Starbucks Foreign Direct Investment

Published Date: 02 Nov 2017

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Starbucks’ Foreign Direct Investment

Question # 1

Initially, Starbucks expanded internationally by licensing its format to foreign operators. It soon became disenchanted with this strategy. Why?

Answer # 1

In order to expand on international level, Starbucks decided to enter Japan by adopting the licensing mode of Foreign Direct Investment (FDI). The corporation licensed its special formula to a joint venture that was formed with a local company ‘Sazaby Inc.’. Starbucks did not have an exporting product but an expertise in service industry that was selling coffee, cakes and pastries along with providing an excellent coffee experience to the customers. The management team realised that it cannot export the packages to the overseas markets but get involved with the entrepreneurs who are looking forward to offer similar enchanting coffee experience to the customers in foreign markets.

Moreover, developing a Starbucks format in other countries required sharing of its expertise and know-how in the field of coffee service. At the start of international expansion strategy, it utilised licensing option by soon became disenchanted because there was less control on the foreign stores. The success of a business is highly dependent on the level of uniformity that is found in all the stores of a firm on global level (Dunning & Lundan, 2008) especially when expanding in overseas markets.

The customers are looking for similar product and service offerings along with quality so that they can get the same experience across the world in the brand stores. Hence, Starbucks was facing difficulty in keeping stringent control on its foreign businesses because of the licensing agreements. Other reason for shifting to joint ventures was that Starbucks wanted to expand at a fast pace in new markets and most of the licensees lack the abilities of implementing a winning strategy required by the corporation.

The main drivers of Starbucks’ successful global expansion strategy are the consistency in its offerings at all the outlets and uniformity in the service quality. When a customer visits the Starbucks’ outlet with certain perception in mind and there is lack of conformity to the expected level, then there is high probability that the customer might not come back again. Starbucks has to ensure that the customers are provided similar level of standards and familiarity so that they prefer to visit the coffee shop on repetitive manner. Hence, it is imperative for the companies to keep a control on the stores that are opened in foreign countries (Allison, 2010).

When a service company decides to enter into foreign markets, it needs to keep a balance between the requirements of the local people and the tourists who visit the country for travelling purpose. When the customers who travel abroad visit the Starbucks outlet, they look for same coffee experience that they cherish at the Starbucks’ coffee shops in their homelands. As Starbucks had a fear that by a pure license agreement will deprive it the right of keeping a strict control on foreign market operations, it had to reconsider its expansion strategy.

The main aim of the corporation was to create the replicated look, ambience, feel and experience of Starbucks in its international outlets and it was not possible with licensing format. In order to ensure uniformity and continuity in between the Japanese locations and American stores, Starbucks decided to transfer its employees from America to Japan so that the employees can be trained in accordance to the company’s required set of standards.

As a result, the company shifted majority of its agreements from licensing arrangements to wholly owned subsidiaries and joint ventures. The primary purpose of the shift in business arrangements was to gain control on the operations so that the customers were provided a marvellous and excellent coffee experience at all the outlets across the world. Therefore, Starbucks had to revamp its business operations to maintain its competitiveness and strong market presence in the coffee industry.

Question # 2

Evaluate the strategic role played by the Human Resources Management of Starbucks during the process of internationalisation. What staffing approach did Starbucks employ in Japan and why?

Answer # 2

Human Resource Management (HRM) is an integral part of every company as the corporations are realising that the only way of maintaining an edge is to invest properly in the development of employees’ competencies (Rupidara & McGraw, 2011). One of the key success factors of Starbucks is its efficient and committed workforce who is satisfied with the working conditions of the corporation. In order to enhance the motivation level of its employees, Starbucks has made drastic changes in their compensation packages. For instance, the part-time employees are given medical benefits and stock grant options.

Since uniformity among the business operations are the important aspects of a firm that is considering the FDI options, it has to ensure that the employees are trained in offering similar service level to the customers (Paryani, 2011). As the demand of highly efficient and competent personnel has increased in today’s world, the corporations are allocating sufficient amount of funds in their competency development programs (Tu, Wang & Cheng, 2012). Starbucks has ensured that it employs the superior quality resources for efficient management of its staff and provides them the same capabilities required for managing their international operations.

