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The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).
• Submissions without this cover page will NOT be accepted.
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المملكة العربية السعودية
وزارة التعليم
الجامعة السعودية اإللكترونية
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 1
Strategic Management (MGT 401)
Due Date: 09/03/2024 @ 23:59
Course Name: Strategic Management
Student’s Name:
Course Code: MGT 401
Student’s ID Number:
Semester: Second Term
CRN: 24911
Academic Year:2023-24-Second term
For Instructor’s Use only
Instructor’s Name: Dr. Farhat Anjum
Students’ Grade:
/10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY
•
•
•
•
•
•
•
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.
Course Learning Outcomes (CLOs):
1.
2.
3.
Recognize the basic concepts and terminology used in Strategic Management (CLO1)
Describe the different issues related to environmental scanning, strategy formulation, and strategy
implementation in diversified organizations- CLO2
Explain the contribution of functional, business, and corporate strategies to the competitive advantage of the
organization-CLO3.
Case study
Read carefully case No. 5 from your textbook (entitled ‘Starbucks Coffee Company) and answer
briefly the following questions: (1 mark each question)
1.
2.
3.
4.
Draw the SWOT matrix of the new Starbucks company.
Provide examples of the Corporate Social Responsibilities (CSR).
What is the competitive strategy used by this company? Justify.
Use the five forces of the M. Porter matrix to describe the Starbucks industry, particularly,
in Japan.
5. Describe the relationship of Starbucks with its primary stakeholders.
6. Describe the core competency of Starbucks company.
7. What kinds of strategic alliances are used by Starbucks in China?
8. What are the main challenges that this company faces in the Indian market?
9. Assess the competitive advantage of Starbucks in the global market.
10. Recommend solutions for Starbucks to improve its competitive advantage in both Japan
and China.
Good Luck
______________________________________________
Answers
1.
2.
3.
SECTION C
International Issues in Strategic Management
CASE
5
Starbucks Coffee Company:
THE INDIAN DILEMMA
Ruchi Mankad and Joel Sarosh Thadamalla
As the world’s second most populous country, with more than 1 billion people and growing at 6% per year,
we see unique and great opportunity for bringing the Starbucks experience to this market (India).1
HOWARD SCHULTZ, CHAIRMAN, STARBUCKS CORPORATION
India is an important long-term growth opportunity in the Asia Pacific region. We’re looking at our own strategy . . .
We believe there is a growing affinity for global brands.2
MARTIN COLES, PRESIDENT, STARBUCKS COFFEE INTERNATIONAL
IN 2006, STARBUCKS COFFEE COMPANY (STARBUCKS), the world’s No.1 specialty coffee retailer had over 11,000 stores in 36 countries of the world and employed over 10,000 people (see Exhibit 1). Every week over 40 million customers visited Starbucks
coffeehouses. The company had over 7,600 retail locations in the United States, which
was its home country and its biggest market. After phenomenal success in the United
States, Starbucks entered one country after another and popularized its specialty coffee
worldwide.
During the 1990s, Starbucks concentrated its expansion efforts mainly in Asia. In 1995 it
entered Japan and by late 1990s Japan had became the second-most-profitable market for
Starbucks. In 1999, Starbucks entered China and by 2006 Starbucks had become the leader in
specialty coffee in China and had moved China up to the No. 1 priority.3
After Japan and China, Starbucks expressed its intentions to enter India. In 2002, Starbucks announced for the first time that it was planning to enter India.4 Later it postponed
its entry as it had entered China recently and was facing problems in Japan. In 2003, there was
news again that Starbucks was reviving its plans to enter India. In 2004, Starbucks
Copyright © 2008, ICFAI. Reprinted by permission of ICFAI Center for Management Research (ICMR), Hyderbad,
India. Website: www.icmrindia.org. The authors are Ruchi Mankad and Joel Sarosh Thadamalla. This case cannot be
reproduced in any form without the written permission of the copyright holder, ICFAI Center for Management
Research (ICMR). Reprint permission is solely granted by the publisher, Prentice Hall, for the books, Strategic
Management and Business Policy–13th Edition (and the International version of this book) by copyright holder,
ICFAI Center for Management Research (ICMR). This case was edited for SM&BP-13th edition. The copyright
holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or
other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless ICFAI
Center for Management Research (ICMR) has granted an additional written reprint permission.
