Order ID | 53563633773 |
Type | Essay |
Writer Level | Masters |
Style | APA |
Sources/References | 4 |
Perfect Number of Pages to Order | 5-10 Pages |
Starbuck’s International Expansion Assignment Essay
November 19, 2012
In this case we reviewed an interview with the Starbucks Chief Executive Office, Orin
Smith dealing with the coffee store chain’s experience with international expansion. Starbuck’s
has achieved major operating in the United States since its beginnings. When Orin Smith joined
the corporation in 1990 the chain only operated 45 stores in the Pacific North West which have
grown to 7200 stores worldwide (1650 international stores, and 5550 in the US). Some of its
key advantages it has had in the US that supported its growth included: 1) operating concepts
such a real estate strategy of finding the best corners in the best markets and opening stores, 2)
reliance on good employees with a strong emphasis on training to enhance the customer
experience and consistently delivery high quality productsi, and 3) provide a unique sit down
customer environment modeled after the espresso bars of Italy while including modern
conveniences such as wireless internet access. However, when it came to international
expansion, Starbucks did not have major success but instead had very mixed results and
challenges where overall its international operations not being profitable since 1996. Issues
related to Starbuck’s international expansion include the following:
– Fierce competition in existing and new markets
– High real estate costs in comparison to US costs
– Cultural differences impacting management, employee, and operating experiences
– Cultural differences related to customer tastes, product preferences, and image
– Financial risk and impacts of overexpansion into new markets
– Impacts due to changing economic conditions
Analysis
One of the issues Starbucks encounters in its international expansion is fierce
competition from other coffee shops. This issue appears in two forms with respect to
Starbucks. One form is that in many European markets similar stores open with lower cost
products. The other stores typically are undercutting Starbuck’s prices, e.g. a Tall Latte sold at
Caffe Nero, a London Competitor, vs. $2.93 at Starbucksii. This type of price competition
naturally has a negative impact on demand for Starbuck’s products if similar products are
available. Independent of price differences leading to fierce competition another related issue
is that it has been common for the Starbuck’s model to be copied in new markets. This poses a
significant dilemma as it pushes Starbucks to act and expand rapidly in markets in which they
would like to enter to stay ahead of copycat competitors.
Another issue faced by Starbuck’s is related to one of their key advantages that
contributed to their domestic success in the United States; High Real Estate costs. As described
in the article when using their strategy to find the best corners in the best markets they met
challenges being profitable. The example in this case was in the United Kingdom where despite
having great volume, the real estate costs were too high. Furthermore they face the issue of
being difficult to relocate after obtaining the high cost locations.
The real estate issue is also tied to a much larger issue that has Starbucks has faced
during their international expansion. Early on in their international expansion Starbucks
attempted to copy their approaches to operations and management. This proved to not be as
effective. Key problems with this approach included the fact the less familiarity with local real
estate meant they may have not be able to as effectively locations for opening stores. Lack of
local knowledge is a major issue. Similar, their approach to sending expatriate management
from the United States to operate the business was not effective because American
management are less familiar with the local culture and business as compared to locally hired
managers. As the article describes however, this issue was realized and Starbucks has began to
make increased use of local management.
Similarly, consideration for local tastes is another issue related to international
expansion. Interestingly, according to the article Starbucks has had success with being able to
sell a consistent product line in multiple regions with some tailoring. An example of this has
been that the coffee that is served in other countries is the same as the coffee sold in the US.
Tailoring has occurred by Starbucks recognizing local preferences such as increased emphasis on
food in some markets or tea in China. In fact this potential issue has turned into a benefit as it
allowed Starbucks to discover and experiment with new products that in one market that it can
introduce into others. A negative aspect with respect to customer perceptions however
involves the image of Starbucks as an American corporation overseas. This can have a severe
enough impact that can lead to the closing of stores such as what occurred in Israel. In other
areas where the Starbucks image may be perceived “corporate colonial imperialists” iii,
expansion approaches have to be carefully considered.
Other issues faced by Starbucks are that of overexpansion and impacts due to economic
downturns. In their experience in Japan they attempted to capitalize on successes and quickly
expanded to 500 stores but experienced a loss of $3.8M. As it was indicated in the article this
may have been due to both economic conditions as well as growing beyond their capabilities.
As economic conditions have worsened in Europe there becomes even more reason for
consumers to lower cost, similar alternatives.
Alternatives
In this article we learned about some of the existing approaches being used to address
the international expansion issues encountered by Orin Smith and Starbucks. Some of the
approaches included opening wholly owned stores, joint ventures with local corporations, hiring
local management, and tailoring products and services to local tastes and preferences. To help
address the issues that were presented several alternative strategies are presented.
