For the Analysis of Starbucks I Will Be Using Different Analytical Framework to Provide

Introduction

The bid to internationalize most companies is a very difficult process. The biggest reason for this is the adding the international branding and policy to their existing company strategy.

Most companies view their expansion into the international scene as mere extension of the existing business. This can be dangerous because of the difference in socio-cultural environment and the other factors such as politics etc. Some other companies will however copy the international strategy of their rivals which is equally not good because of the difference in company policy and marketing strategy.

There are 3 steps in initiating a company’s international strategy

1. Determining if the company is prepared to launch an international operation or market.
2. Determining how the company will launch their operation or product.
3. Developing their Organizational Structure to suit the market strategy.

Starbucks: Starbucks is a multinational which its headquarters is based in the United States. It is the leading coffee drink store in the world. They have a combined 13000+ stores in the world. 40% of the stores are licensed stores while the rest are company owned.

Some of the products sold by Starbucks are

• Brewed Coffee
• Espresso
• Cappuccino
• Coffee beans
• Snacks
• Mugs

Purpose: The purpose of this project is to analyze the real life situation of Starbucks in the international scene, its strategic options and options.

Aim: Is to make sure that we understand the international issues facing Starbucks. It is also necessary to evaluate the Strategic options that Starbucks is faced with and study there environment.

Frameworks to use for analysis

For the analysis of Starbucks I will be using different analytical framework to provide an in-depth analysis into the Company and its Strategic Growth methods. The frameworks will be shown below: To start with I will use the International Strategy framework. ‘‘International strategy is a means by which a firm sells its goods or services outside its domestic market’’ (Hill 378). One of the main reasons for initiating International Strategy (as opposed to a strategy focused on the domestic market) is that international markets yield potential new opportunities. (Writework.com).

These frameworks will be broken down and its different parts explained and used for the appropriate evaluation.

Market DriversGlobal Sourcing

Government DriversPorters Diamond

Competitive Drivers

Cost Drivers

Simple Export

Multi Domestic

Complex Export

Global

Exporting

Joint Ventures & Alliances

Licensing

FDI

Strategy Methods and Evaluation

To analyse the various ways a company can enter a market, I will be using strategy methods together with the framework for mode of entry to explain it.

Modes of entry can differ in terms of the degree of resource that will be committed to a particular market and the extent to which an organisation is going to be operationally involved in a particular location. Selection of an entry mode depends on the stages of organisational development. Moving into international markets means organisations are moving into new and often unknown territory, requiring them to learn new ways of doing business. “Internationalisation is traditionally seen as a sequential process whereby companies gradually increase their commitment to newly entered markets, accumulating knowledge and increasing their capabilities along the way” (Johnson & Scholes). The four types of market entry modes are: Exporting, Joint ventures and alliances, Licensing and Foreign direct investment.

The other mode of entry used is through strategic method, which is a means by which a strategy can be pursued. These methods are divided into the following three types: organic development, acquisition (or disposal) and alliances.

To determine a company or an industry’s potential in the global market, the framework that should be used for this analysis is George Yip’s drivers of globalisation framework. This framework provides a basis for the diagnosis of the strength and direction of trends in particular markets. George Yip’s drivers can also be called simply ‘Internationalisation drivers’. An insight from Yip’s driver’s framework suggests that there is variability in the internationalisation potential of industries. The drivers are divided into four namely:

Market drivers

Competitive drivers

Cost drivers

Government drivers.

There are many different factors that can support or inhibit it, and an important step in determining an internationalisation strategy is a realistic assessment of the true scope for internationalisation in the particular industry.

To determine an organisations national and international source of competitive advantage, the framework to use is Michael Porter’s Diamond and global sourcing.

Porter’s Diamond suggests that there are natural reasons, why in some nations competition is more than others, and why competition in an industry within a nation is more than others. Porter’s Diamond suggests there are four interacting determinants of national or home base, advantage in particular industries and they are Factor conditions, Home demand conditions, Related and supporting industries and Firm strategy, industry structure and rivalry. Together they form a diamond shaped figure.

Global sourcing on the other hand is a source of competitive advantage that can be achieved through both joint ventures and foreign direct investment, by purchasing services and components from the most appropriate suppliers around the world regardless of their geographical location. The advantages that can be derived from different locations are, Cost advantages, unique capabilities and National characteristics.

Another means of entry for organisations is through international strategies, because it helps organisations determine what kinds they want to pursue in their markets. There are four main types of international strategies and they vary according to the extent of coordination and geographical configuration. The four types of international strategies are Simple export, Multidomestic, Complex export and Global strategy. Organisations may often move back and forth or alternate between and within the four strategies and their choices will be influenced by changes in the internationalisation drivers.