Since Starbucks aimed at offering the customers similar taste of coffee and ambience in all of its international outlets, it has developed a distinctive employee training and development program. The HR department of the corporation ensures that adequate time is designated in the recruitment, selection and training program so that the personnel possess the mandatory skills required for the business operations.

In the service industry, one of the most common problems encountered by the HR department is the high employee turnover (Rupidara & McGraw, 2011). However, the employees who are satisfied with their jobs are less likely to switch to other corporations. Starbucks has initiated a health and safety benefits program for the employees working more than twenty hours per week so that they are given an indication that they are valuable part of the corporation. Besides this fringe benefit, the employees are provided an opportunity to gain foreign market experience by sending them in their international outlets.

As the culture of Japanese market is different from American market, the employees were provided training opportunities that enhanced their skills and allowed them to learn the dynamics of the new market. Since HR department of Starbucks was well-aware of the problems that could be encountered, it developed an effective strategy in which details about the training and development initiatives were worked out. The employees working in America were trained in working in Japanese business culture and they were prepared to transfer the relevant skills to the Japanese workforce.

In order to enhance its operations in the market of Japan, Starbucks transferred some of its employees to the new market and ensured that every employed possessed the required set of skills as mentioned in their standards list. The Japanese employees were also mandated to attend the training sessions that were done by US employees so that they could provide the similar experience to the customers. Once the workforce was ready to offer the best and consistent services to the customers, the staff was deployed to the destination outlets and they were even given the stock grant option for enhancing their productivity level.

Hence, the strategic role of HRM in the internationalisation strategy of Starbucks ensured that the personnel was compatible with the requirements of the corporation. The management team has ensured that sufficient amount of funds are allocated for the developmental needs of the employees so that they remain competent and loyal to the firm. In today’s business environment, HR department has to make effective use of the available tools required to motivate and retain the employees because the rival firms cannot replicate the HR competency of Starbucks.

Question # 3

Why do you think Starbucks has now elected to expand internationally primarily through local joint ventures, to whom it licenses its format, as opposed using to a pure licensing strategy?

Answer # 3

Since FDI presents the companies with a wide range of options for entering a new market successfully, it is imperative for them to ensure that they select that mode of entry which has minimum amount of risk. In addition to reducing the risk level, the corporation wants to ensures that its international expansion strategy is a success which will help it to earn good amount of revenue stream (Michelli, 2007). As there is a wide range of entry modes available for the companies, the most effective ones are licensing, franchising, joint ventures, direct investments and exporting.

Considering the case of Starbucks which is operating in a service industry, the two feasible methods that could be employed are licensing and joint ventures. However, it is still utilising the wholly owned subsidiary mode as well which is proving to be a wise move by the corporation. Initially, Starbucks entered into licensing agreements with the local firms in respective markets as its expansion plan on international level but it had to revisit the option as there were many hurdles faced by the corporation.

The foremost problem that was encountered in its initial Japan based operations was lack of uniformity in the service experience provided to the customers. Initially, the corporation used the licensing form of internationalisation strategy as it wanted to expand quickly in the region. Since the staff members working in the outlets of Starbucks in Japan was not competent with the standard requirements of the firm, they were unable to deliver the expected level of service to the customers. Most importantly, Starbucks had limited amount of control on the Japanese outlets which made it difficult to ensure consistency in its business operations in Japan.

The two primary reasons that made the Starbucks’ management team to assess the internationalisation strategy was the lack of control on foreign operations and limited knowledge about the local market. These were the main causes for reconsidering the pure licensing strategy. At that point, the most suitable alternative was to enter into the market through joint ventures with the local firms who had been operation within the sector for certain time period. In a joint venture, both corporations have certain amount of stake in the operations and each one of them has to bear certain amount of market and failure risk as well (Chang & Rhee, 2011).

The three crucial elements that made joint venture a good option as opposed to pure licensing strategy were related to risk sharing, knowledge about the local market and protection of the brand’s success formula. With the adaptation of Joint Venture strategy, Starbucks was ensured that its competitive edge will remain protected and the secret formula of its success will not be leaked out to the competing firms. As the other organisation will be well-informed about the requirements of the local people, it will be easier to develop the strategies in accordance to the market needs.

