MGT 3140International Business

StrategyGroup Report (Starbucks)

Date of Submission: 18-Feb-2011

FINAL YEAR REPORT (MIDDLESEX UNIVERSITY)

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Contents

CHAPTER 1–EXECUTIVE SUMMARY..................................................3

CHAPTER 2–COMPANY PROFILE........................................................3

CHAPTER 3-EXTERNAL AND INTERNAL ENVIRONMENT.........5

PESTEL ANALYSIS.....................................................................................5

SWOT ANALYSIS.......................................................................................9

CHAPTER 4–MOTIVATION FOR EXPANSION................................11

INDUSTRY BASED VIEW..........................................................................12

RESOURCE BASED VIEW.........................................................................13

INSTITUTION BASED VIEW......................................................................14

CHAPTER 5-LOCATION DECISION....................................................15

OPPORTUNITIES......................................................................................16

THREATS................................................................................................20

CHAPTER 6-ENTRY MODE...................................................................23

CHAPTER 7-CONCLUSION...................................................................27

REFERENCES............................................................................................28

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CHAPTER 1–EXECUTIVE SUMMARY

This report aims to evaluate Starbucks’ past and present performance in order

to most importantly stipulate the future position of this largely successful

company. Being that the company’s objective centers around expansion, this

report tries to identify a likely attractive target country (India) for such plans.

The analysis uses SWOT, PESTEL, Industry Based View, Market Entry Mode and

other similar evaluative tools to reach an understandable and valid conclusion

that India provides varied opportunities for expansion that can be exploited by

Starbucks.

CHAPTER 2–COMPANY PROFILE

The current mission statement of Starbucks is “to inspire and nurture the

human spirit by one person, one cup and one neighbourhood at a time”

(Starbucks.com).

The first Starbucks store was opened in Seattle on March 30th 1971 by three

partners and the name of the store originated from the novel Moby Dick. The

firm believes in supplying and serving the best coffee possible by using the

highest standards of quality whilst adhering to ethical trading and responsible

growing practices at the same time. In 1987 the first stores were opened

outside of Seattle, in Vancouver and Chicago and in the subsequent years

stores followed the expansion were much more extensive across North

America.

Starbucks sells a variety of products which include high-quality whole bean

coffees along with fresh rich-brewed coffees, Italian-style espresso beverages

and cold blended beverages, a collection of complementary food items and

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also a selection of premium teas and beverage-related accessories and

equipment (starbucks.com).

There are conflicting reports on the overall market segment that Starbucks

possesses, although according to Mintel a global consumer research firm

Starbucks had a 73% market share of U.S. coffeehouse sales in 2005,

(usatoday.com) and this is significant because the majority of its revenue

comes from their home market which is $2.1 Billion compared to an overseas

share of just $640 Million (marketingmagazine.co.uk).

Amongst Starbucks’ many achievements is its spot of being #1 best coffee in

the fast food and quick refreshment categories and one of the “world’s most

ethical companies” (starbucks.com). Its performance as a multinational firm

has increased over time and as such led to expansion in global operations. The

recession was a major factor that impacted the company’s position because

prior to that, Starbucks was known for having a café around every street corner

(msnbc.com). However prior to the recession in 2007, their share price traded

at $38.41 and a mere two years later the price had fallen to a measly $9.91,

“profits were down for the last three months of the year from an astronomical

$158.5 million to $5.4 million” (business.timesonline.co.uk).

The turnaround for Starbucks started with the restructuring of management

where the former chief executive Howard Schultz took back the role and set the

company’s focus on core markets and utilizing technological breakthrough to

introduce Starbucks coffee in an instant form (pr-inside.com). Starbucks went

back to its roots by focusing on customer service that was neglected during

rapid expansion (Guardian.co.uk). All these decisions helped contribute to the

sales flourishing and “profits rising” to high levels once again (bbc.co.uk).

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The first location outside of north America was in Japan in 1996 which was

followed by an impressive $83 million acquisition of the UK based “Seattle

coffee company” of which there were 60 outlets at the time, all of which were

then re-branded under the Starbucks name. The global expansion continued

into the Latin American, Asian and European markets which resulted in

Starbucks presently being the largest coffee company in the world with over

16,500 stores in over 50 countries (www.starbucks.com).

