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Starbucks
Expansion to Asia-Pacific Region
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Paper within International Management
Authors: Lauris Ancupans
Lynne Wallin
Tutor: Anette Risberg
Jönköping May 2000
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INTRODUCTION
Following
the rapid growth of since 1971, Starbucks management made the logical decision
to expand internationally at the beginning of 1996. Going international is the
decision made by many companies all around the world in order to be able to
stay competitive, sometimes to merely survive, if not prosper. Starbucks saw
the need for this and therefore expanded into the global marketplace.
Asia,
specifically Japan, was chosen as the target market. This was quite a daring
adventure because of the many differences that exist between the United States
and Japanese markets. Companies in the food producing industry must be
extremely careful when entering Asian markets. The tastes are much different
from those in the US and consumer behavior is not at all the same.
CONSUMER
TASTES AND BEHAVIOUR.
The
values, beliefs, customs and collective behavior of a people or a nation
constitute its culture. These cultural factors influence (1) a company’s
decisions about positioning operations overseas and (2) local
consumption preferences. A company must ensure that it has a viable market
for its products or services. (Holt, 1998)
To
ensure that they have a specific market segment in Japan, Starbucks will
definitely have to adjust their ways of operating. They have to define what
will be their target audience and conduct extensive research to determine the
customers’ tastes, preferences and needs. It is quite opposed to the American
“pragmatical” approach to everything they do, both in their buying and
consuming patterns.[L1] Starbucks has the advantage that their
product from the beginning has been focused on high-quality, thus needing only
minimal adjustment to their for the targeted Asian market.
The
target audience in the Japanese marketplace is already more or less clear,
defined by existing coffee-bar chains in Tokyo– the Doutor Coffee Company and the
Pronto Corp. These two companies have targeted quite different market sectors
and are operating in them successfully. To appear attractive to this sector,
Starbucks needs to develop a niche to differentiate themselves from the
competitors. By providing an attractive American product as well as an
“American” experience, this can be achieved. Neither of these attributes can be
replicated by the Asian competitors, so they should be exemplified.
1 COMPETITORS
The
Doutor Coffee Company is a chain of coffee-bars offering something similar to
the “fast-food” restaurant style of shop. They emphasize self-service with a
limited menu. Typically the consumer drops in for 10 minutes just to have a
“fast” cup of coffee and then leaves. About 90 percent of their stores are
franchised, with the remaining 10 percent company owned. The standard cup of
coffee is priced at 180 Yen.
The
Pronto Corp. offers not only coffee, but also soft drinks and light snacks
throughout the day. In the evening, it turns into a bar serving alcoholic
drinks and light meals. In this way they are reaching two styles of customers
with different needs, reaching greater numbers. The standard cup of coffee here
costs 160 Yen.
Starbucks
has some competitive advantages over these firms. They have a unique product,
which until their entry into the market, is not offered in the café style
atmosphere in the Japan. Since Japanese consumers prefer high-quality products,
they readily pay more for better quality. Comparing to the two mentioned main
competitors, Starbucks is able to place a higher price for a standard cup of
coffee because of higher quality and service they offer. The difference is
around 100 Yen between Starbucks and their two competitors. Another advantage
that can be seen as an international advantage is their employees, whom they
train to be extremely knowledgeable about the product and the service. They
have experienced baristas ([L2]bartenders) that show-off the high
quality of the company’s products. After all attention must be also paid to the
fact that American products and style appeal very much to the Japanese. As
Diane Dagat, an industry analyst, has said: “When the Japanese come to Seattle,
the tour buses always stop at Starbucks. The Japanese love American brands.” (www.newstimes.com/archive96/jul3096/bzh.htm).
Thus
we see that all three companies are operating with quite a different sector and
their defined purpose of the coffee-bar is different too. Starbucks, not only
is serving coffee, but offering a full package of products and services,
including different bonuses for regular coffee drinkers, coffee beans selling
and specially designed bar interiors. The competitors in the Japanese market do
not offer any of these value-added benefits that Starbucks cafés do, thus
giving the Seattle-based company an edge.
