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![Building
a
resource
saving
and
environmentally
friendly
society
is
one
of
the
Chinese
government’s
top
priorities
during
the
current
12th
five-‐year
period.
To
achieve
this,
a
large
range
of
issues
have
been
raised,
including
the
necessity
for
proactively
addressing
climate
change,
resource
conservation
and
management,
developing
a
circular
economy,
promoting
ecological
protection
and
restoration,
improving
water
resources,
and
heightening
disaster
prevention
and
mitigation
systems.
Developing
a
skilled
population
is
also
of
great
significance
to
China.
MNCs
can
respond
to
this
objective
through
personnel
(occupational)
training
and
investment
in
education
through
philanthropic
programs.
China
is
working
to
promote
community
self-‐governance
as
well
as
improving
the
mechanisms
for
safeguarding
people’s
right
(Bu
et
al.,
2013,
p.
54)
2.7
Guanxi.
The
term
Guanxi
refers
to
a
person’s
connections;
in
particular,
to
people
in
influential
or
higher
positions
who
may
be
willing
to
perform
favors
for
you,
with
the
understanding
that
these
favors
will
undoubtedly
be
reciprocated
sometime
in
the
future.
2.8
Mianzi.
Meaning
“face”,
“Mian
Zi”
represents
a
person’s
reputation
and
feelings
of
prestige
(both
real
and
imagined)
within
their
family
unit
and
among
friends,
at
their
workplace
and
in
society.
The
concept
of
“face”
is
be
more
deeply
understood
if
one
recalls
that
China
has
traditionally
been
(and
continues
to
be)
a
highly
hierarchical
society.
The
position
a
Chinese
person
occupies
relative
to
others
is
typically
thought
to
command
a
certain
degree
of
respect
and
requires
certain
types
of
behavior
(Upton-‐McLaughlin,
2013,
p.
1).
2.9
The
Chinese
coffee
market
The
Chinese
consumer
market
for
coffee
is
still
in
the
early
stages
of
maturation.
The
retail
sales
volume
of
coffee
in
China
was
slightly
more
than
30,000
tons
in
2009.
This
translates
to
just
over
0.02
kg
per
capita
per
year.
It
is
China’s
growing
urban
population
of
600
million
people
that
accounts
for
an
estimated
90%
of
coffee
consumption
in
the
country.
This
would
place
annual
per
capita
consumption
by
the
target
consumer
market
at
around
0.05
kg
(International
Trade
center
[ITC],
2010,
p.
8).
For
comparison,
figure
3
shows
the
coffee
consumption
in
other
countries.
19](https://image.slidesharecdn.com/mbathesisstarbucks-141105011208-conversion-gate01/75/Integrating-Corporate-Social-Responsibility-into-International-Business-Strategy-21-2048.jpg)
![quality
coffee
that
is
responsibly
grown
and
ethically
traded.
The
cornerstone
of
our
approach
are
the
C.A.F.E.
Practices,
our
comprehensive
coffee-‐buying
program
that
ensures
coffee
quality
while
promoting
social,
economic
and
environmental
standards.”
These
standards
were
developed
in
partnership
with
Conservation
International,
a
Virginia-‐based
nonprofit
that
aims
to
protect
the
earth’s
biodiversity.
Critics
say
that
C.A.F.E.
standards
are
simply
a
set
of
guidelines
co-‐created
and
audited
by
Starbucks
for
larger
coffee
farms.
Starbucks
self-‐auditing
cannot
be
reasonably
considered
as
a
Fair
Trade
means
of
business
certification
when
the
company
operates
on
such
a
global
scale
and
directly
reaps
the
benefits
of
its
auditing
(Rhiannonkate,
2013,
p.
1).
“Unlike
Fair
Trade,
their
standards
do
not
include
a
guaranteed
minimum
price
to
the
producer,”
according
to
Marie-‐Christine
Renard,
a
sociologist
from
the
University
of
Chapingo
in
Mexico
State
(Paley,
2012,
p.
1).
In
2008
Starbucks
made
a
$7.5
million
multi-‐year
commitment
to
CI
and
critics
see
something
unseemly
about
this
deal.
Nonprofit
groups
taking
cash
from
big
companies
are
unlikely
to
push
their
donors
very
hard
(Gunther,
2008,
p.
1).
C.
MacDonald,
the
writer
of
the
book
‘Green
Inc.’
who
worked
for
CI
for
one
year,
accuses
CI
of
green
washing,
(MacDonald,
2008,
p.
89).
Other
critics
argue
that
CI
is
nothing
more
than
a
green
PR
company
and
that
they
should
be
stripped
of
their
UN
NGO
Observer
Status
and
expelled
from
the
various
NGO
caucuses
within
the
UNFCCC
[United
Nations
Framework
Convention
on
Climate
Change]
(Lang,
2011,
p.
1).
4.3
Porters'
Diamond
Framework
–
looking
outside-‐in.
The
outside-‐in
perspective
is
based
on
the
assumption
that
entrepreneurial
activity
not
only
influences
society
but
that
conversely
social
conditions
also
impact
a
business’s
ability
to
compete.
The
Diamond
Model,
developed
by
Porter,
based
on
the
four
interdependent
areas
of
strategy
and
competition,
production
factors,
supporting
industries,
and
demand
conditions
is
used
to
analyze
the
competitive
environment
for
opportunities
for
CSR
initiatives
("Doing
good
and
deriving
benefit,"
2012).
In
addition
to
understanding
the
social
ramifications
of
the
value
chain,
effective
CSR
requires
an
understanding
of
the
social
dimensions
of
the
company's
competitive
context
-‐
the
"outside-‐in"
linkage
that
affect
its
ability
to
improve
productivity
and
execute
strategy
(Porter
&
Kramer,
2006,
p.
9).
43](https://image.slidesharecdn.com/mbathesisstarbucks-141105011208-conversion-gate01/75/Integrating-Corporate-Social-Responsibility-into-International-Business-Strategy-45-2048.jpg)
![years
after
Burger
King
first
entered
the
China
market
in
2005,
the
company
has
only
63
restaurants
in
China,
falling
far
short
of
its
own
plan
of
opening
250
to
300
restaurants
by
2012.
According
to
Edelman
partnering
with
NGOs
in
the
APAC
region
brings
credibility
to
CSR,
particularly
if
the
NGO
partner
becomes
an
advocate
for
the
company.
Starbucks
established
partnerships
with
several
Chinese
NGOs.
The
Edelman
Trust
barometer
shows
that
in
China,
where
only
five
years
ago
trust
in
NGO’s
was
48
percent;
today
it
is
81
percent
(Edelman,
2013,
p.
4).
Nonetheless
there
is
criticism.
Critics
say
that
C.A.F.E.
standards,
which
where
developed
in
partnership
with
CI,
a
nonprofit
that
aims
to
protect
the
earth’s
biodiversity,
are
simply
a
set
of
guidelines
co-‐created
and
audited
by
Starbucks
for
larger
coffee
farms.
Moreover
the
reputation
of
CI
is
doubtful,
the
nonprofit
is
accused
of
green
washing
and
critics
argue
that
the
organization
should
be
stripped
of
its
UN
NGO
Observer
Status
and
expelled
from
the
various
NGO
caucuses
within
the
UNFCCC
[United
Nations
Framework
Convention
on
Climate
Change]
(Lang,
2011,
p.
1).
Starbucks
also
has
been
strongly
criticized
by
the
government
for
their
high
prices
and
for
their
lack
of
cultural
sensitivity
on
several
occasions.
The
most
important
criticism
was
having
a
coffee
shop
in
the
Forbidden
City.
A
doubtful
reputation
can
have
significant
consequences
in
China
where
consumers
consider
social
and
environmental
issues
in
major
decisions,
including
where
to
work
(80%)
and
what
to
buy
or
where
to
shop
(83%).
48
What
is
the
role
of
international
culture
to
Starbucks’
success
in
China?
International
culture
is
of
importance
but
adjusting
to
the
local
culture
significantly
contributes
to
Starbucks’
success.
The
company
recognized
that
establishing
and
maintaining
a
global
brand
does
not
mean
having
a
global
platform
or
uniform
global
products.
Starbucks
concentrates
on
finding
the
perfect
balance
of
cultural
integration
and
tradition
for
the
Chinese
market.
Companies
like
Mattel,
eBay,
Google
and
Home
Depot
have
thrived
in
markets
around
the
world,
but
are
not
successful
in
China.
-‐
Why?
-‐
“It’s
a
lack
of
understanding
of
the
legal
and
cultural
environment
that
leads
to
most
failures,”
says
Shawn
Mahoney,
managing
director
of
the
EP
China
consulting
group
(Carlson,
2013,
p.
1).
How
do
China’s
CSR
requirements
influence
Starbucks'
CSR
strategy?
Saving
resources
and
protecting
the
environment
are
top
priorities
for
the
Chinese
government
during
the
current
five-‐year
plan
and
it
has
been
clearly
demonstrated
that
business
entities
with
good
CSR
practice
will
receive
more
support
from
the
authorities
(Bu
et
al.,
2013,
p.
55).
Not
only
the
government
but
also
the
public
demands
social
responsible
behavior.
Ninety
percent
of
Chinese
consumers
use
social
media
to
engage
with
companies
around
critical
issues.
They
are
leveraging
social
channels
to
share
both
positive
(58%)
and
negative
(49%)
information
with
their
networks
(Cone
Communication,
2013,
p.
51).
The
power
of
social
media
was
made
clear
after
the
massive
earthquake
in
Sichuan
in
2008,
which
claimed
the
lives
of
70,000
people
and
left
five
million
homeless.
Shortly
after
the
earthquake
a
list
titled
‘international
iron
rooster’
was
widely
circulated
via
the
Internet.
The
companies
on
that
list
were
accused
of
making
profits
in
China
but](https://image.slidesharecdn.com/mbathesisstarbucks-141105011208-conversion-gate01/75/Integrating-Corporate-Social-Responsibility-into-International-Business-Strategy-50-2048.jpg)
![50
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- 1. Leidse Onderwijsinstellingen Master of Business Administration (MBA) Author Iris Meyer irismeyer@hotmail.com Goa, India, March 2014 Title Integrating Corporate Social Responsibility into International Business Strategy The success of Starbucks in China and the role of CSR to that success
- 2. Table of Contents Title .................................................................................................................................................................................. 0 Acknowledgments ........................................................................................................................................................... 5 Explanation of abbreviations ........................................................................................................................................... 6 1. Introduction ................................................................................................................................................................. 7 1.2 Problem statement ................................................................................................................................................ 8 1.3 Methodology ......................................................................................................................................................... 8 1.3.1 Research method ............................................................................................................................................ 8 1.3.2 Conceptual model .......................................................................................................................................... 9 1.3.3 Data collection method and data analysis ...................................................................................................... 9 2. Theoretical framework .............................................................................................................................................. 11 2.1 Corporate Social Responsibility and business strategy ....................................................................................... 11 2.1.1 Green washing .............................................................................................................................................. 13 2.2 CSR in China ......................................................................................................................................................... 14 2.3 Chinese economy ................................................................................................................................................ 16 2.4 Chinese society .................................................................................................................................................... 18 2.5 Chinese culture .................................................................................................................................................... 18 2.6 Chinese government. .......................................................................................................................................... 18 2.7 Guanxi. ................................................................................................................................................................. 19 2.8 Mianzi. ................................................................................................................................................................. 19 2.9 The Chinese coffee market .................................................................................................................................. 19 2.10 International culture .......................................................................................................................................... 21 2.11 Models used for the analyses -‐ The EFQM Model with CSR, Value Chain, and the Diamond Framework ........ 21 2.11.1 EFQM Model. .............................................................................................................................................. 21 2.11.2 The Value Chain – looking inside-‐out. ........................................................................................................ 22 2.11.3 Porters' Diamond Framework – looking outside-‐in. ................................................................................... 22 3. Starbucks ................................................................................................................................................................... 23 3.1 The company ....................................................................................................................................................... 23 3.3 Starbucks and CSR ............................................................................................................................................... 24 3.5 Starbucks and international culture .................................................................................................................... 25 3.5.1 Market entry. ................................................................................................................................................ 25 3.5.2 Country development. .................................................................................................................................. 25
- 3. 3.5.3 Global integration. ........................................................................................................................................ 26 3.6 The Starbucks Model ........................................................................................................................................... 26 3.6.1 Starbucks’ Mission Statement. ..................................................................................................................... 26 3.6.2 Environmental Mission Statement. .............................................................................................................. 28 3.6.3 Global Compact. ........................................................................................................................................... 28 3.6.4 Ethical Sourcing. ........................................................................................................................................... 29 3.6.5 Starbucks Global Responsibility Report. ....................................................................................................... 29 4. Research results -‐ Starbucks with EFQM CSR framework, the Value Chain, and Diamond framework .................... 31 4.1 EFQM CSR Framework. ........................................................................................................................................ 31 4.1.1 Leadership .................................................................................................................................................... 32 4.1.2 People ........................................................................................................................................................... 32 4.1.3 Policy and strategy ....................................................................................................................................... 33 4.1.4 Partnership and resources ............................................................................................................................ 33 4.1.5 Processes ...................................................................................................................................................... 33 4.1.6 People results ............................................................................................................................................... 34 4.1.7 Customer results .......................................................................................................................................... 34 4.1.8 Society results ............................................................................................................................................... 34 4.1.9 Key performance results ............................................................................................................................... 35 4.2 Porters’ Value Chain – Looking inside-‐out. .......................................................................................................... 36 4.2.1 Inbound logistics ........................................................................................................................................... 36 4.2.2 Operations .................................................................................................................................................... 38 4.2.3 Outbound logistics ........................................................................................................................................ 38 4.2.4 Marketing and sales ..................................................................................................................................... 38 4.2.5 After sales service ......................................................................................................................................... 41 4.2.6 Firm infrastructure ....................................................................................................................................... 41 4.2.7 Human Resource Management .................................................................................................................... 41 4.2.8 Technology development ............................................................................................................................. 42 4.2.9 Procurement ................................................................................................................................................. 42 4.3 Porters' Diamond Framework – looking outside-‐in. ............................................................................................ 43 5. Conclusion ................................................................................................................................................................. 46 5.1 Research questions, conclusions and criticism .................................................................................................... 46 1
- 4. 5.2 Recommendations ............................................................................................................................................... 49 5.3 Limitations ........................................................................................................................................................... 49 5.4 Future research ................................................................................................................................................... 49 References ..................................................................................................................................................................... 50 Appendix 1 Timeline of Greater China. ......................................................................................................................... 55 2
- 5. MBA THESIS – Integrating Corporate Social Responsibility into International Business Strategy Abstract The challenge of a China market entry has become increasingly important for Western companies. Rapidly changing demographics, rising incomes, increased consumer spending and an increasingly open business environment have all helped to make the Chinese market progressively more attractive to Western businesses across a variety of industries. Correspondingly, declining sales in home markets has forced many American and European companies to move China to the center of their long-‐term global growth strategies (Hedley, 2013, p. 1). Breaking into the Chinese market successfully can seem like an almost impossible task to foreign companies. Home Depot and Best Buy closed their Chinese shops in 2011. Google, eBay and Amazon tried and failed. All these companies play dominate roles in their home market and are very successful internationally but were not able to succeed in China. One of the companies that did succeed in China is Starbucks. The company is known for their good reputation in relation to social responsibility, they have embraced corporate social responsibility like few other companies and CSR plays an important role in their business strategy. This study investigates the relevance of CSR as a business strategy in China. There is relatively little information on CSR as a business strategy in the Chinese market and therefore the knowledge of this topic remained unexplored. The aim of this research is to advance the understanding of Starbucks’ CSR strategy in China, what the role of international culture is to Starbucks’ success and how China’s CSR practices influence Starbucks’ CSR strategy in in that country. The purpose is to provide insight and general understanding of these phenomena using this particular case. From reviewing the literature, several areas were recognized as important to a deeper understanding of the topic. These areas are: CSR and business strategy, CSR in China, Chinese economy, China’s middle class growth, Chinese society, Chinese culture, the Chinese coffee market, international culture and the models used for the analyses – the EFQM Model, Value Chain and the Diamond Framework. A qualitative case study research methodology was applied to investigate the research problem. The research contains both theoretical and case company-‐specific parts. A literature review provided the theoretical foundation. Other sources are online interviews, reports, documents, observation and the Cone Communication/Echo Global CSR Study. The Cone Communication Study is a global survey of consumer attitudes, perceptions and behaviors around CSR. This research supports the view that Starbucks’ CSR strategy has contributed to their success significantly. Due to food scandals and environmental degradation the public and the authorities in China demand that companies are socially responsible. The findings of this study indicate that primary stakeholders are important and due to Starbucks CSR activities the company has a positive image in the eyes of employees, customers and the government.
