Cross-Cultural Issues in International

Business

Starbucks Transition Case (USA-China)

Academic Year: 2010/11

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 CONTENTS

INTRODUCTION....................................................................................................................................3
BACKGROUND INFORMATION........................................................................................................................3
COMPETING IN A GLOBAL MARKET............................................................................................4
ADJUSTING THE CONCEPT............................................................................................................................4
SENSITIVE ISSUES.......................................................................................................................................6
HOFSTEDE’S CULTURAL DIMENSIONS........................................................................................8
THEORETICAL BACKGROUND.......................................................................................................................8
POWER DISTANCE INDEX (USA 40 VS. 80 CHINA).....................................................................................9
INDIVIDUALISM (USA 91 VS. 20 CHINA)...................................................................................................9
MASCULINITY (USA 62 VS. 66 CHINA)..................................................................................................10
UNCERTAINTY AVOIDANCE (USA 46 VS. 40 CHINA)................................................................................10
LONG-TERM ORIENTATION (USA 29 VS. 118 CHINA)...............................................................................10
CONCLUSION.......................................................................................................................................11
BIBLIOGRAPHY..................................................................................................................................12
ONLINE CONTENT.....................................................................................................................................12
BOOKS...................................................................................................................................................12

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Introduction

This project is going to present and discuss in cultural terms the

transition of one of the world’s most successful coffee producers and retailers
from the United States of America: Starbucks, into one of the toughest
markets to access and understand: China.
Te text will try to assess the problems that had to be addressed to
ensure integration into Chinese culture and it will highlight the differences
between the American and Chinese culture. Whilst identifying these
differences, solutions towards tackling them will be proposed along the way
without creating a separate recommendations section.

Background information

Starbucks Corporation is a Seattle, Washington-based coffee

company. It buys, roasts, and sells whole bean specialty coffees and coffee
drinks through an international chain of retail outlets. From its beginnings as a
seller of packaged, premium specialty coffees, Starbucks has evolved into a
firm known for its coffeehouses, where people can purchase beverages and
food items as well as packaged whole bean and ground coffee.
Starbucks is credited with changing the way Americans—and people
around the world—view and consume coffee, and its success has attracted
global attention. Starbucks has consistently been one of the fastest growing
companies in the United States. Over a 10-year period starting in 1992, the
company’s net revenues increased at a compounded annual growth rate of 20
percent, to $3.3 billion in fiscal 2002. Net earnings have grown at an annual
compounded growth rate of 30 percent to $218 million in fiscal 2002, which is
the highest reported net earnings figure in the company’s history.
On Wall Street, Starbucks is the last great growth story. Its stock,
including four splits, has soared more than 2,200 percent over the past
decade, surpassing Wal-Mart, General Electric, PepsiCo, Coca-Cola,

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Microsoft, and IBM in total return. Now at $21, it is hovering near its all-time
high of $23 in July, before the overall market drop. (2008, BusinessWeek)
To continue this rapid pace of growth, the firm’s senior executives are
looking to expand internationally. Specifically, they are interested in further
expansion in Europe (including the Middle East), Asia Pacific (including
Australia and New Zealand), and Latin America. Expanding in these three
continents represents both a challenge and an opportunity to Starbucks.
While the opportunity of increased revenues from further expansion is readily
apparent to the company’s top management, what is not clear is how to deal
with growing “antiglobalization” sentiment around the world. This case looks at
issues that are arising as Starbucks seeks to dominate specialty coffee
markets in China, and explores what changes in strategy might be required
culture-wise.

Competing in a Global Market

Howard Schultz, Starbuck’s Chief Executive until 2002, currently
chairman and chief global strategist, saw China as his biggest next global
market, in terms of expansion and profits. His goal is to: “Establish Starbucks
as the premier purveyor of the finest coffee in the world while maintaining
uncompromising principles as we grow. ”The company’s 25-year goal is to
“become an enduring, great company with the most recognized and respected
brand in the world, known for inspiring and nurturing the human spirit.” The
company’s mission statement articulates several guiding principles to
measure the appropriateness of the firm’s decisions. In describing Starbucks’
unique approach to competition, Fortune notes: The strategy is simple:
Blanket an area completely, even if the stores cannibalize one another’s
business. A new store will often capture about 30 percent of the sales of a
nearby Starbucks, but the company considers that a good thing.

