Entry Modes of Starbucks
School of Sustainable Development of Society and Technology
Master Thesis Course - International Business and Entrepreneurship EFO 705/ MIMA
Entry Modes of Starbucks
Tutor: Leif Linnskog Authors: Beatriz Santamaría (841007-p008) Shuang Ni (831206-p446) Date: 3 June 2008 Group number: 2023
Summary
Date: Level:
3 June 2008 Master Thesis in Business and Administration- International Business and Entrepreneurship Entry Modes of Starbucks
Title: Authors:
Beatriz Santamaria (841007-p008) Cuenca, 3 3A 19005 Guadalajara (SPAIN) +34 64621633 Date of birth: 1984-10-07 E-mail: Bea5031@msn.com Shuang Ni (831206-p446) Vasagatan 40 722 15 Västerås +46 73 584 27 66 Date of birth: 1983-12-06 E-mail: sophia_nishuang@hotmail.com
Tutor: Topic:
Leif Linnskog When an MNC seeks to enter a foreign country, it must choose the most appropriate entry mode for that specific market, such as exporting, licensing, a turnkey project, franchising, joint ventures or wholly-owned subsidiaries. There are many factors which affect the choice of entry modes. Influential factors contributing to the entry mode decision can have different degrees of impact for each particular country. As a consequence, an MNC has to use different entry modes in order to adapt to the specific situations it faces in its international expansion strategy.
Research Problem: Our research problem is to find the answer to two specific research questions while investigating in a particular MNC: Starbucks. The relevant questions are: (1.) What factors affected Starbucks’ entry mode decisions? (2.) Which entry mode strategies did Starbucks use foreign markets and why? Method: We collected data through a qualitative method. We regarded that a qualitative research method would provide us the necessary data to understand entry mode decisions. We collected data through literature, books, journals, and Internet resources. We have decided to focus our qualitative research on exploring Starbucks’ entry mode decision in some specific markets. In particular, we have concentrated on Spain, New Zealand and the United Kingdom.
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Conclusions:
The choice of entry mode is a critical decision made by MNCs. The choice is influenced by several factors; we have divided these into internal and external factors. We have found both groups are important in the decisions made by Starbucks. However, the degree of influence is different in each case. Moreover, it is possible that some influential factors in the choice of entry mode can differ by case. Finally, we have found external factors have been critical in affecting Starbucks’ choice of entry modes. Starbucks has sought to adapt to those external factors and local needs and requirements by using different entry modes. entry modes, Starbucks, external factors, internal factors, Spain, New Zealand, United Kingdom, licensing, joint-venture, wholly-owned subsidiaries
Keywords:
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Acknowledgements
I would like to thank my tutor Leif Linnskog, who devoted his time and energy for our thesis from the first seminar until now. Furthermore I want to thank those groups in each seminar section who gave us a lot of critical comments and useful suggestions. Last but not least, I am thankful to my lovely thesis partner Bea, who invested almost all her time in the library for our thesis. Her understanding, knowledge of thesis writing, and her smart and easygoing personal characteristics always impress me. Therefore I wish to thank her most for all her cooperation and help in completing our thesis. I would like to extend my appreciation to my family, who has supported me throughout this year of Master’s study. I would also like to thank my Daniel, who is always on my side and gives me help. Especially, he helped us to modify the whole thesis’ English sentence by sentence and gave us a lot of useful comments. Moreover, I would like to thank my great friends Linda, Pat, Wang Qi, Marina and all the others with whom I have shared friendship during the past year. Without these relationships, I would have never enjoyed my time in Västerås as much as I have. --- Shuang Ni (Sophia)---
I would like to take this opportunity to thank all who have helped and supported me during this hard year. I also would like to express my gratitude to my tutor Leif Linnskog, for his guidance and his wise advises. I also would like to thank my fellow groups in our seminar for their suggestions and constructive comments. More importantly, I cannot forget to send warm thanks to my thesis partner Sophia. Your help and effort were crucial to the thesis’s success. Furthermore, I would like to expend my appreciation to Daniel for reviewing our English. Especially, I would like to thank my parents and my two brothers for their support and patience. In particular, I would like to dedicate my thesis to my dear Mum who knows her daughter the best and has always been there for her on the way towards her aims. Thank for all your love, good wishes and patience. Finally, I would like to thank four important people who have been through this past year with me and now they are in an important place of my heart. Thanks my dear friend David for your help. To my dear friend Camino, thank for listening me, for your support and advises. To my dear friend Alvarito, I will never forget all messages and emails you sent to me to encourage me. Last but not least, to my dear friend Fa thanks for your advises and good wishes. --- Beatriz Santamaría Sotillo---
Västerås, Sweden June 2008
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Me gustaría aprovechar esta oportunidad para agradecer a todos aquellos que me apoyaron y ayudaron durante este duro año. Mis agradecimientos a mi tutor Leif Linnskog, por su sabios consejos y su orientación. Me gustaría también dar las gracias a mis compañeros de seminario por sus comentarios y sugerencias. A mi compañera de tesis Sophia, gracias por tus comentarios y duro trabajo. Tu ayuda y esfuerzo fueron cruciales para desarrollar nuestra tesis. Además, me gustaría dar las gracias a Daniel por revisar nuestro inglés. Especialmente, me gustaría dar las gracias a mis padres y mis dos hermanos, gracias por vuestro apoyo y paciencia. Me gustaría dedicar esta tesis a mi madre quien siempre supo que su hija conseguirá todo lo que se proponga y ha estado siempre orgullosa de ello. Gracias por todo tu cariño, esfuerzo y paciencia. Por último, me gustaría dar las gracias a cuatro personas muy importantes que conocí este año y que ahora ocupan un lugar muy importante en mi corazón. A mí querido amigo David, gracias por tu ayuda. A mi querida amiga Camino, gracias por escucharme, por todo tu apoyo y consejos. A mi querido amigo Alvarito, nunca olvidaré todos los mensajes y e-mails que me enviaste para animarme. Por último y no por ello menos importante, a mí querida Fa gracias por tus consejos y cariño. ---Beatriz Santamaría Sotillo---
Västerås, Sweden June 2008
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Index
SUMMARY ........................................................................................................................... i ACKNOWLEDGEMENT ......................................................................................................... iii CHAPTER 1: INTRODUCTION AND RESEARCH PROBLEM ........................................................ 1 1.1.TOPIC ................................................................................................................................... 1 1.2.RESEARCH PROBLEM ........................................................................................................... 1 1.2.1.Research question ........................................................................................................ 1 1.2.2. Approach of research problem .................................................................................... 1 1.3. OUR MOTIVATION .............................................................................................................. 2 1.4. TARGET GROUP.................................................................................................................. 2 1.5.LIMITATIONS ...................................................................................................................... 2 CHAPTER 2: RESEARCH METHOD ......................................................................................... 3 2.1.RESEARCH INSTRUMENT ..................................................................................................... 3 2.2. RESEARCH DESIGN.............................................................................................................. 5 2.3.SELECTION OF MNC............................................................................................................. 7 CHAPTER 3: LITERATURE REVIEW ......................................................................................... 8 3.1.DEFINITION OF ENTRY MODE.............................................................................................. 8 3.2.ENTRY MODE FACTORS ....................................................................................................... 8 3.2.1. Chen. L.Y and Mujtaba B. ........................................................................................... 8 3.2.2.Theory of Root ............................................................................................................ 10 3.2.3. Theory by Brassigton and Pettitt .............................................................................. 12 3.2.4.Theory by Koch ........................................................................................................... 12 3.3. ENTRY MODE LITERATURE ............................................................................................... 14 CHAPTER 4: CONCEPTUAL FRAMEWORK ............................................................................ 17 CHAPTER 5: EMPIRICAL INFORMATION .............................................................................. 21 5.1. BACKGROUND .................................................................................................................. 21 5.2. INTERNATIONALIZATION OF STARBUCKS......................................................................... 22 5.3. EMPIRICAL INFORMATION OF THE MARKET INVESTIGATED ........................................... 24
5.3.1. Case 1: United Kingdom ............................................................................................ 24 5.3.2. Case2: New Zealand ................................................................................................. 26 5.3.3. Case3: Spain .............................................................................................................. 27 CHAPTER 6: CASE ANALYSES .............................................................................................. 30 6.1. DATA ANALYSES................................................................................................................ 30 6.1.1.Case 1: United Kingdom ............................................................................................. 30 6.1.2.Case2: New Zealand ................................................................................................... 33 6.1.3.Case3: Spain ............................................................................................................... 37 6.2.CONTRAST OF ANALYSES................................................................................................... 40 CHAPTER 7: CONCLUSION AND RECOMMENDATION .......................................................... 45 7.1. CONCLUSION .................................................................................................................... 45 7.2. RECOMMENDATION ......................................................................................................... 46 REFERENCE LIST ................................................................................................................. 48 APPENDIX-I ....................................................................................................................... 55 APPENDIX-II ...................................................................................................................... 58 APPENDIX-III ..................................................................................................................... 60
CHAPTER 1: INTRODUCTION AND RESEARCH PROBLEM
1.1.TOPIC
When a firm seeks to enter a foreign market, the company must choose the most appropriate entry mode for that specific market. The decision of entry mode strategy is the most critical decision in international expansion. The choice of international strategy has long-term implication for MNCs. That means, entry mode strategies are often massive, irreversible, and can influence the performance of the firm in the long run. MNCs can choose between six international entry mode strategies: exporting, licensing, a turnkey project, franchising, joint ventures and wholly-owned subsidiaries. There are many factors which affect a company’s decision of entry modes. Therefore, managers need to analyze them and determine the most suitable international strategy. Influential factors in entry mode decision can be different in each case. In addition the degree of influence of each factor can vary between countries. As a consequence, some MNCs use different entry modes to adapt to specific situations in their internationalization process.
1.2. RESEARCH PROBLEM 1.2.1. Research Questions
Our purpose is to find an answer to the following research questions while exploring a particular MNC, Starbucks: • What factors affected Starbucks’ entry mode decisions? • Which entry mode strategies did Starbucks use in foreign markets and why? 1.2.2. Approach research problem As we previously commented, our master thesis is focused on choice of entry modes. Our aim is to explore those factors that influence the choice of different entry modes within the same MNC. Furthermore, we will explore why Starbucks uses different entry modes in its internationalization process.
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1.3. OUR MOTIVATION
We find it interesting to investigate the reasons for why Starbucks uses different entry mode strategies in its expansion abroad. We think our investigation has enabled us to better understand the key to Starbucks’ strategy of internationalization. There are many theories about entry modes such as Chen and Mujtaba (2007), Root (1994), Koch (2001), Brassigton and Pettitt (2000) and Transaction Cost Entry Mode (TCE), which have developed different factors that influence entry modes decisions. Through our investigation, we would like to have a more clear understanding of how these theories work in practice.
1.4. TARGET GROUP
One purpose in writing our thesis is to target Starbucks’ managers, students and researchers who are interested in this company and its entry modes strategies. Regarding Starbucks’ managers, we hope our thesis enables them to obtain more information about their company. Our results might shed light on new ways to analyze their entry modes in different subsidiaries and their process of internationalization. The second target group of our thesis is students. Our research could be useful to students−particularly those learning international business. They will find our thesis to be a practical example of a company’s internationalization process. Last but not least is researchers. Our findings could help other researchers in their investigation, or even to suggest new inquires.
1.5. LIMITATIONS
In an investigation, their authors often found limitations in their work. In our particular case, we found two important limitations. First limitation was time; we had liked to analyze six cases in our thesis to get reliable findings. However, as we had a short period of time we only selected three case studies to answer our research questions. Second limitation was found in our methodology part. We had difficulties to get primary data we only got an interview in one of three cases. As consequence, we had to use secondary data and contrast it to avoid using unreliable information.
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CHAPTER 2:
RESEARCH METHOD
There are two main methods which resolve a research problem: quantitative and qualitative methods. The choice of method depends on the researcher and the research problem. Qualitative method is a subjective approach which includes examining and reflecting on perceptions in order to gain an understanding of social and human activities (Hussey J & Hussey R 1997). Quantitative method is an objective approach which includes collecting and analyzing numerical data and applying statistical tests (Hussey J & Hussey R 1997). In our master thesis, we have collected data through a qualitative method. As previously, mentioned the research method has to fit with the research problem. We regarded that a qualitative method was the most suitable to understand entry mode decisions. We sought the flexibility of qualitative instruments to obtain findings more than the rigidity of quantitative methods. We have focused our investigation on several established aspects and factors. However, we have ruled out the possibility to include other crucial factors that explain our phenomenon in our research. The qualitative method has allowed us not only to find the data we look for, but also to locate complementary information that was relevant for our study.
2.1. RESEARCH INSTRUMENTS
There are several instruments that can be used to carry out our qualitative method. We have chosen to develop our investigation through interviews (particularly e-mail interviews) and documentary research. Both methods are suitable to obtain the data for our investigation. Interviews have provided us information directly from the company, and documentary research has provided information indirectly. Interviews: We considered that it was important to obtain information directly from Starbucks’ managers for our research. Interviews are the most reliable research instrument in order to obtain information for our case study. Furthermore, they provide us new and unknown information that would be impossible to get through other sources such as books or annual reports. We have interviewed the Marketing Director of Starbucks in Spain, Luis Peña. We had preferred to interview him face to face, but we were unable to do so because of his schedule and our physical distance from Spain. Therefore we obtained an e-mail interview (See Appendix I). Furthermore, we tried to interview some managers of Starbucks in the United Kingdom, in New Zealand, and in Starbucks international subsidiary. Unfortunately the United Kingdom office refused our request. They informed us that they received a huge demand of enquires and were unable to respond to individual requests. We also got in touch with the managers of Starbucks in New Zealand. They told us they could not provide the information we needed. Because
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Starbucks used the licensing mode of entry in New Zealand, managers who operate under Starbucks’ licensing agreement lack information about the internationalization process of Starbucks in New Zealand. They said that information was only available from Starbucks’ international subsidiary. The New Zealand managers did provide us the email address of the Starbucks international subsidiary contact, however when we sent our e-mail interview (see Appendix II) we did not receive a reply. E-mail interview: There are several limitations to an e-mail interview. First of all, the interviewer cannot know with total certainty who will reply to the interviews. An email interview might carefully crafted by public relations advisers or by someone who is posing as the person to whom we have sent the e-mail. In addition, an e-mail interview denies the chance to ask spontaneous questions or to immediately follow up on an answer. Answers tend to be shorter than a face-to-face interview. Finally, the interviewer cannot see the visible reactions of the interviewee. An e-mail interview does have some advantages. Physical distances between interviewer and interviewee are eliminated. Additionally, the interviewee has flexible time to answer an e -mail interview (Ros-Martin 2006). Interview literature distinguishes two types of interview: pre-code interviews and open interviews. Pre-code interviews are developed using a specific structure. The interviewer hardly deviates from his prepared script and follows a logical sequence (Hussey J & Hussey R 1997). Open interviews are flexible. The interviewer deviates from his prepared script and asks questions which are not directly related to the interview topic (Hussey J & Hussey R 1997). As our interviews were by e-mail, we chose to use pre-code interviews. We have asked precise questions in order to determine the exact information that we seek as provided by the interviewee. However, we have also added some open questions in order to provide an overview of our topic or another perspective (See Appendix I and II). Documentary research consists of using text and documents that come from journals, reports, videos and other research sources (Bryman & Bell 2003). Documentary research also has some advantages and limitations in research. The main advantage is that there are many sources which we can use to obtain information. The documentary research can also provide different perspectives from a number of different people. However, this research instrument has some limitations such as the data might be unreliable. Also relevant information for a specific company is often difficult to find. We have chosen this data collection method because we considered that documentary sources could provide us relevant information for our research. This form of research
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offers a variety of means to obtain information such as journals, document files, reports, books and so on. Starbucks is a successful company which has been the target of a huge amount of studies. There are many documentary sources concerning Starbucks and its strategies and policy. In addition, documentary research enables us to complement the scarce information available with our own interviews. Information sources on the Internet: At the present there are a multitude of resources available on the Internet for many types of investigations. Among the numerous available sources for research are catalogues of important libraries, databases, ejournals and company homepages. In addition, we can consult and read completed versions of textual materials in virtual libraries and e-journals. However, to use the Internet as an information source can be a double-edged sword. We have to be careful when choosing documents. We have to regard which documents are useful and which are not. Furthermore, the reliability and rigor of Internet sources should always be considered.
2.2. RESEARCH DESIGN
Research design is defined as the link between the collected empirical data, its research questions, and the conclusions generated by a study (Yin 1989). There are five main research designs: First is Experimental design, which consists of choosing some independent variables to determine if those influence a determined variable. It also implies that experimental groups and control groups are needed to make a further comparison before and after the manipulation (Bryman & Bell 2003). Second is Cross-sectional design, which refers to collecting quantitative or quantifiable data (through questionnaires, interviews, surveys, etc) within several cases at a specific point in time, establishing patterns of associations between two or more variables. Later on, comparisons are made to surveys formed in other points in time (Bryman & Bell 2003). Third is Longitudinal design, which looks for specific alterations in contexts, organizations or industries. A sample is surveyed several times during different occasions in order to find the effects of the independent variables within the time period (Bryman & Bell 2003). Fourth is Case analysis design, which describes a single case as a specific location, an organization, a person or an event. It uses different sources of data because a unique source of evidence is not enough to achieve validity (Gillham 2000). Lastly is Comparative design, which analyzes two or more cases which are contrasted using more or less the same methodology. When qualitative methodology is applied, the chosen focus is multi-case. Our aim is to study influential factors affecting the decision of entry mode. In order to analyze those factors we need to make a comparison between different examples. Therefore, we consider that using a single case study is not suitable for our research. Using a multi-case study we will achieve a reliable finding in our thesis. Therefore, we
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have selected a set of locations that correspond with countries in which an MNC, Starbucks, has internationalized. In addition to comparative design, we have used cross-sectional design to determine our conclusions. We need to compare case studies and contrast if our three cases have similarities and differences. There are some criticisms to the use of multi-case. It is argued that researchers are less concentrated on the specific context of every case study and more focused on the contrast between different cases. As a consequence, researchers will develop more comparative analyses instead of deepening a particular analysis, therefore losing the essence of research (Dyer & Wilkins 1991). We have tried to avoid the above effect in our thesis by dividing our empirical analysis into two separate phases: the first phase was to analyze in depth each case and second, after we had already reported the individual characteristics of each case, we started to compare our three cases. The following picture depicts the research approach that we are going to follow in our thesis.
1st PHASE: DESIGN
Entry Mode Theory
Process of deduction
Determine influential factors affecting entry mode decision
2nd PHASE: DATA COLLECTION AND ANALYSIS
To find data to determine if our initial deductions are right (Induction)
Select Cases
Select research method and data collection method • Interviews • Documentary research
Collect data from every case
Write individual Case Report
• Spain • New Zealand • U.K.
3rd PHASE: CROSS-CASE
Contrast of Cases
Cross- cases Report
Conclusions
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In the first phase, the target factors of research are selected using entry mode literature. In the second phase, case studies are chosen based on the factors selected in the first phase. After taking that into account, research and data collection methods are selected for our chosen case studies. Then the data for every study is collected, and an individual report will be written for each country. In the third phase, a contrast process will be applied. When the contrast process is finished, we will describe the results. Finally, we will finish our thesis with the conclusions that can be determined from our research.
2.3. SELECTION OF MNC
We have focused our research on Starbucks. We have chosen this company because we found that Starbucks takes different entry modes to internationalize. The choice of entry mode is due to a set of factors that will determine a company’s international strategy. We consider that it is an interesting case to investigate and determine these possible factors that influence the company’s entry mode strategy. Furthermore, we were interesting in exploring if the choice of Starbucks’ entry mode can be determined by factors enumerated by entry mode theories. Starbucks used three different entry mode strategies to internationalize: joint venture, licensing and wholly-owned subsidiaries (Starbucks.com 2008). We have chosen three countries; each one represents one of three Starbucks’ international strategies. We decided to study three countries because of two reasons. First, we sought to obtain representative results. We considered that one unique country was not enough to reach reliable conclusions. Second, we knew it is really difficult to obtain information regarding Starbucks’ internationalization. If we explored more countries than a country we would obtain data from more sources and have the ability to contrast the reliability of our data. We chose United Kingdom, New Zealand and Spain, because these three countries represented the three Starbucks’ entry modes. In United Kingdom, we investigated that Starbucks only chose entry mode of wholly-owned subsidiary in this country from the early beginning. In the rest of cases where at present Starbucks is a wholly-owned subsidiary the company entered with a different strategy to wholly-owned subsidiary. We selected New Zealand case, because Starbucks used licensing and there was available secondary data to carry out our research. Last in Spain case, Starbucks decided to choose joint venture. We selected this case because we knew that to obtain data from Spain it would be easy as Beatriz Santamaria, one of authors this thesis, is Spanish. With the analyses of three different countries, we thought it would carried out an interesting investigation and could draw a comprehensive contrast in order to make the conclusion for answering our research questions. In case analyses, our aim is to explore which factors affect choice of each entry mode. In order to obtain results we are going to separately examine each country. Our
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research on factors represented in our conceptual framework. We considered that our investigation has to follow a structure. Therefore we decided to use these depicted factors in our conceptual framework as guidance or structure within our research. However, we were not going to rule out including other relevant factors on Starbucks’s choice of entry mode. At the end of our case analysis, we will obtain factors that influenced Starbucks’ choice of entry mode. In addition, we will determine if the factors developed in our conceptual framework were represented in our finding. Finally, we will conclude with the causes of Starbucks’ choice of entry mode.
CHAPTER 3: LITERATURE REVIEW
In this chapter we review literature which relates to our research questions. Inside of our literature review, there are two differentiated parts related to above two main parts of our conceptual framework: literature about factors that affect the entry mode decision, and entry mode strategy theory. Literature of entry mode factors describes factors may influence on entry mode decision. Another hand, entry mode theory shows a set of entry mode strategies that a company can carried out to go into a foreign country.
3.1. DEFINITION OF ENTRY MODE
According to Root (1994), an international market entry mode is to create the possibility by arranging company’s products, technology, human skills, management or other resources to enter into a foreign country. He regards that entry modes help companies to determine goals, resources and policy in order to channel their international activities toward a sustainable international expansion.
3.2. ENTRY MODE FACTORS
Several studies have attempted to identify a set of factors that influence entry mode decisions. In our thesis we draw our attention to the following theories:
3.2.1.Chen. L.Y and Mujtaba B.
Chen and Mujtaba (2007) develop their study about entry mode factors based on TCE (Transaction cost model) and non-TCE perspectives. TCE argues that the cost of implementing a particular entry mode is a relevant factor in a company’s entry mode decision. The mode of foreign entry is based on efficiency criteria in order to economize on transaction costs (Yiu & Makino 2002). Non- Transaction Cost Economics Model consists of a set of approaches such as Ecletic approach, Bargain power theory and Resource-based theory. In Ecletic Theory, Dunning (1998) developed three groups of factors that influence the entry mode choice: transaction-specific advantages,
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internationalization-specific advantages and ownership-specific advantages. Bargaining power theory posits the relative bargaining power of the firm and the host governments are influential factors on international strategy (Deng 2003 & Taylor et al 2000). The resource-based approach considers that resource availability and utilization both play a part in the choice among modes of entry. Chen and Mujtaba’s study is concentrated on MNCs in the US. They divided the entry mode factors into three groups of factors: firm-specific factors, country-specific factors and market-specific factors (See Figure 1). The description of the three factors is as follows: Firm- Specific Factors are related to the TCE model. It refers to firm-specific assets and skills that comprise ownership advantages. Chen and Mujtaba (2007) distinguish three types of firm-specific factors: asset specificity, international experience and firm size. Asset specificity refers to products and technologies that tend to create dissemination risks because of the threat of opportunism. The authors posit that great asset specificity tends to favor a higher-control entry mode. International experience according to the TCE approach is local market knowledge accumulated to avoid hazards in international market transactions. Chen and Mujtaba consider that great international experience favors a higher-control entry mode. Finally, firm size refers to the idea that larger firms have a greater capability than smaller ones to expend resources and absorb risks. Country-specific factors are a set of factors that include country-specific economic, political, legal, institutional and cultural factors. Chen and Mujtaba divided countryspecific factors into two variables: country risk and government restriction. Country risk is possible risk of change in the mode of operation owing to that unpredictable changes in the environment might render the original mode inefficient (Erramilli & Rao, 1993). Chen and Mujtaba posit that high country risk tends towards lower involvement entry modes. Government restrictions are laws and regulations that impact on the operation of a foreign firm (Ibid). This theory supports that increased government restrictions leads to low involvement entry modes. Market-specific factors: Several studies posit that factors specific to the market will influence the choice of entry mode. Chen and Mujtaba (2007) point out as representative variables: market potential, demand uncertainty and competitive intensity. Market potential refers to the growth and size potential of the foreign market. When there is a great market potential MNCs preferr high-control entry mode. Demand uncertainty refers to the future demand of products and services in a foreign market that are difficult to predict. Chen and Mujtaba argue that when demand of uncertainty in a foreign market is high, firms tend to use a higher-control entry mode. Competitive intensity refers to the degree to which a firm’s entry into a foreign market is pursued by its competitors. The authors show in their study that firms use a high control entry mode when the competitive intensity is high.
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Figure 1: Factors affecting entry mode decision Source: Chen and Mujtaba (2007)
3.2.2.Theory of Root (1994)
Root (1994) develops a model of factors that affect entry mode decision. He distinguishes between internal and external factors. He states that the choice of entry mode for a product or target country is the result of several (often conflicting) forces. (See Figure 2). He divides influential factors affecting entry mode decision into two groups: external and internal factors.
EXTERNAL FACTORS
Root (1994) determines four influential external factors affecting entry mode choice: target country market factors, target country production factors, target country environment factors and home country factors. Target Country Market Factors: Root (1994) argues that the size of target country market influences entry mode choice. In small markets companies use entry modes with low breakeven sale volumes such as indirect distributor exporting, licensing and contracts. In a market with high potential sales the company uses entry modes with high breakeven sales volume. Root mentioned competitive structure of the market is an important aspect in considering the target country factors. When competitive structure tends towards monopoly, entry modes are high resource commitments to compete against competitors. Otherwise, if the competitive structure of the market tends towards perfect competition, entry modes are often low resource commitments such as exporting. Target Country Production Factors: the quality, quantity and cost of resources in the foreign country, as well as the quality and cost of economic infrastructure influence the choice of entry mode. When the costs of production are low in the target country, local production is favored. On the other hand, if production costs are high in the foreign country, the company tends to export (Ibid).
