The Globalization of Starbucks Thirty years ago, Starbucks was a single store in Seattle's Pike Place Market selling premium-roasted coffee. Today it is a global roaster and retailer of coffee with some 16,700 stores, 40 percent of which are in 50 countries outside of the United States. Starbucks set out on its current course in the 1980s when the company's director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company's owners to experiment with the coffeehouse formatand the Starbucks experience was born. The strategy was to sell the company's own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a tastefully designed coffeehouse setting. The company focused on selling "a third place experience," rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best-known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web. In 1995, with 700 stores across the United States, Starbucks began exploring foreign opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks' presence in Japan. To make sure the Japanese operations replicated the "Starbucks experience" in North America, Starbucks transferred some employees to the Japanese operation. The licensing agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parameters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by the end of 2009 Starbucks had some 850 stores and a profitable business in Japan. After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple, originally from Seattle, had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. In the late 1990s, Starbucks opened stores in Taiwan, China, Singapore, Thailand, New Zealand, South Korea, and Malaysia. In Asia, Starbucks' most common strategy was to license its format to a local operator in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland Europe. As its first entry point, Starbucks chose Switzerland. Drawing on its experience in Asia, the company entered into a joint venture with a Swiss company, Bon Appetit Group, Switzerland's largest food service company. Bon Appetit was to hold a majority stake in the venture, and Starbucks would license its format to the Swiss company using a similar agreement to those it had used successfully in Asia. This was followed by a joint venture in other countries. As it has grown its global footprint, Starbucks has also embraced ethical sourcing policies and environmental responsibility. Now one of the world's largest buyers of coffee, in 2000 Starbucks started to purchase Fair Trade Certified coffee. The goal was to empower small-scale farmers organized in cooperatives to invest in their farms and communities, to protect the environment, and to develop the business skills necessary to compete in the global marketplace. In short, Starbucks was trying to use its influence to not only change the way people consumed coffee around the world, but also to change the way coffee was produced in a manner that benefited the farmers and the environment. By 2010, some 75 percent of the coffee Starbucks purchased was Fair Trade Certified, and the company has a goal of increasing that to 100 percent by 2015. Case

Discussion Questions

1. Where did the original idea for the Starbucks format come from? What lesson for international business can be drawn from this?

2. What drove Starbucks to start expanding internationally? How is the company creating value for its shareholders by pursuing an international expansion strategy?

3. Why do you think Starbucks decided to enter the Japanese market via a joint venture with a Japanese company? What lesson can you draw from this?

4. Is Starbucks a force for globalization? Explain your answer.

5. When it comes to purchasing coffee beans, Starbucks adheres to a "fair trade" program. What do you think is the difference between fair trade and free trade? How might a fair trade policy benefit Starbucks?

Knights Apparel Some years ago Joseph Bozich was watching his son play in a high school basketball game when his vision started to become blurred. A day later he couldn't read. His doctor suspected that Bozich had a brain tumor, but tests revealed that the cause was multiple sclerosis. Luckily for Bozich, his vision improved, and he has not suffered another attack, but the incident left him with a desire to do something important in lifeto somehow make a contribution to humanity. As founder and CEO of Knights Apparel, a privately held company, Bozich realized he had the power to make such a contribution. A former U.S. collegiate bodybuilding champion, Bozich got his start in apparel working for Gold's Gym, selling branded clothing to outside retailers. In 2000 he founded Knights Apparel and started to build a business selling athletic clothing with college logos to universities around America. Like most organizations in the apparel industry, Bozich relied on a network of foreign suppliers to manufacture his products. The apparel industry is often accused of using sweatshop suppliers based in poor nations where pay is low, hours are long, and working conditions are awful. In 2005, Bozich wondered if it might be possible to change thisto source product from less developed nations but to do so in a more ethical way, paying employees a decent wage and providing them with good working conditions. After some investigation, Bozich decided to establish his own "model factory" in the Dominican Republic. He purchased a factory that had previously been used by a Korean company to make baseball caps for Nike and Reebok. The Korean company had moved production to a lower-wage country in 2007, throwing some 1,200 out of work. The factory now produces under a new label, Alta Gracia, which is derived from the name of the local town, Villa Altagracia, and means "exalted grace." The minimum wage in the area is $147 a month, a figure so low that it is insufficient to live on. Bozich's factory pays its workers more than 3.5 times this amount. According a study done by a workers' rights group, this is the pay level required to support a family of four in the region. Bozich has allowed his employees to unionize and has made investments in safety and good working conditions a priority. Knights Apparel invested some $500,000 in upgrading the factory with features that include bright lights, five new sewing lines, and ergonomic chairs for employees, which many seamstresses thought were for the managers. Clearly the higher pay translates into higher costs. Bozich calculates that the factory's cost per unit of clothing is 20 percent higher than if it paid the minimum wage. Given the competitive nature of the market for apparel, Knights cannot pass this cost increase on to wholesalers and retailers in the form of higher prices, so Bozich has elected to take smaller profit margins. For a product such as a basic T-shirt with a logo, the manufacturing cost at Alta Gracia is $4.80, about 80 cents more than if the pay was minimum wage. The shirt is sold for $8 to wholesalers, with most retailers marking them up to about $18. Bozich realizes he has a strong marketing message built around "fair labor." This is particularly useful selling into colleges. Student groups have often agitated for boycotts against companies such as Nike and Reebok for using sweatshop labor. (Since being the target of protests in the 1990s, Nike has put rigorous procedures in place for auditing the operations of suppliers to make sure they adhere to Nike's own code of ethics for suppliers.) The "fair labor" marketing message seems to be resonating with colleges. Several universities have backed the project. Duke University's bookstore, for example, placed an initial order for $25,000 of merchandise. Barnes & Noble College Booksellers planned to have Alta Gracia products at some 350 stores in college campuses by early 2011. Barnes & Noble plans to promote the product heavily and expects to take lower margins to begin with. The United Students Against Sweatshops, a nationwide student group that often attacks apparel manufacturers, has also backed the project and has been distributing flyers at college bookstores urging students to purchase the Alta Gracia shirts. Companies such as Nike and Reebok that also serve the college market are reportedly watching what happens carefully. Case Discussion Questions

