Starbucks in China (Strategic Management)

1.0 INTRODUCTION

In the 1990s, Starbucks Corporation, the world's specialty coffee retailer from United States, started expanding into international markets. Starbuck’s mission statement reads, “To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow”. In September of 1994, Starbucks bought its first acquisition, The Coffee Connection. After its success in Japan in the mid-1990s, it started focusing on China in 1999. China is considered one of the most important markets due to its size and the growth. Starbucks is making its way to become a household brand in China.

2.0 MAIN ISSUES

2.1 STARBUCKS’ GREATEST CHALLENGES AND SOLUTION

Starbucks faced challenges like cultural differences, high real estate prices, unavailability of land and suitable employees. In this study, it focuses on the sociocultural challenges of broad environment in order to answer Question 1. As Starbucks choosing China, a strong base of tea drinker, it is definitely a barrier and challenge for Starbucks in which given a country of devoted tea drinkers who do not readily to accept the taste of coffee. Besides that, the opening of a store like Starbucks, for the Chinese, symbolized a threat from the Western world (Rui, 2007). Many local people saw it as interference into their traditional lifestyle and culture.

Starbucks introduced nine kinds of tea drinks in China including three original-leaf Chinese-style tea drinks, four original-leaf foreign tea drinks, and two handmade special tea drinks, making this coffee shop chain's entry into the huge Chinese tea drinks market. Apart from these tea drinks, Starbucks has also launched related accessory products such as teacups and teapots. Furthermore, Starbucks has also programmed cultural activities to celebrate traditional Chinese holidays with local people, for instance, incorporated moon cakes during the traditional Chinese moon festival (Harris, 2007).

In order to overcome the problem regarding the intrusion into Chinese traditional culture, Starbucks started to create innovative products by strengthen ties with local people to create opportunities for organization. According to Starbucks has not only helped popularize coffee in China, it's also aiming to bring Chinese coffee to the world (Lowe, 2001). The company started a wide-ranging strategic commitment to doing business in China, in a way that's locally relevant. Thus, they going to plant trees and grow coffee in China, in the Yunnan Province. Yunnan coffee is already known as some of the best in Asia. The chain will help develop and operate a farm and processing facilities in Yunnan and will also work with local farmers to boost their crop's yield and quality. The mission is to share coffee knowledge, to help Yunnan continue to develop into a top-quality coffee-growing region and bring the distinctive Yunnan coffee taste to Starbuck’s customers around the world. As a result, China sees Starbucks concerned about their tradition and positively changes the perception of Chinese people against Starbucks in their country.

2.2 STARBUCKS’ COMPETITIVE ADVANTAGE

Competitive advantage indicates what the company can do something that their competitors can’t do which has significant edge over the competition. Starbucks underline their Strengths, Weaknesses, Opportunities and Threats (SWOT) in order to ensure its competitive advantage sustainable over time. Starbucks gain strength as are a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries. As the weakness, Starbucks point out that although they have a reputation for new product development and creativity, they remain vulnerable to the possibility that their innovation may falter over time. According to Schultz (2007), sustaining the differentiation advantage is difficult, rapid growth has led to the dilution of customer experience and the commoditization of the brand. Apart of these internal influences, Starbucks has the opportunity to expand its global operations but they are exposed to rises in the cost of coffee and dairy products and lead to the market entry of many competitors and copy cat brands that pose potential threats.

Starbucks has made sizable efforts to distinguish from traditional coffee drinks. Starbucks coffee is considered to have redefined the coffee experience. At Starbucks, consumers not only drink coffee, but also gain a lifestyle and experience a third place between home and work. It is very important for its competitive advantage and consumer’s perceived positioning of the company. Starbucks ensure that the quality of their products are the best and certainly dilute the core concept of Starbucks in which providing a premium quality. Starbucks also has a joint venture with multinational company, Pepsi to bottle its iced coffees. This indicates that Starbucks are using a well-established company to market its products in order to maintain their image as premium brand. On top of that, Starbucks practice customized service in which consumers are allowed to order the product according to their preferences (Lovelock and Wirtz, 2007). This is also known as customization bonds. Starbucks implement it by providing customized service to its loyal customers and it is difficult for competitors to imitate this type of service. This specialized form of customization treated each individual as a segment by itself. This shows that Starbucks differentiates their service against competitors in providing premium quality of coffee and retains their competitive advantage in its business category.

