MGT 3140

International Business
Strategy
Group Report (Starbucks)

Date of Submission: 18-Feb-2011

FINAL YEAR REPORT (MIDDLESEX
UNIVERSITY)

IF THIS MATERIAL WAS HELPFUL, PLEASE

FREELY UPLOAD YOUR FINISHED WORK IN
ORDER TO HELP OTHERS. ENJOY!!

1
 Contents

CHAPTER 1–EXECUTIVE SUMMARY....................................................3

CHAPTER 2–COMPANY PROFILE........................................................3

CHAPTER 3-EXTERNAL AND INTERNAL ENVIRONMENT.....................5

PESTEL ANALYSIS..............................................................................5

SWOT ANALYSIS................................................................................9

CHAPTER 4–MOTIVATION FOR EXPANSION......................................11

INDUSTRY BASED VIEW......................................................................12

RESOURCE BASED VIEW.....................................................................13

INSTITUTION BASED VIEW...................................................................14

CHAPTER 5-LOCATION DECISION....................................................15

OPPORTUNITIES..............................................................................16

THREATS.......................................................................................20

CHAPTER 6-ENTRY MODE...............................................................23

CHAPTER 7-CONCLUSION...............................................................27

REFERENCES................................................................................... 28

CHAPTER 1–EXECUTIVE SUMMARY

This report aims to evaluate Starbucks’ past and present performance in order to most

2
importantly stipulate the future position of this largely successful company. Being that
the company’s objective centers around expansion, this report tries to identify a likely
attractive target country (India) for such plans. The analysis uses SWOT, PESTEL,
Industry Based View, Market Entry Mode and other similar evaluative tools to reach an
understandable and valid conclusion that India provides varied opportunities for
expansion that can be exploited by Starbucks.

CHAPTER 2–COMPANY PROFILE

The current mission statement of Starbucks is “to inspire and nurture the human spirit
by one person, one cup and one neighbourhood at a time” (Starbucks.com).

The first Starbucks store was opened in Seattle on March 30 th 1971 by three partners and
the name of the store originated from the novel Moby Dick. The firm believes in
supplying and serving the best coffee possible by using the highest standards of quality
whilst adhering to ethical trading and responsible growing practices at the same time. In
1987 the first stores were opened outside of Seattle, in Vancouver and Chicago and in
the subsequent years stores followed the expansion were much more extensive across
North America.

Starbucks sells a variety of products which include high-quality whole bean coffees along
with fresh rich-brewed coffees, Italian-style espresso beverages and cold blended
beverages, a collection of complementary food items and also a selection of premium
teas and beverage-related accessories and equipment (starbucks.com).

There are conflicting reports on the overall market segment that Starbucks possesses,
although according to Mintel a global consumer research firm Starbucks had a 73%
market share of U.S. coffeehouse sales in 2005, (usatoday.com) and this is significant
because the majority of its revenue comes from their home market which is $2.1 Billion
compared to an overseas share of just $640 Million (marketingmagazine.co.uk).

3
Amongst Starbucks’ many achievements is its spot of being #1 best coffee in the fast
food and quick refreshment categories and one of the “world’s most ethical companies”
(starbucks.com). Its performance as a multinational firm has increased over time and as
such led to expansion in global operations. The recession was a major factor that
impacted the company’s position because prior to that, Starbucks was known for having
a café around every street corner (msnbc.com). However prior to the recession in 2007,
their share price traded at $38.41 and a mere two years later the price had fallen to a
measly $9.91, “profits were down for the last three months of the year from an
astronomical $158.5 million to $5.4 million” (business.timesonline.co.uk).

The turnaround for Starbucks started with the restructuring of management where the
former chief executive Howard Schultz took back the role and set the company’s focus
on core markets and utilizing technological breakthrough to introduce Starbucks coffee
in an instant form (pr-inside.com). Starbucks went back to its roots by focusing on
customer service that was neglected during rapid expansion (Guardian.co.uk). All these
decisions helped contribute to the sales flourishing and “profits rising” to high levels
once again (bbc.co.uk).

The first location outside of north America was in Japan in 1996 which was followed by
an impressive $83 million acquisition of the UK based “Seattle coffee company” of which
there were 60 outlets at the time, all of which were then re-branded under the
Starbucks name. The global expansion continued into the Latin American, Asian and
European markets which resulted in Starbucks presently being the largest coffee
company in the world with over 16,500 stores in over 50 countries
(www.starbucks.com).

An examination of Starbucks’ internal and external environment should provide a good

basis for understanding the company’s turnaround, the foundation of its present

4
successes and what the future might hold it.

CHAPTER 3-EXTERNAL AND INTERNAL ENVIRONMENT

Businesses generally operate in a network and are not entirely independent because of
the several environments that influence their activities and actions (Zhu, 2010).
Examples of factors both from the internal and external (micro and macro) environment
that could influence Starbucks includes; competitors, customers, suppliers, financiers;
political, economical, social, technological, environment, and legislation.

The United States being Starbucks’ home market is pivotal in understanding the internal
and external environment that influences the company and its expansion. Coffee
statistics show that Specialty coffee sales are increasing by 20% per year and account for
nearly 8% of the 18 billion dollar U.S coffee market. Coffee shops across America are set
to exceed approximately 50,000+ by the end of 2011 (e-importz.com). This evidently
suggests that the growth of coffee consumption and a possible maturity of the American
coffee market may have caused overcrowding and influenced Starbucks to intensify
expansion plans (See Chapter 4).

PESTEL ANALYSIS
The following PESTEL analysis will aim to extensively evaluate Starbucks and understand
how the Political, Economical, Social Technological Environmental and Legal issues will
impact the company’s External environment since it relatively has minimal control over
such factors.