- 6. 4 However one could conclude that there is a lack of transparency in their CSR reporting. Also Starbucks sourcing practices are under criticism and described as a set of guidelines co-‐created and audited by Starbucks.
- 7. 5 Acknowledgments I would like to express my sincere gratitude to supervisor dr. Paul Breman CMC NXD and Prof. dr. Rob van Eijbergen for their supervision and guidance. I also would like to thank Lucas Wallace and Beverly Bakken for their valuable feedback and review.
- 8. 6 Explanation of abbreviations 3 PL Third-‐party Logistic center C.A.F.E. Coffee and Farmer Equity CCTV China Central TV CDC Central Distribution Center CEO Chief Executive Officer CI Conservation International CPGs Consumer Packages Goods CSR Corporate Social Responsibility CUP Caring United Partners DC regional Distribution Center e.g. exempli gratia “for example” EFQM European Foundation for Quality Management EMEA Europe, Middle East and Africa GRI Global Reporting Initiative HR Human Resource ITC International Trade Center KFC Kentucky Fried Chicken LEED Leadership in Energy and Environmental Design Ltd limited company MNC Multi National Company MNE Multinational Enterprises NGO Non-‐Governmental Organization PSR Purchasing Social Responsibility RMB Renminbi UK United Kingdom UN United Nations UNFCCC United Nations Framework Convention on Climate Change US United States WTO World Trade Organization YAAS Yunnan Academy of Agricultural Science
- 9. 7 1. Introduction This study examines the importance for corporations to integrate Corporate Social Responsibility into their International Business Strategy. This case study investigates how Starbucks integrates CSR into their business strategy in China and how important the role of CSR is to Starbucks’ success in that country. CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis’. Over the past decades the corporate world has experienced a noticeable increase in focus on organizations’ ethical behaviors and responsibilities towards their environment. Recently, news reports have highlighted various incidents that demonstrate poor CSR practices in China. Worker suicides, faulty consumer products, toxic emissions in the countryside, overworked and underpaid employees have all been major topics in the popular press. Given this negative publicity and the social notion of “saving face,” China’s government and industrial organizations have attempted to make sea changes in corporate practices. Although there is a perception that these changes are being adopted at a snail’s pace, the fact is that a move to assume greater CSR is actively under way (Sarkis, Ni, & Zhu, 2011, p. 1). In a certain way, China’s CSR practices are unique. Even though China has similar CSR dimensions as other developed and developing countries, unique dimensions also exist. Various cultural sensitivities and political biases are barriers that make it difficult to investigate CSR in China. Many Fortune 500 companies like Mattel, eBay, Google and Home Depot have succeeded in markets around the world, but not in China. One of the companies that did succeed in China is Starbucks. Starbucks, the largest coffeehouse company in the world with 20,891 stores in 62 countries, entered the Greater China market in 1998. In 2012 the company announced that China is projected be their second largest market by 2014. Starbucks’ largest market remains the US. The company expects to have 1,500 stores in more than over 70 Chinese cities by 2015. China’s government is the most significant actor influencing industrial and commercial practices. Previous to 1978, almost all companies in China were state-‐owned. When many were privatized, in the 1980’s and 90’s, then private industry started making a significant contribution to China’s GDP. After its entry into the World Trade Organization (WTO) in 2001, private ownership was extended to foreign direct investment. Each of these developments brought forth varying CSR concerns for organizations (Xu and Yang, 2010). The national government adopted numerous mandatory and voluntary environmental regulatory policy strategies and instruments. But even with all these regulations ‘on the books’, enforcement has been relatively lax. Encouraging enforcement requires effort by regional governments. Specific central government performance incentives, combined with targets set by regional level governmental agencies, can greatly influence enforcement (Sarkis et al., 2011, p. 1). China’s strong economic growth over the past 25 years (averaging more than 9 percent annually) is unparalleled in modern history. China’s “economic miracle” also coincided with a dramatic drop in extreme poverty (people living on $1 or less per day), from 250 million people in 1978 to 30 million in 2000. China has indeed become a magnet for foreign investment and an export powerhouse (Wen, 2005, p. 2).
- 10. Starbucks has a good reputation in terms of social responsibility. The company defines CSR as conducting business in ways that produce social, environmental and economic benefits to the communities where they operate. The company has been widely recognized for its commitment to numerous stakeholders including coffee growers, the environment, employees, and communities, while simultaneously achieving rapid financial growth. The company acknowledge that well-‐managed CSR creates social and environmental value, while supporting a company's business objectives and reducing operating costs, and enhancing relationships with key stakeholders and customers (Rangan, 2012, p. 1). Howard Schultz, Starbucks’ CEO from 1982 to 2000 and from 2008 until present, has driven CSR throughout the business from the start. The company has a Senior Vice President of CSR who provides strategic development of policies, strategies, processes and tools to align corporate social responsibility with business success, and has oversight of the company’s environment, business practices and community efforts. 1.2 Problem statement The thesis intends to create a profound understanding of the relevance of CSR as a Business Strategy in China, using Starbucks as a case study. The study intends to answer the following questions: 8 Research question How does CSR as a Business Strategy contribute to Starbucks' success in China? Sub-‐questions How does CSR influence the performance of Starbucks in China? What is the role of international culture to Starbucks’ success? How do China’s CSR requirements influence Starbucks' CSR strategy? 1.3 Methodology This chapter explains the research methodology that was applied in order to answer the research questions. It outlines the research method and explains the conceptual model, data collection method and data analysis. 1.3.1 Research method The thesis is based on a qualitative research approach and a case study method. The research contains both theoretical and case company-‐specific parts. Literature reviews provide the theoretical foundation needed for the thesis. According to Yin the case study is the method of choice when the phenomenon under study is not readily distinguishable from its context (Yin, 2003, p. 4). Case study research enables you to investigate important topics not easily covered by other methods (Yin, 2003, p. 13). Qualitative case studies rely upon qualitative data obtained from reports, documents, observation, online interviews and the Cone Communication/Echo Global CSR Study. This study is a global survey of consumer attitudes, perceptions and behaviors around CSR.
- 11. There is limited literature dealing with the importance of integrating CSR into business strategy for success in the Chinese market and only a limited number of studies are devoted to this topic. In most of the research and scholarly books and articles, authors discuss: CSR in China, the integration of CSR into business strategies or business strategies used to enter the Chinese market. This study is unique in that it gathers this dispersed information into one research paper. 9 1.3.2 Conceptual model A conceptual framework can guide research by providing a visual representation of theoretical constructs (and variables) of interest. Therefore, the conceptual model will be used as a guideline in this research. Within the context of the research questions, the dimension where the use of CSR is focused on is important. Research into the various dimensions gives a broad idea of the use of CSR, where it is concentrated and to what extent it is internally or externally focused. Sustainability is often seen to be about the triple bottom line of economy, environment, and society. But the triple bottom line is purely a way of measuring performance and just the first of the three dimensions in Figure 1. The second involves its relational nature — its focus on those ‘primary’ stakeholders who bear risk through having invested something of value in the organization. These stakeholders are an organization’s eyes and ears to the dynamic business environment; they decide its future, and they determine its reputation. The third dimension is responsibilities, the most fundamental being economic: If organizations do not make a profit they will not survive, nor be able to contribute to the sustainability of their community or the environment (Stapledon, 2012, p. 11). Figure 1 Conceptual model (Green, 2007, p. 1) 1.3.3 Data collection method and data analysis According to Yin, case study research is not limited to a single source of data, as in the use of questionnaires to carry out a survey study. In fact, good case studies benefit from having multiple sources of evidence (Yin, 2003, p. 9).
- 12. 10 The researcher of this thesis, who lives in Asia, has 25 years of experience in business-‐to-‐business sales and marketing in the technology sector with experience in Europe, the US and Asia. While the researcher lived in Singapore, India and Australia the importance of the Chinese market and its challenges came into focus. Over the last few years the researcher followed Starbucks in China and built up contacts within the company through LinkedIn. During the research for this thesis the researcher lived in China for two months and observed several Starbucks outlets in the Yunnan province. For the data collection, documentation, interviews, and direct observation at Starbucks outlets in China are used, as well as secondary data in the form of annual reports, web pages, case studies, journals and literature reviews. The interviews were collected from several sources, including periodicals, YouTube and the Starbucks website. The data is analyzed in order to answer the research questions.
- 13. 11 2. Theoretical framework The theoretical framework refers to the theories being used as a basis for the study that are drawn from scholarly literature; it contains the major ideas of authors, theorist, experts and specialists. The main topics of this theoretical framework are CSR and business strategy, CSR in China, Chinese economy, Chinese society, Chinese culture, Chinese government, guanxi, mianxi, the Chinese coffee market, international culture, models for analyses – the EFQM Model with CSR, Value Chain, and the Diamond Framework. These theories represent the basis of the research. 2.1 Corporate Social Responsibility and business strategy Since the concept of CSR was created, there has never been a clear, widely accepted definition of the term (Bu, Bloomfield, & An, 2013, p. 7). Adam Smith’s concept of self-‐interest is still the driving force of post-‐modern society, but sustainable progress will only occur when this self-‐interest is enriched with sufficient ethical, social and environmental elements (Harjono & Marrewijk, 2001, p. 3). For Carroll the total social responsibility of business entails the simultaneous fulfillment of the firm’s economic, legal, ethical, and philanthropic responsibilities (Carroll & Buchholz, 2001, p. 36). The World Business Council for Sustainable Development defines CSR as follows: "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large" ("wbcsd CSR," 2013, p. 1). Turker describes CSR as “corporate behaviors that aim to affect stakeholders positively and that go beyond its economic interest” (Turker, 2009, p. 413). According to her, a company has four stakeholders or interest groups. The first consists of society at large, the environment, the next generations, and NGOs. The second comprises the employees, for whom CSR policy is manifested in fairness and transparency in respect to the decisions that directly affect them. The third are the customers, for whom CSR is measured by fairness and transparency with regard to pricing, product quality, etc. The final interest group is the government, for which CSR is manifested, for example, in paying taxes and obeying the law (Turker, 2009, p. 413). A positive relationship has been found between CSR policies and organizational commitment among current employees leading to a rise in employee performance (Brammer, Millington, & Rayton, 2005, p. 21), (Turker, 2009, p. 200). Supply chain sustainability is increasingly recognized as a key component of corporate responsibility. Managing the social, environmental and economic impacts of supply chain makes good business sense (Sisco, Chorn, & Pruzan-‐ Jorgensen, 2010, p. 5). The term Purchasing Social Responsibility (PSR) refers to the organizations‟ efforts on environmental purchasing, sourcing from minority-‐owned suppliers, and human rights, safety, and philanthropy issues relating to supply management (Carter & Jennings, 2002, p. 40). The purchasing function plays a key role in a firm’s logistics operations and PSR has a direct and positive impact on supplier performance (Carter & Jennings, 2002, p. 38).