The
audience Starbucks should focus on in Japan therefore should not be the rushing
students or workers who just drop in the bar for a couple of minutes, but people
who want to spend time benefiting from the whole atmosphere in the bar and to
get culturally richer. Particularly because the other type coffee-bar niches
are already being served by the two above mentioned companies. Since Japanese
students are associated with having high levels of disposable income, as well
as time to study and converse in cafés, they are a sector to focus on.
Seemingly
Starbucks realized these advantages and entered Tokyo’s market fast and with
determination. Although to minimize the risk of business failure because of
some mistake, it had to secure the investments. They examined the alternatives
for internationalization expansion and choose the most appropriate direction to
take.
2 ENTRY ALTERNATIVES
There
are several entry alternatives in new markets and each of them proposes
differences in resource demands for ownership and in management responsibility
for foreign assets (Holt, 1998). The most secure way of entering a new market
without much knowledge or experience with it, is to cooperate with other
company who is locally present in the host market and in turn has deep
knowledge of it. The most successful forms of collaboration are joint-ventures
and licensing/franchising agreements.
Taking
into account huge differences between the Japanese and American markets, one
could suggest that licensing or franchising would be the most appropriate entry
strategy for Starbucks considering this involves the least amount of resource
commitment. Exporting is not suitable for this kind of business and wholly
owned foreign subsidiary would be too risky.
According to the fact that Japan is the third largest coffee consuming
market in the world and also taking into account Starbucks’ core value of
quality, which is demanded in Japan, obviously the company felt close to the
market and chose joint-venture as the entry mode.
Probably
the choice was also based on the assumption that the company has to keep high
standards of service and production in their operations. Licensing or
franchising could not be very reliable in terms of involving almost no control
of the licensor or franchiser. Thus an equal- stake joint venture with a
Tokyo–based Sazaby Inc. was the best choice.
As
suggested by Holt (1998), Japan and other Asian countries have open government
policies towards forming joint ventures with US companies. 18.7% of joint ventures between an US firm
and a foreign firm are formed with Japan, compared to only 5.8% with France or
1.9% with Switzerland.
When
participating in joint ventures, companies usually have quite strained
relationships that do damage to the operational functionality of the venture.
The can be caused by a poor choice of partners, not well-discussed venture
agreement or other reasons. Joint ventures are often threatened by changes in
operating environment, political events, conflicts between participants etc.
Consequently, international strategic alliances are a high risk market entry
alternative that requires participants skilled in cross-cultural management.
(Holt, 1998)
3 CROSS CULTURAL MANAGEMENT
Although
Hill (1998) in his article does not mention cross-cultural management issues in
the joint venture between Starbucks and Sazaby Inc., they presumably faced the
most common problems in management of alliances between American and Japanese
firms. As no practical evidence is given in the article, we will discuss
cross-cultural management any briefly.
As
one of the leading researches on cultural diversity, Hofstede’s dimensions must
be mentioned. Plotted on his scale, Japanese and America cultures have quite
different placements. The largest difference is in the uncertainty avoidance
dimension, with Japanese asking for highly structured organizations in
which everyone knows his or her place. While Americans on the contrary, prefer
life long incentives providing the atmosphere of frequent job change
acceptability and the spirit of innovational. The American individualism and
Japanese collectivism could come into a conflict. The entrepreneurial
businessman from America could have been come upon a problem in communicating
with the high-contextual Japanese counterparts that highly differ (Forsgren
& Johanson, 1992).
But
let’s observe the typical Starbucks coffee-bar. “Well lit, … plenty of wood, …
artworks on the walls … and jazz or opera music plays softly in the background”
(Hill, 1998). Does this not fit the Japanese “high-contextually”? It fits
perfect, meaning that Starbucks has since the very beginning of the company
been developing not only product coffee as such, but the same attention is also
been paid to the surroundings. Over a hundred employees in Starbucks are
working just for the design of interior in coffee-bars, developing the
atmosphere. Although adjustments in the interior are needed, specific for
Japanese culture, the company has resources and experience to do that. Still,
the adjustments to be made are not drastic because, as mentioned before,
Japanese people like Western, American products and ideas a lot, provided by
American companies.