Political influences
Tariffs and International Trade regulations:
Countries belong to trading blocks such as APEC, G20 and most importantly CAIRNS
GROUP for agriculture (news.bbc.co.uk), where the main aim is to reduce the effects of
tariffs. However Global companies such as Starbucks are still affected because it

5
operates across borders and is in over 50 countries therefore high tariffs might mean
that Starbucks reputation and ability for sourcing the best coffee beans; which involves
importing from different countries could be compromised, subsequently affecting its
global sales and competitiveness.

Government stability:
Political stability of countries is an important issue that firms need to consider because
other indicators may point to a country as being investor friendly, however that could
rapidly change when there is elections or political instability (e.g. Egypt). This could
lead to massive disruption in a firm’s operations and strategy or in a worst case scenario
where Starbucks was forced to completely pull out of Israel because of such issues thus
negatively affecting its strategy for expansion.
Political influence is unfavourable in this case and presents a threat to Starbucks.

Economical Influences
Exchange Rates:
The falling dollar rates compared to other currencies (Bloomberg.com) which was
caused partly by weaker monetary policy will affect imports. Most of Starbucks’ vital
supplies such as coffee beans, sugar and milk will be affected because they are
imported, thus incurring higher cost due to weak dollar. This raises a question as to
whether the company will pass the extra cost to consumer and risk making its coffee
even more expensive.

Income Distribution:
After the economic crises of 2007 that led to job losses, unemployment figures rose (to
2.5 million in Britain 2010 – Office for National Statistics). This affected income disparity
which became unequal. Hence people that were previously able to afford Starbucks’
expensive specialty coffee now saw it as a luxury thus leading to low sales in some
locations. This in effect affects the company’s expansion plan. In this case Economic
Influences has an unfavourable impact.

6
Social Influences
Changing Tastes:
The changing taste in America indicates that people are consuming more specialty
coffee which amounted to about $1.3 billion in imports (Restaurant Hospitality). This
influences Starbucks because it provides an opportunity to exploit this market and gain
higher market share in the coffee market.
In India and China however, tea is still mainly preferred, so Starbucks might have to
alter its strategy there. This will not be too difficult taking into account the trend of
‘Americanisation’ and its success across developing countries so far.

Health consciousness:
Government’s push toward healthy eating in western countries due to concerns
regarding obesity might influence companies such as Starbucks to update its menu in
terms of introducing new lines and healthy alternatives to be sold together with coffee.
This in other words means that Social Influences is favourable and can provide an
opportunity for Starbucks.

Technological Influences
Wave of Technological trends:
Technological advancements have never been so fast, hence firms need to consistently
follow the trends and exploit any opportunities that may result and implement any
change required. For example, Starbucks have embraced the new phone payments
system that was introduced recently which helps cut long queues at peak times.

Social network memberships is growing by the millions e.g. facebook has over 500
million users and users have an average of 130 friends, additionally, time spent on the
site is over 700 billion minutes a month (facebook.com). Exploiting this trend offers
companies such as Starbucks a platform to relate and share ideas with customers. It has
already used social networking sites such as facebook (with over 19 million “friends”)
and a forum which it runs, to communicate and engage with customers and communities

7
(Economist.com). Technology has a favourable impact for Starbucks.

Environmental Influences
Environmental pressure groups:
Non Governmental Organisations and pressure groups possess incredible ability to coerce
businesses into changing their practices. They could influence businesses through
lobbying and boycotts. Such measures usually impact the intangible assets of a firm
which usually involves tarnishing a company’s brand name. Starbucks however works
with the “Fair-Trade movement” (Economist.com) and the accreditation that comes
with such alliance massively improved Starbucks’ image, hence Environmental influences
is favourable for Starbucks.

Legal Influences
Not all countries welcome big firms because they like to protect their indigenous firms
from unfair competition and takeover. Legal issues such as Monopoly and national
protectionist laws will affect Starbucks because of its size and its plan of expansion. E.g.
countries like India guard against such practices with a legislation that bars external
companies from owning more than 51% in a merger (see Section 5). The more this
happens in other countries, the more Starbucks expansion plan is restricted. Thus legal
influences are unfavourable for Starbucks.

In summary, the PESTEL analysis found that External influences was altogether balanced
since Sociological, Technological and Environmental factors were favourable, while the
other factors such as Political, Environmental and Legal factors still pose a valid threat.
Nonetheless Starbucks’ strengths counteracts some PESTEL factors because although it
can’t control the external environment, it has become more flexible to change (closing
600 stores in order to adapt) and is quick at exploiting opportunities. As Accenture (the
consultant company) puts it; “out–thinking the competition is useless unless you can out-
execute them as well”.

8
SWOT ANALYSIS
Strengths
Brand Image:
Starbucks is amongst one of the very few companies that have managed to successfully
create market awareness and stir up consumer interest in specialty coffee while at the
same time preserving brand dominance. Its focus on consistency in delivering positive
consumer experience stresses the point about consumer visits to its cafes being an
‘Experience’ rather than just seeing it as another coffee maker (workforce.com).
Starbucks’ recent change of Logo demonstrates confidence in public awareness of its
brand and follows the likes of McDonalds and Nike that are easily identifiable by logo
alone (marketwatch.com) See Chapter 4.

Unique Strategy:
The Ability to capture key locations and open stores in close proximity to each other is a
unique strategy for Starbucks. This ensures that franchises that don’t meet set
achievements are closed down. Therefore only the most profitable stores that maintain
high sales, and retain the most customers survive.

Valued and motivated employees:

The cafe industry is to some extent dependent on front house staff, their attitude and
their ability to make customers come back. Starbucks promotes an environment that
encourages team working and collaboration. As such it encourages managers to follow its
motto of ‘hire the personality, train the skill’. Hence through exceptional service,
customers keep coming back. Arguably, Starbucks has one of the lowest staff turnover
rate in the industry (workforce.com).
The strengths provide a favourable impact.

