Starbucks FDI

Comment on question 1:

Many of you launched into a lengthy discussion of why Starbucks began its foreign expansion by licensing its business format. However, please note that the question asks why it STOPPED doing so, so explaining why it began to do so does not count towards answering the question. This student’s answer maximizes its impact by going straight to the point: Starbucks desired greater control over its expansion strategy to move quickly in order to saturate the market and capitalize upon its brand image while it remains trendy.

1. The decision to stop licensing was motivated by the need for greater control of the company’s market growth strategy. 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. 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 .

Comment on question 2: The key point to answering this question is to explain why it is more advantageous for Starbucks to enter into joint ventures than to license its business format. This question appears at first glance to be identical to question 1, but note that whereas question 1 asks for the specific reasons why Starbucks became disillusioned with its licensing strategy, question 2 asks how joint ventures overcome the failures of pure licensing. Here, the student correctly notes that joint ventures give Starbucks greater control (compared to licensing) while at the same time permitting the company to retain access to knowledge of the local market through its joint venture partner(s). Note that joint ventures minimize financial risks relative to wholly-owned subsidiaries, but not relative to pure licensing (because there is no initial capital outlay for licensing agreements for the licensor).

2. Local joint ventures seem to offer Starbucks the best of both worlds. On the one hand, the fact that at least half of the newly-created company is owned by Starbucks gives the chain the possibility to control and influence the strategies implemented by the joint ventures’ managers. Starbucks’ quality norms (e.g. those concerning the manner of roasting coffee, serving products, creating a “seductive atmosphere” in a restaurant) and managerial know-how (e.g. expansion strategy) can be more easily transferred to a new company. On the other hand, the risks of failure (due to the lack of knowledge of local conditions, cultural differences etc) are minimised by forming a joint venture. The joint-venture partner knows the market well and can share its experience with Starbucks. In this sense, a joint-venture company is better than a wholly-owned subsidiary.

Comment on Question 3: This question asks you to compare the advantages of joint ventures over wholly-owned subsidiaries. The answer is very similar to the answer given in question 2 above. While wholly-owned subsidiaries offer parent firms the greatest amount of control, joint ventures may still allow the “leading” partner a satisfactory measure of control while minimizing the partners’ financial risks. Moreover, the local joint venture partners may be able to give the foreign partner valuable insight into local tastes and preferences necessary for Starbucks’ success. Please note that many of you stopped right here, without answering the second part of question 3: Why did Starbucks occasionally choose to acquire wholly-owned subsidiaries over joint ventures? The preferred answer is that Starbucks

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