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Target Country Environment Factors such as political, economic and socio-cultural dimensions of the foreign country can influence the choice of entry mode. In particular, government policies and regulations can be decisive in choosing the entry mode. Another important factor within country environment factors is geographical distance. When there is a great distance between the home and foreign country, it is possible that transportation costs are high, thereby discouraging export entry modes and favoring another entry mode such as a wholly-owned subsidiary. The economy of the target country can also influence the decision of entry mode. For instance, in centrally planned socialist economies, equity entry modes are not possible, and therefore companies only rely on non-equity entry modes such as exporting, licensing or other contractual modes. Other important factors are the size of economy (gross national product), absolute level of performance (gross national product per capita), and relative importance of its economic sectors (percentage of gross national product devoted to the particular sector). Finally, another relevant factor is cultural distance; the firms often prefer to enter those foreign countries that are culturally closest to the home country (Ibid). Home Country Factors: These are the set of factors that have influence on entry mode choice such as home country market, production and environmental factors. If the home country has a big market, it enables a company to grow to a large size in the home market before going abroad. The competitive structure also influences the choice of entry mode. Relative production costs of the home country versus the foreign country influence entry mode decisions. If there is a high production cost in the home country, the company will chose foreign market entry modes such as licensing, contract manufacture and investment. Another home country factor is the policy of the home government toward exporting and foreign investment by domestic firms. Finally, geographic distance is an influencing factor in that a large distance will favor local presence in a foreign country (Ibid).
INTERNAL FACTORS
Root expounds two internal factors which affect the choice of entry mode: product factors and resource commitment factors. Product factors: when products are highly differentiated over those offered by their competitors; there is a degree of pricing discretion. As a consequence these products can absorb high unit transportation cost and high import duties and still remain competitive in a foreign market. Otherwise, if products are weakly differentiated, they have to compete on a price basis. Therefore, high product differentiation favors export entry whereas a low differentiation tends to use entry modes as contract manufacture or equity investment. When the company’s product is a service, the firm cannot export it. In order to provide services in foreign countries, the firm must train local companies as in franchising or deliver its service directly under contract with the foreign customers via technical agreements and construction contracts. Firms with products using intensive technology often opt to license. In order to internationalize the product, a considerable adaptation is often necessary. The company establishes the
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foreign market through branch/ subsidiary exporting or by going into local production (Ibid). Resource commitment factors: if a company owns a huge amount of resources (management, capital, technology, production skills, and management skills), the company will have numerous entry mode options. However, companies with limited resources are constrained to use entry modes with small resource commitment (Ibid).
Figure 2: Influential factors in the entry mode decision Source: Root (1994)
3.2.3.Theory by Brassigton and Pettitt (2000)
Brassigton and Pettitt (2000) state two internal factors have influence on entry mode: payback and speed. They define payback as the time that a company needs to create revenue from investment in a foreign country. They refer to speed as the time the company desires to dedicate in order to penetrate a target market.
3.2.4. Theory by Koch (2001)
Koch (2001) posits that influential factors on market entry model selection (MEMs) can be divided into three groups: external, internal and mixture of external and internal factors. In our literature review we only mentioned external and internal factors.
EXTERNAL FACTORS
Koch (2001) states there are six external factors influencing choice of entry mode: industry feasibility/viability of MEM, characteristics of the overseas country business environment, market growth rate, image support requirements, global management
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efficiency requirements, popularity of individual MEMs in the overseas market, and market barriers. The first factor is Industry feasibility/viability of MEM. Koch argues some entry modes such as wholly-owned subsidiary or joint venture may be excluded by law in some countries owing to that the particular industry might be considered strategic by the state. This factor also refers to know-how dissemination risk, labor regulation, cost of labor, level of skill and taxes. Furthermore, Koch states that there are characteristics of the overseas country which are easy to obtain these days, but information about industry and company-specific information is often difficult to find. Inside the last category we finds aspects such as similarity, volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication. Knowledge of this information will influence the choice of international strategy. Koch also regards that market growth rate can be influential in entry mode decision. When the market has a fast growth rate, the company seeks to exploit this opportunity by using entry modes of fast expansion. Otherwise, when growth of demand is predicted to occur over a long time, the company tends to establish entry modes such as joint venture and wholly-owned subsidiary. Another external factor is image support requirements. In order to build and sustain their image, some companies may license their inventions to increase their role as global providers of the latest technology, thereby enabling the company to influence global industrial standards. Koch also points out global management efficiency requirements as another external entry mode factor. He posits that when involvement of internationalization of a company is high, company’s resources start being limited. It is necessary to redefine the company’s global strategy. Some companies choose a diversified, multinational mode of operation in that case. The popularity of individual MEMs in the overseas market factor refers to the particular nature of individual country markets. Country markets may have certain entry modes with more popularity than others. New entrants in this kind of market are influenced by the experience and degree of success of the former entrants, as well as the product market situation. Finally, Koch states that market barriers such as tariff barriers, governmental regulations, distribution access, natural barriers, exit barriers and level of country development can have influence on entry mode choice.
INTERNAL FACTORS
Koch (2001) states that entry modes are influenced by seven internal factors: company size/ resources, management locus of control, experience in using MEMs, management risk attitudes, market share target, calculation methods applied, and profit target. Koch argues that the freedom of selection of entry mode and their relevant preference depends on the company size and its resources. Another internal factor is management locus of control. This refers to manager perceptions, intuition and management style.
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Koch also states that experience in using MEMs is an internal factor affecting the entry mode decision. It refers to the management culture which will influence the behavior of decision makers. For instance, managers will refuse to use unsuccessful and untried modes if there are negative personal consequences for proponents. The author thinks effectiveness and efficiency depend on the amount of experience gathered by individuals, and on prevalence of idea sharing within the company. Management risk attitudes are another internal factor. Koch states that the degree of international business risk that the company takes in its entry mode decision depends on: the company’s financial situation, its strategic options, and competitiveness of environment. Market share target also influences the entry mode decision. Koch argues that there are criteria such as sales or market share maximization that will be important in making this decision. Another influential internal factor affecting the entry mode decision is the calculation methods applied. Koch points out that there are available calculation methods of risk or benefit to evaluate the market entry selection. The last internal factor which influences choice of entry mode is profit target. The choice of entry mode will depend on the level and dynamic of profit that the company desires to attain (Ibid).
3.3. ENTRY MODE LITERATURE
When a firm is going to explore a foreign market, the choice of the best mode of entry will arise in the firm’s expansion strategy. There are six essentially different entry modes, generally named as exporting, turnkey projects, licensing, franchising, joint venture with a host country firm, and setting up a wholly-owned subsidiary in the host country (Hill 2007). All of them have their advantages for the firm to explore as well as disadvantages which must be considered by the firm’s top management. In other words, the managers should make the choice carefully because it directly affects whether the firm will succeed or not in its foreign expansion. Regarding the choice of entry for a service company, licensing, franchising, joint-venture with a host country firm or setting up a wholly-owned subsidiary are more suitable for these types of firms. What’s more, the entry mode theory below is from Hill who wrote the book about foreign market entry entitled International Business—Competing in the Global Marketplace. (Hill 2007)
Licensing
Licensing involves a licensee and licensor tied together by a certain agreement which stands to benefit both sides. The licensor will sell its know-how right to the licensee, usually for a period of time. The know-how refers to intangible properties such as patens, inventions, formulas, processes, designs, copyrights and trademarks. The licensee needs to pay the royalty fee in order to have the agreement with the licensor. Licensing is a primary stage for a firm which plans to enter a foreign market. Due to the uncertainty of the foreign market, the political or economic situation, this instability will arouse the firm to consider developing a licensee agreement. This agreement can
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help the firm to make their expansion in a more steady way. In this manner the licensor firm, can collect a royalty fee from the licensee; this is especially a big benefit for a licensor who has limited capital to establish full operations in a foreign country. Thus the firm can decrease its expansion costs via licensing. Moreover, the country barriers make it difficult for the firm to participate in a foreign market, which makes licensing a more suitable entry mode to explore a new market. Last but not least, when the firm doesn’t expect entry into a new market with its intangible property by themselves, having the foreign licensor may help the firm to improve its chance of a successful patent application. One drawback which is similar to exporting is that licensing gives the firm less central and tight control. For the firm it is difficult to control their licensee through the agreement, except by establishing its own subsidiary. The licensee could be a major disadvantage for the licensor because of the difficulty in coordination. Technical knowhow is a competitive advantage for the firm; whereas by selling the know-how the firm undertakes a huge risk of losing this asset to competitors. Because the licensor will receive the main technology and make full use of it, the licensor loses control by selling it to licensee.
Franchising
Franchising is a similar entry mode to licensing. By the payment of a royalty fee, the franchisee will obtain the major business know-how via an agreement with the franchiser. The know-how also includes such intangible properties as patents, trademarks and so on. The difference from the licensing mode of entry is that the franchisee must obey certain rules given by franchiser. Franchising is most commonly used in service industries, such as McDonald’s to cite an example. However the licensing entry mode is frequently used by manufacturing firms. The primary advantage of franchising is that the firm doesn’t have to bear the development costs and risks associated with entering a new foreign new market, just like in the entry mode of licensing. By the low costs and risks, the firm could explore the market in an efficient way. Thus the strategy of using franchising is similar to the entry mode of licensing. The disadvantage is clear because the agreement requires that the franchisee will abide by strict rules. The franchisee is often hard to control, especially in the service industry whereby the franchisor will require the franchisee to adhere to the same standards of quality. If the franchisee does not strictly obey the rules of the franchisor, it could lead to a worldwide collapse of the international firm.
Joint Ventures
A joint venture is a typical entry mode used world-wide. Literally, it means two or more individual and independent firms join together in an alliance in order to achieve
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better position in the market. Often the joint ventures are a 50/50 venture. It is a method that both sides hold relatively the same percentage of shares in the venture. The joint venture’s operation is separate from both companies, and often the same role is shared by both managerial teams. It could be possible that one firm invests more in order to gain the larger percentage of shares and hold tighter control of the joint venture’s operations. Likewise, a lower investment percentage will usually lead to less control. A joint venture has a lot of advantages. Firstly, both of the firms share the costs as well as the benefits. Both sides share the risk as well. By investing into and joining a local firm, the international firm could successfully explore the foreign market with their assisting jointed firm. The international firm could thereby gain market knowledge from the local firm. Especially considering the political and economic issues in the international market today, it is an overwhelmingly popular way to enter foreign markets. The local firm might have a way to influence the local government, which will smooth the market entry for its joint partner. The disadvantage is obvious in that the firm might have major conflicts with its partner. Regarding the shareholding of the firms, it is often difficult to maintain a balanced relationship. Once one firm’s expansion strategy is in conflict with the other party, it will by all means bargain about the relative share ownership in order to have more control of the firm. Thus the partner with stronger bargaining power will continue to lead an unsteady joint venture. As for the firm’s international expansion, giving up control of technology could be very risky for the firm.
Wholly-owned subsidiaries
The entry mode of wholly-owned subsidiaries means the firm owns 100 percent of the overseas entity. There are two major ways to establish foreign wholly-owned subsidiaries. First is a greenfield venture. That means the firm will enter the new international market by establishing a completely new operation and legal entity. The second method is acquisition; whereby the firm acquires another firm in that international market in order to directly enter. The other firm could be an established and well-built firm in that particular industry. Thus the firm could gain a lot of advantages and promote its own products by using the acquisition strategy. There are a number of advantages to establishing wholly-owned subsidiaries. Obviously, one of the advantages is that the firm could have tight control, because the firm has 100 percentage of ownership. Then it is easy to understand that the firm could make its own strategic plan and control the subsidiaries in its own way. Especially, compared with other entry modes, the firm does not need to bear the risk to lose its competitive advantages and know-how by selling these to another party. Therefore, the firm has more power of control and less risk. Furthermore, as for multinational firms, many of them are eager to explore foreign markets in order to go up the experience curve and understand the local economy. Last but not least, the firm could have 100 percent of profits in its wholly-owned subsidiaries.
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The disadvantages of wholly-owned subsidiaries are clear too. As long as the firm chooses wholly-owned subsidiaries, the cost is definitely high. Because of full ownership, the firm cannot get any assistance from other party. While bearing the full cost of the investment in the foreign country, the firm still needs to bear the entire risk. The risk lies in the uncertain foreign market, the unfamiliar political and economic environment or the culture gap. To do business in a new culture, especially by choosing the entry mode of wholly-owned subsidiaries by acquisition, could raise a lot of problems. The variety and diversity of the foreign business practice or country culture could be a significant issue for the firm to deal with.
ENTRY MODE Licensing
ADVANTAGES Lower cost and risk
DISADVANTAGES No tight control Risk for losing know-how Quality control Hard monitoring Loss control of technology No tight control of partner Conflicts and battles Full cost and risk Culture problems
Franchising Joint Venture
Wholly-owned subsidiaries
Lower cost and risk Fast Benefit from local partner Share cost and risk Political considerations Technology control Tight overall control 100% share of profits Location and experience Curve economy
Figure 3: Entry modes Source: Hill Charles, 2007
CHAPTER 4:
CONCEPTUAL FRAMEWORK
To understand the development of our master thesis conclusion and to collect data for our research, it is valuable to depict a conceptual framework. We have modeled our conceptual framework in two different parts: factors which affect decision of entry modes and different strategies of entry modes. The purpose of this conceptual framework is to show the influence of different factors on the choice of entry modes. When managers have to choose an entry mode to enter into a foreign country, there are many factors which they take into account before making decisions. We have selected a set of factors for our conceptual framework. The factors proposed belong to Chen and Mujtaba (2007), Root (1994), Koch (2001) and Brassigton and Pettitt (2000) entry mode factors literature. Our criterion of selection was based on validity for our particular cases.
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Entry mode literature has collected many of the influential factors on entry mode decision. Some authors have divided these factors in two groups: for example, external and internal factors as Root (1994). Koch (2001) includes a third group which consists of mixed categories of external and internal factors. Other authors such as Chen and Mujtaba (2007) divide factors of entry mode decision in three groups from a different perspective relating to specificity: firm-specific factors, country-specific factors and market-specific factors. In our conceptual framework we have decided to follow the perspective of Root. We have divided influential factors of entry modes into two groups: external factors and internal factors. In external factor group we have included all factors affect entry mode decision indirectly. MNCs cannot control influence of external factors in choice of entry mode. Internal factor group is a set of characteristics and strategies of firm which influence on entry mode strategy. The firm has opportunity of modifying and controlling internal factors, but only in the long term. It is required to make a huge effort to modify those factors over time.
EXTERNAL FACTORS They are a set of factors make up environment surrounds MNCs such as political, economic and social factors. These factors affect its entry mode choice indirectly and MNCs do not have control under them In this group we have decided to include four factors from the authors mentioned in the literature review. The chosen factors to represent the external factor group are as follows: Culture distance refers to the possible differences existing between individuals from different countries in certain behaviors and their ways of thinking. Cultural difference will influence the validity of work practice transfer and methods from one country to another (Quer, Claver & Rienda 2007). In addition, Root (1994) states that the firms often prefer to enter those foreign countries that are closest to their home country. We have chosen this factor because cultural differences among the three countries in our cases (Spain, New Zealand and United Kingdom) might affect the choice of international strategy. Starbucks is American company with a different culture as compared to European or New Zealand culture. Market barriers: Koch (2001) states that market barriers such as tariff barriers, governmental regulations, distribution access, natural barriers, and level of country development can influence a company’s entry mode choice. Many MNCs find legal or natural obstacles to internationalization. We regard market barriers might have played an important role in Starbucks’ entry mode decision. Market potential refers to growth and size potential of the foreign market (Chen and Mujtaba 2007). When Starbucks expanded to the three countries we study, the concept of its coffee stores was successfully adapted. Likely among all three countries a high market potential was identified prior to Starbucks’ entry. In addition, market potential could have been relevant on the chosen entry mode in each country.
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Competition intensity is the degree to which a firm’s entry into a foreign market is simultaneously pursued by its competitors (Chen and Mujtaba 2007). The number of competitors in a market can influence the choice of entry mode.
INTERNAL FACTORS Internal factors are those characteristics, variables and strategies of MNC that affect its activities. In contrast to external factors, MNCs can control influence of internal factors. Within the group of internal factors we have included the following six factors: Characteristics of the overseas country business environment are defined as knowledge of the host country: language, habits, culture, foreign market behavior and functioning of the market. It is also information about the overall industry specific to the company such as volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication (Koch, 2001). We consider that Starbucks’ degree of country-specific knowledge could be important in the decision of Starbucks international strategy. Resource commitment/ firm size refers to the idea that the entry mode option depends on the amount of available resources. The freedom of selection of the entry mode and the preference for a specific entry mode depend on the company size and industry-specific resource demand (Koch, 2001). We think that Starbucks’ firm size could have influenced the selection of entry mode in each country. Its large size and huge amount of available resources might expand number of possible entry modes. Speed consists of the time a company wants to dedicate to go into a foreign market (Brassigton and Pettitt, 2000). We selected this speed factor because we thought it could be a determining factor in Starbucks’ entry mode selection. Starbucks might have chosen some of its entry modes seeking to expand quickly and to avoid losing market opportunities. Global management efficiency requirements refers to the degree of involvement management in the internationalization of a company. When a company has a high degree of international involvement, the company’s resources start to become limited. It therefore becomes necessary to redefine the company’s global strategy (Koch, 2001). We have selected this factor because when Starbucks expanded to our three target countries the degree of involvement was high. We think that might have been an important factor influencing its entry mode decisions. Management risk attitudes refers to the degree of international business risk that company takes in entering a foreign market, which will depend on: the company’s financial situation, its strategic options, and competitiveness of the environment (Koch, 2001). We are sure that Starbucks’ risk attitude was influential in its choice of entry modes.
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Some above factors may affect influence other selected factors, increasing or reducing their influence. After managers analyze the factors that influence the target foreign market, they will select the most appropriate entry mode. If the company is in the service industry, such as Starbucks, it can only select its entry mode strategies among the following types: joint-venture, wholly-owned subsidiary, licensing and franchising. We only have depicted in our conceptual framework the joint venture, wholly-owned subsidiary, and licensing strategies because these are three international strategies that Starbucks carries out in its internationalization process.
INTERNAL FACTORS: EXTERNAL FACTORS: • Culture distance • Market potential • Competition intensity • Market barriers • Characteristics of the overseas country business environment • Resource commitment / firm size • Speed • Global management efficiency • Management risk attitudes
DECISION OF ENTRY MODE
JOINT-VENTURE
WHOLLY-OWNED SUBSIDIARY
LICENSING
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CHAPTER 5: EMPIRICAL INFORMATION
In this chapter, information about Starbucks will be presented while focusing on factors listed in our conceptual framework. Our aim is to present the information we will use in order to analyze our three cases.
5.1. BACKGROUND
Starbucks’ history began in Seattle in 1971, when three students named Jerry Baldwin, Zev Siegel, and Gordon Bowker decided to be partners and opened a little shop in Pike Place Market to sell high-quality coffee beans and equipment. They were influenced by a trip to Africa where they tried a huge variety of coffee flavors as well as a coffee retailer called Alfred Peet. (Magazineusa.com 2004) In 1981, Howard Schultz, Vice President and General Manager of U.S. Operations for Hammarplast, noticed Starbucks’ success and decided to analyze the company in more depth. He was struck by the business philosophy of serving good coffee with darkroasted flavour profiles. He wanted to transmit that coffee passion by working for the Starbucks enterprise to expand outside Seattle, thereby exposing people all over America to Starbucks coffee. However, the founders were against hiring him because geographic expansion was too risky and because they did not share Schultz's vision for Starbucks. Finally, they reconsidered Schultz’s idea and decided to hire him as head of Marketing. After that, Schultz was trained about Starbucks’ coffee culture and then was sent to Italy to attend an international housewares show. In Italy, he visited a variety of coffee bars and noticed that Starbucks needed to serve fresh-brewed coffee, espresso, and cappuccino in its stores in addition to beans and coffee equipment. Besides, he considered that Starbucks stores would be a place to meet friends as they would at home. Re-creating the Italian coffee-bar culture in the United States could be Starbucks' differentiating factor. (Wilson. R 2005) Baldwin and Bowker were not interested in serving coffee. They regarded that to expand their business would deviate from their core business. They were however attracted by the idea to acquire Peet's Coffee and Tea, which took place in 1984. Finally they decided to give Schultz the opportunity to test an espresso bar. (Gresham 2005) Howard Schultz was convinced that his idea was a big winner. He eventually left Starbucks to start his own business, called Il Giornale in 1985. In 1987, Schultz raised enough capital with local investors and purchased Starbucks. He first combined Starbucks and Il Giornale operations, and then re-branded both businesses under the Starbucks name. He wanted Starbucks to become the most respected brand name in coffee and to be admired for its corporate social responsibility, its values and its guiding principles. (Starbucks CSR Report 2007)
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In 1985, Starbucks started its expansion into different cities in the USA and Canada, opening in Chicago and Vancouver, B.C. Finally, Starbucks decided to internationalize its business outside of North America in 1995. The company entered into Japan by creating a joint venture with SAZABY Inc. In 1998, the company went into New Zealand by granting its license to Restaurant Brands New Zealand Ltd. Furthermore, in that year Starbucks bought sixty-five Seattle Stores to enter the United Kingdom market. In 2001, Starbucks created a joint venture with VIPS Group, a well-known Spanish restaurant chain. The following year, Starbucks opened its first store in Spain. Today Starbucks is the largest coffee shop company in the world. It is specialized in high quality of coffee which derives one hundred percent from the arabic coffee variety. Starbucks is characterized by its “third place concept”. A coffee company seeks its customers to consider its stores as a place between home and work. Moreover, its success owes to its introducing a new way to drink coffee and its coffee culture. At present Starbucks has more than 15,700 stores in 43 countries. It is becoming one of the most respected brands in the world. (Starbucks 2008)
5.2. INTERNATIONALIZATION OF STARBUCKS
In this section we show some general aspects of Starbucks’ international strategy. Our aim is to use this data in order to understand our three cases and to know the reason why Starbucks uses different entry modes in its internationalization process. Starbucks adapts its international strategy in order to satisfy the needs and requirements of every market, seeking to respect its cultures and traditions. At present, the company uses three different strategies: joint venture, licenses and wholly–owned subsidiaries (see Figure 4).
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Country Australia Austria China (Beijing) China (Shanghai) Germany Greece Hong Kong Indonesia Israel Japan Malaysia Mexico Middle East New Zealand Philippines Puerto Rico Singapore South Korea Spain Switzerland Taiwan Thailand United Kingdom France
Partner Bon appétit Group Mei Da Coffee Co Shangai President Coffee Co. Karstadt Quelle AG. Marinopoulos Brothers S.A. Maxim´s Caterers Limited PT Mitra Adiperkasa Delek Development Sazaby Inc. Berjaya Coffee Co. S.C. de México, S.A. de C.V. M.H. Alshaya Co. W.L.L. Restaurant Brands Ltd. Rustan Coffee Corp. MacNaughton Group Bonvests Holdings Ltd. Shinsegae Department Store Group Vips & Europastry, S.A. Bon appétit Group President Coffee Co. Group VIPS
Agreement Majority-owner Joint venture License Joint venture Joint venture Joint venture Joint venture License Joint venture Joint venture public License Joint venture License License License Joint venture License Joint venture Joint venture Joint venture Joint venture Majority-owned Wholly-owned Joint venture
Starbucks’ Ownership 90% 19,5% 5% 19,5% 18% 5% 19,5% 40% 18% 5% 50% 18% 19,5% 5% 97% 100% 50%
Figure 4: Starbucks’ international strategy Source: Merrill Lynch and Starbucks Homepage
Before entering a new country Starbucks conducts rigorous quantitative market studies. The company also develops extensive focus group interviews to get a pulse of the marketplace and potential. Starbucks has demonstrated that even a large company needs help to achieve its goals. In order to succeed, a company needs to realize that it often cannot alone fill the gap in serving the needs of its target market. Starbucks has mostly always needed the help of another entrepreneur or another company with whom to work and share financial risks. Starbucks’ partners have helped the coffee company to enter new markets and obtain the products and services available in that market quickly. Strategic partnerships have enhanced Starbucks’ competitiveness in the marketplace. They have also helped the company to keep pace with the rapid changes of technological innovation. Starbucks was able to achieve its objectives, break into new markets, and enhance its bottom line by entering into strategic alliances with the right companies (Isidro 2004).
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Starbucks has certain criteria for consideration of ‘International Partners’. They seek to ensure their local partners will share its value and commitment to bringing the Starbucks Experience to customers worldwide (Starbucks International Development, 2007). Those selection criteria may include the following: a partner who shares its values and corporate culture; a partner with a strategic fit to Starbucks’ business; a seasoned operator of small- box, multi-uni retail stores; a local business leader; someone with a strong track record developing new ventures; someone with experience managing licensed & premium brands and concepts; and a partner with food & beverage experience. Further selection criteria include sufficient financial and human resources, and involvement and commitment with top management. A final point is the partner’s real estate knowledge and access to leverage their structure. Starbucks has developed the following procedure of global expansion: The company selects local partners who are local business leader. Then, Starbucks together with its partner try to adapt its business traditions to the local market. For instance, Starbucks coffee stores in Spain have outside terraces, and in Japan coffee shops have more seats than others countries and provide a smaller serving (Forbes.com 2003). Starbucks’ involvement in the internationalization process varies only in degree (e.g. licensing, joint venture and wholly-owned subsidiary) since the company is constantly in touch with operators to keep abreast of the marketplace. In a joint-venture, Starbucks’ equity position varies across a wide range. Lately, the company tends to minimize its holding and requires a local partner (as in the Spain case) to hold most of the capital cost (Isidro 2004). Starbucks holds less than 50% of the shares in their joint ventures. Schultz commented that Starbucks is constantly attracting potential partners (Forbes.com 2003).
5.3. EMPIRICAL INFORMATION FROM THE MARKETS INVESTIGATED
In this section we present the information found in annual reports, Starbucks’ homepage, interviews and other sources for our three cases. In the following section, we will analyze data based on our literature review. Finally, we compare the three cases in order to attain reliable conclusions for our research.
