International Business Plan

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What is the best way to enter a new market? Should a company first establish an export base or license its

products to gain experience in a newly targeted country or region? Or does the poten!al associated with

first-mover status jus!fy a bolder move, such as entering an alliance, making an acquisi!on, or even star!ng

a new subsidiary? Many companies move from expor!ng to licensing to a higher investment strategy, in

effect trea!ng these choices as a learning curve. Each has dis!nct advantages and disadvantages.

Expor!ng is the marke!ng and direct sale of domes!cally produced goods in another country. Expor!ng is a

tradi!onal and well-established method of reaching foreign markets. Since it does not require that the goods

be produced in the target country, no investment in foreign produc!on facili!es is required. Most of the

costs associated with expor!ng take the form of marke!ng expenses.

While rela!vely low risk, expor!ng entails substan!al costs and limited control. Exporters typically have

li#le control over the marke!ng and distribu!on of their products, face high transporta!on charges and

possible tariffs, and must pay distributors for a variety of services. Further, expor!ng does not give a

company firsthand experience in staking out a compe!!ve posi!on abroad, and it makes it difficult to

customize products and services to local tastes and preferences.

Licensing essen!ally permits a company in the target country to use the property of the licensor. Such

property, such as trademarks, patents, and produc!on techniques, is usually intangible. The licensee pays a

fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because li#le investment on the part of the licensor is required, licensing can provide a very large return on

investment. However, because the licensee produces and markets the product, poten!al returns from

manufacturing and marke!ng ac!vi!es may be lost. Thus, licensing reduces cost and involves limited risk.

However, it does not mi!gate the substan!al disadvantages associated with opera!ng from a distance. As a

rule, licensing strategies inhibit control and produce only moderate returns.

Strategic alliances and joint ventures have become increasingly popular in recent years. They allow

companies to share the risks and resources required to enter interna!onal markets. And although returns

also may have to be shared, these arrangements give companies a degree of flexibility not afforded by going

it alone through direct investment.

There are several mo!va!ons for companies to consider a partnership as they expand globally, including

facilita!ng market entry, risk and reward sharing, technology sharing, joint product development, and

conforming to government regula!ons. Other benefits include poli!cal connec!ons and distribu!on channel

access that may depend on rela!onships.

Such alliances o%en are favorable when (1) the partners' strategic goals converge while their compe!!ve

goals diverge; (2) the partners' size, market power, and resources are small compared to the industry leaders;

and (3) partners are able to learn from one another while limi!ng access to their own proprietary skills.

Learning Topic

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The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology

transfer, local firm capabili!es and resources, and government inten!ons. Poten!al problems include (1)

conflict over asymmetric new investments, (2) mistrust over proprietary knowledge, (3) performance

ambiguity, that is, how to "split the pie," (4) lack of parent firm support, (5) cultural clashes, and (6) if, how,

and when to terminate the rela!onship.

Ul!mately, most companies will aim at building their own presence through company-owned facili!es in

important interna!onal markets. Acquisi!ons and greenfield start-ups represent this ul!mate commitment.

Acquisi!on is faster, but star!ng a new, wholly owned subsidiary might be the preferred op!on if no

suitable acquisi!on candidates can be found.

Also known as foreign direct investment (FDI), acquisi!ons and greenfield start-ups involve the direct

ownership of facili!es in the target country and, therefore, the transfer of resources including capital,

technology, and personnel. Direct ownership provides a high degree of control in the opera!ons and the

ability to be#er know the consumers and compe!!ve environment. However, it requires a high level of

resources and a high degree of commitment.

Coca-Cola and Illycaffé

In March 2008, the Coca-Cola company and Illycaffé Spa finalized a joint venture and launched a

premium ready-to-drink espresso-based coffee beverage. The joint venture, Ilko Coffee Interna!onal,

was created to bring three ready-to-drink coffee products—caffè, an Italian chilled espresso-based

coffee; cappuccino, an intense espresso, blended with milk and dark cacao; and la#e macchiato, a

smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be

available in stylish, premium cans (150 milliliters for caffè and 200 milliliters for the milk variants). All

three offerings will be available in 10 European Coca-Cola Hellenic markets, including Austria, Croa!a,

Greece, and Ukraine. Addi!onal countries in Europe, Asia, North America, Eurasia, and the Pacific were

slated for expansion at a later date.

