An Evaluation of Entrepreneurial Activities and Growth

Strategies – The Case of Starbucks Coffee House

Amer Saad Khushman

Southampton Business School, Dept. of Strategy, Innovation and

Entrepreneurship, University of Southampton

Abstract
This article identifies an entrepreneurial firm in the coffeehouse chain that has expanded
internationally. This article is critically evaluate the growth strategies and help to understand
the drivers, stages, and challenges of global growth as well as internationalisation process for
Starbucks Coffee House. To achieve this objective, secondary data must be collected and
analysed from such as public documents, journals, newspapers, books and websites. Thereby,
the results show that despite the huge potential of operating internationally, firms i.e.
Starbucks Coffee House should undertake an in-depth market research and SWOT analysis to
succeed. They should also work on developing a strategy that focuses on the competencies of
the market and how to align the corporate strategy with market culture.

Introduction
Initially, businesses nowadays are looking for international expansion to gain an opportunity
to minimise cost, increase market share and importantly is to maximise profit. The rapid
growth of the global economy is providing international business opportunities for firms
around the world. Factors including demand condition, related and supporting industries,
firm’s strategy and rivalry all drive international expansion.

According to Brinded (2017), political and economic changes are also considered as drivers
to internationalisation. For instance, the British exit (Brexit) from the European Union is
leading important firms to leave the UK territory as they predict an economic downfall which
may affect their operation, thus finding a new market may protect their sustainable position.

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Also, several existing kinds of literature show that firms internationalise due to motives such
as gaining new technology and knowledge as well as enhancing organisational practices
(Kumar and Snavely, 2004).

Nevertheless, entering a new market raises political, economic, and financial challenges to
the company. For examples, scholars and practitioners have underlined that the formal and
informal institutions of developing economies differ widely to the ones of the developed
economies, as these institutions directly influence the firms’ operating strategies (Bianchi, et
al, 2015). Many western firms are facing issues in negotiating projects and deals when
operating in a developing market as their institutions do not shield certain issues or in some
cases attempt to exploit foreign firms (Hoskisson, et al, 2000; Wright, et al, 2005).

Although many theories and business models show the drivers and advantages of
globalisation, nevertheless, the core of success in the international operations vary among
companies, i.e. resources, organisational behaviour and co-operate factors differ from firm to
firm. Thus, this article will first discuss the drivers, types, stages and challenges of global
growth, then it will focus on one of the world most important player, Starbucks Coffee
House, and its story in the global marketplace. The inspiration for the article came to identify
an entrepreneurial firm that has expanded internationally and evaluated its growth strategies.
The article focus on Starbuck Coffee House as a part of the coffee shop industry, where the
researcher believes there is a lack of attention in the global expansion of the coffee shop
industry.

Part A: Global growth drivers, types, stages and challenges.

According to Goerzen and Makino (2007), the forms of companies business have changed in
so many ways and that can be seen how companies are heading towards from manufacturing
industry to start operating in the service industry, which that make the services sectors more
important in these days and widely presence. According to Ietto-Gillies (2012), a company
may choose to expand across the border of its domestic market for anyone of all of the
following five major drivers:

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1. Gaining access to new customers

Expanding into new markets, offer opportunities for higher profits, revenues and long-term
growth. This is considered a very attractive option, especially when a company’s domestic
markets are maturing and/or declining.

Moreover, firms usually follow international expansion in order to extend their products’ life
cycle. A faster return on investment may also be offered by operating in a new larger market,
this is considered particularly significant in industries where Research and Development
(R&D) is the key tool for success (Ietto-Gillies, 2012).

2. Obtaining lower overheads through economies of scale, experience, and

increased purchasing power.

Several firms are motivated to operate in more than one market, that is refered to the revenue
from internal sales is not sufficient operational cost, expenses and overhead. Likewise,
companies internationalise to increase their market experience and lower cost of their supply
chains.