2.3 STRATEGIES IMPLEMENTED CONSIDERING INCOME DISCREPANCIES IN CHINA

Starbucks are well known of their premium brand worldwide. They claim that their products are not expensive but classified as premium price. According to Far Eastern Economic Review (2003), a cup of coffee would typically cost 50 cents and the charge at a US Starbucks is around the region of USD1.75. Consumers are willing to pay these higher prices because they are not only buying a beverage, but also making a social statement at the same time in which consumers purchase an experience, a lifestyle and an attitude.

Considering the income discrepancies, Starbucks' strategy in China is to attract middle class consumers by opening cafes in selected locations (Fowler et al., 2002). In the context of business level, Starbucks should implement best value strategy in which means to provide a product that is very attractive to customer but also delivered at a fairly low cost, thus providing the best service value for cost (Enz, 2010). As Starbucks are known for their premium coffee, they cannot simply reduce their price because it correlates with the quality they served. The key to a best-value strategy is a simple supply and demand principle. Starbucks are the first-mover that create the opportunity in China of a new perception of coffee. They need to understand the demand of Chinese consumers at selected locations to provide the supply that they intend to serve and have the significant resources associated with innovation and learning. As mentioned earlier, Starbucks not just only provide its premium quality coffee, at the same time customers gain experience and service values thus, make the service more valuable in the eyes of consumers. Although the price remains the same, but there are values creation that comes together with the tangible product. On top of that, Starbucks need to find ways to keep the costs low through technology, economies of scale and reducing waste. These would help Starbucks to identify the effective solution considering the income discrepancies of the country.

To ensure Starbucks produce outputs at low cost, they should implement a corporate level strategy called vertical integration in which they own their upstream suppliers and downstream buyers (Enz, 2010). This can be further classified as background integration (upstream), means they produces their own inputs. This automatically will reduce the cost of production as Starbucks produce their own resources e.g. coffee beans, tealeaves, dairy products and other ingredients. Therefore, Starbucks could control the increase of global price of particular resources as they gain the cost advantage by producing their own inputs. Some of the advantages include eliminate steps in production, avoid time-consuming tasks, prevent from uncertain availability for rare inputs and provide superior control of market environment.

3.0 CONCLUSION

Foreign businesses need to learn how to well understand the values of local culture and local people toward Western culture symbolized in global brands, especially under the new communication state of affairs. As for Starbucks, they had to struggle with certain issues regarding the cultural values, ensure its sustainable competitive advantage and come out with strategies concerning the income discrepancies in China. A company should establish and maintain a healthy relationship between local stakeholders on the possibility of negotiating a shared identity as a cultural bridge in today’s globalization to enhance the acceptance of particular countries for company’s growth and development.

4.0 REFERENCES

Beaton, J. (2010, March 11). Starbucks discovers that Chinese people like tea. CNN Daily News. Retrieved from http://www.cnngo.com/

Burke, A. (2010, November 17). Starbucks to start growing coffee in China, CEO says. CNN Daily News. Retrieved from http://edition.cnn.com/

Enz, C. A. (2010). Hospitality Strategic Management: Concepts and Cases (2^nd Ed.). New Jersey: John Wiley.

Han, G., and Zhang, A. (2009). Starbucks is forbidden in the Forbidden City: Blog, circuit of culture and informal public relations campaign in China. Public Relations Review, 35, 395–401.

Lovelock, C., and Wirtz, J. (2007). Services Marketing: People, Technology, Strategy (6^th Ed.). New York: Prentice Hall.

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