- 14. Instead of joining the debate on definition, the focus of this thesis is on the major components of CSR, which generally include the following: 1 -‐ Environmental protection Take a precautionary approach to environmental issues and responsibilities; be accountable for the impact of business practices on the environment caused by business practices; work proactively to reduce environmental damage; use natural resources and energy more efficiently throughout all operations. 2 -‐ Labor health and security Avoid all forms of forced and compulsory labor; eliminate discrimination with respect to recruitment and employment; treat all workers fairly; uphold the principle of freedom of association and recognize the right to collective bargaining; provide necessary protection for workers and ensure that employee health benefits and safety precautions meet international standards; provide training and career development. 3 -‐ Human rights Treat all individuals respectfully, regardless of their background or personal characteristics; avoid all forms of forced and compulsory labor, whether directly or indirectly connected to one’s own business. 4 -‐ Stakeholder/community engagement Understand and respect the needs and concerns of stakeholders and engage them sincerely in decision making; help with local employment creation, education, social investment, health and other public interests; form partnerships with local organizations and encourage employees to volunteer for community initiatives. 5 -‐ Business ethics Ensure accountability, transparency, ethical conduct, compliance with all laws and regulations and respect for stakeholder interests; work against corruption in all forms. 6 -‐ Corporate philanthropy Provide disaster relief and invest generously in ongoing social development, culture, education, public and environmental health and safety (Bu et al., 2013, p. 7). Strategic corporate social responsibility is a business strategy that is integrated with core business objectives (McElhaney, 2008, p. 2). According to Porter strategic corporate social responsibility can become a source of tremendous social progress, as the business applies its considerable resources, expertise, and insights to activities that benefits society (Porter & Kramer, 2006, p. 2). Burke and Logsdon argue that CSR (policy, program or process) is strategic when it yields substantial business-‐related benefits to the firm, in particular by supporting core business activities and thus contributing to the firm's effectiveness in accomplishing its mission (Burke & Logsdon, 1996, p. 495). Through strategic CSR a firm can have great social influence and obtain larger business benefits. CSR strategy should be integrated with both the business strategy and human resource (HR) strategy (Yang & Crowther, 2012, p. 163). There are different views regarding the relationship between CSR and business strategies. According to Carroll, “The social responsibility of business encompasses the economic, legal, ethical, and philanthropic expectations placed on organizations by society at a given point in time” (Carroll & Buchholz, 2001, p. 35). 12
- 15. 13 In her book, Just Good Business, McElhaney defines strategic corporate social responsibility as, “a Business Strategy that is integrated with core business objectives and core competencies of the firm and from the outset is designed to create business value and positive social change, and is embedded in day-‐to-‐day business culture and operations” (McElhaney, 2008, p. 5). CSR can help companies build customer loyalty, recruit and retain employees, and stand out in a crowded marketplace. But to be most effective CSR must be intimately connected to the corporate brand—it must reinforce a company’s unique identity, and be an integral part of how a company tells its story. CSR can help firms differentiate their brand in order to stand out when the price, quality, and convenience of their product is relatively equal to that of competitors. This positive impact creates a competitive advantage for these firms, both when markets are up and when they are down (McElhaney, 2008, Chapter 1). There are several reasons for considering CSR in developing countries when compared with developed countries, and these reasons are as follows: -‐ Developing countries have the most profitable growth markets for business because the developing countries represent rapidly expanding economics. -‐ Actually, social and environmental crises will give more influence to developing countries in the world. -‐ Developing countries face a different series of CSR challenges and characteristics that are quite different from developed countries (Yang & Crowther, 2012, p. 157). Matten and Moon propose that differences in CSR among different countries are due to a variety of longstanding, historically entrenched institutions (Matten & Moon, 2008, p. 406). 2.1.1 Green washing Green washing is a compound word modeled on "whitewash", a form of spin in which green PR or green marketing is deceptively used to promote the perception that a company’s policies or products are environmentally friendly (MacDonald, 2008, p. 89). It is the overstating of the environmentally or socially conscious attributes of a firm’s offering and the understating of the negative attributes for the firm’s benefit ("ft lexicon," 2014, p. 1). J. In recent years, there has been an expanding critique of several big NGOs. Corporate executives occupy the donor rolls and boards of many green non-‐profits. Davis wrote in the Journal of Business Ethics that green washing is wrong because: 1. Most obviously, green washing is misleading. 2. Green washing could result in consumer and regulator complacency. If one corporation gets away with green washing, other corporations will follow suit, thereby creating an industry-‐wide illusion of environmental sustainability, rather than sustainability itself. This creation of the illusion of environmental sustainability could have dire social consequences as consumers will continue to use products and support companies that further environmental degradation and reduce the quality of living conditions for future generations.
- 16. 3. Green washing may also engender cynicism: if consumers come to expect self-‐congratulatory ads from even the most environmentally backward corporations, this could render consumers skeptical of even sincere portrayals of legitimate corporate environmental successes. Thus well-‐meaning companies, companies committed to responsible behavior with regard to the environment, have every reason to be critical of companies that green wash (Davis, 1992, p. 81-‐87). 2.2 CSR in China While CSR is relatively new in China, it has developed quickly (Bu et al., 2013, p. 5). Seriously contaminated food, water and air, with consequent damage to public health and the environment, have led to rising social unrest and political action (Bu et al., 2013, p. 6). Both the Chinese government and the public increasingly demand that businesses improve their performance regarding public health, environmental protection, worker safety and social development (Bu et al., 2013, p. 5). CSR is a rapidly emerging concept in China. Along with modernization and rapid economic growth over the past 20 years, companies in China are gradually shifting away from focusing entirely on profit maximization, in favor of more attention on business ethics and meeting their responsibilities for addressing social and environmental issues. The principles of CSR and rising public expectations encourage companies to go beyond the minimum requirements regarding product safety, environmental protection, labor rights, and community development imposed by the government. It also requires companies to respect all stakeholders, including employees, consumers, local communities and suppliers, and to incorporate these expectations into the company’s business model (Bu et al., 2013, p. 18). The 2013 “Cone Communications/Echo Global CSR Study” presents the findings of an online survey conducted between February 7-‐28, 2013 by Echo Research among a demographically representative sample of 10,287 adults, comprising 5,127 men and 5,160 women 18 years of age and older. The global breakdown of the study reveals that CSR is a near-‐universal mindset in China, where consumers consider social and environmental issues in major decisions, including where to work (80%) and what to buy or where to shop (83%). On all fronts, Chinese citizens are substantially more likely than their global peers to have engaged in companies’ CSR initiatives in the past 12 months, from buying products with a societal benefit (86% vs. 67% globally) and making donations (69% vs. 60% globally), to volunteering (45% vs. 37% globally) and telling friends and family about corporate efforts (75% vs. 50% globally) (Cone Communication, 2013, p. 53). Conversely, belief in the power of individuals to play a meaningful role through their purchases is the lowest among countries studied; only 11 percent feel they can have significant impact versus 27 percent globally. Brian Chi-‐kuen Ho, China Council of CSR Executives, says that although the Chinese seem to feel comfortable serving as corporate watchdogs, their sense of personal responsibility is less ardent. “People feel responsible for encouraging change, but they don’t think their own actions can make those changes. They believe companies created the problems, and therefore, companies should solve them.” 14
- 17. The government, Ho says, also takes a great interest in CSR, viewing it as an important concept for societal harmony. “Companies must publish corporate responsibility reports, and state-‐owned enterprises must follow guidelines on both operations and community involvement,” he notes (Cone Communication, 2013, p. 51). 15 The concept of trust is an effective business strategy (Shurtleff, 1998, p. 4). According to the 2013 Edelman Trust Barometer, of the four institutions: NGOs, media, government and business; trust in NGOs remain high. In China, where only five years ago trust in NGOs was 48 percent; today it is 81 percent (Edelman, 2013, p. 4). Based on the most recent Edelman Trust Barometer findings, there are five elements that must be addressed if CSR & Sustainability is to help a business build trust. While the principles apply globally, there are some nuances to consider in the APAC region: Clarity The first step is to ensure that CSR & Sustainability have a clear purpose in the context of the company’s business objectives. Once the purpose is determined, setting a strategy with clearly defined targets across functions will help to ensure that activities are included in core operations and decisions can be made when tradeoffs are encountered. Relevance Listening to customers, employees, and other stakeholders and taking into consideration these outside views is a fundamental attribute of building trust in APAC. In the context of CSR & Sustainability, this means understanding which societal issues are relevant and to what degree the business is expected to address them. Integration Stakeholder engagement is the foundation of any CSR & Sustainability practice. Integrating CSR & Sustainability into the operations of the business requires significant internal engagement with employees across functions, levels and geographies. Transparency In APAC, business has a tendency to shy away from communicating about its social and environmental performance. There are a couple of reasons for this. One reason is that business in this region has not traditionally been expected to communicate about these issues. Another reason is corporate culture. Culture that has been nurtured for decades around “being humble” when it comes to social contributions has created internal communications barriers that impede business from informing stakeholders of this performance area. This is particularly distinct in the APAC region. Maintaining corporate culture is important, of course, but the tension between communications expectations and culture must be addressed if trust is to be established. Credibility Business is not expected to address the issues alone. Partnering with NGOs in the APAC region brings credibility to CSR & Sustainability investments, particularly if the NGO partner becomes an advocate for the company. To derive
- 18. the most value from NGO partnerships, business should learn from the NGO’s expertise to improve specific societal impacts of their business. Finding mutual ground at the outset of the partnership is key ("Global practices," 2014, p. 1). 16 Critics argue that companies partner with NGOs in order to enhance their reputation and CSR is primarily about projecting a suitable image in order to placate critics and ensure ‘business as usual’ (Hamann & Kapelus, 2004, p. 86). 2.3 Chinese economy China experienced remarkable economic growth. In terms of GDP numbers, its progress in reducing extreme poverty is impressive. In 1999, the World Bank raised China’s classification from a “low income” to a “lower middle-‐income” country based on its rise in income per capita (Wen, 2005, p. 8). According to the McKinsey Quarterly, the explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation—and it’s not over yet. By 2022, McKinsey’s research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) annually (Barton, Chen, & Jin, 2013, p. 1). In purchasing-‐power-‐parity terms, that is equivalent to range between the average income of Brazil and Italy. To put this in perspective, only 4 percent of urban Chinese households attained this income in the year 2000 – while by 2012, 68 percent did. In the decade ahead, the middle class’s continued expansion will be powered by labor-‐market and policy initiatives that push wages up, financial reforms that stimulate employment and income growth, and the rising role of private enterprise, which should encourage productivity and increase household income. Should all this play out as expected, urban-‐household income will at least double by 2022. Beneath the topline, figures are significant shifts in consumption dynamics, which have been tracked since 2005 using a combination of questionnaires and in-‐depth interviews to create a detailed consumer portrait by income level, age profile, geographic location, and shopping behavior. McKinsey’s latest research suggests that within the burgeoning Chinese middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade (Barton et al., 2013, p. 1). The magnitude of China’s middle-‐class growth is transforming the nation.
- 19. 17 Figure 2 China's middle class growth (Barton, Chen, & Jin, 2013, p. 1) However, official figures on exports and investments do not give a complete picture of the experience of the Chinese people during this period of rapid social and economic change. The free market reforms have affected broader quality of life indicators such as inequality, natural resources and environment, health and education as well as jobs and poverty (Wen, 2005, p. 2). Rapid industrialization is producing massive environmental devastation. China is the world’s second largest greenhouse gas emitter (the US is first). About 60 percent of China’s major rivers are classified as being unsuitable for human contact. Seven of the ten most polluted cities in the world are located in China (Wen, 2005, p. 3). The state of the ecology is one of the most critical factors that will determine China’s future (Wen, 2005, p. 10). Chinese companies did not develop a sense of responsibility in the course of making profits. Some Chinese scholars argue that the rampage of corporate irresponsibility in China has a root in the political ambience in the initial stage of economic development (Li-‐Wen, 2010, p. 27). As global corporations have been firmly established in China, the ethical and social dimensions of their business practices have become a center of debate and controversy (Tang & Li, 2009, p. 199). The concept of CSR finds its philosophical root in the traditional western concepts of democracy, citizenship, and liberty that dated back to ancient thinkers such as Aristotle and Cicero (Tang & Li, 2009, p. 203). CSR practices in Asia should be understood through the lens of Confucianism, which centers social relations on bonds of family and friendship and respect for seniors (Tang & Li, 2009, p. 210). Li-‐Wen argues that China has historical foundations and many real incentives to develop CSR, but meanwhile there are many political, social and economic constraints that do not allow CSR to develop at a quicker pace. The Chinese government plays an important role in developing the indigenous CSR initiatives. The government has political, social and economic motivations to encourage and also to control the development of CSR in China, resulting in
- 20. 18 uneven development of CSR issues. Environmental issues have the broadest space to develop while human rights have the most limited (Li-‐Wen, 2010, p. 36). 2.4 Chinese society Community stakeholders are extremely important to companies. Companies may have positive impacts on their communities in two basic ways: donating the time and talents of managers and employees (volunteerism) and making financial contributions (Carroll & Buchholz, 2001, p. 432). Recently, companies in China are under increasing legal and institutional pressure from different stakeholders to be transparent about the social, ethical, and environmental dimensions of their business practices (Tang & Li, 2009, p. 203). Business cannot be discussed without considering the paramount role played by government. Although the two institutions have opposing systems of belief, they are intertwined in terms of their functioning in the socioeconomic system (Carroll & Buchholz, 2001, p. 236). The Chinese media have enthusiastically disclosed and condemned many foreign-‐based multinational companies in China for their unsafe products or production processes, including Häagen-‐Dazs’ unsanitary kitchens, Kentucky Fried Chicken's illegal use of red dye in food, Nestlé’s unsafe iodine in infant formula, to name just a few. The Research Center on Transnational Corporations of the Ministry of Commerce also has produced a series of reports targeting on CSR performance of foreign companies in China and advocated that foreign companies should undertake CSR in China (Li-‐Wen, 2010, p. 31). 2.5 Chinese culture Culture has been defined in many ways; Hofstede’s shorthand definition is: "Culture is the collective programming of the mind that distinguishes the members of one group or category of people from others" (Hofstede, 2011, p. 3). Cultural differences in ethical decision-‐making are most often discussed within the framework of Hofstede’s typology, which includes individualism/collectivism, uncertainty avoidance, power distance, masculinity/femininity, and Confucian dynamism. China is a very long-‐term oriented society in which persistence and perseverance are normal. Relationships are ordered by status and the order is observed. Nice people are thrifty and sparing with resources and investment tends to be in long-‐term projects such as real estate. Traditions can be adapted to suit new conditions (Hofstede, n.d., p. 1). Recent development shows that China might be one of those rare cases, where after a period of relative isolation, decades of unparalleled double-‐digit economic development concurrent with rapid global exposure and integration may be bringing about shifts, especially in the younger generation (Hofstede, 2011, p. 22). Understanding a culture is vital to the business success in emerging markets such as China, therefore, this thesis reviews the pertinent aspects of Chinese cultural dimensions. It discusses the Chinese government and the Mianzi and the Guanxi theories. 2.6 Chinese government. The development of CSR in China has been strongly influenced, even dominated, by the Chinese government, a key driver for CSR development (Bu, Bloomfield, & An, 2013, p. 54).