5.3.1. Case 1: United Kingdom:
Starbucks Coffee Company Ltd (UK) is a wholly-owned subsidiary of Starbucks Corporation of the US, which is the world’s largest retailer and roaster of specialist coffee. It is the market leader of branded coffee shops in the UK. (Caterersearch 2006) In May 1998, Starbucks entered into the UK by the acquisition of sixty-five Seattle Coffee Company stores (Starbucks UK Home Page). It acquired the Seattle Coffee
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Company in exchange for about 1.8 million shares of common Starbucks stock, or about £50.8 million (Holmes 1998). Starbucks re-branded the purchased Seattle Coffee stores in the year following their purchase. The Starbucks Coffee Company also let Seattle Coffee managers Scott and Ally Svenson continue to manage the original UK operations (BBC news 1998). Seattle Coffee Company was founded in 1995. It included the Seattle's Best Coffee and Torrefazione Italia Coffee brands (Coffeegeek 2003). The company was managed by two Americans, Scott and Ally Svenson. Seattle Coffee Company opened its first coffee bar in Covent Garden in 1996. As of 1998 it had sixty-five retail stores selling Americanstyle coffee which has a similar coffee culture as Starbucks. (Bitic 2003) The United Kingdom was the first European country which Starbucks entered. The UK was to be a springboard from which to internationalize its business in Europe. Acquisition was therefore an efficient and fast way for Starbucks to enter into a new foreign market. Entering the UK was a milestone for Starbucks’ international expansion. The internationalization plan in Starbucks’ long-term strategy consisted of opening 500 retail stores in Europe by the end of 2003. "We are a way from taking the step from the U.K. to Europe," said Schultz, Chairman and Chief Executive Officer of Starbucks (Holmes 1998). What’s more, Schultz said Europe was a "major strategic opportunity to achieve our goal of creating and building an enduring global brand" (Holmes 1998). The low competition intensity in earlier times drove Starbucks to expand in a strategically smart way, which was to create and build a sustainable brand. In the UK Starbucks has grown step by step until becoming recognized as one of the “Top 10 UK Best Places to Work” in 2007 (Starbucks Homepage 2008). In 1999, Starbucks formed an alliance with Sainsbury’s. Starbucks also acquired London coffee shops from Madisons Coffee for £1.4 million in 2001. In 2002, Starbucks formed a partnership with Borders bookshops and bought 13 coffee bars from Coffee Republic for £2 million. By early 2005, Starbucks had 30 concessions in supermarkets (Caterersearch 2006). In 2006, Starbucks UK was listed as one of “UK Top 50 Best Places to Work” (ranked 34th), awarded by the Great Places to Work Institute, in partnership with the Financial Times. Howard Behar, President of Starbucks Coffee International said "We do not believe we are an American company, but an international brand. We hope to benefit from the pub culture in the UK to make Starbucks a natural meeting place for people” (BBC News 1998). The above remark intends to reduce the importance of cultural distance between Starbucks’ coffee concept and United Kingdom’s coffee concept. Between the two countries, there was a huge gap. British people had a different way of thinking than Americans. In the United Kingdom, there was also certain opposition to American products and concepts. Starbucks sought to reduce that distance by acquiring an existing British coffee chain, Seattle Coffee stores. In addition, Starbucks waited a year to re-brand the acquired Seattle Coffee stores with the Starbucks brand. In this way,
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Starbucks first made the British familiar with the Starbucks Coffee concept prior to rebranding. In 2007, Starbucks gained a major success in the UK with more than 500 stores having been opened. It remained the most recognized chain coffee store, with 27% of the respondents rating it their favorite (with Costa at 15 %) (Manson 2007). As of the present moment, Starbucks has more than 600 branches in the UK and Ireland. According to the retail analyst Euromonitor, the company has a 16.7 per cent market share, one per cent ahead of Costa Coffee (Hickman 2008). Costa Coffee is founded in 1971 by Italian brothers Vilas Costa with a wholesale operation supplying roasted coffee. Besides, it is based in United Kingdom.
5.3.2. Case 2: New Zealand
In October 1998, Starbucks opened the first Starbucks retail store in New Zealand at Parnell Road, Auckland, which was operated and owned by Restaurant Brands New Zealand Ltd. Restaurant Brands New Zealand Ltd, which was listed on the New Zealand Stock Exchange in June 1997, was an authorized licensee of Starbucks. Besides that, it was the franchisee for the KFC and Pizza Hut brands in New Zealand with an annual turnover of NZ$216.8 million in 1997 (Business Wire 1998). Restaurant Brands New Zealand Ltd. shared with Starbucks the enthusiasm of bringing the Starbucks experience to New Zealand. Therefore, Restaurant Brands New Zealand Ltd. tried to operate Starbucks stores while keeping the essence of Starbucks’ coffee culture. In this manner, New Zealand Starbucks stores offered much the same as in other international Starbucks stores: coffee beverages, more than 30 varieties of arabic coffee beans, and local pastries and desserts. Restaurant Brands New Zealand Ltd. was delighted to help Starbucks enter New Zealand. Jim Collier, CEO of Restaurant Brands, commented: "We are excited about bringing the unique specialty coffee experience of Starbucks to New Zealanders with our first Starbucks retail location. We hope to open up to 10 retail locations by the end of next year. Our commitment to people, quality coffee, exciting products and excellent customer service will provide New Zealanders with a unique cafe experience.” (Business Wire 1998) Starbucks regarded that its partnership with Restaurant Brands New Zealand Ltd. would provide it certain opportunities. This was especially because the competition intensity of the 1990s in the coffee retail industry was low, as a result of the early stage and un-mature coffee industry in New Zealand. Howard Behar, president of Starbucks Coffee International said "Our successful partnership with Restaurant Brands provides us with a strategic opportunity to further enhance the recognition of Starbucks as the world's leading purveyor of specialty coffee in the Asia Pacific region" (Business Wire 1998). Starbucks could also gain recognition of its good brand image by forming the licensing agreement with the well-known Restaurant Brands New Zealand Ltd. and entering into the new and un-mature New Zealand coffee market.
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After years of having the licensing agreement with Restaurant Brands New Zealand Ltd., the information about Starbucks’ achievement can be found in 2006’s annual report. “Total sales for the year grew 14.4% on a comparative weekly basis to a high of $27.9 million for the year. Same store sales for the year grew by 2.6% and store earnings improved 6.3%” (Salmon 2006). Starbucks was also very successful in the following year as well. Starbucks is now recognized in New Zealand as the foremost international coffee brand. “Starbucks Coffee New Zealand has also been recognized internationally for our local marketing activity” (Salmon 2006). In 2001, Starbucks and Restaurant Brands New Zealand Ltd. reached an agreement to open 50 outlets. In 2006, Starbucks obtained the above negotiated number of coffee stores. Starbucks in New Zealand has been a shining star where there were no signs of its light dimming since its beginnings (Salmon 2006). At the present, Starbucks is continuously growing with steady store development. Starbucks plans to “double shoot” the original plan, with its current plan calling for 100 stores throughout New Zealand (Mark 2006). Starbucks New Zealand General Manager Steve Montgomery said “We could possibly double that and hold our own.”
5.3.3. Case 3: Spain
In 2001, Starbucks signed a joint venture agreement with VIPS, a leading European food service and retail operator, as well as El Molí Vell, a retail operator of cafes and pastry shops in the Barcelona area. Tres Estrellas Unidas S.L. was a joint venture, formed by Starbucks and its two partners to manage the day-to-day Starbucks operations in Spain (Starbucks 2002). In the joint-venture structure, VIPS controlled 82% and Starbucks the other 18%. Nowadays, the joint venture ownership by Starbucks is up to 50% (Press report 2007). Group VIPS was the Spanish market leader in full service dining. It had over 30 years’ experience in retail business. The group operated several chains including VIPS’ own concepts (retail and restaurant), as well as Ginos, and Laeñe. It also integrated international brands such as T.G.I Fridays’, Bice and Itsu. The Group operated many other established restaurants as Teatriz and El Bodegón. At the end of 2001, VIPS operated about 150 outlets (Starbucks 2002). Group VIPS created the joint venture with Starbucks because it regarded that becoming Starbucks’ partner would contribute to its growth strategy (allbusiness.com 2001). In 2000, Group VIPS had put an ambitious growth project into action to double its size in three years. Starbucks, in turn, chose Group VIPS because they needed a local partner to help the company to establish themselves in the community (elmundo.es 2002). Álvaro Salfranca, Starbucks’ Chief Executive in Spain, mentioned in an interview “VIPS group plays a local role, because they understand the country and they operate in the stores; and Starbucks sets its heart, soul and philosophy behind Starbucks’ concept”. (elpais.com 2007)
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Furthermore, both companies shared vision and values facilitate the smooth flow of their venture. Howard Schultz, Starbucks Coffee Company chairman mentioned “VIPS Group is an ideal partner for Starbucks, as its strategic and business vision fit in with ours” (elpais.com 2007). After seven years, its joint venture continues working; they have even expanded their business in France and Portugal. El Moli Vell was a top retail operator of bread and pastry shops in the Barcelona area. It was founded in 1863. It had expertise and skills in handcrafted bakery products. In 2001, the company owned over 170 cafes. El Moli Vell was the retail component of the Europastry group. The Europastry group owned one of the most important European businesses in pastries (allbusiness.com 2001). Similar to Group VIPS, El Molí Vell was delighted with being Starbucks partner. David García-Gasull, CEO of El Molí Vell, commented “We are excited about introducing Starbucks into the Spanish market”. Starbucks sought to strive for the highest quality products and service in the market. (allbusiness.com 2001) In our interview, Luis Peña mentioned more reasons why Starbucks decided to ally with VIPS group and El Molí Vell. First, its partners had experience and reputation in the hotel sector. Besides, both regarded customer service as an important part of their business. Another factor is that they integrated human resources in their businesses. Starbucks also took into account VIPS’ and El Molí Vell’s creative ability, local knowledge and capability to create branding. Finally, both partners had strong financial resources and quality in their products and services. Spain was the first Latin market which the company entered into and an important landmark for Starbucks. Moreover, Starbucks’ development in Spain was part of Starbucks’ ambitious European growth strategy. For instance, in 2001, Starbucks not only entered in Spain, but also in Switzerland and Austria (cincodias.com 2002). Álvaro Salfranca in an interview characterized Spain as a mature and attractive market when they established coffee stores there (elpais.com 2007). When Starbucks went into Spain, coffee market had already developed.There were a huge quantity of traditional coffee stores and big and known coffee chains such as Kroxan, Jamaica Coffee and Café& Té Gr Compañía del Trópico. In Europe, Starbucks was having a tremendous reception from customers and fast and successful growth. Howard Schultz stated, “Our entry into Spain comes at very exciting time for Starbucks” and “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”(Starbucks 2002). In reference with Spanish market, Peter Maslen, president, Starbucks Coffee International mentioned “We believe that Starbucks Experience will be in Spain as it is in the rest of our international market in Europe”. Besides, he added “ we are confident that Spanish coffee drinkers will enthusiaticallly embrace Starbucks unique coffee house experience” (Ibid). In 2002, Starbucks opened its first store in the center of Madrid. Tres Estrellas Unidas S.L. planned to open over 10 to 15 stores over the followings 18 to 24 months.
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(Starbucks 2002). In addition, Alvaro Cañete, managing director of Tres Estrellas Unidas S.L., stated that the joint venture hoped to have 100 stores in five years (Cincodias.com 2002). At present the company has more than seventy stores distributed amongst large Spanish cities: Madrid, Barcelona, Valencia and Sevilla (Press Report, Spain 2007). All Starbucks stores are company-owned by the venture, ruling out the use of franchising owing to a desire to guarantee control over the purchase, treatment and distribution of coffee (Cincodias.com 2002). The reception of Starbucks in Spain was better than had been hoped. Álvaro Salafranca admitted to feeling surprised about the positive reception of Starbucks’ brand. He commented: “We did not know if we get people to fall in love faster than we thought, or if we have been received better we thought”. (elpais.com 2007) When Starbucks was established in Spain, the coffee company already had a strong brand. As a consequence, Starbucks could play a fundamental role in the negotiation between its partners. For instance, Starbucks did not use any co-branding strategy with the VIPS Group. Its brand concept and clear position as “purveyor of experiences” were enough to consolidate its brand locally in a short time (Galli & Carbone 2007). In spite of having a good reception in Spain, Starbucks’ coffee culture was different from Spanish coffee culture. Luis Peña in our interview mentioned: “Spain consumes a lot of coffee, but it does not have coffee culture”. He regarded that Spanish people do not have a lot of knowledge about coffee. Spanish people did not know to distinguish between different varieties of coffee. Therefore, Starbucks established programs in Spain to help people to learn about coffee culture, which included tasting of different kinds of coffee.
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CHAPTER 6:
CASE ANALYSES
In this part we will analyze the empirical data showed in the previous section to get an answer to our research questions. In order to analyze the empirical data thoroughly, the following analysis was based on the literature review.
6.1. DATA ANALYSES 6.1.1. Case 1: United Kingdom:
1. What factors affected Starbucks’ entry mode decisions? INTERNAL FACTORS Characteristic of the overseas country business environment Before Starbucks entered into the UK, it analyzed the foreign market. The top management expected the UK to be the springboard for entry into Europe (Pettigrew 1999). Koch (2001) states that there are characteristics of overseas countries which are easy to obtain these days. While understanding the Italian coffee market and French coffee market, Starbucks saw the more significant opportunity in the British coffee market. The language was easy to understand and the management would be easy to organize. Besides, compared with Italian worldwide coffee culture, British coffee culture was much easier to merge into. However, “volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication” are of difficulty to define in an earlier stage (Koch 2001). Thus, to gain knowledge about the United Kingdom market, Starbucks decided to allow Seattle Coffee Company managers to continue operating for Starbucks. They already had enough market knowledge to run Starbucks stores in the U.K. Firm size Starbucks is a relatively large firm. Until the end of 1997, Starbucks had around 1,400 stores. As it mentioned in Chen and Mujtaba’s theory, larger firms could have a greater capability than smaller ones to expend resources and absorb risks. Therefore, Starbucks had greater capability than others for expending resources and absorbing risk, which meant they could afford to buy sixty-five stores with a cost of £50.8 million.
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Resource commitment Root (1994) argues that company who owns a huge amount of resources has numerous entry mode options. Starbucks had management skills, experience and a huge amount of resources. Thus it had more options regarding their choice of entry. In choosing the particular entry mode the firm considered that it had the available capital to purchase Seattle Coffee. Speed In an internationalization process, speed is related to the stated time a company desires to dedicate before establishing itself in a host country. (Brassigton and Pettitt 2000). The speed of Starbucks’ international expansion was getting more and more aggressive in 1990s. In order to explore the new market, Starbucks needed to find a way to enter into the UK. With the acquisition of Seattle Coffee, Starbucks achieved expansion of its business in a short time. Global management efficiency requirements Degree of internationalization influences the quantity of available resources in a company (Koch 2001). Starbucks had the strategy to enter into the UK as the first step in expanding into the European continent. As Koch defined, as the firm’s degree of internationalization becomes higher, the resources become more limited. Starbucks was a relatively large company in 1997, with 1400 stores. Instead of limiting its resource commitment and redefining their global strategy, Starbucks instead chose the resource-intensive route of a wholly-owned subsidiary. Therefore, this was not a significant factor affecting Starbucks’ mode of entry choice in the UK. Management risk attitudes The management risk attitudes of Starbucks were clear due to the uncertainty of the British market. Koch (2001) determined degree of risk depends on: company’s financial situation, its strategic options, and competitiveness of the environment. When Starbucks entered into United Kingdom, Starbucks had carried out a policy of minimizing risk. EXTERNAL FACTORS Culture distance Culture distance refers to the possible differences existing in relation to the way in which individuals from different countries observe certain behaviors and ways of thinking. They will influence the ability of companies to transfer work practices and methods from one country to another (Quer, Claver & Rienda 2007). When Starbucks, as the American coffee giant, entered the UK market, it widely acknowledged the basic culture distance between American and British culture. Thus, Starbucks tried to look for a local company to adapt to the British coffee culture.
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Howard Behar, President of Starbucks Coffee International, told BBC News Online that taking account of local conditions was very important (BBC news 1998). Starbucks made a distinctive decision to acquire Seattle Coffee Company unlike its more common strategy of a joint venture. It was a good way to enter into a new market and solve the problem of cultural distance. Furthermore, Starbucks waited a year to rebrand these stores with the Starbucks name. In this way, Starbucks made the British first become familiar with Starbucks Coffee. In addition, Seattle Coffee Company was operated in an American coffee style by two Americans. It was a good advantage for the Starbucks’ operation in UK to already have a similar style of coffee. Market barriers Market has obstacles such as tariff barriers, governmental regulations, distribution access, natural barriers, existed barrier and level of country development (Koch 2001). Market barriers are not a distinctive factor in considering the British case. Market potential Chen and Mujtaba’s theory of market potential refers to growth and size potential of foreign market. The market potential affects the strategy of Starbucks’ European expansion. Howard Schultz, chairman of Starbucks Coffee Company, recognized that the market potential of the United Kingdom was an important factor in internationalization in the following statement: “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”. (Starbucks 1998) Competitive intensity Competitive intensity is measured by the number of competitors in the host country. The degree of the market density of the competitors affects MNCs’ strategy of entry mode. Competitive pressures drive MNCs to perform shared-control modes, franchising, licensing, or others when the market could be assumed to be operating under perfect competition. (Chen and Mujtaba 2007) Based on the above analysis, Starbucks was a case of a company using direct investment in order to enter the market in the UK. In 1998, the British coffee market was not mature, and competitive pressure was high. Through the acquisition of the established coffee chain, Seattle Coffee Company, Starbucks could gain a lot of advantages. Starbucks eliminated a potential competitor and reduced competitive intensity in the United Kingdom. Starbucks also used its capital and influence to obtain prime locations and to gain competitiveness. Even some of them were operated at a financial loss. “Critics claimed this was an unfair attempt to drive out small, independent competitors, who could not afford to pay inflated prices for premium real estate.” (Wikipedia 2008)
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2. Which entry mode strategies did Starbucks use in foreign markets and why? Starbucks used a wholly-owned subsidiary as the entry mode in the UK. A whollyowned subsidiary means the firm owns 100 percent of the stock. Establishment of a wholly-owned subsidiary in a foreign market can be done in two ways. The firm either can set up a new operation in a foreign country or can acquire an established firm in that host nation. Thus, the case in the UK uses the second of the two methods. In the case of Starbucks in the UK, it is easy to find out that the internal factors and external factors are relatively important for the choice of entry mode. First of all, Starbucks was influenced by scarce knowledge of the British business market characteristics. There was culture distance between two countries which was generally defined in the external factors. Moreover, there were uncertainties in the new market. For Starbucks, it needed to choose an entry mode which could eliminate these disadvantages. To acquire the Seattle Coffee Company, which was an existing coffee company in the UK, was definitely a big benefit for Starbucks to gain knowledge in the new market. What’s more, the comparatively large size of Starbucks, which could afford to commit more resources and especially a large amount of capital, was a critical factor leading to Starbucks’ decision to acquire Seattle Coffee. Starbucks, in pursuing its high-speed and aggressive expansion strategy, chose this entry mode of building a wholly-owned subsidiary due to the global management efficiency requirement and management risk attitudes. Starbucks’ top management was eager to enter into the UK as the springboard to explore the rest of the European market. Because of high risk, Starbucks chose a familiar American-style operated coffee company existing in the UK. Last but not least, the market potential and the competitive intensity affected Starbucks’ choice of entry. With the promise of serving its first European country in a yet-to-mature market and with the added benefit of eliminating a potential competitor, Starbucks decided to acquire Seattle Coffee Company, form a wholly-owned subsidiary, and enter the UK market.
6.1.2.Case 2: New Zealand
1. What factors affected Starbucks’ entry mode decisions? INTERNAL FACTORS Characteristics of the overseas country business environment Starbucks had an aggressive overseas expansion in the late 1990s. The growth in the Pacific Rim continued since its new opening in several countries in 1998, including such countries as Taiwan, Thailand, New Zealand and Malaysia. The global giant had the aggressive strategy to explore further Pacific Rim locations. At an earlier stage in 1998, Starbucks was planning to enter New Zealand. The first store opening in New Zealand was one of its expansion strategies. However, the new
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characteristics of the overseas country business environment was unfamiliar to Starbucks in New Zealand. It was not the same as those other Pacific Rim countries Starbucks entered such as Japan and Singapore in 1996, and the Philippines in 1997 (Starbucks Timeline 2008) . Starbucks was lacking the information of the new area, which had its own intensive knowledge and culture. Specifically it was facing the “problems of business regulations, business infrastructure, and levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication”. (Koch 2001) Thus it was difficult to operate in New Zealand because of the lack of country-specific knowledge. Therefore, Starbucks joined a licensing agreement with Restaurant Brands New Zealand Ltd., which was a well-known hotel business company. It was obvious that Restaurant Brands New Zealand Ltd. was a suitable licensee for Starbucks to gain market knowledge and obtain benefits through this licensing agreement. Firm size Until the end of 1997, the year before Starbucks entered into New Zealand, Starbucks already had a successful business in the coffee market throughout America and Canada. Furthermore, Starbucks had expanded its branches in the Asia Pacific Rim. In 1996, Starbucks opened its stores in Japan and Singapore and in the Philippines in 1997 (Starbucks Timeline 2008). Starbucks was reaching a high number of total stores, which was 1,412 at fiscal year end 1997 (Starbucks Timeline 2008). Therefore, at that time, Starbucks was a comparatively large-sized firm with around 1,400 stores. As per the theory described by Koch, Starbucks could have greater capability than any other small coffee shops to make full use of its management knowledge and recognition to reach an agreement with Restaurant Brands New Zealand Ltd. However, Starbucks did not use its capability to expend resources and absorb risks in New Zealand. Resource commitment Resource commitment is a factor related to firms’ size. Both of them, the firm size and resource commitment, joined together, influence the choice of the New Zealand entry mode. As mentioned before, Starbucks in 1998 was a comparatively large company with more than 1400 stores. And it already had the experience of expanding abroad. Starbucks opened in Japan and Singapore in 1996 and in the Philippines in 1997. It was already a successful case at an early stage. However, the resource commitment of the company for the New Zealand market seemed not that much. Starbucks had capital, and management, but lacked the huge amount of resources to invest in New Zealand’s internationalization. Starbucks had already acquired more than sixty coffee stores to enter into the United Kingdom and also its far-reaching internationalization plan had limited the number of available resources. Owing to uncertainty of the foreign market, Starbucks could not fully bear the whole costs to establish operation in a new market.
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Therefore, Starbucks’ licensing agreement with a local partner was a strategic way to obtain resources and to share financial risk to enter into New Zealand. The most important thing was that Starbucks could gain the royalty fee through this licensing agreement, which could compensate for the limitation of its capital for international expansion. Speed According to Brassigton and Pettitt (2000), the speed factor in the internationalization process is the time a company desires to dedicate in order to reach a foreign market. The speed of Starbucks’ international expansion was getting more and more aggressive. The firm size was getting bigger too. Before 1998, there were approximately 1400 stores. In 1998, Starbucks also had an accelerated pace of internationalization. The company not only entered into New Zealand, but it established its stores in three more countries: Taiwan; Thailand and Malaysia. As of the end of that year, Starbucks totally had more than 1800 stores worldwide. The company’s desire to expand was getting larger and larger. In the New Zealand case, Starbucks’ strategy was to form a licensing agreement with Restaurant Brands New Zealand Ltd. They had an initial agreement which was to open fifty outlets, a target that was reached in 2006. Global management efficiency requirements According to Koch (2001), the company will start to become limited in its resources, due to the high speed of its international expansion. Starbucks’ internationalization pace was accelerating since the 1990s. The strategy in New Zealand was during this high speed stage of Starbucks’ internationalization. Before entering into New Zealand, Starbucks had acquired more than sixty five Seattle Coffee stores and also it has expanded into many other foreign countries. As a consequence, Starbucks had a reduced quantity of capital for New Zealand internationalization. In spite of being a big firm with a huge quantity of resources, its ambitious expansion program limited quantity of involved resources in its expansion to New Zealand. Management risk attitudes A company’s financial situation, strategic options and competitiveness are influential aspects affecting entry mode decision (Koch 2001). Starbucks in New Zealand formed the licensing agreement with Restaurant Brands New Zealand Ltd. assuming low risk to enter. This decision was in accordance with Starbucks international policy of limiting quantity of invested capital.
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EXTERNAL FACTORS Culture distance The culture distance between New Zealand and USA culture distance was not so high to affect entry mode decision. Market barriers According to the information of the New Zealand market, there is not any typical market barrier such as tariff barriers, governmental regulations, distribution access, natural barriers, existed barrier and level of country development (Koch 2001) that would have influenced Starbucks’ entry mode choice in international expansion. Market potential Market potential refers to growth and size potential of foreign market. New Zealand was a new promising market for Starbucks to enter in the early 1990s. That is why Starbucks chose to enter into New Zealand in the early stage.
Competitive intensity Competition intensity is measured by number of competitors in the host country. The degree of the market density of the competitors affects the firms’ strategy of entry mode (Chen & Mujtaba 2007). According to the research, the competition intensity in 1990s was comparatively low. There were not many coffee shops operating in New Zealand. Therefore, Starbucks did not need to invest in a high-control entry mode in order to be competitive in New Zealand
2. Which entry mode strategies did Starbucks use in foreign markets and why? Starbucks uses licensing as the entry mode in New Zealand. Licensing is an arrangement where a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee. Based on the above investigation and discussion, the main reason for using a licensing entry mode can be found on the internal factors and external factors. The internal factors occupy a higher percentage of the reason for choosing a licensing entry mode, whereas the external factors are less significant. First of all, the characteristic of New Zealand’s business environment was unfamiliar. Starbucks was lacking knowledge of this new market. To form the licensing agreement with an experienced firm, Restaurant Brands New Zealand Ltd. was a way to gain knowledge from its local partner. Besides that, the comparatively large size of the firm
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made it have the capability to commit resources. However, Starbucks needed its partner to commit more managerial resources and lacked the capital due to the fast speed of its growth in the 1990s and internationalization process planned. Thus the global management efficiency and the management risk attitude combined together to incentivize Starbucks to find an efficient and low-risk entry mode: licensing. As for the external factors, there were few cultural differences or market barriers and a large market potential. However, because of the low level of competitive intensity, Starbucks was able to choose the low-control licensing entry mode as opposed to a high-control entry mode such as a joint venture.