The relatively small European market size explains the reason behind companies such as
Nestlé long ago started selling their commodities across Europe, then expanding into North
and Latin American markets. Also, achieving lower cost through economies of scale was a
strategy adopted by Starbucks after 2009, during which the global economic crisis and the
slow down of the retail coffee and snacks store industry in the United States was witnessed
(Ietto-Gillies, 2012).

3. Exploit more in its core competencies

A firm with competitive resources and competencies be able to usually strengthen its leading
position in its domestic market into a global market leadership position through further
leveraging those resources. For instance, Walmart (a giant American supermarket chain) is
expanding into China, Latin America, South Korea, and the United Kingdom, by leveraging
its resources internationally. A strategy conducted by Starbucks by using basic blueprint for
international operations (Ietto-Gillies, 2012).

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4. Gaining the advantages of access to resources and capabilities available in
other foreign markets

Acquiring resources and capabilities that cannot be utilised in a firm’s local market is
considered an important driver for entering foreign markets. For example, companies enter
into a joint venture or a cross border alliance in order to gain access to resources and
capabilities by learning from their partners.

In other cases, firms consider establishing their businesses in other countries to be able to
exploit internal distribution networks, low wages worker, or to gain technical knowledge.
Where others expand to utilise natural resources such as oil, gas and minerals (Ietto-Gillies,
2012). Starbucks through its deep human resources culture was able to attract local
employees in every place it is located and engage them in its culture.

5. Reducing business risk

By working in many different countries, a company can also spread its business risk. Thus,
the company can overcome specific economic downfall by benefiting from its sales
elsewhere (Ietto-Gillies, 2012). Starbucks has managed its business risk through penetrating
emergent markets that offer high growth opportunity such as China.

Porter's Diamond

The previous five drivers, according to Tian (2016), could be endowed to the business,
through applying Porter's Diamond model. The model is consisting of four factors that must
be favourable for an industry to become competitively strong in a given market. Each factor
is explained in the table 1 below for porter in 1985.

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 The demand conditions of business in the domestic market depending on
Demand the size of the market and the kind of needs and wants of the consumers.
condition Such condition supports the position of a company if it could convert its
local-market advantage into a competitive advantage in the global market.
The factor/condition is referring to the availability of production factors,
Factor such as skilled labour, cost of raw materials infrastructure, etc. that a firm
Condition need to produce its products and services. These factors may be labour,
technical knowledge, capital, and other natural resources.
This can be understood as businesses usually develop in a cluster of
Related and
related industries, including parties from the value chain such as the
Supporting
makers of complementary products and suppliers where suppliers support
Industries innovation and globalisation.
The development of different management styles, organisation, and
strategy is strengthened by the environment of a given market. For
Firm
example, strategic alliances are more adopted by Asian or Latin American
Strategy,
firms. In addition to, markets differ in terms of the competitiveness of
Structure,
their industries, as a strong competitive stage in the domestic market
and Rivalry tends to strengthen domestic firms’ competitive capabilities in the
international arena.
Table.1: Porter’s Dimond (Porter, 1985)

Type and Stages of Internationalisation

A) International Market Segmentations & Selection

Market segmentation is a marketing strategy that involves firstly, separating a big number of
target markets into sets of customers, enterprises, or nations with shared needs and wants.
Secondly, designing approaches to target them. It is used to define the target clients and offer
information for a marketing plan. A firm may follow adaptation approaches, which refer to
adapting products and services to a specific market or may follow a standardisation
approaches which refer to offer one product specification to all targeted segments (Hollensen,
2016).

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Market segmentation has four different types, which are geographic, demographic,
behavioural, psychographic segmentation. According to Dudovskiy (2018), Starbucks is
paying close attention to its market segments through exploiting demographic segmentation
in terms of gender, income, age, and ethnic background and through employing geographic
segmentation about a country or region and its market size in that specific area.

