Case Study on Starbucks

Key Aspects, Country and Company Examples:

Traditional companies and markets are obsolete. The economy is changing. Companies are going global and initiating change in their strategy, culture, structure, and technology. U.S. companies are expanding their presence into different nations. Different nations have different political, economic, and cultural institutions. Hill (2000) suggests that there are different strategies when a company pursues international competition. This case study will consider the pros and cons of these strategies and discuss various factors and tactics that affect a company entering a new market. This case study will introduce a country risk analysis for Brazil describing six aspects: (1) history, (2) climate, (3) culture, (4) political risk, (5) economic and financial risk, and (6) legal risk. Next, the case study illustrates Starbucks Coffee as a new player in the Brazilian market. This case study will define four aspects of the SWOT analysis, discuss their importance, and show their impact on the organization. Next, four key aspects will be described: (1) human resources, (2) legal and ethical issues, (3) supply chain, and (4) information technology. Finally, specific company examples will be offered to demonstrate how these aspects are practiced at Starbucks.

Country Risk Analysis:

In order to fairly assess the risk factor of foreign direct investment, several factors are taken into consideration. One of the most crucial aspects of determining risk when entering a foreign market is gaining a clear understanding of who we are, and what is our product is. We have chosen Starbucks as our company and introduce the all around Starbucks product including atmosphere, customer service, taste, touch, aroma, and feel into the Brazilian marketplace. Collectively, we have considered Brazil a moderate risk in our analysis.

Climate

According to Edgar (2003), Brazil is more like a continent than a country. Brazil's climate makes it rich in its natural resources. It is geographically larger than the United States. It is the fifth largest nation in physical size and the largest country in Latin America. With ninety percent of its territory lying between the equator and the Tropic of Capricorn, Brazil is the world's largest tropical country. The Amazon region has the world's largest river system. The Amazon is the source of twenty percent of the world's fresh water. Brazil's climate varies from arid scrubland in the interior to the impassable tropical rainforests of the northerly Amazon jungle and the tropical eastern coastal beaches. The south is more temperate. Rainy seasons occur from January to April in the north, April to July in the northeast, and November to March in the Rio/Sao Paulo area. Brazil's various climates have contributed greatly to its economic well being. Its dynamic climate is the cornerstone for its generous crops. Brazil is the world's largest producer of bananas, coffee, and orange juice. It has the world's largest iron mine and vast stores of precious minerals (Edgar, 2003). Climate risk factor is low.

Culture

According to Executive Planet (2003), Portuguese is the dominant language in Brazil. Brazilians have a strong cultural identity. Brazilians do not perceive themselves as Hispanics, and will take offense if addressed in Spanish. In business culture, English is widely spoken. Women business travelers have few problems dealing with male colleagues in Brazil. Business negotiations require several trips to arrive at a satisfactory conclusion. Brazilians have the image that North Americans jump directly to business building relationships of trust. Valuing people and relationships over business is essential. Therefore, changing a negotiating team can jeopardize an entire contract and is a major breach in Brazilian business protocol. Small talk should always precede business talk. Leaving a business meeting as soon as it is over is another offense leaving Brazilians with the impression that they think you have more important things to do. Business cards and presentation materials should be readily available and printed in both Portuguese and English. In Brazil, personality, cultural awareness, and other interpersonal skills will win a Brazilian counterpart over charts, graphs, and other empirical data. Brazilians conduct business only through personal connections. There must be an implicit understanding that the business relationship will be long term. Official business hours are 8:30AM to 5:30PM. Business appointments are generally scheduled from 10:00AM to noon, the 3:00PM to 5:00PM allowing time for "meio-dia" which is a two to three hour midday break. According to Executive Planet (2003), Brazilians are very personal and close in nature. Brazilians tend to stand very close to each other. Greetings are made with long handshakes and noticeable eye contact. Women most often greet men and women with a touching of the cheeks or a kiss on both cheeks.

Frequently touching of the arms, hands, or shoulder occur during conversation. Machismo in Brazil is subtler than other Latin-American countries. It is more important for men to appear self-assured and in control at all times. Women are perceived as equals in business and society. Brazilians are one people, with a single culture. Starbucks has proven a strong ability to adapt to the cultures in which business is conducted making the overall cultural risk factor low.

