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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
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“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

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