B) Strategies to Market Entry

There are several available options a firm can choose to enter its desired market, however,
differs in term of its efficiency and suitability within a specific case and within the firm’s
capabilities. According to Hollensen (2016), there are approximately 16 different entry
modes or stages to follow, the more capable the firm and the more feasible the option is, the
more advanced the mode is. The following figure below illustrates these modes followed by a
table that includes a number of advantages and disadvantages of the most popular options:

• Wholly-owned subsidiary
• Company acquisition
• Assembly operations
• Joint venture
• Strategic alliance
• Licensing
• Contract manufacture
• Direct marketing
• Franchising
• Distributors and agents
• Sales force
• Trading companies
• Export management
• companies
• Piggyback operations
• Domestic purchasing

Figure.1: Market Entry Options (Hollensen, 2016)

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Entry Option Advantages Disadvantages
Low restrains & cost low control over agents, low
Exporting
information of overseas market
Licensing, Low cost &risks Low control over operation,
Franchising quality issue.
Shared costs and risks, access to Technology leak, insufficient
JV
partner’s channels control, potential conflicts,
WOS High control, protect Technology. High risks and costs
Strategic Access to alliance partner’s Partner interest conflict
Alliance distribution network

Table.2: Market Entry (Hollensen, 2016)

In opposite to its local strategy within the United States market, which focuses on a wholly
owned subsidiary, Starbucks has adopted a strategy of partnerships through a joint venture to
expand its store chain. Such a strategy enabled Starbucks to benefit from the experience and
the power of the local partner in terms of accessing the labour market and acquiring strategic
locations (Dudovskiy, 2018).

Challenges of Global Growth

As mentioned above, internationalisation in most cases comes with issues and complexities
that a firm should understand prior to launching its international strategy. Therefore, in order
to get a better understanding of those risks, this section will review the literature regarding
institutional, economic and cultural theories.

Institutional Theory

This theory, which is also known as the rule of the game (Scott, 1995), indicates that in order
for firms to succeed and secure legitimacy in a given country or business environment, they
must follow a set of institutional isomorphisms and systems such as, regulations, norms and
laws (DiMaggio and Powell 1983; Meyer and Rowan 1977; Scott 1995). These systems and
isomorphisms were organised by Scott (1995) into three elements which are: (1) regulative,

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(2) normative, and (3) cultural-cognitive. The table below illustrates each element followed
by an explanation.

Table.3: The Institutional Elements (Scott, 2013)

a) Regulative Elements

Regulative elements explain the regulative process, including laws, sanction, and rules (Scott,
1995). These elements break down into two significant risk levels, country risk level and
market risk level. Country risk level often stresses the political risk, such as political
instability and its direct impact on the currency exchange rate, according to Simon (1984)
political instability influences the stability of a given country market. Therefore, it is very
important for a firm to undertake a political risk assessment which was developed by Ashley
and Bonner (1987).

Nonetheless, market level risk (Economical factors) which is found in both developed and
emerging economies market (Lewin and Kim, 2004), is divided into two categories—macro
and micro risks. The macroeconomic risk focuses on the movement and trends in the
economy as a whole (Chappelow and Segal, 2019), including the rate of inflation, interest,
production and employment. All have a direct impact on the currency exchange rate, which
in return can lead to a financial and payment-related risk (Ting, 1988). Whereas, the
microeconomic risk can be assessed by the Porter's Diamond definition of the four
dimensions (Porter, 1985).

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 b) Cultural-Cognitive Element

This element highlights the cultural and historical context of a market that has an impact on
consumer's cognitions and beliefs (Scott, 1995). Culture is considered to a risk factor for an
international business which is also correlated to host-country the institution, culture is a
"substratum of institutional arrangements". Therefore, firms should build an understanding of
cross-cultural differences due to their effect on the cost of entry, operational benefits and the
firm’s ability to transfer core-competence (Palich and Gomez-Majia, 1999).

