International Business & Cultural Diversity

Statement of Originality of Submitted Work

I; Aruna Kailasanathan

Student No : UBABM/C/05/19

Module Name : International Business & Cultural Diversity

I hereby confirm that the work presented here in this report and in all other material; is
wholly my own work.

And I agree to assessment for plagiarism.

Signature : ……………………………..

Date : ………………………………

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Acknowledgement

This assignment would not have been possible without the assistance of many people.

I wish to express my sincere thanks to Mr.Bandujeewa Samaranayake, the lecturer of the

module International Business and Cultural Diversity for providing me valuable guidance.

Further I wish to thank my family for their encouragement and support.

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Executive Summary
The objective of this report is to identify the strategies that could be used by Starbucks
Corporation in entering the emerging economies such as China and India.

Starbucks Corporation is one of the largest chain of coffee shops in the world established in
1971.

This report includes an analysis of the cultural differences existing between United States of
America, China and India. Further the approaches that could be used by Starbucks
Corporation to enter the emerging economies are critically evaluated.

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Table of Contents

1 Introduction 1

Introduction to Starbucks Corporation 1

Present situation of Starbucks Corporation in United States of America 1

2 Emerging Economies 2

Characteristics of emerging economies 2

China – An emerging economy 2

India – An emerging economy 2

3 Starbucks entry into China 3

4 Comparison of Culture in USA vs. China Using Hofstede’s Cultural

Dimensional Model 6

Power Distance 6

Individualism vs. Collectivism 6

Masculinity vs. Femininity 6

Uncertainty Avoidance 7

Long Term vs. Short Term Orientation 7

5 Starbucks entry into India 8

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6 Comparison of Culture in USA vs. India Using Hofstede’s Cultural

Dimensional Model 10

Power Distance 10

Individualism vs. Collectivism 10

Masculinity vs. Femininity 10

Uncertainty Avoidance 10

7 Conclusion 11

8 References 12

9 Plagiarism Report 14

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Introduction
Introduction to Starbucks Corporation

Starbucks is an international chain of coffee shops based in Seattle, Washington founded in

1971, by Howard Schultz. Its product offerings include drip brewed coffee, espresso based
hot drinks and snacks. As at 2000, Starbucks had 3501 stores in 17 countries. Out of it, 2729
stores were situated in United States of America.

Present situation of Starbucks Corporation in United States of America

In United States of America, Starbucks opened stores close to each other to avoid competitors
entering the locations. The crowding of stores was very high in United States that it led to
self-cannibalization. As per the Schultz statement, Starbucks stores are self-cannibalized at a
rate of 30% per year. This led Starbucks to a closure of 300 stores in United States since
2008. Starbucks earned a profit of $181.2m in year 2001.The annual sales growth has been
measured as 20%.In year 2002, the profit was reported as $227.45m. This shows that the US
market has become matured and there is no room for further expansion.

Another problem faced by Starbucks in the US market is that their products were not
appreciated by Generation X (people born between year 1960-1980) due to the high pricing
strategy and the mismatch between the products and the consumer needs.

The above stated reasons forced Starbucks to look into the emerging economies, such as
India, China, Vienna, Zurich, Berlin, Brazil and Russia.

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Emerging Economies

Characteristics of emerging economies

Emerging economies are defined as countries with rapid growth in business and
industrialization. Local and foreign investment will be increasing in these countries. Further,
increase in the young population is another feature of the emerging economies.

China – An emerging economy

China reported a gross Domestic Product (GDP) growth rate of 11.3% in 2007. Further the
unemployment rate reported in 2007 was 4%. The urbanization rate was 46.8% in 2009.
Moreover the younger generation seems to increasing in China. It was reported that 92% of
the population was below the age of 64 years and 8% of the population are over 65 years old.

The above suggests that China is an emerging economy in which Starbucks could look
forward to expand its business.

India – An emerging economy

India is considered as a country which has a high potential for rapid growth. This is
evidenced by the 9.2% GDP growth rate reported in 2007. Further a large pool of well-
educated and English speaking people and cheap labour are available. Moreover, the
increasing Indian middle class presents a large market opportunity.

The above facts indicate that India is an emerging economy full of opportunities which
Starbucks Corporation could capitalize on.

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Starbucks entry into China

China was one of the countries chosen by Starbucks to expand its business. Doing business in
China would be different from doing business in United States due to the cultural and
economic differences.

China is traditionally a tea drinking country. So the major challenge for Starbucks when
entering the Chinese market would be to make the people accustomed to drink and appreciate
coffee.

