Starbucks Corporation in China: Problems During September 2017

Statement of Major Problem

This paper analyses the case of Starbucks Corporation during the fiscal year ending September 2017. Starbucks is a multinational company that owns a chain of coffeehouses globally. The primary problem identified by Starbucks in the fiscal year 2017 was its marketing strategy. Starbucks employed a market development strategy to penetrate new markets and increase business in China. A good marketing strategy is crucial for the success of a business. Hence, organizations need to identify the right strategy to penetrate and control a market.

Market penetration in China was a challenging assignment for Starbucks due to the strong attachment of the Chinese to their culture. To begin with, China has a long history and firm attachment to its tea-drinking culture (Alkasim et al., 2018). Adopting and consuming coffee products rather than tea to the Chinese people was nearly impossible. However, Starbucks Corporation focused on selling coffee in China, an event that resulted in numerous challenges for the company.

Critical Sub‑Problems

The Chinese people have a tea-drinking culture which seemed an impossibility to break or change to coffee drinking. However, Starbucks recognized this fact and used locations that were highly visible with heavy traffic to protect its brand (Bertels & Desplaces, 2021). As the use of promotions and advertising would pose a threat to the Chinese tea drinking culture, Starbucks had challenges in choosing the best market development strategy for its products. To solve this challenge, Starbucks had to change its production to incorporate local ingredients that are popular to the people such as green tea in its products. The comfortable and luxurious seats, the chic interior, and the music offered its customers an appealing experience which assisted in growing its popularity.

The other problem that Starbucks faced was localization in the Chinese market. For it to be fully accepted in the market, it had to find local partners and change its development strategy. Partnering with other companies forced Starbucks in China to change its structural settings (Rothaermel, 2017). The company partnered with three local companies as part of its expansion plan. These companies are Uni-President in Taiwan, Maxim’s in Hong Kong, and Mei Da Coffee Company in Beijing.

Alternative Strategies

The major problem associated with Starbucks is market development in their international segments. The company is expanding in China by adding 600 new stores annually in 100 new cities without waiting to see how they perform (Bertels & Desplaces, 2021). The solution to their market development strategy is market penetration. More so, alternative solutions would be backward integration and unrelated diversification.

Alternative strategy 1: Market Penetration

Starbucks can utilize the market penetration strategy to increase sales in their international markets. By increasing their marketing, the company will be able to drive in new customers, which will increase their total revenue.

Advantages

1. It can lead directly to sales and market adoption if the product is priced right. With the proper marketing, the market penetration strategy will drive customers to the store, which will increase sales, and if they have a good experience, they are likely to become brand loyal (Alkasim et al., 2018).
2. It leads to direct brand awareness and customer referrals. If Starbucks markets in the new cities they plan to enter with their Chinese expansion, it will increase brand awareness and lead to customer referrals.
3. If Starbucks improves its marketing, it will create a presence that will prevent other brands from wanting to compete against such a big name in the coffee industry.

Disadvantages

1. Depending on the type of strategy used during market penetration, it can get expensive for the firm. Starbucks needs to set a budget and make sure they utilize their budget to maximize their marketing reach.
2. Market penetration leads to increased competition which lowers the industry margins and revenue (Alkasim et al., 2018).
3. If the money budgeted for the market penetration strategy is not allocated correctly, it becomes inefficient. If that happens, it would be better used elsewhere, for example, to continue developing the North American sector.

Implementation Statement

To implement this strategy, Starbuck should lower the prices of its products to be in line with their competitors’ prices, thus involving the marketing and management departments. Moreover, the company needs to make changes to its products to suit the customers’ preferences a process that will involve the production department.

Alternative strategy 2: Backward Integration

To implement the strategy of backward vertical integration, Starbucks must purchase coffee beans directly from the coffee grower. They must also do so by opening established, company-owned facilities for operations like roasting plants, warehousing, and distribution facilities. Starbucks already applies this strategy, but it needs to increase its use in its various markets.

