Globalization and competition within the international markets demands that multinational corporations employ a series of strategies aimed at ensuring that they maintain a competitive advantage over their rivals. Such strategies can never be realized without first being aware of the external environment differences. An external environment analysis is therefore a key factor in the formulation of a successful internationalization strategy (Kennedy,1984).In this paper, we explore the concept of external environmental analysis and its role in the success of Starbucks as a multinational company.
The role of external environmental analysis in the strategic formulation of an internationalization strategy
The work of Babatunde and Adebesi (2012) noted that every organization that operates in a competitive business environment must employ strategic environmental scanning techniques in the evaluation of the external environmental forces (the opportunities and threats) in order to help the organization seize the opportunities and avoid threats and thereby gain profitability. Organizations, especially multinationals ones must strategically, continuously and periodically engage themselves in a strategic environmental scanning exercise and pay attention to the threats and opportunities in their operating environment.
Starbucks sales are increasingly slowing due to the oversaturation of the U.S. coffee market. This reality coupled by the fact that internationalization strategy couple be its way to profitability forced the company to expand its operations to other countries. The very first Starbucks operation outside the United States was initiated in 1995 in Tokyo, Japan. The work of Subhadra (2003) indicates that Starbuck’s success can be attributed in part to its profitable domestic operations. The company has a stable North American business but plans to expand extensively abroad. This expansion is part of its risk management plan. Starbucks’ internationalization strategy is based on two main strategies- joint-venture partnerships and licensing. Its success in the internationalization strategy is dependent on its ability to locate the right partners in order to help them to negotiate local laws and regulations as well as other issues that are country-specific. In its quest towards an elaborate internationalization strategy, the company has managed to expand its operations to several Asian and European countries. Its operations in Japan, Singapore and India are being hampered by several external environment factors. These factors are the reasons why its international operations reported serious losses in 2003. In 2003, the company’s Japanese operations reported serious losses to the tune of $3.9 million (Subhadra,2003).This was serious because Japan was the largest market for the corporation outside North America. Its operation in Europe as well as Middle East also suffered serious losses. According to Subhadra (2003), analysts attributed these losses to poor planning of Starbucks’ international strategy. This came at a bad time since the company needed to focus on its international operations due to the saturation of the U.S. market. Its only hope of gaining growth and revenue is the adoption of an elaborate internationalization strategy. Starbucks’ FY2012 third quarter growth is noted to have been boosted by its international operations (“Fastcasual.com”) with the largest revenue increase coming from China/Asia Pacific region. The company experienced a 13% increase in its revenue to $3.3 billion with China/Asia pacific region producing $181.8 million in revenue, an increase of 31% from the previous year. This indicates that of late, Starbucks’ internationalization strategy is a success. The internationalization expansion plan in itself became a source of risk to the company since according to the company’s annual reports; much of its growth is driven by its international operations. Its international market segment is however still in its infancy and is dogged by several problems associated with the external environment factors. The company’s operations in China, Russia and India are quite challenging die to a series of factors.
Political factors such as anti-American and anti-globalization sentiments are making it quite harder for the company to capture the Chinese customers due to their attitude and reluctance to embrace and accept coffee consumption, an activity that has for long being viewed as a Western practice. Tariffs as well as international trade regulations hugely affects the company’s profitability since it has to import most of the raw materials (roasted coffee) to its international centers of operations. High tariffs definitely affect its bottom line in a big way. China for instance, reduced the tax rate imposed on foreign companies such as Starbucks thereby providing a suitable investment and growth environment.Economic factors are another group of factors that has led to increased risk in Starbuck’s international operations. Chinese consumers for instance are known to spend less than their U.S. counterparts. This is problem for the company that mainly depends on very high margins from selling from a theme of “affordable luxury.” Exchange rates and income distribution in the target international destinations also affects its profitability. Starbucks’ international operations are exposed to risks that can be mitigated by addresses the various external environmental factors that affect its operations and profitability.
In order for Starbucks’ international operations to be profitable, it is necessary for the company to perform an elaborate external environmental analysis so as to clearly understand the various factors that affects its operations. As noted, earlier on, the work of Babatunde and Adebesi (2012) noted that every organization that operates in a competitive business environment must employ strategic environmental scanning techniques in the evaluation of the external environmental forces (the opportunities and threats) in order to help the organization seize the opportunities and avoid threats and thereby gain profitability. Organizations, especially multinationals ones must strategically, continuously and periodically engage themselves in a strategic environmental scanning exercise and pay attention to the threats and opportunities in their operating environment. As noted earlier, Starbucks’ operations are affected by political and economic factors. Political factors such as anti-American and anti-globalization sentiments are making it quite harder for the company to capture the Chinese customers due to their attitude and reluctance to embrace and accept coffee consumption, an activity that has for long being viewed as a Western practice. Tariffs as well as international trade regulations hugely affects the company’s profitability since it has to import most of the raw materials (roasted coffee) to its international centers of operations. High tariffs definitely affect its bottom line in a big way. China for instance, reduced the tax rate imposed on foreign companies such as Starbucks thereby providing a suitable investment and growth environment.Economic factors are another group of factors that has led to increased risk in Starbuck’s international operations. Chinese consumers for instance are known to spend less than their U.S. counterparts. This is problem for the company that mainly depends on very high margins from selling from a theme of “affordable luxury.” Exchange rates and income distribution in the target international destinations also affects its profitability. Starbucks’ international operations are exposed to risks that can be mitigated by addresses the various external environmental factors that affect its operations and profitability.
Fastcasual (2012). Starbucks growth boosted by international operations. < http://www.fastcasual.com/article/198181/Starbucks-growth-boosted-by-international-operations>
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