Weaknesses
Over-reliance on home market:
Although the American coffee market is worth over $18 Billion (e-importz.com), over-

9
reliance on this market leaves Starbucks vulnerable to unforeseen changes that might
occur in such market. E.g. recession affects disposable income for customers and
subsequently, profits. Thus the management decision to focus mainly on the US market
makes it a weakness.

Aggressive Expansion:
Due to the takeover and acquisition of local community coffeehouses and buildings,
Starbucks has been labeled the ‘Tesco of coffee’ after a backlash from local residents
due to closures of local shops. This has lead to boycotts and increasing membership of
sites like ihatestarbucks.com. They see Starbucks’ aggressive expansion as an erosion of
their local environment and culture. This in effect means that weakness is an
unfavourable impact.

Opportunities
Entry into new markets:
Global companies that plan for expansion usually seek out attractive countries with such
opportunities. In a bid to increase its world wide presence, Starbucks has opened a
range of stores and operates in over 50 countries with 16,000 coffee shops
(Starbucks.com). Starbucks is currently on its way to exploiting potentially lucrative
markets such as India (marketwatch.com) that will provide it with opportunities of
revenue growth.

The above point directly links to Political factors in the External Environment analysis
where on a global scale more countries are embracing open door policies to foreign
companies rather than protectionism. This is favourable for Starbucks in its expansion
plan and will assist it in securing the finest coffee beans due to countries being more
welcoming.

Growth in coffee market:

The general taste of coffee drinkers in America is shifting towards the more expensive

10
organic coffee which accounted for $1.3 billion in imports (Restaurant hospitality).This
links to the Social factors identified in the External analysis and relates to changing
tastes. This is favourable because it provides an opportunity for Starbucks to expand its
customer base with the possibility of higher profit margins as a result. Opportunities is
favourable for Starbucks

Threats
Competition:
Although the competitive threat from the specialty coffee sector is minimal,
competition from other sectors such as restaurants and other big coffee shops still
remain. The dominant threat from other competitors such as dunk’n donaughts and
especially McDonalds which was recently found to sell good coffee for better value is
damaging for Starbucks (digitaljournal.com). In other words this is an unfavourable
influence

The SWOT analysis however also shows Starbucks as being balanced as well because it’s
Strengths and Opportunities are favourable while it’s Weaknesses and Threats are
unfavourable. On closer analysis it could be said that Starbucks possesses more Strengths
than weaknesses and although all companies do have weaknesses, the fact that this is
within their internal environment means that it can change its practices in order to turn
its weaknesses into strengths. Nevertheless for the threats, constant scanning of its
environment and monitoring close rivals should assist it in developing strategies in order
to remain competitive and maintain (or if possible) increase it’s market share.

CHAPTER 4–MOTIVATION FOR EXPANSION

One of the best ways to increase market share is to internationalize. After analyzing the
company’s PESTEL and SWOT analysis, a range of opportunities and threats have been
identified. However Starbucks has more strengths than weaknesses that make the
company more competitive in the coffee industry. The motives to go abroad can be

11
analysed from three different perspectives: Industry-based, Resource-based and
Institution-based views.

INDUSTRY BASED VIEW

For every coffee shop in New York, there were 365 customers therefore proving market
saturation in the US (nytimes.com). This difficulty meant looking beyond the American
border in order to increase profitability and thus resulted in internationalisation.
The target countries that are chosen usually have real potential due to population sizes
and the amount of people with high disposable income and with a high interest in
‘Americanization’. In the years of Starbucks’ expansion, America was the most
developed and innovative country. Western nations had a great interest in American
products and culture, which motivated managers to bring in well known brands to other
countries.

After the huge success in Japan (first Starbucks’ coffee shop outside US), the motive to
expand to other regions and countries became stronger.
This motivated the firm to implement first mover advantage or follow the main
competitors such as McDonald’s and Dunkin’ Donuts. McDonald’s was spreading out
American way of life which provided Starbucks with an advantage in its innovative
strategies of healthier snacks that would give an advantage in other countries where the
healthy life style was popular.
With technological influences, all countries become a part of the ‘global village’, where
people have the same preferences and tastes. (McLuhan, Marshall 2003). This lowered
the risk of backlash from cultural awareness and motivated Starbucks to meet customer
needs and expand globally.

However to get into the target market Starbucks needs to follow the host countries
government regulations, which are not always favourable for the company. However USA
are members in NATO, APEC, NAFTA and Pacific Community trading blocks. This makes
the supply of raw materials cheaper and allows Starbucks to provide the high quality

12
service for a lower price. This advantage motivates the firm to enter new marketplaces
(economywatch.com).

RESOURCE BASED VIEW

After an evaluation of external market and the making of industry-level decisions,
internal strengths and weaknesses need to be considered. The firm’s distinctive
competences are built from tangible and intangible assets, and organizational
capabilities.

The tangible assets are most easy to identify as they include financial resources, raw
materials, production facilities and real estate. Starbucks purchases only the highest
quality of coffee beans from ideal coffee-producing climates. Throughout the promotion
of equitable relationships with farmers, workers and communities as well as protection
of the environment, the firm has improved its marketing ability and upgraded its supply
chain that turns basic resource to an advantage for meeting customer expectations of
quality roasted coffee. This move secures the company’s supply-level. Furthermore it
makes Starbuck’s price and quality more competitive (Differentiation strategy) in the
new markets and worldwide coffee industry (gsb.stanford.edu).