5-1
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International Issues in Strategic Management
EXHIBIT 1
Starbucks Timeline
1971: The first Starbucks, under partners Gordon Bowker, Jerry Baldwin, and Zez Siegel, is
opened across from Pike Place Market in Seattle, Washington.
1972: A second Starbucks store is opened in Seattle.
Early 1980s: Zev Siegel leaves the company. Jerry Baldwin takes over management of the
company and functions as CEO. Gordon Bowker remains involved as a co-owner but other
projects take up most of his time.
1982: Howard Schultz joins the company, taking charge of marketing and overseeing the retail stores.
1984: Starbucks acquires the five stores in San Francisco’s Peet’s Coffee and Tea chain.
April 1984: Starbucks opens its fifth store, the first one in downtown Seattle. Schultz convinces
the owners to test an espresso bar, making this Starbucks the first to sell coffee beverages.
It becomes a huge success.
Late 1984: The Starbucks founders are still resistant to installing espresso bars into other
Starbucks locations and Schultz becomes increasingly frustrated. He has visited the
espresso bars of Milan, Italy, and has a vision of bringing Italian-style espresso bars to
America.
Late 1985: Schultz leaves Starbucks and starts the Il Giornale Coffee Company.
April 1986: The first Il Giornale store opens.
March 1987: Baldwin and Bowker decide to sell the Starbucks Coffee Company.
Aug. 1987: Schultz acquires Starbucks and rebrands all of his Il Giornale coffee houses with
Starbucks name.
1992: Starbucks goes public with its initial public stock offering. At this time it has 165 outlets.
1996: The first Starbucks opens outside of North America in Tokyo, Japan.
Sept. 1997: Starbucks Chairman Howard Schultz publishes a book called Pour Your Heart Into
It: How Starbucks Built a Company One Cup at a Time.
1999: Starbucks enters Hong Kong and China.
April 2003: Starbucks purchases Seattle’s Best Coffee and Torrefazione Italia from AFC
Enterprises and turns them all into Starbucks outlets. By this time, Starbucks has more than
6,400 outlets worldwide.
Oct. 4, 2004: XM Satellite Radio and Starbucks Coffee Company announce the debut of the
Starbucks “Hear Music” channel on XM Radio. The station will feature 24-hour music programming featuring an “ever-changing mix of the best new music and essential recordings
from all kinds of genres.”
Sept. 8, 2005: Starbucks announces plans to donate funds and supplies to the Hurricane Katrina
relief effort, worth monetary donations over $5 million as well as donations of coffee, water, and tea products.
Late 2005: Starbucks and Jim Beam Brands Co., a unit of Fortune Brands Inc., introduce a coffee liqueur product in the United States and announces plans to launch the product in 2006
in restaurants, bars, and retail outlets where premium distilled spirits are sold. The product
will not be sold in company-operated or licensed stores.
SOURCE: Compiled from www.starbucks.com.
officials visited India but according to sources they returned unconvinced as they could not
crystallize on an appropriate partner for its entry. In mid 2006, a Starbucks spokesperson
said, “We are excited about the great opportunities that India presents to the company. We
are looking forward to offering the finest coffee in the world, handcrafted beverages, the
unique Starbucks experience (see Exhibit 2) to customers in this country within the next
18 months.”5
CASE 5
Starbucks Coffee Company
5-3
EXHIBIT 2
The Starbucks
Experience
Howard Schultz believed that Starbucks did not sell just a cup of coffee but provided a Starbucks
experience, which he defined as, “You get more than the finest coffee when you visit a Starbucks—
you get great people, first-rate music, a comfortable and upbeat meeting place, and sound advice
on brewing excellent coffee at home. We establish the value of buying a product at Starbucks by
our uncompromising quality and by building a personal relationship with each of our customers.
Starbucks is rekindling America’s love affair with coffee, bring romance and fresh flavor back to
the brew.6
Starbucks’ outlets provided a captivating atmosphere. Its stores were distinctive, sleek, and
comfortable. Though the sizes of the stores and their formats varied, most were modeled after the
Italian coffee bars where regulars sat and drank espresso with their friends. Starbucks stores tend
to be located in high-traffic locations such as malls, busy street corners, and even grocery stores.
