Starbucks Foreign Direct Investment - Case Study Example

Starbucks’ Foreign Direct Investment Name Institution Date Table of Contents Table of Contents 2 Executive summary 3 Problem identification and analysis 4 Strategy 4 Modes of entry 5 Licensing 6 Joint venture 7 Acquisition 9 Organization issues 10 Alternative solutions 11 Conclusion 12 References 14 Executive summary This paper explores the internalization strategy of Starbucks as it embarked on a vigorous mission of getting its way into the international market. In the first part the main challenge is identified in the problem identification. In the analysis the strategy and the modes of entry are discussed extensive pointing out the advantages of each mode of entry. The success and limitations of these methods are discussed to try and bring a picture of the entire penetration strategy applied by Starbucks in the foreign market campaign. It is also apt for the discussion to outline the necessary recommendations as far as Starbucks internalization strategy is concerned. Problem identification and analysis Starbuck Corporation In faced with the challenge of penetrating new markets after establishing itself as a force to reckon with in the United States of America. The initial stage commences with the company embarking on a vigorous program to motivate employees so that high quality of products is realized. After transforming itself into a formidable brand name, then the company goes forward to launch into new markets using a variety of strategies. The main challenge is to decide which of the modes of entry will work well lead to success in future (Homes & Bennett, 2002). Strategy Starbuck Corporation through its managing director prevailed upon the owners of the company to experiment with the coffeehouse format that he had witnessed in Italy. According to Hill (2011), the strategy was to commercialize the premium roasted coffee of the company with freshly brewed espresso-style coffee beverages together with a variety of pastries, teas, accessories, and many more in a setting the tastefully designed coffee. The company also embarked on the provision of customer service that was superior. The employees were motivated through more attention given to employee hiring. Training programs and progressive compensation policies provided employees on part-time basis medical and grant benefits. These are some of the ways used by the executives to motivate the employees. This method led to success that was spectacular in the United States whereby Starbucks changed from being obscure to one of the famous brand in the country in that decade. Eventually the Starbuck Corporation embarked on internalization as a means of expansion in to the foreign market (Reif, 1997). Modes of entry Firms that make a point of entering into a foreign market have go grapple with the task of deciding which mode of entry to use. Some of the means available to the firm include licensing, exporting, sole venture, joint venture, franchising, direct investment, strategic alliances, piggybacking, own subsidiary, acquisitions and assembly. The factors that determine the entry mode can broadly be categorized as location benefits of a market, a firm’s ownership advantages, and advantages of internalization of transaction integration. The Starbuck had to grapple with the challenge of deciding the best mode of entry in a given market (Hines & Bruce 2007). From the case study given it can be seen that Starbuck has employed several methods of entries that have led either to success or failure of its strategies in the foreign market. In some cases as it going to be analyzed it has changed the mode of entry from one strategy to another. Starbucks Corporation began to embark on its course to go international when, Howard Schultz, the managing director, returned from a trip to Italy fascinated with the experience of the Italian coffeehouse. Having a base of 700 stores allover the United States by the year 1995, Starbucks decide to explore the foreign opportunities available in the other markets on the globe. Some of the modes of entry that were explored by Starbucks Corporation could be discussed as follows; Licensing This is another means of entering a foreign market that carries a degree of risk that is limited. It is different from contract manufacturing in such a way that it usually for long period and comes with more responsibilities on the side of the local producer. Franchising is similar to licensing save for the franchising organization is involved more directly in the control and development of the program of marketing. Patent rights are given to the licensee by the international firm involved in licensing. In reciprocation the licensee produces the product of the licensor, market the product in territory assigned and also he pays the licensor royalties concerning the sales turnover of the particular products Hisrich, 2009). In the case of Starbucks Corporation, it decided to license its product in Japan. In so doing, it dawned on the Starbucks Corporation that pure agreement of licensing would not provide the control required to make sure that the Japanese licensees followed with great diligence the successful formula of Starbucks. The licensor gives the licensee a lot of freedom in the license agreement. According to Hisrich (2009) licensing has the benefit of being a good way of launching into foreign operations and open the door to manufacturing relationships that are low risk. It more provides linkage of receiving and parent partner interests’ means both obtain the optimum of the marketing effort. In this licensing agreement the capital is not tied up in the international organization. Besides the parent has an option of buying into is present or provision to take royalties in stock. The fear expressed by Starbucks Corporation