- 21. Building a resource saving and environmentally friendly society is one of the Chinese government’s top priorities during the current 12th five-‐year period. To achieve this, a large range of issues have been raised, including the necessity for proactively addressing climate change, resource conservation and management, developing a circular economy, promoting ecological protection and restoration, improving water resources, and heightening disaster prevention and mitigation systems. Developing a skilled population is also of great significance to China. MNCs can respond to this objective through personnel (occupational) training and investment in education through philanthropic programs. China is working to promote community self-‐governance as well as improving the mechanisms for safeguarding people’s right (Bu et al., 2013, p. 54) 2.7 Guanxi. The term Guanxi refers to a person’s connections; in particular, to people in influential or higher positions who may be willing to perform favors for you, with the understanding that these favors will undoubtedly be reciprocated sometime in the future. 2.8 Mianzi. Meaning “face”, “Mian Zi” represents a person’s reputation and feelings of prestige (both real and imagined) within their family unit and among friends, at their workplace and in society. The concept of “face” is be more deeply understood if one recalls that China has traditionally been (and continues to be) a highly hierarchical society. The position a Chinese person occupies relative to others is typically thought to command a certain degree of respect and requires certain types of behavior (Upton-‐McLaughlin, 2013, p. 1). 2.9 The Chinese coffee market The Chinese consumer market for coffee is still in the early stages of maturation. The retail sales volume of coffee in China was slightly more than 30,000 tons in 2009. This translates to just over 0.02 kg per capita per year. It is China’s growing urban population of 600 million people that accounts for an estimated 90% of coffee consumption in the country. This would place annual per capita consumption by the target consumer market at around 0.05 kg (International Trade center [ITC], 2010, p. 8). For comparison, figure 3 shows the coffee consumption in other countries. 19
- 22. 20 Figure 3 Per capita coffee consumption in selected countries (ITC, 2010, p. 8) China's consumer coffee market offers boundless potential. Today's low coffee consumption at about 5 cups per capita per year provides robust growth opportunities. The drivers for that growth are the rising population and urbanization, rising disposable income, and the changing lifestyle. China, previously viewed as only a low-‐cost manufacturing supply center, now offers new market opportunities with its growing middle class and a thirst for Western products (Chao, 2012, p. 2). Little known is the fact that coffee is actually grown in China. It is predominantly low-‐quality Arabica, which is grown in full sun using high chemical inputs and processed into instant coffee. The Chinese government is clearly interested in boosting this market crop; it is aggressively promoting the expansion of coffee production into thousands of hectares of land (Craves, 2010). The economic impetus is clear. A family with a hectare of coffee can earn more than $10,000 a year, triple the amount for tea, and five times more than for maize or rice. Nestlé, along with the Chinese government and the United Nations’ Development Program, helped jump-‐start coffee production in the area in the late 1980s. Yunnan's first coffee growers, 19th-‐century European missionaries, found a suitable climate for their bitter juice, but little native interest in drinking it. Now Yunnan accounts for nearly all the coffee grown in China. Other buyers have followed Nestlé in recent years, and demand has outstripped supply ("Coffee in China/The Economist," 2012). Starbucks is the face of the coffee boom in Yunnan. In 2009, the company rolled out its first line of coffee featuring beans from Yunnan, called “South of the Clouds” (a literal translation of the name Yunnan).
- 23. Since then, Starbucks has been working with local governments, firms, and the Yunnan Academy of Agricultural Science (YAAS) to expand its coffee production, increase quality, and improve sustainability. In 2010, Starbucks signed an agreement with YAAS and the Pu’er city government to establish its first coffee bean farm in the region. In addition, in 2012, Starbucks opened a coffee development center, a Farmer Support Center, and coffee processing centers. In 2011, Starbucks set up a local joint-‐venture with Ai Ni Group—an established coffee operator and agricultural company in Yunnan—to expand its coffee sourcing network in the region and more fully implement “best practice” coffee processing methods (Gibson, 2013, p. 1). 2.10 International culture In this thesis, cultural traditions that extend beyond national boundaries will be defined as international culture (Zhang, 2009, p. 1). Since China opened up to foreign investment in the late 1970s, some of America’s most powerful corporations have gone confidently into the People’s Republic, only to stagger out a few years later, battered, confused, and defeated. It’s not because the businesses were incompetent. Many of the biggest failures belong to the Fortune 500: Mattel, eBay, Google, Home Depot. All of these have thrived in markets around the world, but not in China. -‐ Why? -‐ “It’s a lack of understanding of the legal and cultural environment that leads to most failures,” says Shawn Mahoney, managing director of the EP China consulting group. “The only difference between a success and failure in my experience is that people who are successful are more willing to talk and learn about how things work on the ground” (Carlson, 2013, p. 1) Since China joined the WTO, in December 2001, a mixture of cultural, economic and political influences drives the process of globalization. In China, globalization is a material reality. Global trends in all walks of life reflect that China, after having shut itself off from the outside world, has emerged into the world community in a deep and extensive manner. In the eyes of Chinese people, globalization is a new conception of security that can both meet the demands of modernization and help maintain stability and development (Zhang, 2009). 21 2.11 Models used for the analyses -‐ The EFQM Model with CSR, Value Chain, and the Diamond Framework In this thesis the EFQM Model with CSR, Porters’ Value Chain and Diamond Framework are used to analyze Starbucks’ success and the role that CSR plays in that success. The EFQM Model analyzes Starbucks’ CSR activities, while the Value Chain and Diamond Framework are used to analyze why and how CSR improved Starbucks' performance and how CSR can be of strategic value for other companies (Porter & Kramer, 2006) (Neergard & Pedersen, 2012, p. 54). 2.11.1 EFQM Model. The EFQM Model for Corporate Social Responsibility, which is based on the EFQM Excellence Model, Global Compact Principles and other sources, offers organizations a structured approach to corporate social responsibility. It is a useful theoretical model to determine the quality aspects of a firm's processes and delivery. This thesis intends to analyze Starbucks' CSR performance in relation to the EFQM model.
- 24. 22 2.11.2 The Value Chain – looking inside-‐out. The Value Chain depicts all the activities a company engages in while doing business, and can be used as a framework to identify the positive and negative social impact of those activities. The interdependence of a company and society can be analyzed with the same tools used to analyze competitive position and develop strategy. This model is used for 'Looking inside-‐out' (Porter & Kramer, 2006, p. 8). 2.11.3 Porters' Diamond Framework – looking outside-‐in. To understand the social ramifications of the value chain, effective CSR requires an understanding of the social dimensions of the company's competitive context -‐ the "outside-‐in" linkage that affects its ability to improve productivity and execute strategy. These can be understood using the Diamond Framework, which shows how the conditions at a company’s location affect its ability to compete (Porter & Kramer, 2006, p. 9).
- 25. 23 3. Starbucks This chapter describes Starbucks’s entry into China, their CSR strategy, Starbucks and international culture, and the Starbucks Model. The Starbucks CSR approach is not without criticism, therefore this chapter describes the criticism on Starbucks’ Global Responsibility Report. 3.1 The company Starbucks, one of the largest coffee chains in the world, was started in 1971 in Seattle, USA. The company is regarded as the pioneer of the coffee culture in the US and in many other countries. During its early years Starbucks only dealt in coffee beans and equipment. Only in the 1980s, with Howard Schultz taking charge as the marketing chief and later as CEO, did the company venture into building coffee houses. In 1995, the company started its international expansion by entering Japan, followed by many other countries in the later years. It entered China around the mid-‐1990s with a distribution business, before making a full-‐fledged entry with its retail stores in 1998. The company’s objective is to maintain Starbucks standing as one of the most recognized and respected brands in the world. To achieve this goal, the company is continuing the disciplined expansion of their global store base. In addition, by leveraging the experience gained through their traditional store model, they continue to offer consumers new coffee products in a variety of forms, across new categories, and through diverse channels. Starbucks Global Responsibility strategy and commitments are related to coffee and the communities they do business in, as well as their focus on being an employer of choice. (Annual Report 2012, 2012, p. 2) In January 1999 Starbucks opened its first store in Beijing. This opening marked the first Starbucks store in Mainland China. In April 2012 John Culver, Starbucks’ head for China and Asia Pacific, announced that the company will have 1,500 stores in more than 70 Chinese cities by 2015. China will become the Seattle-‐based coffee chain’s second largest market outside the U.S. by 2014, Culver said. Starbucks has about 500 outlets in China and currently operates in 48 cities. “Over the 13 years we’ve been in China, we have been able to introduce the coffee house culture in China and it’s no different when we move into those cities where we don’t currently have stores,” he said. “We see tremendous opportunity to continue to grow in cities that we are currently in -‐ those tier one, tier two cities,” Culver said, “and also, thoughtfully to expand to tier three and tier four cities” ("Starbucks Heads for Smaller China Cities", 2012)” In the past two decades, numerous cities in China have experienced unprecedented economic growth and this economic phenomenon triggered the rise of a classification system based on “tiers”. This aims to rank cities throughout China in terms of population size, development of services, infrastructure and cosmopolitan nature. Although the tier system is often criticized for being inexact and lacking standardized criteria, it can serve as a useful reference for companies that are trying to structure their China strategy. Tier 1 cities were the first opened to competitive economic development by the Chinese government. Tier 1 Cities attract the attention of foreign enterprises given their large middle class representation and income levels well above the national average. Cities that fall within this category represent China’s most developed markets in terms
- 26. of consumer behavior. First tier cities register total retail sales of around 30 billion RMB ($4.75 billion USD), and an annual per capita income of around 11,000 RMB (1,774 USD). Tier 1 Cities are: Shanghai, Beijing, Shenzhen, and Guangzhou. These cities are known for being important political, cultural, industrial and financial centers in China as well as key hubs for the greater East-‐Asia region. The markets in Tier 2 cities are a lot less competitive and the labor costs are substantially cheaper compared to Tier 1 cities. A rapid increase in consumer spending in second tier cities is creating more demand for foreign brands. However, the income of consumers in second, third, and fourth tier cities has been reported to be less than half of those in first tier cities. At the end of 2011 around 60 cities in China qualified as second tier cities (OSIO, 2013, p. 1). According to the latest statistics provided by Starbucks, during its first financial quarter of 2012, ending December 30, the company's net income from the Chinese and Asia Pacific market reached USD 214.1 million, a year-‐on-‐year increase of 28% compared with the same period in the 2011 financial year. At the same time, the company emphasized that in the 2013 financial year it plans to achieve a net increase of 600 chain cafes in China and Asia Pacific. Of those outlets, over half will be opened in China. The financial report showed that Starbucks' global net income reached a record high of USD 3.8 billion in the first financial quarter of 2013, an increase of 11% over last year. The rise was mainly attributed to the 6% sales growth in its comparable outlets worldwide as well as the income from its 401 newly owned cafes opened in the past 12 months. In addition, the 13% income growth of channel development and 14% income growth of franchised stores also contributed to the success. In this financial report, the Chinese and Asia Pacific market is a highlight. In the first quarter of 2013 financial year, Starbucks' net income from China and Asia Pacific was USD 214.1 million, an increase of 28% year-‐on-‐year. The increase was attributed to the net increase of 166 owned cafes in the past 12 months and the 11% sales growth in comparable outlets. In addition, the income from franchised stores increased by 14%. 3.3 Starbucks and CSR Starbucks recognizes that a CSR strategy creates not only social and environmental values but also business values. Starbucks’ mission statement reflects their corporate social values, in the expressed belief that conducting business ethically and striving to do the right thing are vital to the success of the company. From the start, Starbucks founder Howard Schultz has implemented CSR throughout the business. In 1992 Starbucks adopted a mission statement that included a vow to 'contribute positively' to the environment. That was the year the Seattle-‐based Starbucks went public. Today Ben Packard, who joined Starbucks in 1998, is the Vice President for Global Responsibility at Starbucks Corp., where he leads the coffee giant's efforts to tread more lightly on the planet. Since 2001 the company has publicly reported their goals and performance in the area of corporate social responsibility. In China, Starbucks has partnerships with the following NGOs All-‐China Women’s Federation, China Soong Ching Ling Foundation, Give to Asia, Unite for children and WORLD VISION ("NGO partners China," 2013, p. 1) 24
- 27. 3.4 Coffee and Water Coffee growing and processing is a surprisingly water-‐intensive. Beyond brewing the ubiquitous drink, water is needed to grow the coffee plants and process the beans. Dutch scientists have estimated that it requires 140 liters of water to produce one cup of coffee (Gibson, 2013, p. 1). Although coffee cultivation is but a drop in the bucket in terms of Yunnan’s overall agricultural production, the province produces 98 percent of all Chinese coffee. Between 2008 and 2011, the land area used for coffee in Pu’er County, which produces 60 percent of Yunnan’s coffee, doubled from 14,000 hectares to 28,000. But there are questions about the environmental sustainability of Yunnan’s coffee boom. Most of the coffee grown in Yunnan is sun grown, which requires more chemical fertilizers than shade grown coffee to achieve similar yields. Coffee cultivation is also very water intensive, and Yunnan’s ongoing four-‐year drought could threaten future yields. Notably, Starbucks purchases only shade-‐grown coffee, a practice that underscores the potentially large environmental benefits of the company’s program to promoting sustainable coffee farming in the province (Gibson, 2013, p. 1). 25 3.5 Starbucks and international culture As mentioned in chapter 2.10 cultural traditions that extend beyond national boundaries will be defined as international culture. This chapter outlines how Starbucks has successfully expanded into the Chinese market by following the three phases of globalization: 1) Market entry 2) Country development 3) Global integration. 3.5.1 Market entry. Around the mid-‐1990s, Starbucks entered the country through a licensing agreement to supply Starbucks coffee to Beijing Mei Da Coffee Ltd., who ran a wholesale distribution business of supplying coffee beans to various restaurants and hotels. Starbucks soon realized that the country was very bureaucratic and that it was difficult to get permits and sanctions to start and operate the business. It also realized that tie-‐ups with local partners could ease the process of obtaining the required permits and ensure the company's smooth passage into the Chinese market. So the first strategy was to build and maintain a strong relationship with government officials, as well as local partners. Howard Schultz, Starbucks CEO, said: "We wanted to come to China the right way. Before we made a dollar of profit from this country, we sat down with our Chinese team and government officials and said we want to build a different kind of company in China. How can we do that?" (Chatterjee, Purkayasthra, & Indu, 2009, p. 6). 3.5.2 Country development. When Starbucks started in China one of the biggest challenges it faced was to make the customers become accustomed to drinking and appreciating coffee. This was difficult because of the age-‐old tradition of tea drinking in the country, where coffee was seen as nothing less than a kind of Western invasion (Chatterjee et al., 2009, p. 7).
