Strategy formulation of Starbucks sample essay
The purpose of this essay is to prepare a strategy formulation analysis required by the company. The company selected is Starbucks Corporation, commonly known as Starbucks, when they first started in Seattle, Washington in 1971, founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker; and became an American multinational company which started from scratch (Garza, n.d.). It was then incorporated on November 4, 1985, and is a roaster, marketer, and retailer of coffee. Starbucks offers a range of exceptional products include coffee, handcrafted beverages, merchandise, and fresh food. The company’s mission is “to inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time” (Starbucks, 2012).
Today, Starbucks is known as the largest coffeehouse company in the world, connecting with millions of customers every day with exceptional products and nearly 18,000 retail stores in 60 countries and is ranked 208 amongst the Fortune 500 companies (Starbucks, 2012).
The subsequent part of this essay will discuss in detail regarding the hierarchy of the strategic decision-making process to enter into Myanmar by means of three leading strategic models which are institution-based theory, Porter’s industry-based model, and resource-based approach. This essay will then provide recommendations comprise the suggested entry and ownership strategies to be considered by the company. Last of all, aspects and details within these topics will then be concluded.
Strategy formulation comprises the planning and decision-making which leads to the establishment of the company’s goals and the development of a strategic plan (Hodgetts-Luthans, 2005). These includes identifying external opportunities and threats into their long term objectives and therefore, generate, evaluate and select the strategies that best fit strategically for the company. Below are the leading strategic models in order to guide decision making.
2.1 INSTITUTION-BASED THEORY
The institution-based theory treats institutions as independent variables which focuses on dynamic interaction between institutions and organizations, and ponder strategic choices as the outcome of such an interaction (Peng, 2002, as cited in Oever, 2009). Therefore, it is acknowledged that strategic choices are not only bounded by industry conditions and firm-specific resources, but also by formal and informal constraints which would then lead to existing and potential risks and influences in the host area, in this case faced by Starbucks entering Myanmar. The institutional factors that may pose a threat are as below.
2.1.1 POLITICAL RISK
The political risk is the risk that the host country fails to provide a stable legal and regulatory environment, therefore significantly harms the investment (Bonell, Carroll, Kelp, & Ye, 2013). Based on the Political Risk Index by risk consulting firm Maplecroft, Myanmar is ranked the 5th in the world and is rated as extreme risk (Marsh, 2013). One of the main prevalent issues is due to corruption which poses a difficult operating environment for foreign investors. It is stated that even in 2012, corruption watchdog Transparency International ranked Myanmar as one of the world’s most corrupt nations (Mahtani, 2013). Other issues include communal violence and a government bureaucracy that is ranked bottom by Transparency International put early investors at substantial risk (Wettach, 2013).
2.1.2 TRADE BARRIER
Myanmar do impose reasonably high import tariffs, however as Myanmar is a member of ASEAN, it is required to eliminate nearly all its import duties by 2015 as part of the ASEAN Economic Community initiative (Vanderbruggen, 2013). Moreover, Myanmar has to abide by a stringent schedule of reduction of import duties under the “AFTA Plus” agreements, the free trade agreements that ASEAN concluded (Vanderbruggen, 2013). Hence, as trade barrier is reduced, this will attract more foreign investment and would thus benefit Starbucks in Myanmar as imported raw materials are cheaper which leads to obtaining higher revenue.
2.1.3 REGULATORY RISK
Although the government in Myanmar is gradually modernizing its regulatory framework, there is still a lack of stability in government policy and transparency in policy-making processes (Risk Advisory, 2013). Therefore, foreign companies operating in Myanmar, in this case for Starbucks entering Myanmar ought to be in a position to determine the practical consequences of any policy change, as the government has a poor record in communicating its decisions to the public (Risk Advisory, 2013).
2.1.4 CURRENCY RISK
Myanmar faces currency risk as it experience wild swings in exchange rates derived from lack of fiscal discipline, strong monetary controls, lack of technical expertise in handling complex financial reforms, and when the country is just re-entering the global economy. Effective April 2012, Myanmar introduced a manage float of the currency, enacting a long-sought policy reform that is expected to attract more foreign investors (Barta & Frangos, 2012). However, due to that, its currency keep plunging in value as more foreign dollars rush in to take advantage of business opportunities there and causing people to hoard dollars, expecting further rises and thus obtaining fewer customers (CNBC, 2013).
