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Starbucks Corporation’s Entry into China

Company Background

The Starbucks Company is a popular brand operating in over 40 countries around the world. The company was initiated in 1971 in Seattle, on the concept of the Italian roadside café’s and bistros which served snacks, small meals along with freshly brewed espresso coffee. The business process of the company is that it buys and roasts high quality coffee beans and sells them as flavored and original brewed beverages.

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Now however the company has diversified and also started to offer snacks, meals as ell as branded coffee beans to customers at the retail outlets as well as departmental stores. “Additionally, Starbucks produces and sells bottled Frappuccino® coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company. The Company’s objective is to establish Starbucks as the most recognized and respected brand in the world.” (Starbucks Official Website)

Current Situation

Current Performance

In 2001 the revenue of the company stood at $2,649 million as compared to $975.4 million in 1997. The diluted Earnings Per Share (EPS) for the company increased from 0.35 in 1997 to 0.46 in 2001. The Return in Equity (ROE) for Starbucks was at 14.4% with 380 million outstanding shares and a market value of $5,639.6 million

Business Strategy

Vision

The vision of the Starbucks Company is “establish the company as the most recognized and respected brand in the world” (Baru et al., 2002)

Mission

The mission of the company and its enterprise strategy is to establish the company as a premium provider in the market for coffee and coffee based products while still maintaining the standards and principles of the business

Objectives

  • The objectives and the guidelines devised by the Starbucks Company are as follows
  • To provide an excellent working environment for the human resource while respecting their rights
  • Embrace and promote diversity in the business
  • Adopt and retain highest level of standards for quality in purchasing, roasting as well as delivery of its products, i.e. coffee.
  • Increase and promote customer satisfaction
  • Contribute and provide for the community where the business operates in order to improve their living standards and provide them with facilities
  • Keep on introducing new products and innovative services for its customers in the various market segments.

The retail goals of the company pertain to becoming the leading retailer and brand for coffee in all the markets where the company operates. This is to be achieved through provision of superior quality products and excellent service quality. The company is employing the expansion into new markets strategy to increase the market in which it operates, the franchise operations are being employed by the company for its international operations.

Policies

The policies employed by the company include sharing information with its stakeholders and partners, developing innovative solution to the problems promoting environment health and using environmentally friendly products, and integrating the financial performance and growth of the company with environment sustainability strategy.

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Strategic Managers

The key people in the strategic management team for the company include Howard Schulz whose contributions to the company have shaped the structure of Starbucks and its position in the market. The other two key people who are on the team include Howars Behar who is extensively experienced in retail management of various stores and Orin Smith who is an accomplished financial manager. Another prominent person is Dave Olsen who is the senior vice president for Culture and immersion who is responsible for ensuring Starbucks core values are integrated with the operations in the international market as well.

The management at Starbucks is diverse in terms of their origin, ethnicity as well as gender ratios. The gender ratio of employees at Starbucks is 66 percent females and 34 percent males. The Caucasian people employed by the company amount if 69 percent of its workforce, while 31 percent of the people are people of color.

External Environment

The analysis of the external environment for the Starbucks Company and its operations in china is depicted below.

Political

China predominantly is a communist country with centralized economic decision making. However in 1978, market oriented reforms were introduced to open the markets in china up for investment and growth. The economic condition and working environment is very attractive to foreign investors, therefore increasing FDI in the company at an accelerating pace. Recently in 2002 a policy has been passed whereby the Chinese market has been furthered opened by restricting government intervention and increasing promotion of private investments by foreign parties. This has also come about due to the entrance of China into the World Trade Organizations (WTO) in 2001.

Economic

The Chinese market and the economy is one of the fastest growing economies field by low cost of operations and abundance of human resource. The country has observed immense incremental growth since the 90s, which is mostly attributed t the investments made by foreign companies in mainland china. In the first nine months of the 2002 financial year, the direct foreign investment increased by 14.7 percent from that in 2001. It is predicted that the GDP of China will surpass that of France by 2005 and by 2020, the country will be boasting its position as the third super power of the world. Such an environment is a promising environment for the operations of Starbucks

Social

As a result of an open market the culture and consumer spending pattern in amongst the 0people in China is changing. The younger generation of the Chinese population is more influenced by the western traditions and trends as compared to the older generations. The restrictive policies of the government for children in a family has increased the availability for disposable income in the Chinese market, which is now being spent in leisure activities and at American and western eateries. Additionally the media and the influence of the western culture, particularly that of America has increased the consumption of coffee and coffee based products. This is a significant change for a predominantly and traditionally tea drinking nation

Technological

China is one of the most technologically advanced countries where innovations in technology are taking place at an incremental pace. The advancing communicative technology and the internet enables the foreign direct investment companies to operate effectively and efficiently in China.