- 28. A careful market study revealed that as the Chinese middle class emerged, there existed an opportunity for Starbucks to introduce a Western coffee experience and a place where people could meet with their friends while drinking their favorite beverages. Once Starbucks decided to enter China, it implemented a smart market entry strategy. It did not use any advertising or promotions that could be perceived by the Chinese as a threat to their tea-‐drinking culture. Instead, it focused on selecting high-‐visibility and high-‐traffic locations to project its brand image. 26 3.5.3 Global integration. According to the Cambridge dictionary, global integration is the process by which a company combines different activities around the world so that they operate using the same methods (Cambridge Dictionaries Online, n.d., p. 1) Instead of copying the same methods that they used in the US, Starbucks concentrated on finding the perfect balance of cultural integration and tradition for its market entry in China. To capitalize on the tea-‐drinking culture of Chinese consumers they introduced beverages using popular local ingredients such as green tea. This strategy has effectively turned potential obstacles into Starbucks’ favor. Chinese consumers quickly developed a taste for Starbucks’ coffee, which was essential to Starbucks’ success in China. One of Starbucks’ key marketing strategies is to provide customers with an exceptional experience. The chic interior, comfortable lounge chairs, and upbeat music are not the only differentiators that sets Starbucks apart from the competition; it has a strong appeal to younger generations who fantasize about Western coffee culture as a symbol of the modern lifestyle. Many go to Starbucks not just for a Frappuccino, but also the Starbucks Experience that makes them feel cool and trendy. Thus, Starbucks has established itself as an aspiration brand and is able to charge premium prices (Wang, 2012, p. 1). 3.6 The Starbucks Model Schultz attributed his company's success to a business model that balances profitability and social consciousness. Although Starbucks' stock value has grown more than 12,300 percent since it first went public 21 years ago, Schultz said that putting employees and communities first has always been central to the coffee giant's success. Schultz said: “Our business model is not better than others, but distinctive. Our business model is to strike a balance between money and social responsibility, not only to make money but also contribute to the community starting from the first day. We are not in the coffee business serving people, we are in the people business serving coffee” (Starbucks CEO Howard Schultz, 2012, p. 1). 3.6.1 Starbucks’ Mission Statement. The company’s mission statement and guiding principles are: Starbucks’ mission: to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. Starbucks’ guiding principles: Our Coffee
- 29. It has always been, and will always be, about quality. We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We care deeply about all of this; our work is never done. Our Partners We’re called partners, because it’s not just a job, it’s our passion. Together, we embrace diversity to create a place where all of us can be ourselves. We always treat each other with respect and dignity. And we hold each other to that standard. Our Customers When we are fully engaged, we connect with, laugh with, and uplift the lives of our customers – even if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes far beyond that. It’s really about human connection. 27 Our Stores When our customers feel this sense of belonging, our stores become a haven, a break from the worries outside, a place where you can meet with friends. It’s about enjoyment at the speed of life – sometimes slow and savored, sometimes faster. Always full of humanity. Our Neighborhood Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action – bringing together our partners, customers, and the community to contribute every day. Our Shareholders We know that as we deliver in each of these areas, we enjoy the kind of success that rewards our shareholders. We are fully accountable to get each of these elements right so that Starbucks – and everyone it touches – can endure and thrive. Starbucks believes that conducting business ethically and striving to do the right thing are vital to the success of the company. Business Ethics and Compliance is a program that supports Our Starbucks Mission and helps protect our culture and our reputation by providing resources that help partners make ethical decisions at work. In 2013 for the seventh year in a row the Ethisphere Institute included Starbucks on the list of World’s most Ethical Companies.
- 30. 28 3.6.2 Environmental Mission Statement. Starbucks is committed to a role of environmental leadership in all facets of the business. The company will fulfill this mission by a commitment to: -‐ Understanding environmental issues and sharing information with our partners (employees). -‐ Developing innovative and flexible solutions to bring about change. -‐ Striving to buy, sell and use environmentally friendly products. -‐ Recognizing that fiscal responsibility is essential to our environmental future. -‐ Measuring and monitoring our progress for each project. -‐ Encouraging all partners to share in our mission. -‐ Instilling environmental responsibility as a corporate value. 3.6.3 Global Compact. The United Nations Global Compact is a voluntary international corporate citizenship network initiated to support participation of both the private sector and other social actors to advance responsible corporate citizenship and universal social and environmental principles to meet the challenges of globalization (UN Procurement Division, 2004). Membership of the UN Global Compact is made up of corporations, UN agencies, trade unions and nongovernmental organizations. Starbucks signed the UN Global Compact in 2004. As a member of the UN Global Compact Starbucks supports their 10 universal principles. These principles are based on the Universal Declaration of Human Rights; the International Labor Organization’s Declaration of the Fundamental Principles and Rights at Work; and the Rio Declaration on Environment and Development. Membership of the UN Global Compact is made up of corporations, UN agencies, trade unions and nongovernmental organizations. The Ten Universal Principles Human Rights 1. Business should support and respect the protection of internationally proclaimed human rights. 2. Business should ensure that they are not complicit in human rights abuses. Labor Standards 3. Business should uphold the freedom of association and the effective recognition of the right to collective bargaining. 4. Business should support the elimination of all forms of forced and compulsory labor. 5. Business should support the effective abolition of child labor. 6. Business should support the elimination of discrimination of employment and occupation. Environmental Standards 7. Business should support a precautionary approach to environmental challenges. 8. Business should undertake initiatives to promote greater environmental responsibility. 9. Business should encourage the development and diffusion of environmentally friendly technologies. Corruption 10. Business should work against corruption in all its forms, including extortion and bribery.
- 31. 29 3.6.4 Ethical Sourcing. Starbucks does not own coffee plantations; it sources from a variety of producers, directly and indirectly through brokers, exporters, and growers. The company says they are committed to buying and serving high-‐quality coffee that is responsibly grown and ethically traded. The Starbucks website states – “We honor this commitment through our responsible coffee purchasing practices, Farmer Support Centers, loan programs and forest conservation efforts. When we buy coffee this way, we believe that it helps foster a better future for farmers and helps mitigate the impacts of climate change for the planet. The cornerstone of our approach are C.A.F.E. Practices, our comprehensive coffee-‐buying program that ensures coffee quality while promoting social, economic and environmental standards. C.A.F.E. Practices, which we developed in collaboration with Conservation International (CI) a decade ago, has created significant social and economic impacts for more than one million workers, and environmental improvements on the thousands of participating farms”. C.A.F.E. Practices is a comprehensive set of measurable standards focused on the following four areas: Product Quality: All coffee must meet our standards for high quality. Economic Accountability: Economic transparency is required. Suppliers must submit evidence of payments made throughout the coffee supply chain to demonstrate how much of the price that we pay for green coffee gets to the farmer. Social Responsibility: Measures evaluated by third-‐party verifiers help protect the rights of workers and ensure safe, fair and humane working and living conditions. Compliance with minimum-‐wage requirements and prohibition of child and forced labor is mandatory. Environmental Leadership: Measures evaluated by third-‐party verifiers help manage waste, protect water quality, conserve water and energy, preserve biodiversity and reduce agrochemical use. In addition to these purchasing standards, Starbucks offers technical support to coffee producers through their Farmer Support Centers. These centers allow Starbucks agronomists and quality experts to collaborate directly with coffee farmers to encourage responsible growing practices and improve the quality and size of their harvests. Ultimately, these efforts can help farmers earn better prices and become more resilient, long-‐term producers. As part of its commitment to elevate China’s Yunnan Province to a high-‐quality coffee growing region, in December 2012, Starbucks announced the opening of its first Asia-‐based Starbucks Farmer Support Center in Pu’er, China. 3.6.5 Starbucks Global Responsibility Report. Starbucks published its first CSR report in 2001. Now, every year, the company publishes a Global Responsibility Report and a Performance Scorecard. The scorecard shows the company’s long-‐range goals and how they are doing. The goals are set in the three areas that Starbucks believe they can have the greatest impact – ethical sourcing, environment and community.
- 32. In 2009 and 2010 Starbucks’ Global Responsibility Report claims to conform to the GRI Framework at application level B+. The Global Reporting Initiative (GRI) is a non-‐profit organization that has developed, the most widely used, sustainability reporting framework in the world. Elaine Cohen, CSR consultant and winner of the Corporate Responsibility Reporting Awards’ in 2012, points out that, “according to Starbucks GRI Index, the report responds in full to only 14 Performance Indicators, and not the minimum of 20 required for a B level report. This report does not appear to conform to Application Level B of the GRI. I find this rather startling, for a company who works hard to build trust and advance sustainable development” (Cohen, 2011, p. 1). Dr. Mar Smith, the publisher of project CSR, joined ‘Starbucks in Focus’ in 2010, a meeting for reflection on CSR reporting with Starbucks Coffee Company Global Responsibility leader, Ben Packard. On her blog she wrote the following about the meeting: ‘If you read the report, you’ll see that Starbucks is pretty transparent about their successes and their shortcomings in the corporate responsibility space. According to Packard the report provided the opportunity to engage in the conversation about responsibility both within Starbucks and with their stakeholders: suppliers, customers, shareholders, competitors, etc. Second, after producing the report, Starbucks soon discovered that their customers really did want to know where they were headed. Such reporting helped to build loyalty among their customers and shareholders while creating alignment within the company. When Ben Packard was asked why the Starbucks’ 2010 report was so brief and did not employ GRI reporting standards, he addressed this question by expressing his concern that consumers wouldn’t read a detailed report. GRI standards can be detailed and dry. For that reason, Starbucks has limited the length of their report’. (Smith, 2011, p. 1) Dr. Mar Smith disagreed with this perspective. She wrote: “I found the report too superficial. It gave the appearance of a marketing tool rather than a serious responsibility document comparable to a fiscal report. Such reports—by their nature—provide extensive metrics that should help shareholders and stakeholders gain an in-‐depth understanding of the issues and hard data. In fiscal reporting, detailed requirements are in place to create transparency. When a report lacks supporting data and does not comply with industry standards, it raises the question of either that they only abide by their own goals and not industry standards or lack of transparency” (Smith, 2011, p. 1) 30
- 33. 31 4. Research results -‐ Starbucks with EFQM CSR framework, the Value Chain, and Diamond framework This chapter presents the results of the case study. Three models are used to analyze Starbucks’ CSR approach. The EFQM Model incorporated with CSR was chosen because it is a strategic assessment framework. Porters’ Value Chain was selected because it shows that every activity within the value chain influences society, and the Diamond was chosen because the model can help to understand the competitive position of a company. 4.1 EFQM CSR Framework. The EFQM Framework for CSR is based on the EFQM Excellence Model. It is, therefore not a new Excellence Model, but a framework that provides guidelines on how to identify, improve and integrate the social, environmental and economic impacts of its operations into policy and strategy and the day-‐to-‐day management of an organization, taking all stakeholders into account. The Framework is divided into the same nine criteria as the Excellence Model. The Enabler criteria focus on stakeholder engagement and dialogue, while the Result criteria focus on perception and performance of CSR results. Each criterion is then divided into areas of interest, with guidance points in each of these areas (Bianchi, 2005, p. 5). The EFQM Excellence Model is a self-‐assessment framework for measuring the strengths and areas for improvement of an organization across all of its activities. The term ‘excellence’ is used because the Excellence Model focuses on what an organization does, or could do, to provide an excellent service or product to its customers, service users or stakeholders. Figure 4 The Excellence Model Framework ("EFQM model," 2012, figure 6) There are nine ‘big ideas’ or criteria in the Model that underpin this premise and attempt to cover all an organization’s activities. These nine ideas are separated into Enablers (leadership, people, policy & strategy, partnership & resources, process) and Results (people results, customer results, society results, key performance results). The Enabler criteria are concerned with how the organization conducts itself -‐ how it manages its staff and resources, how it plans its strategy and reviews and monitors key processes.
- 34. 32 4.1.1 Leadership Howard Schultz’s philosophy of using the power of the human spirit in business has earned him many prestigious awards in both business and the community. He is the person who established the Starbucks vision, which led to Starbucks’ unrivaled success. Some of the key leadership themes Howard Schultz has mentioned are: -‐ Business at its best is not about just making a profit. It’s about achieving the fragile balance between the fiscal responsibility that we have to our shareholders and constituencies as well as our commitment to benevolence and to the people in the communities that we represent. -‐ Some of Starbucks’ key objectives in the formative stages of the company were to define the equity of the brand around quality coffee, a culture and value system, and to be known as a company that will not leave its people behind. -‐ A large part of the success of the Starbucks brand has been its ability to help partners (employees) realize that they are part of an enterprise that will give them an opportunity to succeed at levels they never believed possible. Employees want to believe that they’re part of an organization that is not only winning but is doing the right thing ("Leadership Howard Schultz," 2012, p. 1). 4.1.2 People The passion for coffee, skills and expertise presented at Starbucks stores require the persistence of each Starbucks partner in their individual learning journey. To help partners enhance their coffee and service expertise, the company has initiated its first class through the innovative Starbucks China University. The Starbucks China University curriculum advances the personal and career development of Starbucks partners across China, including leadership skills as well as a deep understanding of Starbucks coffee craftsmanship and culture. Starbucks China University is a world-‐class corporate university that inspires coffee passion, builds retail expertise and nurtures the human spirit that connects it all. The virtual university features a personalized learning experience through various customized methods, including digital and mobile platforms, to provide partners with modules matching their interests and career development goals. Apart from investing in training to build the careers of its partners, Starbucks also set aside an additional RMB 1million for the Starbucks China Caring Unites Partners (CUP) Fund, which will be used to provide financial assistance to partners in times of significant or immediate needs. "As Starbucks enters an exciting, historic phase of our growth in China, our partners will have unprecedented opportunities to build promising careers with the company," said Wong. "We want them to grow together with us, and we will invest in equipping them with the right skills to take on new career opportunities within Starbucks, as we continue our business growth momentum in the market." In 2012, CEO Howard Schultz joined more than 1,200 Starbucks partners (employees), their parents and family members at two separate Starbucks Partner Family Forums in Beijing and Shanghai. Themed "Growing Together", the event is the first of its kind for the company and recognizes the special role Chinese families traditionally play, while highlighting the commitment by Starbucks to grow and develop its partners.