2.1.5 CULTURAL DISTANCE
To obtain a general idea about cultural distance of Myanmar, refer to Figure 1 and Figure 2 below which shows the cultural distance of Myanmar and U.S. It depicts that Myanmar culture has low power distance value which seems to be consistent with the economic system that developed in Myanmar after gaining independence, highly feminine, moderately individualistic, high uncertainty avoidance. Therefore, Starbucks need to be aware of possible problems caused mainly by cultural differences if entering Myanmar and learn more about Myanmar market and consumer expectations.
Figure 1: Cultural Distance of Myanmar (Nickerson & Rarick, 2006)
Figure 2: Cultural Distance of United States (Hofstede, n.d.)
2.2 PORTER’S INDUSTRY-BASED MODEL
Michael Porter invented the “Porter’s Five Forces Model” which is used to assess the attractiveness of the industry and the profit potential in the industry (Gabriel, 2006). All five forces mutually determine the intensity of the industry competition and profitability. Below illustrates the Porter’s five forces model in Figure 1.
Figure 3: Porter’s Five Forces Model
Source: (Porter, 2008)
2.2.1 RIVALRY AMONG EXISTING COMPETITORS
The force that industries generally pay the most attention to is the one regarding existing competitors (Grant, 2010, as cited in Bruzelius & Johansson, 2012). When there is rivalry among existing competitors, they use strategies such as reduce prices, introduce new products, promotions, and improvement in services to attract customers. According to Starbucks Annual Report 2009, their primary competitors for coffee beverage sales are quick-service restaurants and specialty coffee shops and therefore they believe that customers choose among the competitors primarily on the basis of product quality, service, convenience, and price (Starbucks, Corporation, 2009).
Among many of their competitors, Dunkin Donuts and McDonalds are the main players in the industry as these competitors compete in terms of their coffee. It is announced that those competitors as well want to venture into Myanmar (Maierbrugger, 2013). Therefore, in order for Starbucks to gain a competitive advantage in this industry in Myanmar, they have to formulate differentiation strategies to suit the local culture.
2.2.2 THREAT OF NEW ENTRANTS
If an entrant firm enters a well-established, mature market such as Starbucks, they often face existing firms that have economies of scale. Since Starbucks, a well-established company on the global market, they gain economies of scale, especially in marketing, R&D, and training; and need not spend much on advertising since they are already well-known as compared to a whole new firm, with a small scale, that will have a cost disadvantage (Koehn, 2008, as cited in Bruzelius & Johansson, 2012). New entrants have to face with entry costs to enter to the market. Starbucks is financially strong, thus have the ability to withstand start-up costs and investments, for instance when entering Myanmar, and can therefore be considered as a strong entrant and have access to large capital resources (Starbucks Corporation, 2009).
2.2.3 BARGAINING POWER OF BUYERS
The force of the buyer’s bargaining power is relative to the ability of buyers to force down prices, bargain for higher quality products, and higher level of services, thus increase competition within an industry (Porter, 1998, p.24, as cited in Bruzelius & Johansson, 2012). Starbucks acknowledges that ultimately buyers hold enough power to influence company pricing especially in this industry, therefore they actively collect feedbacks from their customers in order to fulfill as many customers demands and preferences as possible.
2.2.4 BARGAINING POWER OF SUPPLIERS
Firms within any industry require raw materials and thus often use suppliers for their production to a certain extent, and consequently are faced with suppliers with large bargaining power in terms of being able to charge higher prices or limiting quality or service (Bruzelius & Johansson, 2012). In the case of Starbucks when considering power of suppliers, they have an advantage whereby they are highly vertically integrated which reduces the involvement of suppliers, thereby reduces the risk of being subjected to suppliers that are strong in negotiations (Bruzelius & Johansson, 2012).
2.2.5 THREAT OF SUBSTITUTE PRODUCTS OR SERVICES
Threat of substitutes exists when the demand of a product is affected by the price of a substitute product. The primary substitute products posing a potential threat to specialty coffee – Starbucks coffee are the caffeinated drinks such as Red Bull and Coca-Cola that offer their products at significantly lower prices. However, there is a large difference in taste between these products. Therefore, consumers cannot directly substitute coffee for other caffeinated drinks. Additionally, the only direct substitute for specialty coffee is basic coffee, but basic coffee is deemed as considerably lower quality than specialty coffee. Consequently, this actually show that the industry face little threat of substitution.