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Internal Environment

Corporate Structure

The corporate structure of the company is that of a lean hierarchy with a widely distributed management in the global market. The operations of the company are highly decentralized with regional headquarters for Europe, Africa, Asia, North America and South Africa. The main corporate headquarters of the company however are situated in Seattle Washington.

Corporate Culture

The corporate culture at the Starbucks organization is to derive organization growth from employee performance productivity and employee satisfaction. It is the value of the company to develop the employees and provide them opportunities for growth. Aside from this the company is highly focused on utilizing innovative strategies for its operations and promoting sustainability of the environment through used of recycled materials in its packaging and in store furnishings.

Corporate Resources

The corporate resources that are available to the company are the financial resources, marketing resources, human resources, operational as well as the technological resources. The biggest marketing resource for the company is the brand name of the Starbucks Company and the premium high quality and associations which come with it. The financial resource of the company is its robust performance in the past few years which has increased the share value as well as the equity value of the company.

The technological and operational resources employed by the company are innovative high end technology based which support the standard operations of the company in all the international markets while allowing for a small degree of customization for the local communities and customers. The human resource is one of the strongest resources available to the company. The company invests extensively in developing in human resource which has becoming the key success factor for Starbucks.

Porter 5 forces Analysis

Rivalry and competition amongst established firms

China is predominantly a tea drinking country with their culture and traditions rooted around the tradition tea ceremonies. However with globalization taking place the younger generations in the country is more attracted to coffee. The Chinese market for coffee has four main coffee retailers Zhen Guo Coffee a Japanese coffee store chain, Yi Shi and Xian Long Lin form Taiwan as well as Jie Rong from Hong Kong. Following the footsteps of Starbucks, Seattle Coffee Company has also entered the Chinese beverage and coffee market. This has intensively increased competition in the market.

Threat of new entrants

The threat of new entrants in the Chinese beverage and coffee market is very high, as the initial capital and investment required to setup business is small with less operational costs for running the business. Additionally the market for coffee drinkers in China is gradually increasing and the growing market with low barriers to entry is an incentive for new entrants to the Chinese beverage and coffee market.

Bargaining power of suppliers

The suppliers for the coffee chains in China are few and far between. Most of the suppliers are international companies or importers, as the nature of the coffee crop and the climate in China makes it difficult to grow the beans here. As a result suppliers import quality coffee from Europe, Brazil and Africa and tend to demand premium price for their products.

Bargaining power of buyers

Initially the bargaining power of the suppliers was restricted as they had few choices when it came to consuming coffee in China. However with the changing traditional and social trends, the increase in the consumption of coffee as well as the various coffee chains opening in mainland China the buyers have more choice and therefore more bargaining power.

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Threat if substitute products

The main substitute product for coffee in China is the tea. Tea shares a cultural and traditional link with the Chinese people making it the choice of drink for them. Aside from this the tea that is consumed in china comes from various roots, leaves and plants, making the taste and the function of the drink very diverse. Therefore it can comprehensively be highlighted that the main threat faced by coffee in china is form Tea and other caffeinated fizzy drinks which are popular amongst children and the younger generation in the region.

VRIO Matrix

The VRIO Matrix depicts the value, rareness, imitate-ability and the organizational analysis.

