Strategies of Starbucks in Entering the Emerging Market of North Korea - Case Study Example

International Business Theory and Practice Contents Contents 2 Introduction 3 Discussion 4 Theoretical background/Literature Review 4 Empirical Evidence 6 Data Analysis, Interpretation and Discussion 7 Conclusion 9 References 11 Emerging Markets Introduction With the advent of globalization, every company is looking for potential markets to expand their business into. The global expansion strategies of different countries are based on the objectives of increasing the profitability of the businesses through tapping in the various resources available in the foreign countries as well as position the business properly to attract a wider range of customers, especially in the emerging economies who have high purchasing power. But with the opportunities of global expansions comes different challenges which are faced by the companies while entering into and conducting business in the new markets. Starbucks is one of the leading coffee chain businesses in the world which has been exemplary in their strategies for domestic as well as global expansion processes. Starbucks Corporation in a Washington based company but over the last decade, the company has employed different innovation strategies to expand their business internationally and has increased its number of stores across the world at an accelerated rate making it one of the fasted internationally growing multinational corporations across the globe. The company is specifically focused on expanding into the emerging markets with high potential for growth like Middle East, Europe, and Asia pacific including China, Korea, India and the Latin America markets. This paper focuses on the different strategies of Starbucks in entering the emerging market of North Korea. Discussion Theoretical background/Literature Review There are a number of studies and theories presented by different scholars and researchers who have studied the different factors related to the international expansion of various multinationals. The Uppsala model for internationalization expansion processes was one of the earliest developed models for global expansion policies of multinational companies. The Porter’s diamond model for competitive advantage of nations is a critical model used to understand the different locational and company specific advantages to be considered in the international expansion process. According to the study of Chen and Mujtaba (2007) the entry mode factors considered for the expansion strategy are based on transaction cost model and can be considered the most critical step in the global expansion process (Chen and Mujtaba, 2007, p.322-337). The transactional cost model states that the implementation cost of an entry mode is a critically relevant factor in choosing the entry mode for implementation. According to the work presented by Tang and Liu (2011), the evaluation of the foreign markets and the cselection of the entry mode are the two most critical steps in the global expansion proces of any company (Tang and Liu, 2011, p.53-57). They also consider non transaction cost models whcih include different approaches like Resource based approach, Bargain power theory and the eclectic approach. According to Eclectic theory propposed by Dunning (1998), the factors influencing the eentry mode decisions are influenced by three groups of criteria which are advantages specific to internationalization, transaction and ownership. Aulakh and Kotabe (1997) proposed that the internationalization strategies of a business are based on different objectives and the businesses evaluate the different locational advantages and challenges while selecting the potential market for expanding their businesses (Aulakh and Kotabe, 1997, pp. 145-154). As proposed by Li and Yang (2008), the global expansion strategies are based on the criteria of efficiency with an objective of economizing on the various transaction costs (Li and Yang, 2008, pp.219-240). According to the work of Root (1994), the major influential factors related to the global expansion process can be categorized into internal factors and external factors (Root, 1994, pp.91-96). The internal factors include resource commitment and product factors. The external factors include the foreign market production factors, economic factors, regulatory policies, availability of resources, and the demand structures in the home country. The work presented by Egelhoff (1991) indicates that the entry mode factors can be firm specific, market specific and country specific (Egelhoff, 1991, pp.341-356). On the other hand, academicians liek Holmström, B. and Roberts, J. (1998), have supported teh fact that the bargaining powers of both the government of the host country and the company are influential for the decision making process pof teh busienss related to teh global expansion process (Holmstrom and Roberts, 1998, pp.73-93). Brassigton and Pettitt (2000) have identified two major internal factors that act as major drivers of the choice of the international market and the entry modes. These are speed and payback. The firms consider the payback factor to assess the time period that the company will need to break-even and start generating revenues from their investment in the international operations. The factor of speed decides the time which the business wants to dedicate in focusing on penetrating the target market (Brassington and Pettitt, 2006, p.115). Koch (2001) indicates that the entry mode selection process is dependent on internal factors, external factors as well as factors which are a combination of both types of factors. The combined factors include the business environment of the foreign location, the feasibility of the expansion processes, the market conditions in the foreign market as well as the home market, the global efficiency requirements and the market barriers in the foreign locations. According to Alexandrides and Bowers (2005), the multinational companies consider the different entry modes like licensing, exporting, franchising, wholly owned subsidiaries, turnkey projects and joint ventures depending on the requirements of the firms and the opportunities in the new markets (Alexandrides and Bowers, 2005, p.71-73). Empirical Evidence Starbucks Corporation started its global expansion process in 1985. The company was originally based in Seattle and started expanding its business by opening coffee chains in different cities in Canada and the United States like Chicago, Vancouver etc. The company started its internationalization process by entering into the market of Japan in 1995 which was a strong and emerging economy at that time. The empirical evidences show that Starbucks Corporation has a set standard of strategies that it employs in the process of internationalization of the business (Johnson and Turner, 2003, p.189). Since 1995, Starbucks Corporation has extensively employed the global expansion processes by opening up stores in numerous locations across the world. The company employs different entry strategies depending on the environment of the foreign market. Before deciding on the choice of market, Starbucks evaluates and assesses the different external and internal factors that are likely to affect the business in the international operations. The company mainly follows