They were well lighted and featured plenty of light cherry wood and artwork. The people who prepared the coffee are referred to as “baristas.” Jazz or opera music played softly in the background.
The stores ranged from 200 to 4,000 square feet, with new units tending to range from 1,500 to
1,700 square feet.
SOURCE: Compiled by IBS Ahmedabad Research Center.
About Starbucks
The Initial Years
In 1971, three partners, Gordon Bowker, Jerry Baldwin, and Zev Siegel opened a store in
Seattle to roast and sell quality whole coffee beans. The trio had a passion for dark-roasted coffee, which was popular in Europe but yet to catch on in the United States. They chose Starbucks
Coffee, Tea and Spice as the name of their store. The name Starbucks was taken from the name
of a character from the novel Moby Dick. They chose the logo of a mermaid encircled by the
store’s name. The store offered a selection of 30 different varieties of whole-bean coffee, bulk
tea, spices and other supplies but did not sell coffee by the cup. The popularity of the store grew
and within 10 years, it employed 85 people, had five retail stores which sold freshly roasted
coffee beans, a small roasting facility, and a wholesale business that supplied coffee to local
restaurants. Its logo had become one of the most visible and respected logos.
Howard Schultz and Starbucks
Howard Schultz, who was later to lead Starbucks, was born in 1953. He started his career as
a sales trainee at Xerox.7 After three years at Xerox, the 26-year-old Schultz joined a Swedish
housewares company, Hammerplast, which sold coffee makers to various retailers and Starbucks was one of its major customers. In 1981, Schultz visited Starbucks while on a business
trip to Seattle. After visiting the company and its owners, he was completely fascinated. He
realized that the specialty coffee business was close to his heart and he decided to be a part
of Starbucks. In 1982 Schultz joined Starbucks as director, Retail Operations & Marketing.
In 1983, while on a company trip to Milan, Italy, Schultz observed the immense popularity of coffee, which was central to the national culture. In 1983, there were around 200,000
coffee bars in Italy and 1,500 coffee bars in Milan alone. The espresso8 bars in the cities had
trained baristas9 who used high-quality Arabica beans to prepare espresso, cappuccino, and
other drinks. Schultz witnessed that though each coffee bar had its own individual character,
all provided a sense of comfort and the ambience of an extended family. During his week-long
5-4
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International Issues in Strategic Management
stay in Milan, he made frequent visits to espresso bars. These visits were a revelation to
Schultz, which he described in his book10 thus:
As I watched, I had a revelation: Starbucks had missed the point, completely missed it… The connection to the people who loved coffee did not have to take place only in their homes, where they
ground and brewed whole-bean coffee. What we had to do was unlock the romance and mystery
of coffee, firsthand, in coffee bars. The Italians understood the personal relationship that people
could have to coffee, its social aspect. Starbucks sold great coffee beans, but we didn’t serve coffee by the cup. We treated coffee as produce, something to be bagged and sent home with the groceries. We stayed one big step away from the heart and soul of what coffee has meant throughout
the centuries.11
Schultz was convinced that he could recreate the Italian coffee culture in the United
States through Starbucks and differentiate it from other specialty coffee suppliers. After returning, he tried to convince the owners to build Starbucks into a chain of Italian style
espresso bars, but they refused. In 1985, Schultz left Starbucks and launched his own coffee
bar; Il Giornale12 coffee bar chain. The first Il Giornale store was opened in mid-1986 in a
well-known office building in Seattle. The décor of the store resembled an Italian style coffee bar. The baristas wore white shirts and bow ties. All service was stand-up and no seating
was provided. National and international newspapers were hung on stands. Only Italian opera
was played. The store offered high-quality coffee in whole beans and in espresso drinks, such
as cappuccino and caffe lattes.13 It also offered salads and sandwiches. The menu was covered with Italian words. With the passage of time, many changes were done in the store décor
based on feedback from customers. Chairs were added for those customers who wanted to
stay longer in the store. Carryout business constituted a large part of the revenues, so paper
cups for serving carryout customers were introduced. The store gained popularity and within
six months the store was serving more than 1,000 customers a day. A second store opened in
Seattle, six months after the first store. For the third store, Giornale went international and
opened a store in Vancouver, British Columbia, in mid-1987. By this time, the sales in each
store had reached around $500,000 a year.14
The New Starbucks
In early 1987 the founders of Starbucks decided to sell the assets of Starbucks, including its
name. As soon as Schultz came to know about the decision, he decided to buy Starbucks. In
August 1987, Schultz with the help of investors bought Starbucks, including its name, for
$3.8 million.15 All the stores were consolidated under the name Starbucks. Schultz promised
the investors that Starbucks would open 125 stores in the next five years.