Advantages

1. It reduces the company’s reliance on external factors, in this case, suppliers. By reducing the need to rely on outside sources for supplies, inventory management functions are easier to control (Spindler et al., 2018).
2. Lower prices occur by eliminating the middleman between farmer and distributor and reducing fees associated with third parties.
3. Real-estate investment trusts allow companies to gain more profits when they can purchase the land on which they earn their income.

Disadvantages

1. Initial startup costs can be high for backward integration. Opening one’s facilities cost significant amounts of resources and capital. This puts a massive strain on the company’s struggling to increase profits.
2. Lack of experience in the industry leads to failure of businesses. Proper research and planning are needed to enter the market.
3. Developing a new facility through backward integration involves replacing one’s current supplier with that of one’s own (Spindler et al., 2018). The transition from external supplier to company brand supplier can halt operations and disrupt the existing structure of the business.

Implementation Statement

Starbucks will need to look for new suppliers from the local farmers to implement this strategy. The success of a backward integration strategy will require the collaboration of the supply chain and marketing departments. As the marketing looks for new suppliers, the supply chain will change its structure to accommodate the new suppliers.

Alternative strategy 3: Unrelated Diversification

Starbucks can develop a product that matches the tastes and preferences of the market in stores in different geographic regions. For instance, Starbucks could have developed a tea brand in China to promote Chinese culture.

Advantages

1. Companies can use unrelated diversification to reduce cyclical and seasonal variations. By expanding into an unrelated business area, a company can offset these variations and stabilize cash flow (Ramaswamy et al., 2017).
2. Operating a group of businesses under one roof enables the management to allocate resources effectively to address every business’ needs.
3. Unrelated diversification adds more revenue generators that can fund growth and mitigate risk through diversification

Disadvantages

1. The companies are likely to suffer from insufficient spread of talents and resources. It is also challenging to have an expert that can oversee unrelated businesses successfully.
2. In unrelated diversification, it is difficult to keep and grow the brand image of every business without diluting into another (Alkasim et al., 2018).
3. Lack of shared resources can make it hard to achieve any advantages relative to the businesses (Ramaswamy et al., 2017). With unrelated diversification, the business areas are unconnected, and there is no opportunity for sharing resources between areas

Implementation Statement

Developing unrelated products involves consultation of the management, marketing, production, and supply chain department. The marketing team will conduct market research to establish the customers’ needs and consult with the managerial department. After an agreement, the supply chain will be directed on the goods and services to provide to the production department which will design the product.

Solution

Market penetration is the overall solution to Starbuck’s market development problem. It is good that it has already entered the international markets. The company needs to market products that are better suited for those geographic areas and cultures. Marketing research will determine which marketing strategies are most likely to succeed in the different markets. Customized campaign messages and methods are what Starbucks needs to increase profits from their international segments such as China (Bertels & Desplaces, 2021). The legal department will need to get all the contracts for expanding so that way the operations team can roll out their process of making sure Starbucks operates correctly. Accounting and finance will allocate funds accordingly. Marketing will design strategies to market in big cities and the new cities. Human resource management must ensure that the right people are hired for the right jobs and trained to work in the new market. All of this must be overseen by management to ensure that everything goes smoothly and adequately for market penetration to be successful.

Strategy Implementation

Management

To implement the market penetration strategy in the Chinese market, the management will plan on the specific areas to be covered, in this case, Starbucks will need to concentrate on big cities such as Hong Kong, Beijing, and Taiwan. They will also plan on how many resources to be used and the expected results. Starbucks should plan for a 20% increase in sales in the next 12 months if they invest half a million dollars in the strategy. Thus, the money shall be allocated in departments involved as follows; the marking department shall have 40%, human resource 20%, legal department 10%, finance department 15%, management 20%, and production 15%.