Entry Barriers

According to Peng et al. (2008) entry barriers are an issue that has highlighted in his 2008
research paper on the institutional-based view. His aim was to illustrate the legal aspects of
an institutional-based model in regard to international strategy. According to Porter (1985), a
trade barrier is a governing power tool used to eliminate and control what's referred to as
trade dumping and trade invading. According to Peng et al. (2008), trade dumping is when a
local firm sells products below the international-cost level to gain a competitive advantage in
its market then attempt to raise the selling prices afterwards. Therefore, it is important for a
firm to analysis these barriers prior to launching an international operation to enhance its
chance of success.

Part B: The Case of Starbucks

Starbucks strategy to enter international markets is supported by market researches that

enable a deeper understanding of the institutions and the way in which they influence a
forging firm’s performance. Moreover, the researches include the market analysis that help
with choosing the market will be targeted followed by selection processes. The entry mode
they will adopt. The entry mode would be based on three attribute levels; feasibility,
acceptability and suitability level (Dvault, 2018). Starbucks is one of the biggest and well
recognised international brands, not only in the coffee industry, but also in the world of
international business. Starbucks is operating in more than 76 international markets and in
China alone it is estimated that every 15 hours a new store open (Turner, 2018). Despite their

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success, Starbucks has lost their competitive advantage in the Australian content, even
though in 2008 they had 87 operating stores which is a big number considering that they first
entered that market in the year 2000. This part of the essay will discuss the brand success in
the Chinese market and its failure in the Australian one.

Starbucks in China

With regards to China, Starbucks created a marketing strategy that would align it with its
specific market whilst respecting the culture Starbucks did not follow its conventional
approach to advertising which could have been viewed as not respecting the Chinese culture
of drinking tea. That could have had a negative response from the Chinese consumer. Instead,
Starbucks allowed the Chinese consumer to discover them by positioning their stores in the
high street with high visibility. Moreover, they introduced a beverage that included local tea-
based ingredients to bridge the gap between the Chinese culture of tea drinking and the
American culture of coffee drinking. This adaptive approach supported the brand
development and market position in this market, that was done through market research.
Starbucks could have developed a separate brand name only for the Chinese market as the
case Toyota and Lexus. However, that would have cost the brand loss of the targeted
segment, which views a western brand as highly appealing (Devault, 2018).

Starbucks in Australia

Starbucks opened their first Australian branch in Sydney in 2000, followed by a total of 87
branches over the next 8 years. However, despite their success, they were forced to close 26
of their branches due to the unattractive offerings to the Australian consumer. The reason for
this was mainly a result of the rapid expansion strategy in that market (Turner, 2018).

To understand why the Australian consumer was not attracted by the brand, we need to
understand the coffee culture in Australia. According to Turner (2018), Coffee was
introduced to Australia by the Italian Migrants in the mid-1900s. Australians adopted the
Italian way of meeting up in for social and business gatherings.

Yet, Starbucks did not adapt to this consumer behaviour and they entered the market with a
standardised approach by introducing the American coffee culture where the consumer orders

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his takeaway coffee and leave. On the contrary, another American coffee brand (Gloria
Jeans) has more than 400 locations in Australia, and the reason behind that success is that
they adapted to the market (Turner, 2018). Therefore, it is widely believed that Starbucks
successes in other international markets led them to rather neglect the organic approach of
internalisation and miss understand the core differences and challenges in the international
market.

Conclusion
In conclusion, this article aimed to help understand the drivers, stages, and challenges of
global growth, where it discussed several issues that the firms should consider before
formulating an international expansion strategy. Conducting the assessments mentioned will
help a firm succeed in a given country market while eliminating the risks and challenges that
may arise by the institution or competitors.

Despite the huge potential of operating internationally, firms should undertake an in-depth
market research and SWOT analysis to succeed. They should also work on developing a
strategy that focuses on the competencies of the market and how to align the corporate
strategy with market culture.

In China, Starbucks was able to succeed through acquiring strategic locations, and through
bridging the gap between the Chinese culture of tea is the national drink instead of coffee,
and at the same time recognizing the cultural aspects in the marketing campaigns. On the
contrary Starbucks strategy in Australia was not successful, as they tried to deliver the
American culture to the market, and not to adapt to the local market culture and needs.

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