Starbucks first always gained a foothold in the market it entered and then moved on to the
next market. Starbucks entered Chicago in 1987. Chicago proved a difficult market and presented several challenges to the company, initially. It took around three years for Starbucks to
become successful in Chicago and by 1990 it was able to build a critical mass of loyal customers. Starbucks entered Los Angles in 1991 and achieved success without much struggle.
As in other markets, Starbucks did not advertise its locations heavily but relied on the wordof-mouth promotions by the consumers.
Between 1990 and 1992 sales at Starbucks increased almost 300% and reached $103 million.
Earnings reached to $4.4 million in 1992. Starbucks came out with an IPO16 in 1992, which
was very successful and raised $29 million for the company.
In 1993, Starbucks opened its first store in Washington, D.C. After succeeding in Washington, Starbucks opened stores in New York and Boston in 1994. Starbucks opened stores at
places that were home to many opinion makers. Within a short duration, Starbucks was rated
CASE 5
Starbucks Coffee Company
5-5
as the best coffee in New York. In Boston after opening a few company-owned stores, Starbucks acquired the leading competitor, The Coffee Connection. The Coffee Connection was
founded in 1975 and had around 24 stores in Boston in 1994. It specialized in light-roasted
gourmet coffee and had a loyal customer base in Boston. After the acquisition, Starbucks became the leading player in Boston overnight.
Hot drinks at Starbucks were available in four cup sizes: Venti containing 20 oz.,17 Grande
containing 16 oz., Tall containing 12 oz., and Short containing 8 oz. Cold drinks were available in three cup sizes; Iced Venti–24 oz., Iced Grande–16 oz., and Iced Tall–12 oz.18 In 1994,
Starbucks launched Frappuccino, a cold drink made from coffee, sugar, low-fat milk, and ice.
It became an instant hit and drew many non–coffee drinkers also to the store. In 1995, more
than three million people visited Starbucks stores each week.19
Over time and with experience, Starbucks developed a sophisticated store-development
process based on a six-month opening schedule. The process enabled it to open a store every
day. In 1996 alone, Starbucks opened 330 outlets. It also refined its expansion strategy. Schultz
said, “For each region we targeted a large city to serve as a hub where we located teams of professionals to support new stores. We entered large markets quickly, with the goal of opening
20 or more stores in the first two years. Then from that core we branched out, entering nearby
spoke markets, including smaller cities and suburban locations with demographics similar to
our typical customer mix.”20
Starbucks was opposed to the concept of franchising. Schultz believed that, “If we had
franchised, Starbucks would have lost the common culture that made us strong. We teach
baristas not only how to handle the coffee properly but also how to impart to customers our
passions for our products. They understand the vision and value system of the company, which
is seldom the case when someone else’s employees are serving Starbucks coffee.”21
Starbucks initially believed in selling coffee only through its own outlets. But with the passage of time, to broaden its distribution channels and product line, it started to enter into strategic alliances. Schultz said, “When we enter into any partnership, we first assess the quality of
the candidate. We look for a company that has brand name recognition and a good reputation in
its field, be it hotels or airlines or cruise ships. It must be committed to quality and customer service. We look for people who understand the value of Starbucks and promise to protect our brand
and the quality of our coffee. All these factors are weighted before financial considerations.”22
The first strategic alliance Starbucks entered was with the real estate company Host
Marriott wherein Starbucks licensed Marriott to open Starbucks outlets at select airport locations. Starbucks licensed Aramark23 to open Starbucks stores at a few college campuses. Other
partnerships were with the department store Nordstrom, the specialty retailer Barnes & Noble,
the Holland America cruise lines, Starwood hotels, Dreyer’s Grand Ice Cream, and United Airlines. Under a joint venture with PepsiCo Inc.,24 a new version of Frappuccino was bottled and
sold through grocery stores.