Even Starbucks was able to ensure that it successfully adapted to the local market culture so that they can resonate the brand and develop strong positive associations. By modifying the offerings according to the market culture and preserving the uniform ambience at the outlets, Starbucks was successful in maintaining its individuality and uniqueness in the coffee market. Likewise, adequate knowledge about the market ensured that the corporation minimised its failure risk and was able to present the customers with the best coffee experience compatible with their level of expectation.

Hence, Joint Venture mode of entry has been a wise internationalisation strategy adopted by Starbucks as it has been able to expand quickly in the new foreign markets successfully. It is believed that Starbucks has a winning strategy because it is allocating its resources efficiently and making strategic choices with the passage of time. The drawbacks of pure licensing strategy are eradicated by entering into joint ventures with already established firms in the respective markets.

Question # 4

In some markets such as Britain and Thailand, Starbucks has chosen to enter through wholly owned subsidiary. How different are these countries from Japan?

Answer # 4

Starbucks has been experimenting with three main FDI strategies to gain entrance into the foreign markets i.e. licensing, joint ventures and wholly owned subsidiary. It has employed different modes of entry in the various markets after carefully analysing their characteristics. For instance, it entered into licensing agreements in Japan initially and then developed Joint Ventures so that it could share the risk and cost of the international expansion. Likewise, in other countries in Asia, it has given licenses to the local firms to operate their store formats by charging them the licensing fees and royalties for the revenue earned.

In its initial foreign expansion phase, it entered into pure licensing agreement but the option was not an appropriate move by the company because it lacked control on its outlets in Japan. Even the customers who visited the outlets were dissatisfied as they were not provided the similar service level found in the American countries. As a result, Starbucks shifted to Joint Venture mode of entry in international market. With the help of this initiative, the success and expansion rate increased at an accelerating pace and its brand image started to get strong in the foreign markets.

However, it wanted to have complete control on its international business operations and decided to create wholly owned subsidiaries. This mode of entry is preferred by large corporations because it provides them the opportunity of penetrating at a fast pace in the global market, get instant access to the local markets and small companies are willing to present their resources to well-known foreign companies (Chang & Rhee, 2011). Starbucks also realised from its expansion strategy projects that wholly owned subsidiary format allows them to achieve their targets quickly as oppose to joint ventures or pure licensing agreements.

For instance, in Thailand, it entered by a licensing agreement with a local Thai company ‘Coffee Partners’ and it was given a target of opening up twenty more Starbucks outlets within next five years within the region. However, the company was unable to raise the desired amount of funds required for expansion purpose and Starbucks took over Coffee Partners in 2000. By the end of 2007, there were about one hundred and three Starbucks outlets in Thailand which is a span of seven years.

Similarly, in Britain, Starbucks bought Seattle Coffee in 1998 which was a Britain coffee shop that was operating with the similar format as followed by the corporation. At the time of purchase, Seattle Coffee had sixty retail stores which were trying to present the customers with the Starbucks like coffee experience. By acquiring a well-known company in Britain, Starbucks was able to effectively deploy its expertise in the industry and offer the customers the similar product and service ranges. Since the coffee chain was strategically expanded in various regions in Britain, it was relatively convenient for Starbucks to enter in this region.

Other positive element for Starbucks was that there is similarity of culture in US and Britain regarding the coffee, it did not have to face any problem for understanding the market or its culture. The concept of coffee shop was highly appreciated by British people and Starbucks was able to achieve success in the region quickly. Hence, by making use of wholly owned subsidiary format, Starbucks was able to keep a strict control on its business operations in Britain and Thailand. Moreover, Starbucks was able to save huge amount of time and cost by utilising its own resources efficiently in these markets.

The markets of Britain and Thailand are different from Japan because the former ones bear a lot of resemblance with the American target market and Starbucks kept a control on its business operations to provide the customers with the excellent coffee experience. Hence, Starbucks has ensured that every customer is able to have the similar experience in all of its operations worldwide so that they can develop positive brand associations and appreciate the service level of the coffee market leader.