Strong Cultural Embrace of the Starbucks Brand in the United States - Case Study Example

A critical evaluation of Starbucks’ 1995 entry into Japan BY YOU YOUR SCHOOL INFO HERE HERE 0 Introduction Market entry into a foreign market takes considerable planning, foresight and strategic talent in order to ensure a long-term success of the entry. This report evaluates Starbucks’ 1995 entry in Japan, focusing on what variables formulated the basis of this decision. The research further delves into whether the mode of entry was successful and offers recommendations as to what specific strategic decisions could have been made more lucratively. Scope of the project involves examination of host country culture, economic conditions and competitive rivalry to make these determinations of success versus improvement. 2.0 An introduction to Starbucks Starbucks is an American-based coffee house that serves a variety of cold and hot beverages, relevant snack products, ground coffees and even Starbucks-branded merchandise. The company, at the time of its initial public offering on the New York Stock Exchange in 1992, only had 140 stores throughout the United States. The ability of the firm to attract shareholders and a decision to sell a portion of the original company raised over $25 million USD that allowed the company to expand further and open more stores domestically (Schmitt, Simonson and Peters 1997). With such rapid success and consumer adoption of the brand in the U.S., the company determined it could potentially achieve revenue growth by entering a new market: Japan. By the end of 1992, shareholder confidence in the long-term opportunities for growth for Starbucks had pushed the share price upwards by 70 percent, giving the firm significant financial capital that allowed the firm to expand rapidly (Schmitt, et al.). Motivation to enter the new market was driven by profit motives and growth for the company. With such strong cultural embrace of the Starbucks brand in the United States, the firm determined it could have cultural relevancy in a developed foreign market (Schultz and Yang 1999). 3.0 The Japanese market in 1995 In 1995, with no foreign market experience, Starbucks took considerable risks to launch a new product in Japan. Japan was experiencing a financial crisis in 1995 so severe that thirteen different financial companies went completely bankrupt. Poor regulatory authorities in the country had led to a situation where banks in Japan held $40 trillion in bad loans (Schaede 1996). Japan’s stock exchange, the Nikkei, had fallen to historical levels in 1993 and consumers were now forced to pay their first three percent sales tax on products consumed, a situation which severely eroded consumer confidence in 1995 (Amyx 2004). In 1995, the government spent 680 billion Yen to bail out failing loan companies and other struggling financial institutions and economic growth shrank substantially in 1994 (ADBI 2015). In 1995, the value of the Japanese Yen, compared to the U.S. dollar, had fallen to near-historic lows. During this time period, Japanese consumers were very ethnocentric, where sustaining Japanese cultural identity was considered to be a unified social obsession (Ben-Ari 1992). In fact, an empirical study conducted by Akhter and Hamada (1995) found that Japanese consumers did not believe that American products were superior to Japanese competing products and had a sentiment that the Japanese government should regulate American businesses more stringently. In general, high levels of ethnocentrism did not, by and large, represent a quality opportunity for Starbucks in 1995 in establishing an American brand when Japanese foreign consumers were obsessed with preserving Japanese identity and heritage. During this period, consumerism was not a major theme in Japanese lifestyle and was considered to be civic engagement, buying only what was needed to sustain lifestyle with less emphasis on self-indulgence (Furlong and Strikwerda 1997). Furthermore, Fernandez, et al. (1997) found that Japanese consumers scored very highly in uncertainty avoidance, the propensity of Japanese citizens to avoid risk in decision-making and avoid ambiguity. With Starbucks maintaining only a domestic presence in the United States, and no other international presence in 1995, this would be an uncertain and ambiguous brand identity for Starbucks. However, in 1995, Japan was undergoing significant social, legislative and economic changes that were attracting foreign firms to Japan (Fahy and Taguchi 1995). By 1995, Japan had 1.72 million retail outlets in the country, which represented one retailer for every 69 consumers (Fahy and Taguchi). As compared to the U.S. at this time, there were 1.92 million retailers in the U.S.; or one for every 126 people (Goodnow and Kosenko 1990). Therefore, Japan represented even more potential locations by which to sell its product than its domestic home country of the United States. Such a high volume of retailers illustrates, most probable, a well-developed distribution infrastructure in Japan. Concurrently, the country was, in 1995, a country with a capitalistic-based consumer society that would obviously be providing revenues to such a high volume of retailers throughout the nation. To illustrate, convenience stores in Japan grew at a rate of 10.7 percent between 1991 and 1992. Fay and Taguchi (1995) iterate that the food distribution network in 1995 Japan was highly effective in ensuring quality. 