Introduction
Today, coffee is a big and attractive business area. Most people can hardly imagine their lives without coffee either in the morning or during the day. If they choose to go outside to have a cup of coffee, in most cases, they will grab one at Starbucks. What started as a single store selling coffee beans, has turned into a global giant represented in more than 60 countries worldwide and employing more than 20,000 people.
The number of licensed stores and those operated by the corporation exceeds 22,000 (Starbucks Company Timeline, n.d.). Starbucks’ decision to go global was met with some criticism; some even saw Starbucks as a threat to cultural diversity. Nonetheless, the company’s decision to expand overseas secured its place as the leader of the premium coffee market. The company’s current position in the global economy and worldwide recognition of its brand make it an interesting case study on the globalization of business.
Despite the globalization of the economy, companies who decide to go global face numerous political, economic, and cultural challenges that require strategic planning and sophisticated management systems to support the profitability of business on a global scale. The purpose of this case study is to provide an overview of Starbuck’s globalization progress and investigate the influence of globalization on the company. The research will start with studying the foundation of the company and opening its first coffee stores as well as current economic and financial performance with specific attention to factors contributing to its success and popularity.
The researcher will examine the challenges faced by the company after its decision to expand the business to other countries, and review the benefits and drawbacks of going global with the aim of identifying the motives for international expansion. Finally, the researcher will explore how Starbucks became a global corporation and take a close look at pivotal decisions and changes in the developmental strategy that reshaped the company over time.
Review of the company
Starbucks opened its first store in 1971 in Seattle’s Pike Place Market and initially sold whole bean coffees and coffee-making equipment, rather than hot and cold coffee drinks it sells today (History of Starbucks, n.d.). The name of the company was inspired by Moby-Dick character Starbuck and symbolizes the connection to the times when coffee trade was done by sea (Company Information, n.d., para. 2).
In 1982 Howard Schultz joined the company as director of retail operations and marketing. The following year Schultz traveled to Italy and, inspired by the popularity of espresso bars in Milan, convinced the founders of the company to start offering brewed coffee and test the coffeehouse concept. The success of the experiment led to the creation of Il Giornale, a company that offered brewed coffee made from Starbucks coffee beans.
In 1987, Il Giornale acquired all Starbucks assets and changed its name to Starbucks Corporation. By 1987, the company was operating 17 coffeehouses (Starbucks Company Timeline, n.d.). In the following decade, the company continued the expansion of its network of stores across the nation, opened drive-through stores, and introduced several new products to the coffee market, including Frappuccino blended beverages. Schultz was responsible for the company’s strict growth policy, and by 1995, the company operated over a thousand stores and achieved nation-wide success (Starbucks Company Timeline, n.d.).
Starbucks’ strategy was unique in a way that the company expanded by covering a particular area with its stores, even if it cannibalized each store’s sales. The company’s management saw oversaturation as a good thing, since the clustering of stores lowered delivery and management costs, and increased the quality of customer service by eliminating lines (Kotha & Glassman, 2002, p. 3). The successful expansion of Starbucks in the domestic market prompted the company’s management to look across the ocean for new business opportunities. The company opened its first overseas coffeehouse in Tokyo, Japan, in 1996 (Starbucks Company Timeline, n.d.).
The same year the company expanded its brand beyond coffeehouses by selling bottled Frappuccino coffee drink and other products through retail channels (Starbucks Company Timeline, n.d.). Starbucks continued global expansion in the following two decades and opened more than 22,000 stores across the globe.
The quality of Starbucks’ service was key to its success. The company did not just sell high-quality beverages; it sold a premium lifestyle through its branding and marketing. The company claims that its mission is “to inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.” (Company Information, n.d., par. 7). Starbucks management understood the importance of community and customer loyalty, provided a consistent coffee-house experience, and used it as a product differentiation strategy. Starbucks coffeehouses are a part of “Starbucks Experience”.
They are visually appealing and have a unique design that reflects the specific features of the surrounding neighborhood, provide fine music and free unlimited wi-fi. Starbucks successfully marketed its stores as neighborhood gathering places, where people come to do creative work or chat with friends and family. The company succeeded in creating a special experience by embracing a customer-centric approach, providing high-quality customer service in addition to the finest coffee.
Advantages and disadvantages of going global
Globalization in the economy is the concept that describes “the integration of economic activity across borders” (Hirst, Thompson, & Bromley, 2015). The advances in technology in the late 20th century, including the creation of comparatively cheap means of transportation and the development of global telecommunications infrastructure, are the forces that shaped globalization. In other words, globalization allowed more producers to distribute their goods and services globally, and now there are stores that sell goods from all over the world.
