adopt in India, Russia and Brazil Ownership advantages resulting from MNEs operations can be looked upon from two directions. That is in a situation where full ownership prevails and a situation where ownership is shared with local partners. Tseng Hui-Chuing (2007) argued that MNEs equipped with capabilities to attain assets seeking objectives are more likely to choose an internationalization of foreign operations than a shared ownership mode. In this direction, diversification of institutional power is reduced, corporate identity is preserved, and opportunistic behaviour resulting from shared ownership minimize. If the activities of Starbucks are facing greater challenges in Europe it is because of the opportunistic behaviour resulting from joint venture and lack of head office control of operational costs He went further to argue that, MNEs will prefer full ownership mostly in situation where the short term benefits in collaborating in assets exploration tend to be more than the long term cost of full ownership (White &Lei 2005). Entering into join venture is only possible option when assets seeking multinationals lack capabilities to duplicate or acquire needed assets or where the pros of sharing assets outweighs the cons of ownership (Chen &Hennart 2002, Oliver 1990, White and Lui, 2005. By entering into a join venture ownership structure, the partnership will provide an advantage to easily gain access to resources that are costly or prohibitive to be reproduced or transfer outside of the firm that controls the resources (Oliver 1990). Makino & Neupert(2000) went further to substantiate that a wholly owned structure has an advantage a greater discretion or latitude to leverage the resources when compared to join venture. However, in the situation of Starbucks, it is different as the multinational is equipped with all the resources to break foreign market. In India, because of the strong role cultural aspect plays in organization development, I will recommend a joint venture as a strategic breakthrough for this culture. In Brazil, I will also recommend a joint venture, here this time not because of the cultural aspect of it, to take advantage and form a joint venture with local coffee producing firm. In Russia, a wholly owned subsidiary should be adopted. Here, White &Lei (2005) argue that, entering into join venture is only possible option when assets seeking multinationals lack capabilities to duplicate or acquire needed assets or where the pros of sharing assets outweighs the cons of ownership1. By entering into a join venture ownership structure, the partnership will provide an advantage to easily gain access to resources that are costly or prohibitive to be reproduced or transfer outside of the firm that controls the resources. Makino & Neupert(2000) went further to substantiate that a wholly owned structure has an advantage a greater discretion or latitude to leverage the resources when compared to join venture 3.3 Why should this Model be adopted Tseng Hui-Chuing (2007) elaborated and strengthened location and ownership advantages existing to MNEs using a set of hypothesis to connect, local technological advantages, natural resource advantages, cheap labour, technological advantages with firm specific advantages (Marketing and firm size advantage). Tseng Hui Chuing (2007) however, postulated that in situation where the advantages and capabilities that MNEs embrace, is location specific (labour, technology, natural resources, expertise etc), or difficult to be redeployed or rebuilt in a new market, then Join ownership should not be given a second thought. These ties with Dunning (1993) findings that there are four generic location specific advantages for MNEs. Natural resource seeking advantage Market seeking advantage Strategic assets seeking advantage Efficiency seeking advantage. Smarzynska, & Mariana, (2008), argued that affiliates with joint domestic and foreign ownership may face lower costs of finding local suppliers of intermediates and thus may be more likely to engage in local sourcing than wholly owned foreign subsidiaries. This in turn may lead to higher productivity spillovers to local producers in the supplying sectors (vertical spillovers). Second, the fact that MNEs tend to transfer less sophisticated technologies to their partially owned affiliates than to wholly owned subsidiaries, combined with the better access to knowledge through the participation of the local shareholder in partially owned projects, may facilitate more knowledge absorption by local firms in the same sector (horizontal spillovers) Looking at it from this direction, one will hesitate to note that by circumventing a wholly owned ownership structure, the internalization advantages likely to result will include; Preservation of Proprietary know how Minimise losses due to opportunistic behaviour Protect the organisational cultural identity Confined capital structure of the organisation. Christos, et al., (2007) argued that cultural differences decrease firm value by imposing a barrier to the exploitation of internalisation advantages listed above. In all, we argue here