Starbucks maintained a non-smoking policy at all its outlets worldwide. It believed that
the smoke could adversely affect the aroma of its coffee. For similar reasons, its employees
were required to refrain from using strong perfumes.
Focusing on Asia
In 1994, Starbucks International was formed and Howard Behar became its president. Starbucks
pursued international expansion with three objectives in mind: to prevent competitors from getting a head start, to build upon the growing desire for Western brands, and to take advantage of
higher coffee consumption rates in different countries.25 Starbucks entered new markets outside
the United States either through joint ventures, licenses, or by company-owned operations. In
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SECTION C
International Issues in Strategic Management
1996, Starbucks entered Japan, Hawaii, and Singapore. In 1998, it entered Taiwan, Thailand,
New Zealand, and Malaysia, and in 1999, it opened stores in Kuwait, Korea, Lebanon, and
China. During the 1990s Starbucks concentrated its expansion efforts mainly in Asia. Schultz
said, “The maturity of the coffee market in Europe was very strong and was not going to change
much over the years. The Asian market share was in its developmental stage and we had an
opportunity to position Starbucks as a leader in a new industry, and in a sense, educate a market
about the quality of coffee, the experience, and the idea of Starbucks becoming the third place
between home and work in those countries.”26
Starbucks in Japan
As its first international destination, Starbucks chose Japan because it was the third-largest
coffee importer in the world after the United States and Germany and the largest economy
in the Pacific Rim. Japan originally was a tea-drinking country and the per capita consumption of coffee in Japan in 1965 was only 300 grams per year.27 Owing to the decade-long
promotional activities of coffee companies and coffee associations, coffee became immensely popular in Japan and by 1990s the per capita consumption of coffee had reached
3.17 kilograms.28
In the Japanese coffee industry, specialty blends were the fastest growing segment.
Gourmet coffee accounted for 2.5% of the 1.2 billion pounds of coffee imported by Japan annually. The average per capita consumption among gourmet coffee drinkers had doubled from
1990 to 1.5 cups a day in 1997.29 An industry analyst said, “The Japanese have taken to coffee like a baby to milk.”30
In 1995, Starbucks entered Japan with a joint venture—Starbucks Coffee Japan, Ltd. with
a leading Japanese retailer and restaurant operator, Sazaby Inc. In 1996, Starbucks opened its
first shop in the upscale Ginza shopping district, Tokyo, Japan. The décor and logo of the stores
were similar to its U.S. stores. The menu remained the same but with slight variations. The
store also offered Starbucks coffee beans and coffee-making equipment as well as fresh pastries and sandwiches. The store gathered a huge crowd on the opening day and Japanese lined
around the block to get a taste of the Starbucks coffee.
The initial sales volume in Japan was twice as that in the United States. Starbucks rapidly
expanded and by 1997 it had 10 stores at prime locations. Despite the slump in economic
growth in Japan in the late 1990s, Starbucks remained profitable. Japan had become the most
profitable market for Starbucks outside North America. The success of Starbucks and the
growing popularity of coffee propelled other players to enter Japan.
By 2002, Starbucks had opened over 360 stores in Japan. But in the same year, Starbucks incurred huge losses in its Japanese operations. According to analysts, Starbucks
was opening stores too close to each other, which affected its brand image. Food menu
was another reason, for Japanese consumers, food was a major part of the coffee experience. The no-smoking policy of Starbucks also displeased many. As a result many competitors took advantage and included an elaborate food menu with coffee and had separate
smoking areas. Other challenges that Japan presented to Starbucks were high rent and cost
of labor. The land rent rate in Tokyo was more than double that of Seattle. Moreover, Starbucks did not have a roasting facility in Japan; it had to ship coffee from its roasting
facility in Kent.