Economic & Financial Risk:

According to Nations of the World (2003), Brazil's economy was one of the largest in the 1990's; inflation and devaluation of the real, Brazil's currency, have taken their toll on the economy. The International Monetary Fund approved a $30 billion loan in August of 2002 to help boost the economy and decrease the $260 billion debt when the country was close to meltdown. The success of these measures could in fact be Brazil's steppingstones on the road to first-world benefits of prosperity and social justice. For Starbucks, the absence of inflation plays as a major determining factor to entering this market. For Starbucks, the ability to source and developing a process to roast coffee in Brazil can essentially have a positive economic impact on the Brazilian economy.

According to the Economist (2003), in the early 1990's, one in four Brazilians continued to survive on less than $1 per day despite Brazil's economy being one of the largest in the world. Currently 3.60 real, the currency of Brazil, are equal to one U.S. dollar. One year ago the exchange was 2.43 real to the dollar. According to the Economist (2003), the war with Iraq has been a factor in the recent slip in the value of Brazil's currency.

Any sharp devaluation of the real will raise the debt burden of Brazil, regardless of a heightened primary surplus. Thus, the exchange rate for both Starbucks and Brazil becomes a critical factor in the successful fortitude of this global business venture. The overall economic and financial risk factor of Brazil is definitely moderate at this time. As noted above, there is great opportunity for both financial success and economic hardship for the country and Starbucks.

Legal Risk:

When legal risks in a country are high, an international business might hesitate entering into a long-term contract or joint-venture agreement with firms in that country. This is due to the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. This is not the case with Brazilian Corporate Law. Some examples of successful performances by foreign investors are, American Phillip Morris, French Rhodia, Korean Samsug, English Glazo Wellcome, Swedish Electrolux and the list goes on and on. The financial sector has also seen an increasing participation of foreign banks, English Lloyds, Spanish Santander, German Dresdner and Hong Kong Shanghai Bank Corporation. Many other institutions await Banco Central's authorization to begin operations in the country (Alvim, 2002).

According to Alvim (2002), in spite of the risks, analysts believe that the Brazilian economy is on firmer ground now than in the past. As long as the government keeps its consistency and commitment to the economic reforms, Brazil will remain a top choice for foreign investors. Recent research released by Site Selection, the official publication of the International Development Research Council, shows that Brazil is the fifth investment destination recommended by 24 percent of the world's 100 largest corporate advisors. It shadows only to the United States and China, tied in first place, and chosen by 47% of the consultants; Mexico, with 30% and the United Kingdom, with 27%. The Brazilian market is preferred over Malaysia, Thailand, Japan, Canada and Germany (Alvim, 2002). From a legal perspective, the risk is low.

SWOT Analysis:

According to Mind Tools (2003), a SWOT analysis is a very effective way of identifying a company's strengths and weaknesses, and of examining the opportunities and threats faced. Carrying out an analysis using the SWOT framework helps a company focus specific business activities where there is strength and where the greatest opportunities lie. SWOT consists of five basic areas: (1) strengths, (2) weaknesses, (3) opportunities, (4) threats, and (5) trends. We will discuss the first four key aspects and give specific examples. We will approach the SWOT framework using Starbucks Coffee entering a new market, Brazil.

Strengths

Starbuck's is an organization that is able to bring several strengths to the Brazilian marketplace. Starbucks mostly purchases premium green coffee, certified as Fair Trade Coffee. The Fair Trade Coffee Agreement ensures local farmers receive a guaranteed price for their harvest above the prevailing market price, thus helping to improve their economic stability. Commitment to Origins is Starbuck's strong commitment to coffee producers, their families, communities, and the natural environment to help promote a sustainable social, ecological, and economic model for the production and trade of coffee (Starbucks, 2003). This precedence setting commitment sends a strong message to the world economy that Starbucks is committed to preserving the best interest of farmers, the economy, and the environment.

According to Starbucks (2003), with nearly 900 coffeehouses in 22 markets outside North America, it is clear that Starbucks passion transcends language and culture. Expertise and experience in entering new markets is another strength that Starbucks brings to the table. Starbucks further magnifies this ongoing business practice by its dedication in supporting communities around the world where Starbucks lives and works, as well as in the origin countries where Starbucks coffees are produced.