The Coca-Cola Company is the world's largest beverage company. Along with Coca-Cola, recognized as

the world's most valuable brand, the company markets four of the world's top five nonalcoholic

sparkling brands, including Diet Coke, Fanta, Sprite, and a wide range of other beverages, including diet

and light beverages, waters, juices and juice drinks, teas, coffees, and energy and sports drinks.

Through the world's largest beverage distribu!on system, consumers in more than 200 countries enjoy

the company's beverages at a rate of 1.5 billion servings each day.

Based in Trieste, Italy, Illycaffé produces and markets a unique blend of espresso coffee under a single

brand leader in quality. Over 6 million cups of Illy espresso coffee are enjoyed every day. Illy is sold in

over 140 countries around the world and is available in more than 50,000 of the best restaurants and

coffee bars. Illy buys green coffee directly from the growers of the highest quality Arabica through

partnerships based on the mutual crea!on of value. The Trieste-based company fosters long-term

collabora!ons with the world's best coffee growers—in Brazil, Central America, India, and Africa—

providing know-how and technology and offering above-market prices.

Entry Strategies: Timing

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In addi!on to selec!ng the right mode of entry, the !ming of entry is cri!cal. Just as many companies have

overes!mated market poten!al abroad and underes!mated the !me and effort needed to create a real

market presence, so have they jus!fied their overseas' expansion on the grounds of an urgent need to

par!cipate in the market early. Arguing that there existed a limited window of opportunity in which to act,

which would reward only those players bold enough to move early, many companies made sizable

commitments to foreign markets even though their own financial projec!ons showed they would not be

profitable for years to come. This dogma!c belief in the concept of a first-mover advantage (some!mes

referred to as pioneer advantage) became one of the most widely established theories of business. It holds

that the first entrant in a new market enjoys a unique advantage that later compe!tors cannot overcome

(i.e., that the compe!!ve advantage so obtained is structural and therefore sustainable).

Some companies have exemplified this concept. Procter & Gamble (P&G), for example, has always trailed

rivals such as Unilever in certain large markets, including India and some La!n American countries, and the

most obvious explana!on is that its European rivals were par!cipa!ng in these countries long before P&G

entered. Given that history, it is understandable that P&G erred on the side of urgency in reac!ng to the

opening of large markets such as Russia and China. For many other companies, however, the concept of

pioneer advantage was li#le more than an ar!cle of faith and was applied indiscriminately and with

disastrous results to country-market entry, to product-market entry, and, in par!cular, to the new economy

opportuni!es created by the Internet.

The get-in-early philosophy of pioneer advantage remains popular. And while there are clear examples of its

successful applica!on—the advantages gained by European companies from being early in colonial markets

provide some evidence of pioneer advantage—first-mover advantage is overrated as a strategic principle. In

fact, in many instances, there are disadvantages to being first. First, if there is no real first-mover advantage,

being first o%en results in poor business performance, as the large number of companies that rushed into

Russia and China can a#est to. Second, pioneers may not always be able to recoup their investment in

marke!ng required to kick-start the new market. When that happens, a fast follower can benefit from the

market development funded by the pioneer and leapfrog into earlier profitability. For a more detailed

discussion, see Tellis & Golder (2002).

This ability of later entrants to free-ride on the pioneer's market development investment is the most

common source of first-mover disadvantage and suggests two cri!cal condi!ons necessary for real first-

mover advantage to exist. First, there must be a scarce resource in the market that the first entrant can

acquire. Second, the first mover must be able to lock up that scarce resource in such a way that it creates a

barrier to entry for poten!al compe!tors. A good example is provided by markets in which it is necessary for

foreign firms to obtain a government permit or license to sell their products. In such cases, the license, and

perhaps government approval, more generally, may be a scarce resource that will not be granted to all

comers. The second condi!on is also necessary for first-mover advantage to develop. Many companies

believed that brand preference created by being first cons!tuted a valid source of first-mover advantage,

only to find that, in most cases, consumers consider the alterna!ves available at the !me of their first

purchase, not which came first.

Starbucks’ Global Expansion

Starbucks' decision to expand abroad came a%er an extended period of exclusive focus on the North

American market. From its founding in 1971, it grew to almost 700 stores by 1995, all within the

United States and Vancouver, Canada. It was not un!l the next decade that Starbucks made its first

entry into other interna!onal markets. By 2006, Starbucks operated approximately 11,000 stores—with

70 percent in the United States and 30 percent in interna!onal markets—and interna!onal revenue had

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grown to almost 20 percent of Starbucks' total revenue. Starbucks offered the same basic coffee menu

interna!onally as it did in the United States. However, the range of food products and other items, such

as coffee mugs stocked, varied somewhat according to local customs and tastes.