In the organizing phase, the management will collaborate with other departments such as human resources to deploy employees in the areas. Moreover, they also need to work with the finance department to account for the planned resources and analyze the expected returns. The marketing departments should be engaged in conducting the actual marketing activities such as the development of a marketing message, getting in contact with customers, and providing feedback. The legal department will be involved in the process of hiring spaces for billboards and publishing marketing messages. It will also be involved in getting contracts from suppliers and negotiating prices of raw materials. The production department shall be prepared to meet the expected rise in demand by hiring more staff and purchasing more raw materials. The management shall control the whole operation through managers in various departments.

Finance Department

To implement the market penetration strategy in China, Starbucks will require 908,341 million dollars. This figure is arrived at after a budget for the strategy was constructed as shown in Table 1 below.

Table 1: Market penetration strategy budget.

The company will finance this project by acquiring a loan from a favorable bank. The table1 below represents interest rates from various banks that Starbucks should choose. After comparing interest rates from various banks, Starbucks’ finance department should borrow a loan from HSBC due to its effective interest rates.

Table 2: Interest rates from potential banks.

To analyze the company’s credibility status, the finance department will analyze its financial statements as in Table 2 below.

Table 2: Starbucks financial statements for the year 2017.

Operations Department

The production/operations department is there to make sure that activities that transform inputs into finished goods. There are five basic decisions functions in production/operations: process, capacity, inventory, workforce, and quality. Starbucks will need to consider all of the decision-making areas when pursuing market penetration. All the promotions that Starbucks will do will rely on the inventory, raw materials, finished goods, and the workforce. Starbucks’ workforce would have to work quickly and efficiently to produce quality products that will be sold to customers around the world. Production/operations will be responsible for making sure that all five of the production/operations areas are performing at their full capacity to ensure that Starbucks will be able to provide its customers with quality coffee.

Legal Department

The legal department is typically responsible for all related legal matters such as litigation, investigations, compliance, mergers, and acquisitions. This is a diverse, complex, and often unpredictable portfolio of challenges. Starbucks’ legal staff is on hand to ensure that everything is done appropriately and lawfully to effectively penetrate the Chinese market without encountering any problems or breaches. First, they must ensure that all requirements are met for all contracts related to the market penetration plan. They must work with the finance and accounting department to secure funding from the bank and with operations to settle the contracts about supplies and resources. This way, they can negotiate lower prices to allocate the additional money elsewhere.

Additionally, the legal team must work with the operations team to ensure all contracts and policies are in place moving forward with the expansion. The human resource management department will use the legal to ensure the easy onboarding of new employees concerning their benefits, insurance, and other paperwork. The legal team will also help with the facilitation of contracts for the marketing team. There will be contracts for billboards, magazines, online ads, and any other advertising the marketing team does, so the legal department will need to overlook all the contracts. Management must ensure that the legal department is linked with all other corporate processes to ensure that everything is ethical and correct. The laws of doing business in China, are vastly different and therefore, legal outsourcing will be needed.

Human Resource Department

Starbucks must recruit new employees for their market penetration in China, and HRM must ensure a smooth and transition from the hiring process to the training process for these new employees. One way to ensure the seamless transition is to have a translator present or a Starbucks employee fluent in both English and Chinese. They must also assess and consider staffing requirements in collaboration with the finance and accounting departments, based on the availability of funds. Staffing levels in the current Chinese markets should be kept at a minimum until sales pick up. However, there is a need to hire local marketers as they are conversant with the consumer values and geography of the regions. HRM will also have to work closely with the legal team to ensure they are not violating any laws in China.

Management Information Systems

Starbucks widely utilizes Management Information Systems. Management Information Systems (MIS) collect, code, store, synthesize, and present information in a manner that aids in operational and strategic decision-making. The company uses this information for market penetration by tracking customers’ desires (Rothaermel, 2017). Starbucks must continue to cater its menu specifically to the company’s current target market. They must use this technic in china to sustain their customer loyalty and competitive advantage. However, with Starbucks increasing its marketing efforts, it will also need to strengthen its supply chain and advertising in the region. Data mining could help the company find new suppliers and develop new advertising strategies to match and facilitate their growth strategy of market penetration.