Market selection is an integral part of an international strategy and after organisations have decided on their cost drivers and their sources of competitive advantage, they need to examine the countries they would want to enter. For organisations to examine market attractiveness they can use a framework developed by Pankaj Ghemawat, which is the CAGE framework, this can be used to analyse competitive characteristics of an organisation. Ghemawat used this framework to argue that distance still matters, by using each letter of the acronym to highlight the different dimensions of distance. C- Cultural distance, A- Administrative and political distance, G- Geographical distance and E- Economic.

An organisation has to decide on a choice of innovation to follow, either through first-mover advantage or late mover-advantage. First mover advantage exists where an organisation is better off than its competitors as a result of being the first significant organisation to the market with new product, process, or service. There are five potential types of first-mover advantage and they are Experience curve benefits, Scale benefits, Pre-emption of scarce resources, Reputation and Buyer witching costs. The types of late-mover advantage are, Free-riding and learning. Also a Niche market is a way organisations can use to push their innovated products and services, because they are focusing on an area where other goods and services providers have neglected or have not yet gotten into.

Background of the Company and the International issues it’s facing

Starbucks was founded in 1971 by three men from Seattle, by the names of Jerry Baldwin, Zev Ziegler and Gordon Bowker who loved coffee and wanted to bring to coffee lovers in Seattle what Peet’s coffee provided to residents in the San Francisco Bay Area. They even named it after another coffee lover Starbuck in a novel.

They started off by selling primarily whole bean roasted Arabica coffee, tea, spices and some gourmet kitchen supplies in their first store. Alfred Peet agreed to sell Starbucks coffee under the stipulation that as soon they got too big they will have to roast their own bean, Alfred agreed to these because the founders had been longstanding, loyal mail-order customers of his.

After a decade Starbucks had four stores bringing great coffee to the Seattle area. And In 1984 the former vice president and general manager of Hemmerplast, Howard Schultz joined Starbucks as the director of operations and marketing and he brought a new vision to the company.

Change of ownership

In 1985, Schultz left Starbucks to pursue his vision, starting up an espresso bar called Il Giornale, which proved to be a tremendous success. Schultz left Starbucks because after his trip to Milan, Italy in 1983, he came up with the idea that Starbucks should have something like the Italian coffee bar, but the founders of Starbucks resisted this idea saying it doesn’t fit with the whole idea of Starbucks store that it was more of a concept for a restaurant.By 1987 Schultz was operating 3 cafes similar to Il Giornale, and in that year Bowker and Baldwin were looking to sell Starbucks, with Zielgler having sold his interest in 1980. Il Giornale acquired the assets and the name “Starbucks Coffee Company” and became the Starbucks Corporation.

Growth, Success, Location and Strategy

Schultz hired Howard Behar to the position of stores director and together both of them began a rapid expansion, believing that building recognition is the only way to fend off competition. A key part of this was building more stores. Starbucks was unprofitable in its first three years, and in 1992 it became a publicly traded company, raising the necessary capital to fund its continued expansion. Their initial expansion period was undertaken solely through organic growth. Schultz believed that the only way to ensure success was by building only company-owned stores to maintain full control of customer experience. This was the sought of differentiation strategy employed by Starbucks, by building a strong brand, a unique culture and a distinctive customer experience.

Starbucks initial strategy was to purchase and roast high-quality whole bean coffees and sell them along with fresh rich-brewed coffees and Italian-style espresso beverages, primarily through company-operated and licensed retail stores. The average Starbucks offered a range of product diversity, asides from their known freshly roasted whole bean coffees, they offered fresh pastries, sodas, juices, and coffee-related hardware products and equipment. Beginning in 2007, Starbucks continued with its extension of its food offerings, by including warm breakfast sandwiches, dessert selections and pre-packaged launches, but they never deviated from selling “the finest whole bean coffees and coffee beverages.” As a means of maintaining control of quality and to ensure that rigorous standards are complied with, Starbucks used vertical integration, by controlling its coffee sourcing, roasting and distribution through its retail stores.

In terms of location, Starbucks stores where clustered in high-traffic, high-visibility locations in each market. In choosing retail locations, Starbucks looked for stores that were convenient for pedestrian street traffic, which is why they could be found in variety of settings such as retail centres, office building, kiosks, university campuses and airport terminals.

When it comes to product supply, Starbucks regularly negotiates fixed price purchase commitments to secure an adequate supply of quality green coffee, seeing as the supply of the special type of coffee they require can be unpredictable, this helps bring greater certainty to the cost of sales in future periods.

Starbucks being the one that purchases the highest amount of high-quality coffee in the world, exporters of this coffee are always anxious to be their suppliers, this therefore gives Starbucks an advantage in its selection process and it’s sampling for quality standards.

In terms of competition in the beverage market it was generally fragmented. Starbucks competed directly against speciality retailers, speciality coffees sold at retail through supermarkets, and a growing number of speciality coffee stores, also they were competing against espresso stands, carts and stores. Starbucks believe was that customers chose a retailer because of quality and convenience and rarely on price.