- 35. "Since our inception, Starbucks has believed in building a different kind of a company, one that grows in a way that is driven by our values. Our partners are at the heart and soul of our signature 33 Starbucks Experience, and have contributed greatly to Starbucks success through every single moment of personal connection they have built with our customers," Schultz said. "As we expand our footprint across China, we are committed to sharing our success and continue to grow together with them and their families ("Commitment to China employment," 2012). The company encourages open employee communication, values each employee as ‘partner’, and provides medical care, stock options and vacations. The cultural phenomenon guanxi, mentioned in chapter 2.10, can be illustrated in relation to Starbucks in China as follows: All job creation looks favorable to the government. Starbucks creates thousands of jobs there. By doing so, Starbucks gains some credit when they apply for the various permits necessary to expand their business. 4.1.3 Policy and strategy Schultz attributes his company's success to a business model that balances profitability and social consciousness. “For any company operating today, profitability cannot be the sole measure of success,” Schultz said. “Delivering long-‐term shareholder value is essential. But today’s increasingly complex world requires companies to hold themselves to higher standards. Amidst continued worldwide economic uncertainty, Starbucks has demonstrated that it will continue to build shareholder value, but never before has that value been more closely aligned to our values (CNBC Mad Money, 2013, p. 1)." As a key facet of its vision for growth in China, Starbucks focuses on helping local communities thrive. Through its various community outreach initiatives, in 2011 Starbucks partners and customers across Mainland China contributed close to 25,000 community service hours. As it expands its footprint in China, Starbucks will also continue its efforts to connect directly with its customers and understand their needs with respect to the local culture. 4.1.4 Partnership and resources Starbucks claims on their website that the company: “seeks strategic relationships with organizations and institutions that reflect Starbucks diversity and inclusion values. By actively seeking diverse businesses to purchase from, we help build prosperous communities”. 4.1.5 Processes Starbucks has acquired an amazing supply chain that spans across almost nineteen countries. Cocoa beans can come from one country while milk might come from an entirely different country hundreds of miles away! This global resource span is a great way for Starbucks to expand the company and reach more countries than ever before. All raw materials are then sent to a roasting, manufacturing, and packaging plant. Starbucks has six roasting centers where the beans are prepared. This number may seem very small for such an incredibly large company like Starbucks, but this centralized system is very effective. These roasting centers make sure every single one of the beans is quickly prepared, manufactured, and packaged in the identical way, through a series of well-‐designed
- 36. manufacturing processes. Once the beans are prepared, Starbucks has a reliable, well-‐thought-‐out delivery process (Cooke, 2010, p. 1). 34 4.1.6 People results For a company like Starbucks, which expects growth over the next five years to be heavily weighted towards China, crafting a human resource system that can find new associates, train them in the Starbucks service and product culture, and ensure they stay, is central to the company’s ability to be successful. Starbucks will open approximately 600 new stores in China this year alone, and by 2015 plans to have 1500 stores in 70 cities across the country. This translates to a new store every 1.5 days. Every store has, on average, 15 employees who need 15 to 20 hours of training each. These growth plans could derail if the company’s human resource capabilities are not ready for the challenge. Belinda Wong, president of Starbucks China, says “Starbucks China University will be the platform to equip partners with the right skills to take on new career opportunities.” Done properly, the platform Starbucks develops will not only reinforce the company’s product and service culture, it will also become a means of showing its Chinese associates how to work their way up the organization from associate to positions with more responsibility. Formally opened in November 2012, Starbucks China University has five unique sections: coffee and culture, a leadership academy, retail college, functional excellence center, and training service center (Shobert, 2013, p. 1). Starbucks has done an amazing job at recruiting, retaining, and training employees. 30 percent annual turnover is common in China according to data compiled by CNBC. Yet, Starbucks has far lower turnover than the industry average, due to its good compensation packages, work environments, and career paths (Rein, 2012, p. 1). 4.1.7 Customer results Starbucks' competitive advantage is built on product, service, and brand attributes, which have been shown through market research to be important to Starbucks' customers. Western brands have an advantage over local Chinese brands because of their commonly accepted reputation for consistently higher quality products and services, a factor that establishes the Western brands as premium brands in the minds of consumers. When Western brands attempt to increase market share by cutting prices, they erode the very competitive strategy that gives them an edge in consumer perceptions. Moreover, Western brands cannot effectively maintain a lower pricing strategy than local Chinese brands. Starbucks' global brand is valuable and maintaining brand integrity is a fundamental focus in Starbucks' internationalization efforts. The baristas in China act as brand ambassadors to help embed the Starbucks culture in the new market and ensure that high standards for customer service and product quality are maintained at each new and established local store (DeVault, 2012, p. 1). 4.1.8 Society results Starbucks created a lot of jobs in China. By the end of 2012 Starbucks had 1200 employees in China and the company will more than double their Chinese staff by 2015 as part of its expansion in the world’s second-‐largest economy.
- 37. The connection that Starbucks establishes with the communities in which it operates extends beyond the daily interactions between barista and customer, and is embodied by the Starbucks™ Shared Planet™ commitment. Education and the environment are two issues seen as vital to bettering the lives of those within the regions, therefore Starbucks provides monetary contributions and encourages partners to volunteer their time, in support of creative efforts to benefit these issues. Demonstrating this commitment, the company announced a 34.17 million RMB (USD $5 million) grant to the Starbucks China Education Project. The first donation of 12 million RMB (USD $1.75 million) from this project was awarded to the China Soong Ching Ling Foundation, to support a program aimed at helping students and teachers in rural China. Additionally, Starbucks donated 4.1 million RMB (USD $600,000) to the China Women Development Foundation, supporting a program aimed at helping Chinese women obtain access to clean drinking water. In January 2009, Starbucks allocated 5 million RMB (USD $730,000) from the Starbucks China Education Project to the Chengdu Education Foundation, to sustain teachers and their students in provinces deeply impacted by the 2008 Sichuan earthquake. In alliance with the American Red Cross, International Red Cross and the Red Crescent (supporting the Red Cross Society of China), The Starbucks Foundation has provided $250,000 for immediate humanitarian and long-‐term recovery efforts since the 2008 Sichuan earthquake. In addition to this support, Starbucks Coffee Greater China has contributed $100,000 for immediate disaster relief and long-‐term recovery through company donations and fundraising by partners and customers. 35 4.1.9 Key performance results Starbucks’ established cafes in China maintained a double-‐digit sales growth over the past couple of months of 2012, compared to the year before. In the fourth quarter of 2012, ending September 30, Starbucks’ same-‐store sales, at cafes open at least 13 months, rose 10% in the China and Asia-‐Pacific region. Starbucks stores in China now average $886,000 in annual sales, up from $507,000 in 2008. The company expects China to become its largest market outside the U.S. by 2014. “We continue to see very healthy growth coming out of China,” John Culver stated at an investors conference in 2012. “We are very aware of the economic environment there, but there is clearly a pent-‐up demand that is in the very nascent stage of us achieving saturation” he added (Gasparro, 2012, p. 1). Other major U.S. restaurant chains in China, such as Yum Brands Inc., which owns of KFC and Pizza Hut, and McDonald’s Corp. have seen sales growth slow in the region recently. Higher food and labor costs have forced eateries to raise menu prices, while Chinese consumers are more cost-‐conscious due to economic uncertainty, preventing them from spending at the rate they once did. Starbucks says it still sees potential for thousands of cafes in China, and plans to reach 1,500 there in 2015. Nonetheless recently Starbucks has come under fire from the Chinese state media for charging more for its coffee in China than in other countries, making it the latest western company to face scrutiny over its Chinese pricing strategy. The barrage of criticism on television and in newspapers comes as Starbucks has been rapidly expanding its China business. China Central Television (CCTV), the official broadcaster, has accused Starbucks of gouging
- 38. consumers by charging about a third more than in the US. “Starbucks coffee price investigation” shot up to become the second most popular topic on Sian Weibo, China’s Twitter-‐like website. But rather than rallying to CCTV’s side, many of the users commenting on the story criticized the state broadcaster for dwelling on the price of coffee, something seen as an indulgence rather than a daily necessity in China (Rabinovitch, 2013, p. 1). 4.2 Porters’ Value Chain – Looking inside-‐out. The so-‐called inside-‐out perspective states that every activity within the value chain of a business influences society in some way either positively or negatively. Therefore, it is essential to closely examine all business activities and identify those which offer the greatest chances of creating shared value for both parties ("Doing good and deriving benefit," 2012, p. 1). 36 Figure 5 Porters' Value Chain (Porter & Kramer, 2006, p. 8) 4.2.1 Inbound logistics In 2008 Starbucks started to create a single, global logistics system because of its far-‐flung supply chain.
- 39. The company generally brings coffee beans from Latin America, Africa, and Asia to the United States and Europe in ocean containers. From the port of entry, the "green" (unroasted) beans are trucked to six storage sites, either at a roasting plant or nearby. After the beans are roasted and packaged, the finished product is trucked to regional distribution centers. Starbucks runs five regional distribution centers (DCs) in the United States. Two are company-‐ owned and the other three are operated by third-‐party logistics companies (3PLs). Starbucks also has two distribution centers in Europe and two in Asia, all of which are managed by 3PLs. Coffee, however, is only one of many products held at these warehouses. They also handle other items required by Starbucks' retail outlets— everything from furniture to cappuccino mix (Cooke, 2010, p. 1). Depending on their location, the stores are supplied by either the large, regional DCs or by smaller warehouses called central distribution centers (CDCs). Starbucks uses 33 such CDCs in the United States, seven in the Asia/Pacific region, five in Canada, and three in Europe; currently, all but one are operated by third-‐party logistics companies. The CDCs carry dairy products, baked goods, and paper items like cups and napkins. They combine the coffee with these other items to make frequent deliveries via dedicated truck fleets to Starbucks' own retail stores and to retail outlets that sell Starbucks-‐branded products (Cooke, 2010, p. 1). In 2012 Starbucks and its Indian partner Tata Coffee today inaugurated a roasting and packaging plant in Karnataka that will cater to the domestic as well as select overseas markets in future ("Roasting plant in India," 2013, p. 1). 37 Although Starbucks has a raft of metrics for evaluating supply chain performance, it focuses on four high-‐level categories to create consistency and balance across the global supply chain team: safety in operations, service measured by on-‐time delivery and order fill rates, total end-‐to-‐end supply chain costs, and enterprise savings (Cooke, 2010, p. 1). The Climate Counts Company Scorecard provides an independent and transparent way to gauge which consumer brands are seriously committed to reducing their climate impact -‐ and which are not. On the 2012 Climate Counts Company Scorecard, Starbucks score was 69 out of 100 possible points ("Scorecard," 2013, p. 1) (Climate Counts, 2013, p. 6). Competitors, who also have outlets in China, have significantly lower scores: Starbucks 69 Yum! Brands 46 McDonald’s 14 Burger King 2 ("Food services," 2013, p. 1) It is remarkable that the companies with a lower score are struggling in China. In 2012 the same-‐store sales of Yum Brands in China declined 6% in the fourth quarter. The reputation of the global fast food powerhouse, which operates thousands of KFC restaurants in China, has suffered in the wake of an investigation by Chinese food regulators. The inquiry was launched after media reports alleged that excess antibiotics and hormones were found in some chicken products sold at KFC locations. The revelation set Chinese consumers on edge and sparked calls for
- 40. a boycott (Riley, 2013, p. 1). Meanwhile MacDonald’s also saw a sales decrease in China. It’s Asia-‐Pacific, Middle East and Africa segment reported a drop of 3.3%, primarily due to negative sales results in China (Morrison, 2013, p. 1). Eight years after Burger King first entered the China market in 2005, the world’s second largest burger chain restaurant has only 63 restaurants in the country, falling far short of its own plan of opening 250 to 300 restaurants by 2012 (Wang, 2013, p. 1). 38 4.2.2 Operations Starbucks claims it is using a standard global practice and does not make changes for its China operations. These standards range from global ethical business standards to their own guidelines for doing business. This is not always easy. In 2012 a Beijing newspaper attacked the company for wasting water. Two articles in the Beijing Evening News accused the company of being unaware of the city's water-‐saving guidelines due to its practice of setting taps on coffee workbenches to flow constantly. The People.com website even conducted an online survey that found about 90 per cent of 2,434 respondents considered Starbucks guilty of wasting water. But Starbucks defended itself, claiming it was an environmentally friendly enterprise. “Dipper wells are designed to have a constant stream of running fresh water to keep utensils clean between uses, especially preventing bacterial growth,” Starbucks said, “In order to conserve water, the flow is kept minimal while maintaining a strong enough stream of water to effectively rinse the utensils. We consistently re-‐evaluate our equipment, store design and training opportunities to reduce our overall water use.” Starbucks had informed its staff to try their best to reduce water flow according to their workload and added that it would conduct spot checks at outlets to ensure staff compliance with the water-‐saving policy (Wu, 2012, p. 1). 4.2.3 Outbound logistics In 2010 Starbucks announced its intention to complete U.S. Green Building Council's LEED certification for all new company-‐owned stores, starting in late 2010. LEED stands for Leadership in Energy and Environmental Design and is a set of rating systems for the design, construction, operation, and maintenance of green buildings, homes and neighborhoods. Since then a number of Starbucks stores have been built or remodeled as part of the new LEED Volume Certification program that Starbucks helped to establish. Since energy use in Starbucks' stores makes up roughly 80 percent of its entire carbon footprint (as reported in Starbucks CSR Report of 2009), a sustainable building program will have significant impact. Before deciding on a building certification program, Starbucks established objectives, which included sourcing construction materials locally, reducing energy and water utilization, and providing a healthy and inviting environment for employees and customers (Girrbach, 2010, p. 1). By 2012 Starbucks achieved LEED certification for 116 stores in 12 countries. 4.2.4 Marketing and sales With a population of 1.3 billion, China presents an attractive market opportunity for many multinational companies, as well as some unique challenges in building and expanding a brand.
