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A Case Study of International Expansion: Starbucks Expansion into China

Harvard, Bachelor
5 pages, 6 sources

The case study sample below offers an insightful look into Starbucks’ remarkable expansion into the Chinese market. It provides an in-depth exploration of the cultural, operational, and strategic factors that the global coffee giant successfully navigated to thrive in a predominantly tea-drinking nation. This sample highlights key lessons in international business and cultural adaptation. If you’re seeking inspiration for exploring global market strategies or need a strong foundation for your own work, this case study is an excellent starting point.

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Introduction

Global expansion by multinationals forms one of the fertile areas through which to explore the intricacies of international business strategies. The case of Starbucks Corporation’s entry and subsequent expansion into the Chinese market forms one such development that best describes the duality of challenge and opportunity underpinning internationalization (Cooper and Nguyen, 2020). Starbucks, which is almost synonymous with the cultural ethos of coffee, entered China in 1999, a nation steeped in tea-drinking culture (Zhaozhe, 2023). This bold move presents a fascinating case study of how a foreign company navigated cultural, economic, and operational challenges to establish a strong presence in a market that is quite different from its home base. By examining the case of Starbucks, one gains insights into motives for internationalization, the barriers present, and the strategic decisions regarding choosing and implementing an entry mode. This paper critically reviews the process of Starbucks’ internationalization in China by considering the pros and cons of the method adopted by the company.

Company Background

Ambitious international expansion by Starbucks Corporation sets the stage for the company’s remarkable journey from a single store in Seattle to a global coffee giant. Founded in 1971, the company sold high-quality coffee beans to a niche market of coffee enthusiasts (Zhaozhe, 2023). Things started to take a dramatic turn when Howard Schultz joined the company in 1982 with a different vision of creating an Italian-style coffeehouse culture in America (Bisello, 2021). This would transform Starbucks from a regional roaster into a national chain of coffeehouses, not only selling high-quality coffee but also delivering a distinct “third place” experience between home and work. According to Musonera (2021), in the mid-1990s, Starbucks achieved phenomenal success in the United States domestic market, establishing a powerful brand and an ever-expanding number of stores.

Target Foreign Market Analysis

China, in the late 1990s, introduced Starbucks into a challenging, changing environment. Drinking coffee was not considered a routine for most people. In 1999, annual coffee consumption in China was less than 5 cups per capita, while over 400 cups were being consumed in the United States (Musonera, 2021). This cultural difference meant that Starbucks would need to engage not only in product marketing but also in creating a new consumer culture around the habit of drinking coffee. Doing business in the Chinese market was also quite a complex environment. There were many bureaucracies for foreign companies, regional diversity in consumer preference and buying power, and seeking out local allies to conduct their business better.

Internationalization Approach

Entering the Chinese market required a well-thought-out strategy by Starbucks, balancing global standardization with local responsiveness. Starbucks chose to enter the market through a series of joint ventures with local partners, a fact that became critical in determining the success of the decision (Musonera, 2021). This allowed Starbucks to leverage its local know-how while still having substantial control over both its brand and operations. In 1999, the first Starbucks store appeared on the mainland of China through a joint venture with Beijing Mei Da coffee company (Bisello, 2021). Later on, Starbucks established joint ventures with various other local companies across the region. One of the most important joint venture deals was made for expansion in Shanghai and the Yangtze River Delta region with Taiwan-based Uni-President Enterprises Corporation. Such joint ventures helped Starbucks to understand local consumer tastes better, find high-potential real estate, and make their way through the regulatory environment.

Advantages of the Adopted Method

One advantage of the joint venture approach was that the method gave the company the necessary local knowledge and know-how. The Chinese business environment has complicated regulations and consumers with quite specific preferences, making this market highly problematic for every foreign entrant (Kim et al., 2020). Through the alliance with already well-settled local companies, Starbucks gained great insight into market dynamics, the behavior of the final consumer, and the peculiarities of the regulatory environment that would have been hard and relatively long to get on its own.

