Product Standardization Strategy of Starbucks - Case Study Example

Product Standardization Strategy of Starbucks The growth of Starbucks has indeed been phenomenal. It established itself in the more affluent markets of US, Canada and Japan while also captivating the markets of some Third World countries such as Indonesia and Philippines. How Starbucks was able to achieve and manage its success is then an interesting fact to discover. We shall be discussing some pertinent questions related to this. Question 1. How a decision on choosing between product standardization strategy and product adaptation can be properly made according to the case of Starbucks? A number of researches have already been concluded as to the choice between product standardization and adaptation. They yield contradicting and sometimes confusing results, but the central lesson that stem out of these analyses is that the choice whether to standardize or adapt the marketing strategy that fits the local country is largely dependent on the circumstances that surround the firm within a specific country given a specific period of time. (Marios Theodosiou). A Short Background The rise of multinationals such as Starbucks came with the advent of globalization, where trade restrictions were eliminated. Doing businesses in most countries abroad became much easier than before. Government regulations are more relaxed and tariffs were reduced or totally eliminated. These developments have given chance to big companies in the developed countries to capture bigger markets including the Third World. This has given rise to the issue of how to standardize product internationally and at the same time adapt to the individual idiosyncrasies of each country. Multinational firms such as Starbucks face this type of dilemma. Product Standardization Vs. Adaptation Product standardization is the introduction of domestic products internationally with a little or no modification (International Product Decision). Product standardization is done in commodities such as shoes. Multinational shoe firms such as Nike, Adidas and Reebok release shoes that are sold across different countries. The other way of marketing product is through adaptation. If the firm spouses this marketing strategy, it adapts domestic product to suit the foreign market. Product modifications are done. They can be specifically designed for foreign markets. It is believed that ‘global marketing of standardized products can, however, lower operating costs, and with effective coordination exploit a company's best product and marketing ideas” (Powers). One of the benefits of standardization is it allows current technology to adapt products and services to the local needs and wants. “It is also possible to tailor standardized strategies for different worldwide segments that exist cross-nationally” (Powers). On the other hand, there are doubts on the standardizing domestic products. Some concerns raised against standardization are national prejudices (Powers). Buzzel posited that “it is a mistake to assume that product standardization is possible without careful consideration of the idiosyncrasies of each market, such as physical environment, the stage of economic development, cultural characteristics, the stage of product lifecycle, competition, distribution systems, advertising media, legal restrictions, and finding the right balance between local autonomy and central coordination” (Powers). There is a need for both. Both have advantages and disadvantages. At this point, we will specifically be analyzing how Starbucks was able to make a decision on choosing between product standardization strategy and product adaptation. The Starbucks’ Case Starbucks is known for coffee. But people around the world know that it does not only offer coffee or food, it offers experience, tranquility, and class. This is something that the company has standardized. Covering three continents, the green and white emblem has dominated various countries. Starbucks management has decided to standardize the product all over the world. Its cozy interior, plus modest and elegant crew poses an image of tranquility and class. Starbucks outlets all over the world maintain this feature. With dim lights and mellow sound, Starbucks outlets provide respite for its most precious customers – the young professionals. Countries where Starbucks has opened an outlet all pose the same image. As to the product packaging, the use of the terminologies “venti” and “grande” are also observed in foreign countries. No effort to adjust to the local language was seen. Paper cups used for hot coffee and plastic cups for frappuccino and lattes are also standardized. The marketing strategy of crowding so many stores in one place is also a standardized marketing strategy. This can also be observed in Asia including the Philippines, where several Starbucks outlets crowd the busy business districts. Starbucks offer perks to customers which are apparently observed in other countries. An example of this is the yearly Starbucks organizer which has certainly improved sales for the company. The company gives an illustrious Starbucks Organizer with facts about the company. The organizer is given to those who were able to collect enough number of marks. These marks are given for every purchase of Starbucks products. The Starbucks calendar contains additional perks such as discounts for especial occasion. The company has been