There comes an opportunity for Starbucks to introduce new flavours such as green tea
flavoured coffee which appeals to the local taste rather than trying to push the same product
which worked out well in United States such as whip cream covered frozen coffee.

As an entry strategy Starbucks could distribute the new flavoured coffee to all the major
restaurants in China and get the response from the Chinese consumers. Since the younger
generation in China are willing to try out new ideas, there is a high possibility that Starbucks
would get a favourable response. In addition to the coffee it could offer food items, fruit
drinks, ice cream and music. This strategy is considered as product diversification strategy in
Ansoff matrix theory.

The main advantage of using this strategy is that it requires less investment. Since this
strategy is introduced in a new market the risk is low as the existing market will not be
affected. Moreover, Starbucks has a strong brand recognition which could be helpful in
building a strong customer base in China. Further, this would help Starbucks to maintain a
competitive advantage.

In USA, take-out orders at Starbucks accounts for the majority of the sales. But, Chinese
prefer a dine-in service. Chinese consumers come to the coffee shops not only for the coffee,
but for meeting up with friends and acquaintances and enjoying their time. Starbucks could
capitalize on that culture.

Starbucks could offer the consumers a unique atmosphere to hang out with music,
newspapers and magazine and wireless internet facilities. This environment could also be
considered as a suitable place for business meetings. Starbucks could be able to develop a

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competitive advantage as only a few restaurants in China have air conditioning facility and
comfortable environments.

The drawback of this approach is that providing comfortable outlets instead of take-out
orders results in lesser revenue per square metre than in USA. To offset this disadvantage
Starbucks may sell their products as aspirational products with high prices. The price of a
coffee sold in China is more expensive than in USA. Since, the new generation of Chinese
have high purchasing power and the desire for high status brands, the premium pricing
strategy of Starbucks would be successful.

Another cultural difference between the Chinese and the Americans is that Chinese prefer to
have coffee along with some food, unlike Americans. This allows Starbucks to implement a
product differentiation strategy by offering a portfolio of products. This would lead to sales
per customers being higher in China than in USA.

Chinese culture is to meet up with friends and family in coffee shops in evenings to share
their day’s experience. This will lead to high traffic in the evening unlike in USA where most
of the business happens in the morning. This should be taken into consideration by Starbucks
when planning on the service provided.

One of the tactics which could be used by Starbucks is hiring of part time workers to handle
the traffic in the mornings. This would assist in keeping the labour cost down.

Starbucks could franchise its operations to a local partner in China. The advantage of this
approach is that the local partner would have the local market knowledge and a strong
customer base. The main disadvantage would be that Starbucks losing its control over its
products and quality.

Instead of this, it may enter into joint ventures with local companies. This would assist
Starbucks in controlling and monitoring its operations. For example Starbucks might partner
with Beijing Mei Da Coffee Company, Uni- president Corporation which are the largest
coffee manufacturers in China.

Unlike in USA, Chinese value relationships more than the business. They prefer to do
business with people they know and trust. So, Starbucks will need to build the trust with the

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Chinese to make their business a success. Starbucks could entertain the business partners for
example through inviting them for dinner to build trust.

In USA, business could be done even without meeting the people. In contrast, face to face
interaction is preferred in China. For Starbucks to build relationships with partners or
suppliers of coffee beans they will have to make frequent face to face interactions.

The disadvantage of this method is that it results in high cost and its time consuming. The
benefit of face to face interaction is that the discussion made would be clear and the honesty
of the parties can be measured easily by the body language and behaviour.

Another factor which should be considered by Starbucks is the negotiations in business

dealings. In USA there is no room for bargaining on dealings. Unlike in USA, the Chinese
mostly negotiate on every deal. So when Starbucks builds partnerships with local companies
in China, there is no guarantee that the negotiation would be favourable for Starbucks.

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Comparison of Culture in USA vs. China Using Hofstede’s Cultural

Dimensional Model

Hofstede’s cultural dimensional model could be applied by Starbucks to understand the

cultural differences between China and USA.

Power Distance

If we analyse the culture, using the Hofstede’s cultural dimensional model, Starbucks in USA
has a low power distance. This means that the employer and the employees are treated
equally. This culture encourages the low level staff to express their ideas to the top
management and getting involved in decision making.

China has a high power distance with a score of 80. Therefore Starbucks cannot adopt the
approach which it used in USA in China. The inequalities among the superiors and the
subordinates are acceptable in China. The low level staff prefers to be told what to be done
rather than getting involved in decision making. Therefore Starbucks should take this into
consideration when recruiting and training their employees. Through this it could reduce the
staff turnover rates.