that, this model should be adopted because, Schneider, (1989) argues that in culture is very important because of the cultural shock where there are several stages in the difference of a country culture. In international business culture is classified under three stages: the honeymoon stage when we know the culture is new and we want to be there, the irritation-hostility stage, the gradual adjustment and the bi-culturalism where the company gets a comfortable way in the settlement of the new culture (Schneider, 1989). Schneider (1998) citing Schein (1985) notes that National culture could play an important role in strategy formulation as it derives from assumptions regarding relationships with the environment as well as relationships among people. Schneider (1998) argues that these assumptions will influence how information is gathered and how that information is interpreted within the organization. The strategy formulation process can therefore not be considered 'culture-free' because information is embedded in social norms and acquires symbolic value as a function of a particular set of beliefs in a particular set of cultures. (Feldman and March, 1981). In India for example, a joint ventures and strategic alliances will be quite feasible. This will be so because, the government requires that local business operations require 51% control by Indian nationals, Starbucks first step will be to find franchise owners. These in turn will have to form alliance and joint ventures to raise enough capital to develop the links necessary to form a successful entity. Joint Ventures mean even more. They establish that the local owner/operators become an integral part of the stakeholder group. It is expected that they will therefore be more contentious of operations and therefore be more successful In high-risk markets, we will recommend Starbucks to develop its market strategy to develop supplier links in the host country. This is meant to reduce the strategic risk that may result from political legal and financial issues. By developing a relationship with local suppliers, the suppliers can provide valuable input into the opportunities and threats. Through this entry mode, the local stakeholders become an integral part of the stakeholder group. It is expected that they will therefore be more contentious of operations and therefore be more successful Porter 1980). In situations were subsidiaries are created they should be like extension of the head office with attention on local values and culture. 4 Compare and contrast the influence upon Starbucks strategic development of a range of stakeholders including non governmental organization (NGOs) in your view. How should Starbucks manage the paradox of profitability and responsibility Corporate social responsibility (CSR) refers to the awareness, acceptance, and management of the implications and effects of all corporate decision making, taking particular account of community investment, human rights, and employee relations, environmental practices, and ethical conduct. (Park, 2007). CSR activities show consideration for the environment, consumers, charity, minority groups, employee welfare, community development, women empowerment, etc. (Hsueh, 2008). Today, the requirements of an organisation's stakeholders including, customers, employees, suppliers, shareholders, government, etc are on a continuous rise Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits". (Sacconi, 2004) "Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial window-dressing; still others argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations". (Bulkeley, 2001; Sacconi, 2004) Major Stakeholders of an organisation. Source: adapted from: Brignall and Ballantine (1996). Management is likely to carry out its activities in line with the expectations of powerful stakeholders. Powerful Stakeholders include those stakeholders who control resources which are scarce and essential to the success of the organisation. Management would therefore take on activities that are in line with the expectations of powerful stakeholders and provide disclosure of these activities by means of a social responsibility report. According to Hsueh (2008) CSR has received much attention in recent years and more and more businesses are taking CSR to improve their corporate image. Organisation must proof that, they are socially responsible. That's, why Starbucks faced increasingly calls from non governmental organizations that urged the company to change its strategies and start acquiring certified beans. This was enough proof to show that an organisation do not exist in isolation, but is part of the mega environment. To the other Stakeholders as the community, Starbucks had to carry out socially responsible activities, in order not to compromise profitability and responsibility. To its employees, Starbuck was the very first privately own firm to offer stock options, it became a dream environment for work as diversity was encouraged. In order not to compromise profitability and responsibility, we recommend the organisation's action to be defined inline with stakeholders