Starbucks Entry strategy into the Russian Market
When a company seeks to expand into a foreign market, it must select the most appropriate entry mode for that particular market. The entry mode selected has long-term implications for the company. This implies that entry strategies have a direct impact on a firm`s long run performance. There are six major entry mode strategies that companies use when expanding overseas. These include exporting, wholly owned subsidiaries, franchising, licensing, joint ventures, and turnkey projects. This paper examines the best entry mode strategy that Starbucks should use in entering the Russian market. The paper also provides an alternative plan (“Plan B”) that can be used in the event that the choice becomes infeasible.
Starbucks entry mode into Russia will be influenced by various internal and external factors. The most important internal factors include speed and characteristics of Russia`s business environment. On the other hand, the most significant external factors affecting the company`s entry mode into Russia include its level of resource commitment, the risk attitude of management and the company`s global management efficiency. The paper analyzes why these factors make a joint venture to the most appropriate mode of entry into the Russian market.
Characteristics of Russia`s Business Environment
According to Koch (2001), when entering a foreign market, the business environment in the host country has to be analyzed. These includes issues such as business practices, regulations, level of competition, infrastructural development, laws on customer protection, and customer sophistication. Moreover, the company has to learn the host country knowledge, which includes habits, culture, and behavior in the foreign market. In some cases, a company may find it difficult to acquire some of this information. As at present, Starbucks has vast international experience given that it has expanded to many foreign markets including but not limited to China, Austria, Germany, Israel, Japan, Mexico and Malaysia (Starbucks, 2015). However, the company has limited knowledge about the hotel industry in Russia. As a result, it will be beneficial for Starbucks to seek partners in the Russian market who have a comprehensive understanding of the Russian market, and can play a local role on behalf of Starbucks. This will help the company to be part of the Russian community despite being a UK company.Starbucks can form a joint venture with a Russian company such as Shokoladnitsa that has hotel experience and the required knowledge to operate in the Russian market.
Speed can be defined as the length of time a firm seeks to dedicate into an overseas market (Brassigton and Pettitt, 2003). Given its present state of internationalization, Starbucks` desire would be to enter the Russian market within the shortest time possible and to begin generating profits as early as possible (for example within three years of operations). Moreover, Starbucks past history indicates that once it enters a foreign market, the company often pursues ambitious expansion plans, with many stores opened within the first two years of operation (Business Wire, 2002). Such speed can only be possible through a joint venture with an established local business in the Russian market.
Efficiency in Global Management
The extent to which a company is involved in internationalization can influence the level of resources available to expand into a new foreign market (Koch, 2001). When the level of involvement in international expansion is high, the available resources become limited. As at 2015, Starbucks has operations in 65 countries (Starbucks, 2015). This implies that the company has invested heavily in these markets, and its expansion to Russia will require more investment. Consequently, Starbucks may not have a huge quantity of resources to spend in internationalizing Russia.
Company Size/ Resource Commitment
The entry mode selected depends both on the available resources and the size of the firm (Koch, 2001). A big company has substantial resources, and as such has various entry mode alternatives. On the other hand, smaller firms have to use entry modes that require limited resource commitment. Presently, Starbucks is a big company, with technology, experience, reputation, a strong brand and production and management capabilities. Consequently, the company has powers and advantages in negotiating to select particular entry modes like the joint venture mode. However, despite its size, its high level of international expansion may limit the resources available to go into Russia.
Risk Attitude on the Part of Management
The level of risk in international operations is determined by firm`s financial position, the level of competition, and the company`s strategic alternatives (Koch, 2001). According to Forbes (2003), Starbucks expansion strategy often tends to reduce its holdings and require a local partner to carry out its operations in the host market. In joint venture arrangements, Starbucks usually holds no more than 50% stake.
The most significant external factors in the Russian market that are likely to influence entry mode are the level of competition and the market potential in Russia.