2.3 RESOURCE-BASED APPROACH
Resource-based approach aspires to explain the internal sources of a firm’s sustained competitive advantage, in this case, determining Starbucks unique niche or competitive advantage which comprise of its strengths and weaknesses (Groen, & Kraaijenbrink, & Spender, 2010).
Starbucks understands concepts of brand identity and product differentiation as they acknowledged on what the consumer perceives and managed to differentiate themselves between other companies’ products or services. They apprehend this success depends significantly on the value of the Starbucks brand and relying on its excellent reputation for their product quality and superior service. Hence, this leads to brand inimitability as Starbucks brand name is recognizable in most countries around the world.
An important trade-off that Starbucks do to succeed is by putting effort on research when establishing on a new market, discovering local knowledge, and adapting Starbucks’ concept to suit the locals’ preferences (Bruzelius & Johansson, 2012). Starbucks sets to be a different kind of company that not only celebrated coffee and the rich tradition, but also brought a feeling of connection. These are a rarity among other firms.
Moreover, Starbucks was one of the first companies to offer part-time employees equity and health benefits, unlike its competitors and is rare which makes it difficult for others to imitate as most firms only aim for profitability.
Furthermore, Starbucks has been so successful because they mainly focus on quality and experience rather than price. Starbucks aspire to serve high quality coffee through service-minded employees in a coffee shop with nice ambience (Bruzelius & Johansson, 2012). But equally influential are the store design as well as the recruitment and training of the “baristas”.
Conversely, Starbucks’ weaknesses include operating in a monopolistic competitive society which would eventually cause the company to crumble. The organization has been able to maintain customers in the short run. Therefore, it will eventually reach equilibrium in the long run because the demand will ultimately decrease and result in a zero economic profit. Moreover, Starbucks offer great coffee and experience, but results in high prices of its products. In contrast, McCafe premium coffee offer lower prices and was better evaluated (Jurevicius, 2013).
Entry mode strategy is a vital decision in the internationalization process of a company as it directly impacts whether the company will succeed or not in its foreign expansion. The suggested entry and ownership strategies to be considered are licensing, joint venture, and wholly-owned subsidiary strategies because these are the international strategies that Starbucks carries out in its internationalization process.
Due to the uncertainty of Myanmar’s market, the political or economic condition, this instability will stimulate Starbucks to consider developing a licensee agreement as it can aid the company to enable their expansion in a more steady way, thus reducing risk (Ni & Santamaria, 2008). Moreover, Starbucks can decrease its expansion cost through licensing. However, licensing gives the company less central and tight control.
A joint venture with a local Myanmar partner enables both of the companies share the costs and risk, as well as the benefits. Moreover, Starbucks would reap the opportunity to explore Myanmar’s market and gain market knowledge and experience from the local company. Additionally, the local firm might have connections with the local government, thus eases the market entry for Starbucks. The drawbacks are that there is a possibility that major conflicts might occur and it is difficult to maintain balanced relationship due to cultural difference.
This entry mode is established through a Greenfield venture whereby Starbucks has 100% ownership and therefore, can have full control over its operation and 100% share of profits. Nevertheless, the investment cost is definitely high as Starbucks cannot get any assistance from other party and needs to bear the entire total risk which lies in the uncertain Myanmar market, political and cultural differences.
Recommended Entry Mode for Starbucks in Myanmar
Hence, it is recommended that Starbucks enter Myanmar through a joint venture as it the most suitable. As Myanmar is going through political and economical reform, it is facing unstable economy. Therefore, it is recommended to operate with a local partner as the nation does not have a strong rule of law.
Starbucks seeks to adapt to different local needs, preferences and influential factors in each country, thus they have to adapt its international strategy in order to satisfy the needs and requirements of every market. For Starbucks to remain a major player in this industry, they must differentiate themselves from their competitors and reinvent themselves with the ever-changing lifestyles, tastes and preferences. Myanmar should be part of Starbucks’ expansion as it provides a good opportunity for its internationalization process through a joint venture as the recommended entry mode.
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