Mode of entry & factors affecting mode of entry 1.1.Mode of entryIn internationalization process, the most important step isthe mode of entry decision.
There are several mode of entry tactics: jointventures, licensing, franchising… For this particular Icelandic market, Starbucks will use licensing as the entry mode.
Licensingis an arrangement where a licensor grants the rights to intangible property toanother entity for a specified period, and in return, the licensor receives aroyalty fee from the licensee (Paul, 2015). Licensingrequires a licensor and licensee linked with each other by a particularagreement which gains advantages for both sides. The licensee will pay theroyalty fee, and in returns, the licensor have to sell its know-how right tothe licensee for a discussed period of time. The licensor can receive a royaltyfee from the licensee, which is a considerable benefit for a licensor who haslimited capital to set up business in a new market. Finally, corporating with alocal licensee may increase the company’s opportunity of a profitable operation.
On the downside, the licensing agreement means the corporation has less strictcontrol. It is also considered a drawback for the licensor due to complicationin communication and cooperating. For any company, technical know-how is undeniablythe most important competitive advantage, therefore by having another partyacknowledging the know-how, the firm should be awared of the possibility of losingthis resource to other rivals. 1.2.Factors affecting mode of entry a.
Competition intensityThe quantity of rivals inthe mentioned market will determine the competition intensity. As referenced tothe Porter’s five forces applied in the Icelandic market, the competitionintensity is moderate to high. Local coffee stores have had a chance to blossomdue to the lack of big commercial chains like McDonald’s, though with theapproaching appearance of Starbucks, their position in the market will not beas secure as before. b.Global management requirementsAs referenced to Koch(2001), if an organisation’s pace of international development increases, atthe same time its own resources will decrease. For the past 17 years, the speedof Starbucks’ internationalization procedure has been inflating.
Beforeplanning to enter Iceland’s market, Asia has been dominated by Starbucks withalmost 100 stores opened. Thus, the company will have to reduce the fundsinvesting in Iceland as a result. c.PaceAs per the theory publishedby Brassington and Pettitt (2000), the period of time a firm wishes to spendwith the intention to expand to a brand new market is the pace component in theinternationalization procedure. In Starbucks’ case, the corporation’s size aswell as the pace of international development are continuously increasing. d.
Risk managementAs stated by Koch (2001),the most important factors that have an impact on an organisation’s mode ofentry decision are industry competitiveness, tactical alternatives and economiccondition. For the implementation in the Icelandic market, Starbucks will reacha licensing agreement with an experienced local firm to lower the risk in theoperation process. e.
Corporation’s sizeUp until 2017, with morethan 24,000 stores in 70 countries, Starbucks is undeniably a successfulcorporation. According to Koch (2001), in comparison with other small-scalecoffee houses, Starbucks could have greater potential to fully exploit itsmanagement achievements to acquire an agreement with a qualified Icelandicfirm. Nonetheless, Starbucks will not take advantage of its abilities toincrease risks in Iceland. f.Resource commitmentResource commitment andcorporation’s size are two factors that are linked to each other. As statedpreviously, Starbucks is a successful corporation with more than 24,000 storesworldwide up until 2017. Despite of that, the features of Iceland’s businessconditions was uncommon from what the company was familiar with, and Starbuckswas lacking information of this brand new market. Starbucks has capital andmanagement, but lacked the huge amount of resources to invest in Iceland’sinternationalization.
Thus, establishing the licensing arrangement with aqualified firm is a rational method to obtain information from its local collaborator.One more point worthed mentioning is that Starbucks could in some ways balanceout the restriction of its capital for international development with theroyalty fee earning through the licensing agreement. 2. Porter’s Five Forces First described by Michael Porter in hisclassic 1979 Harvard Business Review article(Porter, 1979) on how competitive forces shape strategy within an industry. Porter’stheory will be illustrated in this segment, with emphasis on the elements thatare related for this Starbucks in Iceland’s case, which intends to provide astrategic framework to assess industry attractiveness and how trends willaffect industry competition. The five forces listed including rivalryintensity, supplier power, buyer power, threat of entry and threat of substitutesare merged as demonstrated in the figure below. Figure.
“The fivecompetitive forces that shape strategy” (Porter M. E., The Five CompetitiveForces That Scape Strategy, 2008)· Rivalry amongexisting competitors: Moderate. The fixed expenses relatedto Starbucks are high, as well as the retreat barriers because of the expensesof assets and resources they have obtained. The switching costs to buyers arelow since there are many other coffee options, and the prices of Starbucks arethe highest. The increase of competition in Iceland from direct competitors isrising from Dunkin Donuts with promotions on social media and opening 16 storesall throughout the country. With Iceland’s lack of big commercial chains likeStarbucks and McDonald’s, smaller businesses have had a chance to blossom (Te& Kaffi, Mokka, Stofan Cafe). · Bargaining power ofsuppliers: Low.
With its scale of company, Starbucks certainly has acompetitive edge in comparison with other rivals in the market. Though Starbucksis able to buy its input goods from any supplier, the company spent 26% morethan the market price for all of its coffee in fiscal year 2014 report. Starbucks’suppliers are comparatively limited, despite of the power Starbucks holds dueto the amount of goods demanded.
Consequently, substitutes are accessible ifStarbucks searches for a new price range because of the high competitiveness ofthe market. Furthermore, with the disadvantages of isolated placements and low retailabilities, suppliers can not forwardly take actions by themselves. Basically,Starbucks possesses all the power in the connections it has with its suppliers.
· Bargaining power of buyers: Low. The price ranges of Starbucks’beverages is determined based on the price elasticity of its customers and thepresent prices at other competing businesses. With the concept of higherquality is based upon perception, the products of Starbucks are able to sell ata higher price range. Therefore, prices are non?debatable as the consumers have no bargaining power withStarbucks.
· Threat of newentrants: Low to Moderate. The threat of newcomers for Starbucks inIceland is moderate. Newcomers in Iceland can challenge brands like Starbucksat a local level. Although, it is undoubtly difficult for small businesses tocompete against strong brands like Starbucks; therefore, their chance of beingsuccessful stays low to moderate.
Still, it gets lessened to an abundant extentby several elements such as market share, brand loyalty and brand image. It is alsoworth mentioning that Starbucks has an advantage with its own network of suppliersand high quality materials. With all aspects considered such as corporation’ssize and potential to purchase, it is no doubt that Starbucks has access tobetter quality coffee and an enormous amount of suppliers worldwide. All theseelements act to moderate the amount of threat caused by the newcomers. Nevertheless, Starbucks does not neglect the possibilityof rivals coming into the picture and has taken adaptation into action. Forexample, the firm had purchased new machines that brew one cup of coffee individuallyfor the coffee quality purpose, as well as providing cheaper options for theircoffee size choices.
This act can be viewed as another way Starbucks isrenovating in order to preserve its tremendous market share, as well asrestraining others from considering compete. · Threat of substitute products or services: Moderate.The risk of consumers substituting away from Starbucks for direct rivals inIceland such as Te & Kaffi and Mokka is a genuine concern. As they allhonour themselves on customer service, specialty beverages, they are very hardto differentiate. The available drinks section is diversed varying from energydrinks to smoothies or juice.
Although, Starbucks sells a huge range of thesedrinks within its stores. While the greater part of coffee drinkers do notreplace coffee, the most direct replacement is tea, which Starbucks sells underits own Teavana® Tea brand. This can be considered as an ideal example of howStarbucks has successfully done a good job hedging against the risk ofreplacements with the variety of drinks it provides.