1. The case states that higher wage rates at the Alta Gracia factory have raised the cost per item by 20 percent. Can you see any way in which the philosophy with regard to pay and working conditions at Alta Gracia might lower costs in the long run?

2. Do you think Joseph Bozich would have been able to try the Alta Gracia experiment if Knights Apparel was a publicly traded enterprise?

3. What do you think might stand in the way of Alta Gracia becoming successful? What strategies might Bozich adopt to minimize the risk of failure while still adhering to his high ethical standards?

4. Alta Gracia serves a niche market, colleges, where there is higher awareness of ethical issues in apparel production. Do you think the strategy would work if the company tried to sell to the mass market through retailers such as Walmart?

5. Is it ethical for apparel companies to move production around the world in pursuit of the lowest possible labor costs, even if that means paying wage rates that are below a living wage? What if the alternative is not to produce at all?

6. To what extent does the Alta Gracia experiment suggest that good ethics are also good business practice?

BMS Information Technologies: A case of international Bribery? Case prepared by Charles A Rarick, PhD., and Richard Burroughs, PhD., both of the Andreas School of Business, Barry University. Bill Bothwell is the 28-year-old CEO of BMS Information Technologies, an Internet services form located in Ohio. Bill began the business on a part-time basis while he was a computer science student at a state university. He began consulting with local businesses that sought his web site building expertise, and soon two friends together built the business into a full-time venture. BMS now consists of 25 professional employees. Having a background in computer science was particularly useful in solving technical computer problems, but Bill struggled to solve business problems. The Web site development business though was a perfect fit for a smart college student like Bill. He sold a service, which was in short supply, and he could use the computers and software on campus to complete projects for clients. Bill could even ask his professors for help with particularly daunting programming problems. At the time Bill started his business, everyone was just learning the Internet and so he had very little competition. With the low overhead of a college student Bill was able to develop impressive Web sites for his customers at a very reasonable price. Bill's business flourished even without a formal business education. With two friends, BMS Information Technologies was created upon graduation. BMS maintained close ties with the university and kept up on the latest technologies. The company also provided internship opportunities for promising students. Even in the fast-paced world of Web site development BMS gained a reputation for delivering astonishing Web sites to larger and more established business throughout the Northeast and Midwest. After just two years out of college Bill was president of a firm with 25 professional employees and a client list that included Fortune 500 companies. Bill reasoned that if BMS could satisfy Fortune 500 companies, certainly then international clients would be the next logical step. Buba Obimaka, the president of a private Nigerian trade group who was seeking to contract with an Internet consulting firm for the member businesses, contacted BMS. Buba had seen BMS' work on the Internet and he was impressed with the firm. Buba invited Bill to Nigeria to meet with him and to discuss the details of the assignment. Bill was under the impression that BMS would be offered the contract, and that meeting with Buba was simply a formality before signing the contract. He felt that he was primarily on a fact-finding mission to learn about the various businesses in the trade group and their Internet needs. When Bill arrived at the airport in Abuja, he was tired and a bit overwhelmed. He had not been outside the United States except as a college student when he traveled to Cancun, Mexico. Nigeria was looking very foreign to him. As Bill passed through immigration, the official asked him if he "had a present for him." Bill wasn't sure why he would bring a present for someone he didn't know, so he told the official "No." at this point, the official told Bill to go to the end of the line. On his second try in line, he was asked the same question by the same official and he gave the same response, "No." Once again he was told to go to the back of the line. On his third attempt, Bill gave the official $10 (US) and passed through immigration. Buba was waiting for Bill at the airport and after exchanging greeting the two men proceeded to go to Buba's office. Bill had related the immigration experience to Buba who laughed and said "Welcome to Nigeria."Buba told Bill that such practices are common in Nigeria and that he should not worry about such matters. After four days of meeting with various representatives of the trade group's businesses, Bill felt that he and his associates could handle the assignment. Nigeria was much less developed that he had thought, but Bill felt that the emerging Internet infrastructure would provide an interesting challenge for the firm. The contract would be quite significant and would provide good international exposure for BMS. On the last day of his visit Bill was informed by Buba that another firm was competing for the contract with the trade group and that this European firm had agreed to provide Buba with a $10,000 (US) "finder's fee" for his work in arranging the contract. Bill was surprised by the revelation that another firm was being considered and also surprised that a fee would be required in order to sign the contract. Buba had the final authority to act on behalf of the trade group and Bill felt that if he didn't offer more than the $10,000 (US) his company would not get the contract. Bill was disappointed with the news and wondered if it was legal for BMS to even offer Buba the money. He told Buba that he would have to talk it over with his partners and that he would get back to him soon. As Bill boarded the airplane to return home, he wondered if he shouldn't just keep the business confined to the United States.