Another advantage of the joint venture model was that it allowed Starbucks to mitigate some of the financial risks associated with international expansion. Market entry, particularly into a market as large and heterogeneous as China, is an intensive activity investment (Gammeltoft and Cuervo, 2021). Being able to share these investments and operational costs with local investors meant that Starbucks was able to expand faster with less capital exposure. This was particularly important in light of the uncertainties associated with introducing a predominantly Western concept coffee shop culture to a traditional tea-drinking nation.

The other advantage of the joint venture approach was that it hastened market penetration. The local partners contributed with pre-existing networks, relationships with suppliers and landlords, and knowledge of the prime real estate locations (Kim et al., 2020). This accelerated Starbucks’ ability to secure favorable store locations and establish a strong presence in key urban centers. Speed of expansion was critical in establishing Starbucks as a category leader in the nascent Chinese coffee shop market before significant competition could emerge.

In addition, the joint venture approach made it easier to overcome cultural and linguistic barriers. In-country partners supported Starbucks in reworking the product and marketing strategies to better appeal to Chinese consumers (Gammeltoft and Cuervo, 2021). For instance, local snacks, such as mooncakes, helped Starbucks appeal to local tastes while remaining consistent with the core of its brand. The insight the local partners were able to give was critical in shaping the Starbucks experience to local tastes without losing its global appeal.

Disadvantages of the Method Adopted

One of the main disadvantages was related to conflicting interests between Starbucks and the local partners or differences in their management style. Differences in business culture, strategic priorities, and operational approaches inevitably cause friction, slowing down decision-making or complicating global standards (Gammeltoft and Cuervo, 2021). Such partnerships also involve a lot of time and resources that could be utilized elsewhere in the business. For example, the resources used in conflict resolution could be used to expand investments.

Other considerable disadvantages involved were lessened control over operations and brand management. While Starbucks had excellent standards when it came to quality, with the number of participating partners throughout disparate regions in China, it could be a challenge to attain consistency in customer experience and brand presentation (Kim et al., 2020). This structure required more coordination and monitoring for complete uniformity. Poor, consistent brand representation risks diluting the premium image necessary for Starbucks’ success in the Chinese market.

In addition, the joint venture model required Starbucks to share profits with local partners. While the joint venture arrangement helped reduce initial investment risk, this may increasingly constrain longer-term profitability as the brand establishes a strong presence and becomes more successful in the Chinese market (Gammeltoft and Cuervo, 2021). As Starbucks grew in China, the sharing of profit with the partners could have been more balanced compared to the structure of wholly-owned subsidiaries.

Furthermore, reliance on local partners for market intelligence and operational support would hinder Starbucks from developing rich knowledge about the Chinese market. This would slow down the learning curve and the company’s ability to navigate the business landscape in China independently (Kim et al., 2020). In the long run, this would be a strategic disadvantage, especially if Starbucks wanted to make significant changes to its business model or expand into new areas within China.

Critical Evaluation of the Internationalization Process

Motivation for internationalization

Starbucks’s motivation for entering the Chinese market aligns with traditional internationalization theories, such as the Uppsala model. The model postulates that firms typically internationalize gradually through stages, starting with the closest markets, which have a lesser psychic distance (Bisello, 2021), and entering progressively more distant ones as they learn from experience and develop knowledge. Starbucks’s growth opportunities had reached a limit in the domestic market, and the company aimed to extend its business into China despite the huge psychic distance.

Another factor is that the company was in an excellent position to establish its brand as a global one before any other rival company could make any substantial moves in developing markets. China, with its vast population and quite rapidly growing economy, presented a beautiful opportunity (Zhaozhe, 2023). Although China was a tea-drinking nation, its growing openness to Western influences and its mushrooming middle class made the country an attractive market for Starbucks’ expansion plans.

Barriers to internationalization

One of the significant barriers to Starbucks was cultural distance. The profoundly entrenched tea culture in China presented a solid barrier to entry for any company based on the concept of drinking coffee (Zhaozhe, 2023). Additionally, the “third place” between home and work, integral to Starbucks’ value proposition, was totally alien in Chinese society. This was one of those cultural obstacles whereby Starbucks wasn’t selling a product but instead creating an entirely new consumer behavior. The company tried to get around this by positioning the brand as high-end and aspirational and by gradually introducing the Chinese consumer into the world of coffee. It added tea-based drinks and local snacks to its menus, attempting to strive across the cultural divide.

