The Foreign Investment Strategy of Starbucks in India
In this essay we will be analysing the foreign investment strategy of Starbucks in India, this will be done by using Dunning’s eclectic paradigm, going through their ownership advantages, location advantages and lastly internalization advantages. Furthermore, the reason why Starbucks decided to be a joint venture with Tata Beverages. The end of the analysis will conclude if the investment of Starbucks was a success or not.
Starbucks first opened in 1971, their first store was located in Seattle, Washington. The fast-developing coffee store now operates in 75 countries and has over 17,650 stores around the world, currently has 254,000 employers in the organisation. Their revenue in recent years has been increasing exponentially thanks to their active rewards members in organisation. Their successful rate led them to an expansion in China, which has been the fastest growing market outside the United States. Starbucks own around 1,300 stores in China, and they are looking to expand that in the coming years. Starbucks already had their eyes on their next target, India. Due to both countries having a densely population and prospering economy, it could be a lucrative investment such as the one in China for the multinational chain of coffeehouses.
With Dunning’s theory it’s very comprehensible to analyse Starbucks’ FDI strategy in India. The eclectic paradigm is a three-tiered framework that companies use when they determine if the FDI investment is beneficial for the organisation. It has an overall approach to examine the main components, giving the business a good strategy to operate an expansion through a foreign direct investment. The three following three advantages need to be acknowledged, starting with the ownership advantage. Often intangible, as it normally consists of branding, product development, patents, marketing skills, trademarks and also copyright. Ownership advantages can help the organisation remain competitive against companies in the same industry.
Generally, people would think that it is merely about which company provides the best prices, although to all intents and purposes there are more elements to have in mind. The following is location advantage, when companies look into investing in a different location, they need to assess whether an investment in that location will be an advantage for the organisation. Location advantages often refer to natural or created resources, companies have to consider the availability and costs of these resources.
However, they would require a partnership to grant access to these resources as they are often immobile. And lastly internalization advantages, this is all about an ownership protecting its assets when expanding into a new country, an example of this could be producing within the firm, instead of looking elsewhere. This gives the company full control of the production process.
The reason why Starbucks decided to expand comes in four categories, first one is market seeking, companies want to satisfy markets with their product, in this case coffee. Secondly, is the need of natural resources, thirdly, specialising their assets or looking for a better division of labour. Lastly, could also be to protect their ownership advantage by expanding in the market, more stores, more recognition, more sales, better company. Same as China, India is seen as a high growth market which makes it a good shot for Starbucks to expand even further.
Moreover, the joint venture with Tata Global Beverages, makes it easier for Starbucks to access a local network and also firms in the country. Both companies decided to form a 50:50 joint venture which resulted them to form a joint venture called Tata Starbucks Private Limited. This gives Starbucks access to Indian-grown coffee, which can attract the local population by respecting their culture.
Starbucks’ market entry based on Dunning’s Eclectic will show a unique insight to be able to understand their entry, we could say that they had advantages in those three categories. Their ownership advantages started with their trademark, they acknowledge the importance of their brand and want to show their quality and service in a market that is developed but not fully meeting the standards and the aim of Starbucks is to fulfil those standards in that emerging market.
Furthermore, Starbucks was able to trademark their brand in at least 10 Indian languages such as Urdu, Punjabi, Telegu, Tamil, Bangla, and Gujarati, this allowed the Seattle, US-based company to please retail outlets, by trying to make it as a way of relaxation and lifestyle when purchasing their premium product at premium prices. In addition to this, Starbucks realised that their success in this expansion is not only about the service that they deliver, but also other factors such as product quality, venue style, and price.
Therefore, they decided to bring innovative ideas such as mobile payments, making it easier for customers to purchase their goods, and also comfortable. They also found a way of gaining a good reputation in the market, they support their workforce in their personal lives, such as payment for the tuition fees, Starbucks know how important it is for its employees, and want to help them develop their education and training which strengthens the company in so many ways.
Moving on to their location advantages, a company will look for political or institutional advantages, they have to study the market and the economy of the country, will the Indian population go forward into spending their disposable income into a new foreign organisation? Sure, they did. Starbucks offers a comfortable place where customers can spend time and be friendly and not just come in for a coffee which was attractive.
Starbucks allured by the market potential India was offering. Having a robust growth in manufacturing, business friendly reforms and political stability, also known as the world’s, fastest growing economies, even though poverty in the country is still widespread. On account of the joint venture with Tata Beverages, Starbucks had access to raw materials which allowed them to gain competitive advantage.
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