Russia`s Market Potential
Chen and Mujtaba (2007) define market potential as the size and growth prospects of a foreign market. Although Russia is facing tough economic environment at present, it still presents significant growth potential for Starbucks. According to Vorotnikov (2013), Russia was ranked in position seven in the world in terms of coffee consumption, and number one in terms of instant coffee consumption. Intensity of competition relates to the number of competitors and pressure from competitors in the host market (Chen and Mujtaba, 2007). Currently, Russia`s coffee market is very competitive, with companies competing in different coffee segments, including specialty coffee. Foreign coffee companies are also entering the Russian market (Vorotnikov, 2013). The growing popularity of coffee in Russia makes it easier for Starbucks to find a suitable joint venture partner in the market.
This refers to the differences in terms of the manner in which people from different countries view particular behaviors and ways of thinking. In the case of Russia, cultural distance may not have a substantial influence on entry mode selected given that Russians are already coffee in large quantities. Nonetheless, unlike in the UK where the coffee culture is established, Russia still lacks a coffee culture, as such the entry mode selected must be one that can permit the company to inculcate a coffee culture using learning programs.
Reasons for a Joint Venture in Russia and Not Any Other Entry Mode
The joint venture strategy will allow Starbucks to adapt to the Russian market, and as a result be able to satisfy the unique requirements and needs of the Russian coffee consumers while respecting their tradition and culture. A joint venture will allow the company to adapt to the internal and external factors discussed above. The joint venture option is more appropriate because for Starbucks“ type of business, exporting and turnkey projects can never be used for this type of service business. On the other hand, franchising, licensing and wholly-owned subsidiary are not appropriate for Starbucks entry into Russia for several reasons.
Firstly, Starbucks lacks knowledge of the Russian market. As a result, there it is important to form an alliance with a local partner in Russia who can offer knowledge and help Starbucks operate in the Russian market. Moreover, knowledge of the Russian language is a must if a company is to operate successfully in Russia. Secondly, given that the company would want to achieve a faster expansion in Russia (speed), it needs a mode of entry that can support this objective. A whole-owned subsidiary is not appropriate in this context because other than the high capital outlay and risks involved, it will take time for Starbucks to understand the market because of cultural factors. In addition, the company`s presence in 65 countries across the globe means that the company has already invested too much in its internationalization efforts, as such it has limited resources available for Russian expansion. This tends to limit the company`s size factor in terms of choice of entry mode. Furthermore, the risk minimization attitude on the part of management means that they would prefer a local partner in Russia not only to operate in Russia, but also to share the financial risks. Therefore, this makes a wholly-owned subsidiary less appropriate. Moreover, because of Russia`s market potential and the high competitive rivalry, a joint venture is more appealing compared to both licensing and franchising. The Russian market offers significant opportunities for Starbucks. As a result, the company requires an entry mode that will allow it to have sufficient control over its operations in Russia. Both licensing and franchising will give the company low or no level of control over the operations in Russia.In addition, Starbucks will not be able to control the quality of service offered by its Russian franchises. In addition, the company faces the risk of losing its know-how to the licensed entities in Russia. Most importantly, given that the Russian coffee market is ranked 7thin the world, it is a mature market with numerous local and international competitors. Consequently, Starbucks needs an entry mode that will give it a significant level of control so that it can counter the competitive market environment in Russia. All these factors combined makes joint venture to be the best entry mode for Starbucks into Russia.
An Alternative Plan (“Plan B”)
In the event that the joint venture fails, franchising will be the second best alternative. Given Starbucks` interest in faster expansion and limited resources that would be further worsened by the failure of the joint venture, franchising would be the second best choice of entry mode. Under this, a Russian company will pay Starbucks royalty fee, and in turn, Starbucks will give the franchisee major business know-how, including its trademarks and patents. Through this arrangement, Starbucks will not have to incur additional development costs and risks associated with the Russian market. This will allow Starbucks to explore the Russian market in an efficient manner. However, the franchising challenges discussed above will still apply. To address these challenges, Starbucks should ensure that franchisee strictly adheres to its rules, which includes standards of quality.
Based on the analysis, a joint venture entry mode is the most appropriate for Starbucks to enter the Russian market. It will benefit the business in terms of helping the company adapt to the local requirements and needs of the Russian market, allows the company to share its risks with the local partner while limiting the amount of capital the company invests in the Russian market.
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