An examination of Starbucks’ internal and external environment should provide

a good basis for understanding the company’s turnaround, the foundation of its

present successes and what the future might hold it.

CHAPTER 3-EXTERNAL AND INTERNAL

ENVIRONMENT

Businesses generally operate in a network and are not entirely independent

because of the several environments that influence their activities and actions

(Zhu, 2010). Examples of factors both from the internal and external (micro

and macro) environment that could influence Starbucks includes; competitors,

customers, suppliers, financiers; political, economical, social, technological,

environment, and legislation.

The United States being Starbucks’ home market is pivotal in understanding

the internal and external environment that influences the company and its

expansion. Coffee statistics show that Specialty coffee sales are increasing by

20% per year and account for nearly 8% of the 18 billion dollar U.S coffee

market. Coffee shops across America are set to exceed approximately 50,000+

by the end of 2011 (e-importz.com). This evidently suggests that the growth of

coffee consumption and a possible maturity of the American coffee market may

have caused overcrowding and influenced Starbucks to intensify expansion

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plans (See Chapter 4).

PESTEL ANALYSIS

The following PESTEL analysis will aim to extensively evaluate Starbucks and

understand how the Political, Economical, Social Technological Environmental

and Legal issues will impact the company’s External environment since it

relatively has minimal control over such factors.

Political influences

Tariffs and International Trade regulations:

Countries belong to trading blocks such as APEC, G20 and most importantly

CAIRNS GROUP for agriculture (news.bbc.co.uk), where the main aim is to

reduce the effects of tariffs. However Global companies such as Starbucks are

still affected because it operates across borders and is in over 50 countries

therefore high tariffs might mean that Starbucks reputation and ability for

sourcing the best coffee beans; which involves importing from different

countries could be compromised, subsequently affecting its global sales and

competitiveness.

Government stability:

Political stability of countries is an important issue that firms need to consider

because other indicators may point to a country as being investor friendly,

however that could rapidly change when there is elections or political instability

(e.g. Egypt). This could lead to massive disruption in a firm’s operations and

strategy or in a worst case scenario where Starbucks was forced to completely

pull out of Israel because of such issues thus negatively affecting its strategy

for expansion.

Political influence is unfavourable in this case and presents a threat to

Starbucks.

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Economical Influences

Exchange Rates:

The falling dollar rates compared to other currencies (Bloomberg.com) which

was caused partly by weaker monetary policy will affect imports. Most of

Starbucks’ vital supplies such as coffee beans, sugar and milk will be affected

because they are imported, thus incurring higher cost due to weak dollar. This

raises a question as to whether the company will pass the extra cost to

consumer and risk making its coffee even more expensive.

Income Distribution:

After the economic crises of 2007 that led to job losses, unemployment figures

rose (to 2.5 million in Britain 2010 – Office for National Statistics). This affected

income disparity which became unequal. Hence people that were previously

able to afford Starbucks’ expensive specialty coffee now saw it as a luxury thus

leading to low sales in some locations. This in effect affects the company’s

expansion plan. In this case Economic Influences has an unfavourable impact.

Social Influences

Changing Tastes:

The changing taste in America indicates that people are consuming more

specialty coffee which amounted to about $1.3 billion in imports (Restaurant

Hospitality). This influences Starbucks because it provides an opportunity to

exploit this market and gain higher market share in the coffee market.

In India and China however, tea is still mainly preferred, so Starbucks might

have to alter its strategy there. This will not be too difficult taking into account

the trend of ‘Americanisation’ and its success across developing countries so

far.

Health consciousness:

Government’s push toward healthy eating in western countries due to concerns

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regarding obesity might influence companies such as Starbucks to update its

menu in terms of introducing new lines and healthy alternatives to be sold

together with coffee.

This in other words means that Social Influences is favourable and can provide

an opportunity for Starbucks.

Technological Influences

Wave of Technological trends:

Technological advancements have never been so fast, hence firms need to

consistently follow the trends and exploit any opportunities that may result and

implement any change required. For example, Starbucks have embraced the

new phone payments system that was introduced recently which helps cut long

queues at peak times.

Social network memberships is growing by the millions e.g. facebook has over

500 million users and users have an average of 130 friends, additionally, time

spent on the site is over 700 billion minutes a month (facebook.com).