Along with many other companies that pursue global expansion, Starbucks con!nually faces ques!ons

about where and how to further increase its global presence. Should the emphasis be on growth in

exis!ng countries or on increasing the number of countries in which it has a presence? How important

is the fact that interna!onal markets so far have proven less profitable than US and Canadian markets?

Starbucks in Japan

Interes!ngly, Starbucks' first move outside the United States and Canada was a joint venture in Japan.

At the !me, Japan had the second-largest economy in the world and was consistently among the top

five coffee importers.

The decision to use a joint venture to enter Japan followed intense internal debate. Concerns among

senior execu!ves centered on Starbucks' lack of local knowledge, and ques!ons were raised about the

company's ability to a#ract the local talent necessary to grow the Japanese business quickly enough.

Starbucks was acutely aware that there were significant differences between doing business in Japan

and in the United States and that it might not have enough experience to be successful on its own.

Among other factors, opera!ng costs were predicted to be double those of North America, and

Starbucks would have to pay to ship coffee to Japan from its roas!ng facility in Kent, Washington (near

Sea#le). In addi!on, retail space in Tokyo was two to three !mes as expensive as in Sea#le. Just finding

rental space in such a populous city might prove to be a tremendous challenge. Starbucks concluded it

needed to form an alliance with a local group that had experience with complex opera!ons and real

estate.

Starbucks execu!ves worried that a licensing deal would not be the right solu!on. Specifically, they

were concerned about a possible loss of control and insufficient knowledge transfer to learn from the

experience. A joint venture was thought to be a be#er answer, and, a%er a long search, Starbucks

approached Sazaby, Inc., operators of upscale retail and restaurant chains, whose president had

approached Starbucks years earlier about the poten!al of opening Starbucks stores in Japan. Similarity

in values, culture, and community development goals between Starbucks and Sazaby were important

considera!ons in concluding the 50-50 deal. The two companies were equally represented on the

board of directors of the newly created Starbucks Coffee Japan. Starbucks was the sole decision-

making power in ma#ers rela!ng to brand, product line adver!sing, and corporate communica!ons,

while decisions regarding real-estate opera!onal issues and human resources were handled by Sazaby.

Despite strong local compe!!on, the venture was successful from the start. By fiscal year 2000,

Starbucks Coffee Japan became profitable more than two years ahead of schedule.

Starbucks in the United Kingdom

Unlike its expansion into Asia and later, the Middle East, Starbucks chose to enter the United Kingdom

through acquisi!on rather than partnerships. Speed was a major factor in Starbucks' decision to enter

the fast-growing UK market by acquisi!on. In addi!on, the culture, language, legal environment,

management prac!ces, and labor economics in the United Kingdom were considered sufficiently similar

to those that Starbucks' management already knew. This meant that a wholly owned UK subsidiary

could be successfully established from the outset. In May 1998, Starbucks acquired the Sea#le Coffee

Company, which had had a presence in the United Kingdom for some !me. This fast-growing chain was

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modeled on its own style of opera!ons and, at the !me of the purchase, had 56 retail units. The Sea#le

Coffee Company was an a#rac!ve acquisi!on target because of its focus—rela!vely small market

capitaliza!on and established retail units. By 2005, Starbucks had 469 stores in the United Kingdom,

which made it the third-largest country, a%er the United States and Japan, to serve Starbucks coffee.

Licensing in China

In a number of developing markets, including China, Starbucks chose to enter into minority share

licensing agreements with high-quality, experienced local partners in order to minimize market-entry

risks. Under these agreements, the local partners absorbed the capital costs (real estate, store

construc!on) of bringing the Starbucks brand abroad. These steps eliminated the need for substan!al

general and administra!ve expenses by Starbucks and enabled it to establish a presence in foreign

markets much more quickly than it would have if it had to invest its own capital and absorb start-up

losses.

Risk was also a major considera!on when Starbucks looked to enter China. While offering high-volume

opportuni!es in an untapped coffee market, the prevailing culture and poli!cs in China poten!ally

posed significant problems. In April 2000, Beijing city authori!es ordered Kentucky Fried Chicken to

close its store near the Forbidden City when its lease expired in 2002. Similarly, under pressure from

local authori!es, McDonald's removed its golden arches from outlets near Tiananmen Square. These

incidents demonstrated China's ambiguous a&tude toward a growing Western economic and cultural

influence.