6.1.3. Case 3: Spain
1. What factors affected Starbucks’ entry mode decisions? In Spain, entry mode decision was influenced by several factors: internal and external. Within internal factors, the most relevant factors were characteristic of the overseas country business environment and speed. The most influential external factors affecting entry mode were those such as resource commitment, global management efficiency and management risk attitude. In this case analysis, we will explain why the above factors were influential in Starbucks’ choice to pursue a joint venture in Spain. INTERNAL FACTORS Characteristics of the overseas country business environment There is information to be considered about a specific country such as business regulations or practices, infrastructure, scope and intensity of competition, customer protection legislation and customer sophistication (Koch 2001). In addition, there is host country knowledge to be learned such as habits, culture and foreign market behavior. Companies sometimes have difficulties to attain part of this information. When Starbucks decided to enter into Spain, the coffee company had a long international experience, but it lacked knowledge about the hotel sector in Spain. The company sought partners that “understood the country and played a local role” and helped the company to form part of the community as Álvaro Salfranca, Starbucks Chief Executive in Spain, mentioned in several interviews (Starbucks 2002). Therefore, the company allied with VIPS and El Molí Vell who had hotel experience and necessary knowledge to operate Spanish market. Speed Brassigton and Pettitt (2000) define speed factor as time that a company wants to dedicate to go into foreign market. Starbucks desired to enter into Spain in a short time in order to bring profits from third year of operations. Furthermore, the company had designed an ambitious expansion plan consisting of opening over 10 to 15 stores
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over 18 to 24 months (Starbucks 2002) and to have 100 stores in five years (Cincodias.com 2002). Global management efficiency requirement Degree of involvement in internationalization process can determine quantity of available resources to enter into a new country (Koch 2001). When international involvement is high, the company’s resources start being limited. Before Starbucks established its stores in Spain, the coffee company had already internationalized in twenty countries (see Appendix III: Company time line). The internationalization process had required a huge amount of investment by Starbucks and its expansion plan anticipated even further investment. As a consequence it was impossible for the company to expend a huge quantity of resources in internationalizing Spain. Resource commitment/ firm size Choice of entry mode depends on amount of available resources and company size Koch (2001). If the company size is big, the company will have a huge amount of available resources and in turn numerous entry mode options. (Root 1994) However, companies with limited resources are constrained to use entry mode with small resource commitment. In 2001, Starbucks was already an important and large company. The coffee company had experience, technology, reputation, strong branding and management and production skills. As a consequence, Starbucks had certain power and advantages in negotiations to choose certain entry modes such as the joint venture entry mode. For instance, Starbucks did not use any co-branding strategy with VIPS Group. Its brand concept and clear position as “purveyor of experiences” were enough to quickly consolidate its brand locally (Galli & Carbone 2007). However, the number of resources involved was reduced, as Starbucks only invested 18% of the joint venture’s capital in spite of its large size. Although Starbucks was big MNC, its high level of international involvement limited the number of available resources to go into Spain. Management risk attitudes Degree of risk in an international business depend on: the company’s financial situation, its strategic options, and the competitiveness of the environment (Koch 2001). Starbucks’ international strategy tends to minimize its holding and require a local partner to operate in the target market. In a joint-venture strategy, the company usually does not hold more than a 50% stake (Forbes.com 2003). In the case of Spain, Starbucks only held an 18% stake of the Tres Estrellas Unidas, S.L. joint venture, in keeping with its financial policy to hold less than a 50% stake. VIPS Group was the investor of a major part of Tres Estrellas Unidas’ capital .
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EXTERNAL FACTORS The greatest external factors in Spain’s entry mode choice were: market potential and competitive intensity. Market potential According to Chen and Mujtaba (2007) market potential is the growth and size potential of a foreign market. Spain was regarded as a potentially important market by Starbucks. Howard Schultz, chairman of Starbucks Coffee Company, stated “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”. Starbucks was confident of Spanish market would behave as the rest of European markets where the coffee company had already internationalized (Starbucks 2002). Peter Maslen, president of Starbucks coffee international gave the same opinion in the following statement: “We are confident that Spanish coffee drinkers will enthusiastically embrace Starbucks unique coffee house experience” (Ibid). Competitive Intensity It is related to number of competitors and competitive pressure in a host country (Chen and Mujtaba 2007) When Starbucks entered into Spain, the company knew that Spain was a mature market with many competitors. Álvaro Salfranca recognized the importance of competitive intensity to go into Spain in a granted interview where he said “We knew Spain a mature and attractive market when they entered into” (elpais.com 2007). In Spain, there were a huge quantity of traditional coffee stores and also big chain of coffee company as Kroxan, Jamaica Coffee and Cofee & Té GR Compañía del tropico. Culture distance Culture distance refers to the possible differences with relation to the way in which individuals from different countries observe certain behaviors and ways of thinking. In Spain’s case, cultural distance was not a large influential factor in the entry mode decision because Spanish people were already consuming a huge amount of coffee before Starbucks entered into Spain. However, they lacked coffee culture. Therefore Starbucks has sought to inculcate its coffee culture through coffee learning programs ever since it entered into Spain. 2. Which entry mode strategies did Starbucks use in foreign markets and why? In Spain, Starbucks chose joint venture as entry mode. Luis Peña in our interview pointed out the Starbucks’ international strategy adapts to different markets to satisfy needs and requirements from every market, respecting its cultures and traditions. In Spain, Starbucks decided to use a joint venture entry mode in order to adapt to external factors and also internal factors as well.
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The choice of the joint venture entry mode instead of its other international strategies (licensing and wholly-owned subsidiary) owes to a set of factors. First of all, Starbucks lacked knowledge of the Spain market. Therefore, the coffee company needed to ally with a local partner who provided its knowledge and helped the company to operate locally. Another factor was speed; Starbucks wanted to have a fast expansion in Spain. The coffee company had planned to open 100 stores in only five years and needed an international strategy that enabled its internationalization in a short period of time. As Starbucks wanted a fast internationalization process, the wholly-owned subsidiary strategy was unsuitable. Global management requirement was another crucial factor; the degree of internationalization in Starbucks Company was high in 2001 with coffee stores in twenty countries. The coffee company had invested a huge quantity of financial resources in its international process, and its anticipated internationalization plan was also ambitious. All of that limited the number of available resources, reducing influence firm size factor in entry mode choice. In addition, Starbucks’ management attitudes were to minimize its holding and require a local partner to operate in the target market and to share financial risk. As a consequence, the company could only dedicate a limited number of resources in every country, which ruled out the whollyowned subsidiary entry mode. Finally, the key factors that influenced the company in choosing a joint venture instead of licensing were market potential and competitive intensity. The Spanish market had great potential for Starbucks. The coffee company needed an entry mode that allowed it to control its operations in Spain, but licensing gave Starbucks a low degree of control. Lastly, the Spanish market was already mature, and with several significant competitors Starbucks needed an entry mode that allowed higher control in order to face the competitive situation. Therefore, Starbucks chose joint venture as entry mode.
6.2. CONTRAST ANALYSES
After having analyzed three cases separately the following is a comparative analysis to determine similarities and differences between Spain, United Kingdom and New Zealand cases. The comparison of the first research question, “What factors affected Starbucks’s entry mode decisions?” In every case, there is a set of factors, external and internal, which influenced entry mode decisions. We will explore if crucial factors of entry mode choice were different or not.
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Internal factors Characteristics of the overseas country business environment It refers to information about characteristics of overseas country. There are overall country characteristics which are easy to obtain, but information about particular industries and company-specific information is often difficult to find such as general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication (Koch 2001). In the three cases, we only have found similarities about knowledge of host country. All of them were affected by the “characteristic of the overseas country business environment”. Due to the uncertainty and unfamiliarity of the new foreign market, Starbucks investigated the foreign market at first. Then it managed to gain the knowledge through different ways of entry from its partnerships or alliances. As we mentioned above there are not major differences—only the manner which Starbucks took in order to obtain host country knowledge. In Spain and New Zealand, Starbucks sought a local partner who provided information whereas in the United Kingdom the company kept Seattle Coffee Company managers.
Firm size Firm size refers to capability of expending resources and absorbing risks (Chen and Mujtaba 2007). In our three cases, we have found that firm size affected the choice of entry mode. Owing to Starbucks’ size, its experience and resources, the coffee company had possibility to choose any international strategies. The firm size was quite big, with more than 1,400 stores in 1998 when Starbucks went into New Zealand by licensing and acquired the Seattle Coffee Company in the UK. In 2001, Starbucks’ firm size was much larger, with approximately 4,700 stores when Starbucks entered into Spain. However, influence of Starbucks’ size in entry mode decision of Spain and New Zealand was reduced owing to influence global management requirement factor. Resource commitment Resources commitment is the number of resources which a firm invests to enter into a foreign country. We have found the resource commitment factor to be relevant in the three cases. Comparatively, there are some differences. The three modes of entry show a different degree of resources commitment. In the U.K. Starbucks committed a great quantity of resources to acquire Seattle Coffee store, £ 50.8 million. In Spain, the joint venture required an investment of 3 million euros, which means Starbucks invested €540.000, equal to 18% of its total capital (Cincodías.com 2002). In New Zealand, Starbucks committed few resources at all, while Restaurant Brands New Zealand Ltd. committed a huge amount resources, including store set up costs and royalty fees under the licensing agreement.
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Speed This refers to time a company dedicates in order to reach a target market (Brassigton and Pettitt 2000). These three cases are all influenced by the firm’s speed. Starbucks sought to enter into all three countries and expanded in a short time. In the 1990s Starbucks accelerated the speed of internationalization, and as a consequence this aggressive speed was a decisive factor in the choice of entry mode. However, the strategy of Starbucks’ international subsidiary to accelerate internationalization was different in each case. In the United Kingdom, Starbucks expanded quickly by acquiring 65 established Seattle Coffee stores. In the New Zealand case, Starbucks handed over its expansion to Restaurant Brands New Zealand Ltd. Lastly in Spain, Starbucks allied with VIPS Group and El Moli Vell to help them expand in a short time. Global management efficiency requirements When involvement of internationalization of a company is high, resources start being limited (Koch 2001). We have found that Starbucks in Spain and in New Zealand were affected by limitation of resources owing to Starbucks’ ambitious expansion plan. Internationalization of Starbucks was high when it entered into three countries. The coffee company wanted to internationalize in a huge of number countries, and Starbucks had already internationalized in many countries. That limited available resources to invest in Spain and New Zealand. In these two countries, the influence of global management efficiency requirement reduced influence of firm size and degree of resource commitment in entry mode decision. However, Starbucks’ entry mode in the UK is not in accordance with explanation of global management requirement by Koch (2001). Starbucks chose the more aggressive way of entry in the UK, by acquiring a similar coffee company with a high capital commitment. In spite of the decision to invest a reduced quantity of resources, Starbucks still invested a great amount in the United Kingdom internationalization.
Management risk attitudes Companies determine degree of international business risk that they will take in their international businesses taking into account their specific situation (Ibid). Starbucks had established a policy of reduced risks. We found that management attitudes of reduced risk had affected the three cases. The differences between the three cases are in degree of assumed risk. The lowest risk was taken in New Zealand with a licensing entry mode, whereas the highest risk was assumed by Starbucks in the United Kingdom. In Spain, the risk involved is somewhat of a middle-ground strategy.
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External factors Culture distance Between different countries is the possibility of differences in behaviors and ways of thinking. They can influence the validity of transferring work practices and methods from one country to another (Root 1994). In our research we have found that cultural distance was not a crucial factor in New Zealand and Spain. However, the cultural distance factor was relevant in the United Kingdom. Market barriers Tariff barriers, governmental regulations, distribution access, natural barriers, exit barrier and level of country development can influence entry mode choice (Koch 2001). However, in our three investigated countries, market barrier factors did not affect entry mode decisions.
Market potential Internationalization process can be influenced by potential growth of a market (Chen and Mujtaba 2007). Starbucks had a great potential market in Europe that made the company sought entry modes of fast expansion. In New Zealand, market potential also was important, but the company had a low degree of market potential.
Competitive intensity Competitive intensity in a host country drives companies to select an entry mode related to specific competitive pressures (Chen and Mujtaba 2007). Starbucks’ entry mode decision was influenced in the three cases by competitive intensity factors. Competitive intensity was relatively high in the Spain and United Kingdom cases. Starbucks in Spain chose a joint venture with two local partners to attain recognition and reputation in market. The joint venture increased Starbucks’ market power. In the UK case, Starbucks acquired a potential coffee competitor to reduce competitive intensity. However, degree of influence in New Zealand was totally different. There was a low competitive intensity that provided Starbucks the chance to license its coffee stores to Restaurant Brands New Zealand Ltd.
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FACTORS Characteristic of the overseas country business environment
NEW ZEALAND X
UK SPAIN X X
Firm size INTERNAL FACTORS Resource commitment Speed
X X X X
X X X --
X X X X
Global management efficiency requirements Management risk attitudes X X X
Culture distance EXTERNAL FACTORS Market barriers Market potential Competitive intensity
--X X
X -X X
--X X
Figure: Comparision of influential factors affecting entry mode decision
X means the factors affect the choice of entry in each country. -- means the factors do not affect the choice of entry in each country.
The comparison of the research question, “which entry mode strategies did Starbucks use in foreign markets and why?” Starbucks chose different international strategies in each of our cases. Our three countries represent the three types of Starbucks’ international strategies in its international development. In Spain, Starbucks carried out a joint venture as its entry mode. In New Zealand Starbucks decided to use licensing whereas in the United Kingdom the coffee company opted for a wholly-owned subsidiary. Starbucks carried out different entry modes in order to adapt to specific factors, needs and requirement in every country. Our findings show that similar factors influence the three cases. However, their degree of influence was different in every particular case. For instance, the competitive intensity factor was decisive in two of our cases, Spain and New Zealand, but its influence affected each country in a different way. In the Spain case, competitive intensity was high and led Starbucks to choose a joint venture
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as its entry mode. In New Zealand, Starbucks selected licensing, influenced by a low competitive intensity together with other relevant factors such as the global management requirement. Starbucks carried out different entry modes because situations in the three cases were not the same. In the Spain case, Starbucks chose joint venture as the entry mode owing to three main reasons. First, the company needed a partner who provides it country specific knowledge. Besides, the coffee company sought to share financial resources and risk owing to its financial policy and that the company was immersed in an ambitious international development program. Lastly, the coffee company had to control its operations directly because the Spanish market had high potential with high competitive intensity. In the United Kingdom case, the company decided to use a wholly-owned subsidiary as the cultural distance there was great, and there was a high degree of competitive intensity. Besides, the coffee company was influenced by speed and characteristics of the overseas country business environment. Finally, the reasons for choosing licensing in New Zealand were the followings: Starbucks lacked knowledge about the country and needed a local partner to help the company to operate. Furthermore, the decision was influenced by management attitudes of minimizing its international investment. It is also because of the global management requirement that the company had limited available resources to enter into New Zealand. Lastly, Starbucks’ decision was influenced by a low competitive intensity. In short, Starbucks carried out different entry modes in Spain, New Zealand and the United Kingdom because it wanted to adapt to the specific circumstances of each country. In three countries, the external and internal factors, as well as their degree of influence, were not the same. As Starbucks wanted to avoid difficulties during its expansion and was aware of the long-implications of entry mode decision, the company preferred to seek the most suitable entry mode in each case.
CHAPTER 7: CONCLUSION AND RECOMMENDATION
7.1. CONCLUSION
The main purpose of our research was to know why an MNC such as Starbucks used different entry modes, and what factors have influenced their entry mode decisions. To obtain findings: first, based on our literature review, we developed a set of possible influential factors affecting the entry mode decision in our conceptual framework. Then we collected our empirical data from different sources. Finally, we analyzed and contrasted our three cases in order to determine similarities and differences between them.
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In our first research question: “What factors affected Starbucks’ entry mode decisions”, we obtained the following findings: First, entry mode decision is influenced by a number of factors. Factors which influenced entry mode decisions can be related to either internal or to external environment of MNC. In our case, we have found that internal factors that have affected Starbucks’ choice of entry modes are: culture distance, market potential and competition intensity. On the other hand, relevant external factors are: characteristic of overseas country business environment, resource commitment, speed, management risk attitudes, and global management requirement. Both sets of factors are relevant in entry mode decisions, but the external factors are often decisive in devising the choice of international strategy. Furthermore, internal and external factors can influence companies’ internationalization strategies to different degrees. Factors that influence entry mode decisions can be different in each case; not always is an entry mode decision influenced by the same factors. Even, some factors can affect other as it happened in New Zealand and Spain case with firms size, resource commitment and global management efficiency requirement factors. Starbucks was a big company with high experience and resources when internationalized in both countries. However, the company had to limit and rationalize their resource and to reduce its entry mode options to fulfill its ambitious internationalization plan. Last but not least, there are several factors which influence choice of international strategy, but one or two factors are often crucial in the decision. Those factors are often external factors. The results of our second research question “Which entry mode strategies did Starbucks use in foreign markets and why?”: We show that Starbucks used three different international strategies: joint-venture, wholly-owned subsidiary and licensing. Our findings have determined that the reason for using three different strategies is that Starbucks seeks to adapt to different local needs, requirements and influential factors in every country. It means that the cause of using different entry modes is mainly owing to external factors. In summary, we can conclude by saying our investigation shows that entry mode strategy is an important decision in the internationalization process of Starbucks. The choice of international strategy has long-term implications for the company. Therefore, managers needed to analyze every influential factor thoroughly in the internationalization process prior to make entry mode choice.
7.2. RECOMMENDATION
Our study has shown that internal and external factors influenced the choice of entry mode for Starbucks. Moreover, we have determined that external factors are often the most decisive ones. As for the firm, it is significant to analyze the external factors first-hand. Then to choose the suitable way of entry among possible entry modes is to find the most effective and efficient way for the company’s international expansion.
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As for Starbucks, each mode of entry for the three cases was a good choice for the short-term or early stage entry. As part of a long-run strategy, it is critical that Starbucks chooses stable entry mode strategies in order to stand still in the highly competitive market situation.
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REFERENCE LIST
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Business Wire 1998, ‘Starbucks Coffee Company Opens First Store in New Zealand’, in findarticles, accessed 1st May 2008, from Carlson, S 1975, How Foreign is Foreign Trade?, Acta Universitatus Upsaliensis, Uppsala Caterersearch 2006, ‘Starbucks Coffee Company Ltd’, in caterersearch, accessed 29 April 2008, from Chen LY & Mujtaba B 2007, ‘The choice of entry mode strategies and decisions for international market expansion’, Journal of American of Business, p. 322 Chen, LY & Mujtaba, B 2007, ‘The Choice of Entry Mode Strategies and Decisions for International Market Expansion’, Journal of American Academy of Business, vol. 10, issue 2, p. 322 Cincodías.com 2002, ‘Starbucks prevé abrir 100 cafés en el mercado español en cinco años’, in cincodias, accessed 20th April 2008, from Coffeegeek 2003, ‘Starbucks Corporation completes acquisition of Seattle Coffee Company’, in coffeegeek, accessed 29 April 2008, from Dunning, JH 1988, ‘The eclectic paradigm of international production: A restatement and some possible extensions’, Journal of International Business Studies, vol. 19, pp. 19, 1-31 Dutta S & Subhadra K 2003, ‘Starbucks' International Operations’, in scribd, accessed 29 April 2008, from http://www.scribd.com Dyer, W G &Wilkins, A L 1991, ‘Better Stories, not Better Constructs, to Generate Better Theory: A Rejoinder to Eisenhardt’, Academy of Management Review, Vol.16, p. 613- 619 Ekeledo, I & Sivakumar, K 2004, ‘International market entry mode strategies of manufacturing firms and service firms: A resource-based perspective’, International Marketing Review, vol. 21, issue 1, p. 68 Elmundo.es 2002, ‘He creado la empresa para la que mi padre nunca pudo trabajar: una que valora a la gente’, in elmundo, accessed 21st April 2008, from Elpais.com 2007, ‘Starbucks, a la conquista de España’, in elpais, accessed 15th April 2008, from
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Emprendedores 2007, ‘Las técnicas de Starbucks para crear verdaderos adictos a su marca España un Mercado diferente’, in emprendedores, accessed 16th of April , from Encina, A 2008, ‘La experiencia Starbucks’, MK Marketing + Ventas, Nº 231, p.20 Florin, J & Ogbuehi, AO 2004, ‘Strategic Choice In International Ventures: A Contingency Framework Integrating Standardization and Entry-Mode Decisions’, Multinational Business Review, vol. 12, issue 2, p. 83, 27 Forbes.com 2003, ‘Starbucks' World Won't Be Built In A Day’, in forbes, accessed 21st April 2008, from Galli & Carbone 2007, ‘Desembarco de marcas. La promoción de exportaciones, en transición: ahora se centra en el nombre y la reputación de los productos’, in lancion, accessed 20th April 2008, from Gatignon, H & Anderson, E 1988, ‘The multinational corporation’s degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation’, Journal of Law, Economics and Organization, vol. 4, pp. 305-306 Ghoshal, S & Westney, DE 2005, Organization Theory and Multinational Corporation, 2nd edition, Palgrave McMillan Gillham, B 2000, Case Study Research Methods, Continuum, p.1-2 Gresham 2005, ‘Starbucks Coffee Company’, in ezinearticles, accessed 15th April, from Hickman M 2008, ‘Starbucks is bottom of high street coffee test’, in independent, accessed 29 April 2008, from < http://www.independent.co.uk > Hill, Charles WL 2007, International Business-competing in the global market, McGrawHill Hill, WL, Hwang, P & Kim, WC 1990, ‘A eclectic theory of the choice of international entry mode’, Strategic Management Journal, vol. 11, pp. 117-118 Hofstede, G 1980, Culture’s Consequences. International Differences in Work-Related Values, Sage Publications, Newbury Park Hofstede, G 1991, Culture’s and Organization’, Software of the Mind, Mc Graw-Hill, London
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Holmes, S 1998, ‘Starbucks To Buy U.K. Company -- Seattle Coffee Deal Opens Door Into Europe’, in Seattle Times Business Reporter, accessed 29 April 2008, from Huanming,Wang 2007, 'The lost of Starbucks', in Globrand, accessed 1st April 2008, from Hussey J & Hussey R 1997, Business research A practical guide for undergraduate and postgraduate students MacMillan Business Hwang, P & Kim, WC 1992, ‘Global strategy and multinationals’ entry mode choice, Journal of International Business Studies, vol. 23, pp. 29-53 Isaac, GE, Perdikis, N & Kerr, WA 2004, ‘Cracking export markets with genetically modified crops: What is the entry mode strategy?’, International Marketing Review, vol. 21, issue 4/5, p. 536 Isidro, I 2004, ‘Learning from Starbucks: 10 Lessons for Small Businesses’, in powerhomebiz, accessed 24th April 2008, from Jiangwei, Huang 2007, 'The comparision of Hargendaz and Starbucks', in Globrand, accessed 1st April 2008, from Kaynak, E, Demirbag, M & Tatoglu, E 2007, ‘Determinants of Ownership-based Entry Mode Choice of MNEs: Evidence from Mongolia’, Management International Review, vol. 47, issue 4, p. 505 Kogut, B & Singh, H 1988, ‘The effect of national culture on the chouce of entry mode’, Journal of Internation Business Studies, vol. 19, pp. 411-432 Li, Cai 2007, 'The service of Starbucks', in Globrand, accessed 1st April 2008, from Magazineusa.com 2004, ‘Starbucks history’, in magazineusa, accessed 15th April 2008, from Manson, E 2007, ‘UK coffee market set to double over the next 10 years’, in caterersearch, accessed 29 April 2008, from < http://www.caterersearch.com> Mark 2006, ‘A Double Shot From Starbucks’, in franchise business-opportunities, accessed 1st May 2008, from
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Nitsch, DP, Beamish, P & Makino, S 1996, ‘Entry mode and performance of Japanese FDI in Western Europe’, Management International Review, vol. 36, pp. 27-43 Peinado, ES & Barber, JP 2006, ‘Un enfoque integrador de la elección del modo de entrada en los mercados internacionales. Una aproximación empírica en sectores de servicios1’, Management International, vol. 10, issue 2, p. 43, 23 Peña, L., 30/04/2008, Interview Pettigrew, J 1999, ‘Starbucks Coffee U.K.: springboard to Europe’, in allbusiness, accessed 29 April 2008, from < http://www.allbusiness.com/sales/291390-1.html> Quer, D, Claver, E & Rienda, L 1997, ‘The impact of country risk and cultural distance on entry mode choice; An integrated approach’, Cross Cultural Management, vol. 14, issue. 1, p. 74 Quer, D, Claver, E & Rienda, L 2007, ‘The impact of country risk and cultural distance on entry mode choice; An integrated approach’, Cross Cultural Management, vol. 14, issue 1, p. 74 Randoy, T & Dibrell, CC 2002, ‘How and why Norwegian MNCs commit resources abroad: beyond choice of entry mode’, Management International Review, vol. 42, pp. 119-40 Restaurantbrands 2008, ‘Home page of restaurantbrands’, in restaurantbrands, accessed 1st May 2008, from < http://www.restaurantbrands.co.nz/> Root, FR 1994, Entry strategies for international market, San Francisco: Jossey Bass, Inc Ros-Martín, M 2006, ‘Qué es fuente de información en Internet’, in documentalistaenredado, accessed May 21st 2008, from < http://www.documentalistaenredado.net/355/que-es-fuente-de-informacion-eninternet/> Salmon, V 2006, ‘General Meeting’, in restaurantbrands, accessed 8th May 2008, from < http://www.restaurantbrands.co.nz/info/part_04.htm> Sarkar, M & Cavusgil, ST 1996, ‘Trends in international business thought and literature:A review of internatinal market entry mode research: Integration and synthesis’, International Executive, vol. 38, pp. 825-847 Schultz,H & Jones, D 1997, How Starbucks built a company one cup at a time,Hyperion, New York Shan, W 1991, ‘Environmental risks and joint venture sharing arrangements’, Journal of International Business Studies, vol. 22, pp. 555-580
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Shang, Lian 2007, 'The crisis of Starbucks'brand problem', in Globrand, accessed 1st April 2008, from Starbucks 2002, ‘Starbucks celebrates Spain entry the opening of its first stores in Starbucks, accessed 20th April 2008, Madrid’, in Starbucks 2008, ‘Company_Recognition’, in Starbucks Homepage, accessed 29 April 2008, from Starbucks UK 2008, ‘About Starbucks in the UK’, in Starbucks UK, accessed 29 April 2008, from Starbucks 2008, ‘Starbucks gana un 1,5% en el último trimestre del año’, in expansion, accessed 8th April 2008, from
Master Thesis Course - International Business and Entrepreneurship EFO 705/ MIMA
Entry Modes of Starbucks
Tutor: Leif Linnskog Authors: Beatriz Santamaría (841007-p008) Shuang Ni (831206-p446) Date: 3 June 2008 Group number: 2023
Summary
Date: Level:
3 June 2008 Master Thesis in Business and Administration- International Business and Entrepreneurship Entry Modes of Starbucks
Title: Authors:
Beatriz Santamaria (841007-p008) Cuenca, 3 3A 19005 Guadalajara (SPAIN) +34 64621633 Date of birth: 1984-10-07 E-mail: Bea5031@msn.com Shuang Ni (831206-p446) Vasagatan 40 722 15 Västerås +46 73 584 27 66 Date of birth: 1983-12-06 E-mail: sophia_nishuang@hotmail.com
Tutor: Topic:
Leif Linnskog When an MNC seeks to enter a foreign country, it must choose the most appropriate entry mode for that specific market, such as exporting, licensing, a turnkey project, franchising, joint ventures or wholly-owned subsidiaries. There are many factors which affect the choice of entry modes. Influential factors contributing to the entry mode decision can have different degrees of impact for each particular country. As a consequence, an MNC has to use different entry modes in order to adapt to the specific situations it faces in its international expansion strategy.
