Starbuck’s FDI

Initially Starbucks expanded internationally by licensing its format to foreign operators. It soon became disenchanted with this strategy. Why? When Starbucks started its international expansion in Japan, it initially decided to license. As it is known licensing is “the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor”.

Advantages of licensing are obvious: it is less expensive, less risky as the risk is held by licensee and it ensures additional profitability with less initial investment. However, licensing has disadvantages and for Starbucks the main disadvantages of licensing in Japan are:

• This strategy did not give Starbucks the control needed to ensure that the licensees closely followed Starbucks’ successful formula.
• Starbucks successful formula” refers to its basic strategy: To sell the company’s own premium roasted coffee, along with freshly brewed espresso-style beverages, a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting and also providing superior customer service.

Starbucks found it necessary to successfully replicate the look, feel, and experience of an American Starbucks that is why Starbucks transferred American employees to the Japanese stores to help train workers in the Starbucks way. With licensing Starbucks had limited control of expansion rate. Simultaneously with entering the market in Japan, in US Starbucks developed new cold beverage (Frappuchino) with Pepsi, signed contract with Dreyer’s for making ice cream. However, the expansion rate in Japan was not controlled under licensing agreement as could be done in US and the realization of new products was slow in Japan.

Why do you think Starbucks has now elected to expand internationally primarily through local joint ventures, to whom it licenses its format, as opposed using to a pure licensing strategy? Joint venture is “an enterprise in which two or more investors share ownership and control over property rights and operation”. In short, the advantages of joint venture are: the company can be more informed about the situation in the market and how the consumers respond to the products; the fixed costs for new product entrance are shared with the company; synergy effect can be achieved. The main disadvantages of joint ventures are that more capital investment is needed versus licensing; the financial losses and risks are higher compared to licensing; a potential conflict between partners exists.

By using joint ventures Starbucks managed to share the cost and risks of developing its foreign markets with the licensee and at the same time to have higher control over the operations of the licensee. Another reason for expanding through local joint ventures was that Starbucks had access to local knowledge through the partner and can measure the process of product adaptation. Pure licensing did not give enough power to Starbucks to control which helped Starbucks to sustain competitive advantage. The pure licensing limits the important information about market situation in the country.

What are the advantages of a joint-venture entry mode for Starbucks over entering through wholly owned subsidiaries?  On occasion, Starbucks has chosen a wholly owned subsidiary to control its foreign expansion (e. g. , in Britain and Thailand). Why? Entering a new market is always risky and is accompanied with huge costs. Using joint venture model allows Starbucks to have controls over those risks by sharing them with a local company.

The advantages of joint ventures, if compared with the wholly owned subsidiaries, are the opportunities to share the costs and risks associated with entering and developing in the market, having access to greater resources as well as getting acquainted with the local market, its culture, characteristics with the help of the local partner’s experience and knowledge. An advantage of Joint venture is also the opportunity to widen economic scope fast; building reputation is often difficult, time consuming and expensive.

At a joint venture, Starbucks has the opportunity to widen its economic scope without spending too much money and waiting for a long time. With the Joint venture model, the local company also has incentives and motivations for the total joined success and growth. It would be much lengthier, difficult and expensive process in case of entering through wholly owned subsidiary. One more advantage of joint venture is still having large measure of control over the situation, even though the control is more limited if compared with a wholly owned subsidiary, however it gives the opportunity to have sufficient control over the local situation.

A joint venture example of Starbucks is entering into a joint venture with a Swiss company, Bon Appetit Group, the largest food service company in Switzerland. The disadvantages of joint venture are the following: it takes time to build the right partnership relationship with another business, especially when the objectives of the two partners are not entirely agreed and communicated, or there are differences in cultural and management styles. Also control and decision making are sometimes compromised in joint ventures.

Since there is an agreement that divides which one will take over a particular operation, the other may not be satisfied with how the things are worked out with another. This leads to another disadvantage of a joint venture. There would be no communication or agreement issues in case of wholly owned subsidiaries. Another disadvantage is that the profit generated in the local market is shared. There are several cases when Starbucks preferred a wholly owned subsidiary in the process of its foreign expansions.

There were different reasons for making such decisions. One reason was if the country had appropriate operations up for sale. Such example was in Britain, when Starbucks acquired an existing coffee chain that was modeled after Starbucks. An American couple, originally from Seattle, had started Seattle Coffee with the intention of establishing a Starbucks like chain in Britain. The chain was already successful; some of the risks that would normally be associated with introducing a new concept to a foreign market were eliminated.

The other reason of choosing a wholly owned subsidiary model would be if control was very important in the country of expansion or if the country didn’t have an appropriate joint venture partners which have prerequisites acceptable by Starbucks. In case of Thailand, Starbucks chose to shift to a wholly owned operation, after the jointed venture with Coffee Partners, a local Thai company, didn’t manage to raise capital from Thai banks for further pre-agreed expansion of Starbucks in Thailand. Thus by acquiring Coffee Partners, Starbucks had a goal to have more control over the expansion strategy in Thailand.

Which Theory of Fdi Best Explains the International Expansion Strategy Adopted by Starbucks? Starbucks followed Internalization theory, which suggests that when licensing is difficult, foreign direct investment is appropriate. The theory was developed by Buckley and Casson, in 1976 and then by Hennart, in 1982 and Casson, in 1983.

Initially, the theory was launched by Coase in 1937 in a national context and Hymer in 1976 in an international context. In his Doctoral Dissertation, Hymer identified two major determinants of FDI. One was the removal of competition. The other was the advantages which some firms possess in a particular activity (Hymer, 1976).

Advantages of Foreign Direct Investment are:

• A firm will favor FDI over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive
• A firm will favor FDI over licensing when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing

This theory fits Starbucks wants to maintain product quality and brand identity in all countries it has internationally expanded, to be perceived in the same way in all cultures, and preserve taste preferences, work habits and ways of doing business all over the world.