Business

When Starbucks decided to enter China market for its expansion strategy, it assessed how big the market was. Obviously, the market is big compared to other countries that Starbucks has penetrated. By adopting an international strategy, the coffee company has made a strategic priority that has long term effect on company growth. Starbucks  has 165 stores across 18 mainland Chinese cities, about 120 of which lie in the capital or around Shanghai. There are fewer than 400 Starbucks in greater China, which includes Hong Kong and Taiwan. This aggressive expansion into the huge China market has its attendant problems.        

According to Howard Schultz, CEO of Starbucks, China has emerged as the strategic priority within the company today and in the long term, (Financial Times, 2006)  He further remarked that The opportunity we have in China is like no other. China has emerged as the strategic priority of the company today and it adopted the international approach. This approach transfers distinctive competencies to foreign markets responds to national operational requirements and worldwide product and market requirements, and offers control, standardization, and choice locations for various functions that afford economies of scale. (Porter, 1983). This strategy is appropriate when there is a high demand for that competency in a foreign country, like China, while the need to customize it locally is relatively low. This was true in 1999 when Starbucks first entered the China market.

Today, Starbucks is faced with many challenges arising from its decision to put up stores in the Chinas Forbidden City, a World Heritage site. The company also is faced with management problems with its local partners and it has started to buy back equity from these partnerships in order to have more control of its stores.    Starbucks likewise has to deal with the Chinese government which has become more restrictive on the operations of foreign-owned companies in their country.

Chinese government role in Starbucks operations in China        
The Chinese government plays a very important role in Starbucks operations in China and ignoring this vital role of the government could have dire consequences. China still controls business and industry and dealing with China officials calls for prudence and tact in order not to antagonize them. It has tight control of the media and the civil society. The problem being faced by Starbucks when it was ousted from the Forbidden City of China, looked like it has political undertones. It may be a  reaction to the increasing amount of China-bashing taking place in America, especially in Congress. (The Economist, 2007).Starbucks s Entry Strategy in the Global Context
 
For its entry strategies into international market, like China, Starbucks  has a two-pronged store expansion either open company- owned and company-operated store, or else license a reputable and capable local company with retailing know-how in the target host country to develop and operate new Starbucks stores. ( Thompson ,Strickland,  Gamble 2005 C-18). However in this China expansion case, Starbucks  embarked on an expansion into second-tier markets in China while attempting to consolidate ownership control over its stores in place of partnership deals. (Financial Times. London February 14, 2006). This means that Starbucks finds that getting partners in China may not be the best strategy at all in doing business in this host country.

For a historical background on Starbucks operations in China, Starbucks entered the Chinese market in 1999 by partnering with mainland and Taiwanese food and beverage companies. By 2004, Howard Schultz, CEO of Starbucks commented that China was expected to be Starbucks biggest market outside the United States in the years to come. (( Thompson Strickland,  Gamble 2005 C-18.) It created a subsidiary, called Starbucks Coffee International, it licensing arm, to take care of the global expansion of the company and for it to develop and build the Starbucks brand name through licensees. While Schultz was against franchising as an entry strategy, he prefers licensing and he opened stores in China through partnership with local companies, in particular, partnering with mainland and Taiwanese food and beverage companies. Licensing as a strategy option for entering foreign market has its advantages. Thompson et al (2005) remark, Licensing makes when a firm with valuable technical know-how or a unique patented product has neither the organizational capability nor the resources to enter foreign market. (( Thompson Strickland,  Gamble 2005 181).Another advantage of licensing is less risks in committing resources in politically volatile foreign markets, like China.. Today, licensing as entry strategy of Starbucks in China seems to be not working well, hence, Schultz is consolidating ownership control.

The ouster of Starbucks stores in the Forbidden City is a telltale sign that all is not well in this foreign market in Asia, believed to be the biggest market in that part of the globe. But if Starbucks would like to keep its other stores in places in China outside of the Forbidden City, then it has to move cautiously in dealing with the Chinese government or else these stores would be in peril.
 Strategic choices and downsizing in the USA and  the global growth in China and elsewhere.

One strategic choice that Starbucks made was when they started buying back equity from their local partners so they will have more control over their stores. In 1999, when they first made their entry into China market, Starbucks had no choice but to agree to the mandate of the Chinese government not to have full foreign ownership of their stores. But in 2004, China relented to lift this restriction. The reason behind such a move was China wanted to join the World Trade Organization. Five years later, the government began again to restrict foreign ownerships of business establishments in their country. As a result, Starbucks got the beating through its ouster from The Forbidden City. It is feared that other American companies operating in China might likewise be restricted in their expansion strategies.

Downsizing in the USA by Starbucks impacts global growth in China and elsewhere. Strangely enough, while 12,000 workers of US-based Starbucks stores had been retrenched in 2009, the reverse is happening in China. Starbucks global growth in China has increased. It continues to expand and put up stores in many places in China, with 209 stores opened since 1999. This is because the young generation of China seeks out Starbucks as meeting place for their friends and where they can study.

Another strategic choice that Starbucks made was when they decided to make local brew. This local brew made to suit local tastes was introduced  to China market in order to increase sales.. According to China Daily (2009) Mr. Schultz said the company was looking at new ways to tailor the menu to local tastes, as US fast food chains have done. It was also seeking to buy equity from Chinese partners.

Licensing as a strategic choice made by Starbucks has its pitfalls. Porter (1985 193) points out that the two most common pitfalls of licensing are to create competitors unnecessarily in the process, and to give away the firms competitive advantage for a small royalty fee. Realizing this, Starbucks is now seeking to buy equity from their Chinese partners. This is the best way to counter the ill effects of the licensing strategy.