The regulatory barriers were also high. The complex and sometimes not-so-transparent regulatory environment of China had posed quite a few challenges before the foreign business entities. The regulations involving foreign ownership, property rights, and business operations were particularly demanding (Bisello, 2021). Starbucks chose the joint venture model in part due to regulatory barriers. By partnering with local companies, it can work its way more effectively into the regulatory landscape, leveraging the understanding of the local laws and the relationships with the regulatory bodies of its partners.

Current Levels and Trends of Global Trade and Business

Starbucks’ entry and expansion in China reflect a number of critical trends in global trade and business. The company is well-placed strategically, given the increasing globalization of markets and the rising importance of emerging economies. When Starbucks entered China in 1999, it was a country that was equally facing rapid economic growth (Bisello, 2021). An opening-up stance toward foreign investment is a part of the more significant trend of developing economies as major players in world trade. Indeed, the trend has kept on going, with China emerging as the world’s second-largest economy while turning into a vital market for multinational corporations such as Starbucks.

The coffee giant’s strategy also shows the rise of “glocalization” in China. The idea behind offering global products or services is to suit the taste and liking of local consumers. Starbucks quickly realized the need to redesign offerings in the Chinese market, where tea-based drinks and local snacks have been launched alongside its traditional coffee (Musonera, 2021). This testifies to the more significant trend in international business, which is to make personal and locate the products and services offered while allowing global brands to retain their core identity and appeal.

Modes of Entry Available to Businesses in The International Process

Looking from the perspective of market entry strategies, joint ventures were the primary entry mode for Starbucks’ entry into the Chinese market. This reflects a nuanced understanding of surmounting the challenges and grasping the opportunities during international expansion (Zhaozhe, 2023). A joint venture is among the modes of entry a firm may adopt in the process of internationalization, each having relative advantages and disadvantages. For example, exporting bears shallow risk and investment against low control in marketing and distribution in the foreign market.

This approach allowed Starbucks to better rely on locals to handle China’s complex regulatory and cultural ecosystem. Of course, the application of joint ventures would reduce the liability of foreignness, which is a necessary tradeoff when multinational firms expand abroad (Zhaozhe, 2023). Secondly, by sharing investment with local partners, Starbucks mitigated the risks associated with entering an unfamiliar market, a crucial consideration given the significant cultural and economic differences between the U.S. and China.

Conclusion

Starbucks’ internationalization process in China shows that in any successful global expansion, there needs to be a proper balance between global standardization and local responsiveness. It proves that companies can provide reasons for other companies to hurdle cultural and economic obstacles through proper approaches in order to become strong players in foreign markets. Such flexible and judicious approaches to internationalization will, therefore, be critical in the relentless evolution of global markets for the eventual success of companies within the international environment.

References

  1. Bisello, G., 2021. Starbucks and Illycaffé: different strategies to successfully enter the Chinese coffee market. http://dspace.unive.it/handle/10579/20350
  2. Cooper, M., and Nguyen, Q.T., 2020. Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda. International Business Review29(3), p. 101692. https://www.sciencedirect.com/science/article/abs/pii/S0969593120300305
  3. Gammeltoft, P., and Cuervo-Cazurra, A., 2021. It enriches internationalization process theory, providing insights from the study of emerging market multinationals. Journal of International Management27(3), p. 100884. https://www.sciencedirect.com/science/article/pii/S1075425321000636
  4. Kim, H., Wu, J., Schuler, D.A., and Hoskisson, R.E., 2020. Chinese multinationals’ fast internationalization: financial performance advantage in one region, disadvantage in another. Journal of International Business Studies51, pp. 1076-1106. https://link.springer.com/article/10.1057/s41267-019-00279-9
  5. Musonera, E., 2021. Strategic marketing case analysis: Starbucks. Journal of Business and Social Science Review2(11), pp. 12-22. https://jbssrnet.com/wp-content/uploads/2021/12/2.pdf
  6. Zhaozhe, W.A.N.G., 2023. Analysis of Starbucks in China. Psychology13(5), pp. 223-228. https://pdfs.semanticscholar.org/c02b/a3709d844ec89bf70a397d3f0f860490052c.pdf
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