is very true of licensing ventures. There exists limited form of participation as far as specific product, trademark, process and length of agreement are concerned. Secondly potential proceeds from manufacturing and marketing can be lost. Licensing surrenders the right of Starbuck marketing and manufacturing its products to the licensee in Japan. In the long run the licensee may turn into a competitor against the parent company. This can be overcome through engaging in transfer deals of technology. Licensing more so calls for adequate fact finding, investigation, and interpretation and planning. The challenges outlined above gave Starbucks Corporation the impetus to look at other types of entry modes (Reif, 1997). Joint venture Having acknowledged the limitation of licensing, Starbucks established in Japan a joint venture involving a local retailer known as Sazaby Inc. Joint venture can be explained as an enterprise in two or more investors control and share operation and property rights. Joint ventures are to a large extent more extensive form of participation than either licensing or exporting. Joint ventures have a number of advantages. In the first place, joint venture involves sharing ability and risk to combine the local in-depth knowledge together with a foreign partner blending it with process or technology know-how. There is also presence of formidable financial strength that is owned jointly and it can be used as the only means of entry (UNIDO, 1996). Joint ventures also have their negative sides. In the case of a joint venture the partners involved in the agreement do not gain full control of management thus limiting their participation. In there will be a reason to recover capital invested then this task will prove to be impossible. In the course of operation there will disagreement on markets of third party that are to be served. Finally the partners will definitely, at some point possess different views or opinions concerning expected benefits. In the case of Starbuck Corporation, each company had an equal percent of 50% stake in Starbuck Coffee of Japan. The initial invested made by Starbucks in the venture was $10 million which was the ever first foreign direct investment. Yeh (2006) argues that in this kind of arrangement the parent company is involved greatly in the operation. In the next stage the Starbucks format was then licensed to the venture which mandated with the growth of Starbucks in Japan. In so doing, Starbuck was trying to ensure that its brand make a huge impression in the Japanese market. To further ensure the replica of North America ‘Starbucks experience’ in the Japanese market, Starbucks had to transfer to the Japanese operation some its employees. The agreement of licensing had a close requiring all store employees and managers in Japan had to take part in classes of training very similar to those accorded to employees in the United States. The agreement further directed that all the store stick to the parameters of design as stipulated in the United States. In all these efforts Starbuck Corporation was training to make the same impression it made ion the American soil. In the year 2001, Starbucks introduced a stock option plan all employees in Japan making it the first company to do so is Japan (Yeh, 2006). Many people doubted the company’s investment in Japan and whether it will be able to produce the same ‘Starbuck experience’ it demonstrated in North America, but by the late 2007 seven hundred stores of Starbucks and planned keep on opening them as a fast pace. Initially Starbucks Corporation had resisted temptation of franchising in North America. As the company struggled to find the appropriate means of entry into the Japanese market it can be seen it tried one method to another. The joint venture that was established incorporated vast element s of licensing to be able to make the agreement more formidable and not be glossed over at all. The company had the great desire of replicating the ‘Starbucks experience’ that had transpired in North America. Tying the loose ends with a licensing agreement led to the course of action being stuck on and there was no derailing hence the success of Starbucks brand in Japan. After the licensing agreement the Starbuck Corporation seemed to transfer from licensing to foreign direct investment (Reif, 1997). Foreign direct invest can be described as the direct ownership in the target country of facilities. It encompasses the resources transfer including technology, personnel and capital. Direct foreign investment can be done through acquiring of an entity that is existing or new enterprise establishment. In Starbucks case it can be seen that employees were transferred employees to the Japanese operation. It can be surmised also technology and of course capital was also transferred to the Japanese venture. Other methods were also used by the company to gain entry into foreign new markets. The company also engaged in acquisitions (Hisrich, 2009). Acquisition This is whereby a company buys or acquires another local company to help it gain entry into the foreign market. In it foreign investment program, Starbucks corporation also ventured in acquisition to get into other markets. In the year 1998 it bought Seattle Coffee which is a British coffee chain having at least sixty retail stores for an amount of $84 million. In the real sense it was Starbucks strategy to get into the Britain market. From what can be deduced Seattle Coffee was an establishment of an American couple with the purpose of starting Starbucks like chain in Britain. It is an acquisition which cannot be said to be straight deal since it was a conspiracy for Starbucks Corporation to find its way in the Britain market. In the end of 1990s Starbucks established stores in China, Taiwan, Thailand, Singapore, South