Exploiting this trend offers companies such as Starbucks a platform to relate

and share ideas with customers. It has already used social networking sites

such as facebook (with over 19 million “friends”) and a forum which it runs, to

communicate and engage with customers and communities (Economist.com).

Technology has a favourable impact for Starbucks.

Environmental Influences

Environmental pressure groups:

Non Governmental Organisations and pressure groups possess incredible ability

to coerce businesses into changing their practices. They could influence

businesses through lobbying and boycotts. Such measures usually impact the

intangible assets of a firm which usually involves tarnishing a company’s brand

name. Starbucks however works with the “Fair-Trade movement”

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(Economist.com) and the accreditation that comes with such alliance massively

improved Starbucks’ image, hence Environmental influences is favourable for

Starbucks.

Legal Influences

Not all countries welcome big firms because they like to protect their

indigenous firms from unfair competition and takeover. Legal issues such as

Monopoly and national protectionist laws will affect Starbucks because of its

size and its plan of expansion. E.g. countries like India guard against such

practices with a legislation that bars external companies from owning more

than 51% in a merger (see Section 5). The more this happens in other

countries, the more Starbucks expansion plan is restricted. Thus legal

influences are unfavourable for Starbucks.

In summary, the PESTEL analysis found that External influences was altogether

balanced since Sociological, Technological and Environmental factors were

favourable, while the other factors such as Political, Environmental and Legal

factors still pose a valid threat. Nonetheless Starbucks’ strengths counteracts

some PESTEL factors because although it can’t control the external

environment, it has become more flexible to change (closing 600 stores in

order to adapt) and is quick at exploiting opportunities. As Accenture (the

consultant company) puts it; “out–thinking the competition is useless unless

you can out-execute them as well”.

SWOT ANALYSIS

Strengths

Brand Image:

Starbucks is amongst one of the very few companies that have managed to

successfully create market awareness and stir up consumer interest in

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specialty coffee while at the same time preserving brand dominance. Its focus

on consistency in delivering positive consumer experience stresses the point

about consumer visits to its cafes being an ‘Experience’ rather than just seeing

it as another coffee maker (workforce.com).

Starbucks’ recent change of Logo demonstrates confidence in public awareness

of its brand and follows the likes of McDonalds and Nike that are easily

identifiable by logo alone (marketwatch.com) See Chapter 4.

Unique Strategy:

The Ability to capture key locations and open stores in close proximity to each

other is a unique strategy for Starbucks. This ensures that franchises that don’t

meet set achievements are closed down. Therefore only the most profitable

stores that maintain high sales, and retain the most customers survive.

Valued and motivated employees:

The cafe industry is to some extent dependent on front house staff, their

attitude and their ability to make customers come back. Starbucks promotes an

environment that encourages team working and collaboration. As such it

encourages managers to follow its motto of ‘hire the personality, train the skill’.

Hence through exceptional service, customers keep coming back. Arguably,

Starbucks has one of the lowest staff turnover rate in the industry

(workforce.com).

The strengths provide a favourable impact.

Weaknesses

Over-reliance on home market:

Although the American coffee market is worth over $18 Billion (e-importz.com),

over-reliance on this market leaves Starbucks vulnerable to unforeseen

changes that might occur in such market. E.g. recession affects disposable

income for customers and subsequently, profits. Thus the management

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decision to focus mainly on the US market makes it a weakness.

Aggressive Expansion:

Due to the takeover and acquisition of local community coffeehouses and

buildings, Starbucks has been labeled the ‘Tesco of coffee’ after a backlash

from local residents due to closures of local shops. This has lead to boycotts

and increasing membership of sites like ihatestarbucks.com. They see

Starbucks’ aggressive expansion as an erosion of their local environment and

culture. This in effect means that weakness is an unfavourable impact.

Opportunities

Entry into new markets:

Global companies that plan for expansion usually seek out attractive countries

with such opportunities. In a bid to increase its world wide presence, Starbucks

has opened a range of stores and operates in over 50 countries with 16,000

coffee shops (Starbucks.com). Starbucks is currently on its way to exploiting

potentially lucrative markets such as India (marketwatch.com) that will provide

it with opportunities of revenue growth.

The above point directly links to Political factors in the External Environment

analysis where on a global scale more countries are embracing open door

policies to foreign companies rather than protectionism. This is favourable for

Starbucks in its expansion plan and will assist it in securing the finest coffee

beans due to countries being more welcoming.

