Globalistaion & Coffee preparation

5 May 2016

Our International business module aims for us to explore and understand theory behind international business and trade. These concepts theories can be applied and understood using real life business case studies. These theories include: Globalisation, International Trade Theory, International Business Strategy and Internationalisation Process of the Firm.

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For this assignment we chose to use Starbucks. Starbucks are relevant and apply well to the above theories as they are a globally recognised brand and have achieved large success since their founding in 1971. They now operate 15,000 stores across 50 countries and employee in excess of 150,000 staff.

‘Globalisation can be defined as the process by which markets and production in different countries are becoming increasingly independent due to the dynamics of trade in goods and services and flows of capital and technology. It is not a new phenomenon but the continuation of developments that have been in train for some considerable time.’ (EU Commission 1997, cited by Held)

Globalisation has been aided by improvements in transport and technology as well as the movement of capital. The Internet has made the world as much smaller place and multi-national enterprises are becoming more common. Also barriers to trade have been reduced dramatically worldwide over the last few decades. All of which aided Globalisation for companies.

International Theory of Trade or Classical Theory includes Adam Smith’s theory of ‘Absolute Advantage’ and David Ricardo’s theory of ‘Comparative Advantage’. In ‘Absolute Advantage’, countries specialize in what they best produce, reducing goods prices and encouraging trade across countries.

David Ricardo’s comparative advantage reinforces Smith’s theory of a country producing its most efficient product even if it possess’ efficiency in more than one product. He states that although they possess efficiency in more than one, one of the products must still hold a marginal higher efficiency.

This benefits countries as you get to import what you cannot produce and you get to export what you are good at producing. This creates agreements between countries on trade and encourages relations and creates economic growth. (Wall, Minocha and Rees 2010)

International Business Strategy is an essential area for the expanding organisation to review. Your strategy is the plan that you have for when you are going to internationalise your company, this will differ on what type of company you are and what your company objectives are.

Examples of international business strategy include: importing, exporting, franchising, licensing and foreign direct investment. Foreign direct investment is the most profitable, but the most risk risky strategy for a company to implement.

The Internationalisation Process of the Firm reviews why the firm are internationalising or expanding internationally. These can include Diversification, Economies of scale, Market growth, Joint ventures and a Saturated domestic market. The process you take will depend on your industry and the strategy that you plan to implement.

Background of the company and international issues facing

In 1971, Starbucks started off as a Seattle-based coffee company, which sold coffee beans and coffee equipment. Starbucks began to change their vision in the late 1980s after Howard Schultz visited Italy and was inspired by their coffee-drinking culture and he wanted to bring that to the American market.

This idea was initially dismissed by Starbucks owners, but when Schultz bought the company, he implemented his idea and Starbucks as we know it today was born. The initial opportunity for success lay with the Americans and Italians having an established coffee culture.

The Italians liked to drink expressos and sit outside in the sun; whiles Seattle natives preferred to drink black coffee indoors to keep out of the
cold. Seattle was a sophisticated city and with an increase of people living in cities, Schultz believed that this was a good starting point for Starbucks as people in a sophisticated city would be more willing to try something new. This was Starbucks first opportunity.

Starbucks wasn’t profitable in its first few years, but they believed that they should expand to build up their brand name. Starbucks strived on their brand name and it resulted in them opening many stores across America and then they expanded into Canada.

Starbucks built on the power of their brand and made a proactive decision to enter the Asian market in mid 1990s. Asia was a major opportunity: as the Asian people are obsessed with American culture. Starbucks opened their first Asian store in Japan in 1996, via a joint-venture. Starbucks was now an international company. This was big opportunity for Starbucks to increase their growth. In the late 90s and early 2000s Starbucks continued to expand at a rapid pass, entering many more countries in Asia and then moving into the European market.

In 2001 Starbucks faced an issue as they received criticism for not using fair trade coffee. Starbucks responded by opting to use fair trade coffee, even though it was more expensive for them to purchase: resulting in a more expensive price for the customer. Starbucks, we feel had to make to switch, as they risked damaging their strong brand name, which is a major asset of their company.

Having to increase their prices however came at a good time as in the early 2000s people were willing to pay more for a premium coffee. Starbucks were then able to differentiate their prices on Americanos and Cappuccinos for example, as people wouldn’t mind paying more for a cappuccino. This provided Starbucks with an opportunity to increase their profitability.

Also, even though Starbucks now had to pay more for their coffee beans, they were able to create a deal with their suppliers; as all the suppliers wanted to deal with Starbucks, as Starbucks purchased more high quality coffee beans than anyone else. This enabled Starbucks with the luxury of picking the best deal suitable to them.

In 2006 the world faced one of its worst recessions in decades, which left companies all over the world with lower profits and many well-known businesses for example Woolworths and HMV closing entirely. The recession didn’t escape the coffee industry as coffee consumption decreased globally. Their market was now also already highly saturated, especially with well-established companies like McDonalds coming into the market and offering a lower priced coffee. This was an issue as McDonalds already had 14,000 stores in the US alone.

The recession also made people more price-conscious and with Starbucks seen as an expensive coffee store, it came as no surprise when Starbucks had to close some of its stores, the vast number however did come as a surprise; as 600 stores in the US and 61 in Australia were forced to shut down operations.