4.0 Evaluation of entry strategy into Japan The selection of an appropriate mode of entry is based on achieving a proper way for a business to exploit the enterprise’s advantages (Root 1994). These decisions are based on a transaction cost structure, or the total accrued costs that a firm will experience when operating in a particular market (Douma and Schreuder 2012). The choice of entry mode will likely dictate the long-term profitability of a firm’s decision to enter a new market and this decision is based not only on costs, but issues of culture of the foreign market, the economic condition of the new market, the amount of experience a firm has in foreign markets and the scope of competitive rivalry in the new market (Padmanabhan and Cho 1995). Whilst there is not exact data as to how Starbucks formulated its mode of entry to Japan, there are indicators supporting its decision-making. Starbucks selected a joint venture entry strategy, partnering with the Sazaby League, a company with a long brand history in Japan (since 1972). In 1995, the Sazaby League operated many Japanese restaurants, was famous for its tearooms, cosmetics, women’s apparel, and other merchandise in many industries (Bloomberg Business 2015). The founder of Starbucks admitted that the only real sustainable advantage that the firm had was the quality of its work force (Schilling and Kotha 1997). Sazaby, a company with competitive advantages similar to Starbucks, in terms of service quality, represented a joint venture opportunity for Starbucks to protect its only form of sustainable competitive advantage. By partnering with this firm, with a strong brand identity related to service competency, having this name linked with Starbucks could potentially provide trust in Starbucks in an environment where the firm had no brand recognition whatsoever. Starbucks developed a 50/50 joint venture with Sazaby, a means of minimising the potential economic risks in the event that the venture was unsuccessful in capturing the attention of diverse Japanese demographics; local adaptation. He and Wei (2010) iterate that the choice of market entry strategy must be aligned with firm resources and its own capability to achieve the best possible performance in the new market. With no other sustainable competitive advantage than its service competency, it would have been very difficult for Starbucks to differentiate itself from other tearooms and relevant competitors already established in the Japanese market. With the joint venture with Sazaby, it gave Starbucks a unique opportunity to effectively position itself in terms of quality (its main competitive competency) and also achieve the organisational learning needed to compete in this new market, a phenomenon recognised by Glaister (1996). What Starbucks did have to offer to a joint venture strategy was capital investment, asserted by Child and Yan (2003) as being a main performance predictor that underpins success of a joint venture. With a U.S. stock valuation that continued to achieve substantial and rapid growth, and with a favourable currency exchange rate between Japan and the United States, Starbucks maintained the ability to invest considerable capital (in Japanese Yen) that would allow the business to establish quality operations throughout Japan. In 1995, the exchange rate (due to economic difficulties in Japan at the time) was 80:1. Hence, a $10 million USD investment into the new joint venture would be valued at $800 million Yen, a substantial predictor of success in a market where total return on investment, using limited capital, would provide the firm with tremendous Japan-market expansion opportunities. In 1995, additionally, the Japanese coffee culture was one where patrons had limited seating room, but ample standing room in a bar-style environment (White 2012). Hence, Starbucks’ American model of providing a balanced standing-room and formal seating opportunities ensured that the firm’s facilities/servicescape model could differentiate the business from domestic coffee house competitors. To open bricks-and-mortar facilities, similar to outlets in the United States, represents significant start-up expenditures and asset procurement. The 50/50 joint venture would spread the capital expenditure risk between Starbucks and Sazaby, allowing the firm to allocate other capital expenditures in areas of promotion and non-operational aspects of the company’s new Japanese value chain. More expenditure to ensure the firm could exploit its customer service competencies (rather than absorbing all start-up costs) would allow Starbucks to ensure its products could be delivered to Japanese consumers “at the best possible price/performance trade-off” (Hamel 1991, p.83). Without having data as to whether Japanese consumers would be price-sensitive, the joint venture represented an opportunity to ensure that Starbucks, itself, did not absorb all financial risks and, again, become the learning organisation about this new market that is critical for achieving long-term foreign market success (Glaister 1996). Sazaby maintained the most vital knowledge about Japanese consumers, with years of managerial experience operating tearooms, therefore the joint venture represented a tremendous opportunity to network with Sazaby management to develop strategies relevant to the cultural expectations of Japanese consumers. Without this joint venture, Starbucks would essentially learn the hard way, a risk that a firm with absolutely no experience in foreign market operations cannot sustain. 