Resource Valuable Rare Costly to Imitate Exploited by Organization Competitive Implications
Marketing Yes Yes Yes Yes The brand of Starbucks is unique and a very strong competitive advantage of the company.
Finance Yes Yes Yes Yes The company reinvests its profits into the business without paying out dividends. This has helped the share value of the company to grow immensely and strengthen the financial position as a competitive advantage for the company.
Technology Yes Yes Yes Yes The company uses state of the art and innovative technology to make its operations lean and provide customers with diverse product offerings. This is one of the most important strategic advantages the company has over others in the region of China.
Operations Yes Yes No Yes The operations of the company are based on the license style of business which has been exploited by the company to expand into diverse and emerging markets of coffee consumers.
HR Yes No No Yes The company prizes and developed its HR internally. It promotes equal opportunity and wok amongst the retired and elderly. The company has been voted as the top 100 companies to work for which is a prominent strength of the company as well as its organizational goal and objective.

5 ratios that have significance to Starbucks’ strategic audit.

The five most significant and important ratios for the Starbucks company for a strategic audit are the debt ratio, the return on equity ratio, the current ratio, the market value and the dividend payout ratio. The debt ratio is important as it depicts the debt of the business against the equity. Currently it stands at 0.40% in 2001. The return on equity ratio for the company is at 14.40% which depicts high returns for the company on the capital which is invested by it into the business and the market. The current ratio provides the liquidity status of the company which is currently at 1.33. The dividend payout ratio is also significant as it stands at 0.0% which means the company has been operating without paying out dividends to its shareholders, while still maintaining a high share value in the market. The market value of the company is at $5,639.90 million

Analysis of Strategic Factors

The situation analysis of the company is conducted through a SWOT analysis which highlights the strengths, weaknesses, opportunities and threats.

Strengths

The Starbucks Company has a strong brand image which contributes to most of its success and popularity in the market. The strong image and positioning of the brand of Starbucks in the market is derived through consistency of service quality and high product quality standards. It enables the company charge premium prices for its products. Other strengths of the company include the robust financial performance of the company and the large scale of international and well as global operations of the Starbucks Company.

Weaknesses

The weaknesses that plague the company pertain to the weak compliance function which has led to several legal proceedings. The other weaknesses the company has include low level of productivity from the employees and a limited / narrow mix of products primarily based on coffee and coffee based products.

Opportunities

The opportunities that are available to the company pertain to the entrance of the company into new and emerging markets like China, India and UAE. The Hear music label can enable the company to form relationships and alliances with musicians and artists. The market for specialty coffees has been increasing and the strong line of specialty coffees by Starbucks can enable the company to attain a large share of the market.

Threats

The threats that are faced by the company pertain to the intense competition that it is facing form local and traditional coffee bars and cafes as well as the volatile coffee prices in the market. Moreover the controversy of the Forbidden City can also negatively affect the company in its operations in the future.

Strategic Alternatives and Recommended Strategy

Starbucks in China has faced problems pertaining to the culture of the organization and the history culture of the Chinese market. Due to this the company has been affected by the Forbidden City controversy in which the operations of the company store in the scared city is highly criticized upon by the Chinese.

The alternatives that the company has to better position and present itself to the Chinese market is to incorporate the Chinese culture and tradition in its approach to business and dealing with customers while maintaining the service level and standards of its operations. For this the company can customize its menus to the Chinese market by offering flavorings of tradition Chinese herbs and teas with the Starbucks coffees as well as including tradition Chinese snacks like duck. Aside form this corporate culture in the region of China can be customized and more diversified so as to not offend the Chinese market with their operations.

Implementation

The strategies mentioned above can be implemented by changing the atmosphere for Starbucks stores in China, making them reflect a fusion of Starbucks and modern/contemporary Chinese culture. This can also be reflected in the advertising and marketing campaigns launched by Starbucks in China.

For incorporating the Chinese culture in the menus and product offering of the company, Starbucks will have to carry out extensive product and service related research and development specific to the South East Asian and Chinese market. The results can provide which menu items would be appreciated and preferred by the Chinese coffee market.

Evaluation and Control

In order to be effective in deploying the market specific and customized corporate and marketing strategies, the Starbucks company needs to setup a monitory and control set up. Specific objectives for the strategy deployment need to be develop which highlight the desired end results in terms of strengthening of the Starbucks brand and image in China as well as the increasing the market of coffee consumers. Additionally an external audit program can be launched to evaluate the performance of the business.

References

Baru, A., Hou, Y., Patel, V., Spinnenweber, B., Talera, A., Wuson, K., Starbucks Entry in to China, School of Hotel Administration Cornell University. Starbucks Official Company Website. Web.

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