How International Business Organization Starbucks Achieves its International Objectives - Case Study Example

International Business Essay How International Business Organization achieves its International Objectives in the Contemporary Context Name Course Name and Code Instructor’s Name Date Introduction Starbucks is an International Company whose history dates back to 1971 when Zev Siegl, Gordon Bowker and Jerry Baldwin started a coffee bean store known as “Starbucks” in order to trade in specialty whole bean coffees in the Seattle. Starbucks had its stores increased to 5 in 1981 around which Howard Schultz noticed that the company was actually ordering more coffee as opposed to other companies and thus opted to join it. According to Starbuck’s website, the company claims to be in its infancy stages on the international scene. In 2003, having Howard Schultz as its Chief Global Strategist and Chairman, Starbucks emerged position 465 out of 500 companies in the annual list of 500 most successful companies in the Fortune Magazine (Schultz, 2011). During the first quarter of the year 2003, Starbucks reported a 31% increase in its total earnings and a 23 per cent increase in its total sales. Starbucks is also recognized as being the first company in the United States to not only presents their part time employees with health coverage but it was also the first enterprise in the country to offer stock options. According to analysts, it was felt that Starbucks’ success was greatly attributed to its domestic operations, which were highly profitable. In addition, analysts felt that Starbucks’ success was also due to the quality of their product, which speaks for itself and the lower costs that the company spent on both marketing and advertising (Burks, 2009). Employees also preferred working with Starbucks because of the company’s friendly policies. On the other hand, it was reported that most of the Company’s (Starbucks) international operations were actually incurring losses. For instance in Japan, which formed the largest market for Starbucks outside the United States, the company announced a total loss of $3.9 million in May 2003 and it also performed badly in both the Middle East and Europe (Gilbert, 2009). Analysts attributed the poor performance of the company in its international businesses to lack of proper planning. The analysts also noted that the poor performance of Starbucks outside the US was due to the volatile or harsh international business environment, which made it hard or difficult for it to manage its international business effectively. Despite Starbucks’ poor performance in international business, many analysts thought that it was important for it to place emphasis on its international business or operations. This is because as the United States market starts being saturated, Starbucks would eventually be forced to search outside the country for growth and increased revenues. The idea of going international The idea of Starbucks going international emerged in 1982 when Schultz, then working for the company as a Marketing Manager was sent to Italy to attend an International Housewares show. It was while there that Schultz noticed that in every city street, there was an Espresso Coffee shop or bar where individuals met as they spent their time. The Marketing Manager (Starbucks) realized that their company could do business if they introduced such espresso coffee bars in not only their home country but other places as well. Despite the fact that they did not like the idea, Shultz was allowed to sell the espresso coffee in the retail shop and the business picked up very well. Schultz opted to quit the company and establish on his own after the partners became reluctant in venturing into the coffee beverage business. Internationalization of Starbucks/ the Internationalization Process Upon opening a Coffee bar named “II Giornale” in Seattle in April 1985 and the subsequent opening of the second and third stores respectively located in Seattle and Vancouver, Schultz heard that the owners of Starbuck were disposing off six of their stores with Starbucks as the brand name. Since Starbucks was a more established named, Schultz opted to raise $3.8 million and bought it. Soon after, Schultz expanded the Starbucks stores to Los Angeles, Chicago and other main cities despite the fact that the company reported losses in 1990. Despite of these setbacks, Schultz never gave up and indeed, he continued with the expansion strategy and by 1991, the Starbucks had increased to 116 stores making it to become the first company that was privately owned to offer employees with stock options. Starbucks’ success is attributed to the company’s aggressive expansion strategies coupled with the innovation of new products to attract its clients. For instance, the company started to sell the infamous in-house music program CDs in 1995 and established coffee containing low fat known as Frappuccino to cater for the diet needs of the young people in 1995. It was due to the expansion initiatives that the company was able to record an increased traffic of between 6-8% annually and an average growth of 20 per cent annually since the start of 1991 (Cullen, et al, 2009). The market saturation that occurred during the mid 1990’s made it difficult for Starbucks to depend on the United States for growth. It was thus the feeling of analysts that Starbucks should internationalize its operations in order to not only boost revenues but also maintain the company’s growth. It was in this aspect that Starbucks established the “Starbucks Coffee International” in 1995, a completely owned subsidiary aimed at monitoring the organization’s international expansion. Through a joint venture with a leading interior goods retailer and Japanese teashop known as “Sazaby’s Inc”, Starbucks successfully penetrated the Japanese market. Over the