1. The licensee will pay the royalty fee, and

1.    
Mode of entry & factors affecting mode of entry

   1.1.

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Mode of entry

In internationalization process, the most important step is
the mode of entry decision. There are several mode of entry tactics: joint
ventures, licensing, franchising… For this particular Icelandic market, Starbucks will use licensing as the entry mode. Licensing
is an arrangement where a licensor grants the rights to intangible property to
another entity for a specified period, and in return, the licensor receives a
royalty fee from the licensee (Paul, 2015). Licensing
requires a licensor and licensee linked with each other by a particular
agreement which gains advantages for both sides. The licensee will pay the
royalty fee, and in returns, the licensor have to sell its know-how right to
the licensee for a discussed period of time. The licensor can receive a royalty
fee from the licensee, which is a considerable benefit for a licensor who has
limited capital to set up business in a new market. Finally, corporating with a
local licensee may increase the company’s opportunity of a profitable operation.

On the downside, the licensing agreement means the corporation has less strict
control. It is also considered a drawback for the licensor due to complication
in communication and cooperating. For any company, technical know-how is undeniably
the most important competitive advantage, therefore by having another party
acknowledging the know-how, the firm should be awared of the possibility of losing
this resource to other rivals.

   1.2.

Factors affecting mode of entry

             a.

Competition intensity

The quantity of rivals in
the mentioned market will determine the competition intensity. As referenced to
the Porter’s five forces applied in the Icelandic market, the competition
intensity is moderate to high. Local coffee stores have had a chance to blossom
due to the lack of big commercial chains like McDonald’s, though with the
approaching appearance of Starbucks, their position in the market will not be
as secure as before.

             b.

Global management requirements

As referenced to Koch
(2001), if an organisation’s pace of international development increases, at
the same time its own resources will decrease. For the past 17 years, the speed
of Starbucks’ internationalization procedure has been inflating. Before
planning to enter Iceland’s market, Asia has been dominated by Starbucks with
almost 100 stores opened. Thus, the company will have to reduce the funds
investing in Iceland as a result.

             c.

Pace

As per the theory published
by Brassington and Pettitt (2000), the period of time a firm wishes to spend
with the intention to expand to a brand new market is the pace component in the
internationalization procedure. In Starbucks’ case, the corporation’s size as
well as the pace of international development are continuously increasing.

             d.

Risk management

As stated by Koch (2001),
the most important factors that have an impact on an organisation’s mode of
entry decision are industry competitiveness, tactical alternatives and economic
condition. For the implementation in the Icelandic market, Starbucks will reach
a licensing agreement with an experienced local firm to lower the risk in the
operation process.

             e.

Corporation’s size

Up until 2017, with more
than 24,000 stores in 70 countries, Starbucks is undeniably a successful
corporation. According to Koch (2001), in comparison with other small-scale
coffee houses, Starbucks could have greater potential to fully exploit its
management achievements to acquire an agreement with a qualified Icelandic
firm. Nonetheless, Starbucks will not take advantage of its abilities to
increase risks in Iceland.

             f.

Resource commitment

Resource commitment and
corporation’s size are two factors that are linked to each other. As stated
previously, Starbucks is a successful corporation with more than 24,000 stores
worldwide up until 2017. Despite of that, the features of Iceland’s business
conditions was uncommon from what the company was familiar with, and Starbucks
was lacking information of this brand new market. Starbucks has capital and
management, but lacked the huge amount of resources to invest in Iceland’s
internationalization. Thus, establishing the licensing arrangement with a
qualified firm is a rational method to obtain information from its local collaborator.

One more point worthed mentioning is that Starbucks could in some ways balance
out the restriction of its capital for international development with the
royalty fee earning through the licensing agreement.

2. Porter’s Five Forces

First described by Michael Porter in his
classic 1979 Harvard Business Review article
(Porter, 1979) on how competitive forces shape strategy within an industry. Porter’s
theory will be illustrated in this segment, with emphasis on the elements that
are related for this Starbucks in Iceland’s case, which intends to provide a
strategic framework to assess industry attractiveness and how trends will
affect industry competition. The five forces listed including rivalry
intensity, supplier power, buyer power, threat of entry and threat of substitutes
are merged as demonstrated in the figure below.

 

Figure. “The five
competitive forces that shape strategy” (Porter M. E., The Five Competitive
Forces That Scape Strategy, 2008)

·      
Rivalry among
existing competitors: Moderate. The fixed expenses related
to Starbucks are high, as well as the retreat barriers because of the expenses
of assets and resources they have obtained. The switching costs to buyers are
low since there are many other coffee options, and the prices of Starbucks are
the highest. The increase of competition in Iceland from direct competitors is
rising from Dunkin Donuts with promotions on social media and opening 16 stores
all throughout the country. With Iceland’s lack of big commercial chains like
Starbucks and McDonald’s, smaller businesses have had a chance to blossom (Te
& Kaffi, Mokka, Stofan Cafe).

·      
Bargaining power of
suppliers: Low. With its scale of company, Starbucks certainly has a
competitive edge in comparison with other rivals in the market. Though Starbucks
is able to buy its input goods from any supplier, the company spent 26% more
than the market price for all of its coffee in fiscal year 2014 report. Starbucks’
suppliers are comparatively limited, despite of the power Starbucks holds due
to the amount of goods demanded. Consequently, substitutes are accessible if
Starbucks searches for a new price range because of the high competitiveness of
the market. Furthermore, with the disadvantages of isolated placements and low retail
abilities, 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 the
present prices at other competing businesses. With the concept of higher
quality is based upon perception, the products of Starbucks are able to sell at
a higher price range. Therefore, prices are non?debatable as the consumers have no bargaining power with
Starbucks.

·      
Threat of new
entrants: Low to Moderate. The threat of newcomers for Starbucks in
Iceland is moderate. Newcomers in Iceland can challenge brands like Starbucks
at a local level. Although, it is undoubtly difficult for small businesses to
compete against strong brands like Starbucks; therefore, their chance of being
successful stays low to moderate. Still, it gets lessened to an abundant extent
by several elements such as market share, brand loyalty and brand image. It is also
worth mentioning that Starbucks has an advantage with its own network of suppliers
and high quality materials. With all aspects considered such as corporation’s
size and potential to purchase, it is no doubt that Starbucks has access to
better quality coffee and an enormous amount of suppliers worldwide. All these
elements act to moderate the amount of threat caused by the newcomers. Nevertheless, Starbucks does not neglect the possibility
of rivals coming into the picture and has taken adaptation into action. For
example, the firm had purchased new machines that brew one cup of coffee individually
for the coffee quality purpose, as well as providing cheaper options for their
coffee size choices. This act can be viewed as another way Starbucks is
renovating in order to preserve its tremendous market share, as well as
restraining others from considering compete.

·       Threat of substitute products or services: Moderate.

The risk of consumers substituting away from Starbucks for direct rivals in
Iceland such as Te & Kaffi and Mokka is a genuine concern. As they all
honour themselves on customer service, specialty beverages, they are very hard
to differentiate. The available drinks section is diversed varying from energy
drinks to smoothies or juice. Although, Starbucks sells a huge range of these
drinks within its stores. While the greater part of coffee drinkers do not
replace coffee, the most direct replacement is tea, which Starbucks sells under
its own Teavana® Tea brand. This can be considered as an ideal example of how
Starbucks has successfully done a good job hedging against the risk of
replacements with the variety of drinks it provides.

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