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MGT 3140

International Business
Strategy
Group Report (Starbucks)

Date of Submission: 18-Feb-2011

FINAL YEAR REPORT (MIDDLESEX


UNIVERSITY)

   
 



 

     
   
  

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CHAPTER 1²EXECUTIVE SUMMARY .................................................... 3

CHAPTER 2²COMPANY PROFILE ......................................................... 3

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


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

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

CHAPTER 4²MOTIVATION FOR EXPANSION....................................... 11


INDUSTRY BASED VIEW .................................................................... 11

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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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.

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The current mission statement of Starbucks is ´to inspire and nurture the human spirit by

one person, one cup and one neighbourhood at a timeµ (Starbucks.com).

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

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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 companiesµ
(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 millionµ (business.timesonline.co.uk).

The turnaround for Starbucks sta rted 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 risingµ to high levels once again
(bbc.co.uk).

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 companyµ of which
there were 60 outlets at the time, all of which were then re -branded under the Starb ucks

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

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and what the future might hold it.

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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 envir onment 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 plans ( 
 p.





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.


 

 
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

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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.

  

 
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 b ecause 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 ² 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.


 

 

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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 coun tries so far.

Health consciousness:

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

 
 

 
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 ´friendsµ) and a forum which it

runs, to communicate and engage with customers and communities (Economist.com).


Technology has a favourable impact for Starbucks.


 

 

Environmental pressure groups :


Non Governmental Organisations and pressure groups possess incredible ability to coerce

businesses into changing their practices. They could influence busin esses 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 movementµ (Economist.com) and the accreditation that co mes with such

alliance massively improved Starbucks· image, hence Environmental influences is


favourable for Starbucks.



 

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

from unfair competition and ta keover. 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 al together 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 fa ctors 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; ´out²thinking the competition is useless unless you can

out-execute them as wellµ.

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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 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.


Over-reliance on home market:
Although the American coffee market is worth over $18 Billion (e-importz.com),

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over-reliance on this market leaves Starbucks vulnerable to unforeseen changes th at might
occur in such market. E.g. recession affects disposable income for customers and

subsequently, profits. Thus the management decision to focus mainly on the US market
makes it a weakness.

Aggressive Expansion:

Due to the takeover and acquisition o f 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.

   

Entry into new markets:

Global companies that plan for expansion usually seek out attrac tive 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 potenti ally 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.

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This is favourable because it provides an opportunity for Starbucks to expand its customer
base with the possibility of higher profit margins as a result. Opportunities is favourable

for Starbucks

 
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.

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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: Industry-based, Resource-based and


Institution-based views.

    

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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 D unkin· 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 bl ocks. This makes the

supply of raw materials cheaper and allows Starbucks to provide the high quality service
for a lower price. This advantage motivates the firm to enter new marketplaces
(economywatch.com).


   

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 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

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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).

   

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 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

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market, the high potential of new emerging markets, brand recognition in many countries,
customer loyalty and security in the supply-chain. These motives provide encoura gement

for Starbucks to expand and grow very rapidly while surpassing its rivals, especially if the
right countries are chosen for expansion.

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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 Starbu cks
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 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,  , 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   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 analyze d by scanning its environmental factors, as PEST


analysis and SWOT analysis imply, to identify whether it is an opportunity or threat for
Starbucks.

   

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 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;

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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 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

  
 


    

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

data, combined to consider related demogr aphic factors.


According to the Indian Consumer Lifestyles Report, published by Euromonitor

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International (2010), which states that although India is traditional a tea -drinking country,
coffee drinking has become an essential part of the daily routine amon g 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 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 so me 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 increasi ng market for Starbucks.

  


India 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.

 

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
  

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 se rvice 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·.

Even though the Indian government claimed to improve its administrative bureaucratic
system (j     
, Starbucks in its best interest should prepare to face
possible lengthy applications for planning permissions, licenses etc.

   
Another concern in India is polit ical corruption. According to published Corruption

Perceptions Index (CPI) 2010 by Transparency International, India was ranked the 87 th of
178 countries with a score of 3.3. Compared with CPI 2009 with 3.5 (rank 84 th), 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

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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.


 
 
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.

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.

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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 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 ultimate ly 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.

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  s   
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 and return/profits,


will be analysed to help us make a final decision for Starbucks.

 
  
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 cul tural 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.

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Product specific factors
Coffee is a common commodity which doesn·t really provi de uniqueness as such compared

to having technology, hence could be easily learned or copied. This indicates that
Starbucks need an entry mode with at least a medium control.

 
  

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):
 
, 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.

 
, 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 give a clear picture of every entry

criteria used in each step.

°p
 c: 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.

 °: 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 firm s

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 choo se at this stage.


Hence, the next step is towards joint venture.

 Y: Ask ourselves if Starbucks needs to build up a new firm with its partner, or not.

The answer is not that simple.  


, Starbucks has a need to source and roast coffee

beans, controlling the upper value chain sections and achieving vertical integration.

 
 Starbucks must open its own coffee stores to operate its main business of
running coffeehouses across India.

°Ö
Therefore, considering Starbucks· two business requirements m entioned 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 tha t 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.


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.

 
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.

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

its partner which is uncharacteristic of the company.

  
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.

°s
   

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 subsequen t 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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