Starbucks prided itself in its company’s culture; it says that at the heart of the company’s continuing success lie the company’s two cornerstones, coffee and the people. Starbucks had a very good reward system for its employees; by giving all employees irrespective of if they were part-time or full-time stock options, healthcare benefits and an allotment of free coffee per week.

Starbucks Growth Modes

Starbucks growth was pursued through these three avenues: Existing product lines and distribution channels, increasing domestic penetration of stores, andinternational expansion. When Starbucks decided to increase its food offerings prior to 2003, it did not meet customer expectations and they had to pull the products. In 2007, Starbucks decided again to expand its food offerings and this time focusing on quality.

In terms of expansion, Starbucks was focused on domestic growth up to 1996, in areas within the United States and Canada. By 1997, Starbucks stores were heavily concentrated on the West Coast with 34 of the 54 states.

Starbucks started its international expansion in the mid 1990s.

Starbucks Existing Growth Choice Modes

Starbucks used a combination of organic growth, acquisition, joint venture and franchise to grow their chain of specialty coffee stores.

In the United States, they pursued organic growth model: Starbucks was unable to fuel its expansion with acquisitions and had to build its empire store by store, because it was offering U.S consumers a relatively new value proposition. By 1991, Starbucks had 105 stores, and with the help of the money raised from trading the company publicly in 1992, Starbucks could be found in 725 U.S./Canadian locations by 1995. From 1996-2008, U.S./Canadian company operated Starbucks stores grew from 926-7969, while its licensed U.S./Canadian stores grew from 75-4560.

In Japan, Starbucks pursued a joint venture strategy. Japan was Starbucks first international venture. With an attractive market and a pre-existing taste for coffee, Japan was selected as the logical entry point for the region with them being the second-largest economy in the world and consistently among the top five importers of coffee in the world. Starbucks entered the Japanese market by entering into a 50-50 joint venture agreement with Sazaby Inc, operators of upscale retail and restaurant chains who had approached Starbucks earlier. Once the Starbucks stores in Japan were launched it boasted the single largest number of Starbucks outside North America.

In the United Kingdom Starbucks pursued acquisition as the mode of entry. The U.K market was entered in May 1998, through the acquisition of the Seattle Coffee Company. Through this purchase, Starbucks acquired 56 retail units. By end of 2000, the units had grown to 156units and by end of 2008, it had 664 units. Seattle Coffee Company was choosing by Starbucks as its target acquisition because of its focus, its relatively small valuation, and its established retail units.

In China Starbucks entered the market through the use of licensing. Expansion into China was through licensed stores, 9 in 1999 and 28 in 2000. China was one of the most risky markets that Starbucks entered into. By 2008 in China there were 178 Company operated stores and 269 licensed stores.

Future of Starbucks

By 1998 Starbucks was seen to be on its way to becoming the Coca-Cola of specialty coffee segment by industry analysts. This was due to the fact that it was the only company close to national market coverage. The company’s immediate objective is to have 2,000 stores by year 2000 in operation, but its long term objective is to become the most respected and recognised brand of coffee in the world. Schultz way of reinventing the company involved going into joint ventures, Licensing agreements and FDI. Schultz also believed that for the company to continue to grow it had to be innovative, take risks, invest in its employees and always put its customers needs first, all this are to be done by getting the right people, acquiring the right location, having the right design in place for its stores and investing in customer-focused initiatives.

Analysis of Starbucks

Company’s current situation:

Starbucks is currently in a situation where there is high market saturation, which is leading them to close some of their stores, although the closure of these stores by Starbucks is not just because of market saturation it has to do with the company looking ahead at its future prospect. According to the Internal Memo Schultz sent to then CEO Jim Donald in 2007, he was concerned the Starbucks experience was becoming diluted. Schultz stated an example in terms of the purchase of the automatic espresso machine which solved problems of efficiency and speed of service but it eliminated the interaction the customers got from employees when their coffees were been made and the height of the machines blocked customers view. Also the fact that that baristas didn’t have to start grinding coffees fresh in front of customers caused a loss of aroma in the store which was one of Starbucks trade marks.

Starbucks design is no longer in line with the older designs which reflects a neighbourhood store now its just like a chain of stores, even though this new concepts where done in order to gain efficiencies of scale and too satisfy the financial aspect of Starbucks it was detrimental to the company’s overall vision.

Also Starbucks was focusing more on infrastructure ahead of growth curve, and it also focused on innovation and creativity, rather than customer-facing initiatives. This led Starbucks to be bureaucratic and the atmosphere in the stores were reflecting this.

Starbucks situation was one where rapid growth was leading to problems for the company; Schultz therefore decided that the best strategy was for the company to slow down its growth process, there will still be expansion in some areas internationally and locally, but underperforming stores will be closed, so that attention can be focused on store-level unit economics.