- 41. Starbucks has invested much of its efforts in localizing products. Aside from seasonal, regional and Asian-‐inspired offerings, the company has also moved to deepen its connection to China in other ways. Starbucks’ willingness to cater to local tastes and sensibilities has paid off in kind. Growth in the China and Asia-‐ Pacific region has consistently outpaced the rest of Starbucks’ business, and China has been the driving force. Loyalty amongst Chinese customers has led to the highest per-‐store average -‐ 2,000 members per store, of the ‘My Starbucks Rewards’ benefits program per store. This is a powerful endorsement of the emotional attachment that Chinese customers have to the Starbucks brand. (Ferdman, 2013, p. 1). Starbucks entered Beijing in 1999 through a joint-‐venture agreement with a local operating partner and later expanded into Shanghai and the Jiangsu and Zhejiang provinces. After China joined the World Trade Organization in 2001, Starbucks was allowed to buy back equity in their joint-‐ventures and set up its own independent company structure. Starbucks made this strategic decision in order to maintain consistency in branding and better control over operational efficiency ("Branding in China," 2009, p. 1). In the west the main criticism from customers is Starbucks lack of a recycling infrastructure because Starbucks’ cups still cannot be processed by many paper-‐recycling systems (Lozanova, 2009, p. 1). Another significant topic of criticism in the west was the avoidance of paying tax on their British sales in 2012. In that year Starbucks had sales of £400m in the UK but paid no corporation tax. To eliminate its corporate tax liabilities, the company transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business. As the public has an increased understanding of corporate tax avoidance, there is a clear sense of outrage that is going well beyond a small group of protesters and the public feels that the current system is not right (Barford & Holt, 2013, p. 1). In the west, Starbucks is criticized for its recycling policy and tax avoidance. In China cultural problems are the main source of criticism and Starbucks ran into problems on several occasions. In 2007 Starbucks closed its coffeehouse in China's former Imperial Palace as a result of protests by Chinese critics who said it damaged a major historical site. The controversy over Starbucks at the 587-‐year-‐old Forbidden City in Beijing has highlighted Chinese sensitivity about cultural symbols and unease over an influx of foreign popular culture. The Starbucks coffeehouse had opened in 2000 at the invitation of palace managers, hoping to raise money to maintain the 72-‐hectare complex of villas and gardens. But critics said the move was inappropriate. An anchor for Chinese state television led an online protest, saying the coffeehouse diminished Chinese culture ("Starbucks closes coffeehouse in Forbidden City," 2007, p. 1). In 2011 Starbucks again drew protest in China over its latest marketing efforts -‐ this time upsetting the descendants of Bao Zheng, a renowned 11th century judge after seeing his face plastered on the chain's coffee mugs. Starbucks ran into trouble after opening its first branch in the city of Hefei, the capital of east China’s Anhui Province. The branch was selling coffee mugs and bottles featuring Bao Zheng, more commonly known as “Bao Gong.” Bao Zheng (999-‐1062), who was born in present-‐day Feidong County near the city of Hefei, was a senior official of the Northern Song Dynasty (960-‐1127). He was highly esteemed for his strictness in upholding justice and opposing corruption, no matter how powerful the offending party was. Bao Xun'an, a 36th-‐generation descendent of Bao and head of an association that studies and promotes Bao's spirit of integrity, said he was "shocked" to see his ancestor's face on the mug. He said that the company's marketing 39
- 42. strategy is disrespectful and might even be a violation of intellectual property rights. The mug features a stern-‐faced Bao clad in traditional official attire sitting on a judge's chair under large text proclaiming "Hefei, Starbucks Coffee." ("Legendary judge has case against Starbucks," 2011, p. 1) In 2013 a picture of a pen with an alpaca-‐like ornament at its top next to a Starbucks cup, posted by Starbucks China on its official Weibo account, attracted a flurry of some 3,000 comments and 40,000 retweets. As pronunciation of the Chinese nickname for alpacas, “cao ni ma (directly translates as Grass Mud Horse),” suggests vulgarity, most commentators interpreted the picture to be Starbucks’ veiled strike-‐back at a recent TV program by China’s state broadcaster investigating its high prices. (Shao, 2013, p. 1). Since Mr. Xi Jinping became President of the People’s Republic of China a year ago, foreign companies have been targeted by corruption investigations, price-‐fixing accusations and state media-‐led smear campaigns. "The perception amongst foreign investors is that it is getting harder to do business here," says Michael Crain, Beijing director of administration for law firm Bingham McCutchen, which advises international companies doing business in China. "In most of the government investigations and media exposés this year the focus has definitely been on the behavior of foreign companies." Nationalist rhetoric, communist revivalist symbolism and crackdowns on all perceived challenges to Communist party rule have characterized his tenure since he took power (Anderlini, 2013, p. 1). Starbucks overarching competitive strategy is to create an aspirational brand. Prospective Starbucks customers in China could look forward to what Starbucks refers to as The Third Place experience, the place between home and work. The Starbucks Experience conveys status that is highly appealing to those aspiring to Western standards or to climbing the ladder in their own culture. The middle class in China has rapidly accepted Western standards as a standard for the bourgeois class. Moreover, Chinese consumers accept purchases of luxury goods as a means to pursuing quality lifestyles, and no longer consider it to be decadent or indicative of a lack of a nationalistic orientation. Capitalism in The Peoples' Republic of China supports the status conscious population that manifests its interest in keeping up with the Jones' through excessive luxury consumption. China is not one homogeneous market. The organizational strategies employed by Starbucks address the many Chinese markets. The culture dominant in northern China differs radically from the culture in the eastern parts of China, as reflected in the differences in consumer spending power inland which is considerably lower than the spending power in in coastal cities. Starbucks' ability to address changing markets is honed by ongoing, effective market research. Establishing and maintaining a global Starbucks brand does not mean having a global platform or uniform global products. Starbucks’ marketing strategy in China was based on customization in response to diverse Chinese consumer target segmentation. Starbucks created extensive consumer taste analyses that are sufficiently flexible to enable them to change with the market and create an attractive East meets West product mix. Moreover, the localization effort is sufficiently adjustable in order to permit each store to have the flexibility to choose from a wide beverage portfolio (DeVault, 2012, p. 1). 40
- 43. 41 4.2.5 After sales service Starbucks is committed to significantly reducing and diverting the waste that their stores generate. Cup recycling is just one way to do this but it is the most visible to the consumer. About four billion cups are provided to their customers globally per year and they almost all end up in the trash. Environmental groups have criticized Starbucks about this fact. Since 2008, Starbucks has worked on a system-‐based approach to cup recycling with Massachusetts Institute of Technology and the Society for Organizational Learning. In 2009, they began two pilot projects. The first one was to recycle used cups into new cups, cooperating with cup supplier, International Paper and recycle pulp producer Mississippi River Pulp. The second project was to gather used cups from Starbucks stores in Chicago and make paper napkins for Starbucks and other customers at Geogia-‐Pacific paper mill in Green Bay, Wisconsin. These became successful recycling solutions for used cups. Starbucks is now expanding these solutions not only in North America but also worldwide. It is ideal for Starbucks to construct a recycle supply chain network in a local area because of shorter lead-‐time and lower logistics cost (Fujimori, 2013, p. 1). But it remains a complex problem. Starbucks’ iconic green and white hot-‐beverage cup, made with 10 percent post-‐ consumer recycled fiber, is itself technically recyclable and compostable right now. The issue is infrastructure. “We define recyclability or compost ability based on access and not on materiality,” says Jim Hanna, Starbucks’s Director of environmental impact. “That means we’re not going to call our cups recyclable until we know our customers actually have access to recycling.” Indeed, with a few exceptions (Seattle, Toronto and San Francisco for now), the company does not offer recycling for the soiled, plastic-‐lined paper cups in its store because most communities don’t recycle them (Lara, 2011, p. 1). 4.2.6 Firm infrastructure Starbucks recently moved to a new three-‐region organizational structure: China and Asia Pacific: All Asia Pacific markets and China Americas: United States, Canada, Mexico and Latin America EMEA: Europe, U.K., Middle East, Russia and Africa A president for each region will oversee the company-‐operated retail business, working closely with both the licensed and joint-‐venture business partners in each market. They also work closely with the Starbucks Global Consumer Products and Foodservice team to continue building out Starbucks brands and channels in each region. China and Asia Pacific Region: John Culver has been named president, Starbucks China and Asia Pacific. Culver's focus and accountability will center on Starbucks retail business in Asia Pacific, including China, Japan and Starbucks newest market entry India. China, Japan and India are important areas of growth for the company and Culver brings the extensive global experience navigating complex operating environments to drive even greater business results in this region. John Culver and his team have delivered strong international growth and set the foundation for the company's international business and growth opportunities ahead. 4.2.7 Human Resource Management The workforce is duly perceived by Starbucks to be the most valuable resource.
- 44. 42 In an interview with Inc. Magazine Howard Schultz said: “That the most important discipline at Starbucks is human resources. Every enterprise has a memory. And that memory is imprinted with a history and a way of doing business. As leaders, we have to make sure that we're attracting the right people and that the values of the company are being upheld. When you see something that isn't right, you have to make sure that you're not a bystander. I've said for years that the most important aspect of our company is the culture. And people laugh at that, but that's the truth” (Gossage, 2011, p. 1). 4.2.8 Technology development With the perception that purchasing is less of an avenue to drive change than social media, the Chinese instead take to their screens to participate in CSR discussions. Simply put, social media is king. Ninety percent of Chinese consumers — the highest of all countries surveyed — use social media to engage with companies around critical issues. They are leveraging social channels to share both positive (58%) and negative (49%) information with their networks, as well as to learn more about specific companies or issues (37%). Social media (11%) and company websites (11%) are tied for the third most effective channel to reach Chinese consumers with CSR messages, behind the media (23%) and on-‐product communication (16%). In a country where free speech is not a given, social media represents a bastion of open conversation, driving both awareness and action around issues such as product safety, pollution and labor practices. “Social media speech is quite free as long as it’s not attacking the government. That’s why there are a lot of reports on corporate behavior from citizens,” Mr. Ho (convener, China Council of CSR Executives) observes. “These stories apply pressure to government to get involved, which then results in a change of business behavior” (Cone Communication, 2013, p. 51). The power of social media was made clear after the massive earthquake in Sichuan on May 12, 2008, measuring 7.9 on the Richter scale. The earthquake claimed the lives of 70,000 people and left five million homeless. Shortly after the earthquake a list titled ‘international iron rooster’ was widely circulated via the Internet and cell phones messages, and updated constantly. Using the culturally significant term iron rooster, which refers to a bird that has no feathers to give and is used in the Chinese language as a metaphor for an individual that is stingy with his money, this list, in its various forms delivered the similar message that: “ MNCs, which have made profits in China, are too stingy to make donations when the county is confronted with a devastating disaster. All Chinese should boycott these companies and spread the news.” Among the global companies included on various versions of this list were KFC, McDonald’s, Nokia, and Coca Cola. The quick spread of the lists led to an immediate impact on these companies. McDonald’s faced a boycott in Sichuan province, the area most severely impacted by the earthquake (Fang, 2010, p. 16). Starbucks China promotes the same message of quality, social responsibility, and community building across all of its social-‐media efforts. The company’s approach is designed to interact meaningfully with fans, generate buzz, and deepen customer engagement with the brand (Chiu, Ip, & Silverman, 2012, p. 1). 4.2.9 Procurement An essential dimension of CSR is business responsibility of foreign suppliers from whom MNCs’ procure goods to meet their global demand. Starbucks claims on their website that “We are committed to buying and serving high-‐
- 45. quality coffee that is responsibly grown and ethically traded. The cornerstone of our approach are the C.A.F.E. Practices, our comprehensive coffee-‐buying program that ensures coffee quality while promoting social, economic and environmental standards.” These standards were developed in partnership with Conservation International, a Virginia-‐based nonprofit that aims to protect the earth’s biodiversity. Critics say that C.A.F.E. standards are simply a set of guidelines co-‐created and audited by Starbucks for larger coffee farms. Starbucks self-‐auditing cannot be reasonably considered as a Fair Trade means of business certification when the company operates on such a global scale and directly reaps the benefits of its auditing (Rhiannonkate, 2013, p. 1). “Unlike Fair Trade, their standards do not include a guaranteed minimum price to the producer,” according to Marie-‐Christine Renard, a sociologist from the University of Chapingo in Mexico State (Paley, 2012, p. 1). In 2008 Starbucks made a $7.5 million multi-‐year commitment to CI and critics see something unseemly about this deal. Nonprofit groups taking cash from big companies are unlikely to push their donors very hard (Gunther, 2008, p. 1). C. MacDonald, the writer of the book ‘Green Inc.’ who worked for CI for one year, accuses CI of green washing, (MacDonald, 2008, p. 89). Other critics argue that CI is nothing more than a green PR company and that they should be stripped of their UN NGO Observer Status and expelled from the various NGO caucuses within the UNFCCC [United Nations Framework Convention on Climate Change] (Lang, 2011, p. 1). 4.3 Porters' Diamond Framework – looking outside-‐in. The outside-‐in perspective is based on the assumption that entrepreneurial activity not only influences society but that conversely social conditions also impact a business’s ability to compete. The Diamond Model, developed by Porter, based on the four interdependent areas of strategy and competition, production factors, supporting industries, and demand conditions is used to analyze the competitive environment for opportunities for CSR initiatives ("Doing good and deriving benefit," 2012). In addition to understanding the social ramifications of the value chain, effective CSR requires an understanding of the social dimensions of the company's competitive context -‐ the "outside-‐in" linkage that affect its ability to improve productivity and execute strategy (Porter & Kramer, 2006, p. 9). 43
- 46. 44 Figure 6 Porters' Diamond Framework (Porter, 1993, p. 151) (1) Firm Strategy, Structure, and Rivalry: Firms start programs of corporate citizenship as a specific instrument of its CSR strategy to support local community projects with donations, sponsoring or even as a project partner. They are often dedicated to educational projects that offer access to knowledge or new technologies. It is crucial that corporate strategy combines the internal competencies of the firm with external opportunities in the local environment (Kupke, Schneider, & Lattemann, 2007, p. 1). Starbucks strategy is to connect with the Chinese market on three levels. On the first level the company tries to connect with its partners (employees). On the second level, it connects with the communities in which the company operates -‐ the daily interactions between barista and customer is part of the Starbucks™ Shared Planet™ commitment to community involvement. Starbucks provides monetary contributions and encourages partners to volunteer their time in support of these efforts. In order to show its commitment to China Starbucks also donates to educational programs in rural China. On the third level Starbucks connects with the Chinese market by sourcing coffee from China. (2) Demand Conditions: The CSR activities influence the demand conditions within the region because the firm’s image increases and it becomes more attractive to local customers and other stakeholders (Kupke et al., 2007, p. 1). Starbucks has shown a willingness to embrace certain aspects of Eastern culture in its personnel policies. There are definitely adaptations because China is a different type of market. Perhaps the best example of such an adaptation is the launch of ‘Starbucks Partner Family Forums’ in Beijing and Shanghai. These forums demonstrate deference to several notable Chinese norms, including the importance of filial piety and family expectations in the traditionally Confucian country. These forums, which were attended by the company’s CEO, Howard Schultz, served as an opportunity for Starbucks to explain to parents who “would rather their children be working behind bank counters than serving up Sumatra” that progression up the company’s career ladder is possible. As evidence of this possibility, they offered testimonials from existing managers who began in entry-‐level positions (O’Brian, 2012, p. 1). (3) Factor Conditions: A country creates its own important factors such as skilled resources and technological base. Local disadvantages may include factors of production force innovation. Adverse conditions such as labor shortages
- 47. or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage ("Porter’s Diamond," 2010, p. 1). Skilled resources can be hard to find in China and Starbucks will need to recruit thousands of employees. Many of them have extraordinarily close ties to their parents, due to the country's one-‐child rule. In order to get a good relationship with the parents Starbucks China hosted what may be called the world’s largest employee/parent conference in Beijing end Shanghai. In an interview with Maria Bartiromo from 45 USA Today Howard Schultz said: “The reason we did that is that we have to present ourselves in a way that is locally relevant, not only with our customers, but with our employees. We felt strongly that we wanted to describe our relationship as a company to the parents so they understood what we stand for” (Bartiromo, 2013, p. 1). (4) Related and Supporting Industries: Often CSR programs integrate the supplier firms as well as corporate partners. Sometimes it can be observed that a CSR strategy leads to a local CSR network in which several firms are involved. This may evolve especially if a local supply chain exists. (5) Government: Political initiatives can enable and support CSR Strategies and thus promote sustainable development of the specific regions. Furthermore, the customer’s demand for highly developed and sustainably-‐ produced products could be stimulated (Kupke et al., 2007, p. 1).