Starbucks
has been building the ability to expand internationally since it’s beginning,
focusing on quality international products and providing an international flare
to their café atmosphere. These are qualities that can be transferred globally
thus giving Starbucks an advantage.
To
be able to work successfully, any company anywhere needs highly skilled and
committed workforce. The workforce is committed and eager to do a better job if
they have a reasonable motivation. In order to achieve that, successful
companies implement different reward, benefit and different other kind employee
motivation programs, and so did Starbucks. Human resource managers have to pay
great attention to these issues: the more satisfied is the employee, the more
productive is the time he or she spends at the workplace.
4 HUMAN RESOURCE MANAGEMENT
5 Maslow’s need hierarchy
One
of the core competences Starbucks Corporation considers is the people working
in the company. They have developed employee training programs according to
which every new worker in the company must receive specific training; different
employee benefits as medical insurance systems, paid holidays, and employee
assistance programs, to mention a few. Starbucks has developed a strong company
culture, which is presented in a way that makes every employee feel proud to
belong to the company and work for it.
In
order to evaluate the employee motivating programs we will compare the ones
used in America and their appropriateness of
these to Japanese workers by using Maslow’s need hierarchy model. The
model suggests that a person has five core needs, which he or she tries to
fulfill. They are ranked according to importance level. First, a person tries
to achieve the highest priority need and after moving to the next level to
remove the satisfaction deficit. (Holt, 1998) The five core needs according to
Maslow’s theory are shown in figure 1, the top of the pyramid being the highest
priority need.
Figure 1: The
Maslow’s need hierarchy.
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Source: http://www.accel-team.com/maslow_/maslow_nds_03.html
Psychological needs, being the primary needs in the Maslow’s need hierarchy,
are supported by strong corporate culture, which makes employees feel like they
belong to a particular group of people in the society.
Regarding
the fourth Maslow’s need group, safety, Starbucks does a lot to satisfy
this need. It includes medical insurance, free mental/chemical dependency
benefits, 401(k) plan and others. All of these are included in Starbucks’ employee
programs. Employees therefore can focus more on their performance, as safety is
more or less guaranteed.
Differences
might arise when considering the third need category – social needs.
According to Hofstede’s dimensions, Japan and America vary greatly on the
Individualism-Collectivism scale. Americans can be characterized as
entrepreneurial and self-determined and they probably do not ask for high
social recognition, while Japanese are more collectivist. The individual
performance could worsen if acceptance and support from the collective is not
received. Therefore Americans working at facilities in Japan must be educated
in order to support this necessity. One could argue that most employees in
Starbucks Japanese coffee-bars are still Americans, with the intention to
maintain the American atmosphere in the bar. Managerial level people are still
mainly Japanese as well. It will not be possible to avoid hiring lower-level
Japanese workers in the long-term. Collectivism characteristics must therefore be
observed in forming teams with the Japanese workers.
According
to the case, employees in Starbucks are carefully selected. An important
criteria during recruiting is that the potential employee must really love his
job and in process of work, share the passion of the whole process of
coffee-making. The company also has a supportive policy towards employees,
encouraging employees to commit to the company and come up with new ideas
(Hill, 1998). Thus by carefully selecting internal company policies and recruiting
of employees, Starbucks is fulfilling the primary human needs –self-esteem and
self-actualization.
As we see, self-actualization
is the highest level need in the Maslow’s need hierarchy. This need implies the
necessity for a person to follow the wish to do the work appealing to him, thus
achieving personal goals. Self-actualization
is the need to maximize one's potential, whatever that may be. As Maslow put it
"What a man can be, he must be" (http://www.users.globalnet.co.uk/~cfg/maslow_is.htm).