1) License Sale of Starbucks Products before Store Expansion – In this alternative Starbuck
has a significant shift from existing expansion approaches. To enter new markets,
instead of opening new store locations that provide the Starbucks experience, Starbucks
instead licenses the sale of its products and equipment for the sale in non-Starbucks
coffee shops or other retail outlets. This is intended provide lower risk when entering
new markets as real estate would not be purchased and staff would not need to be
trained. Tailoring of products is dependent on what is ordered by the coffee store
owners. Starbucks would then monitor sales data and trends based on the orders that
are being placed by store owners to help evaluate where they may see success if
Starbucks stores were opened. The marketing and promotion of the licensed products is
determined by the store owner at the international store location.
2) Expansion through Franchise Opportunities – In this alternative Starbucks would in a
similar way to the first alternative attempt to reduce its risk by allowing potential store
owners to open franchises in the locations of their choice to sell Starbucks products. The
stores would be recognizable as Starbucks cafes allowing Starbucks to have a more
visible presence while reducing the corporation’s burden of obtaining real estate. The
franchise owners would be local to the area where the franchise is being opened.
Starbucks would extend its training to Franchise owners to allow them to leverage best
practices and to create similar customer experiences that have contributed to past
success.
3) Expansion through Joint Ventures – In this alternative, Starbucks would partner with
existing corporations in the countries in which they would like to expand. Starbucks
would utilize local management to support the selection of real estate and develop
marketing approaches and to tailor products based on customer preferences. Starbucks
would require training to allow them to leverage best practices and to create similar
customer experiences that have contributed to past success. Through working with the
joint venture partners, training would also be tailored to incorporate local culture and
customs.
Additionally, market selection is a key aspect to be considered. Two alternatives will be
discussed.
1) Mature, wealthy markets – Typically wealthier markets and countries with a strong
presence of coffee drinkers and cafes, and high incomes such as Western European
countries.
2) Emerging, growing markets – Typically markets with a growing middle and upper class,
less presence of cafes and café culture.
Decision Criteria
In analyzing the alternative approaches Starbuck’s can use when considering
international expansion, it is important to considering certain decision criteria. The following
criteria will be considered.
1) Does the alternative allow Starbucks to control the store and customer experience? – In
this criteria we mainly focus on the amount of control Starbucks has over how its
products and services will be perceived. One of Starbuck’s advantages has been its store
experience which allowed it to stand out from other competitors and is the reason it has
been copied in some markets.
2) Does the alternative add significant financial risk? – In this criteria financial aspects of
implementing the alternative are considered. Currently the international operations are
not turning a profit and have led to store closures. Past decisions have led Starbucks to
be stuck in certain high cost areas such as the UK expansion which has proved to be
difficult to relocate from high costs, low profitability areas.
3) Does the alternative address long term competitiveness? – Though financial
considerations are important, if an approach does not consider how Starbuck’s can
address the competitive nature of the industry, it would not be a viable approach. The
example of this is coffee chains modeled after Starbucks rapidly expanding in new
markets.
Analysis of Alternatives
Using the decision criteria discussed above, each alternative can be analyzed to
determine if it is appropriate for Starbucks for international expansion.
Expansion Approach:
1) License Sale of Starbucks Products before Store Expansion
experience? – This alternative does not provide Starbucks with any control over
the store and customer experience. How Starbucks products are marketed is left
to the store owner and can have the potential to negatively impact the Starbucks
image. The alternative also minimizes the interaction between the corporations
that may want to tailor products for other markets. Because it is up to the
smaller store owner, there is less feedback to influence product development
decisions.
financial risks to Starbucks as there is no risk while acquiring costly real estate for
the opening of new stores, training employees, and maintaining operations.
alternative has small financial risk for entering new markets, it has a negative
impact on Starbuck’s ability to achieve long term competitiveness. Because
there are issues with fierce competition from chains copying Starbucks and
rapidly expanding into new markets, Starbucks would effectively never gain
competitive advantage since it would not have any strong presence to promote
their products.
2) Expansion through Franchise Opportunities
experience? – This alternative allows Starbucks to have more influence on the
promotion of its products. The Franchise would provide a strong presence as
compared with licensing and a stronger relationship with a Franchisee would also
allow Starbucks the ability to make better product development decisions for the
target markets. However without having complete control of the store locations
Starbucks cannot enforce the creation of a common customer experience as it
can through the training it utilizes for all employees in its domestic operations.
reduces financial risks to Starbucks as the Franchise is assuming the risk when
acquiring real estate and operating the store.
aspects and risks associated with this approach as well. In the very competitive
marketplace Starbucks would be taking a risk by not having more control because
it can potentially pass on knowledge and expertise what may become a future
competitor.
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