years, the company was capable of entering or expanding into the Middle East, Europe and South East Asia and by March 2003, Starbucks as a company had established a total of 1,532 stores outside the United States, representing 23% of the company’s total stores. Starbucks had its international presence felt through various entries in different countries. For instance in countries like Japan, Taiwan, Australia, Israel, Germany, Greece, Mexico, Hawaii, Hong Kong, Indonesia, Puerto Rico and Spain, Starbucks entered the markets as Joint Ventures while in Canada, it has a wholly owned subsidiary known as Starbucks Coffee Canada. In countries like Malaysia, New Zealand, Kuwait, Philippines, Austria, Switzerland and Lebanon, the company penetrated the markets as a Licensee. Due to an eagerness among the young people to imitate Western characters and lifestyles, Starbucks got lucrative markets in countries like Thailand, Japan, Malaysia, Taiwan, Cambodia, New Zealand, Singapore, Indonesia, Philippines, New Guinea, North Korea China and South Korea. Primary ways a company can use to enter a foreign market Despite the fact that there are various modes of entry that a company can use to enter International markets, Starbucks opted to use a three-pronged strategy in order to penetrate international markets and this included through licensing, wholly owned subsidiaries and through joint ventures. Some other primary methods through which a company can penetrate a foreign market include through exporting, through Turnkey projects and through franchising. Despite the fact that there are six major primary means through which a company can use to enter any given foreign market, it should be noted that each mode of entry actually has its pros (advantages) and cons (disadvantages). The method chosen by a company to enter a foreign market will therefore depend highly on various factors such as conditions that prevail in the targeted foreign market and the nature of a given product or service (Margardt, 2009). Licensing, one of the methods used by Starbucks to enter foreign markets, refers to an arrangement in which a company or a licenser grants another company intangible property in form of formulas, patents, designs, inventions, trademarks, copyrights and processes for a stipulated time period while the licenser gets royalty from the licensee. This method of market entry is advantageous because it has lower costs and developmental costs. However, it also has disadvantages in that it lacks control over technology, it is unable to participate in coordination of global strategies and it also has the inability of realizing experience and location curve economies. The use of joint ventures by Starbucks to penetrate foreign markets implies allowing a company to play a role and have a stake in the management of a foreign business operation. At most times, joint ventures will actually need more training and direct investments, technology transfer and management assistance. Either joint ventures can be non-equity or equity partnerships whereby in equity joint ventures, there are various contractual agreements with the equal partners as opposed to non-equity ventures in which a partner in the host country will normally have a higher stake. In some nations, a joint venture is actually the only way through which a foreign company can be allowed to operate in its markets. This method is advantageous in that it is politically acceptable, there are shared costs and risks and there is easy access towards local partners. However, it is disadvantageous in that there is inability to get involved in coordination that is globally strategic, there is inability to realize experience and location economies and there is also a lack of control on the technology (De, 2010). Another method opted by Starbucks to enter the foreign market is through the use of wholly owned subsidiaries in which the company owns 100 per cent of the subsidiary’s stock. There are two ways in which a company can create subsidiaries in a foreign nation: this can be done through establishing Greenfield investments or new operations in a foreign nation or acquiring a firm and using it to promote its products (Brownfield investments). This method is advantageous in that there is protection of technology, there is ability of realizing experience and economies and there is also ability of engaging in the global strategic coordination. However, the method is also disadvantageous in that it has high costs and risks. Before entering the international markets, Starbucks as a company placed emphasis on studying the conditions in the market for the company’s product in a given country. It then after resorted to the local partners for its business operations. Through Seattle’s highly experienced Managers, Starbucks started with testing the markets by opening some few stores, which were located in trendy areas (Jones, 2009). How Starbucks internationalized itself Starbucks entered the Japanese market through using a joint venture with a company known as Sazaby Inc and stuck to its business principles despite of being advised by analysts to forego some of them. They proved the analysts wrong when their stores became an attraction to young Japanese women thus making the company to open more than 100 branches. Sources close to Starbucks indicated that their success was due to listening to their local partners’ knowledge regarding various coffee drinking habits thus leading to innovation of new products in their countries of operation. Due to people’s desire to imitate and adopt the American culture, Starbuck became successful in running their business operations in most of the Asian culture. In addition to that, Starbuck also ensured that it easily adapted towards local culture in the new markets in order to easily gain market acceptance. For instance, in Asian markets, Starbucks resorted