Research Problem: Our research problem is to find the answer to two specific research questions while investigating in a particular MNC: Starbucks. The relevant questions are: (1.) What factors affected Starbucks’ entry mode decisions? (2.) Which entry mode strategies did Starbucks use foreign markets and why? Method: We collected data through a qualitative method. We regarded that a qualitative research method would provide us the necessary data to understand entry mode decisions. We collected data through literature, books, journals, and Internet resources. We have decided to focus our qualitative research on exploring Starbucks’ entry mode decision in some specific markets. In particular, we have concentrated on Spain, New Zealand and the United Kingdom.
i
Conclusions:
The choice of entry mode is a critical decision made by MNCs. The choice is influenced by several factors; we have divided these into internal and external factors. We have found both groups are important in the decisions made by Starbucks. However, the degree of influence is different in each case. Moreover, it is possible that some influential factors in the choice of entry mode can differ by case. Finally, we have found external factors have been critical in affecting Starbucks’ choice of entry modes. Starbucks has sought to adapt to those external factors and local needs and requirements by using different entry modes. entry modes, Starbucks, external factors, internal factors, Spain, New Zealand, United Kingdom, licensing, joint-venture, wholly-owned subsidiaries
Keywords:
ii
Acknowledgements
I would like to thank my tutor Leif Linnskog, who devoted his time and energy for our thesis from the first seminar until now. Furthermore I want to thank those groups in each seminar section who gave us a lot of critical comments and useful suggestions. Last but not least, I am thankful to my lovely thesis partner Bea, who invested almost all her time in the library for our thesis. Her understanding, knowledge of thesis writing, and her smart and easygoing personal characteristics always impress me. Therefore I wish to thank her most for all her cooperation and help in completing our thesis. I would like to extend my appreciation to my family, who has supported me throughout this year of Master’s study. I would also like to thank my Daniel, who is always on my side and gives me help. Especially, he helped us to modify the whole thesis’ English sentence by sentence and gave us a lot of useful comments. Moreover, I would like to thank my great friends Linda, Pat, Wang Qi, Marina and all the others with whom I have shared friendship during the past year. Without these relationships, I would have never enjoyed my time in Västerås as much as I have. --- Shuang Ni (Sophia)---
I would like to take this opportunity to thank all who have helped and supported me during this hard year. I also would like to express my gratitude to my tutor Leif Linnskog, for his guidance and his wise advises. I also would like to thank my fellow groups in our seminar for their suggestions and constructive comments. More importantly, I cannot forget to send warm thanks to my thesis partner Sophia. Your help and effort were crucial to the thesis’s success. Furthermore, I would like to expend my appreciation to Daniel for reviewing our English. Especially, I would like to thank my parents and my two brothers for their support and patience. In particular, I would like to dedicate my thesis to my dear Mum who knows her daughter the best and has always been there for her on the way towards her aims. Thank for all your love, good wishes and patience. Finally, I would like to thank four important people who have been through this past year with me and now they are in an important place of my heart. Thanks my dear friend David for your help. To my dear friend Camino, thank for listening me, for your support and advises. To my dear friend Alvarito, I will never forget all messages and emails you sent to me to encourage me. Last but not least, to my dear friend Fa thanks for your advises and good wishes. --- Beatriz Santamaría Sotillo---
Västerås, Sweden June 2008
iii
Me gustaría aprovechar esta oportunidad para agradecer a todos aquellos que me apoyaron y ayudaron durante este duro año. Mis agradecimientos a mi tutor Leif Linnskog, por su sabios consejos y su orientación. Me gustaría también dar las gracias a mis compañeros de seminario por sus comentarios y sugerencias. A mi compañera de tesis Sophia, gracias por tus comentarios y duro trabajo. Tu ayuda y esfuerzo fueron cruciales para desarrollar nuestra tesis. Además, me gustaría dar las gracias a Daniel por revisar nuestro inglés. Especialmente, me gustaría dar las gracias a mis padres y mis dos hermanos, gracias por vuestro apoyo y paciencia. Me gustaría dedicar esta tesis a mi madre quien siempre supo que su hija conseguirá todo lo que se proponga y ha estado siempre orgullosa de ello. Gracias por todo tu cariño, esfuerzo y paciencia. Por último, me gustaría dar las gracias a cuatro personas muy importantes que conocí este año y que ahora ocupan un lugar muy importante en mi corazón. A mí querido amigo David, gracias por tu ayuda. A mi querida amiga Camino, gracias por escucharme, por todo tu apoyo y consejos. A mi querido amigo Alvarito, nunca olvidaré todos los mensajes y e-mails que me enviaste para animarme. Por último y no por ello menos importante, a mí querida Fa gracias por tus consejos y cariño. ---Beatriz Santamaría Sotillo---
Västerås, Sweden June 2008
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Index
SUMMARY ........................................................................................................................... i ACKNOWLEDGEMENT ......................................................................................................... iii CHAPTER 1: INTRODUCTION AND RESEARCH PROBLEM ........................................................ 1 1.1.TOPIC ................................................................................................................................... 1 1.2.RESEARCH PROBLEM ........................................................................................................... 1 1.2.1.Research question ........................................................................................................ 1 1.2.2. Approach of research problem .................................................................................... 1 1.3. OUR MOTIVATION .............................................................................................................. 2 1.4. TARGET GROUP.................................................................................................................. 2 1.5.LIMITATIONS ...................................................................................................................... 2 CHAPTER 2: RESEARCH METHOD ......................................................................................... 3 2.1.RESEARCH INSTRUMENT ..................................................................................................... 3 2.2. RESEARCH DESIGN.............................................................................................................. 5 2.3.SELECTION OF MNC............................................................................................................. 7 CHAPTER 3: LITERATURE REVIEW ......................................................................................... 8 3.1.DEFINITION OF ENTRY MODE.............................................................................................. 8 3.2.ENTRY MODE FACTORS ....................................................................................................... 8 3.2.1. Chen. L.Y and Mujtaba B. ........................................................................................... 8 3.2.2.Theory of Root ............................................................................................................ 10 3.2.3. Theory by Brassigton and Pettitt .............................................................................. 12 3.2.4.Theory by Koch ........................................................................................................... 12 3.3. ENTRY MODE LITERATURE ............................................................................................... 14 CHAPTER 4: CONCEPTUAL FRAMEWORK ............................................................................ 17 CHAPTER 5: EMPIRICAL INFORMATION .............................................................................. 21 5.1. BACKGROUND .................................................................................................................. 21 5.2. INTERNATIONALIZATION OF STARBUCKS......................................................................... 22 5.3. EMPIRICAL INFORMATION OF THE MARKET INVESTIGATED ........................................... 24
5.3.1. Case 1: United Kingdom ............................................................................................ 24 5.3.2. Case2: New Zealand ................................................................................................. 26 5.3.3. Case3: Spain .............................................................................................................. 27 CHAPTER 6: CASE ANALYSES .............................................................................................. 30 6.1. DATA ANALYSES................................................................................................................ 30 6.1.1.Case 1: United Kingdom ............................................................................................. 30 6.1.2.Case2: New Zealand ................................................................................................... 33 6.1.3.Case3: Spain ............................................................................................................... 37 6.2.CONTRAST OF ANALYSES................................................................................................... 40 CHAPTER 7: CONCLUSION AND RECOMMENDATION .......................................................... 45 7.1. CONCLUSION .................................................................................................................... 45 7.2. RECOMMENDATION ......................................................................................................... 46 REFERENCE LIST ................................................................................................................. 48 APPENDIX-I ....................................................................................................................... 55 APPENDIX-II ...................................................................................................................... 58 APPENDIX-III ..................................................................................................................... 60
CHAPTER 1: INTRODUCTION AND RESEARCH PROBLEM
1.1.TOPIC
When a firm seeks to enter a foreign market, the company must choose the most appropriate entry mode for that specific market. The decision of entry mode strategy is the most critical decision in international expansion. The choice of international strategy has long-term implication for MNCs. That means, entry mode strategies are often massive, irreversible, and can influence the performance of the firm in the long run. MNCs can choose between six international entry mode strategies: exporting, licensing, a turnkey project, franchising, joint ventures and wholly-owned subsidiaries. There are many factors which affect a company’s decision of entry modes. Therefore, managers need to analyze them and determine the most suitable international strategy. Influential factors in entry mode decision can be different in each case. In addition the degree of influence of each factor can vary between countries. As a consequence, some MNCs use different entry modes to adapt to specific situations in their internationalization process.
1.2. RESEARCH PROBLEM 1.2.1. Research Questions
Our purpose is to find an answer to the following research questions while exploring a particular MNC, Starbucks: • What factors affected Starbucks’ entry mode decisions? • Which entry mode strategies did Starbucks use in foreign markets and why? 1.2.2. Approach research problem As we previously commented, our master thesis is focused on choice of entry modes. Our aim is to explore those factors that influence the choice of different entry modes within the same MNC. Furthermore, we will explore why Starbucks uses different entry modes in its internationalization process.
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1.3. OUR MOTIVATION
We find it interesting to investigate the reasons for why Starbucks uses different entry mode strategies in its expansion abroad. We think our investigation has enabled us to better understand the key to Starbucks’ strategy of internationalization. There are many theories about entry modes such as Chen and Mujtaba (2007), Root (1994), Koch (2001), Brassigton and Pettitt (2000) and Transaction Cost Entry Mode (TCE), which have developed different factors that influence entry modes decisions. Through our investigation, we would like to have a more clear understanding of how these theories work in practice.
1.4. TARGET GROUP
One purpose in writing our thesis is to target Starbucks’ managers, students and researchers who are interested in this company and its entry modes strategies. Regarding Starbucks’ managers, we hope our thesis enables them to obtain more information about their company. Our results might shed light on new ways to analyze their entry modes in different subsidiaries and their process of internationalization. The second target group of our thesis is students. Our research could be useful to students−particularly those learning international business. They will find our thesis to be a practical example of a company’s internationalization process. Last but not least is researchers. Our findings could help other researchers in their investigation, or even to suggest new inquires.
1.5. LIMITATIONS
In an investigation, their authors often found limitations in their work. In our particular case, we found two important limitations. First limitation was time; we had liked to analyze six cases in our thesis to get reliable findings. However, as we had a short period of time we only selected three case studies to answer our research questions. Second limitation was found in our methodology part. We had difficulties to get primary data we only got an interview in one of three cases. As consequence, we had to use secondary data and contrast it to avoid using unreliable information.
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CHAPTER 2:
RESEARCH METHOD
There are two main methods which resolve a research problem: quantitative and qualitative methods. The choice of method depends on the researcher and the research problem. Qualitative method is a subjective approach which includes examining and reflecting on perceptions in order to gain an understanding of social and human activities (Hussey J & Hussey R 1997). Quantitative method is an objective approach which includes collecting and analyzing numerical data and applying statistical tests (Hussey J & Hussey R 1997). In our master thesis, we have collected data through a qualitative method. As previously, mentioned the research method has to fit with the research problem. We regarded that a qualitative method was the most suitable to understand entry mode decisions. We sought the flexibility of qualitative instruments to obtain findings more than the rigidity of quantitative methods. We have focused our investigation on several established aspects and factors. However, we have ruled out the possibility to include other crucial factors that explain our phenomenon in our research. The qualitative method has allowed us not only to find the data we look for, but also to locate complementary information that was relevant for our study.
2.1. RESEARCH INSTRUMENTS
There are several instruments that can be used to carry out our qualitative method. We have chosen to develop our investigation through interviews (particularly e-mail interviews) and documentary research. Both methods are suitable to obtain the data for our investigation. Interviews have provided us information directly from the company, and documentary research has provided information indirectly. Interviews: We considered that it was important to obtain information directly from Starbucks’ managers for our research. Interviews are the most reliable research instrument in order to obtain information for our case study. Furthermore, they provide us new and unknown information that would be impossible to get through other sources such as books or annual reports. We have interviewed the Marketing Director of Starbucks in Spain, Luis Peña. We had preferred to interview him face to face, but we were unable to do so because of his schedule and our physical distance from Spain. Therefore we obtained an e-mail interview (See Appendix I). Furthermore, we tried to interview some managers of Starbucks in the United Kingdom, in New Zealand, and in Starbucks international subsidiary. Unfortunately the United Kingdom office refused our request. They informed us that they received a huge demand of enquires and were unable to respond to individual requests. We also got in touch with the managers of Starbucks in New Zealand. They told us they could not provide the information we needed. Because
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Starbucks used the licensing mode of entry in New Zealand, managers who operate under Starbucks’ licensing agreement lack information about the internationalization process of Starbucks in New Zealand. They said that information was only available from Starbucks’ international subsidiary. The New Zealand managers did provide us the email address of the Starbucks international subsidiary contact, however when we sent our e-mail interview (see Appendix II) we did not receive a reply. E-mail interview: There are several limitations to an e-mail interview. First of all, the interviewer cannot know with total certainty who will reply to the interviews. An email interview might carefully crafted by public relations advisers or by someone who is posing as the person to whom we have sent the e-mail. In addition, an e-mail interview denies the chance to ask spontaneous questions or to immediately follow up on an answer. Answers tend to be shorter than a face-to-face interview. Finally, the interviewer cannot see the visible reactions of the interviewee. An e-mail interview does have some advantages. Physical distances between interviewer and interviewee are eliminated. Additionally, the interviewee has flexible time to answer an e -mail interview (Ros-Martin 2006). Interview literature distinguishes two types of interview: pre-code interviews and open interviews. Pre-code interviews are developed using a specific structure. The interviewer hardly deviates from his prepared script and follows a logical sequence (Hussey J & Hussey R 1997). Open interviews are flexible. The interviewer deviates from his prepared script and asks questions which are not directly related to the interview topic (Hussey J & Hussey R 1997). As our interviews were by e-mail, we chose to use pre-code interviews. We have asked precise questions in order to determine the exact information that we seek as provided by the interviewee. However, we have also added some open questions in order to provide an overview of our topic or another perspective (See Appendix I and II). Documentary research consists of using text and documents that come from journals, reports, videos and other research sources (Bryman & Bell 2003). Documentary research also has some advantages and limitations in research. The main advantage is that there are many sources which we can use to obtain information. The documentary research can also provide different perspectives from a number of different people. However, this research instrument has some limitations such as the data might be unreliable. Also relevant information for a specific company is often difficult to find. We have chosen this data collection method because we considered that documentary sources could provide us relevant information for our research. This form of research
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offers a variety of means to obtain information such as journals, document files, reports, books and so on. Starbucks is a successful company which has been the target of a huge amount of studies. There are many documentary sources concerning Starbucks and its strategies and policy. In addition, documentary research enables us to complement the scarce information available with our own interviews. Information sources on the Internet: At the present there are a multitude of resources available on the Internet for many types of investigations. Among the numerous available sources for research are catalogues of important libraries, databases, ejournals and company homepages. In addition, we can consult and read completed versions of textual materials in virtual libraries and e-journals. However, to use the Internet as an information source can be a double-edged sword. We have to be careful when choosing documents. We have to regard which documents are useful and which are not. Furthermore, the reliability and rigor of Internet sources should always be considered.
2.2. RESEARCH DESIGN
Research design is defined as the link between the collected empirical data, its research questions, and the conclusions generated by a study (Yin 1989). There are five main research designs: First is Experimental design, which consists of choosing some independent variables to determine if those influence a determined variable. It also implies that experimental groups and control groups are needed to make a further comparison before and after the manipulation (Bryman & Bell 2003). Second is Cross-sectional design, which refers to collecting quantitative or quantifiable data (through questionnaires, interviews, surveys, etc) within several cases at a specific point in time, establishing patterns of associations between two or more variables. Later on, comparisons are made to surveys formed in other points in time (Bryman & Bell 2003). Third is Longitudinal design, which looks for specific alterations in contexts, organizations or industries. A sample is surveyed several times during different occasions in order to find the effects of the independent variables within the time period (Bryman & Bell 2003). Fourth is Case analysis design, which describes a single case as a specific location, an organization, a person or an event. It uses different sources of data because a unique source of evidence is not enough to achieve validity (Gillham 2000). Lastly is Comparative design, which analyzes two or more cases which are contrasted using more or less the same methodology. When qualitative methodology is applied, the chosen focus is multi-case. Our aim is to study influential factors affecting the decision of entry mode. In order to analyze those factors we need to make a comparison between different examples. Therefore, we consider that using a single case study is not suitable for our research. Using a multi-case study we will achieve a reliable finding in our thesis. Therefore, we
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have selected a set of locations that correspond with countries in which an MNC, Starbucks, has internationalized. In addition to comparative design, we have used cross-sectional design to determine our conclusions. We need to compare case studies and contrast if our three cases have similarities and differences. There are some criticisms to the use of multi-case. It is argued that researchers are less concentrated on the specific context of every case study and more focused on the contrast between different cases. As a consequence, researchers will develop more comparative analyses instead of deepening a particular analysis, therefore losing the essence of research (Dyer & Wilkins 1991). We have tried to avoid the above effect in our thesis by dividing our empirical analysis into two separate phases: the first phase was to analyze in depth each case and second, after we had already reported the individual characteristics of each case, we started to compare our three cases. The following picture depicts the research approach that we are going to follow in our thesis.
1st PHASE: DESIGN
Entry Mode Theory
Process of deduction
Determine influential factors affecting entry mode decision
2nd PHASE: DATA COLLECTION AND ANALYSIS
To find data to determine if our initial deductions are right (Induction)
Select Cases
Select research method and data collection method • Interviews • Documentary research
Collect data from every case
Write individual Case Report
• Spain • New Zealand • U.K.
3rd PHASE: CROSS-CASE
Contrast of Cases
Cross- cases Report
Conclusions
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In the first phase, the target factors of research are selected using entry mode literature. In the second phase, case studies are chosen based on the factors selected in the first phase. After taking that into account, research and data collection methods are selected for our chosen case studies. Then the data for every study is collected, and an individual report will be written for each country. In the third phase, a contrast process will be applied. When the contrast process is finished, we will describe the results. Finally, we will finish our thesis with the conclusions that can be determined from our research.
2.3. SELECTION OF MNC
We have focused our research on Starbucks. We have chosen this company because we found that Starbucks takes different entry modes to internationalize. The choice of entry mode is due to a set of factors that will determine a company’s international strategy. We consider that it is an interesting case to investigate and determine these possible factors that influence the company’s entry mode strategy. Furthermore, we were interesting in exploring if the choice of Starbucks’ entry mode can be determined by factors enumerated by entry mode theories. Starbucks used three different entry mode strategies to internationalize: joint venture, licensing and wholly-owned subsidiaries (Starbucks.com 2008). We have chosen three countries; each one represents one of three Starbucks’ international strategies. We decided to study three countries because of two reasons. First, we sought to obtain representative results. We considered that one unique country was not enough to reach reliable conclusions. Second, we knew it is really difficult to obtain information regarding Starbucks’ internationalization. If we explored more countries than a country we would obtain data from more sources and have the ability to contrast the reliability of our data. We chose United Kingdom, New Zealand and Spain, because these three countries represented the three Starbucks’ entry modes. In United Kingdom, we investigated that Starbucks only chose entry mode of wholly-owned subsidiary in this country from the early beginning. In the rest of cases where at present Starbucks is a wholly-owned subsidiary the company entered with a different strategy to wholly-owned subsidiary. We selected New Zealand case, because Starbucks used licensing and there was available secondary data to carry out our research. Last in Spain case, Starbucks decided to choose joint venture. We selected this case because we knew that to obtain data from Spain it would be easy as Beatriz Santamaria, one of authors this thesis, is Spanish. With the analyses of three different countries, we thought it would carried out an interesting investigation and could draw a comprehensive contrast in order to make the conclusion for answering our research questions. In case analyses, our aim is to explore which factors affect choice of each entry mode. In order to obtain results we are going to separately examine each country. Our
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research on factors represented in our conceptual framework. We considered that our investigation has to follow a structure. Therefore we decided to use these depicted factors in our conceptual framework as guidance or structure within our research. However, we were not going to rule out including other relevant factors on Starbucks’s choice of entry mode. At the end of our case analysis, we will obtain factors that influenced Starbucks’ choice of entry mode. In addition, we will determine if the factors developed in our conceptual framework were represented in our finding. Finally, we will conclude with the causes of Starbucks’ choice of entry mode.
CHAPTER 3: LITERATURE REVIEW
In this chapter we review literature which relates to our research questions. Inside of our literature review, there are two differentiated parts related to above two main parts of our conceptual framework: literature about factors that affect the entry mode decision, and entry mode strategy theory. Literature of entry mode factors describes factors may influence on entry mode decision. Another hand, entry mode theory shows a set of entry mode strategies that a company can carried out to go into a foreign country.
3.1. DEFINITION OF ENTRY MODE
According to Root (1994), an international market entry mode is to create the possibility by arranging company’s products, technology, human skills, management or other resources to enter into a foreign country. He regards that entry modes help companies to determine goals, resources and policy in order to channel their international activities toward a sustainable international expansion.
3.2. ENTRY MODE FACTORS
Several studies have attempted to identify a set of factors that influence entry mode decisions. In our thesis we draw our attention to the following theories:
3.2.1.Chen. L.Y and Mujtaba B.
Chen and Mujtaba (2007) develop their study about entry mode factors based on TCE (Transaction cost model) and non-TCE perspectives. TCE argues that the cost of implementing a particular entry mode is a relevant factor in a company’s entry mode decision. The mode of foreign entry is based on efficiency criteria in order to economize on transaction costs (Yiu & Makino 2002). Non- Transaction Cost Economics Model consists of a set of approaches such as Ecletic approach, Bargain power theory and Resource-based theory. In Ecletic Theory, Dunning (1998) developed three groups of factors that influence the entry mode choice: transaction-specific advantages,
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internationalization-specific advantages and ownership-specific advantages. Bargaining power theory posits the relative bargaining power of the firm and the host governments are influential factors on international strategy (Deng 2003 & Taylor et al 2000). The resource-based approach considers that resource availability and utilization both play a part in the choice among modes of entry. Chen and Mujtaba’s study is concentrated on MNCs in the US. They divided the entry mode factors into three groups of factors: firm-specific factors, country-specific factors and market-specific factors (See Figure 1). The description of the three factors is as follows: Firm- Specific Factors are related to the TCE model. It refers to firm-specific assets and skills that comprise ownership advantages. Chen and Mujtaba (2007) distinguish three types of firm-specific factors: asset specificity, international experience and firm size. Asset specificity refers to products and technologies that tend to create dissemination risks because of the threat of opportunism. The authors posit that great asset specificity tends to favor a higher-control entry mode. International experience according to the TCE approach is local market knowledge accumulated to avoid hazards in international market transactions. Chen and Mujtaba consider that great international experience favors a higher-control entry mode. Finally, firm size refers to the idea that larger firms have a greater capability than smaller ones to expend resources and absorb risks. Country-specific factors are a set of factors that include country-specific economic, political, legal, institutional and cultural factors. Chen and Mujtaba divided countryspecific factors into two variables: country risk and government restriction. Country risk is possible risk of change in the mode of operation owing to that unpredictable changes in the environment might render the original mode inefficient (Erramilli & Rao, 1993). Chen and Mujtaba posit that high country risk tends towards lower involvement entry modes. Government restrictions are laws and regulations that impact on the operation of a foreign firm (Ibid). This theory supports that increased government restrictions leads to low involvement entry modes. Market-specific factors: Several studies posit that factors specific to the market will influence the choice of entry mode. Chen and Mujtaba (2007) point out as representative variables: market potential, demand uncertainty and competitive intensity. Market potential refers to the growth and size potential of the foreign market. When there is a great market potential MNCs preferr high-control entry mode. Demand uncertainty refers to the future demand of products and services in a foreign market that are difficult to predict. Chen and Mujtaba argue that when demand of uncertainty in a foreign market is high, firms tend to use a higher-control entry mode. Competitive intensity refers to the degree to which a firm’s entry into a foreign market is pursued by its competitors. The authors show in their study that firms use a high control entry mode when the competitive intensity is high.
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Figure 1: Factors affecting entry mode decision Source: Chen and Mujtaba (2007)
3.2.2.Theory of Root (1994)
Root (1994) develops a model of factors that affect entry mode decision. He distinguishes between internal and external factors. He states that the choice of entry mode for a product or target country is the result of several (often conflicting) forces. (See Figure 2). He divides influential factors affecting entry mode decision into two groups: external and internal factors.
EXTERNAL FACTORS
Root (1994) determines four influential external factors affecting entry mode choice: target country market factors, target country production factors, target country environment factors and home country factors. Target Country Market Factors: Root (1994) argues that the size of target country market influences entry mode choice. In small markets companies use entry modes with low breakeven sale volumes such as indirect distributor exporting, licensing and contracts. In a market with high potential sales the company uses entry modes with high breakeven sales volume. Root mentioned competitive structure of the market is an important aspect in considering the target country factors. When competitive structure tends towards monopoly, entry modes are high resource commitments to compete against competitors. Otherwise, if the competitive structure of the market tends towards perfect competition, entry modes are often low resource commitments such as exporting. Target Country Production Factors: the quality, quantity and cost of resources in the foreign country, as well as the quality and cost of economic infrastructure influence the choice of entry mode. When the costs of production are low in the target country, local production is favored. On the other hand, if production costs are high in the foreign country, the company tends to export (Ibid).
