Managerial Economics: Expanding Project - Research Paper Example

? Managerial Economics: Expanding Project Introduction Starbucks is a fast growing coffeehouse giant which has a market presence in 62 countries across the globe. The company is interested in expanding its international activities and is currently planning to spread its business to India. Macroenvironmental studies point that India has maintained a steady and attractive GDP growth rate over the last years and hence India is potential place for investment despite its growing political instability and corruption. A partial debt financing is recomendable for the company to start its new division in India because this financing strategy is particularly better in the context of a recovering global economy. The generic strategy of differentiation can really assist Starbucks to meet consumer interests and to grow its business in India. Finally, it is recommendable for the company to start soft drinks business in India because this business sector has strong growth potential in the Indian market in spite of intense competition threats. 1. The business 1.1 Brief overview Starbucks Corporation is a multinational coffeehouse chain headquartered at Washington in the United States. It was founded in 1971 by Jerry Baldwin, Gordon Bowker, and Zev Siegl. Starbucks is the world’s largest coffeehouse company with 20,891 stores spread across 62 countries. The organization has a strong market presence in economically leading countries like US, UK, Canada, Japan, China, Mexico, and South Korea. It has played a significant role in developing a distinct coffee culture in many countries and this uniqueness is the main reason why the brand is still admired by millions of customers. As per CNN reports, the firm has a diverse product line and it mainly focuses on products such as whole-bean coffee, microground instant coffee, hot and cold beverage, pastries, snacks, and full-leaf teams. In addition, this coffeehouse company also operates an entertainment division for the purpose of marketing items like books, music, and film. The organization achieved a tremendous growth rate over the last two decades and currently the firm’s overseas stores constitute nearly one third of its total stores. In order to confront recessionary pressures successfully and to make its operations more productive and profitable, the Starbucks Corporation announced hundreds of store closures since 2008 in the United States. This downsizing strategy greatly assisted the company to effectively survive the recent global recession and further fuel its business growth. According to the Fortune 500 rating (as cited in CNN Money), Starbucks was ranked at number 227 in terms of largest corporations in America in 2012. While analyzing the business strategy of Starbucks, it seems that the company has been using focus and differentiation generic strategies to drive its business growth. 1.2 Rationale for the country choice Currently the Starbucks Corporation plans to enter India as part of its global business expansion because growth opportunities are rapidly emerging in this world’s one of the largest markets. In order to justify this country choice, a PEST analysis is conducted. Political factors While evaluating the political spectrum of the country, political instability seems to be a great threat. Emergence of more local parties and religion-based political parties contributes to the political uncertainty of the country. However, analysts indicate that India would institute more economic reforms after the national elections scheduled in 2013-2014 (Lucintel). In addition, the government is taking immense efforts to eliminate corruption. India has a free market environment and the government extremely encourages foreign investment to deal with issues like unemployment. Hence, legal barriers would not disturb the market entry of Starbucks. Economic factors India has achieved a steady GDP growth rate of 8% over the last five years (Lucintel). Economists predict that the Indian economy is expected to maintain its growth rate over the next five years despite its current issues in currency values and stock markets. Strong domestic demand and improving middle class are some attractive features of the Indian economy (Lucintel). When world’s economic powers like the United States and Europe were severely hit by the global financial crisis 2008-09, India effectively survived the crisis. India has a strong banking system and a well established small business sector that greatly assist the nation to escape from adverse global market fluctuations. Social factors India is the world’s second largest country in terms of human population, and its huge reserve of human capital can play a notable role in driving the country’s economic development. India has a strong cultural diversity, and customs and traditions can greatly influence the consumer behavior in India. Similarly, Indian population gives specific focus to arts and traditional ceremonies, and the diverse dress codes across different Indian states indicate the way Indians pursue cultural norms. In addition, the Indian culture is host-friendly and a developing Western culture in India would match the interests of Starbucks. Technological factors India has a fast growing technological landscape and a potential technically skilled workforce that assist the country to drive technological innovations. Many of the world’s top class technical institutes operate in India. Furthermore, the government gives particular focus to R&D sector in order to enhance technological innovations and to attract more foreign investments. These technological advancements have greatly assisted the country to improve the living standards of its people. India’s technologically developed landscape can really assist Starbucks to trim down its operating costs and thereby improve profitability. 1.3 Method of expansion The Greenfield investment strategy would be better for the organization to enter the Indian market. Under this type of market entry, the parent company starts its new venture or subsidiary in an overseas country by developing new operational facilities from the ground up. Since Starbucks can create new long-term jobs in India through Greenfield investment, the Indian government may offer tax concessions, subsidies, and other forms of incentives to set up the company. This form of market entry is particularly recommendable for the company because Starbucks is a well established firm with significant brand recognition. Furthermore, the Greenfield investment strategy is better for the company to enjoy full control over its venture and to take advantages of immediate decision making. Since Starbucks is the world’s largest coffeehouse company, it has huge cash reserves. Therefore it does not need to depend on debt financing to set up new subsidiaries in India. However, it is recommendable for the company to fund this new venture partially through debt financing because the global economy has not yet fully recovered from the recent global recession and hence it is better for the company to keep adequate reserve funds. Considering the huge size and strong global presence of Starbucks, the company’s creditworthiness is high and hence the company would not face any difficulty in finding potential creditors. 