In response to this issue, Starbucks change their direction by introducing Starbucks Via, which is an instant coffee to the used at home. This was introduced to compete with Nestle and Kraft Foods, who were both well-established brands. This provided Starbucks with a new opportunity as they were targeting a different segment of the market and it could it increase their market share. Also it was a response to the issue of the recession, as Starbucks Via could be used for many servings so it was value for money.

In 2010, there was a lack of production of coffee beans, due to unsuitable weather. This shortage resulted in a sudden increase for the price of coffee. This was an unforeseen issue for Starbucks, which meant that would not have budgeted for this, so Starbucks may have had to change their strategy.

Going forward there is still an opportunity for Starbucks as specialty coffee increased in market share from just 1% in 1981 to 20% in 2006, in America. This growth is encouraging for Starbucks.

Analysis

Beginning in 1971 Starbucks sold coffee beans and coffee making equipment. When Schultz visited Italy, he saw a concept, which excited him and wanted to bring this platform of espresso coffee bars to his home city, Seattle. This was a complete change of scope for Starbucks as a company and so much so that Shultz had to wait until he was in charge to take this change of scope.

Increasing the ‘Starbucks’ brand name and brand recognition was achieved by opening multiple new stores. This strategy was used by Starbucks to gain a competitive advantage over their rivals and to leverage their already established coffee supply brand within Seattle.

Sequential theory states that when expanding internationally, four phases exist. These are, intermittent export, export via agents, licensing and foreign direct investment.

Starbucks were aware that their product range is homogenous so the phases of sequential theory do not apply. So Starbucks expanded through simultaneous expansion.

After establishment of their domestic markets in America and Canada through organic growth, Shultz made a proactive decision to expand Starbucks into the Asian market. This made Starbucks an international company. In the late 1990s and 2000s Starbucks further expanded their Asian operations and moved into the European Market. Starbucks had to review their International business strategy regarding how they would move into these markets to ensure success.

For its Japanese expansion, Starbucks chose a joint venture strategy. This was a corporate level decision as Starbucks already have a large presence with a recognised brand. T

his was most suitable for Starbucks as the Japanese market was very different from its American based operations and it was Starbucks first step outside its domestic markets. This joint venture with an established Japanese company provided Starbucks with the local market knowledge and operational experience within the market. This combined with Starbucks great product gave the expansion the best possible chance for success. This is also considered a less profitable form of expansion.

1998 brought Starbucks expansion to the UK market. The UK was chosen as a target market was its tastes and culture is quite similar to the US and thus well known by Starbucks. This was done through the acquisition of the ‘Seattle Coffee Company’.

This gave Starbucks 56 prime retail units with already established customer base from the previous company. This catapulted Starbucks into a position only possible through acquisition and gave little time to competitor start-ups or existing competition. This strategy was successful as by the end of 2008 Starbucks had expanded too 664 units in the UK.

China was identified as another potential growth market, providing a large target market and a relatively untapped coffee market. Starbucks chose licensing for its Chinese stores as the Chinese market, although lucrative presented large risk. The countries culture and political stance was completely new to Starbucks and a licensee already established in China proved best to bring the brand to China.

Using licensing as a strategy reduced Starbucks risk in the Chinese market, as the risk is greater for the people buying the license, than Starbucks itself. Starbucks now has 62% market share in China with 1,500 stores expected by 2015. (China Post)

As a result of a global economic downturn, the demand for Starbucks premium coffee fell. This developed a need for a change of direction for Starbucks. They chose Starbucks Via as this change of direction. Starbucks Via allowed Starbucks to sell their premium coffee for home consumption. The home coffee market is huge and Starbucks were successful in the market. This direction change helped increase market share will increasing revenue for the company.

Starbucks initial expansion strategy was Proactive. As it progressed and
saturation of its domestic markets increased, the decision to rapidly expand and open new stores became reactive. This was similar to their initial strategy of expansion to increase brand recognition and presence in the market place.

Personal Learning Statement

Aidan Keenan

Learning outcomes achieved.

Examine the major ideas and concepts from international business, and apply these to current business case studies.

During work on the project I explored Globalisation, International trade theory, International business strategy and the Internationalisation process of firms. I reviewed these practically with case studies and could see the workings of each theory and topic within these case studies.

Analyze the impact of Globalisation on countries, economies and companies, markets and consumers

The Starbucks case study allowed me to see the expansion of a large company into multiple foreign markets. The study looked at angles including political, cultural and geographical factors associated with engaging in international business, which previous I would not have considered.

Interpret the role of Internationalisation by identifying strategic level approaches of business growth, scope and processes.

Corporate level, Business level and Functional level are decision levels, which can be chosen by Starbucks. Its international expansion was corporate based. Scope, direction, competitive advantage and long term strategies can be chosen with Starbucks changing both scope and direction in the case. Starbucks also achieved competitive advantage.

Determine the current issues businesses face in the global context including increase competition, efficiency issues and outsourcing.

Starbucks faced saturation of their domestic market with increased competition. Increased supplier prices and facing a global economic turndown Starbucks were already in the international market and thus benefitted further from its already in place expansion plans removing its dependency on its domestic market.

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