successful in carrying this out across countries. Since it was able to project the same image and capture comparable target market across countries, it was not difficult for the company to standardize. To accommodate both smoking and non-smoking customers, Starbucks outlet provide smoking and non-smoking areas. This was also done due to the universal use of cigarette which has become popular to the young professionals all over the world. These common characteristics between people of different countries give Starbucks some ease in standardizing even their store features. The use of Wi-Fi service has also been made available around the world. This has added reasons for its market to drop by. The coffee’s sweetness is one prominent feature of Starbucks. This is also a standardized feature since even Japanese are willing to spend much for just this type of taste. Coffee blends are comparable in all Starbucks outlet. Common features around the world such as the desire to have a respite after a busy day’s work, the desire for a place to meet and talk and the comparable advancement in technology around the world made it easier for Starbucks to standardize. To fit with the individual needs and idiosyncrasies of each country, Starbucks has not standardized prices. Given the situation that it will face when it enters Italy, Starbucks will be forced to lower their prices since their competitors offer much lower prices too. This is also true for outlets in the Third World where standard of living is lower and salaries are lower compared to those at the First World. In terms of service, there are cultures who value courteous and friendly service much. This is where they also adjust to meet the specific expectations of the market. In cultures such as Japan wherein women are expected to serve men, modifications in the offering of service can be done. There are also countries wherein prepaid cards are not distributed. Instead, they wait for walk-in customers who pay in cash. For some countries, the need for the prepaid cards may not be much needed neither much appealing. To adapt to the need of the local market, Starbucks has also added services such as hot breakfast. This is offered in their branch in Seattle. For the busiest districts, Starbucks has also adapted the use of web technology wherein customers can pre-order and prepay for beverages and pastries via phone or the store’s website. “According to Fatt (1964), people are basically all the same, in that most are looking for a better way of life for themselves and their families; also, appeals such as mother and child, freedom from pain and glow of health know no boundaries” (Powers). For things in which people have the same or comparable features, Starbucks practice standardization. On the other hand, if idiosyncrasies are inevitable, the company practices adaptation. Question 2. Entry modes analysis according to the case of Starbucks. The commonly used entry modes are export, licensing, franchising, joint venture and wholly owned subsidiaries (International Market Entry Mode). Different Modes of Entry “Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses” (QuickMBA.com). Exporting is a relatively secure way of entering a foreign market. Not much investment is made. It is associated with low control, low risk and high flexibility. Since need for control is one of the determinants of the mode of entry, companies who export are willing to let go of this for security purposes. It is also possible that the exporting company lacks the necessary capital. Another mode of entry is licensing.“Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance” (QuickMBA.com). A joint venture is a partnership in which the product usually bears the name of both partners. There are basically five reasons in forming a joint venture “market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations” (QuickMBA.com). Lastly, multinationals can establish a direct investment in a foreign country. It can wholly own a subsidiary. “Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment” (QuickMBA.com). Starbucks’ Entry Mode The entry mode decision of Starbucks was made given both internal and external considerations. Internal factors include firm size, international experience, and product complexity and differentiation. External considerations comprise socio-cultural distance between home country and host country, country risk/demand uncertainty, market size & growth, direct & indirect trade barriers, intensity of competition, small number of relevant intermediaries available. In the case of Starbucks, the firm is relatively large and has enough international experience that’s why opening up partnerships in other countries go easier. They have also practices product standardization more so it was easier to supply oversee foreign operations. Starbucks started with 17 coffee shops in Seattle, but has grown to capture 28 countries with 5689 outlets. The company’s first strategy of growth is issuing its public offering amounting to $2.6 billion. The company has grown enough to be included in the top 100 global brands. In the case of Starbucks, partnership is the entry mode. Local partnership makes it easier for the company to start up but decreases their revenue by 20-50%. Starbucks has made partnerships with some affluent corporations in the Third World. In 2006, it had 4247 stores scattered around US and Canada. To preserve the quality and the taste