- 48. 46 5. Conclusion This final chapter includes the conclusions based on the analyses in previous chapters. The researcher answers the research questions and provides overall conclusions regarding the findings of this study. First the sub questions are answered and then the main question. This chapter also includes recommendations, limitations of the study and suggestions for further research. 5.1 Research questions, conclusions and criticism The focus of this thesis is to investigate the relevance of CSR as a Business Strategy in China. The global company, Starbucks, was chosen as a case study due to its position as market leader within its business area. The company is engaged in many social, ethical and environmentally responsible activities, and is recognized as a committed company within the field of CSR. How does CSR influence the performance of Starbucks in China? While relatively new, CSR has developed quickly in China and both the Chinese government and the public, increasingly demand that businesses improve their performance regarding public health, environmental protection, worker safety and social development. Seriously contaminated food, water and air, with consequent damage to public health and the environment, have led to rising social unrest and political action (Bu et al., 2013, p. 6). Companies, like Starbucks, with a well-‐considered CSR strategy have an advantageous position in the eye of the public and the government and are more likely to be successful in China. Starbucks main objective is to establish Starbucks as the most recognized and respected brand in the world. Starbucks promotes their coffee shops as The Third Place experience, the place between home and work. The Starbucks experience conveys status that is highly appealing to those aspiring to Western standards. The company has established itself as an aspiration brand and is able to charge premium prices. The middle class in China has rapidly accepted Western standards and accepts purchases of luxury goods. Starbucks’ CSR strategy and commitments are mainly focused on their employees, customer relationship and coffee sourcing. In connection with an effective CSR strategy trust is an important element. Based on the most recent Edelman Trust Barometer findings, there are five elements that must be addressed if CSR & Sustainability is to help a business build trust in the APAC region. The elements are clarity, relevance, integration, transparency and credibility. To ensure that CSR & Sustainability has a clear purpose in the context of Starbucks’ main business objectives the company connects with the Chinese market on three levels. On the first level, Starbucks connects deeply with its employees. By the end of 2012 Starbucks had 1200 employees in China and the company will more than double their Chinese staff by 2015. The company sees their employees as the heart and soul of the Starbucks Experience, and also the cornerstone of their success. Starbucks encourages open employee communication, values each employee as ‘partner’, and provides good work environments, medical care, stock options, career paths and vacations. The result is a low employee turnover. While 30 percent annual turnover is common in China according to data compiled by CNBC, Starbucks has far lower turnover than the industry average (Rein, 2012, p. 1).
- 49. On the second level Starbucks connects with the communities in which the company operates. Through its various community outreach initiatives, in 2011 Starbucks partners and customers across Mainland China contributed close to 25,000 community service hours. These activities are important because research shows that Chinese citizens are substantially more likely than their global peers to have engaged in companies’ CSR initiatives, from buying products with a societal benefit (86% vs. 67% globally) and making donations (69% vs. 60% globally), to volunteering (45% vs. 37% globally) and telling friends and family about corporate efforts (75% vs. 50% globally) (Cone Communication, 2013, p. 53). On the third level Starbucks connects with the Chinese market and government by sourcing coffee from China. The cornerstone of their approach are the C.A.F.E. Practices, a comprehensive coffee-‐buying program that Starbucks promotes as important to ensuring coffee quality while promoting social, economic and environmental standards. The economic motivation for growing coffee in China instead of tea is clear. With a hectare of coffee a family can earn more than $10,000 a year, triple the amount for tea. As most Chinese people don’t like the taste of coffee Starbucks' has an ongoing, effective market research. Their marketing strategy in China is based on customization in response to diverse Chinese consumer target segmentation. Starbucks created extensive consumer taste analyses that enable them to change with the market, which permits each store to have the flexibility to choose from a wide beverage portfolio. Starbucks’ willingness to cater to local tastes and sensibilities has paid off in kind. Growth in the China and Asia-‐ Pacific region has consistently outpaced the rest of Starbucks’ business, and China has been the driving force. Loyalty amongst Chinese customers has led to the highest per-‐store average -‐ 2,000 members per store, of the ‘My Starbucks Rewards’ benefits program per store. This is a powerful endorsement of the emotional attachment that Chinese customers have to the Starbucks brand. (Ferdman, 2013, p. 1). 47 The Climate Counts Company Scorecard provides an independent and transparent way to gauge which consumer brands are seriously committed to reducing their climate impact -‐ and which are not. On the 2012 Climate Counts Company Scorecard, Starbucks score was 69 out of 100 possible points ("Scorecard," 2013, p. 1) (Climate Counts, 2013, p. 6). Competitors, who also have outlets in China, have significantly lower scores: Starbucks 69 Yum! Brands 46 McDonald’s 14 Burger King 2 ("Food services," 2013, p. 1) It is remarkable that the companies with a lower score are struggling in China. In 2012 the same-‐store sales of Yum Brands in China declined 6% in the fourth quarter. Meanwhile MacDonald’s also saw a sales decrease in China. Eight
- 50. years after Burger King first entered the China market in 2005, the company has only 63 restaurants in China, falling far short of its own plan of opening 250 to 300 restaurants by 2012. According to Edelman partnering with NGOs in the APAC region brings credibility to CSR, particularly if the NGO partner becomes an advocate for the company. Starbucks established partnerships with several Chinese NGOs. The Edelman Trust barometer shows that in China, where only five years ago trust in NGO’s was 48 percent; today it is 81 percent (Edelman, 2013, p. 4). Nonetheless there is criticism. Critics say that C.A.F.E. standards, which where developed in partnership with CI, a nonprofit that aims to protect the earth’s biodiversity, are simply a set of guidelines co-‐created and audited by Starbucks for larger coffee farms. Moreover the reputation of CI is doubtful, the nonprofit is accused of green washing and critics argue that the organization should be stripped of its UN NGO Observer Status and expelled from the various NGO caucuses within the UNFCCC [United Nations Framework Convention on Climate Change] (Lang, 2011, p. 1). Starbucks also has been strongly criticized by the government for their high prices and for their lack of cultural sensitivity on several occasions. The most important criticism was having a coffee shop in the Forbidden City. A doubtful reputation can have significant consequences in China where consumers consider social and environmental issues in major decisions, including where to work (80%) and what to buy or where to shop (83%). 48 What is the role of international culture to Starbucks’ success in China? International culture is of importance but adjusting to the local culture significantly contributes to Starbucks’ success. The company recognized that establishing and maintaining a global brand does not mean having a global platform or uniform global products. Starbucks concentrates on finding the perfect balance of cultural integration and tradition for the Chinese market. Companies like Mattel, eBay, Google and Home Depot have thrived in markets around the world, but are not successful in China. -‐ Why? -‐ “It’s a lack of understanding of the legal and cultural environment that leads to most failures,” says Shawn Mahoney, managing director of the EP China consulting group (Carlson, 2013, p. 1). How do China’s CSR requirements influence Starbucks' CSR strategy? Saving resources and protecting the environment are top priorities for the Chinese government during the current five-‐year plan and it has been clearly demonstrated that business entities with good CSR practice will receive more support from the authorities (Bu et al., 2013, p. 55). Not only the government but also the public demands social responsible behavior. Ninety percent of Chinese consumers use social media to engage with companies around critical issues. They are leveraging social channels to share both positive (58%) and negative (49%) information with their networks (Cone Communication, 2013, p. 51). The power of social media was made clear after the massive earthquake in Sichuan in 2008, which claimed the lives of 70,000 people and left five million homeless. Shortly after the earthquake a list titled ‘international iron rooster’ was widely circulated via the Internet. The companies on that list were accused of making profits in China but
- 51. unwilling to make donations when the county was confronted with a devastating disaster. Many Chinese people boycotted these companies and spread the news. Among the global companies on this list were KFC, McDonald’s, Nokia, and Coca Cola. The quick spread of the list led to an immediate drop in sales for these companies (Fang, 2010, p. 16). Immediately after the earthquake Starbucks donated money through the Red Cross and didn’t experienced negative publicity. Today Starbucks China promotes the same message of quality, social responsibility, and community building across all of its social-‐media efforts, as well as in its stores. How does CSR as a Business Strategy contribute to Starbucks' success in China? Starbucks’ CSR strategy has contributed to their success significantly. Due to food scandals and environmental degradation the public and the authorities demand that companies are socially responsible. In Starbucks’ CSR strategy, the focus is on their employees, the communities in which their business is located and their suppliers. The high value they place on their employees leads to a low employee turnover. Starbucks’ willingness to cater to local tastes and cultural sensibilities has created loyalty amongst Chinese customers and has led to the highest per-‐ store average of the ‘My Starbucks Rewards’ benefits program per store. Starbucks sourcing practices are the C.A.F.E. standards, which claim to ensure coffee quality while promoting social, economic and environmental norms. Critics say that C.A.F.E. standards, which were co-‐developed with CI, are simply a set of guidelines co-‐created and audited by Starbucks and that the reputation of CI is doubtful. 5.2 Recommendations Based on the findings of this research it can be argued that Starbucks is serious in its attempt to obtain the status of a corporation with a positive CSR commitment. However one could conclude, that there is a lack of transparent communication, which could increase pressure groups skepticism. Therefore it would be recommend that Starbucks be more selective in their choice of NGO partners and more comprehensive in the transparency of its reporting. 5.3 Limitations The limitations of this thesis are due to the nature of the research data available regarding Starbucks and China. The first limitation is that information acquired from Starbucks concerns the company as a whole, not specifically China. The second limitation is that changes are occurring so rapidly in the Chinese society, that up-‐to-‐date information is not always available. The third limitation is that there was no direct contact with Starbucks. 5.4 Future research The findings of this study have a number of important implications for future research. It would be valuable to research the CSR strategy of a Chinese company and to see how they integrate CSR into their business strategy. The role of the Chinese government is decisive, therefore it would be interesting to research to what extent the government influences the Chinese multi national companies’ CSR engagement. 49
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- 57. 55 Appendix 1 Timeline of Greater China. 1995 Starbucks Coffee International is established. 1998 In March, Starbucks enters the Greater China market with its first store in Taipei, Taiwan through a joint-‐ venture agreement with President Enterprise Corp./President Chain Store Corp. 1999 In January, Starbucks opens its first store in Beijing, China through a licensing agreement with Mei Da Coffee Co. Ltd. This opening marks the first Starbucks store in Mainland China. 2000 In May, Starbucks opens its first store in Hong Kong/Macau with its first store in Exchange Square, Hong Kong, through a joint-‐venture agreement with Maxim’s Caterers, Ltd. In May, Starbucks enters the Shanghai market with its first store in the Lippo Tower, through a joint-‐venture agreement with President (Coffee) Cayman Holdings, Ltd. 2002 In October, Starbucks opens its first store in Shenzhen through a joint-‐venture agreement with Mei-‐Xin International Ltd., forming Coffee Concepts (South China) Ltd. President Starbucks Taiwan Limited introduces Green Tea Frappuccino® Blended Crème beverage, which enjoys tremendous success locally and is later adopted with equal enthusiasm in the Asia Pacific region, then North American markets. 2003 In July, Starbucks Coffee International increases its equity position in the Shanghai and Taiwanese operations, acquiring a 50 percent ownership interest in its Shanghai joint-‐venture with President Enterprise Corp. and a 50 percent ownership interest in its Taiwanese joint-‐venture with President Chain Store Corp. In August, Starbucks enters Guangzhou with its first store in the heart of Dongshan, at the Peace World Plaza. The company further extends its presence beyond Shanghai with announcements of entry into Nanjing and Ningbo. 2004 In April, Starbucks opens its first store in Suzhou. In May, Starbucks opens its first store in Wuxi. In November, Starbucks opens its first store in Changzhou. 2005 In April, Starbucks enters the Qingdao market under the legal operating entity name of Qingdao American Starbucks Coffee Company Ltd.. Qingdao marks the first Starbucks company-‐operated market in China. In September, Starbucks chairman Howard Schultz announces a grant of 34.17 million RMB (USD 5 million) for the Starbucks China Soong Ching Ling Foundation, to sponsor educational programs in China. In September, Starbucks opens its first store in Dalian. During the same month, the company expands into Western China with the opening of its first store in Chengdu, under a cooperative joint-‐venture agreement between partners Coffee Concepts Limited and Starbucks Coffee International. In December, Starbucks enters the Shenyang market with its first Taiyuan store. Starbucks establishes the Greater China Regional Support Center in Shanghai. 2006 In January, Starbucks enters the Chongqing market, expanding its reach to 19 mainland cities. In February, Starbucks allocates 12 million RMB (USD 1.75 million) from the Starbucks China Education Project to the China Soong Ching Ling Foundation, supporting a program aimed at helping students and teachers in need in rural China. In October, Starbucks acquires majority ownership in its Beijing and Tianjian operations from High Grown Investment Group (Hong Kong) Ltd. 2007 In November, Starbucks launches ready-‐to-‐drink Starbucks® bottled Frappuccino® coffee drinks in China. 2008 In February, Starbucks enters the Wuhan market, expanding its reach to 26 mainland cities. In March, Starbucks celebrates its 10th anniversary in Taiwan. In May, Starbucks donates 2.7 million RMB (USD 395,000) to provide relief in the areas of Sichuan most impacted by a devastating earthquake. In October, Jinlong Wang, President, Starbucks Greater China is awarded the China Entrepreneur of the Year Award at the 2008 China Business Leader Awards (CBLA).
- 58. 56 2009 In January, Starbucks celebrates its 10th anniversary in Mainland China. Also in January, Starbucks launches South of the Clouds Blend™ in Greater China, marking the first ever Starbucks blend to feature coffee beans sourced from China. Also in January, Starbucks announces a strategic relationship with The People’s Government of Yunnan Province to improve coffee quality and develop the coffee industry in this key Chinese coffee growing region. Also in January, Starbucks allocates 5 million RMB (USD 730,000) from the Starbucks China Education Project to the Chengdu Education Foundation, to sustain teachers and their students in provinces deeply impacted by the 2008 Sichuan earthquake. In December, Starbucks launched the Starbucks™ Shared Planet™ in China and kicked off of the Starbucks “I’m In!” campaign, an initiative that supports Starbucks’ commitment to communities within Mainland China. 2010 In March, Starbucks celebrated the launch of its new Starbucks® Tea in China. Available in nine varieties, including brewed, infusion and Chinese tea selections, the new Full Leaf Starbucks® Teas combine the company’s international tea expertise, and the authentic Starbucks Experience, to provide its customers with even more reasons to want to come together at their favorite Starbucks store. In May, Starbucks enters the Zhu Hai market, expanding its reach to 27 mainland cities. In September, Starbucks opens two stores in Changsha, making it the 30th mainland market. In the same month, Starbucks enters the Fuzhou market, expanding to 31 mainland cities ("Timeline -‐ greater China," 2010).