Adjusting the concept

First of all a clear definition of how the “coffee” concept is understood

within each of the two cultures has to be brought forward. This will enable a

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better practical understanding of the essential points that matter when it
comes to the values and products that Starbucks is offering.
At 7:45 in the morning in a downtown Seattle Starbucks, customers
want their coffee to go, and now. Hands clutching cell phones and briefcases
fumble to toss the latest Beck CD onto the counter or maybe tuck a pound of
beans under the elbow for later. The Chinese, though, are remaking the
"Starbucks Experience." Mostly eschewing to-go coffees and foods – and
certainly music purchases -- they're opting for on-site dining on curry puffs
and moon cakes during the Chinese Mid-Autumn Festival. They can sit for
hours. "In Hong Kong and China, coffee is still more of a social event than a
daily necessity" said Michael Wu, 34, the managing director of Maxim's
Caterers, Starbucks' joint venture partner in Hong Kong, Macau and southern
China. "People come to meet their friends and talk." Wu said that Starbucks
has increased the size of the stores he oversees in Hong Kong and in China
to around 2,000 square feet, to accommodate all the customers enjoying a sit-
in atmosphere. It is a testament to the "Third Place" concept, often used by
Chairman Howard Schultz to describe Starbucks -- that home away from
home where, for a premium, the host serves you coffee and offers up CDs
and candy, too. In the United States, though, Starbucks revenue is driven by
the speed and frequency of its transactions, as people grab their coffee, and
maybe a sandwich, before scurrying out the door to their next appointment.
But in the five years that it has operated in Hong Kong, Starbucks has
come to be viewed as a destination restaurant rather than a coffee take-out
shop, helped by Maxim's Caterers' experience as Hong Kong's largest
catering conglomerate. "The Chinese especially, they mostly cannot drink
coffee alone, it must go with food," said Wu, explaining the generalized
Chinese notions of coffee that Starbucks is hoping to transform. "That's why
our sales per customer are higher than in the United States -- they buy food
with their coffee."
Wu said that less than 5 percent of the Starbucks business in China
that he oversees is take-away, unlike the United States, where it is the vast
majority of sales. "They come here and make use of the store, which is why
they will pay a premium," said Wu. "For take-away to take off, we need to get
loyal customers to be coming in 10 times a month until it becomes a part of

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daily life." Wu said that Starbucks does most of its business in Hong Kong
during the afternoon and night time, when people gather to review their day
with friends and family, unlike the United States, where much of Starbucks'
traffic is driven during the morning. Despite the cultural differences, business
is going extremely well. Wu plans to expand by about 10 stores per year in
Hong Kong, where real-estate prices have skyrocketed in the past two years.
And he's working to change some buying habits there. "Starbucks, apart from
coffee, sells many other items, like beans, mugs, music. But in Hong Kong
and China, that has yet to take off," said Wu, who said sales of CDs and
whole coffee beans are sluggish in China. "In Hong Kong, we will embark on
other sales distributions channels, but in China, it is not part of our initial
strategy ... for the first five years." (2009, Seattlepi)

Sensitive issues

Apart from the daily cultural habits, there are some other issues that
have to be addressed. And one of them is Beijing, and its Forbidden City.
Starbucks touched a nationalist nerve in 2000 when it opened a small coffee
shop in Beijing’s Forbidden City. In highlighting this particular store, The New
York Times noted: Starbucks opened its Forbidden City shop a month ago
with a signature menu board advertising the usual Americano and decaf latte
coffee and a glass display case filled with fresh lazed donuts, cinnamon
rings, and banana walnut muffins.
Starbucks, for its part, had taken extraordinary care to ensure that its
presence was unobtrusive. To avoid ruining the atmosphere of the Forbidden
City, the signs and brand images were placed inside for this store. This small
store (barely a closet according to some reports) had only two small tables
and few chairs. It was located on the edge of the Forbidden City, among 50
other retailers, including some selling souvenirs and trinkets. Despite such a
low-key presence, this store ignited controversy.
Dozens of Chinese newspapers reported on reactions to the shop.
According to one such report in the People’s Daily: The reason for the uproar
is due to the cafe’s location: the Forbidden City, the world’s largest imperial