5.0 Exploring challenges to Starbucks in Japan In the first year of operations in Japan, Starbucks incurred a loss due to unexpected overhead costs, mostly related to the higher-than-anticipated costs of construction incurred by the joint venture. Additionally, the company was forced to ship coffee to Japan from its Kent, Washington roasting facility (De Kluyver 2010) which significantly raised price considerations attached to the company’s foreign supply chain strategy. However, Starbucks, in the United States, had built a brand around quality of the company’s coffee products and in order to ensure this same level of quality in service, higher logistical costs to ship coffee to Japan was a necessity. This did not affect the entry strategy in an economic environment where currency exchange rates were highly favourable for low financial investment with high returns. The strategy of joint venture was monumentally successful and there is no evidence that any challenges of the firm could not be efficiently overcome with proper strategic direction. On the new joint venture’s board of directors, Starbucks retained its authorities in branding, product advertising, and communications with corporate headquarters, whilst Sazaby maintained governance on human resources and real estate-related concerns (De Kluyver). This made sense in a market environment where Sazaby was more familiar with Japanese work ethic and capabilities and dealing with business-to-business partners in Japan where Starbucks maintained absolutely no foreign market operational experience. In fact, Starbucks Japan had achieved profitability within two years of the launch of the venture and the firm established its first Japanese IPO in the securities market that valued the joint venture firm at 90.8 billion Yen. This valuation was much higher than expected at the time of the stock launch as the joint venture had spent 19.16 billion Yen simply on unanticipated overhead costs (Ho and Lee 2004). Why did the stock receive such abnormal returns over initial underwriter evaluation? Investor theory and cognitive psychologists recognise framing theory which states that individuals will develop perception and meaning about a phenomenon based on how this information is presented to them (Druckman 2001). By maintaining control over promotion and marketing, Starbucks could exploit its main competitive advantage, service competency, in a way that was relevant for capturing new market demographic attention. Sazaby did not maintain experience in how Starbucks had built its U.S. brand identity and therefore should not have maintained governance over these activities. Using their experience in brand-building and promotions, through securing joint venture governance, they could frame messages to Japanese investors to provide faith and confidence that the company could achieve growth in Japan. Therefore, over-confidence in the firm by investors in the securities market was created by making sure that the joint venture contract allowed Starbucks management to retain control over marketing communications. Abnormal returns on a firm’s stock is not uncommon when messages about firm growth potential is framed properly in public relations and marketing. Netflix, Facebook, and U.S.based Groupon all had substantial IPO returns that were abnormal from the valuation provided these businesses in the initial underwriting valuation. As a result of quality marketing, of which Starbucks was adept, the ability of the firm to procure capital as a Japanese publicly-traded company was increased substantially. It is doubtful that Sazaby would have been able to achieve these abnormal returns if allowed to govern promotion and market communications. Starbucks was able to focus on the most important aspects of its operational strategy, marketing and communications, giving the new joint venture firm an effective power structure that removed pluralism in key areas that could have been harmed by Sazaby involvement in marketing. The social reality for Starbucks, if the firm was to achieve brand-related success, was that the coalition ideology in the joint venture needed to be controlled and pluralism removed in some aspects of the new market entry. Plural power structures are not stable over time, according to Bachrach and Baratz 1962), hence joint ventures, which usually have a limited life cycle, was highly advantageous to Starbucks. This was not a challenge for Starbucks, but a strength. If the firm had chosen a Greenfield entry strategy, Starbucks management would have had to handle dealings with real estate-related industry leaders and try to develop an HR-based recruitment strategy with no concept of what drives Japanese worker values and culture. This would have created many problems with labour and capital resource allocations in which Starbucks maintained no experience. In essence, Starbucks identified the right partner with the correct values, experience and flexibility that was needed in a joint venture, pluralist system with some dimension of separation of powers that was critical in how Starbucks was able to build a brand identity rapidly in a new market environment. Through this pluralism/monism structure of governance ensured that Starbucks maintained limited challenges in the joint venture and protected its main asset, which is its brand, and allowed proper communication of service strategy as its only sustainable competitive advantage. 