Another major concern with star!ng opera!ons in China was recrui!ng the right staff. Uniformity of

customer experience and coffee quality was the key driver behind the Starbucks brand. Failure to

recruit the staff to ensure these key criteria not only would mean failure for the Chinese retail outlets

but also could harm the company's image globally.

Although these factors made licensing an a#rac!ve entry model, with growing experience in the

Chinese market, Starbucks is steadily reducing its reliance on the licensing model and switching to its

core company-operated business model to increase control and reap greater rewards.

Starbucks' globaliza!on history shows that while it was a first mover in the United States, it was forced

to push harder in interna!onal markets to compete with exis!ng players. In Japan, Starbucks was

ini!ally a huge success and became profitable two years earlier than an!cipated. However, just two

years a%er Starbucks Japan had become profitable, the company announced a loss of $3.9 million in

Japan, its second largest market at the !me, reflec!ng a major increase in local compe!!on. Addi!onal

interna!onal challenges were a result of Starbucks' chosen entry mode. Although joint ventures

provided Starbucks with local knowledge about the market and a low-risk entry into unproven territory,

joint ventures did not always reap the rewards that the partners had an!cipated. One key factor was

that it was o%en difficult for Starbucks to control the costs in a joint venture, resul!ng in lower

profitability.

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Glossary

expor"ng The marke!ng and direct sale of domes!cally produced goods in another country

fast follower A firm that uses the benefits from prior market development by a pioneering firm to achieve profitability more quickly

foreign direct investment (FDI)

A firm's direct ownership of facili!es in a target country market

greenfield start-ups Wholly-owned subsidiaries created by firms to gain entry in foreign markets

joint ventures Methods by which firms share the resources and risks required to enter interna!onal markets

licensing Permits a firm (licensee) in the target country to use the intangible property of the licensor for a fee

strategic alliances Methods by which firms share the resources and risks required to enter interna!onal markets

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Selec!ng global target markets, entry modes, and deciding how much to adapt the

company's basic value proposi!on are in!mately related. The choice of customers to

serve in a par!cular country or region with a par!cular culture determines how and how

much a company must adapt its basic value proposi!on. Conversely, the extent of a

company's capabili!es in tailoring its offerings around the globe limits or broadens its

op!ons to successfully enter new markets or cultures.

Few companies can afford to enter all markets open to them. The track record shows

that picking the most a#rac!ve foreign markets, determining the best !me to enter

them, and selec!ng the right partners and level of investment has proven difficult for

many companies, especially when it involves large emerging markets such as China.

Research shows there is a pervasive the-grass-is-always-greener effect that infects global

strategic decision making in many companies—especially those without global experience

—and causes them to overes!mate the a#rac!veness of foreign markets.

Four key factors in selec!ng global markets are (1) a market's size and growth rate, (2) a

par!cular country or region's ins!tu!onal contexts, (3) a region's compe!!ve

environment, and (4) a market's cultural, administra!ve, geographic, and economic

distance from other markets the company serves.

There is a wide menu of op!ons regarding market entry, from conserva!ve strategies,

such as first establishing an export base or licensing products to gain experience in a

newly targeted country, to more aggressive op!ons, such as entering an alliance, making

an acquisi!on, or even star!ng a new subsidiary.

Selec!ng the right !ming of entry is equally cri!cal. Many companies have overes!mated

market poten!al abroad, underes!mated the !me and effort needed to create a real

market presence, and have they jus!fied their overseas expansion on the grounds of an

urgent need to par!cipate in the market early.

References

Davila, A., Foster, G., Pu#, C., & Somjen, A. (2006). Starbucks: A global work-in-progress (Case No. IB74).

Retrieved from h#ps://www.gsb.stanford.edu/faculty-research/case-studies/starbucks-global-work-

progress

Tellis, G. J., & Golder, P. (2002). Will and Vision: How latecomers grow to dominate markets. New York, NY:

McGraw Hill.

Licenses and A#ribu!ons

Fundamentals of Global Strategy v. 1.0 (h#ps://saylordotorg.github.io/text_fundamentals-of-global-

strategy/) was adapted by Saylor Academy and is available under a Crea!ve Commons A#ribu!on-

NonCommercial-ShareAlike 3.0 Unported (h#ps://crea!vecommons.org/licenses/by-nc-sa/3.0/) license

without a#ribu!on as requested by the work's original creator or licensor. UMUC has modified this work

and it is available under the original license.

Key Points

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