1. Initially Starbucks expanded internationally by licensing its format to foreign operators. It soon became disenchanted with this strategy. Why?
When Starbucks started its international expansion in Japan, it initially decided to license. As it is known licensing is "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor". Advantages of licensing are obvious: it is less expensive, less risky as the risk is held by licensee and it ensures additional profitability with less initial investment. However, licensing has disadvantages and for Starbucks the main disadvantages of licensing in Japan are: • This strategy did not give Starbucks the control needed to ensure that the licensees closely followed Starbucks’ successful formula. “Starbucks successful formula” refers to its basic strategy: 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 and also providing superior customer service. Starbucks found it necessary to successfully replicate the look, feel, and experience of an American Starbucks that is why Starbucks transferred American employees to the Japanese stores to help train workers in the Starbucks way.
• With licensing Starbucks had limited control of expansion rate. Simultaneously with entering the market in Japan, in US Starbucks developed new cold beverage (Frappuchino) with Pepsi, signed contract with Dreyer’s for making ice cream. However, the expansion rate in Japan was not controlled under licensing agreement as could be done in US and the realization of new products was slow in Japan.
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 using to a pure licensing strategy?
Joint venture is "an enterprise in which two or more investors share ownership and control over property rights and operation". In short, the advantages of joint venture are: the company can be more informed about the situation in the market and how the consumers respond to the products; the fixed costs for new product entrance are shared with the company; synergy effect can be achieved. The main disadvantages of joint ventures are that more capital investment is needed versus licensing; the financial losses and risks are higher compared to licensing; a potential conflict between partners exists. By using joint ventures Starbucks managed to share the cost and risks of developing its foreign markets with the licensee and at the same time to have higher control over the operations of the licensee. Another reason for expanding through local joint ventures was that Starbucks had access to local knowledge through the partner and can measure the process of product adaptation. Pure licensing did not give enough power to Starbucks to control which helped Starbucks to sustain competitive advantage. The pure licensing limits the important information about market situation in the country.
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?
Entering a new market is always risky and is accompanied with huge costs. Using joint venture model allows Starbucks to have controls over those risks by sharing them with a local company. The advantages of joint ventures, if compared with the wholly owned subsidiaries, are the opportunities to share the costs and risks associated with entering and developing in the market, having access to greater resources as well as getting acquainted with...
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