Actually,
we can see that the defined five needs cannot be totally independent; they are
connected each with other. After fulfilling one need it is not only a logical
step to move on to the next, but they even to some extent complement each
other.
The
main suggestion thus concerning the need hierarchy for Starbucks would be to
adjust to the Japanese more collective orientation. While the American style
coffee-bar concept as such is appealing to Japanese consumers, the management
level human resources have to be trained specifically according to local
preferences.
International
managers are trained in Seattle, Washington. Located there is Starbucks’
International Division, which consists of 12 managers responsible for all
international operations. This division has been responsible for opening
coffeehouses in the Asia-Pacific region. Implementing this type of
organizational structure seems to be not typical for a company of the type Starbucks
is.
ORGANISATIONAL STRUCTURE. INTERNATIONALISATION
According
to Holt (1998), the organizational structure became a Product-Oriented
International Division Structure after Starbucks established the Seattle –
based international division in 1996. A company having this structure attempts
to configure foreign activities to pursue competitive and comparative
advantages. This development marks the beginning of integration and movement
toward global networking, although the global networking stage is not always
reached.
This
structure though is only the very beginning of internationalization. At this
stage we can call Starbucks international. The international organization model
involves formal coordination and control by the corporate headquarters over the
overseas subsidiaries, seeing them as appendages to the controlling domestic
corporation (Dicken, 1998).
We
can see that Starbucks suits all the criteria of an international
company, defined by Dicken (1998) as: many assets are centralized, management
and planning is formal, the competencies are adapted from the parent company
and the knowledge used in the Starbucks Japanese subsidiaries is developed in
America and then transferred to Japan.
Some
characteristics of Starbucks match perfectly the criteria of a global
company as defined by Dicken (1998), e.g., the knowledge and product is
developed in America and then transferred overseas with minimal changes.
However it is still not enough to call it global, as the company has only two
markets: America and Asia-Pacific. Also the organizational structure is
strictly limited to the parent – subsidiary relations. We assume that in the
case of expanding to other regions of the world, Starbucks will have to
restructure the organization and instead of the International Division
structure move to a Global Division, Product or Functional Group structure. We
think the Global Division structure would be the most appropriate for a service
company such as Starbucks.
An
interesting issue is that the International Division location is in the US –
far from the target region of Asia. Being far from the location where business
is conducted, the International Division could lose control over operations in
Japan. In addition, the high distance considerably slows down the process of
decision making, which can often be harmful to the company. Being far from the
local situation results in insufficient knowledge of the current occurrences.
Problems that have transpired in a distant café will tend to have less
importance to the US headquarters. Managers in these distant locations must
develop methods to communicate their significance to the headquarters in order
to efficiently solve these problems.
CONCLUSIONS
As
we have seen, Starbucks has pursued a business strategy encompassing high
quality products and services. This as well as appropriate human resource
management and market entry choices have made the company successful.
If
Starbucks want to expand internationally further, and seemingly they will,
maybe including Europe, we would suggest them to change the organizational
structure from International Division to the Global Group model. Slight
adjustments in the business strategies will be needed if the company expands
into Europe.
As
we have discussed above, new industrialized Asian-Pacific countries are open to
joint ventures formed with US companies. Starbucks could use this advantage in
Asia, but in the case of expanding to Europe, the company most
likely will have to choose other entry modes.
REFERENCE LIST
Dicken,
P., 1998, Global Shift: transforming the world economy. Third edition, London:
Chapman, Chapter 7: “Webs of Enterprise”: Transnational Corporations within
Networks of Relationships.
Forsgren,
M. & Johanson, J., 1992, Managing
Networks in International Business, Gordon
& Breach, USA
& Breach, USA
Hill,
C.,1998, International Business: Competing in the Global Marketplace, third
edition, Boston et al.: Irvin McGraw-Hill.
Holt, D.H.
1998. International Management. Text and
Cases. The Dryden Press.
Other sources:
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