Starbucks’ unique strategy of key locations helps it to attract foreigners. This promotes
Starbucks’ brand image and raises prominence. This makes foreigners familiar with the
service, quality and products that Starbucks is offering.
The intangible resources are the brand name, reputation, knowledge, experience, etc.
The basic ideas for Starbucks creation were taken from Italian coffee shops, where Mr.
Schultz (Starbucks’ CEO) learnt about the Italian culture of coffee drinking, which had
not existed in the US before. This knowledge and the experience gained throughout the
decades in the US market provided Starbucks with the unique know-how, which raises
competitiveness in international markets.

13
The Starbucks brand has elements of uniqueness and differentiation that are essential to
create positive associations in the minds of the consumers (Perera et al, 2009). This
level of brand inimitability and quality is vital for international buyers. Starbucks brand
name is recognizable in most countries around the world; this makes customers pay a
higher price for the brand name. Starbucks has joined the big league of no-name logo,
which could assist it in expansion into the countries which not only have different
languages but different writings e.g. Arabic (Guardian.co.uk).

Starbucks being one of the companies to have the lowest rate for employee turnover
also has a high employee satisfaction quota. This makes international recruitment much
easier as they are seen as attractive to work for (Money.cnn.com).

Starbucks has a reputation for being a good socially responsible firm. It is eco-friendly,
and encourages customers to use recyclable cups. It has incorporated green designs in
its stores and helped farmers reduce carbon emissions. All these build up its brand
image throughout the world and increases customer loyalty around the globe
(Starbucks.com).

INSTITUTION BASED VIEW

The main stakeholders in Starbucks are the employees, owners, suppliers and the
customers. Individual stakeholders do not have a lot of influence on the firm’s
performance, due to insufficient power as a single unit. The influence can occur if
stakeholders share their expectations and objectives within a stakeholder group.

As a result of shareholder group pressure the firm needs to maximize the value of
shares, through increasing profitability and growth rate. To achieve these goals,
managers implement the strategies that lower the costs or add more value to firm’s
products, thus allowing the company to raise prices. Managers can increase the rate at

14
with profits grow over time by pursuing strategies to sell more products in existing
markets or to enter new markets (Zhu, 2010). Due to Starbucks’ home market yielding
low growth as mentioned before, this acts as a reason why managers are pressured by
shareholders to internationalize thus analysing the coffee industry in order to leveraging
their core competence.

In conclusion, the main motives for internationalization are; the saturation of the US
market, the high potential of new emerging markets, brand recognition in many
countries, customer loyalty and security in the supply-chain. These motives provide
encouragement for Starbucks to expand and grow very rapidly while surpassing its rivals,
especially if the right countries are chosen for expansion.

CHAPTER 5-LOCATION DECISION

Picking out a target country to enter certainly seems tough after considering over 200
nation-states all over the world. Based on chapter 5 and chapter 6, we will use our
extensive knowledge in international business strategy, to assume the roles of Starbucks
management in order to make a plan for its next foreign expansion in terms of: where to
enter, how to enter and on what scale.

Starbucks’ current strategy involves exploring retail growth outside the United States
(Trevino, 2010). In the past two decades, emerging markets has been a hot topic,
especially after the banking crisis. While searching for countries in these emerging
markets, we found that Starbucks had opened stores in most of them. However, India,
the world’s second populous country, still was untouched by Starbucks. Our curiosity
lead us to investigate the reasons further.

In fact, as early as in July 2007, Starbucks considered entry into India, but it withdrew
its application from the Indian Department of Industrial Policy & Promotion, Ministry of
Commerce & Industry. The delay of their India plan was mainly because Starbucks could

15
not find suitable or agreeable local companies at that time. However, in January 2011,
Starbucks expressed its intention of preparations to re-enter India, hence we decided to
choose India as the target country to write an entry plan for Starbucks. A systematic
analysis of the reasons why Starbucks decided to enter the Indian market twice will be
given as following:

The attractiveness of India will be analyzed by scanning its environmental factors, as

PEST analysis and SWOT analysis imply, to identify whether it is an opportunity or threat
for Starbucks.

OPPORTUNITIES
The following parts will investigate opportunities in India for Starbucks, by focusing on
both Economic Outlook and Industry Outlook.

Economic Outlook
According to Zhu (2010), to decide if one country is suitable for entry, the country long-
run economic profit and growth potential should be assessed. This potential could be
interpreted as a function of several factors, such as Trends in GDP and Foreign Direct
Investment, etc.

Based on International Monetary Fund’s published data, India has become the world’s
fourth economic entity by 4001bn GDP (PPP) in 2010, following United States, China and
Japan. Figure 5.1 depicts real GDP in India advancing in a strong upwards trend since
1995 to 2009, and forecast for the following five years (2010-2015) indicates Indian
economy will continually follow the previous pattern.

16
Besides, India is also one of the BRIC - Big Four, comprising Brazil, Russia, India and
China; argued by Goldman Sachs to be a collective grouping of emerging markets that
would dominate world economies by 2050 (Wilson & Purushothaman, 2003). As O’Neill &
Poddar (2008) stated, Indian has the potential to be 40 times bigger by 2050.

To show India’s growing economic globalization, Foreign Direct Investment (FDI) could
be used to measure the activity of foreign ownerships in India’s domestic economy.
According to UNCTAD’s World Investment Prospects Survey 2010-2012, which tries to
find out future trends of FDI by asking the largest transnational corporations (TNCs),
India was placed the second most important FDI destination for TNCs. Moreover, Figure
5.2 shows FDI Inflows to India has been on the upturn in financial years 2000 to 2009.

17
Figure 5.2 enhances India’s strong economy in the view of attracting more foreign direct
investments in the past ten years. Based on the above analysis of its economic
prospects, it is arguable that India has a positive economic outlook and attractive future
growth forecast that is suitable for Starbucks to invest in.