Discussion Questions:

1. Was the $10 bribe given to the immigration official at the airport legal? Explain.

2. Would the payment of a "finder's fee" to Buba be legal? Explain.

3. What would you recommend to Bill?

Gethal Amazonas: Saving the rain forest one yellow tree at a time Case prepared by Charles A Rarick, PhD., of the Andreas School of Business, Barry University. Gethal Amazonas is a Brazilian plywood producer. In the 1950s and 1960s, the company was responsible for destroying the Atlantic Forest of southern Brazil through excessive deforestation. When all the trees were removed from this forest, the company moved into the Amazon. Today Gethal Amazonas is considered one of the most socially responsible timber companies in Brazil. Its workers proudly paint the base of fallen trees a bright yellow, signifying that the timber is certified wood. Gethal Amazonas has become the first plywood producer to be certified by the Forest Stewardship Council (FSC) as a company that promotes environmentally sound forest harvesting. The FSC is based in Mexico and its membership consists of environmental groups, timber companies, and lumber retailers. The organization seeks to make the timber industry more environmentally responsive. Environmental organizations such as Greenpeace and Friends of the Earth are members, as well as American retailer Home Depot, which gives preference in its purchasing to certified lumber companies. FSC requires that companies wishing to be certified as practicing environmentally sound forest harvesting agree to abide by certain standards. Regulations are established for minimum tree circumference, limitations are placed on the harvesting of certain hardwoods, and companies are required to conduct an analysis and mapping of the environmental impact on soils, watersheds, and ecosystems. During the 1980's, the Brazilian rain forests were being destroyed at an alarming rate. World attention became focused on the problem and a common refrain became "Save the Rain Forest." Politicians, actors/actresses, rock starts, and others joined environmental groups in calling for an end to the destruction. Madonna, the singer, organized a benefit concert called "Don't Bungle the Jungle". When then Tennessee Senator Al Gore visited Brazil, he called the destruction ''one of the great tragedies of all history." In the past 30 years, over 15% of Brazil's rain forests have been destroyed and the rain forests of Asia have been depleted at even higher rate. Environmentalists fear that further destruction of the rain forests of the world will lead to dire climatic changes. Countless species of animals and plants will vanish from earth and potential medical breakthroughs will be lost. The Brazilian rain forest has sometimes been called the world's greatest pharmaceutical factory. Many medicines, including some for cancer are derived from rain forest plants. Agronomists also worry about a potential loss of alternative food sources with further destruction. Brazil has become more conscious of the environmental impact of harvesting the Amazon, and has begun to impose fines on companies that violate environmental laws. The Brazilian Institute for the Environment fined 26 timber companies in 2000 for crimes against the environment. Nevertheless, it is estimated that approximately 17,000 square kilometers of rain forest are destroyed each year. Gethal and the FSC hope that consumers will demand timber products that carry environmental certification. Gethal had planned to price its products 30% above noncertified wood; however, certified wood at the present time only commands a premium of about 7.5%. While some consumers in the United States are requesting environmentally certified wood, most are unaware of the product. The concept is, however, more popular in Europe. In the recent past, products have been sold that were considered Amazon friendly. Ben & Jerry's sells its Rainforest Crunch flavor ice cream, which contains nuts from the Amazon jungle. It was hoped that alternative sources of income could be generated for the people of the rain forest. Although this product is popular, it is unclear how many sales are based on the environmental appeal. Other products have not fared as well, including Amazon cereals, juices, and cookies, whose sales were intended to promote preservation of the rain forests. While previous products promoting the rain forest may have had lackluster sales, Gethal is undaunted in its effortsto responsibly harvest Amazon timber and have consumers pay extra for its products. While not all timber companies are following the lead of Gethal, the company continues to paint its tress yellow and hopes for a bright future.

Discussion Questions: 1. Would you pay a premium to ensure that the wood you buy is harvested in an environmentally sound fashion? Explain.

2. Is green business good business in your opinion?

3. Will Gethal Amazonas survive in a price-sensitive global industry? What could Gethal do to increase demand for its product?