Individualism vs. Collectivism

Individualism vs. Collectivism is one of the aspects of this model. USA is a highly
individualist country, where people look after themselves only. Whereas, China with a score
of 20, is considered as a collective society. This implies that Chinese are interdependent and
they are supposed to take care of their groups. This means that there are strong relationships
between people which lead to meet-ups in coffee shops with family, friends and colleagues.
This is an opportunity for Starbucks to capitalize on.

Masculinity vs. Femininity

Furthermore, USA and China are considered to be masculine societies. These societies are
driven by achievement, success and competition. Starbucks should consider this in managing
and motivating their employees. Since both economies are masculine, Starbucks will not find
any difficulties in managing people.

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Uncertainty Avoidance

According to the Hofstede’s model USA gets a high score for uncertainty avoidance. This
means the people in USA are not comfortable with ambiguity. Starbucks would have
operated with well-defined structure, rules and job roles in USA.

In contrast, China gets a low score of 30 in uncertainty avoidance. This suggests that the
Chinese are comfortable with ambiguity. This is also reflected in the Chinese language which
has several ambiguous meanings. This would lead to difficulties for Starbucks to adapt and
operate in China.

Long Term Vs. Short Term Orientation

Alike the Americans, the Chinese society is a long term oriented society. This similarity
makes it easier for Starbucks to manage the organization.

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Starbucks entry into India

Another emerging economy which Starbucks could consider for the expansion is India. India
has a high population growth rate and the income spent on discretionary goods indicates an
increasing trend. Starbucks could capitalize on this trend.

But the main problem Starbucks will face in entering India is that it is a tea drinking nation
like China. But it seems that there is increasing demand for coffee as the younger generation
prefers Western Café culture more than the traditional Indian coffee houses. The most
reputed coffee chain such as Café Coffee Day and Costa Coffee have already entered India
and performing well. This implies that a coffee cafe culture has been already introduced in
India.

Alike in China, Starbucks could use product differentiation strategy to approach the Indian
Market. For example, McDonalds introduced Mc Spicy paneer, an Indianised vegetarian
burger to account for local tastes of Indians. Likewise Starbucks should come up with
vegetarian items to attract larger crowds. It could offer customized products such as “masala
chai”, Tulsi tea and South Indian filtered coffee.

India is the 5th largest exporter of Coffee beans in the world. This opens up an opportunity
for Starbucks to source the coffee beans from India. Starbucks could go for a vertical
integration with coffee producers. The benefit of this approach would be that Starbucks will
be able to save the 112% duty charges applied on imported coffee beans. Since, India is a
price sensitive market this could give a competitive advantage to Starbucks.

It is questionable whether the coffee beans sourced from India would give the well-known
Starbucks experience. But, Indian coffee is known to have a good quality. Further George
Howell Coffee, one of the best coffee buyers have recommended Indian coffee beans gives a
sweet taste. Therefore Starbucks could go ahead with this approach since the benefits
outweigh the drawbacks.

Another factor which would affect the success of Starbucks would be the café atmosphere
and guest experience. This requires trained employees. Offering coffee is a low skilled and
low paid job in India. This results in high labour turnover.

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To overcome this issue Starbucks could open up their own training schools like the famous
brands CCD and Gloria Jean. The limitation of this approach is that it requires significant
investment and it is time consuming. But since the young generation prefers a relaxed coffee
culture and good customer service apart from the quality of coffee, the training provided to
the employees become essential. The necessity for training and the benefits to be gained
justifies the future investment in training schools.

In USA, punctually is highly valued. Adherences to tight deadlines are considered to be a

norm. Whereas, India is perceived to have a laidback culture where, they take more time to
do the job than Americans. Therefore when Starbucks plans their strategy and operations it
should include more time than the normal time taken in USA.

In general, Americans prefer to be addressed by their first names. But Indians tend to address
people as ‘sir’ and ‘madam’ in order to show their respect. Calling by first names is
considered as disrespectful. Starbucks should keep this in mind when addressing the Indian
employees.

Further it is an Indian tendency to raise questions from the speaker after the business has
broken up, not during the meeting. This is different to the American tendency where
Americans are outspoken in the business meetings. Therefore Starbucks should encourage the
Indian employees to raise the questions and share their view points at the meetings.

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Comparison of Culture in USA vs. India Using Hofstede’s Cultural

Dimensional Model

Power Distance

According to the Hofstede's cultural dimensional model, India has a high power distance
scoring 77 unlike in USA. Indian employees are comfortable with a top down structure where
their job roles are clearly defined and guidance from their managers is appreciated.
Starbucks should take this into consideration in managing their employees in India.