Korea, New Zealand, and Malaysia (Cooper & Argyris, 1998). Hill (2011) observes that in the Asian market most common strategy for Starbucks was the licensing of its format to an operator locally in return for initial royalties and licensing fees of revenues of the stores. The same method applied in Japan concerning strict specifications on the layout of the store and format as well as training program of employees that was very intensive. Nevertheless it is reported that the company became disenchanted with some arrangements of straight licensing and changed some into wholly owned subsidiaries or joint ventures. From here its activities in Asia became disjointed and without a good accomplishment formula. Although there was considerable success as far as foreign market entry is concerned, there are also setbacks in its expansion strategy that pulled it back from getting the maximum results (Homes & Bennett, 2002). Organization issues As far as people, operations and procedures are concerned, Starbucks has trained to bring everything on board. The company is engaged in superior goods production and it commences with motivation its employees through training programs and close attention. By doing so, the company succeeds in winning the support of employees in that later on it can engage in transfer of personnel to enforce its format in the international market as Japan. There is aptness and diligence in operations that make it possible for the company to blend the modes of entry due to efficiency in the work force (Hill, 2011). Alternative solutions Bruce, Moore and Birtwistle (2004) note that apart from the methods that the company employed in its foreign market entry, it would have been prudent for the company to engage in other less costly methods that could have seen results being achieved at a lesser cost and a sure pace. Exporting could be another method of market entry that less costly. It is the direct sale and marketing of goods produced domestically in another country. It is a well established and traditional method of getting access to foreign market. There is no any form of investment that is required in case of exporting. The main costs incurred in exporting involve expenses to do with marketing. Consequently Starbucks should have considered such a method as one its modes of entry into the foreign market. There should be close supervision of this investment as opposed to rushing out to do the investment elsewhere (Hill, 2011). Recommendations It was very wise of the management of the company to embark on a program of strengthening their brand locally before venturing out. The company was obsessed with the need to expand rapidly in Asia and Europe. It could have been prudent for the company to exercise some sense of caution by moving step by step without considering too many investment projects that had an imminent toll on the resources of the company. Some of the projects did not pick out well owing to the fact that the company had to divide the resources among many ventures abroad. If Starbucks number of projects in Asia is anything to count on then the company had spectacular results. However this experience should not be used to make the entry of the company into other market without having to do a thorough investigation of the real situation on the ground. There is also quick changing over from one mode of entry to another which at times will prove to be very challenging as far as costs and the time to adjust is concerned. The company must have incurred a lot in line with its quick change from one mode of entry to another. The success of the company would have been very tremendous had the company not engaged in many projects that same time had no clear road map resulted into slow expansion although it took place in many locations. Generally the company experience great success in pushing its brand into the international market. As the company targets to continue expanding, it should consider the possibility of employing other methods of market entry to enhance efficiency as well as effectiveness (Bruce, Moore & Birtwistle, 2004). Conclusion This paper has discussed extensively the modes of entry employed by Starbucks to get into the foreign market including the weaknesses and strength. Alternative solutions have been pointed out and more importantly some of the recommendations have been explained. It will be to the success of the company if it revisits its foreign market entry from time to time. Whatever has been discussed has to do with some of the issues faced by companies. It is essential that the necessary strategies are put in place for the realization of set goals. References Hill, C.W.L. (2011). International Business: Competing in the Global Marketplace, 8th edition. New York: McGraw-Hill Bruce M., Moore C. & Birtwistle G. (2004). International retail marketing: a case study approach. New York: Butterworth-Heinemann. Reif J. et al., (1997). Services--the export of the 21st century: a guidebook for US service exporters. NY: World Trade Press. United Nations Industrial Development Organization (UNIDO). (1996). Manual on Technology transfer negotiation: a reference for policy-makers and practitioners on technology transfer. New York: United Nations Industrial Development Organization Cooper C. L. & Argyris C. (1998).The concise Blackwell encyclopedia of management. London: Wiley-Blackwell. Hisrich R. D. (2009). International entrepreneurship: starting, developing, and managing a global venture. London: SAGE Publications Inc. Hines T. & Bruce M. (2007). Fashion marketing: contemporary issues. NY: Butterworth- Heinemann. Homes S. & Bennett D. (2002). Planet Starbucks. BruinessWeek September 9, 2002, pp. 99-110. Yeh, A. (2006). Starbucks Aims for New'llier in China. Financial Tirws, February 14, 2006, p. 17. Read More