INDUSTRY OUTLOOK
Socio-cultural (lifestyle and demographic)
The growing domestic coffee consumption in India will be proved by the following
factual data, combined to consider related demographic factors.
According to the Indian Consumer Lifestyles Report, published by Euromonitor
International (2010), which states that although India is traditional a tea-drinking
country, coffee drinking has become an essential part of the daily routine among people
living in Southern India. Also coffee has been often consumed by those in the urban
areas most especially by the younger population. Although cafes are appearing all over
India, Indians still regard visiting a café or bar as a special outing, and has become very
popular among young, urban Indians who visit coffee shops from once a week to once a
day and consume more than a drink, together with their friends, partners or business
associates.
Some recent data support the trend of coffee’s increasing popularity in India:

18
1. According to GlobalTGI Productbook 2011, its latest study indicates 52% of 31,000
respondents in 15 urban cities drank instant coffee.
2. In India, Coffee is currently competing against tea to increase its per capita
consumption. According to 2009 India Profile published by International Coffee
organization, the per capita consumption is 0.08 kg.
3. Figure 5.3 draws a clear picture of India domestic consumption of coffee from 1995
to 2008 which shows gradual increment. This indicates, to some extent that
Starbucks could attain long-run benefits from India.

4. Figure 5.4 below indicates the contribution of fresh coffee sold in coffee shops and
instant coffee towards the total consumption of coffee in India. This shows an
increase from 2005 to 2010 and forecast also shows this trend will continue for the
following 5 years.

19
In summary, the prospect of India’s coffee industry is great. Furthermore, the strong
coffee consumption trend provides a big potentially increasing market for Starbucks.

Resource Availability
India has a long history of planting coffee bean trees. Besides, India is the only country
that grows all of its coffee under shade. Based on the statistics data from the Coffee
Board of India, the production volume of coffee forecast for the next crop year 2010-
2011 is placed at 299,000 million tons (MT). Figure 5.5 depicts the increasing production
volume of coffee in India. The country is also the fifth largest exporter of coffee beans
(Euromonitor International, 2010).

20
In summary, India being a coffee planting and exporting country, makes it a good target
country that matches Starbucks’ sustainable development. Starbucks could achieve
vertical integration through its sourcing and roasting coffee business in India.

THREATS
The following parts will discuss whether Starbucks will face potential threats, in terms
of Political/Legal (red tape, corruption, and regulation issues), Cultural Differences and
Competition.

Political/ Legal
Red Tape Risks
According to a released survey report by Hong Kong’s Political and Economic Risk
Consultancy (PERC) in June 2010, India’s red tape is the worst in Asia. It explains that
India’s bureaucracy is ineffective and inefficient. It also mentions that the civil service
has frustrated most Indians and foreign investors alike. Besides, another survey
conducted by Mathaba in early 2010, indicated that the majority of respondents thought
Indian bureaucracy was a ‘complete failure’.
Even though the Indian government claimed to improve its administrative bureaucratic
system (David and Ganz, 2010), Starbucks in its best interest should prepare to face

21
possible lengthy applications for planning permissions, licenses etc.

Corruption Risks
Another concern in India is political corruption. According to published Corruption
Perceptions Index (CPI) 2010 by Transparency International, India was ranked the 87 th of
178 countries with a score of 3.3. Compared with CPI 2009 with 3.5 (rank 84 th), it
indicates that corruption in India is worsening.

Since Starbucks is a member of the UN Global Compact, in which members should obey
10 universal principles, including working against corruption in all its forms, extortion
and bribery. Starbucks’ anti-corruption is also shown within its Business Conduct. After
entering India, a dilemma will confront Starbucks, whether to engage in corrupt
practices to smoothing out its business dealing, or insist on its principle.

Regulation/Law Risks
Even though the Indian market has been liberalized, some industries maintain approval
requirements to foreign investment. For example, foreign investment proposals in 34
high-priority industrial sectors can not exceed 51% as directed by the Indian government.
Besides, in recent years, especially after the 2008 financial crisis, Indian government
increased taxations in order to support a huge deficit in its budget (ISH Global Insight,
2009).

Starbucks’ entry mode therefore is limited in relation to Indian laws, which will be
addressed in Chapter 6. Also, Starbucks could possibly suffer if regulations are tightened
up in the future.

Cultural Difference
Starbucks is an American-based firm hence If it enters India, it should be aware of
possible problems caused mainly by cultural differences. According to the famous Greet
Hofestede cultural dimensions study, as shown in Figure 5.6 and Figure 5.7, the

22
differences of the U.S and India are clear to make deductions from.

In this case, Starbucks should choose a suitable way to learn more about the Indian
market and consumer expectations as the chart above shows the need for it.
Nonetheless, no matter what entry mode Starbucks might choose to enter India in the
future, dealing with the relationship and management of Indian employees is going to be
a tricky task.

Competitive issues
Table 5.1 shows the intensive competition of coffee retailing industry in India. The two
leading coffee brands on a national scale are Hindustan Unilever and Nestlé India. If
Starbucks enter India, it may have to face high entrancing costs set by these already
well-established firms. Bearing in mind the already heated competition, Starbucks
should choose a suitable entry strategy.

23
In conclusion, even though Starbucks faces some threats from political/legal, cultural
differences and competitive areas, there also are a lot of opportunities for it to enter
India. Therefore, to further support its strategic global expansion and ultimately achieve
its No.1 goal, Starbucks should go ahead with a correct entry model with enough
awareness of these above threats. At the same time, Starbucks should explore as much
opportunities as possible by using its core competencies and brand reputation identified
in chapter 3 & 4.

CHAPTER 6-ENTRY MODE

After detailed analysis from the previous sections above concerning the company’s
motive to go international, its strengths and weaknesses; evaluating the attractiveness
and risks of the Indian market; this section will explore market entry mode.
Some external and internal factors, which may influence or determinate Starbucks’
expectations on entry speed, control, risk, commitment/investment and return/profits,
will be analysed to help us make a final decision for Starbucks.