1.4 Impact of expansion on the firm’s overall strategy The international expansion can have great influence on the overall strategy of the Starbucks because this process significantly affects the size of the firm as well as the way the firm operates in the global market. The global business expansion can greatly assist Starbucks to take advantages of economies of scale and hence the firm can trim down its operational expenses to a notable extent. According to Luo (1999, p. 8)), international expansion will increase the size of the organization and this situation in turn can benefit the country to spread its business risks. It is clear that culture and philosophy of markets may change from country to country. In countries like India where cultural diversity is at its peak, market culture may change even from region to region. As a result, Starbucks may be forced to make some changes in its overall business strategy so as to fit its business with the market culture while entering a market like India. In addition, international expansion process may compel the organization to modify its marketing strategies because a common marketing tactic may not be suitable for all market environments. In short, Starbucks needs to change its overall business strategy in a way that would support its ongoing international expansion activities. 2. Dynamic Competitive Strategy As discussed already, Starbucks operates in the restaurants industry and gives particular focus to coffee products. The company has a huge size as it is the largest coffeehouse company in the world. It is clear that degree of competitiveness is high in the restaurants industry and therefore Starbucks operates in a highly competitive market environment. Today, the restaurants industry is growing at a rapid pace mainly because of the mounting demand in the tourism sector. India is a famous global tourist destination and tens of thousands of foreigners, particularly Westerners, visit the country every day. Hence, the Indian restaurants industry offers numerous potential growth opportunities to Starbucks. While analyzing the current business status of the Starbucks Corporation, a generic strategy of differentiation is advisable for the company to increase its market share and profitability within its industry. According to Griffin (2007), companies that follow the differentiation strategy market unique products or services for differentiating their products/services from their competitors’. The differentiation competitive strategy is very advantageous for companies because it aids them to gain an edge over their competitors who offer ordinary products/services. The author clearly states that “firms that successfully implement a differentiation strategy are able to charge more than competitors because customers are willing to pay more to obtain the extra value they perceive” (Griffin, p.69). To illustrate, Rolex follows a differentiation strategy. Rolex watches are made up of precious metals like gold, platinum, and stainless steel and they pass through a series of tests for quality and reliability. The organization maintains a high market reputation, which in turn enables the company to charge relatively higher prices for its watches. Similarly, Coca Cola and Pepsi compete in the bottled water industry based on the generic strategy of differentiation. Coca Cola differentiates its Dasani brand on the basis of its fresh taste whereas Pepsi tries to distinguish its Aquafina brand on the basis of its purity. Lexus, Nikon, and Ralph Lauren are examples of some popular brands pursuing a differentiation strategy (pp.69-70). However, firms need to heavily invest in research and development to develop unique products/services and hence every business cannot afford differentiation strategy. However, Starbucks is a huge MNC and it can easily afford this competitive strategy. Moreover, Starbucks spends low on advertising and the firm’s advertising costs constitute a very small percent of its total expenditure. Hence, the organization would not find any difficulty to make heavy R&D investments. While analyzing the Indian market context, the restaurants industry is very strong and there are many potential marketers offering coffee products. Hence, it is necessary for Starbucks to offer something unique so as to make its brand easily recognizable to Indian customers. 3. Market Feasibility Study Starbucks is mainly dealing with coffee products and entertainment items. As noted already, India is a large consumer market and hence it may be better for the company to think about introducing some new product/service offerings. It is possible for the company to start soft drinks business without huge additional investments because the current coffee outlets can be used to market these products too. The success of soft drinks like Coca Cola and Pepsi in the Indian market indicate that soft drink products can greatly entertain the tastes of Indians. While analyzing the Indian soft drinks market, it seems that the demand for soft drink products is likely to remain high although it may be subject to seasonal fluctuations. There are many close substitutes such as fruit juices and other bottled drinks to soft drinks and hence customers would switch their demand to alternative products if the firm increases the price of its soft drinks. In addition, threat of new entrants is relatively high in the soft drinks industry because of low establishment costs. Buyer power is comparatively less in the soft drinks industry because these products are relatively cheap and hence customers are less likely to bargain over prices. However, it is to be noted that customers may switch marketers if there is a notable variation in prices. Similarly bargaining power of suppliers is also low in the soft drinks industry because there are numerous potential suppliers in the industry and supplier switching cost is low. Despite the threat of new entrants and substitute products, soft drinks still have a great growth potential in the Indian market. In India, celebrities like cricket players and Bollywood stars have great influence on people and hence companies increasingly use celebrities to promote their products and services. This promotional strategy was effectively used by firms like Coca Cola and Pepsi over the last several decades to dominate the Indian soft drinks industry. Therefore, it is advisable for Starbucks to hire some famous cricket or Bollywood celebrities to advertise its soft drinks in India. The company can keep product and distribution costs low because cheap raw materials and labor are available in India. Hence, it is easy for the company to minimize its production costs and thereby offer relatively lower prices to its customers. In short, the proposed soft drinks business would assist the company to earn attractive revenues if the company maintains strong competition capabilities. Conclusion Starbucks’s competitiveness and financial strength indicate that the corporate can easily expand its business to India. Although the new destination involves potential threats from rivals in soft drink industry, Starbucks can effectively overcome them because of its brand reputation and financial stability. Above all, in India, market opportunities overweigh business challenges. References CNN Money. Starbucks. Retrieved from http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/10567.html Griffin, R. W. (2007). Fundamentals of Management. US: Cengage Learning. Lucintel. PESTLE Analysis of India 2012:Lucintel Forecasts Robust Growth for Indian Economy. Retrieved from http://www.lucintel.com/press/pestle_analysis_india_2012.aspx Luo, Y. (1999). Entry and Cooperative Strategies in International Business Expansion. US: Greenwood Publishing Group. Read More