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palace. First constructed in 1406, the Forbidden City is China’s best-
preserved ancient architecture encircled by a rampart of three kilometers. The
cafe, named Starbucks, is situated in the south-eastern corner of the Hall of
Preserving Harmony (Baohedian), one of the three most impressive buildings
on the palace ground. The hall used to be the venue to hold feasts by
emperors and nobles of ethnic groups on New Year’s Eve of China’s lunar
calendar.
Debates over the mini-cafe took place first on Web. A survey by
Sina.com showed that over 70 percent of nearly 60,000 people surveyed were
opposed to the cafe’s entry into the Forbidden City, the main reason being the
damaging effects to Chinese cultural heritage and its atmosphere. The
administrators of the Forbidden Palace and other government officials took
note of the controversy but were supportive of Starbucks. Chen, a
spokesperson for the Forbidden City Museum, maintained that allowing
Starbucks into the Forbidden City was part of their efforts to improve services
in the area. Moreover, Chen added: “The reaction has been very intense.
Some people say this is a gem of Chinese culture and that foreign brands
should not be allowed in. We can’t give up eating for the fear of choking.”
Depending on the quality, the location of a newly opened premise was
classified on a scale from A to D. According to Horwat: The Forbidden City
location was a “C” site at best. But definitely not a “D” site, because there was
still the benefit of brand presence. But the government said, “We think you
should come in,” and it was difficult to say no. There was no local community,
only tourists. Following the flurry of articles in the Chinese media, CNN began
to run news clips of this story in the United States. Watching this unfold in the
U.S. media, some senior managers at Starbucks became alarmed at the
negative publicity. According to Soon Beng Yeap: The immediate reaction
was to “close the store!” due to the relentless negative coverage generated by
the international media. After serious discussion among the senior executives,
we felt as guests in a foreign country, we should be respectful of our hosts -
the Forbidden City officials - who invited us to be there in the first place. We
decided to not pull out because it was the international media that stirred up
the whole controversy.

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 Unlike the Primrose Hill case, there was no real local community “push-
back.” It was all media-driven. A few reporters got hold of the story and ran
with it, all citing the same survey by Sina.com. We were very disappointed by
the negative media coverage, which created a false sense of “cultural
imperialism” about our intentions in opening the store, especially when we
worked very hard to be culturally sensitive and listen to the local community.
(2000, Daily Mail)

Hofstede’s Cultural Dimensions

Theoretical background

National cultures can be described according to the analysis of Geert

Hofstede. These ideas were first based on a large research project into
national culture differences across subsidiaries of a multinational corporation
(IBM) in 64 countries. Subsequent studies by others covered students in 23
countries, elites in 19 countries, commercial airline pilots in 23 countries, up-
market consumers in 15 countries, and civil service managers in 14 countries.
Together these studies identified and validated four independent dimensions
of national culture differences, with a fifth dimension added later: Power
Distance, Individualism, Masculinity, Uncertainty Avoidance, Long-Term
Orientation.
The two graphs below are highlighting the cultural differences between
USA and China in respect to each of the Hofstede’s Dimensions:

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Power Distance Index (USA 40 vs. 80 China)

Of note is China's significantly higher Power Distance ranking of 80

compared to the other Far East Asian countries' average of 60, and the world
average of 55, and most importantly, USA’s 40. This is indicative of a high
level of inequality of power and wealth within the society. This condition is not
necessarily forced upon the population, but rather accepted by the society as
their cultural heritage.
The second lowest ranking Dimension for the United States is Power
Distance (PDI) at 40, compared to the world Average of 55. This is indicative
of a greater equality between societal levels, including government,
organizations, and even within families. This orientation reinforces a
cooperative interaction across power levels and creates a more stable cultural
environment.

Individualism (USA 91 vs. 20 China)

The Chinese rank lower than any other Asian country in the
Individualism (IDV) ranking, at 20 compared to an average of 24. This may be
attributed, in part, to the high level of emphasis on a Collectivist society by the
Communist rule, as compared to one of Individualism.
The low Individualism ranking is manifest in a close and committed
member 'group', be that a family, extended family, or extended relationships.
Loyalty in a collectivist culture is paramount. The society fosters strong
relationships where everyone takes responsibility for fellow members of their
group.
The high Individualism (IDV) ranking for the United States indicates a
society with a more individualistic attitude and relatively loose bonds with
others. The populace is more self-reliant and looks out for themselves and
their close family members.