Growth in coffee market:

The general taste of coffee drinkers in America is shifting towards the more

expensive organic coffee which accounted for $1.3 billion in imports

(Restaurant hospitality).This links to the Social factors identified in the External

analysis and relates to changing tastes. This is favourable because it provides

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an opportunity for Starbucks to expand its customer base with the possibility of

higher profit margins as a result. Opportunities is favourable for Starbucks

Threats

Competition:

Although the competitive threat from the specialty coffee sector is minimal,

competition from other sectors such as restaurants and other big coffee shops

still remain. The dominant threat from other competitors such as dunk’n

donaughts and especially McDonalds which was recently found to sell good

coffee for better value is damaging for Starbucks (digitaljournal.com). In other

words this is an unfavourable influence

The SWOT analysis however also shows Starbucks as being balanced as well

because it’s Strengths and Opportunities are favourable while it’s Weaknesses

and Threats are unfavourable. On closer analysis it could be said that

Starbucks possesses more Strengths than weaknesses and although all

companies do have weaknesses, the fact that this is within their internal

environment means that it can change its practices in order to turn its

weaknesses into strengths. Nevertheless for the threats, constant scanning of

its environment and monitoring close rivals should assist it in developing

strategies in order to remain competitive and maintain (or if possible) increase

it’s market share.

CHAPTER 4–MOTIVATION FOR EXPANSION

One of the best ways to increase market share is to internationalize. After

analyzing the company’s PESTEL and SWOT analysis, a range of opportunities

and threats have been identified. However Starbucks has more strengths than

weaknesses that make the company more competitive in the coffee industry.

The motives to go abroad can be analysed from three different perspectives:

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Industry-based, Resource-based and Institution-based views.

INDUSTRY BASED VIEW

For every coffee shop in New York, there were 365 customers therefore proving

market saturation in the US (nytimes.com). This difficulty meant looking

beyond the American border in order to increase profitability and thus resulted

in internationalisation.

The target countries that are chosen usually have real potential due to

population sizes and the amount of people with high disposable income and

with a high interest in ‘Americanization’. In the years of Starbucks’ expansion,

America was the most developed and innovative country. Western nations had

a great interest in American products and culture, which motivated managers

to bring in well known brands to other countries.

After the huge success in Japan (first Starbucks’ coffee shop outside US), the

motive to expand to other regions and countries became stronger.

This motivated the firm to implement first mover advantage or follow the main

competitors such as McDonald’s and Dunkin’ Donuts. McDonald’s was

spreading out American way of life which provided Starbucks with an

advantage in its innovative strategies of healthier snacks that would give an

advantage in other countries where the healthy life style was popular.

With technological influences, all countries become a part of the ‘global

village’, where people have the same preferences and tastes. (McLuhan,

Marshall 2003). This lowered the risk of backlash from cultural awareness and

motivated Starbucks to meet customer needs and expand globally.

However to get into the target market Starbucks needs to follow the host

countries government regulations, which are not always favourable for the

company. However USA are members in NATO, APEC, NAFTA and Pacific

Community trading blocks. This makes the supply of raw materials cheaper and

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allows Starbucks to provide the high quality service for a lower price. This

advantage motivates the firm to enter new marketplaces

(economywatch.com).

RESOURCE BASED VIEW

After an evaluation of external market and the making of industry-level

decisions, internal strengths and weaknesses need to be considered. The firm’s

distinctive competences are built from tangible and intangible assets, and

organizational capabilities.

The tangible assets are most easy to identify as they include financial

resources, raw materials, production facilities and real estate. Starbucks

purchases only the highest quality of coffee beans from ideal coffee-producing

climates. Throughout the promotion of equitable relationships with farmers,

workers and communities as well as protection of the environment, the firm has

improved its marketing ability and upgraded its supply chain that turns basic

resource to an advantage for meeting customer expectations of quality roasted

coffee. This move secures the company’s supply-level. Furthermore it makes

Starbuck’s price and quality more competitive (Differentiation strategy) in the

new markets and worldwide coffee industry (gsb.stanford.edu).

Starbucks’ unique strategy of key locations helps it to attract foreigners. This

promotes Starbucks’ brand image and raises prominence. This makes

foreigners familiar with the service, quality and products that Starbucks is

offering.