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Target Country Environment Factors such as political, economic and socio-cultural dimensions of the foreign country can influence the choice of entry mode. In particular, government policies and regulations can be decisive in choosing the entry mode. Another important factor within country environment factors is geographical distance. When there is a great distance between the home and foreign country, it is possible that transportation costs are high, thereby discouraging export entry modes and favoring another entry mode such as a wholly-owned subsidiary. The economy of the target country can also influence the decision of entry mode. For instance, in centrally planned socialist economies, equity entry modes are not possible, and therefore companies only rely on non-equity entry modes such as exporting, licensing or other contractual modes. Other important factors are the size of economy (gross national product), absolute level of performance (gross national product per capita), and relative importance of its economic sectors (percentage of gross national product devoted to the particular sector). Finally, another relevant factor is cultural distance; the firms often prefer to enter those foreign countries that are culturally closest to the home country (Ibid). Home Country Factors: These are the set of factors that have influence on entry mode choice such as home country market, production and environmental factors. If the home country has a big market, it enables a company to grow to a large size in the home market before going abroad. The competitive structure also influences the choice of entry mode. Relative production costs of the home country versus the foreign country influence entry mode decisions. If there is a high production cost in the home country, the company will chose foreign market entry modes such as licensing, contract manufacture and investment. Another home country factor is the policy of the home government toward exporting and foreign investment by domestic firms. Finally, geographic distance is an influencing factor in that a large distance will favor local presence in a foreign country (Ibid).
INTERNAL FACTORS
Root expounds two internal factors which affect the choice of entry mode: product factors and resource commitment factors. Product factors: when products are highly differentiated over those offered by their competitors; there is a degree of pricing discretion. As a consequence these products can absorb high unit transportation cost and high import duties and still remain competitive in a foreign market. Otherwise, if products are weakly differentiated, they have to compete on a price basis. Therefore, high product differentiation favors export entry whereas a low differentiation tends to use entry modes as contract manufacture or equity investment. When the company’s product is a service, the firm cannot export it. In order to provide services in foreign countries, the firm must train local companies as in franchising or deliver its service directly under contract with the foreign customers via technical agreements and construction contracts. Firms with products using intensive technology often opt to license. In order to internationalize the product, a considerable adaptation is often necessary. The company establishes the
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foreign market through branch/ subsidiary exporting or by going into local production (Ibid). Resource commitment factors: if a company owns a huge amount of resources (management, capital, technology, production skills, and management skills), the company will have numerous entry mode options. However, companies with limited resources are constrained to use entry modes with small resource commitment (Ibid).
Figure 2: Influential factors in the entry mode decision Source: Root (1994)
3.2.3.Theory by Brassigton and Pettitt (2000)
Brassigton and Pettitt (2000) state two internal factors have influence on entry mode: payback and speed. They define payback as the time that a company needs to create revenue from investment in a foreign country. They refer to speed as the time the company desires to dedicate in order to penetrate a target market.
3.2.4. Theory by Koch (2001)
Koch (2001) posits that influential factors on market entry model selection (MEMs) can be divided into three groups: external, internal and mixture of external and internal factors. In our literature review we only mentioned external and internal factors.
EXTERNAL FACTORS
Koch (2001) states there are six external factors influencing choice of entry mode: industry feasibility/viability of MEM, characteristics of the overseas country business environment, market growth rate, image support requirements, global management
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efficiency requirements, popularity of individual MEMs in the overseas market, and market barriers. The first factor is Industry feasibility/viability of MEM. Koch argues some entry modes such as wholly-owned subsidiary or joint venture may be excluded by law in some countries owing to that the particular industry might be considered strategic by the state. This factor also refers to know-how dissemination risk, labor regulation, cost of labor, level of skill and taxes. Furthermore, Koch states that there are characteristics of the overseas country which are easy to obtain these days, but information about industry and company-specific information is often difficult to find. Inside the last category we finds aspects such as similarity, volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication. Knowledge of this information will influence the choice of international strategy. Koch also regards that market growth rate can be influential in entry mode decision. When the market has a fast growth rate, the company seeks to exploit this opportunity by using entry modes of fast expansion. Otherwise, when growth of demand is predicted to occur over a long time, the company tends to establish entry modes such as joint venture and wholly-owned subsidiary. Another external factor is image support requirements. In order to build and sustain their image, some companies may license their inventions to increase their role as global providers of the latest technology, thereby enabling the company to influence global industrial standards. Koch also points out global management efficiency requirements as another external entry mode factor. He posits that when involvement of internationalization of a company is high, company’s resources start being limited. It is necessary to redefine the company’s global strategy. Some companies choose a diversified, multinational mode of operation in that case. The popularity of individual MEMs in the overseas market factor refers to the particular nature of individual country markets. Country markets may have certain entry modes with more popularity than others. New entrants in this kind of market are influenced by the experience and degree of success of the former entrants, as well as the product market situation. Finally, Koch states that market barriers such as tariff barriers, governmental regulations, distribution access, natural barriers, exit barriers and level of country development can have influence on entry mode choice.
INTERNAL FACTORS
Koch (2001) states that entry modes are influenced by seven internal factors: company size/ resources, management locus of control, experience in using MEMs, management risk attitudes, market share target, calculation methods applied, and profit target. Koch argues that the freedom of selection of entry mode and their relevant preference depends on the company size and its resources. Another internal factor is management locus of control. This refers to manager perceptions, intuition and management style.
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Koch also states that experience in using MEMs is an internal factor affecting the entry mode decision. It refers to the management culture which will influence the behavior of decision makers. For instance, managers will refuse to use unsuccessful and untried modes if there are negative personal consequences for proponents. The author thinks effectiveness and efficiency depend on the amount of experience gathered by individuals, and on prevalence of idea sharing within the company. Management risk attitudes are another internal factor. Koch states that the degree of international business risk that the company takes in its entry mode decision depends on: the company’s financial situation, its strategic options, and competitiveness of environment. Market share target also influences the entry mode decision. Koch argues that there are criteria such as sales or market share maximization that will be important in making this decision. Another influential internal factor affecting the entry mode decision is the calculation methods applied. Koch points out that there are available calculation methods of risk or benefit to evaluate the market entry selection. The last internal factor which influences choice of entry mode is profit target. The choice of entry mode will depend on the level and dynamic of profit that the company desires to attain (Ibid).
3.3. ENTRY MODE LITERATURE
When a firm is going to explore a foreign market, the choice of the best mode of entry will arise in the firm’s expansion strategy. There are six essentially different entry modes, generally named as exporting, turnkey projects, licensing, franchising, joint venture with a host country firm, and setting up a wholly-owned subsidiary in the host country (Hill 2007). All of them have their advantages for the firm to explore as well as disadvantages which must be considered by the firm’s top management. In other words, the managers should make the choice carefully because it directly affects whether the firm will succeed or not in its foreign expansion. Regarding the choice of entry for a service company, licensing, franchising, joint-venture with a host country firm or setting up a wholly-owned subsidiary are more suitable for these types of firms. What’s more, the entry mode theory below is from Hill who wrote the book about foreign market entry entitled International Business—Competing in the Global Marketplace. (Hill 2007)
Licensing
Licensing involves a licensee and licensor tied together by a certain agreement which stands to benefit both sides. The licensor will sell its know-how right to the licensee, usually for a period of time. The know-how refers to intangible properties such as patens, inventions, formulas, processes, designs, copyrights and trademarks. The licensee needs to pay the royalty fee in order to have the agreement with the licensor. Licensing is a primary stage for a firm which plans to enter a foreign market. Due to the uncertainty of the foreign market, the political or economic situation, this instability will arouse the firm to consider developing a licensee agreement. This agreement can
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help the firm to make their expansion in a more steady way. In this manner the licensor firm, can collect a royalty fee from the licensee; this is especially a big benefit for a licensor who has limited capital to establish full operations in a foreign country. Thus the firm can decrease its expansion costs via licensing. Moreover, the country barriers make it difficult for the firm to participate in a foreign market, which makes licensing a more suitable entry mode to explore a new market. Last but not least, when the firm doesn’t expect entry into a new market with its intangible property by themselves, having the foreign licensor may help the firm to improve its chance of a successful patent application. One drawback which is similar to exporting is that licensing gives the firm less central and tight control. For the firm it is difficult to control their licensee through the agreement, except by establishing its own subsidiary. The licensee could be a major disadvantage for the licensor because of the difficulty in coordination. Technical knowhow is a competitive advantage for the firm; whereas by selling the know-how the firm undertakes a huge risk of losing this asset to competitors. Because the licensor will receive the main technology and make full use of it, the licensor loses control by selling it to licensee.
Franchising
Franchising is a similar entry mode to licensing. By the payment of a royalty fee, the franchisee will obtain the major business know-how via an agreement with the franchiser. The know-how also includes such intangible properties as patents, trademarks and so on. The difference from the licensing mode of entry is that the franchisee must obey certain rules given by franchiser. Franchising is most commonly used in service industries, such as McDonald’s to cite an example. However the licensing entry mode is frequently used by manufacturing firms. The primary advantage of franchising is that the firm doesn’t have to bear the development costs and risks associated with entering a new foreign new market, just like in the entry mode of licensing. By the low costs and risks, the firm could explore the market in an efficient way. Thus the strategy of using franchising is similar to the entry mode of licensing. The disadvantage is clear because the agreement requires that the franchisee will abide by strict rules. The franchisee is often hard to control, especially in the service industry whereby the franchisor will require the franchisee to adhere to the same standards of quality. If the franchisee does not strictly obey the rules of the franchisor, it could lead to a worldwide collapse of the international firm.
Joint Ventures
A joint venture is a typical entry mode used world-wide. Literally, it means two or more individual and independent firms join together in an alliance in order to achieve
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better position in the market. Often the joint ventures are a 50/50 venture. It is a method that both sides hold relatively the same percentage of shares in the venture. The joint venture’s operation is separate from both companies, and often the same role is shared by both managerial teams. It could be possible that one firm invests more in order to gain the larger percentage of shares and hold tighter control of the joint venture’s operations. Likewise, a lower investment percentage will usually lead to less control. A joint venture has a lot of advantages. Firstly, both of the firms share the costs as well as the benefits. Both sides share the risk as well. By investing into and joining a local firm, the international firm could successfully explore the foreign market with their assisting jointed firm. The international firm could thereby gain market knowledge from the local firm. Especially considering the political and economic issues in the international market today, it is an overwhelmingly popular way to enter foreign markets. The local firm might have a way to influence the local government, which will smooth the market entry for its joint partner. The disadvantage is obvious in that the firm might have major conflicts with its partner. Regarding the shareholding of the firms, it is often difficult to maintain a balanced relationship. Once one firm’s expansion strategy is in conflict with the other party, it will by all means bargain about the relative share ownership in order to have more control of the firm. Thus the partner with stronger bargaining power will continue to lead an unsteady joint venture. As for the firm’s international expansion, giving up control of technology could be very risky for the firm.
Wholly-owned subsidiaries
The entry mode of wholly-owned subsidiaries means the firm owns 100 percent of the overseas entity. There are two major ways to establish foreign wholly-owned subsidiaries. First is a greenfield venture. That means the firm will enter the new international market by establishing a completely new operation and legal entity. The second method is acquisition; whereby the firm acquires another firm in that international market in order to directly enter. The other firm could be an established and well-built firm in that particular industry. Thus the firm could gain a lot of advantages and promote its own products by using the acquisition strategy. There are a number of advantages to establishing wholly-owned subsidiaries. Obviously, one of the advantages is that the firm could have tight control, because the firm has 100 percentage of ownership. Then it is easy to understand that the firm could make its own strategic plan and control the subsidiaries in its own way. Especially, compared with other entry modes, the firm does not need to bear the risk to lose its competitive advantages and know-how by selling these to another party. Therefore, the firm has more power of control and less risk. Furthermore, as for multinational firms, many of them are eager to explore foreign markets in order to go up the experience curve and understand the local economy. Last but not least, the firm could have 100 percent of profits in its wholly-owned subsidiaries.
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The disadvantages of wholly-owned subsidiaries are clear too. As long as the firm chooses wholly-owned subsidiaries, the cost is definitely high. Because of full ownership, the firm cannot get any assistance from other party. While bearing the full cost of the investment in the foreign country, the firm still needs to bear the entire risk. The risk lies in the uncertain foreign market, the unfamiliar political and economic environment or the culture gap. To do business in a new culture, especially by choosing the entry mode of wholly-owned subsidiaries by acquisition, could raise a lot of problems. The variety and diversity of the foreign business practice or country culture could be a significant issue for the firm to deal with.
ENTRY MODE Licensing
ADVANTAGES Lower cost and risk
DISADVANTAGES No tight control Risk for losing know-how Quality control Hard monitoring Loss control of technology No tight control of partner Conflicts and battles Full cost and risk Culture problems
Franchising Joint Venture
Wholly-owned subsidiaries
Lower cost and risk Fast Benefit from local partner Share cost and risk Political considerations Technology control Tight overall control 100% share of profits Location and experience Curve economy
Figure 3: Entry modes Source: Hill Charles, 2007
CHAPTER 4:
CONCEPTUAL FRAMEWORK
To understand the development of our master thesis conclusion and to collect data for our research, it is valuable to depict a conceptual framework. We have modeled our conceptual framework in two different parts: factors which affect decision of entry modes and different strategies of entry modes. The purpose of this conceptual framework is to show the influence of different factors on the choice of entry modes. When managers have to choose an entry mode to enter into a foreign country, there are many factors which they take into account before making decisions. We have selected a set of factors for our conceptual framework. The factors proposed belong to Chen and Mujtaba (2007), Root (1994), Koch (2001) and Brassigton and Pettitt (2000) entry mode factors literature. Our criterion of selection was based on validity for our particular cases.
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Entry mode literature has collected many of the influential factors on entry mode decision. Some authors have divided these factors in two groups: for example, external and internal factors as Root (1994). Koch (2001) includes a third group which consists of mixed categories of external and internal factors. Other authors such as Chen and Mujtaba (2007) divide factors of entry mode decision in three groups from a different perspective relating to specificity: firm-specific factors, country-specific factors and market-specific factors. In our conceptual framework we have decided to follow the perspective of Root. We have divided influential factors of entry modes into two groups: external factors and internal factors. In external factor group we have included all factors affect entry mode decision indirectly. MNCs cannot control influence of external factors in choice of entry mode. Internal factor group is a set of characteristics and strategies of firm which influence on entry mode strategy. The firm has opportunity of modifying and controlling internal factors, but only in the long term. It is required to make a huge effort to modify those factors over time.
EXTERNAL FACTORS They are a set of factors make up environment surrounds MNCs such as political, economic and social factors. These factors affect its entry mode choice indirectly and MNCs do not have control under them In this group we have decided to include four factors from the authors mentioned in the literature review. The chosen factors to represent the external factor group are as follows: Culture distance refers to the possible differences existing between individuals from different countries in certain behaviors and their ways of thinking. Cultural difference will influence the validity of work practice transfer and methods from one country to another (Quer, Claver & Rienda 2007). In addition, Root (1994) states that the firms often prefer to enter those foreign countries that are closest to their home country. We have chosen this factor because cultural differences among the three countries in our cases (Spain, New Zealand and United Kingdom) might affect the choice of international strategy. Starbucks is American company with a different culture as compared to European or New Zealand culture. Market barriers: Koch (2001) states that market barriers such as tariff barriers, governmental regulations, distribution access, natural barriers, and level of country development can influence a company’s entry mode choice. Many MNCs find legal or natural obstacles to internationalization. We regard market barriers might have played an important role in Starbucks’ entry mode decision. Market potential refers to growth and size potential of the foreign market (Chen and Mujtaba 2007). When Starbucks expanded to the three countries we study, the concept of its coffee stores was successfully adapted. Likely among all three countries a high market potential was identified prior to Starbucks’ entry. In addition, market potential could have been relevant on the chosen entry mode in each country.
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Competition intensity is the degree to which a firm’s entry into a foreign market is simultaneously pursued by its competitors (Chen and Mujtaba 2007). The number of competitors in a market can influence the choice of entry mode.
INTERNAL FACTORS Internal factors are those characteristics, variables and strategies of MNC that affect its activities. In contrast to external factors, MNCs can control influence of internal factors. Within the group of internal factors we have included the following six factors: Characteristics of the overseas country business environment are defined as knowledge of the host country: language, habits, culture, foreign market behavior and functioning of the market. It is also information about the overall industry specific to the company such as volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication (Koch, 2001). We consider that Starbucks’ degree of country-specific knowledge could be important in the decision of Starbucks international strategy. Resource commitment/ firm size refers to the idea that the entry mode option depends on the amount of available resources. The freedom of selection of the entry mode and the preference for a specific entry mode depend on the company size and industry-specific resource demand (Koch, 2001). We think that Starbucks’ firm size could have influenced the selection of entry mode in each country. Its large size and huge amount of available resources might expand number of possible entry modes. Speed consists of the time a company wants to dedicate to go into a foreign market (Brassigton and Pettitt, 2000). We selected this speed factor because we thought it could be a determining factor in Starbucks’ entry mode selection. Starbucks might have chosen some of its entry modes seeking to expand quickly and to avoid losing market opportunities. Global management efficiency requirements refers to the degree of involvement management in the internationalization of a company. When a company has a high degree of international involvement, the company’s resources start to become limited. It therefore becomes necessary to redefine the company’s global strategy (Koch, 2001). We have selected this factor because when Starbucks expanded to our three target countries the degree of involvement was high. We think that might have been an important factor influencing its entry mode decisions. Management risk attitudes refers to the degree of international business risk that company takes in entering a foreign market, which will depend on: the company’s financial situation, its strategic options, and competitiveness of the environment (Koch, 2001). We are sure that Starbucks’ risk attitude was influential in its choice of entry modes.
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Some above factors may affect influence other selected factors, increasing or reducing their influence. After managers analyze the factors that influence the target foreign market, they will select the most appropriate entry mode. If the company is in the service industry, such as Starbucks, it can only select its entry mode strategies among the following types: joint-venture, wholly-owned subsidiary, licensing and franchising. We only have depicted in our conceptual framework the joint venture, wholly-owned subsidiary, and licensing strategies because these are three international strategies that Starbucks carries out in its internationalization process.
INTERNAL FACTORS: EXTERNAL FACTORS: • Culture distance • Market potential • Competition intensity • Market barriers • Characteristics of the overseas country business environment • Resource commitment / firm size • Speed • Global management efficiency • Management risk attitudes
DECISION OF ENTRY MODE
JOINT-VENTURE
WHOLLY-OWNED SUBSIDIARY
LICENSING
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CHAPTER 5: EMPIRICAL INFORMATION
In this chapter, information about Starbucks will be presented while focusing on factors listed in our conceptual framework. Our aim is to present the information we will use in order to analyze our three cases.
5.1. BACKGROUND
Starbucks’ history began in Seattle in 1971, when three students named Jerry Baldwin, Zev Siegel, and Gordon Bowker decided to be partners and opened a little shop in Pike Place Market to sell high-quality coffee beans and equipment. They were influenced by a trip to Africa where they tried a huge variety of coffee flavors as well as a coffee retailer called Alfred Peet. (Magazineusa.com 2004) In 1981, Howard Schultz, Vice President and General Manager of U.S. Operations for Hammarplast, noticed Starbucks’ success and decided to analyze the company in more depth. He was struck by the business philosophy of serving good coffee with darkroasted flavour profiles. He wanted to transmit that coffee passion by working for the Starbucks enterprise to expand outside Seattle, thereby exposing people all over America to Starbucks coffee. However, the founders were against hiring him because geographic expansion was too risky and because they did not share Schultz's vision for Starbucks. Finally, they reconsidered Schultz’s idea and decided to hire him as head of Marketing. After that, Schultz was trained about Starbucks’ coffee culture and then was sent to Italy to attend an international housewares show. In Italy, he visited a variety of coffee bars and noticed that Starbucks needed to serve fresh-brewed coffee, espresso, and cappuccino in its stores in addition to beans and coffee equipment. Besides, he considered that Starbucks stores would be a place to meet friends as they would at home. Re-creating the Italian coffee-bar culture in the United States could be Starbucks' differentiating factor. (Wilson. R 2005) Baldwin and Bowker were not interested in serving coffee. They regarded that to expand their business would deviate from their core business. They were however attracted by the idea to acquire Peet's Coffee and Tea, which took place in 1984. Finally they decided to give Schultz the opportunity to test an espresso bar. (Gresham 2005) Howard Schultz was convinced that his idea was a big winner. He eventually left Starbucks to start his own business, called Il Giornale in 1985. In 1987, Schultz raised enough capital with local investors and purchased Starbucks. He first combined Starbucks and Il Giornale operations, and then re-branded both businesses under the Starbucks name. He wanted Starbucks to become the most respected brand name in coffee and to be admired for its corporate social responsibility, its values and its guiding principles. (Starbucks CSR Report 2007)
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In 1985, Starbucks started its expansion into different cities in the USA and Canada, opening in Chicago and Vancouver, B.C. Finally, Starbucks decided to internationalize its business outside of North America in 1995. The company entered into Japan by creating a joint venture with SAZABY Inc. In 1998, the company went into New Zealand by granting its license to Restaurant Brands New Zealand Ltd. Furthermore, in that year Starbucks bought sixty-five Seattle Stores to enter the United Kingdom market. In 2001, Starbucks created a joint venture with VIPS Group, a well-known Spanish restaurant chain. The following year, Starbucks opened its first store in Spain. Today Starbucks is the largest coffee shop company in the world. It is specialized in high quality of coffee which derives one hundred percent from the arabic coffee variety. Starbucks is characterized by its “third place concept”. A coffee company seeks its customers to consider its stores as a place between home and work. Moreover, its success owes to its introducing a new way to drink coffee and its coffee culture. At present Starbucks has more than 15,700 stores in 43 countries. It is becoming one of the most respected brands in the world. (Starbucks 2008)
5.2. INTERNATIONALIZATION OF STARBUCKS
In this section we show some general aspects of Starbucks’ international strategy. Our aim is to use this data in order to understand our three cases and to know the reason why Starbucks uses different entry modes in its internationalization process. Starbucks adapts its international strategy in order to satisfy the needs and requirements of every market, seeking to respect its cultures and traditions. At present, the company uses three different strategies: joint venture, licenses and wholly–owned subsidiaries (see Figure 4).
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Country Australia Austria China (Beijing) China (Shanghai) Germany Greece Hong Kong Indonesia Israel Japan Malaysia Mexico Middle East New Zealand Philippines Puerto Rico Singapore South Korea Spain Switzerland Taiwan Thailand United Kingdom France
Partner Bon appétit Group Mei Da Coffee Co Shangai President Coffee Co. Karstadt Quelle AG. Marinopoulos Brothers S.A. Maxim´s Caterers Limited PT Mitra Adiperkasa Delek Development Sazaby Inc. Berjaya Coffee Co. S.C. de México, S.A. de C.V. M.H. Alshaya Co. W.L.L. Restaurant Brands Ltd. Rustan Coffee Corp. MacNaughton Group Bonvests Holdings Ltd. Shinsegae Department Store Group Vips & Europastry, S.A. Bon appétit Group President Coffee Co. Group VIPS
Agreement Majority-owner Joint venture License Joint venture Joint venture Joint venture Joint venture License Joint venture Joint venture public License Joint venture License License License Joint venture License Joint venture Joint venture Joint venture Joint venture Majority-owned Wholly-owned Joint venture
Starbucks’ Ownership 90% 19,5% 5% 19,5% 18% 5% 19,5% 40% 18% 5% 50% 18% 19,5% 5% 97% 100% 50%
Figure 4: Starbucks’ international strategy Source: Merrill Lynch and Starbucks Homepage
Before entering a new country Starbucks conducts rigorous quantitative market studies. The company also develops extensive focus group interviews to get a pulse of the marketplace and potential. Starbucks has demonstrated that even a large company needs help to achieve its goals. In order to succeed, a company needs to realize that it often cannot alone fill the gap in serving the needs of its target market. Starbucks has mostly always needed the help of another entrepreneur or another company with whom to work and share financial risks. Starbucks’ partners have helped the coffee company to enter new markets and obtain the products and services available in that market quickly. Strategic partnerships have enhanced Starbucks’ competitiveness in the marketplace. They have also helped the company to keep pace with the rapid changes of technological innovation. Starbucks was able to achieve its objectives, break into new markets, and enhance its bottom line by entering into strategic alliances with the right companies (Isidro 2004).
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Starbucks has certain criteria for consideration of ‘International Partners’. They seek to ensure their local partners will share its value and commitment to bringing the Starbucks Experience to customers worldwide (Starbucks International Development, 2007). Those selection criteria may include the following: a partner who shares its values and corporate culture; a partner with a strategic fit to Starbucks’ business; a seasoned operator of small- box, multi-uni retail stores; a local business leader; someone with a strong track record developing new ventures; someone with experience managing licensed & premium brands and concepts; and a partner with food & beverage experience. Further selection criteria include sufficient financial and human resources, and involvement and commitment with top management. A final point is the partner’s real estate knowledge and access to leverage their structure. Starbucks has developed the following procedure of global expansion: The company selects local partners who are local business leader. Then, Starbucks together with its partner try to adapt its business traditions to the local market. For instance, Starbucks coffee stores in Spain have outside terraces, and in Japan coffee shops have more seats than others countries and provide a smaller serving (Forbes.com 2003). Starbucks’ involvement in the internationalization process varies only in degree (e.g. licensing, joint venture and wholly-owned subsidiary) since the company is constantly in touch with operators to keep abreast of the marketplace. In a joint-venture, Starbucks’ equity position varies across a wide range. Lately, the company tends to minimize its holding and requires a local partner (as in the Spain case) to hold most of the capital cost (Isidro 2004). Starbucks holds less than 50% of the shares in their joint ventures. Schultz commented that Starbucks is constantly attracting potential partners (Forbes.com 2003).
5.3. EMPIRICAL INFORMATION FROM THE MARKETS INVESTIGATED
In this section we present the information found in annual reports, Starbucks’ homepage, interviews and other sources for our three cases. In the following section, we will analyze data based on our literature review. Finally, we compare the three cases in order to attain reliable conclusions for our research.