to offer meat buns and curry puffs since Asians liked eating something while having their coffee (Cullen, et al, 2009). Factors affecting the process of Internationalization It is through the process of internationalization that firms can be able to spread their business activities and operations beyond their country’s boundaries. Before venturing into international expansion, firms are obliged to consider various factors like for instance which targeted markets to enter/penetrate, when to enter such markets and how to enter the selected foreign markets. In order to be capable of setting a control system and monitor the performance of a business, it is also necessary for the company to prepare an efficient marketing plan. In order to be successful in the selection of foreign markets, firms should therefore discover appropriate foreign markets and market opportunities (Schultz, 2012). Another vital factor that affects the revenue of investment and cost by companies wishing to expand in international markets is timing of entry. Having knowledge about the market actually plays an important role in entry timing. It is appropriate for companies to enter markets which it has accumulated enough information regarding its cultural and economic environments. During the process of internationalization, the choice of the entry mode is a crucial factor in a company’s strategic decisions. This because the adoption of a suitable entry mode will greatly help any given company to achieve better survival and performance in foreign markets. It is through the internationalization theory that Starbucks was able to establish itself from a low resource commitment towards a successive greater control and commitment. Starbucks clearly followed the normal four processes involved in the internationalization theory. Problems faced by companies when penetrating foreign markets Just like any other company expanding into new markets, Starbucks also faced many challenges and problems in its guest of internationalizing its operations. For instance, the company faced serious problems due to the volatile political environment that existed in the Middle East whereby Arab students gave a call, which asked for the boycott of all American goods and services because of the close ties that existed between Israel and the United States. Just like any other firm that operates its businesses internationally, Starbucks can also become exposed to various risks, which can be financial, strategic, environmental or organizational. Some of these risks include strategic, operational, political, technological, country and environmental risks. Insights gained in the international Business in the contemporary context Through Starbucks’ expansion to foreign markets in other countries, a lot of experience and lessons can be deduced from this case study. It can be ascertained from this case study that for any company to succeed in the process of internationalization, then it is important for such a company to know how to cope with various challenges like for instance economic recessions, stiff competitions from local players who are well established, resistance from clients and high business development costs. It should also be noted that the lack of relevant real estates for a company wishing to expand in the foreign markets coupled with the lack of adequately trained workforces could negatively affect an organizations success in foreign markets. The lack of trained personnel and real estates has therefore been a major hindrance towards foreign expansions in outside markets by companies (Meyer, 2010). Some of the insights gained from the internationalization business in the modern context are that Multinational companies are capable of mitigating some of the possible risks in international markets through making a viable decision regarding the most suitable method of entering in foreign markets. For instance, Starbucks opted to adopt three entry strategies while penetrating foreign markets. It is also important to make both a careful analysis and research and management of the possible risks to not only be able to mitigate the losses that an organization can incur but also be in a good position to achieve superior returns for its investments (Kluywer, 2010). It is also a fact that a company may experience various sets of risks as it expands into international markets and thus they should aim at reducing such risks in order to become successful in their international businesses. A company striving to expand into international or foreign markets should also aim at being protected from some of the external risks, which may emerge from volatile business and political environments all over the world (Aswathappa, 2010). References Aswathappa. International Business. New York: Tata McGraw-Hill Education. 2010. Burks, Moses. Starbucks. New York: ABC-CLIO. 2009. Cullen, J, et al. International Business. New York: Routledge. 2009. Cullen, J, et al. International Business: Strategy and the Multinational Company. New York: Routledge. 2009. De, Cornelis, Kluyver. Fundamentals of Global Strategy: A Business Model Approach. New York: Business Expert Press. 2010. Gilbert, Sara. The Story of Starbucks. New York: The Creative Company. 2009. Jones, Marian. Internationalization, Entrepreneurship and the Smaller Firm. New York: Edward Elgar Publishing. 2009. Kluywer, Cornelis. Fundamentals of Global Strategy. New York: Business Expert Press. 2010. Margardt, Daniela. A Critical Comparison of Internationalisation Theories. New York: GRIN Verlag. 2009. Meyer, Ron. Strategy: Process, Content, Context. New York: Cengage Learning. 2010. Schultz, Howard. Onward: How Starbucks Fought for Its Life Without Losing its Soul. New York: John Wiley & Sons. 2011. Schultz, Howard. Pour Your Heart Into it: How Starbucks Built a Company One Cup at a Time. New York: Hyperion. 2012. Read More