24
External factors
Country specific factors
The limited holding of up to 51% equity for foreign investment clearly indicates that
Starbucks will give up the idea of wholly owned subsidiary, which entails high risk.

Industry specific factors

The current coffee retailing industry in India is crowded and consists of many local and
foreign competitors (Hopenow, 2010). This indicates that if Starbucks wants to break
through the close siege, it should use a high scale of entry by choosing an entry mode
with high investment/commitment.

Firm specific factors

Starbucks is not familiar with the Indian market and cultural differences between the
U.S. and India also exists. In other words this indicates that Starbucks need to choose an
entry mode that provides a good learning opportunity.
Product specific factors
Coffee is a common commodity which doesn’t really provide uniqueness as such
compared to having technology, hence could be easily learned or copied. This indicates
that Starbucks need an entry mode with at least a medium control.

Internal Factors
Internal factors influencing entry mode is highly dependent on the decision maker in this

25
case, Starbucks’ Management in its Headquarter since this information needed for such
analysis is unavailable for us. However using the famous Greet Hofestede’s cultural
study to explain the internal factors, the Risk Avoidance Tendency will be examined by
Uncertainty Avoidance Index (UAI).

Based on Greet Hofestede’s results, The United States got 46, compared to the world
average of 64, which indicates that Americans do not attempt to control all outcomes
and results. In other words, American managers in Starbucks’ headquarter seem not to
have a risk avoidance tendency and would accept an entry mode with a high risk.

As stated in Chapter 5, Starbucks’ first attempted entry into India in 2007 failed. There
are two lessons Starbucks should have learnt from that failure (Indian Wine Academy,
2007):
Firstly, this time when writing a proposal to hand over to the India Ministry of
Commerce & Industry, Starbucks should draw a clear picture of its expansion intentions
in India (which it failed to do in 2007), by obeying India laws exactly and carefully.
Secondly, this time when finding and negotiating with possible partners, Starbucks
should take a step back in terms of its usual high expectations and requirements in the
contract, to avoid leaving India without accomplishing anything again.
Nevertheless after analysing the possible external and internal factors and learning from
its previous failure, a feasible entry mode will be suggested. The procedure of filtering
several entry modes through a Hierarchical Model could give a clear picture of every
entry criteria used in each step.

26
Step 1: Ask ourselves if Starbucks need an equity mode, or a non-equity mode.
Our answer is Yes, that it needs an equity mode. Even though Starbucks used licensing
to; hotels, airports, tourism places, schools/universities in some countries, this way will
not be suitable in the case of India. This is because India provides many opportunities
for Starbucks, which it will surely want to participate in order to secure a certain
amount of equity and high profit in India. Therefore, licensing, franchising and exporting
could be excluded here. Then the step is towards joint venture and wholly owned
subsidiary.

Step 2: Ask ourselves if Starbucks needs an entry mode that requires holding a 100%
stake, or not.
Our answer is No. The restriction for Starbucks in this step is highly dependent on Indian
laws. As it has been mentioned in Chapter 5, India’s government only allows foreign
firms to hold no more than 51% equity in 34 industrial sectors, including the retailing
industry in which Starbucks will operate (Russ Thai, 2009). Therefore, a wholly owned
subsidiary by acquisition or Greenfield investment is impossible for Starbucks to choose
at this stage. Hence, the next step is towards joint venture.

Step 3: Ask ourselves if Starbucks needs to build up a new firm with its partner, or not.
The answer is not that simple. Firstly, Starbucks has a need to source and roast coffee
beans, controlling the upper value chain sections and achieving vertical integration.

27
Secondly, Starbucks must open its own coffee stores to operate its main business of
running coffeehouses across India.
Therefore, considering Starbucks’ two business requirements mentioned above, a joint
firm would need to be built up between Starbucks and its local partner for example
Starbucks India Ltd. Hence, a strategic alliance is inadequate for Starbucks.
Finally, through the process of elimination, our solution suggests that Starbucks should
enter India through a joint venture in which it holds the majority stake (51%-49%).

After identifying Joint venture as the preferred form of entry, it is important to assess
the benefits and downsides of such entry mode.
Advantages
Firstly, potential risks, such as unseen future regulations, political risks or natural
disasters for coffee growing, could be shared with its partner.
Secondly, Starbucks could gain more knowledge about the Indian coffee growing,
roasting and retailing industry from its partner during their work together.

Disadvantages
Firstly, even though Starbucks holds a majority role in the venture, it means Starbucks
cannot have total control and may face some conflicts related to decision and
management issues, which could possibly result from their different
expectations/objectives on each other and their cultural differences as identified in
Chapter 5.

Secondly, the nature of a joint venture determines that Starbucks must share profits
with its partner which is uncharacteristic of the company.

Recommendation
No entry mode is perfect and all has its downsides, but Joint Venture seems the most
suitable in for Starbucks’. One final precaution for Starbucks can be made here in that
all controversial details during negotiation should be clearly stated in the contract with

28
its partner, to avoid any petty and unnecessary conflicts in the future.

CHAPTER 7-CONCLUSION
In conclusion, having assessed the evidence concerning Starbucks’ decision to
internationalise, the internal and external environment and its impact on the company,
it is fair to conclude that the company is in a strong position to expand especially after
successfully scaling through the effects of the financial crisis while learning to be lean
and efficient in the process. India should be the next country for its subsequent
expansion since it provides a very good opportunity for potential high profitability,
increased market share and strategic placement in terms of resources for Starbucks.