The intangible resources are the brand name, reputation, knowledge,

experience, etc. The basic ideas for Starbucks creation were taken from Italian

coffee shops, where Mr. Schultz (Starbucks’ CEO) learnt about the Italian

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culture of coffee drinking, which had not existed in the US before. This

knowledge and the experience gained throughout the decades in the US

market provided Starbucks with the unique know-how, which raises

competitiveness in international markets.

The Starbucks brand has elements of uniqueness and differentiation that are

essential to create positive associations in the minds of the consumers (Perera

et al, 2009). This level of brand inimitability and quality is vital for international

buyers. Starbucks brand name is recognizable in most countries around the

world; this makes customers pay a higher price for the brand name. Starbucks

has joined the big league of no-name logo, which could assist it in expansion

into the countries which not only have different languages but different writings

e.g. Arabic (Guardian.co.uk).

Starbucks being one of the companies to have the lowest rate for employee

turnover also has a high employee satisfaction quota. This makes international

recruitment much easier as they are seen as attractive to work for

(Money.cnn.com).

Starbucks has a reputation for being a good socially responsible firm. It is eco-

friendly, and encourages customers to use recyclable cups. It has incorporated

green designs in its stores and helped farmers reduce carbon emissions. All

these build up its brand image throughout the world and increases customer

loyalty around the globe (Starbucks.com).

INSTITUTION BASED VIEW

The main stakeholders in Starbucks are the employees, owners, suppliers and

the customers. Individual stakeholders do not have a lot of influence on the

firm’s performance, due to insufficient power as a single unit. The influence can

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occur if stakeholders share their expectations and objectives within a

stakeholder group.

As a result of shareholder group pressure the firm needs to maximize the value

of shares, through increasing profitability and growth rate. To achieve these

goals, managers implement the strategies that lower the costs or add more

value to firm’s products, thus allowing the company to raise prices. Managers

can increase the rate at with profits grow over time by pursuing strategies to

sell more products in existing markets or to enter new markets (Zhu, 2010).

Due to Starbucks’ home market yielding low growth as mentioned before, this

acts as a reason why managers are pressured by shareholders to

internationalize thus analysing the coffee industry in order to leveraging their

core competence.

In conclusion, the main motives for internationalization are; the saturation of

the US market, the high potential of new emerging markets, brand recognition

in many countries, customer loyalty and security in the supply-chain. These

motives provide encouragement for Starbucks to expand and grow very rapidly

while surpassing its rivals, especially if the right countries are chosen for

expansion.

CHAPTER 5-LOCATION DECISION

Picking out a target country to enter certainly seems tough after considering

over 200 nation-states all over the world. Based on chapter 5 and chapter 6,

we will use our extensive knowledge in international business strategy, to

assume the roles of Starbucks management in order to make a plan for its next

foreign expansion in terms of: where to enter, how to enter and on what scale.

Starbucks’ current strategy involves exploring retail growth outside the United

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States (Trevino, 2010). In the past two decades, emerging markets has been a

hot topic, especially after the banking crisis. While searching for countries in

these emerging markets, we found that Starbucks had opened stores in most of

them. However, India, the world’s second populous country, still was

untouched by Starbucks. Our curiosity lead us to investigate the reasons

further.

In fact, as early as in July 2007, Starbucks considered entry into India, but it

withdrew its application from the Indian Department of Industrial Policy &

Promotion, Ministry of Commerce & Industry. The delay of their India plan was

mainly because Starbucks could not find suitable or agreeable local companies

at that time. However, in January 2011, Starbucks expressed its intention of

preparations to re-enter India, hence we decided to choose India as the target

country to write an entry plan for Starbucks. A systematic analysis of the

reasons why Starbucks decided to enter the Indian market twice will be given

as following:

The attractiveness of India will be analyzed by scanning its environmental

factors, as PEST analysis and SWOT analysis imply, to identify whether it is an

opportunity or threat for Starbucks.

OPPORTUNITIES

The following parts will investigate opportunities in India for Starbucks, by

focusing on both Economic Outlook and Industry Outlook.

Economic Outlook

According to Zhu (2010), to decide if one country is suitable for entry, the

country long-run economic profit and growth potential should be assessed. This

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potential could be interpreted as a function of several factors, such as Trends in

GDP and Foreign Direct Investment, etc.