6.0 Improving strategic decision-making It is quite difficult to isolate where Starbucks could have chosen a better market entry strategy in light of their lack of organisational experience in any foreign market in 1995, their need to spread risk in the event of total market failure in Japan, and a company that did not, yet, sustain billions of dollars in revenue as a result of limited expansion history. Fortunately, Starbucks was not a significantly leverage firm at the time of this market entry into Japan, which makes a firm more susceptible to economic recessions than competing firms (Opler and Titman 1994). If the recession in Japan had been sustained, the company would only have a 50 percent obligation of financial risk if Japanese consumption habits had declined substantially as a product of the 1995 financial crisis in the country. Hence, from an economic perspective, Starbucks chose the right strategy to ensure that risk was spread sufficiently in a wholly-unfamiliar market during a period of economic trouble with an uncertain future about the recession’s longevity. However, there is no evidence that Starbucks conducted market research into Japanese culture, consumption behaviours and other relevant market factors prior to entering the market. For example, from the inception of the firm, the business has maintained a publicised stance on corporate social responsibility, such as procuring sustainable products and assisting coffee farmers with enhancing their quality of living. Market research into Japanese consumption values, during the period of 1995, might have illustrated ethical consumption values for these consumers. In the 1990s, Japanese government was bringing more social attention toward stakeholder protectionism causing corporate governance teams to change their focus on corporate social responsibility (Doherty, et al. 2009). If Starbucks had conducted more strategic marketing research, utilising quantitative and qualitative tools to identify the CSR-related values of Japanese consumers, the firm could have, perhaps, utilised its emphasis on corporate social responsibility as a means of selling the brand in Japan. This could potentially have given the joint venture a new ability to differentiate itself in the Japanese market, whilst still using a 50/50 joint venture mode of entry, which would attract the attention of consumers that maintain consumption behaviours associated with positive response toward ethical procurement which was a mainstay of marketing in the American market. Starbucks could have also selected licensing as a market entry strategy, however this would have required the business to train Japanese businesspersons on the corporate values, brand strategies, and service-oriented beliefs that drove U.S. success for the business. This would have represented a significant labour and financial expenditure to ensure that licensed operators were conducting business according to the Starbucks Way. Licensing might have provided the firm with more rapid profit opportunities with even less investment (i.e. rent, utilities and other overhead related to start-up costs), however the firm’s management team would have had much less oversight into whether the licensed businesses were meeting expectations of proper governance, promotion and general operations related to excellence of service. Again, this would tend to illustrate that Starbucks selected the most appropriate mode of entry, a risk-spreading joint venture, which allowed the firm to test the Japanese market whilst also retaining majority control over the most fundamental operational aspects that had brought Starbucks long-term business success in the United States. There is simply no evidence that any other strategy than the chosen joint venture would have brought Starbucks in Japan the type of rapid success it achieved. In fact, in 2014, Starbucks announced that it would be buying out Sazaby’s stake in the joint venture for a price of approximately $913.5 million (Baertlein 2014). Not only was the company successful in the long-term in Japan as a result of entering the market and gaining organisational learning through the joint venture, but the firm now can boast 100 percent ownership over Starbucks Japan through this buyout of Sazaby’s stake, something that not all new market entrants can boast over the long-term. In fact, Starbucks intended in this buyout of the joint venture to give Sazaby a substantial premium (Baertlein), which speaks toward the ability of the firm to successfully establish a reputation for ethics and business-to-business competency that could assist in entering other foreign markets by having a reputation for trustworthy business practices. This set of beliefs is directly aligned with the firm’s existing emphasis on corporate social responsibility that distinguishes this firm as a highly ethical company. If Starbucks had not selected the joint venture strategy, a correct strategy, the business would have learned lessons about the Japanese market with many more financial risks as learning was procured. It was an excellent long-term vision for market entry that has paid off substantially in terms of reputation and revenue growth for the Starbucks company. 7.0 Conclusion This report evaluated the viability for Starbucks and its 1995 market entry into Japan, its first experience conducting business in a market outside of the US. Research proficiency in identifying market trends, both consumer-related and economic, were demonstrated as a means of uncovering what constitutes a firm’s intentions to enter a new market and what strategies are most profitable. 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