29
REFERENCES
Starbucks (2010) Company Profile [Online].Available from:
http://assets.starbucks.com/assets/company-profile-feb10.pdf [Accessed 11th January 2011]

Starbucks (2010) Recognition [Online].Available from:

http://assets.starbucks.com/assets/starbucks-recognition-jan2010.pdf [Accessed 23rd
January 2011]

Iwata (2006) Owner of small coffee shop takes on java titan Starbucks [Online].
Available from: http://www.usatoday.com/money/industries/food/2006-12-20-
starbucks-usat_x.htm [Accessed 1st Febuary2011]

Reynolds, J. (2011) via’s Christmas performance boosts Starbucks' revenue

[Online].Available from: http://marketingmagazine.co.uk/news/1051724/Vias-
Christmas-performance-boosts-Starbucks-revenue/ [Accessed 3rd February 2011]

Jagger (2008) Starbucks profits dive by 97% [Online].Available from:

http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article512726
7.ece[Accessed 23rd January 2011]

Linn (2008) Starbucks to close 600 stores in the U.S. [Online].Available from:
http://www.msnbc.msn.com/id/25482250/ns/business-retail/[Accessed
28thDecember2010]

Thompson (2008) Starbucks blames UK for weak performance [Online].Available from:

http://www.independent.co.uk/news/business/news/starbucks-blames-uk-for-weak-
performance-1012568.html [Accessed 3rd February 2011]

Bowers (2010) Starbucks losses in UK rise to £10m [Online].Available from:

http://www.guardian.co.uk/business/2010/jul/09/starbucks-losses-rise-
recession[Accessed 6th February 2011]

Guardian.co.uk (2010) Starbucks triples profits to $240m [Online].Available from:

http://www.guardian.co.uk/business/2010/jan/21/starbucks-triples-profits-coffee
[Accessed 14th January 2011]

BBC.co.uk (2010) Starbucks' profits jump as sales climb [Online].Available from:

http://www.bbc.co.uk/news/business-11699561 [Accessed 19th December2010]

E –imports (2011) Coffee Statistics [Online].Available from: http://www.e-

importz.com/Support/specialty_coffee.htm [Accessed 19th December2010]

30
Andrejczak (2011) Starbucks unveils new logo [Online].Available from:
http://www.marketwatch.com/story/starbucks-unveils-new-logo-2011-01-05-1433150
[Accessed 17th December2010]

Facebook.com (2011) Press room logo [Online].Available from:

http://www.facebook.com/press/info.php?statistics [Accessed 16th December2010]

Weber (2011) Preserving the Starbucks Counter Culture [Online]. Available from:
http://www.workforce.com/section/recruiting-staffing/feature/preserving-starbucks-
counter-culture/[Accessed 16th December2010]

Starbucks (2011) Investor Relations [Online].Available from:

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome [Accessed 3rd
February 2011]

Dobson (2011) Dollar to Fall on Fed Rates, Deficit, Bagguley at Barclays

Says[Online].Available from http://www.bloomberg.com/news/2011-01-28/dollar-to-
decline-on-low-fed-rates-u-s-deficit-barclays-bagguley-says.html [Accessed 10th
February 2011]

www.statistics.gov.uk (2011) Employment [Online].Available

fromhttp://www.statistics.gov.uk/cci/nugget.asp?id=12 [Accessed 10th February 2011]

Andrejczak (2011) India: Here comes Starbucks [Online].Available from

http://www.marketwatch.com/story/india-here-comes-starbucks-2011-01-13[Accessed
30th February 2011]

Starbucks (2010) Company Profile [Online].Available from:

http://assets.starbucks.com/assets/company-profile-feb10.pdf [Accessed 20th January]

Hoovers.com (2011) Starbucks Corporation [Online].Available from

http://www.hoovers.com/company/Starbucks_Corporation/rhkchi-1.html [Accessed
13th January 2011]

Coffee Watch Full Text Available By: Rowe, Megan. Restaurant Hospitality, Sep2009,
Vol. 93 Issue 9, p52-52, [Accessed 13th January 2011]

Economist.com (2008) Not enough Froth [Online].Available from:

http://www.economist.com/node/10490218 [Accessed 14th January 2011]

Starbucks (2011) Newsroom [Online].Available from:

http://news.starbucks.com/article_display.cfm?article_id=200 [Accessed 28th January 2011]

Economist.com (2009) Woke up, smelled the coffee [Online].Available from:

31
http://www.economist.com/node/14536977 [Accessed 1st February 2011]
Perera, L. C. J. Et. Al. (2009) Case study: Starbucks- adding value to brand equity
through an innovative brand image. Journal of the Academy of Business & Economics.
[Online] (9) p 174-185 Available from: www.ebscohost.com [Accessed 22 January].

The New York Times (1999) McDonald's Corp. Betting That Coffee Is Britain's Cup of Tea
[Online]. Available from: http://www.nytimes.com/1999/03/28/world/mcdonald-s-
corp-betting-that-coffee-is-britain-s-cup-of-tea.html [Accessed: 10th January 2011].

Economy Watch (2011) Traiding groups and country groups [Online]. Available from:
http://www.economywatch.com/country-grouping/ [Accessed: 10th January 2011].

Duda, James, Mackwani, Munoz, Volk (2007) Starbucks Corporation

building a sustainable supply chain [Online]. Available from:
http://www.gsb.stanford.edu/scforum/login/abstracts/documents/GS54.pdf [Accessed:
10th January 2011].

Clark (2011) Starbucks joins Nike and Apple in the big league of no-name logos [Online].
Available from: http://www.guardian.co.uk/business/2011/jan/09/starbucks-new-logo-
no-name [Accessed: 22th January 2011].

Starbucks (2011) Recycling & Reducing Waste [Online]. Available from:

http://www.starbucks.com/responsibility/environment/recycling [Accessed: 22th
January 2011].