Based on International Monetary Fund’s published data, India has become the

world’s fourth economic entity by 4001bn GDP (PPP) in 2010, following United

States, China and Japan. Figure 5.1 depicts real GDP in India advancing in a

strong upwards trend since 1995 to 2009, and forecast for the following five

years (2010-2015) indicates Indian economy will continually follow the previous

pattern.

Besides, India is also one of the BRIC - Big Four, comprising Brazil, Russia, India

and China; argued by Goldman Sachs to be a collective grouping of emerging

markets that would dominate world economies by 2050 (Wilson &

Purushothaman, 2003). As O’Neill & Poddar (2008) stated, Indian has the

potential to be 40 times bigger by 2050.

To show India’s growing economic globalization, Foreign Direct Investment (FDI)

could be used to measure the activity of foreign ownerships in India’s domestic

economy. According to UNCTAD’s World Investment Prospects Survey 2010-

2012, which tries to find out future trends of FDI by asking the largest

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transnational corporations (TNCs), India was placed the second most important

FDI destination for TNCs. Moreover, Figure 5.2 shows FDI Inflows to India has

been on the upturn in financial years 2000 to 2009.

Figure 5.2 enhances India’s strong economy in the view of attracting more

foreign direct investments in the past ten years. Based on the above analysis of

its economic prospects, it is arguable that India has a positive economic

outlook and attractive future growth forecast that is suitable for Starbucks to

invest in.

INDUSTRY OUTLOOK

Socio-cultural (lifestyle and demographic)

The growing domestic coffee consumption in India will be proved by the

following factual data, combined to consider related demographic factors.

According to the Indian Consumer Lifestyles Report, published by Euromonitor

International (2010), which states that although India is traditional a tea-

drinking country, coffee drinking has become an essential part of the daily

routine among people living in Southern India. Also coffee has been often

consumed by those in the urban areas most especially by the younger

population. Although cafes are appearing all over India, Indians still regard

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visiting a café or bar as a special outing, and has become very popular among

young, urban Indians who visit coffee shops from once a week to once a day

and consume more than a drink, together with their friends, partners or

business associates.

Some recent data support the trend of coffee’s increasing popularity in India:

1. According to GlobalTGI Productbook 2011, its latest study indicates 52% of

31,000 respondents in 15 urban cities drank instant coffee.

2. In India, Coffee is currently competing against tea to increase its per capita

consumption. According to 2009 India Profile published by International

Coffee organization, the per capita consumption is 0.08 kg.

3. Figure 5.3 draws a clear picture of India domestic consumption of coffee

from 1995 to 2008 which shows gradual increment. This indicates, to some

extent that Starbucks could attain long-run benefits from India.

4. Figure 5.4 below indicates the contribution of fresh coffee sold in coffee

shops and instant coffee towards the total consumption of coffee in India.

This shows an increase from 2005 to 2010 and forecast also shows this

trend will continue for the following 5 years.

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In summary, the prospect of India’s coffee industry is great. Furthermore, the

strong coffee consumption trend provides a big potentially increasing market

for Starbucks.

Resource AvailabilityIndia has a long history of planting coffee bean trees. Besides, India is the only

country that grows all of its coffee under shade. Based on the statistics data

from the Coffee Board of India, the production volume of coffee forecast for the

next crop year 2010-2011 is placed at 299,000 million tons (MT). Figure 5.5

depicts the increasing production volume of coffee in India. The country is also

the fifth largest exporter of coffee beans (Euromonitor International, 2010).

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In summary, India being a coffee planting and exporting country, makes it a

good target country that matches Starbucks’ sustainable development.

Starbucks could achieve vertical integration through its sourcing and roasting

coffee business in India.

THREATS

The following parts will discuss whether Starbucks will face potential threats, in

terms of Political/Legal (red tape, corruption, and regulation issues), Cultural

Differences and Competition.

Political/ Legal

Red Tape Risks

According to a released survey report by Hong Kong’s Political and Economic

Risk Consultancy (PERC) in June 2010, India’s red tape is the worst in Asia. It

explains that India’s bureaucracy is ineffective and inefficient. It also mentions

that the civil service has frustrated most Indians and foreign investors alike.

Besides, another survey conducted by Mathaba in early 2010, indicated that

the majority of respondents thought Indian bureaucracy was a ‘complete

failure’.