doctrine. For example management is interested in compensation, prestige and power; employees are concerned with job satisfaction, compensation and safety; minority groups are interested in fair employment and no discrimination, for example, this group would love to see a company that does not discriminate between Caucasians and Asian Minorities or between Caucasians and Blacks when it comes to employment, they are against racial discrimination by companies when it comes to selection of candidates to fill a place in the company. The community loves a company that takes into consideration the community first when it comes to employment, as well as an organisation that takes measures to preserve the environment and the earth's natural resources that are necessary for maintaining the ecosystem; Creditors are interested in companies that can pay interest and principal upon maturity of debt obligations; shareholders are interested in dividends and capital gains; customers need quality products and services as well as increased customer value and customer satisfaction; suppliers need regular payments and continuity of business (going concern), for example, no supplier will like to supply a company that is unable to settle its accounts payable or that is likely not going to continue business; and the government needs to collect taxes from the company. If this is put at the forefront of the company's activities and decisions are more ethical, then it will be easier to reconcile profitability and responsibility. References Andrews K. (1997). Resources and Strategy: A Reader, edited by Nicolai J. Foss. Oxford University Press, ISBN 0198781792, 9780198781790 Anand, J., & Delois, A.,(2002) Absolute and relative resources as determinants of international acquisitions. Strategic Management Journal 23(2), 119-134 Anderton. A., (2006) Economics. 4th Edt Causeway Press Charles W.L.Hill. (2007). International Business. Competing in the global Marketplace. McGraw Hill, International edition. Chen, S., & Hennart, J., (2002) Japanese Investors choice of joint ventures versus wholly owned subsidiaries in the US. The role of market barriers and firm capabilities. Journal of international Business studies, 33(1), 1-18 Cheng, J. L. C., & Bolon, D. S. (1993). The management of multinational R&D: A neglected topic in international business research. Journal of International Business Studies, 24(1), 1-18. Dunning J. H., (1993) Multinational enterprise and the global economy: Wokingham, UK Anderson Wesley Feldman, M. S., and J. G. March (1981) "Information in organizations as signal and symbol", Administrative Science Quarterly, vol. 26, pp. 171-186. Hsueh, C., Chang S. (2008) Equilibrium analysis and corporate social responsibility for supply chain integration European Journal of Operational Research,Volume 190, Issue 1,Pages 116-129 Markino, S., Lau.,C., and Yeh, R. (2002) Asset exploitation versus Asset seeking: Implication for location choice for foreign direct investment. From newly industrialized economies. Journal of international business studies.33 (3), 403-421 Markusen, James R. & Venables, Anthony J., (1998)Multinational firms and the new trade theory. http://www.colorado.edu/Economics/ Oliver, C., (1990) Determinants of organisational relationship. Integration and future directions. Academy of Management Review, 15(2), 241-265 Park Chris. (2007). Corporate Social Responsibility" A Dictionary of Environment and Conservation. Oxford University Press, Oxford Reference Online. Schneider S. C. (1989), "Strategy Formulation: The Impact of National Culture", Organization Studies, vol. 10, pp. 149-168. Torre, J. de la, Doz, Y., & Devinney, T. (2001) Managing the Global Corporation: Case Studies in Strategy and Management (2nd, international Ed.). New York: McGraw-Hill. White. D.C., Stephen. C. & Baghai. A.M., (1999). Turning Capabilities into Advantages. The McKinsey Quarterly, No. 1, 1999 Root F., (1994) International Trade and Investment Shapiro A. C. (2006). Multinational Financial Management. Eight Edition. Wiley and Sons Inc. Tseng Hui-Chiung (2007). Exploring Location-Specific Assets and Exploiting Firm-Specific Advantages: An Integrative Perspective on Foreign Ownership Decisions. Canadian Journal of administrative Sciences. , Vol. 24 Issue 2, p120-134, 15p Verschoor W. C., Muller A. (2007). The Asian Crises Exchange Risk Exposure of US Multinationals. Managerial Finanace, vol. 23, No. 9, pp. 710-740 Smarzynska, B. J., & Mariana, S., (2008) To share or not to share: Does local participation matter for spillovers from foreign direct investment Journal of Development Economics; Feb2008, Vol. 85 Issue 1/2, p194-217, 24p Pong K. W.,(2006) Foreign direct investment and forward hedging Journal of Multinational Financial Management; Dec2006, Vol. 16 Issue 5, p459-474, 16p Jones, G., (2005) Multinationals and Global Capitalism: From the Nineteenth to the Twenty-First Century. Oxford University Press Sacconi, L. (2004). A Social Account for CSR as Extended Model of Corporate Governance (Part II): Compliance, Reputation and Reciprocity. Journal of Business Ethics, No. 11, pages 77-96. Read More