Weaknesses

As with any new idea, one must consider both the obvious and the subtle areas of marketing vulnerability. One of the most obvious weaknesses for Starbucks market in Brazil would be that they do not exist. It is the South and Central American countries that provide Starbucks with coffee beans along with all the other specialty coffee companies in the United States. It is understandable that these countries are probably not the most likely for coffee companies, of other countries, to invest in their markets. The fact that there is no research from the Specialty Coffee Association of America, or other coffee companies doing business in Brazil can make it very expensive for Starbucks. A tactic to overcome this is to develop roasting and distribution processes in Brazil to avoid importing and exporting associated costs, thereby reducing costs while continuing the product offering of neighboring countries.

Another weakness for Starbucks is dealing with a country that is very traditional. Researching a countries culture is one of the most important factors before "starting up shop." What is the success rate of any other American beverage product in that country? Like many other South American countries, new products are foreign as well as expensive and Brazilians may not find themselves susceptible to change, or opt to purchase specialty coffees. Extensive and appropriate research that determines the appropriate Brazilian niche can combat this weakness.

Opportunities

It is clear that Starbuck's has been successful in appealing to all five senses of its customers - through the enticing aroma of the beans, the rich taste of the coffee, the product displays and attractive artwork adorning the walls, the contemporary music playing in the background, and even the cozy, clean feel of the tables and chairs. Though the startling success is evident, every company has weaknesses when entering a new market. According to its Annual Report (2002), Starbucks expanded its international presence by opening 294 new international licensed stores, including the first stores in Austria, Oman, Spain, Germany, Indonesia, Mexico, Puerto Rico and Greece. Net revenues from international customers totaled $458,258,000US.

Starbuck's has identified and created opportunities around the world. Doing business in Brazil requires time and building relationships of trust. Since Brazil manufactures one-third of the world's coffee beans, the supply chain can be shortened. Instead of shipping beans from Brazil and other South and Latin American countries to the United States, Starbucks should build its own roasting plant and distribution facility in Brazil.

Despite it's popularity, coffee is not the most popular beverage of the people. It is Guarana, a beverage produced from dried berries, water, and sugar. Brazilians have historically consumed their coffee, strong, thick, and simple. It will be an opportunity to introduce the various and sweeter tastes of Starbucks various coffee drinks to the Brazilian market. Coffee in Brazil has long been inexpensive and readily available at the price of pennies. Brazilians drink coffee at home, in restaurants, cafes, even in tiny villages. Thousands of coffee vendors line the streets of Rio de Janeiro, Sao Paolo, and other large cities. For example, Starbuck's challenge is to convince an entire market that paying 3 to 4 dollars per cup is normal. Starbuck's must change the Brazilian consumer's perceptions of value. Building brand loyalty and adjusting the pricing structure to align with the culture, especially during the initial product offering, can achieve impact the perception of value.

Regardless of the business, brand loyalty is the fundamental building block to ensure an organization's long-term success. According to Starbuck's Chairman Howard Schultz (2002), Starbuck's understands the significance of building brand loyalty. It begins with a commitment to the business philosophy that your customers are precious. Customers are at the heart of the business and winning their loyalty is your first objective. The customers have many choices for beverages and will dictate what they want, why they need it, and how they want to do business with Starbucks. Success can only be gained by listening. Customer loyalty will depend on Starbuck's ability to understand and cater to the needs of the Brazilian people. Brand loyalty will ultimately drive long-term, profitable customer relationships.

Threats

All organizations face threats in the marketplace. Threats and change are two things that can be ultimately relied upon. Some of the most prevalent threats are discussed in more detail below such as finding the right people, overcoming differing legal, cultural, and ethical issues, developing a local production, roasting, and distribution operation. In addition to these threats, there are the aspects of pricing, product offering, and competition. Starbucks must identify a pricing structure that is profitable, differentiates Starbucks from any other cup of coffee, and is still economical in the Brazilian marketplace.

Finding the right unique product offering that is just similar enough to Guarana, the Brazilian drink of choice, is another task at hand to ward off potential threats. One of the last threats to anticipate is competition. Once the Starbucks craze catches on, there is always the potential threat of copycats. Copycats coffee houses are no stranger to Starbucks history. Nonetheless, Starbucks almost always prevails.