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Even though the Indian government claimed to improve its administrative

bureaucratic system (David and Ganz, 2010), Starbucks in its best interest

should prepare to face possible lengthy applications for planning permissions,

licenses etc.

Corruption Risks

Another concern in India is political corruption. According to published

Corruption Perceptions Index (CPI) 2010 by Transparency International, India

was ranked the 87th of 178 countries with a score of 3.3. Compared with CPI

2009 with 3.5 (rank 84th), it indicates that corruption in India is worsening.

Since Starbucks is a member of the UN Global Compact, in which members

should obey 10 universal principles, including working against corruption in all

its forms, extortion and bribery. Starbucks’ anti-corruption is also shown within

its Business Conduct. After entering India, a dilemma will confront Starbucks,

whether to engage in corrupt practices to smoothing out its business dealing,

or insist on its principle.

Regulation/Law Risks

Even though the Indian market has been liberalized, some industries maintain

approval requirements to foreign investment. For example, foreign investment

proposals in 34 high-priority industrial sectors can not exceed 51% as directed

by the Indian government. Besides, in recent years, especially after the 2008

financial crisis, Indian government increased taxations in order to support a

huge deficit in its budget (ISH Global Insight, 2009).

Starbucks’ entry mode therefore is limited in relation to Indian laws, which will

be addressed in Chapter 6. Also, Starbucks could possibly suffer if regulations

are tightened up in the future.

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Cultural Difference

Starbucks is an American-based firm hence If it enters India, it should be aware

of possible problems caused mainly by cultural differences. According to the

famous Greet Hofestede cultural dimensions study, as shown in Figure 5.6 and

Figure 5.7, the differences of the U.S and India are clear to make deductions

from.

In this case, Starbucks should choose a suitable way to learn more about the

Indian market and consumer expectations as the chart above shows the need

for it. Nonetheless, no matter what entry mode Starbucks might choose to

enter India in the future, dealing with the relationship and management of

Indian employees is going to be a tricky task.

Competitive issues

Table 5.1 shows the intensive competition of coffee retailing industry in India.

The two leading coffee brands on a national scale are Hindustan Unilever and

Nestlé India. If Starbucks enter India, it may have to face high entrancing costs

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set by these already well-established firms. Bearing in mind the already heated

competition, Starbucks should choose a suitable entry strategy.

In conclusion, even though Starbucks faces some threats from political/legal,

cultural differences and competitive areas, there also are a lot of opportunities

for it to enter India. Therefore, to further support its strategic global expansion

and ultimately achieve its No.1 goal, Starbucks should go ahead with a correct

entry model with enough awareness of these above threats. At the same time,

Starbucks should explore as much opportunities as possible by using its core

competencies and brand reputation identified in chapter 3 & 4.

CHAPTER 6-ENTRY MODE

After detailed analysis from the previous sections above concerning the

company’s motive to go international, its strengths and weaknesses;

evaluating the attractiveness and risks of the Indian market; this section will

explore market entry mode.

Some external and internal factors, which may influence or determinate

Starbucks’ expectations on entry speed, control, risk, commitment/investment

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and return/profits, will be analysed to help us make a final decision for

Starbucks.

External factors

Country specific factors

The limited holding of up to 51% equity for foreign investment clearly indicates

that Starbucks will give up the idea of wholly owned subsidiary, which entails

high risk.

Industry specific factors

The current coffee retailing industry in India is crowded and consists of many

local and foreign competitors (Hopenow, 2010). This indicates that if Starbucks

wants to break through the close siege, it should use a high scale of entry by

choosing an entry mode with high investment/commitment.

Firm specific factors

Starbucks is not familiar with the Indian market and cultural differences

between the U.S. and India also exists. In other words this indicates that

Starbucks need to choose an entry mode that provides a good learning

opportunity.

Product specific factors

Coffee is a common commodity which doesn’t really provide uniqueness as

such compared to having technology, hence could be easily learned or copied.

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This indicates that Starbucks need an entry mode with at least a medium

control.

Internal Factors

Internal factors influencing entry mode is highly dependent on the decision

maker in this case, Starbucks’ Management in its Headquarter since this

information needed for such analysis is unavailable for us. However using the

famous Greet Hofestede’s cultural study to explain the internal factors, the Risk

Avoidance Tendency will be examined by Uncertainty Avoidance Index (UAI).

