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Course: MGT 372

Sec: 5
Instructor: Samira Rahman (Smi)
Case: Starbucks
Group no: 11
1. Initially Starbucks expanded internationally by licensing its format to foreign
operators. It soon became disenchanted with this strategy. Why?

Starbucks after initial success of the home market began to explore the foreign
opportunities. It entered the Asia market initially by licensing its strategy. However they
soon changed it and stopped following the licensing strategy in view for greater control
of the market and failure of maintaining growth by the licensee company. Starbuck is
known for its aggressive market strategy – it usually focuses on one country and tries to
dominate the local market as quickly as possible. This strategy requires a lot of financial
resources and managerial know-how about the country’s market. Coffee Partners lacked
surely the first and, probably, also the second. The company tried to secure resources
from Thai banks, but this strategy failed – the local banking industry was probably very
sceptical of the new initiative. As to the managerial know-how required for an aggressive
growth strategy, it is part of the company’s culture. It has been created on the basis of a
long history of experience and is sustained by the people who are truly committed to the
company’s principles. These two elements cannot be enshrined in the licence agreement.

2. Why do you think Starbucks has now elected to expand internationally primarily
through local joint ventures, to whom it licenses its format, as opposed to pure
licensing strategy?

3. 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 (eg. In Britain and Thailand).
Why?

4. Which theory of FDI best explains the international expansion strategy adopted by
Starbucks?

Starbucks is a branded firm that mostly produces coffee of variety of flavors. They
started out small and gradually became massive. Now they have over 8400 stores around
the world which includes 31 foreign countries. They have invested in foreign countries
by licensing or franchising. But mostly they had joint ventures with foreign companies
for “know how” theory. They do so because they like to have more control over their
firms and run it according to their will. They believed in superior customer service and
made sure it remained the same in every store they had around the world. Starbuck’s
strategy is based on horizontal FDI – Starbuck does not buy plantations (sources of
inputs), but creates or buys companies in its own industry. Hence, we would like to
analyse the strengths and weaknesses of five theories of FDI: transportation costs, market
imperfections, strategic rivalry, follow the competitor, and location specific advantages.
Out of the theories, the first seems to explain Starbuck’s FDI strategy per se: services like
coffee-houses simply cannot be exported to a different country. What is needed is a chain
of restaurants. The market imperfections theory is, by contrast, a much more precise
explanation of Starbuck’s strategy. As it was explained in one of the previous questions,
joint ventures offer a superior method to transfer Starbucks’ know-how to a new market.
The theory also provides the rationale for creating wholly-owned subsidiaries, namely,
eliminating competition. The strategic behaviour theory offers scant explanation for
Starbucks’ foreign direct investment because the case gives no indication that Starbucks
followed another global coffee house chain (in an oligopolistic industry) into Asia in
order to ward off future competition. As to the product life-cycle theory, the weakness of
the theory is that the Starbucks FDI was not undertaken at particular stages in the “life
cycle” of the “coffee-house-experience” “product.” Furthermore, Starbucks did not
export its “production” abroad because of price competition and cost pressures back
home in the United States. As to the location specific advantage, it does not play any role
– coffee can be served and prepared anywhere in the world. Summing up, it seems that
market imperfection theory is the best explanation of Starbucks’ strategy – other
explanations are partial or totally invalid.