Research and Development

The R&D will work closely with the marketing team especially during production promotions. The marketing and R&D will mount test kitchens in malls where marketers will direct customers to taste the products. They will take note of the customers’ comments and recommendations. More so, the R&D department will incorporate local ingredients into their production to customize the production. From the data collected in the activity, the R&D will report on the necessary changes needed to their products to penetrate the Chinese market.

Marketing Department

The marketing department needs to research the Chinese tea and coffee industry to understand their culture and trends fully. Starbucks must adapt and gear its marketing advertisements towards Chinese consumers by developing marketing messages that are in line with Chinese values. Starbucks should focus the additional budget on the CAP segment and use it for billboards, signage, and ads in areas where store revenue is not up to par. They should implement an event that will attract customers. For this strategy, the company should give gifts and discounts, for instance, give a free drink coupon to the first 100 customers and a 50% paid offer to the next 50 customers. They can also have samples so new customers can taste all the great products they offer in various malls and stores outlets. Marketing for the Chinese customer and appealing to them based explicitly on research will bring in customers and build customer loyalty, which is ultimately the goal.

Control

Implementation Measures

Marketing Department

The primary objective of market implementation is to increase brand awareness which will lead to increased sales in the Chinese market. Hence, it is necessary to measure if the strategy is working as planned by measuring various parameters. To begin with, Starbucks has to find out how many potential customers is their marketing message reaching. There are various marketing strategies used such as mass media marketing, billboards, product promotions, discounts, social media, and gifts. The marketing team conducting several promotional activities will keep a record of each customer they reach out to and their responses. These records will be analyzed using a statistical analysis tool and a word cloud to display the most relevant words used. The attendants in various stores will also record the number of giveaways and discounts provided and the difference in a timeframe to measure awareness of the strategy.

Management Information Systems

To evaluate the number of people reached through various mass media channels, Starbucks Management Information Systems department will have to measure reach, frequency, rating, and gross rating point (GRP = reach x frequency). This measurement should be conducted weekly to determine if more adverts should be launched or not.

Finance Department

The finance department will keep track of the difference in sales margin to evaluate whether the company is making progress. Due to the presence of discounted offers and giveaways, the amount of profit made might not have a normal rise hence the department should only focus on the number of sales. The store attendants will also be required to submit a report containing the number of inquiries about various products and customers’ feedbacks on the products.

Human Resource Department

The human resource department needs to measure if the existing and newly hired employees are maintaining the standard quality of work as required. Starbucks is famous for maintaining a global standard of performance in all its stores. To measure their performance, the human resources department will keep track of their services and customer’s feedback. The newly employed marketed will be required to report the number of people they reached out to and the clients motivated to visit the store after their meeting.

The Legal department

The legal team will be in charge of ensuring all activities in the project follow a legal procedure. To measure their effectiveness, the legal department will document each case and how they deal with it and what needed to be done in the failed cases. They need to follow the international and Chinese laws in the project market.

The Management Department

The management will be in charge of overseeing the success of the whole operation. Hence it will measure the overall performance of the market penetration strategy. After every department has conducted its controls, it will submit the results to the managerial team which will analyse all the reports to assess whether the project is achieving the desired objectives.

Back-up Solution

The management sets forth the goal to increase market share in the Chinese markets during the timeframe of a year through promotion while keeping an eye on market development as an alternative strategy. Sometimes marketing efforts may fail to lead to a company making losses and closure (Soltani-Fesaghandis & Pooya, 2018). To avoid this, a company ought to have a backup plan in case the first one does not work. In the case of Starbucks, product development should be their backup plan. Product development involves designing and creating new products that will suit the needs and preferences of the customers (Alkasim et al., 201). In China, tea drinking is preferred to coffee hence, Starbucks could develop products with tea ingredients to increase sales and profits in the Chinese markets.

Ratio Analysis

References

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