The intensification of the transportation of goods, services, and capital in the late 20th century increased the interdependency of national economies across the world. Many companies saw a growth opportunity in global expansion, due to the obvious advantages of globalization. The main advantage of international expansion is the fact that the company presents its goods or services to a much larger target market. Access to a large global market means bigger profits due to higher demand.
In other words, the more people buy a particular product, the higher the product sales will be. Increasing the scale of operations typically means lower production costs due to high volume, and this fact means higher profits can be achieved (The long-run – increases in scale, n.d., para. 1). In addition, a company can benefit by relocating its production facilities to countries with cheaper labor costs and less strict regulations.
Globalization allows the company to search for cheaper resources across the globe, which will help cut down costs and increase the company’s competitive advantage. The company can leverage its brand equity and offer its brand and resources to a franchisee for a fee, which will help achieve global presence at a minimum cost. Despite the advantages of globalization, building a global business means overcoming several unique challenges. It is much more difficult to coordinate company operations on a global scale: a company may find itself less efficient when growing too large (The long-run – increases in scale, n.d., para. 7).
For example, establishing a consistent level of customer-service quality requires maintaining company-wide policies and standards in every store, which may be opened in different remote locations across the globe. A global company needs an integrated communication technology network in order to maintain the flow of information between different departments and subsidiaries. A global corporation has to implement an effective operations management system in order to monitor and improve the company’s operational performance.
Global companies may also suffer the negative effects related to the principal-agent problem, the concept that describes the inefficiency that may occur when corporate management delegate important decisions to their subordinates. These subordinates may be located in different countries all over the world, making it difficult to monitor their performance and judge whether they act in the best interests of the company.
The evolution of Starbucks as a global corporation
In order to maintain the rapid pace of growth, Starbucks established a profitable growth strategy at the beginning of the 2000s. To expand Starbucks business to foreign markets, the company was divided into two business units, one responsible for North American operations, and the other, Starbucks Coffee International, responsible for opening company stores overseas (Kotha & Glassman, 2002, p. 2). Starbucks ‘ mission statement is to “establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” (Kotha & Glassman, 2002, p. 20).
The company chose Europe, Asia-Pacific, and Latin America as the main opportunities for expansion. More recently, the company entered the emerging markets of India and BRIC. When the company started its international expansion, it used the same strategy that led to its success in the domestic market. However, soon the company’s management saw that due to a variety of factors, the company’s strategy did not always work overseas.
Each particular country Starbucks chose to operate in had its own traditions, values, practices, laws, and regulations. The cultural conflict between the company’s strategy and the traditions of different countries fact required the company to be flexible and adapt its strategy. Starbucks used joint ventures as well as other alliances to gain cultural understanding and research every country thoroughly to differentiate its business according to local values and beliefs (Hart, 2011). One of the company’s top managers said:
The peak time in China is not 7 to 10 in the morning, it is from 4 to 6 in the afternoon. And there are also food preferences we had to adapt to. There is the holiday Yorkshire pudding that is big in the UK but does not work in New York. Breakfast sandwiches in Germany, for example, are made up of a hard roll with sausage and tomato and served cold. So we listen hard to what our partners in a region say (Hart, 2011, par. 6).
The company created a core set of products and provided the same premium experience in its every store. However, the company’s management kept an open mind when it comes to the introduction of new products to accommodate local tastes. For instance, in Japan Starbucks released sakura-themed latte and Frappuccino beverages (Baseel, 2016).
Another challenge faced by the company was the opposition to the globalization of Starbucks as a larger trend of opposition to globalization. Starbucks was seen as a threat to cultural diversity because, as was mentioned above, the company exports a certain image of an acceptable lifestyle adding to the establishment of universal global culture (Elliott, 2005). However, the homogenization of culture is a direct outcome of globalization itself, not Starbucks’ decisions.
The company’s top management claims their business model was not developed to hurt or eliminate local players: “We never under-price our coffee and it’s clear that we position ourselves so as not to undercut the pricing structure in the marketplace” (Kotha & Glassman, 2002, p. 3).
