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Rivera

Análisis del caso “Starbucks’ FDI”

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
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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
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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?

-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 competing in the foreign country.

-Although Starbucks is a very rich enterprise, it is always important to save

expenses, so the best strategy for Starbucks is to create a joint venture
where the other joint owner has the responsibility to share costs, risks and
work together in the “fight” against the competition.

On occasion, Starbucks has chosen a wholly owned subsidiary

to control its foreign expansion (e.g., in Britain and Thailand).
Why?

Because Starbucks felt those specific joint ventures would not be able to
achieve the company’s aggressive growth targets.

Starbucks has been always interested to create joint venture

arrangement where both join owners are able to invest in the venture,
so when Starbucks noticed Thailand and Britain did not relied with
enough resources for opening at least 20 Starbucks coffee stores in
those countries (respectively) within five years: it decided to acquired
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both ventures, which goal was to gain righter control over the
expansion strategy (in Britain and Thailand).

3. Which theory of FDI best explains the international

expansion strategy adopted by Starbucks?

HORIZONTAL FOREIGN DIRECT INVESTMENT1

It is known that one of the most important advantages Horizontal FDI gives
to the enterprise that practices it, is the fact that the enterprise finds more
profitable to have another operator to produce abroad than to pay the
commerce barriers […] it is not really the case of Starbucks, because the
advantage of its FDI is not to save money of payments in commerce barriers
(exporting would not be useful because this enterprise does not sell a
product directly, its main direction is to sell the service), it is to have an
important presence in as many countries as possible, obviously to earn much
more money and to create one of the best value brand.

However, the mean characteristics of Horizontal FDI Starbucks practices are

in the following points:

-Market Imperfections (Internalization Theory).

Impediments to Exporting: in this case, it does not refers to commerce

barriers payments, the main reason that causes almost impossible for
Starbucks to exporting (talking about products, not knowledge) is the
fact that Starbucks competitive advantage is not the product, it is the
capacity of having presence in a lot of countries giving to customers a
supreme service that only Starbucks can provide.

Impediments to Sale of Know-How: “when tight control over a foreign

entity is desirable, horizontal FDI is preferable to licensing”; both facts
were attacked by Starbucks strategy based in giving trainings to the
foreign employees (also to the other join owner) and creating a joint
1
“Horizontal Foreign Direct Investment” means the investment in the same industry abroad
as a firm operates in at home.
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venture to whom it licenses its format, so that Starbucks has been able
to control the activities and the developing of the coffee stores around
the world.

Note: Although Starbucks’ skills are embedded in its organizational

culture, and culture is something that cannot be licensed… the
strategy was the trainings and the creation of the joint venture (to
whom it licenses its format).

-Location Specific Advantages – Strategic Behavior: in this case, it is

important to describe the relation between location specific advantages and
strategic behavior that provides to Starbucks important benefits on its
international expansion.

The international expansion strategy adopted by Starbucks is mainly

managed to have presence in as many countries as possible, of course it will
give Starbucks enough revenues and a better value brand.

Starbucks has entered to many countries by analyzing the possibilities to

create long term value, taking advantage of the opportunities this service
(coffee stores) might have if the joint owners worked together to improve the
results…

The most important location specific advantages that Starbucks had used
are: to enter into a foreign country by joint venture, where the company will
provide significant skills about: investment (enough money to invest) and
knowledge of the foreign country (costumers).

The strategic behavior that Starbucks has undertaken is: to use all the
advantages foreign joint owner can provide, and also to share [Starbucks]
the knowledge; to train foreign employees and joint owner; to take control
about the following of the “Starbucks successful strategy”; to give a supreme
service to customers, making them feel comfortable and spoiled; to create a
very good value on the brand; to improve and innovate the service given in
each country, making an enterprise characterized by its quality in each
branch.

CPRM