CASE STARBUCKS FDI

1. MAR ATHANASIOS COLLEGE
FOR ADVANCED STUDIES
GROUP MEMBERS
TINY SALY PONNACHAN
TRACY ANN MATHEW
VIMAL
VISHNU SAJAN
VISHNU SATHEESHAN

2. STARBUCKS
• Starbucks Corporation is an American coffee company
and coffeehouse chain. Starbucks was founded in Seattle,
Washington in 1971. As of November 2016, it operates 23,768
locations worldwide.
• Starbucks is considered the main representative of "second wave
coffee", initially distinguishing itself from other coffee-serving
venues in the US by taste, quality, and customer experience while
popularizing darkly roasted coffee. Since the 2000s, third wave
coffee makers have targeted quality-minded coffee drinkers with
hand-made coffee based on lighter roasts, while Starbucks
nowadays uses automated espresso machines for efficiency and
safety reasons

3. Q 1: Initially Starbucks expanded Internationally by licensing
its format to foreign operators. It soon became disenchanted
with this strategy. Why?
• Although Starbucks had resisted a franchising strategy in
North America, where it’s shares are company owned,
Starbucks initially decided to license its format in Japan.
• However, the company also realized that a pure licensing
agreement would not give Starbucks the control needed to
ensure that the Japanese licensees closely followed
Starbucks successful formula.
• With licensing, Starbucks had limited control of their
expansion rate.
• Soon Starbucks became disenchanted with some of the
straight licensing arrangements and converted several into
joint-venture arrangements or wholly owned subsidiaries.

4. • Their licenses did not have the capability to expand as
rapidly as Starbucks wanted.
• Starbucks initially licensed its format to ESCO Korea Ltd in
1999. Although ESCO soon had 10 very successful stores
open, Starbucks felt that ESCO would not be able to
achieve the company’s aggressive growth targets, so in
December 2000 it converted licensing agreement into a
joint venture with Shinsegae, the parent company of ESCO.
• The joint venture enabled Starbucks to exercise greater
control over the growth strategy in South Korea and to help
fund that operation while gaining the benefits of a local
operating partner.
• By October 2000, Starbucks had invested some $52 million
in foreign joint ventures.

5. Q 2: Why do you think Starbucks has now elected to expand
internationally primarily through local joint ventures, to whom it
licenses its format, as opposed to a pure licensing strategy?
Starbucks has a larger measure of control
and still can access local knowledge through
the joint venture partner.
In order to expand on international level, Starbucks decided to enter
Japan by adopting the licensing mode of Foreign Direct Investment
(FDI). The corporation licensed its special formula to a joint venture
that was formed with a local company ‘Sazaby Inc.’.

6.  Starbucks format in other countries required sharing of its
expertise and knowledge in the field of coffee service.
 At the start of international expansion strategy,
they utilized licensing option and there was less
control on the foreign stores.
 The success of a business is highly dependent on the level of
uniformity that is found in all the stores of a firm on global level
especially when expanding in overseas markets.

7.  When a service company decides to enter into foreign markets,
it needs to keep a balance between the requirements of the local
people and the tourists who visit the country for travelling
purpose.
 When the customers who travel abroad visit the Starbucks
outlet, they look for same coffee experience that they cherish at
the Starbucks’ coffee shops in their homelands.
 Starbucks’ successful global expansion strategy are the
consistency in its offerings at all the outlets and uniformity in
the service quality.

8.  The main aim of the corporation was to create the replicated look,
ambience, feel and experience of Starbucks in its international
outlets and it was not possible with licensing format.
 In order to ensure uniformity and continuity in between the
Japanese locations and American stores. Starbucks decided to
transfer its employees from America to Japan so that the employees
can be trained in accordance to the company’s required set of
standards.

9.  The company has entered into joint venture Bono Appetit group,
largest Swiss food producing company. Bono Appetit was to hold
majority stock in the venture and Starbuck license its format to
the Swiss company.
 In Germany Starbuck has venture with Karstadt
Quelle. Starbuck held 18% equity in the venture
and Karstadt held the remainder.
• In Asia, Starbuck’s most common strategy was to license its
format to local operator in return of initial licensing fees and
royalties on stores revenue.

10. Q.3What are the advantages of a joint-venture entry mode for
Starbucks over entering through the wholly owned
subsidiaries? on occasion, Starbucks has chosen a wholly
owned subsidiary to control its foreign expansion(eg:in Britain
and Thailand). Why?
• Joint venture is a mode of entry which has minimum amount of risk.
To ensure international expansion, two feasible methods that could
employed are licensing and joint ventures.
• The foremost problem that was encountered in its initial operations
was lack of uniformity also, the Starbucks had limited amount of
control on the foreign operations and limited knowledge about the
local market.
• At that point they reconsidering their pure licensing strategy and
enter into the market through joint ventures.
• In a joint venture, both corporations have certain amount of stake in
the operations and each one of them has to bear certain amount of
market and failure risk as well.
• It also help to share the risk and cost of international expansion.

11. • The success and expansion rate increased at an accelerating pace and its brand image
started to get strong in foreign markets after entering into joint venture.
• However ,it wanted to have complete control on its international business operations
and decided to create wholly owned subsidiaries.
• It provides opportunity of penetrating at a fast pace in global market, get instant
access to the local markets and small companies are willing to present their resources
to well known foreign markets.
• In Thailand, they took over ‘coffee partners’ ,which is the company earlier they have
licensing agreement, in 2000.By the end of 2007,they were about 103 Starbucks
outlets in Thailand.
• In Britain, Starbucks acquiring a well known company ‘Seattle Coffee’, help them to
effectively deploy its expertise in the industry and offer the customers the similar
product and service ranges.
• Another positive element for Starbucks was there is similarity of culture in us and
Britain.
• Hence by making use of wholly owned subsidiary format, Starbucks was able to
keep a strict control over business in Britain and Thailand, also was able to save huge
amount of time and cost.
• Starbucks ensured similar experience in all of its operations worldwide and
appreciate the service level of the coffee market leader.

12. Q 4: Which theory of FDI best explains the international expansion
strategy adopted by Starbucks?
 Market imperfections theory (internalization) best explains
Starbucks approach.
 Starbucks wants to maintain product quality and brand identity
across a wide range of cultures, taste preferences, work habits and
ways of doing business.

13.  Internalization Theory – when one or more of the following
conditions holds, FDI is preferable to licensing and exporting
1. When a firm has valuable know-how that cannot be adequately
protected by a licensing contract.
2. When the firm needs tight control over a foreign entity to
maximize its market share and earnings in that country.
3. When a firm’s skills and know-how are not amenable to
licensing

14.  Horizontal foreign direct investment refers to the fact that a
parent company decides on expanding its operations throughout
the world.
 This expansion is achieved not through means of franchising but
by the process of entering in to joint ventures with other
enterprises operating in the other countries.
 The major advantage for the firms that practices the horizontal
FDI is that the firm's profitability margin is fairly high, since it
has another firm for the production in other countries.

15.  The main goal of the strategy adopted by Starbucks is to ensure
their existence in different countries in order to make as much
money as possible along with the creation of well known brand
image.
 The characteristics of the Horizontal FDI practiced by the
Starbucks is the internalization theory also known as the market
imperfections.

16. GROUP 7
• Case: “Starbuck’s FDI”- Page 323-”International
Business” by Charles W Hill & Arun K Jain, 6th
Edition, Mc Graw-Hill – New Delhi.