Individualism vs. Collectivism

Unlike in USA, India with a score of 48, is a collectivist society where individuals are
influenced by their family, friends and workgroup. Therefore, the Indian employees will
expect familial protection from the employer Starbucks and expect them to be compassionate
during the family crisis.

Masculinity vs. Femininity

Likewise in USA, India is also considered as a masculine society where achievements and
success are valued. This makes it easy for Starbucks as it could use the same management
techniques used in USA to motivate staff in India.

Uncertainty Avoidance

India with a score of 40 has low preference in avoiding uncertainty whereas in USA,
uncertainty avoidance is highly preferred. Starbucks will not have experience in working with
uncertainty. Therefore it may face difficulties in coping with uncertainty in India.

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Conclusion

This report has identified the cultural differences between USA, China and India. Further the
strategies that could be used by Starbucks to enter those markets have also been analysed.

Both China and India includes opportunities and risks as well.

However, due to the market saturation in USA, it is advisable for Starbucks to expand its
operations to China, India and the emerging economies with a good understanding of the
cultural differences.

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References

ABL Overseas, n.d. India- A cultural Perspective. [online]Available at:

<http://www.abloverseas.com/resources/india-cultural-perspective/index.php> [Accessed 15
June 2012]

Benjamin Shobert, 2012.What Starbucks will need to do right in India. [online] Cross the
Rubicon. Available at: <http://crosstherubiconblog.com/2012/02/08/what-starbucks-will-
need-to-do-right-in-india/> [Accessed 16 June 2012]

Business Papers, n.d. Achieving Success in China: Starbucks – Starbucks Assignment, Case
Study. [online] Available at: <http://www.assignmentspro.com/starbucks-assignment-china-
case-study/> [Accessed 15 June 2012]

Chillibreeze, n.d. The Role of Culture in Business Relationships with Indians - A Case Study.
[online] Available at: <http://www.chillibreeze.com/articles/the-role-of-culture.asp>
[Accessed 15 June 2012]

Firstpost Business, 2012, How Starbucks plans to sell espressos to Indian consumers,[online]
Available at :< http://www.firstpost.com/business/how-starbucks-plans-to-sell-espressos-to-
indian-consumers-208480.html> [Accessed 15 June 2012]

Focus, n.d. Doing Business in India: 20 Cultural Norms You Need To Know. [online]
Available at :< http://www.focus.com/fyi/doing-business-in-india/> [Accessed 16 June
2012]

Geert Hofstede, n.d. What about China? [online] Available at: < http://geert-
hofstede.com/china.html> [Accessed 16 June]

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Geert Hofstede, n.d. What about India. [online] Available at: <http://geert-
hofstede.com/india.html> [Accessed 16 June]

India Knowledge at Wharton, 2011, Capturing India’s percolating coffee market.

[online]Available at: <http://knowledge.wharton.upenn.edu/india/article.cfm?
articleid=4607> [Accessed 15 June 2012]

Leverage China, 2010. Seven Major Differences between Chinese and American Business
Cultures. [online] Available at: <http://leveragechina.com/archives/473> [Accessed 16 June
2012]

Lingbo Li, 2009, Starbucks in China: The good, the bad and the sugar free, [online] Available
at: <http://lingboli.com/travel/starbucks-in-china-the-good-the-bad-and-the-sugarfree/>
[Accessed 16 June 2012]

Matt Andrejczak, 2011, India: here comes Starbucks, Market watch, [online] Available at:

<http://articles.marketwatch.com/2011-01-13/industries/30747513_1_starbucks-shares-
chief-executive-howard-schultz-coffee-beans> [Accessed 16 June 2012]

Prashanth Parameswran, 2011, India is Starbucks’s cup of tea, The Tufts Daily, [online]
Available at: <http://www.tuftsdaily.com/op-ed/prashanth-parameswran-the-asianist-
name-1.2470719#.T-yFh7UjFK0> [Accessed 16 June 2012]

Samuel Richter, 2012, Will Starbucks succeed in India? Morning Star, [online] Available at :<
http://www.morningstar.in/posts/7921/will-starbucks-succeed-in-india.aspx> [Accessed
15 June 2012]

Shaun Rein, 2012, Why Starbucks succeeds in China and others haven’t, USA TODAY,
[online] Available at: <http://www.usatoday.com/money/industries/food/story/2012-02-
12/cnbc-starbucks-secrets-of-china-success/53040820/1> [Accessed 16 June 2012]

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Plagiarism Report

This assignment was done in my own words, expect for the quotations which are mentioned
in the reference listing. Further I confirm that I have not committed plagiarism in doing this
assignment.

Signature: ………………………….

Date : …………………………

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