the strategies of joint venturing, licencing and wholly owned subsidiaries (James and Weidenbaum, 2003, p.51). Starbucks entered the market of Japan by entering into a joint venture with Sazaby Incorporation. Starbucks has employed the licencing mode in entering the markets of New Zealand, United Kingdom and Spain. Starbucks is considered as the largest coffee chain business in the world and is characterized by the feature of a concept of third place. The company has focused on adapting the expansion strategies according to the requirements characteristics to every new market and has given considerable importance in respecting and adhering to the local traditions and culture. This process has made the global expansion of Starbucks a hugely successful strategy resulting in the company operating with more than 5500 coffee houses in 51 countries across the world. Starbucks Corporation is expected to follow its traditional strategies when entering the emerging potential market of North Korea. The extensive study of the environment and characteristics of the market should be done when the company starts considering the expansion process. Starbucks can try to find out the gaps existing in the market that they can fill by opening up their coffee chains in North Korea and also analyse how they can utilize the resources of the location and set up a successful operation in the country. The Korean coffee market is expected to grow and seems highly profitable for a coffee chain like Starbucks to enter into. Starbucks already entered South Korea by opening up a store in 1999. Since then, the company has seen much growth and profitability in its business in South Korea. Before entering the Korean market, the company should extensively study the economic and political conditions prevailing in the market and try to enter the market through a safe strategy like joint venture which would create some cushion for the company in the adverse political and economic conditions. Strategic partnerships have helped the business in its earlier expansion processes and are likely to be very beneficial in tapping the North Korean market. The North Korean economy has been developing as a financially strong economy and thus it would be an ideal market for Starbucks to open up its next coffee house. Data Analysis, Interpretation and Discussion The different factors that would affect the foreign market entry process of Starbucks Corporation in the North Korean market are analysed and evaluated on the basis of the theory proposed by Koch (2001). Foreign country business environment: Before Starbucks enters North Korea, the company should effectively analyse the political, cultural, social and economic conditions prevailing in the country (Culpan, 2002, p.78). Though the Korean market is not as sophisticated as the Italian or French coffee market, yet the economy seems to grow at an accelerated rate which is likely to boost the business of Starbucks in the country. Firm capabilities: Starbucks has grown into a huge business with more than 5500 coffee houses across the world. As stated by the theory of Chen and Majtuba, the large businesses are better equipped for international expansion processes in terms of resources and risk management. Thus, Starbucks seems adequately equipped to absorb the risks in the market. The company has more capability for absorbing the risks and expending resources due to their strong financial position. Resource commitment: Starbucks has huge resources, management skills as well as financial strength and therefore according to the work of Root (1994), Starbucks can choose from multiple entry modes for entering into the North Korean market. The North Korean market is ideal for the supply of cheap labour which would help in increasing the profitability of the company. Market Barriers: The native language in the country may pose a s a barrier, thus it is important or Starbucks to hire local people for the operations in its coffee houses, particularly for order placing, billing and other customers services where direct communication with the customers is mandatory. The volatility of the business regulations and the political aspects should be dealt with effectively which highly supports the strategy of joint partnership with a local firm (Rugman, 2001, p.17). Market potential: The political environment in North Korea is not very stable which would work as a threat to the business. But the fact that the government has started to encourage development in the economy of the country would be a beneficial factor for the company. According to the statistics of the financial investment industry, it is expected that the coffee market will grow hugely in ten coming years. The worldwide demand for coffee is increasing as is the purchasing power of the consumers in the emerging economies. Therefore the global management of Starbucks can consider the North Korean market as an effective location for its. International expansion Competitive intensity: The competitive landscape of the North Korean market is encouraging for Starbucks. There are not many coffee chains in the market and the purchasing power of the consumers is increasing. The local coffee shops do not pose any threat to Starbucks as Starbucks is considered as a different league of coffee chain. Conclusion The international business expansion practices of Starbucks are highly renowned. The company has effectively evaluated and employed the different applicable strategies in the choice of markets. The analysis of the international expansion of the business of Starbucks in North Korea indicates that the company should enter into a joint venture with an existent company in the country. The expansion strategy is likely to be profitable due to availability of resources in the country and the financial strength of the company. Starbucks Corporation has strong management, financial policies and resources which make it strongly equipped to grow its international business successfully. Before entering the market, the management should effectively evaluate the influential factors which would affect the success and profitability of Starbucks in the foreign market. The external factors are more critical and the competitive advantage of the location plays a major role in impacting the expansion decision of the company as well as the future profitability of the business. It is important that Starbucks analyses the external opportunities and barriers in the North Korean economy as discussed in this report earlier. Since, international expansion processes are significant strategies in creating sustainable competitive advantage for a company, it is critical for Starbucks to analyse each and every aspect of the expansion strategy in the market of North Korea. References Alexandrides, C. G. & Bowers, B. L. 2005. Market Entry Strategies: Choosing a Foreign Market Entry Mode. London: Routledge. Aulakh, P. S & Kotabe, M. 1997. Antecedents and performance implications of channel integration in foreign markets. Journal of International Business Studies, Vol. 18(1), p.145-154. Bhide, A.V. 2003. The Origin and Evolution of New Businesses. New York: Oxford University Press. Brassington, F. & Pettitt, S. 2006. Principles of Marketing. New Jersey: Prentice Hall. Chen, L. Y. and Mujtaba, B. 2007. 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