Supply Chain:

According to Starbucks (2003), the company is committed to sourcing the highest quality coffees from around the world. It searches mountain trails in Indonesia, Kenya, Guatemala, and all over the world for the highest quality Arabica beans. Starbucks requires zero defects in grade, good even color, and consistent bean size. Starbucks has limited their sourcing by applying strict, more environmentally beneficial guidelines to their suppliers. Starbucks has a specific purchasing philosophy. In order to become a Starbucks preferred supplier, these qualifications must be met: (1) verifiable quality of product, (2) minimal environmental impacts, including soil management, water reduction, clean water, forest conservation, use of shade and energy use, and waste management, (3 )social conditions, including wages, benefits, health and safety, and living conditions, (4) economical issues, including transparency from supplier to farm level., and (5) price incentives. Starbucks believes that all these criteria are crucial to creating a sustainable coffee production system and improves the coffee market.

According to Starbucks (2003), the company participates and encourages the Fair Trade Certified label. Starbucks purchases 59 percent of their coffee directly from farmers and small-scale coffee farming cooperatives while paying higher than prevailing market prices. Its participating farmers democratically run these cooperatives. Starbucks pays an average of $1.20 per pound for green coffee purchased through long-term contracts.

For Brazil, Starbucks should provide incentives to local farmers and cooperatives to grow premium coffee that meets their standards. It has successfully convinced many farmers to do this. According to Hill (2000), Starbucks in 1992 set a new precedent in the coffee-purchasing world by outbidding European buyers for the exclusive Narino Supremo bean crop.

In Brazil, Starbucks intends to establish a production operation to roast the coffee beans and package the products. Starbucks will seek local suppliers for paper goods and other necessary raw materials. A distribution warehouse will be established to track the supply chain process and distribute its retail locations and new local joint ventures with hotel, airports, and grocery stores.

Information Technology:

Advanced technology is essential to the success of collaborative relationships. Starbucks uses the same point-of-sale system in the stores, the manufacturing system, and distribution system. Coffee beans are tracked all the way through the roasting process using a silo management system and production control. The distribution system tracks the roasted beans. And it also tracks receipt in the stores. The point-of-sale system feeds back into the corporate office where a replenishment order is generated. It is a full circle process. Starbuck's goal is to have an enduring and innovative, state of the art integrated supply chain system that would reduce costs by an undisclosed amount, improve customer service, and maintain consistent quality.

Starbucks will be in constant communication with Brazilian employees. The latest technologies using the Internet, E-Mail, and Business-to-Business and Business-to-Consumer software will also be implemented. According to Hewlett-Packard (2002), Starbucks and Compaq Computer Corporation have a five-year strategic relationship in which Compaq provides the information technology structure and hardware for Starbuck's retail stores and corporate headquarters. Starbucks and Microsoft have created a wireless, high-speed connected internet environment in more than a thousand U.S. locations. This wireless internet service will be made available in all the Brazilian retail locations as well.

Overall Risk Factor:

Brazil, Vietnam, and Colombia account for more than 50 percent of world exports of green coffee. Starbucks creating a presence in the Brazilian market place is ideal. From a political aspect, the country has renewed leadership strength. Economically, foreign investment is increased. The new president's goals are to keep inflation down and decrease the national deficit. Export is good. The Brazilian Real is low compared to the U.S. dollar. This is advantageous for Starbuck's to fund business growth in Brazil. However, the devaluation of the Real also means that Brazilians will have a difficult time paying premium prices for Starbuck's products. Sourcing beans and raw materials in Brazil will be financially opportune for Starbucks. From an economical and environmental perspective, Starbucks can help Brazilian coffee growers zero in on better premium beans in a ecologically improved environment. From a financial perspective, Starbucks coffee shops are sprouting on every street corner in our part of the world, it is inevitable that it will do the same around the world and especially, in Brazil. These benefits financially outweigh the risks.

I didn't understand the answers of following questions

Question 1: How can Starbuck's overcome its threats and weaknesses? Provide solutions from information given in the case study and by applying marketing management concepts.

Question 2: How do you think the culture and climate of Brazil will affect Starbucks?

Question 3: What is the role of supply chain and IT in the business operations of Starbucks? Explain by highlighting the main points.

Question 4: Based on the risks involved, in your opinion should Starbucks enter the Brazilian market or not? Support your answer with two logical reasons.