MOD003409 International Business

Case Study - Starbucks Foreign Direct Investment

Thirty years ago, Starbucks was a single store in Seattles Pike Place Market
selling premium roasted coffee. Today it is a global roaster and retailer of coffee
with some 13,000 stores, more than 3,750 of which are to be found in 38 foreign
countries. Starbucks Corporation set out on its current course in 1980s when the
companys director of marketing, Howard Schultz, came back from a trip to Italy
enchanted with the Italian coffeehouse experience. Schultz, who later became
C.E.O., persuaded the companys owners to experiment with the coffeehouse
format- and the Starbucks experience was born.
The strategy was to sell to the companys own premium roasted coffee and
freshly brewed espresso-style coffee beverages, along with a variety of pastries,
coffee accessories, teas and other products, in a tastefully designed coffeehouse
setting. The company also focused on providing superior customer service.
Reasoning that motivated employees provide the best customer service,
Starbucks executives devoted a lot of attention to employee hiring and training
programs and progressive compensation policies that gave even part-time
employees stock option grants and medical benefits. The formula led to the
spectacular success in the United States, where Starbucks went from obscurity to
one of the best known brands in the country in a decade.
In 1995, with 700 stores the United States, Starbucks began exploring foreign
opportunities. Its first target market was Japan. Although Starbucks had resisted
a franchising strategy in North America, where its stores are company owned,
Starbucks initially decided to license its format in Japan. However, the company
also realised that a pure licensing agreement would not give it the control
needed to ensure that the Japanese licences closely followed Starbucks
successful formula.
So the company established a joint venture with a local retailer, Sazaby Inc. Each
company held a 50% stake in the venture, Starbucks Coffee of Japan. Starbucks
initially invested $10 million in this venture, its first foreign direct investment.
The Starbucks format was then licensed to the venture, which was charged with
taking over responsibility for growing Starbucks presence in Japan.
To make sure the Japanese operations replicated in the Starbucks experience in
North America, Starbucks transferred some employees to the Japanese
operation. The licensing agreement required all Japanese store managers and
employees to the Japanese to attend training classes similar to those given to
U.S employees. The agreement also required that stores adhere to the design
parameters established in the United States. In 2001, the company introduced a
stock option plan for all Japanese employees, making the first company in Japan
to do so. Sceptics doubted that Starbucks would be able to replicate its North
American success overseas, but by the end of 2007 Starbucks had over 700
stores in Japan and planned to continue opening them at a brisk pace.

After Japan, the company embarked on an aggressive foreign investment

program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60
retail stores, for $84 million. An American couple, originally from Seattle, had
started Seattle Coffee with the intention of establishing a Starbucks-like chain in
Britain. In the late 1990s, Starbucks opened stores in Taiwan, China, Singapore,
Thailand, New Zealand, South Korea and Malaysia.

In Asia, Starbucks most common strategy was to licence its format to a local
operator in return for initial licensing fees and royalties on store revenues. As in
Japan, Starbucks insisted on an intensive employee training program and strict
specifications regarding the format and layout of the store. However, Starbucks
became disenchanted with some of the straight licensing arrangements and
converted several into joint-venture arrangements or wholly owned subsidiaries.
In Thailand, for example, Starbucks initially entered into a licensing agreement
with Coffee Partners, a local Thai company. Under the terms of the licensing
agreement, Coffee Partners was required to open at least 20 Starbucks coffee
stores in Thailand within five years. However, Coffee Partners found it difficult to
raise funds from Thai banks to finance this expansion. In July 2000, Starbucks
acquired Coffee Partners for about $12 million. It goal was to gain tighter control
over the expansion strategy in Thailand. By the end of 2007 the company had
103 stores in Thailand.
By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe.
As its first entry point, Starbucks chose Switzerland. Drawing on its experience in
Asia, the company entered into a joint venture with a Swiss company, Bon
Apptit Group, Switzerlands largest food service company. Bon Apptit was to
hold a majority stake in the venture, and Starbucks would licence its format to
the Swiss company using a similar agreement to those it had used successfully in
Asia. This was followed by a joint venture in other countries. In 2006, Starbucks
announced that it believed there was the potential for up to 15, 000 stores
outside of the United States, with major opportunities in China, which the
company now views as the largest single market opportunity outside of the
United States. Currently the company only has 350 stores in China. (Hill, 2011)
Answer all three questions:
1. Using suitable business tools carry out an extensive foreign market
analysis and assess the reasons why Starbucks chose to enter the markets
in the case study.
(1500 words- 40 marks)
2. Assess the suitability of the different market entry strategies employed by
Starbucks in their pursuit of the different foreign markets identified in the
case study.
(1100 words- 30 marks)

3. Critically assess the suitability of the staffing approach that Starbucks

utilised in Japan in relation to their corporate strategy.
(1200 words- 30 marks)

Guidelines for undertaking the Assessment;

1. All assignments must be word processed in Microsoft Word (or similar)
format with size 12 and line spacing 1.5. Handwritten assignments will
attract an automatic FAIL grade.

2. Assignments will be graded on the basis of research done, analysis of the

facts collated, stand taken and the justification of the stand.

Report structure and word count for each question:-

Title Page
Table of Contents
Executive summary-200 words
Introduction-100 words
Question 1-1500 words
Question 2-1200 words
Question 3-1100 words
Conclusions-100 words
References
Bibliography
Appendix-use sparingly

The assessment weighting for the assignment is 100%.

Links between the Learning Outcomes and the Assessment

Learning Outcomes
LO1: Critically evaluate the main features which contribute to
the international business environment and its main
institutions and the key decisions underpinning international
organisational strategy

Where
Assessed
Question 1

LO2:
Evaluate the different modes of engagement with
international markets and explore and form critical
judgements on the interconnectedness between these and the
economic, legal, governmental, political, regulatory, cultural
and other environments in which expanding companies
operate

Question 2

LO3: Conduct informed research into international business

issues and apply theoretical insights to the analysis of such
issues in the context of a complex international business
environment

Question 3

Marking Criteria

Topic

Link to
Learnin
g
Outcom
e

Marks
Possibl
e

Question 1
A critical review of contemporary and academic literature
Collection of data from a range of sources

L.O. 1

16

Content and analysis

Has the question been answered / is the answer focused?
Question 2
Critical review of contemporary and academic literature
Collection of data from a range of sources

20
L.O.2

Content and analysis

Has the question been answered / is the answer focused?
Question 3
Critical review of contemporary and academic literature
Collection of data from a range of sources

12

15
L.O.3

12

Content and analysis

15

Has the question been answered / is the answer focused?

Presentation and structure of the assignment including
referencing of sources as per the Harvard style.

10

TOTAL

100