Based on Greet Hofestede’s results, The United States got 46, compared to the

world average of 64, which indicates that Americans do not attempt to control

all outcomes and results. In other words, American managers in Starbucks’

headquarter seem not to have a risk avoidance tendency and would accept an

entry mode with a high risk.

As stated in Chapter 5, Starbucks’ first attempted entry into India in 2007

failed. There are two lessons Starbucks should have learnt from that failure

(Indian Wine Academy, 2007):

Firstly, this time when writing a proposal to hand over to the India Ministry of

Commerce & Industry, Starbucks should draw a clear picture of its expansion

intentions in India (which it failed to do in 2007), by obeying India laws exactly

and carefully.

Secondly, this time when finding and negotiating with possible partners,

Starbucks should take a step back in terms of its usual high expectations and

requirements in the contract, to avoid leaving India without accomplishing

anything again.

Nevertheless after analysing the possible external and internal factors and

learning from its previous failure, a feasible entry mode will be suggested. The

procedure of filtering several entry modes through a Hierarchical Model could

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give a clear picture of every entry criteria used in each step.

Step 1: Ask ourselves if Starbucks need an equity mode, or a non-equity

mode.

Our answer is Yes, that it needs an equity mode. Even though Starbucks used

licensing to; hotels, airports, tourism places, schools/universities in some

countries, this way will not be suitable in the case of India. This is because India

provides many opportunities for Starbucks, which it will surely want to

participate in order to secure a certain amount of equity and high profit in

India. Therefore, licensing, franchising and exporting could be excluded here.

Then the step is towards joint venture and wholly owned subsidiary.

Step 2: Ask ourselves if Starbucks needs an entry mode that requires holding a

100% stake, or not.

Our answer is No. The restriction for Starbucks in this step is highly dependent

on Indian laws. As it has been mentioned in Chapter 5, India’s government only

allows foreign firms to hold no more than 51% equity in 34 industrial sectors,

including the retailing industry in which Starbucks will operate (Russ Thai,

2009). Therefore, a wholly owned subsidiary by acquisition or Greenfield

investment is impossible for Starbucks to choose at this stage. Hence, the next

step is towards joint venture.

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Step 3: Ask ourselves if Starbucks needs to build up a new firm with its

partner, or not.

The answer is not that simple. Firstly, Starbucks has a need to source and

roast coffee beans, controlling the upper value chain sections and achieving

vertical integration. Secondly, Starbucks must open its own coffee stores to

operate its main business of running coffeehouses across India.

Therefore, considering Starbucks’ two business requirements mentioned above,

a joint firm would need to be built up between Starbucks and its local partner

for example Starbucks India Ltd. Hence, a strategic alliance is inadequate for

Starbucks.

Finally, through the process of elimination, our solution suggests that Starbucks

should enter India through a joint venture in which it holds the majority stake

(51%-49%).

After identifying Joint venture as the preferred form of entry, it is important to

assess the benefits and downsides of such entry mode.

Advantages

Firstly, potential risks, such as unseen future regulations, political risks or

natural disasters for coffee growing, could be shared with its partner.

Secondly, Starbucks could gain more knowledge about the Indian coffee

growing, roasting and retailing industry from its partner during their work

together.

Disadvantages

Firstly, even though Starbucks holds a majority role in the venture, it means

Starbucks cannot have total control and may face some conflicts related to

decision and management issues, which could possibly result from their

different expectations/objectives on each other and their cultural differences as

identified in Chapter 5.

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Secondly, the nature of a joint venture determines that Starbucks must share

profits with its partner which is uncharacteristic of the company.

Recommendation

No entry mode is perfect and all has its downsides, but Joint Venture seems the

most suitable in for Starbucks’. One final precaution for Starbucks can be made

here in that all controversial details during negotiation should be clearly stated

in the contract with its partner, to avoid any petty and unnecessary conflicts in

the future.

CHAPTER 7-CONCLUSION

In conclusion, having assessed the evidence concerning Starbucks’ decision to

internationalise, the internal and external environment and its impact on the

company, it is fair to conclude that the company is in a strong position to

expand especially after successfully scaling through the effects of the financial

crisis while learning to be lean and efficient in the process. India should be the

next country for its subsequent expansion since it provides a very good

opportunity for potential high profitability, increased market share and

strategic placement in terms of resources for Starbucks.

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