5.3.1. Case 1: United Kingdom:
Starbucks Coffee Company Ltd (UK) is a wholly-owned subsidiary of Starbucks Corporation of the US, which is the world’s largest retailer and roaster of specialist coffee. It is the market leader of branded coffee shops in the UK. (Caterersearch 2006) In May 1998, Starbucks entered into the UK by the acquisition of sixty-five Seattle Coffee Company stores (Starbucks UK Home Page). It acquired the Seattle Coffee
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Company in exchange for about 1.8 million shares of common Starbucks stock, or about £50.8 million (Holmes 1998). Starbucks re-branded the purchased Seattle Coffee stores in the year following their purchase. The Starbucks Coffee Company also let Seattle Coffee managers Scott and Ally Svenson continue to manage the original UK operations (BBC news 1998). Seattle Coffee Company was founded in 1995. It included the Seattle's Best Coffee and Torrefazione Italia Coffee brands (Coffeegeek 2003). The company was managed by two Americans, Scott and Ally Svenson. Seattle Coffee Company opened its first coffee bar in Covent Garden in 1996. As of 1998 it had sixty-five retail stores selling Americanstyle coffee which has a similar coffee culture as Starbucks. (Bitic 2003) The United Kingdom was the first European country which Starbucks entered. The UK was to be a springboard from which to internationalize its business in Europe. Acquisition was therefore an efficient and fast way for Starbucks to enter into a new foreign market. Entering the UK was a milestone for Starbucks’ international expansion. The internationalization plan in Starbucks’ long-term strategy consisted of opening 500 retail stores in Europe by the end of 2003. "We are a way from taking the step from the U.K. to Europe," said Schultz, Chairman and Chief Executive Officer of Starbucks (Holmes 1998). What’s more, Schultz said Europe was a "major strategic opportunity to achieve our goal of creating and building an enduring global brand" (Holmes 1998). The low competition intensity in earlier times drove Starbucks to expand in a strategically smart way, which was to create and build a sustainable brand. In the UK Starbucks has grown step by step until becoming recognized as one of the “Top 10 UK Best Places to Work” in 2007 (Starbucks Homepage 2008). In 1999, Starbucks formed an alliance with Sainsbury’s. Starbucks also acquired London coffee shops from Madisons Coffee for £1.4 million in 2001. In 2002, Starbucks formed a partnership with Borders bookshops and bought 13 coffee bars from Coffee Republic for £2 million. By early 2005, Starbucks had 30 concessions in supermarkets (Caterersearch 2006). In 2006, Starbucks UK was listed as one of “UK Top 50 Best Places to Work” (ranked 34th), awarded by the Great Places to Work Institute, in partnership with the Financial Times. Howard Behar, President of Starbucks Coffee International said "We do not believe we are an American company, but an international brand. We hope to benefit from the pub culture in the UK to make Starbucks a natural meeting place for people” (BBC News 1998). The above remark intends to reduce the importance of cultural distance between Starbucks’ coffee concept and United Kingdom’s coffee concept. Between the two countries, there was a huge gap. British people had a different way of thinking than Americans. In the United Kingdom, there was also certain opposition to American products and concepts. Starbucks sought to reduce that distance by acquiring an existing British coffee chain, Seattle Coffee stores. In addition, Starbucks waited a year to re-brand the acquired Seattle Coffee stores with the Starbucks brand. In this way,
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Starbucks first made the British familiar with the Starbucks Coffee concept prior to rebranding. In 2007, Starbucks gained a major success in the UK with more than 500 stores having been opened. It remained the most recognized chain coffee store, with 27% of the respondents rating it their favorite (with Costa at 15 %) (Manson 2007). As of the present moment, Starbucks has more than 600 branches in the UK and Ireland. According to the retail analyst Euromonitor, the company has a 16.7 per cent market share, one per cent ahead of Costa Coffee (Hickman 2008). Costa Coffee is founded in 1971 by Italian brothers Vilas Costa with a wholesale operation supplying roasted coffee. Besides, it is based in United Kingdom.
5.3.2. Case 2: New Zealand
In October 1998, Starbucks opened the first Starbucks retail store in New Zealand at Parnell Road, Auckland, which was operated and owned by Restaurant Brands New Zealand Ltd. Restaurant Brands New Zealand Ltd, which was listed on the New Zealand Stock Exchange in June 1997, was an authorized licensee of Starbucks. Besides that, it was the franchisee for the KFC and Pizza Hut brands in New Zealand with an annual turnover of NZ$216.8 million in 1997 (Business Wire 1998). Restaurant Brands New Zealand Ltd. shared with Starbucks the enthusiasm of bringing the Starbucks experience to New Zealand. Therefore, Restaurant Brands New Zealand Ltd. tried to operate Starbucks stores while keeping the essence of Starbucks’ coffee culture. In this manner, New Zealand Starbucks stores offered much the same as in other international Starbucks stores: coffee beverages, more than 30 varieties of arabic coffee beans, and local pastries and desserts. Restaurant Brands New Zealand Ltd. was delighted to help Starbucks enter New Zealand. Jim Collier, CEO of Restaurant Brands, commented: "We are excited about bringing the unique specialty coffee experience of Starbucks to New Zealanders with our first Starbucks retail location. We hope to open up to 10 retail locations by the end of next year. Our commitment to people, quality coffee, exciting products and excellent customer service will provide New Zealanders with a unique cafe experience.” (Business Wire 1998) Starbucks regarded that its partnership with Restaurant Brands New Zealand Ltd. would provide it certain opportunities. This was especially because the competition intensity of the 1990s in the coffee retail industry was low, as a result of the early stage and un-mature coffee industry in New Zealand. Howard Behar, president of Starbucks Coffee International said "Our successful partnership with Restaurant Brands provides us with a strategic opportunity to further enhance the recognition of Starbucks as the world's leading purveyor of specialty coffee in the Asia Pacific region" (Business Wire 1998). Starbucks could also gain recognition of its good brand image by forming the licensing agreement with the well-known Restaurant Brands New Zealand Ltd. and entering into the new and un-mature New Zealand coffee market.
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After years of having the licensing agreement with Restaurant Brands New Zealand Ltd., the information about Starbucks’ achievement can be found in 2006’s annual report. “Total sales for the year grew 14.4% on a comparative weekly basis to a high of $27.9 million for the year. Same store sales for the year grew by 2.6% and store earnings improved 6.3%” (Salmon 2006). Starbucks was also very successful in the following year as well. Starbucks is now recognized in New Zealand as the foremost international coffee brand. “Starbucks Coffee New Zealand has also been recognized internationally for our local marketing activity” (Salmon 2006). In 2001, Starbucks and Restaurant Brands New Zealand Ltd. reached an agreement to open 50 outlets. In 2006, Starbucks obtained the above negotiated number of coffee stores. Starbucks in New Zealand has been a shining star where there were no signs of its light dimming since its beginnings (Salmon 2006). At the present, Starbucks is continuously growing with steady store development. Starbucks plans to “double shoot” the original plan, with its current plan calling for 100 stores throughout New Zealand (Mark 2006). Starbucks New Zealand General Manager Steve Montgomery said “We could possibly double that and hold our own.”
5.3.3. Case 3: Spain
In 2001, Starbucks signed a joint venture agreement with VIPS, a leading European food service and retail operator, as well as El Molí Vell, a retail operator of cafes and pastry shops in the Barcelona area. Tres Estrellas Unidas S.L. was a joint venture, formed by Starbucks and its two partners to manage the day-to-day Starbucks operations in Spain (Starbucks 2002). In the joint-venture structure, VIPS controlled 82% and Starbucks the other 18%. Nowadays, the joint venture ownership by Starbucks is up to 50% (Press report 2007). Group VIPS was the Spanish market leader in full service dining. It had over 30 years’ experience in retail business. The group operated several chains including VIPS’ own concepts (retail and restaurant), as well as Ginos, and Laeñe. It also integrated international brands such as T.G.I Fridays’, Bice and Itsu. The Group operated many other established restaurants as Teatriz and El Bodegón. At the end of 2001, VIPS operated about 150 outlets (Starbucks 2002). Group VIPS created the joint venture with Starbucks because it regarded that becoming Starbucks’ partner would contribute to its growth strategy (allbusiness.com 2001). In 2000, Group VIPS had put an ambitious growth project into action to double its size in three years. Starbucks, in turn, chose Group VIPS because they needed a local partner to help the company to establish themselves in the community (elmundo.es 2002). Álvaro Salfranca, Starbucks’ Chief Executive in Spain, mentioned in an interview “VIPS group plays a local role, because they understand the country and they operate in the stores; and Starbucks sets its heart, soul and philosophy behind Starbucks’ concept”. (elpais.com 2007)
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Furthermore, both companies shared vision and values facilitate the smooth flow of their venture. Howard Schultz, Starbucks Coffee Company chairman mentioned “VIPS Group is an ideal partner for Starbucks, as its strategic and business vision fit in with ours” (elpais.com 2007). After seven years, its joint venture continues working; they have even expanded their business in France and Portugal. El Moli Vell was a top retail operator of bread and pastry shops in the Barcelona area. It was founded in 1863. It had expertise and skills in handcrafted bakery products. In 2001, the company owned over 170 cafes. El Moli Vell was the retail component of the Europastry group. The Europastry group owned one of the most important European businesses in pastries (allbusiness.com 2001). Similar to Group VIPS, El Molí Vell was delighted with being Starbucks partner. David García-Gasull, CEO of El Molí Vell, commented “We are excited about introducing Starbucks into the Spanish market”. Starbucks sought to strive for the highest quality products and service in the market. (allbusiness.com 2001) In our interview, Luis Peña mentioned more reasons why Starbucks decided to ally with VIPS group and El Molí Vell. First, its partners had experience and reputation in the hotel sector. Besides, both regarded customer service as an important part of their business. Another factor is that they integrated human resources in their businesses. Starbucks also took into account VIPS’ and El Molí Vell’s creative ability, local knowledge and capability to create branding. Finally, both partners had strong financial resources and quality in their products and services. Spain was the first Latin market which the company entered into and an important landmark for Starbucks. Moreover, Starbucks’ development in Spain was part of Starbucks’ ambitious European growth strategy. For instance, in 2001, Starbucks not only entered in Spain, but also in Switzerland and Austria (cincodias.com 2002). Álvaro Salfranca in an interview characterized Spain as a mature and attractive market when they established coffee stores there (elpais.com 2007). When Starbucks went into Spain, coffee market had already developed.There were a huge quantity of traditional coffee stores and big and known coffee chains such as Kroxan, Jamaica Coffee and Café& Té Gr Compañía del Trópico. In Europe, Starbucks was having a tremendous reception from customers and fast and successful growth. Howard Schultz stated, “Our entry into Spain comes at very exciting time for Starbucks” and “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”(Starbucks 2002). In reference with Spanish market, Peter Maslen, president, Starbucks Coffee International mentioned “We believe that Starbucks Experience will be in Spain as it is in the rest of our international market in Europe”. Besides, he added “ we are confident that Spanish coffee drinkers will enthusiaticallly embrace Starbucks unique coffee house experience” (Ibid). In 2002, Starbucks opened its first store in the center of Madrid. Tres Estrellas Unidas S.L. planned to open over 10 to 15 stores over the followings 18 to 24 months.
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(Starbucks 2002). In addition, Alvaro Cañete, managing director of Tres Estrellas Unidas S.L., stated that the joint venture hoped to have 100 stores in five years (Cincodias.com 2002). At present the company has more than seventy stores distributed amongst large Spanish cities: Madrid, Barcelona, Valencia and Sevilla (Press Report, Spain 2007). All Starbucks stores are company-owned by the venture, ruling out the use of franchising owing to a desire to guarantee control over the purchase, treatment and distribution of coffee (Cincodias.com 2002). The reception of Starbucks in Spain was better than had been hoped. Álvaro Salafranca admitted to feeling surprised about the positive reception of Starbucks’ brand. He commented: “We did not know if we get people to fall in love faster than we thought, or if we have been received better we thought”. (elpais.com 2007) When Starbucks was established in Spain, the coffee company already had a strong brand. As a consequence, Starbucks could play a fundamental role in the negotiation between its partners. For instance, Starbucks did not use any co-branding strategy with the VIPS Group. Its brand concept and clear position as “purveyor of experiences” were enough to consolidate its brand locally in a short time (Galli & Carbone 2007). In spite of having a good reception in Spain, Starbucks’ coffee culture was different from Spanish coffee culture. Luis Peña in our interview mentioned: “Spain consumes a lot of coffee, but it does not have coffee culture”. He regarded that Spanish people do not have a lot of knowledge about coffee. Spanish people did not know to distinguish between different varieties of coffee. Therefore, Starbucks established programs in Spain to help people to learn about coffee culture, which included tasting of different kinds of coffee.
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CHAPTER 6:
CASE ANALYSES
In this part we will analyze the empirical data showed in the previous section to get an answer to our research questions. In order to analyze the empirical data thoroughly, the following analysis was based on the literature review.
6.1. DATA ANALYSES 6.1.1. Case 1: United Kingdom:
1. What factors affected Starbucks’ entry mode decisions? INTERNAL FACTORS Characteristic of the overseas country business environment Before Starbucks entered into the UK, it analyzed the foreign market. The top management expected the UK to be the springboard for entry into Europe (Pettigrew 1999). Koch (2001) states that there are characteristics of overseas countries which are easy to obtain these days. While understanding the Italian coffee market and French coffee market, Starbucks saw the more significant opportunity in the British coffee market. The language was easy to understand and the management would be easy to organize. Besides, compared with Italian worldwide coffee culture, British coffee culture was much easier to merge into. However, “volatility of general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication” are of difficulty to define in an earlier stage (Koch 2001). Thus, to gain knowledge about the United Kingdom market, Starbucks decided to allow Seattle Coffee Company managers to continue operating for Starbucks. They already had enough market knowledge to run Starbucks stores in the U.K. Firm size Starbucks is a relatively large firm. Until the end of 1997, Starbucks had around 1,400 stores. As it mentioned in Chen and Mujtaba’s theory, larger firms could have a greater capability than smaller ones to expend resources and absorb risks. Therefore, Starbucks had greater capability than others for expending resources and absorbing risk, which meant they could afford to buy sixty-five stores with a cost of £50.8 million.
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Resource commitment Root (1994) argues that company who owns a huge amount of resources has numerous entry mode options. Starbucks had management skills, experience and a huge amount of resources. Thus it had more options regarding their choice of entry. In choosing the particular entry mode the firm considered that it had the available capital to purchase Seattle Coffee. Speed In an internationalization process, speed is related to the stated time a company desires to dedicate before establishing itself in a host country. (Brassigton and Pettitt 2000). The speed of Starbucks’ international expansion was getting more and more aggressive in 1990s. In order to explore the new market, Starbucks needed to find a way to enter into the UK. With the acquisition of Seattle Coffee, Starbucks achieved expansion of its business in a short time. Global management efficiency requirements Degree of internationalization influences the quantity of available resources in a company (Koch 2001). Starbucks had the strategy to enter into the UK as the first step in expanding into the European continent. As Koch defined, as the firm’s degree of internationalization becomes higher, the resources become more limited. Starbucks was a relatively large company in 1997, with 1400 stores. Instead of limiting its resource commitment and redefining their global strategy, Starbucks instead chose the resource-intensive route of a wholly-owned subsidiary. Therefore, this was not a significant factor affecting Starbucks’ mode of entry choice in the UK. Management risk attitudes The management risk attitudes of Starbucks were clear due to the uncertainty of the British market. Koch (2001) determined degree of risk depends on: company’s financial situation, its strategic options, and competitiveness of the environment. When Starbucks entered into United Kingdom, Starbucks had carried out a policy of minimizing risk. EXTERNAL FACTORS Culture distance Culture distance refers to the possible differences existing in relation to the way in which individuals from different countries observe certain behaviors and ways of thinking. They will influence the ability of companies to transfer work practices and methods from one country to another (Quer, Claver & Rienda 2007). When Starbucks, as the American coffee giant, entered the UK market, it widely acknowledged the basic culture distance between American and British culture. Thus, Starbucks tried to look for a local company to adapt to the British coffee culture.
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Howard Behar, President of Starbucks Coffee International, told BBC News Online that taking account of local conditions was very important (BBC news 1998). Starbucks made a distinctive decision to acquire Seattle Coffee Company unlike its more common strategy of a joint venture. It was a good way to enter into a new market and solve the problem of cultural distance. Furthermore, Starbucks waited a year to rebrand these stores with the Starbucks name. In this way, Starbucks made the British first become familiar with Starbucks Coffee. In addition, Seattle Coffee Company was operated in an American coffee style by two Americans. It was a good advantage for the Starbucks’ operation in UK to already have a similar style of coffee. Market barriers Market has obstacles such as tariff barriers, governmental regulations, distribution access, natural barriers, existed barrier and level of country development (Koch 2001). Market barriers are not a distinctive factor in considering the British case. Market potential Chen and Mujtaba’s theory of market potential refers to growth and size potential of foreign market. The market potential affects the strategy of Starbucks’ European expansion. Howard Schultz, chairman of Starbucks Coffee Company, recognized that the market potential of the United Kingdom was an important factor in internationalization in the following statement: “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”. (Starbucks 1998) Competitive intensity Competitive intensity is measured by the number of competitors in the host country. The degree of the market density of the competitors affects MNCs’ strategy of entry mode. Competitive pressures drive MNCs to perform shared-control modes, franchising, licensing, or others when the market could be assumed to be operating under perfect competition. (Chen and Mujtaba 2007) Based on the above analysis, Starbucks was a case of a company using direct investment in order to enter the market in the UK. In 1998, the British coffee market was not mature, and competitive pressure was high. Through the acquisition of the established coffee chain, Seattle Coffee Company, Starbucks could gain a lot of advantages. Starbucks eliminated a potential competitor and reduced competitive intensity in the United Kingdom. Starbucks also used its capital and influence to obtain prime locations and to gain competitiveness. Even some of them were operated at a financial loss. “Critics claimed this was an unfair attempt to drive out small, independent competitors, who could not afford to pay inflated prices for premium real estate.” (Wikipedia 2008)
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2. Which entry mode strategies did Starbucks use in foreign markets and why? Starbucks used a wholly-owned subsidiary as the entry mode in the UK. A whollyowned subsidiary means the firm owns 100 percent of the stock. Establishment of a wholly-owned subsidiary in a foreign market can be done in two ways. The firm either can set up a new operation in a foreign country or can acquire an established firm in that host nation. Thus, the case in the UK uses the second of the two methods. In the case of Starbucks in the UK, it is easy to find out that the internal factors and external factors are relatively important for the choice of entry mode. First of all, Starbucks was influenced by scarce knowledge of the British business market characteristics. There was culture distance between two countries which was generally defined in the external factors. Moreover, there were uncertainties in the new market. For Starbucks, it needed to choose an entry mode which could eliminate these disadvantages. To acquire the Seattle Coffee Company, which was an existing coffee company in the UK, was definitely a big benefit for Starbucks to gain knowledge in the new market. What’s more, the comparatively large size of Starbucks, which could afford to commit more resources and especially a large amount of capital, was a critical factor leading to Starbucks’ decision to acquire Seattle Coffee. Starbucks, in pursuing its high-speed and aggressive expansion strategy, chose this entry mode of building a wholly-owned subsidiary due to the global management efficiency requirement and management risk attitudes. Starbucks’ top management was eager to enter into the UK as the springboard to explore the rest of the European market. Because of high risk, Starbucks chose a familiar American-style operated coffee company existing in the UK. Last but not least, the market potential and the competitive intensity affected Starbucks’ choice of entry. With the promise of serving its first European country in a yet-to-mature market and with the added benefit of eliminating a potential competitor, Starbucks decided to acquire Seattle Coffee Company, form a wholly-owned subsidiary, and enter the UK market.
6.1.2.Case 2: New Zealand
1. What factors affected Starbucks’ entry mode decisions? INTERNAL FACTORS Characteristics of the overseas country business environment Starbucks had an aggressive overseas expansion in the late 1990s. The growth in the Pacific Rim continued since its new opening in several countries in 1998, including such countries as Taiwan, Thailand, New Zealand and Malaysia. The global giant had the aggressive strategy to explore further Pacific Rim locations. At an earlier stage in 1998, Starbucks was planning to enter New Zealand. The first store opening in New Zealand was one of its expansion strategies. However, the new
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characteristics of the overseas country business environment was unfamiliar to Starbucks in New Zealand. It was not the same as those other Pacific Rim countries Starbucks entered such as Japan and Singapore in 1996, and the Philippines in 1997 (Starbucks Timeline 2008) . Starbucks was lacking the information of the new area, which had its own intensive knowledge and culture. Specifically it was facing the “problems of business regulations, business infrastructure, and levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication”. (Koch 2001) Thus it was difficult to operate in New Zealand because of the lack of country-specific knowledge. Therefore, Starbucks joined a licensing agreement with Restaurant Brands New Zealand Ltd., which was a well-known hotel business company. It was obvious that Restaurant Brands New Zealand Ltd. was a suitable licensee for Starbucks to gain market knowledge and obtain benefits through this licensing agreement. Firm size Until the end of 1997, the year before Starbucks entered into New Zealand, Starbucks already had a successful business in the coffee market throughout America and Canada. Furthermore, Starbucks had expanded its branches in the Asia Pacific Rim. In 1996, Starbucks opened its stores in Japan and Singapore and in the Philippines in 1997 (Starbucks Timeline 2008). Starbucks was reaching a high number of total stores, which was 1,412 at fiscal year end 1997 (Starbucks Timeline 2008). Therefore, at that time, Starbucks was a comparatively large-sized firm with around 1,400 stores. As per the theory described by Koch, Starbucks could have greater capability than any other small coffee shops to make full use of its management knowledge and recognition to reach an agreement with Restaurant Brands New Zealand Ltd. However, Starbucks did not use its capability to expend resources and absorb risks in New Zealand. Resource commitment Resource commitment is a factor related to firms’ size. Both of them, the firm size and resource commitment, joined together, influence the choice of the New Zealand entry mode. As mentioned before, Starbucks in 1998 was a comparatively large company with more than 1400 stores. And it already had the experience of expanding abroad. Starbucks opened in Japan and Singapore in 1996 and in the Philippines in 1997. It was already a successful case at an early stage. However, the resource commitment of the company for the New Zealand market seemed not that much. Starbucks had capital, and management, but lacked the huge amount of resources to invest in New Zealand’s internationalization. Starbucks had already acquired more than sixty coffee stores to enter into the United Kingdom and also its far-reaching internationalization plan had limited the number of available resources. Owing to uncertainty of the foreign market, Starbucks could not fully bear the whole costs to establish operation in a new market.
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Therefore, Starbucks’ licensing agreement with a local partner was a strategic way to obtain resources and to share financial risk to enter into New Zealand. The most important thing was that Starbucks could gain the royalty fee through this licensing agreement, which could compensate for the limitation of its capital for international expansion. Speed According to Brassigton and Pettitt (2000), the speed factor in the internationalization process is the time a company desires to dedicate in order to reach a foreign market. The speed of Starbucks’ international expansion was getting more and more aggressive. The firm size was getting bigger too. Before 1998, there were approximately 1400 stores. In 1998, Starbucks also had an accelerated pace of internationalization. The company not only entered into New Zealand, but it established its stores in three more countries: Taiwan; Thailand and Malaysia. As of the end of that year, Starbucks totally had more than 1800 stores worldwide. The company’s desire to expand was getting larger and larger. In the New Zealand case, Starbucks’ strategy was to form a licensing agreement with Restaurant Brands New Zealand Ltd. They had an initial agreement which was to open fifty outlets, a target that was reached in 2006. Global management efficiency requirements According to Koch (2001), the company will start to become limited in its resources, due to the high speed of its international expansion. Starbucks’ internationalization pace was accelerating since the 1990s. The strategy in New Zealand was during this high speed stage of Starbucks’ internationalization. Before entering into New Zealand, Starbucks had acquired more than sixty five Seattle Coffee stores and also it has expanded into many other foreign countries. As a consequence, Starbucks had a reduced quantity of capital for New Zealand internationalization. In spite of being a big firm with a huge quantity of resources, its ambitious expansion program limited quantity of involved resources in its expansion to New Zealand. Management risk attitudes A company’s financial situation, strategic options and competitiveness are influential aspects affecting entry mode decision (Koch 2001). Starbucks in New Zealand formed the licensing agreement with Restaurant Brands New Zealand Ltd. assuming low risk to enter. This decision was in accordance with Starbucks international policy of limiting quantity of invested capital.
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EXTERNAL FACTORS Culture distance The culture distance between New Zealand and USA culture distance was not so high to affect entry mode decision. Market barriers According to the information of the New Zealand market, there is not any typical market barrier such as tariff barriers, governmental regulations, distribution access, natural barriers, existed barrier and level of country development (Koch 2001) that would have influenced Starbucks’ entry mode choice in international expansion. Market potential Market potential refers to growth and size potential of foreign market. New Zealand was a new promising market for Starbucks to enter in the early 1990s. That is why Starbucks chose to enter into New Zealand in the early stage.
Competitive intensity Competition intensity is measured by number of competitors in the host country. The degree of the market density of the competitors affects the firms’ strategy of entry mode (Chen & Mujtaba 2007). According to the research, the competition intensity in 1990s was comparatively low. There were not many coffee shops operating in New Zealand. Therefore, Starbucks did not need to invest in a high-control entry mode in order to be competitive in New Zealand
2. Which entry mode strategies did Starbucks use in foreign markets and why? Starbucks uses licensing as the entry mode in New Zealand. Licensing is an arrangement where a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee. Based on the above investigation and discussion, the main reason for using a licensing entry mode can be found on the internal factors and external factors. The internal factors occupy a higher percentage of the reason for choosing a licensing entry mode, whereas the external factors are less significant. First of all, the characteristic of New Zealand’s business environment was unfamiliar. Starbucks was lacking knowledge of this new market. To form the licensing agreement with an experienced firm, Restaurant Brands New Zealand Ltd. was a way to gain knowledge from its local partner. Besides that, the comparatively large size of the firm
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made it have the capability to commit resources. However, Starbucks needed its partner to commit more managerial resources and lacked the capital due to the fast speed of its growth in the 1990s and internationalization process planned. Thus the global management efficiency and the management risk attitude combined together to incentivize Starbucks to find an efficient and low-risk entry mode: licensing. As for the external factors, there were few cultural differences or market barriers and a large market potential. However, because of the low level of competitive intensity, Starbucks was able to choose the low-control licensing entry mode as opposed to a high-control entry mode such as a joint venture.