The overseas competition, however, was not as politically correct in their approach. When Starbucks started opening stores in key developed and emerging markets, it saw other companies copy its business practices, coffeehouse designs, and even the company’s logo. There were several major copyright infringement cases that required the company to devote resources to keeping its brand equity intact and differentiate itself from its competitors (Hart, 2011, par. 9). Particularly difficult was copyright infringement in China, where trademark disputes are still considered a new concept. Different Chinese companies used names that sounded like Starbucks and copied its green circle logo (Hart, 2011, par. 9). Nonetheless, the Chinese legal system helped Starbucks protect its intellectual property and keep its brand intact.
Another challenge that required Starbucks to reorient its business strategy was the need to maintain the availability of high-quality coffee beans throughout the year. Starbucks management feared that certain factors could deplete the supply of high-quality coffee beans, which is essential for company operations (Fridell, 2007, p. 256). In order to secure a steady supply of coffee beans, the company launched the preferred supply program, which provided above-average pay for environmentally responsible suppliers and motivated them to grow coffee for Starbucks (Roby, 2011, p. 19).
There are numerous opinions regarding Starbucks’ decision to go global. Some scholars believe that once the company has become a global corporation, it has lost its identity and turned into a moneymaking machine putting the desire to make the economic profit higher than the initial wish to satisfy the customers’ needs in high-quality coffee (Enz, 2010). The company’s top management argues that its successful expansion is directly linked to the quality of its service, and it is not compromised but maintained in all the company’s coffeehouses (Kotha & Glassman, 2002, p. 3). In addition, the company is a bridge connecting the poorest countries with the richest ones by providing them with coffee of premier quality.
This linking effect derives from the company’s ethical considerations and its promise to serve people identically without regard to the level of living in the country of a Starbucks store location. Moreover, it comes from the very nature of the phenomenon of globalization, which results not only in boosting the scale of a company’s operation but also increasing human connectivity and promoting exchanging lifestyles and cultures (Hult & Hill, 2015). It means that Starbucks’ expansion implies the exports of not only coffee products and desserts of high quality but also the perception of leisure time and luxury because even though hanging out in one of its stores is a costly experience, it is viewed as the synonym of fun and high standards of living (Campbell, McKinnon, & Stevens, 2010).
Benefits gained from going global
Starbucks’ gained many benefits from its global expansion. The company now has a significant global presence with coffeehouses in over 60 countries, and its brand is the most recognized one in its industry. Such strong brand recognition is the company’s competitive advantage which helps it achieve higher growth all over the world. Starbucks leverages brand equity by selling merchandise with its logo and licensing it to third parties. High brand recognition also allows Starbucks to further monetize their brand by producing packed beverages and other coffee-related products and selling them through retail stores.
The international expansion allowed the company to reach an unprecedented scale of operations, with some 22,000 stores across the globe opened today. The company’s scale means that it possesses superior distribution channels and sophisticated supply chain systems not available to smaller competitors. By going global Starbucks increased the power over its suppliers, and now the company has the power to get the best prices from its suppliers that local companies cannot get. Superior distribution channels allow Starbucks to expand its product range and sell new products through an exceptionally wide chain of stores across the globe, which immediately affects the company’s operating and financial performance.
Starbucks can leverage their scale and financial prowess to expand to emerging markets such as India, which provides further opportunities for economic growth. India is a growing economy with its residents only starting to embrace western trends. The decision to go global opened almost limitless opportunities for growth in developed nations, where middle classes only recently embraced the coffee industry. These nations include BRIC nations in addition to India, Brazil, and China. With the company’s financial resources, brand equity, and superior operations management systems, it can achieve global domination in the premium segment.
Starbucks stores are often located at high-traffic, strategic locations across the globe. The company’s financial prowess allows it to operate in the most expensive downtown and suburban locations, which further increases its market share. This fact elevates the appeal of the company’s products and significantly increases customer convenience.
The company’s scale also means that it is more stable during recession periods and is less affected by economic crises. Starbucks ‘ profits allowed the company to maintain growth during the financial crisis in 2008.
Conclusion
There is no denying that nowadays Starbucks is one of the central players in economic globalization. It stands in one row with Apple, Ikea, Google, and McDonald’s (Smallman & Brown, 2015). The devotion of Starbucks top management in creating a sustainable, global business has paid off. Now Starbucks is a globally recognized brand of premium coffee that operates its coffeehouses in many countries all over the world.
After three decades of building and expanding the Starbucks chain of stores, the company’s management came up with a number of strategies to improve every part of its business activities, and successfully overcame the cultural challenges by being flexible and customer-centric. Nowadays Starbucks can leverage its experience and financial resources to continue expansion into developing markets, and use its globally recognized brand to introduce new products to the market.
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