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[1].
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.[2]
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 either wanted to buy out a competitor, or was unable to find a suitable local joint venture partner, or because Starbucks needed even tighter control than what the joint venture format would have given.
3. Joint venture is tantamount to taking the best of both worlds from licensing (risks of failure due to the lack of knowledge of local conditions is smaller) and full ownership of a subsidiary (the possibility of a stricter control). This rationale is generally valid. Nonetheless, paraphrasing Otto von Bismarck, management is not an exact science and exceptions do occur. In the case of the Seattle Coffee Co., the reason for buying out the company was that the firm was trying to act as a successful competitor. By buying it out, Starbucks aimed to achieve two objectives: entering the British market and removing a possible competitor. Furthermore, Seattle Coffee had already built a chain in the UK, which made Starbucks’ entry easier. In the case of Thailand, one may conjecture that the step was probably motivated by multiple factors. Firstly, Coffee Partners may have been unwilling to form a joint venture company: they invested much money, and now the contract was to be totally renegotiated, so they feared losing much of their profits by starting to run its operations under a new strategy (which they may not have fully espoused). Forming a joint venture with another company was not an option either - it would have taken time and effort. Hence, buying Coffee Partners was the fastest way to establish a strong market position. Furthermore, buying the company was once again removing a market competitor. Coffee Partners most likely gained at least some know-how from licensing Starbucks’ model, which made it a potential rival of Starbucks in the future.
Comment on question 4: The preferred answer for this question is the market imperfections (internalization) theory. The student goes beyond the call of duty by explaining why other theories fail to explain the international expansion strategy adopted by Starbucks (this was not technically required for the maximum credit for this question), but I have included them in the hopes of convincing those of you with alternative answers that your answers are not the preferred response based on the facts of the case.
4. 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, I 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.
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[1] Obviously, Starbuck could make a special clause in the licensee agreement concerning market strategy. Nonetheless, contract might be hardly-enforceable not only due to the lack of know-how, but also due to a poor quality of judiciary in some countries.
[2] It is important to notice that joint-venture does not eliminate the risk of creating a competitor – it only minimizes its repercussions. In the event Coffee Partners sells its shares of the joint venture and decides to open its own chain, Starbucks retains its position in the market, as it has the largest chain.