6.1.3. Case 3: Spain
1. What factors affected Starbucks’ entry mode decisions? In Spain, entry mode decision was influenced by several factors: internal and external. Within internal factors, the most relevant factors were characteristic of the overseas country business environment and speed. The most influential external factors affecting entry mode were those such as resource commitment, global management efficiency and management risk attitude. In this case analysis, we will explain why the above factors were influential in Starbucks’ choice to pursue a joint venture in Spain. INTERNAL FACTORS Characteristics of the overseas country business environment There is information to be considered about a specific country such as business regulations or practices, infrastructure, scope and intensity of competition, customer protection legislation and customer sophistication (Koch 2001). In addition, there is host country knowledge to be learned such as habits, culture and foreign market behavior. Companies sometimes have difficulties to attain part of this information. When Starbucks decided to enter into Spain, the coffee company had a long international experience, but it lacked knowledge about the hotel sector in Spain. The company sought partners that “understood the country and played a local role” and helped the company to form part of the community as Álvaro Salfranca, Starbucks Chief Executive in Spain, mentioned in several interviews (Starbucks 2002). Therefore, the company allied with VIPS and El Molí Vell who had hotel experience and necessary knowledge to operate Spanish market. Speed Brassigton and Pettitt (2000) define speed factor as time that a company wants to dedicate to go into foreign market. Starbucks desired to enter into Spain in a short time in order to bring profits from third year of operations. Furthermore, the company had designed an ambitious expansion plan consisting of opening over 10 to 15 stores
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over 18 to 24 months (Starbucks 2002) and to have 100 stores in five years (Cincodias.com 2002). Global management efficiency requirement Degree of involvement in internationalization process can determine quantity of available resources to enter into a new country (Koch 2001). When international involvement is high, the company’s resources start being limited. Before Starbucks established its stores in Spain, the coffee company had already internationalized in twenty countries (see Appendix III: Company time line). The internationalization process had required a huge amount of investment by Starbucks and its expansion plan anticipated even further investment. As a consequence it was impossible for the company to expend a huge quantity of resources in internationalizing Spain. Resource commitment/ firm size Choice of entry mode depends on amount of available resources and company size Koch (2001). If the company size is big, the company will have a huge amount of available resources and in turn numerous entry mode options. (Root 1994) However, companies with limited resources are constrained to use entry mode with small resource commitment. In 2001, Starbucks was already an important and large company. The coffee company had experience, technology, reputation, strong branding and management and production skills. As a consequence, Starbucks had certain power and advantages in negotiations to choose certain entry modes such as the joint venture entry mode. For instance, Starbucks did not use any co-branding strategy with VIPS Group. Its brand concept and clear position as “purveyor of experiences” were enough to quickly consolidate its brand locally (Galli & Carbone 2007). However, the number of resources involved was reduced, as Starbucks only invested 18% of the joint venture’s capital in spite of its large size. Although Starbucks was big MNC, its high level of international involvement limited the number of available resources to go into Spain. Management risk attitudes Degree of risk in an international business depend on: the company’s financial situation, its strategic options, and the competitiveness of the environment (Koch 2001). Starbucks’ international strategy tends to minimize its holding and require a local partner to operate in the target market. In a joint-venture strategy, the company usually does not hold more than a 50% stake (Forbes.com 2003). In the case of Spain, Starbucks only held an 18% stake of the Tres Estrellas Unidas, S.L. joint venture, in keeping with its financial policy to hold less than a 50% stake. VIPS Group was the investor of a major part of Tres Estrellas Unidas’ capital .
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EXTERNAL FACTORS The greatest external factors in Spain’s entry mode choice were: market potential and competitive intensity. Market potential According to Chen and Mujtaba (2007) market potential is the growth and size potential of a foreign market. Spain was regarded as a potentially important market by Starbucks. Howard Schultz, chairman of Starbucks Coffee Company, stated “While these are still early days in our growth, our success worldwide firmly validates our ongoing belief of the enormous potential for expansion in Europe”. Starbucks was confident of Spanish market would behave as the rest of European markets where the coffee company had already internationalized (Starbucks 2002). Peter Maslen, president of Starbucks coffee international gave the same opinion in the following statement: “We are confident that Spanish coffee drinkers will enthusiastically embrace Starbucks unique coffee house experience” (Ibid). Competitive Intensity It is related to number of competitors and competitive pressure in a host country (Chen and Mujtaba 2007) When Starbucks entered into Spain, the company knew that Spain was a mature market with many competitors. Álvaro Salfranca recognized the importance of competitive intensity to go into Spain in a granted interview where he said “We knew Spain a mature and attractive market when they entered into” (elpais.com 2007). In Spain, there were a huge quantity of traditional coffee stores and also big chain of coffee company as Kroxan, Jamaica Coffee and Cofee & Té GR Compañía del tropico. Culture distance Culture distance refers to the possible differences with relation to the way in which individuals from different countries observe certain behaviors and ways of thinking. In Spain’s case, cultural distance was not a large influential factor in the entry mode decision because Spanish people were already consuming a huge amount of coffee before Starbucks entered into Spain. However, they lacked coffee culture. Therefore Starbucks has sought to inculcate its coffee culture through coffee learning programs ever since it entered into Spain. 2. Which entry mode strategies did Starbucks use in foreign markets and why? In Spain, Starbucks chose joint venture as entry mode. Luis Peña in our interview pointed out the Starbucks’ international strategy adapts to different markets to satisfy needs and requirements from every market, respecting its cultures and traditions. In Spain, Starbucks decided to use a joint venture entry mode in order to adapt to external factors and also internal factors as well.
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The choice of the joint venture entry mode instead of its other international strategies (licensing and wholly-owned subsidiary) owes to a set of factors. First of all, Starbucks lacked knowledge of the Spain market. Therefore, the coffee company needed to ally with a local partner who provided its knowledge and helped the company to operate locally. Another factor was speed; Starbucks wanted to have a fast expansion in Spain. The coffee company had planned to open 100 stores in only five years and needed an international strategy that enabled its internationalization in a short period of time. As Starbucks wanted a fast internationalization process, the wholly-owned subsidiary strategy was unsuitable. Global management requirement was another crucial factor; the degree of internationalization in Starbucks Company was high in 2001 with coffee stores in twenty countries. The coffee company had invested a huge quantity of financial resources in its international process, and its anticipated internationalization plan was also ambitious. All of that limited the number of available resources, reducing influence firm size factor in entry mode choice. In addition, Starbucks’ management attitudes were to minimize its holding and require a local partner to operate in the target market and to share financial risk. As a consequence, the company could only dedicate a limited number of resources in every country, which ruled out the whollyowned subsidiary entry mode. Finally, the key factors that influenced the company in choosing a joint venture instead of licensing were market potential and competitive intensity. The Spanish market had great potential for Starbucks. The coffee company needed an entry mode that allowed it to control its operations in Spain, but licensing gave Starbucks a low degree of control. Lastly, the Spanish market was already mature, and with several significant competitors Starbucks needed an entry mode that allowed higher control in order to face the competitive situation. Therefore, Starbucks chose joint venture as entry mode.
6.2. CONTRAST ANALYSES
After having analyzed three cases separately the following is a comparative analysis to determine similarities and differences between Spain, United Kingdom and New Zealand cases. The comparison of the first research question, “What factors affected Starbucks’s entry mode decisions?” In every case, there is a set of factors, external and internal, which influenced entry mode decisions. We will explore if crucial factors of entry mode choice were different or not.
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Internal factors Characteristics of the overseas country business environment It refers to information about characteristics of overseas country. There are overall country characteristics which are easy to obtain, but information about particular industries and company-specific information is often difficult to find such as general business regulations/ practices, business infrastructure, levels of industrial development, forms, scope and intensity of competition, customer protection legislation and customer sophistication (Koch 2001). In the three cases, we only have found similarities about knowledge of host country. All of them were affected by the “characteristic of the overseas country business environment”. Due to the uncertainty and unfamiliarity of the new foreign market, Starbucks investigated the foreign market at first. Then it managed to gain the knowledge through different ways of entry from its partnerships or alliances. As we mentioned above there are not major differences—only the manner which Starbucks took in order to obtain host country knowledge. In Spain and New Zealand, Starbucks sought a local partner who provided information whereas in the United Kingdom the company kept Seattle Coffee Company managers.
Firm size Firm size refers to capability of expending resources and absorbing risks (Chen and Mujtaba 2007). In our three cases, we have found that firm size affected the choice of entry mode. Owing to Starbucks’ size, its experience and resources, the coffee company had possibility to choose any international strategies. The firm size was quite big, with more than 1,400 stores in 1998 when Starbucks went into New Zealand by licensing and acquired the Seattle Coffee Company in the UK. In 2001, Starbucks’ firm size was much larger, with approximately 4,700 stores when Starbucks entered into Spain. However, influence of Starbucks’ size in entry mode decision of Spain and New Zealand was reduced owing to influence global management requirement factor. Resource commitment Resources commitment is the number of resources which a firm invests to enter into a foreign country. We have found the resource commitment factor to be relevant in the three cases. Comparatively, there are some differences. The three modes of entry show a different degree of resources commitment. In the U.K. Starbucks committed a great quantity of resources to acquire Seattle Coffee store, £ 50.8 million. In Spain, the joint venture required an investment of 3 million euros, which means Starbucks invested €540.000, equal to 18% of its total capital (Cincodías.com 2002). In New Zealand, Starbucks committed few resources at all, while Restaurant Brands New Zealand Ltd. committed a huge amount resources, including store set up costs and royalty fees under the licensing agreement.
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Speed This refers to time a company dedicates in order to reach a target market (Brassigton and Pettitt 2000). These three cases are all influenced by the firm’s speed. Starbucks sought to enter into all three countries and expanded in a short time. In the 1990s Starbucks accelerated the speed of internationalization, and as a consequence this aggressive speed was a decisive factor in the choice of entry mode. However, the strategy of Starbucks’ international subsidiary to accelerate internationalization was different in each case. In the United Kingdom, Starbucks expanded quickly by acquiring 65 established Seattle Coffee stores. In the New Zealand case, Starbucks handed over its expansion to Restaurant Brands New Zealand Ltd. Lastly in Spain, Starbucks allied with VIPS Group and El Moli Vell to help them expand in a short time. Global management efficiency requirements When involvement of internationalization of a company is high, resources start being limited (Koch 2001). We have found that Starbucks in Spain and in New Zealand were affected by limitation of resources owing to Starbucks’ ambitious expansion plan. Internationalization of Starbucks was high when it entered into three countries. The coffee company wanted to internationalize in a huge of number countries, and Starbucks had already internationalized in many countries. That limited available resources to invest in Spain and New Zealand. In these two countries, the influence of global management efficiency requirement reduced influence of firm size and degree of resource commitment in entry mode decision. However, Starbucks’ entry mode in the UK is not in accordance with explanation of global management requirement by Koch (2001). Starbucks chose the more aggressive way of entry in the UK, by acquiring a similar coffee company with a high capital commitment. In spite of the decision to invest a reduced quantity of resources, Starbucks still invested a great amount in the United Kingdom internationalization.
Management risk attitudes Companies determine degree of international business risk that they will take in their international businesses taking into account their specific situation (Ibid). Starbucks had established a policy of reduced risks. We found that management attitudes of reduced risk had affected the three cases. The differences between the three cases are in degree of assumed risk. The lowest risk was taken in New Zealand with a licensing entry mode, whereas the highest risk was assumed by Starbucks in the United Kingdom. In Spain, the risk involved is somewhat of a middle-ground strategy.
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External factors Culture distance Between different countries is the possibility of differences in behaviors and ways of thinking. They can influence the validity of transferring work practices and methods from one country to another (Root 1994). In our research we have found that cultural distance was not a crucial factor in New Zealand and Spain. However, the cultural distance factor was relevant in the United Kingdom. Market barriers Tariff barriers, governmental regulations, distribution access, natural barriers, exit barrier and level of country development can influence entry mode choice (Koch 2001). However, in our three investigated countries, market barrier factors did not affect entry mode decisions.
Market potential Internationalization process can be influenced by potential growth of a market (Chen and Mujtaba 2007). Starbucks had a great potential market in Europe that made the company sought entry modes of fast expansion. In New Zealand, market potential also was important, but the company had a low degree of market potential.
Competitive intensity Competitive intensity in a host country drives companies to select an entry mode related to specific competitive pressures (Chen and Mujtaba 2007). Starbucks’ entry mode decision was influenced in the three cases by competitive intensity factors. Competitive intensity was relatively high in the Spain and United Kingdom cases. Starbucks in Spain chose a joint venture with two local partners to attain recognition and reputation in market. The joint venture increased Starbucks’ market power. In the UK case, Starbucks acquired a potential coffee competitor to reduce competitive intensity. However, degree of influence in New Zealand was totally different. There was a low competitive intensity that provided Starbucks the chance to license its coffee stores to Restaurant Brands New Zealand Ltd.
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FACTORS Characteristic of the overseas country business environment
NEW ZEALAND X
UK SPAIN X X
Firm size INTERNAL FACTORS Resource commitment Speed
X X X X
X X X --
X X X X
Global management efficiency requirements Management risk attitudes X X X
Culture distance EXTERNAL FACTORS Market barriers Market potential Competitive intensity
--X X
X -X X
--X X
Figure: Comparision of influential factors affecting entry mode decision
X means the factors affect the choice of entry in each country. -- means the factors do not affect the choice of entry in each country.
The comparison of the research question, “which entry mode strategies did Starbucks use in foreign markets and why?” Starbucks chose different international strategies in each of our cases. Our three countries represent the three types of Starbucks’ international strategies in its international development. In Spain, Starbucks carried out a joint venture as its entry mode. In New Zealand Starbucks decided to use licensing whereas in the United Kingdom the coffee company opted for a wholly-owned subsidiary. Starbucks carried out different entry modes in order to adapt to specific factors, needs and requirement in every country. Our findings show that similar factors influence the three cases. However, their degree of influence was different in every particular case. For instance, the competitive intensity factor was decisive in two of our cases, Spain and New Zealand, but its influence affected each country in a different way. In the Spain case, competitive intensity was high and led Starbucks to choose a joint venture
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as its entry mode. In New Zealand, Starbucks selected licensing, influenced by a low competitive intensity together with other relevant factors such as the global management requirement. Starbucks carried out different entry modes because situations in the three cases were not the same. In the Spain case, Starbucks chose joint venture as the entry mode owing to three main reasons. First, the company needed a partner who provides it country specific knowledge. Besides, the coffee company sought to share financial resources and risk owing to its financial policy and that the company was immersed in an ambitious international development program. Lastly, the coffee company had to control its operations directly because the Spanish market had high potential with high competitive intensity. In the United Kingdom case, the company decided to use a wholly-owned subsidiary as the cultural distance there was great, and there was a high degree of competitive intensity. Besides, the coffee company was influenced by speed and characteristics of the overseas country business environment. Finally, the reasons for choosing licensing in New Zealand were the followings: Starbucks lacked knowledge about the country and needed a local partner to help the company to operate. Furthermore, the decision was influenced by management attitudes of minimizing its international investment. It is also because of the global management requirement that the company had limited available resources to enter into New Zealand. Lastly, Starbucks’ decision was influenced by a low competitive intensity. In short, Starbucks carried out different entry modes in Spain, New Zealand and the United Kingdom because it wanted to adapt to the specific circumstances of each country. In three countries, the external and internal factors, as well as their degree of influence, were not the same. As Starbucks wanted to avoid difficulties during its expansion and was aware of the long-implications of entry mode decision, the company preferred to seek the most suitable entry mode in each case.
CHAPTER 7: CONCLUSION AND RECOMMENDATION
7.1. CONCLUSION
The main purpose of our research was to know why an MNC such as Starbucks used different entry modes, and what factors have influenced their entry mode decisions. To obtain findings: first, based on our literature review, we developed a set of possible influential factors affecting the entry mode decision in our conceptual framework. Then we collected our empirical data from different sources. Finally, we analyzed and contrasted our three cases in order to determine similarities and differences between them.
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In our first research question: “What factors affected Starbucks’ entry mode decisions”, we obtained the following findings: First, entry mode decision is influenced by a number of factors. Factors which influenced entry mode decisions can be related to either internal or to external environment of MNC. In our case, we have found that internal factors that have affected Starbucks’ choice of entry modes are: culture distance, market potential and competition intensity. On the other hand, relevant external factors are: characteristic of overseas country business environment, resource commitment, speed, management risk attitudes, and global management requirement. Both sets of factors are relevant in entry mode decisions, but the external factors are often decisive in devising the choice of international strategy. Furthermore, internal and external factors can influence companies’ internationalization strategies to different degrees. Factors that influence entry mode decisions can be different in each case; not always is an entry mode decision influenced by the same factors. Even, some factors can affect other as it happened in New Zealand and Spain case with firms size, resource commitment and global management efficiency requirement factors. Starbucks was a big company with high experience and resources when internationalized in both countries. However, the company had to limit and rationalize their resource and to reduce its entry mode options to fulfill its ambitious internationalization plan. Last but not least, there are several factors which influence choice of international strategy, but one or two factors are often crucial in the decision. Those factors are often external factors. The results of our second research question “Which entry mode strategies did Starbucks use in foreign markets and why?”: We show that Starbucks used three different international strategies: joint-venture, wholly-owned subsidiary and licensing. Our findings have determined that the reason for using three different strategies is that Starbucks seeks to adapt to different local needs, requirements and influential factors in every country. It means that the cause of using different entry modes is mainly owing to external factors. In summary, we can conclude by saying our investigation shows that entry mode strategy is an important decision in the internationalization process of Starbucks. The choice of international strategy has long-term implications for the company. Therefore, managers needed to analyze every influential factor thoroughly in the internationalization process prior to make entry mode choice.
7.2. RECOMMENDATION
Our study has shown that internal and external factors influenced the choice of entry mode for Starbucks. Moreover, we have determined that external factors are often the most decisive ones. As for the firm, it is significant to analyze the external factors first-hand. Then to choose the suitable way of entry among possible entry modes is to find the most effective and efficient way for the company’s international expansion.
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As for Starbucks, each mode of entry for the three cases was a good choice for the short-term or early stage entry. As part of a long-run strategy, it is critical that Starbucks chooses stable entry mode strategies in order to stand still in the highly competitive market situation.
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2008 Master Thesis – Group 2023
REFERENCE LIST
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Business Wire 1998, ‘Starbucks Coffee Company Opens First Store in New Zealand’, in findarticles, accessed 1st May 2008, from Carlson, S 1975, How Foreign is Foreign Trade?, Acta Universitatus Upsaliensis, Uppsala Caterersearch 2006, ‘Starbucks Coffee Company Ltd’, in caterersearch, accessed 29 April 2008, from Chen LY & Mujtaba B 2007, ‘The choice of entry mode strategies and decisions for international market expansion’, Journal of American of Business, p. 322 Chen, LY & Mujtaba, B 2007, ‘The Choice of Entry Mode Strategies and Decisions for International Market Expansion’, Journal of American Academy of Business, vol. 10, issue 2, p. 322 Cincodías.com 2002, ‘Starbucks prevé abrir 100 cafés en el mercado español en cinco años’, in cincodias, accessed 20th April 2008, from Coffeegeek 2003, ‘Starbucks Corporation completes acquisition of Seattle Coffee Company’, in coffeegeek, accessed 29 April 2008, from Dunning, JH 1988, ‘The eclectic paradigm of international production: A restatement and some possible extensions’, Journal of International Business Studies, vol. 19, pp. 19, 1-31 Dutta S & Subhadra K 2003, ‘Starbucks' International Operations’, in scribd, accessed 29 April 2008, from http://www.scribd.com Dyer, W G &Wilkins, A L 1991, ‘Better Stories, not Better Constructs, to Generate Better Theory: A Rejoinder to Eisenhardt’, Academy of Management Review, Vol.16, p. 613- 619 Ekeledo, I & Sivakumar, K 2004, ‘International market entry mode strategies of manufacturing firms and service firms: A resource-based perspective’, International Marketing Review, vol. 21, issue 1, p. 68 Elmundo.es 2002, ‘He creado la empresa para la que mi padre nunca pudo trabajar: una que valora a la gente’, in elmundo, accessed 21st April 2008, from Elpais.com 2007, ‘Starbucks, a la conquista de España’, in elpais, accessed 15th April 2008, from
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Emprendedores 2007, ‘Las técnicas de Starbucks para crear verdaderos adictos a su marca España un Mercado diferente’, in emprendedores, accessed 16th of April , from Encina, A 2008, ‘La experiencia Starbucks’, MK Marketing + Ventas, Nº 231, p.20 Florin, J & Ogbuehi, AO 2004, ‘Strategic Choice In International Ventures: A Contingency Framework Integrating Standardization and Entry-Mode Decisions’, Multinational Business Review, vol. 12, issue 2, p. 83, 27 Forbes.com 2003, ‘Starbucks' World Won't Be Built In A Day’, in forbes, accessed 21st April 2008, from Galli & Carbone 2007, ‘Desembarco de marcas. La promoción de exportaciones, en transición: ahora se centra en el nombre y la reputación de los productos’, in lancion, accessed 20th April 2008, from Gatignon, H & Anderson, E 1988, ‘The multinational corporation’s degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation’, Journal of Law, Economics and Organization, vol. 4, pp. 305-306 Ghoshal, S & Westney, DE 2005, Organization Theory and Multinational Corporation, 2nd edition, Palgrave McMillan Gillham, B 2000, Case Study Research Methods, Continuum, p.1-2 Gresham 2005, ‘Starbucks Coffee Company’, in ezinearticles, accessed 15th April, from Hickman M 2008, ‘Starbucks is bottom of high street coffee test’, in independent, accessed 29 April 2008, from < http://www.independent.co.uk > Hill, Charles WL 2007, International Business-competing in the global market, McGrawHill Hill, WL, Hwang, P & Kim, WC 1990, ‘A eclectic theory of the choice of international entry mode’, Strategic Management Journal, vol. 11, pp. 117-118 Hofstede, G 1980, Culture’s Consequences. International Differences in Work-Related Values, Sage Publications, Newbury Park Hofstede, G 1991, Culture’s and Organization’, Software of the Mind, Mc Graw-Hill, London
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Holmes, S 1998, ‘Starbucks To Buy U.K. Company -- Seattle Coffee Deal Opens Door Into Europe’, in Seattle Times Business Reporter, accessed 29 April 2008, from Huanming,Wang 2007, 'The lost of Starbucks', in Globrand, accessed 1st April 2008, from Hussey J & Hussey R 1997, Business research A practical guide for undergraduate and postgraduate students MacMillan Business Hwang, P & Kim, WC 1992, ‘Global strategy and multinationals’ entry mode choice, Journal of International Business Studies, vol. 23, pp. 29-53 Isaac, GE, Perdikis, N & Kerr, WA 2004, ‘Cracking export markets with genetically modified crops: What is the entry mode strategy?’, International Marketing Review, vol. 21, issue 4/5, p. 536 Isidro, I 2004, ‘Learning from Starbucks: 10 Lessons for Small Businesses’, in powerhomebiz, accessed 24th April 2008, from Jiangwei, Huang 2007, 'The comparision of Hargendaz and Starbucks', in Globrand, accessed 1st April 2008, from Kaynak, E, Demirbag, M & Tatoglu, E 2007, ‘Determinants of Ownership-based Entry Mode Choice of MNEs: Evidence from Mongolia’, Management International Review, vol. 47, issue 4, p. 505 Kogut, B & Singh, H 1988, ‘The effect of national culture on the chouce of entry mode’, Journal of Internation Business Studies, vol. 19, pp. 411-432 Li, Cai 2007, 'The service of Starbucks', in Globrand, accessed 1st April 2008, from Magazineusa.com 2004, ‘Starbucks history’, in magazineusa, accessed 15th April 2008, from Manson, E 2007, ‘UK coffee market set to double over the next 10 years’, in caterersearch, accessed 29 April 2008, from < http://www.caterersearch.com> Mark 2006, ‘A Double Shot From Starbucks’, in franchise business-opportunities, accessed 1st May 2008, from
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Nitsch, DP, Beamish, P & Makino, S 1996, ‘Entry mode and performance of Japanese FDI in Western Europe’, Management International Review, vol. 36, pp. 27-43 Peinado, ES & Barber, JP 2006, ‘Un enfoque integrador de la elección del modo de entrada en los mercados internacionales. Una aproximación empírica en sectores de servicios1’, Management International, vol. 10, issue 2, p. 43, 23 Peña, L., 30/04/2008, Interview Pettigrew, J 1999, ‘Starbucks Coffee U.K.: springboard to Europe’, in allbusiness, accessed 29 April 2008, from < http://www.allbusiness.com/sales/291390-1.html> Quer, D, Claver, E & Rienda, L 1997, ‘The impact of country risk and cultural distance on entry mode choice; An integrated approach’, Cross Cultural Management, vol. 14, issue. 1, p. 74 Quer, D, Claver, E & Rienda, L 2007, ‘The impact of country risk and cultural distance on entry mode choice; An integrated approach’, Cross Cultural Management, vol. 14, issue 1, p. 74 Randoy, T & Dibrell, CC 2002, ‘How and why Norwegian MNCs commit resources abroad: beyond choice of entry mode’, Management International Review, vol. 42, pp. 119-40 Restaurantbrands 2008, ‘Home page of restaurantbrands’, in restaurantbrands, accessed 1st May 2008, from < http://www.restaurantbrands.co.nz/> Root, FR 1994, Entry strategies for international market, San Francisco: Jossey Bass, Inc Ros-Martín, M 2006, ‘Qué es fuente de información en Internet’, in documentalistaenredado, accessed May 21st 2008, from < http://www.documentalistaenredado.net/355/que-es-fuente-de-informacion-eninternet/> Salmon, V 2006, ‘General Meeting’, in restaurantbrands, accessed 8th May 2008, from < http://www.restaurantbrands.co.nz/info/part_04.htm> Sarkar, M & Cavusgil, ST 1996, ‘Trends in international business thought and literature:A review of internatinal market entry mode research: Integration and synthesis’, International Executive, vol. 38, pp. 825-847 Schultz,H & Jones, D 1997, How Starbucks built a company one cup at a time,Hyperion, New York Shan, W 1991, ‘Environmental risks and joint venture sharing arrangements’, Journal of International Business Studies, vol. 22, pp. 555-580
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