of Starbucks coffee, the company did not venture in licensing. Indeed partnership was enough to preserve standardization of the company’s products and service. This means that coffees are shipped from the main manufacturing plant to the local country. With partnership, Starbucks are able to penetrate markets which are normally difficult to enter. It was able to enter Vienna, Zurich, Madrid, Berlin and Jakarta. Partnership is also the only way to enter some countries. Partnership then has proven to be effective for Starbucks. It allows the company to enjoy more control that exporting, but divests them of the necessary work burdens that a wholly owned subsidiary requires. Partnership also allows Starbucks to get the necessary knowledge from their local counterpart on how to please the local market. This enables them to make necessary adaptations. This is true for outlets inside America and even outside. The advantage of forming foreign partnership is greater control over the operation. It therefore creates comparison among branches around the world. It allows them to maintain an image which is uniquely Starbucks. Forming foreign partnership also brings in more money that just exporting and licensing. On the other hand, foreign partnership is still inferior to having wholly owned subsidiaries or wholly owned branches in terms of profit realization. They have to share profits with their partners which take away sizeable amount from them. To continue its fast growth, Starbucks has also resorted to exporting its concepts aggressively so that it has reached Beijing and Bristol with its 1200 international outlets. Even abroad, the company adapts similar marketing strategy particularly “crowding out”. The company believes that clustering outlets increases revenue, even though there is a tendency to cannibalize. They believe that clustering makes it easier to dominate local market. It also has the advantage of management ease Question 3. Major factors which affect the effectiveness of marketing communications across countries based on Starbucks case study “Companies are increasingly entering foreign markets due to various factors. These include saturation in domestic markets, decreasing profit margins, advancements in technology, and proliferation of global media. The need for proper global marketing communications has risen, to promote their products in world markets” (Case Studies in Business Management). Effective global marketing communication necessitates proper study of the market environment. In the case of Starbuck’s planned entry to France and Italy several things must be considered. France is laden with local cafes so definitely there will not be much need for the company to encourage dining in such type of store. Its only concern is how it will be able to attract locals away from the local cafes where they are used of dining in. It will face stiff competition in so that a critical decision between standardization and adaptation has to be made. In the 4 Ps study in marketing, this concern falls under the concern for product. How it will position its product is an essential thing. In the case of Italy, the price is the primary concern. Marketing Starbucks coffee in Italy would be difficult given that Italian coffee is cheaper by a more than half. Price is also a primary consideration and this is dictated by the current environment. Price communicates something about the product. One consideration in marketing communication is whether to standardize or globalize its advertising or to localize. The company has to take various key decisions to undergo international advertising campaigns. In the case of Starbucks, the advertisement is standardized. Not much local advertisements are seen. The advertising consideration is something that depends on the marketing environment. It is simply a question of what will appeal to the targeted markets more. If a country has an innate love for locals, localizing the advertisements will appeal more. On the other hand, if a country prefers foreign products and celebrities, standardizing the advertisement will appeal more. Marketing communication also includes decision on “message strategy, selection of advertising agency and media” (Case Studies in Business Management). The effectiveness of the choice on these aspects depends on the attitude of the customers. Different countries view products differently. These distinctions must be properly accounted for so that advertisements and other marketing communication can be done well. “Other elements in the promotional mix such as sales promotions, personal selling and public relations in the international marketing context” are also used to convey something about the product. Same considerations on the country of origin effect: such as perception of product (which can be categorized by product category, nationality and demographics) must be properly accounted for (International Product Decision). Currently, the company relies on mystique and word-of-mouth on marketing costs. Starbucks advertising expense amounts to $30 million annually which is around 1% if its revenue. It only spends for new product launches and new services. Starbucks indeed does not need much media advertisement. The giving of perks such as calendar is enough to retain and attract new customers. The current marketing communication of the company is very effective so that it conveys the same message in every country. Read More