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Masculinity (USA 62 vs. 66 China)

The second highest Hofstede Dimension is Masculinity (MAS) with a

ranking of 62, compared with a world average of 50. This indicates the
country experiences a higher degree of gender differentiation of roles. The
male dominates a significant portion of the society and power structure. This
situation generates a female population that becomes more assertive and
competitive, with women shifting toward the male role model and away from
their female role. However, in China, this phenomenon is even more
profound.

Uncertainty Avoidance (USA 46 vs. 40 China)

Another Dimension for the US is Uncertainty Avoidance (UAI), with a

ranking of 46, compared to China’s 40. A low ranking in the Uncertainty
Avoidance Dimension is indicative of a society that has fewer rules and does
not attempt to control all outcomes and results. It also has a greater level of
tolerance for a variety of ideas, thoughts, and beliefs. Although the two values
are similar, the 6 points downward difference would still be noticeable within
Chinese culture.

Long-Term orientation (USA 29 vs. 118 China)

Geert Hofstede analysis for China has Long-term Orientation (LTO) the
highest-ranking factor (118), which is true for all Asian cultures. This
Dimension indicates a society's time perspective and an attitude of
persevering; that is, overcoming obstacles with time, if not with will and
strength.
The LTO is the lowest Dimension for the US at 29, compared to the
world average of 45. This low LTO ranking is indicative of the societies' belief
in meeting its obligations and tends to reflect an appreciation for cultural
traditions.

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Conclusion
The only way for Starbucks to succeed is to understand what other
companies that tried to go international didn’t and failed. That is when a
company encounters a culture essentially different than theirs, the only way to
adapt and be successful is to understand it. And the proven way to
accomplish that aim is to employ a local management team for its abroad
subsidiary. Even though this might not completely rule out any communication
issues with the headquarters, at least it ensures that the company’s image
and products, are perceived in a way that appeals to the local public. And that
might make the difference between success and failure.
That is a shout to the world that Starbucks is planting roots in China,
which Chief Executive Jim Donald said will be the company's largest market
outside of the United States. Currently owning more than 400 stores in China,
Starbucks is still barely dipping its toe in a market also targeted by local
competitors such as Pacific Coffee and fellow global giants McDonald's and
Kentucky Fried Chicken, who have McCafes and K-Cafes there. But it was an
all-time successful dip. Given its adaptation in China, perhaps Starbucks will
find itself offering in India a mango lassi, and in Russia, instead of a moon
cake, how about a piroshki with that latte?

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Bibliography
Online content

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Lashinsky, A., 2006. Starbucks: vision & strategy, Fortune, [online] Available
at: <http://money.cnn.com/magazines/fortune/> [Accessed 19 November
2010].

Bolt, K. M., 2009. Starbucks adjusts its formula in China, Seattlepi, [online]
Available at: <http://www.seattlepi.com/business> [Accessed 28 November
2010].

Kirk, R., 2003. Accessing new cultures, People’s Daily, [online] Available at: <
http://english.peopledaily.com.cn/> [Accessed 10 December 2010].

Buhmiller, E., 2003. Starbucks entering Forbidden City, New York Times,
[online] Available at < http://www.nytimes.com/> [Accessed 14 November
2010].

Jiabao, W., 2003. Starbucks on sensitive territory, Sina, [online] Available at <
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Taylor, S., 2003. Transnational business, SigmaTwoGroup, [online] Available

at < http://www.SigmaTwoGroup.com> [Accessed 03 December 2010]

Books

French, R., 2010, Cross-Cultural Management in Work Organisations. 2nd ed.

London: The Chartered Institute of Personnel and Development

Schneider, S. Barsoux, J-L., 2003. Managing across Cultures. 2nd ed. New
York: Pearson EducationLtd.

Hampden-Turner, C., 2000. Building Cross-Cultural Competence, London:

Yale University Press

Hofstede, G., 1997. Culture and Organisation: Software of the Mind. London:
McGraw-Hill

Holden, N., 2002. Cross-Cultural Management: a Knowledge Management

Perspective. Harlow: Financial Times Prentice Hall

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