Coffee and Starbucks

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“Starbucks FDI”

Case Study

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

Because this strategy did not give Starbucks the control needed to ensure that the licensees closely followed Starbucks’ successful formula.

Note: “Starbucks successful formula” refers to its basic strategy, which was:

To sell the company’s own premium roasted coffee, along with freshly brewed espresso-style beverages, a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting also providing superior customer service.

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

I am sure it is one of the most important Starbucks’ strategies: to license its format to foreign operators and also establishing local joint ventures with them. This fact (as I said before) gives Starbucks the control to be sure that licensees are following its success formula; “licensed to the venture” means that both joint owners have the responsibility for growing the business (Starbucks) presence where it has established.

For example: at the beginning Starbucks decided to enter to Japan by licensing its format to foreign operators, but later it become a bad decision because Starbucks did not have the authority to control this new business was still following Starbucks successful formula. It is when Starbucks improved this situation adding to the license a joint venture, so both companies which participated as joint owners had the commitment and responsibility to work together in order to get the best result=sales.

So it is clear Starbucks’ strategies had been innovated, in the way that it doesn’t want to affront directly a new business in other countries, Starbucks has been operating in foreign markets by sharing the costs of being international, working on the advantages the foreign joint owner may provide, and also preparing the foreign working party by some trainings given by American experts (American employees).

Example: In Japan, Starbucks decided to train the foreign working party by transferring some employees from the USA, so they could teach them the way to deal with customers and to follow the “Starbucks essence” in their behavior.

Talking about strategic alliances, Starbucks got some important advantages for expanding internationally through local joint ventures (to whom it licenses its format):

-A facility entry into foreign markets

-Starbucks shared fixed costs (and associate risks) of developing this service into new markets.

-This alliance was a way to bring together complementary skills and assets that neither company could easily develop on its own (Starbucks provided to the joint venture the “success formula” = expertise = management know-how; however, the other joint owner provided the experience in that specific country, the national identity to facilitate the entry of the business and to make the costumers feel comfortable with the service (because it is established in their country and identified with their feelings and customer demands).

3. What are the advantages of a joint-venture entry mode for Starbucks over entering through wholly owned subsidiaries? On occasion, Starbucks has chosen a wholly owned subsidiary to control its foreign expansion (e.g., in Britain and Thailand). Why?

-The risks associated with learning to do business in a new culture are less if the firm acquires an established host-country enterprise.

-Starbucks benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language and political systems.

-A joint venture makes a good combination: it provides not only management know-how, but also marketing expertise and the necessary local knowledge for...
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