Starbucks (2011) Tackling Climate Change [Online]. Available from:

http://www.starbucks.com/responsibility/environment/climate-change [Accessed: 22th
January 2011].

Kramer (2007) After Long Dispute, a Russian Starbucks [Online]. Available from;
http://www.nytimes.com/2007/09/07/business/worldbusiness/07sbux.html?
_r=1&adxnnl=1&oref=slogin&adxnnlx=1296419036-urxfcuOvOMaoQFddv+zjrg. [Accessed:
22th January 2011].

Karolefski (2002) Conquering new grounds [Online]. Available from:

http://www.brandchannel.com/features_effect.asp?fa_id=78 [Accessed: 22th January 2011].

Yi, Z. (2010) International Business Strategy, 3rd ed., UK: McGraw-Hill Custom
Publishing.

Trevino (2010) Starbucks Outlines Blueprint for Multi-Channel Growth. [Online].

Available from:
http://starbucks.tekgroup.com/article_display.cfm?article_id=476 [Accessed: 2nd
January 2011]

32
Fawkes (2011) Beyond the New Starbucks Logo: Interview with Mike Peck, the Senior
Design Manager. [Online]. Available from: http://www.psfk.com/2011/01/starbucks-new-
logo.html [Acceessed 10th January 2011]

Kowitt (2009) For Mr. BRIC, nations meeting a milestone, CNN Money [Online]. Available
from: http://us.ft.com/ftgateway/superpage.ft?news_id=fto110620061008293518
[Acceessed 15th January 2011]

Wilson & Purushothaman (2003) Dreaming With BRICs: The Path to 2050, Goldman
Sachs[Online]. Available from: http://www2.goldmansachs.com/ideas/brics/book/99-
dreaming.pdf [Acceessed 21st December 2010]

O’Neill & Poddar (2008) Ten Things for India to Achieve Its 2050 Potential, Goldman
Sachs{online}. Available from: http://www2.goldmansachs.com/ideas/brics/ten-things-
doc.pdf [Accessed 20th December 2011]

United Nations Conference on Trade and Development (UNCTAD) (2010), World

Investment Prospects Survey 2010-2012 [Online]. Available from:
http://www.unctad.org/en/docs//diaeia20104_en.pdf [Accessed 27th January 2011].

Department of Industrial Policy & Promotion, Ministry of Commerce and Industry (2011), India
FDI Fact Sheet-November 2010 [Online]. Available from:
http://dipp.nic.in/fdi_statistics/india_FDI_November2010.pdf [Accessed 20th January 2011]

Indian Population ‘to be biggest’ (2004) BBC News [Online]. Available from:
http://news.bbc.co.uk/1/hi/3575994.stm [Accessed 20th Dececember 2010]

Country and Areas Ranked by Population: 2050 (2010), International Data Base (IDB),
Population Division, U.S. Census Bureau [Online]. Available from:
http://sasweb.ssd.census.gov/idb/ranks.html [30th December 2010]

Coffee per capita consummation in India (2009), International Coffee Organisation [Online].
Available from: http://www.ico.org/countries/india.pdf [Accessed 27th January 2011]

Coffee Consumption in India (1999-2008), the Coffee Board of India [Online]. Available
from: http://www.indiacoffee.org/indiacoffee.php?page=CoffeeData [Accessed 12th
January 2011]

Consumer Lifestyles in India:Café Culture (2010), Euromonitor International: Country

Sector Briefing [Online]. Available from:
http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 20th
January 2011]
Retail Sales of Coffee in India (2011), Euromonitor International: Country Sector Briefing
[Online]. Available from:

33
http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 22nd
January 2011]

Prediction of 2010-2011 coffee production in India, the Coffee Board of India [Online].
Available from: http://www.indiacoffee.org/indiacoffee.php?page=CoffeeData
[Accessed 2nd January 2011]

Total Coffee Production in India (1990-2008), World Resource Institute [Online].

Available from: http://earthtrends.wri.org/searchable_db/index.php?theme=8
[Accessed 15th January 2011]

India’s Red Tape Worst in Asia, Survey Says, Hong Kong’s Political and Economic Risk
Consultancy (PERC) [Online]. Available from:
http://www.2point6billion.com/news/2010/06/03/india%E2%80%99s-red-tape-worst-in-
asia-survey-says-5879.html [Accessed 15th January 2011]

India: Steel Frame of Indian Bureaucratic System Needs Revamping (2010), Mathaba [Online].
Available from: http://www.mathaba.net/news/?x=623624 [Accessed 17th January 2011]

David, R. and Ganz, K. (2010) Reducing Red Tape in India's Courts, Bloomberg
Businessweek [Online]. Available from:
http://www.businessweek.com/magazine/content/10_30/b4188016347519.htm
[Accessed 11th January 2011]

Corruption Perceptions Index 2010 (2011) Transparency International [Online]. Available

from: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results
[Accessed 21st January 2011]

Statement on Industrial Policies (1991), Ministry of Industry, Government of India [Online].

Available from: http://siadipp.nic.in/publicat/nip0791.htm [Accessed 30th December
2010]

Budget 2009/10: Deficit-Financed Expenditure Rises in India in Support of Growth (2009) ISH
Global Insight [Online]. Available from:
http://www.ihsglobalinsight.com/SDA/SDADetail17230.htm [Accessed 23rd January 2011]

Coffee Company Shares by Retail Value (2011), Euromonitor International: Country

Sector Briefing [Online]. Available from:
http://www.portal.euromonitor.com/Athens/Magazines/Topic.aspx [Accessed 22nd
January 2011]

Greet Hofstede Cultural Dimensions [Online]. Available from:

http://www.geert-hofstede.com/ [Accessed 22nd December 2010]

34