After cost-cutting exercises and introduction of new products based on consumer
research, Starbucks Japan returned to profitability in 2004. By 2006, Starbucks had over 600
retail locations in Japan.31
CASE 5
Starbucks Coffee Company
5-7
Starbucks in China 32
A key component of our development in the China market was finding the right business partner who understands the marketplace, and, more importantly, share similar values, vision, and business philosophy.33
Howard Schultz
Starbucks had begun its groundwork for entering China since 1994 and entered China in
1999. Starbucks decided to first enter Hong Kong. In Hong Kong, Starbucks created a joint
venture, Coffee Concepts (Hong Kong) Ltd., with Maxim’s Caterer, a food and beverage
company that had 46 years of experience in Hong Kong. Maxim had a thorough know-how
of establishing and running businesses in China. Maxim was also the business partner of
Hong Kong Land Company, which had cornered a lot of real estate market in Hong Kong.
Maxim provided Starbucks with valuable insights about Chinese preferences.
After Hong Kong, Starbucks opened a store at Beijing through a joint venture with Beijing
Mei Da Coffee Co. Ltd.34 The first Starbucks store opened in 1999 at the China World
Trade Center, Beijing. The store opening was celebrated according to Chinese traditions. The
store offered a complete menu of Starbucks internationally acclaimed coffee beverages, a selection of more than 15 varieties and blends of the finest Arabica coffee beans, freshly baked
local pastries and desserts, and a wide selection of coffee brewing equipment, accessories, and
service-ware. The ambience and décor of the store were kept similar to its stores in the United
States. After Beijing, Starbucks opened stores in Shanghai. As in other markets, Starbucks did
not market, advertise, or promote its stores in China and relied mainly on word-of-mouth promotion. Starbucks selected high visibility, high traffic locations to open its stores.
By 2002 Starbucks had expanded to 50 outlets in China. Pedro Man, the then-president
of Starbucks Asia Pacific said, “These are still early days of our expansion in the China market. Our approach is very focused. We plan to open one store at a time, serve one customer
at a time.”35
In 2003, Starbucks raised its stake in its joint venture operations in Shanghai to 50%. In
mid-2005, Starbucks became the majority owner of its operations in Southern China. The first
wholly owned and operated Starbucks store opened in Qingdao36 in 2005 and by mid-2006,
there were nine wholly owned stores in Qingdao, Dalian, and Shenyang.37
Starbucks had to face many challenges in China. In its initial years, many were opposed to the opening of a Western coffee chain in China, which was traditionally a tea
drinking country. Another challenge it faced was the dominance of instant coffee among
coffee drinkers. Specialty coffee was limited to mainly urban consumers. Competition had
also grown intense and many domestic and foreign players were setting up specialty coffee shops. Despite the challenges, Starbucks achieved significant success in China and became the leader in specialty coffee. By 2005, China contributed to little less than 10% of
the global sales of Starbucks and by 2008, Starbucks expected to derive 20% of its revenue
from Chinese locations.38
The Next Destination
In 2006, Schultz said,39 “We are equally excited about two other major markets we intend to
enter during 2007—India and Russia (see Exhibit 3). We are in discussions with potential joint
venture partners. Meanwhile, we are scouting locations, meeting with government officials—
all toward gaining additional market knowledge and building critical relationships to make
our market entries a success.”40
5-8
SECTION C
International Issues in Strategic Management
About India
India had embarked on a series of economic reforms since 1991. The reforms included liberalization of foreign investment, significant reduction in tariffs and other trade barriers and
significant adjustments in government policies.41 The reforms over the years had resulted in
higher growth rates, lower inflation, and significant increase in foreign investment (see
Exhibit 4). In 2006, India was ranked as the fourth-largest economy in the world in terms of
purchasing power parity42 and the tenth-most-industrialized country in the world.43 In 2006,
the middle class44 in India was estimated at around 250 million and was growing in double
digits in urban and second tier 45 cities.46 The spending power had increased considerably in
the recent years (see Exhibit 5). According to a report47 by KPMG,48 disposable incomes remained concentrated in urban areas, well-off and affluent classes, and double-income households. Consumers in the age group of 20–45 years were emerging as the fastest growing
consumer group.
India’s population was one of the youngest in the world and was to remain the youngest in
the coming years (see Exhibit 6). In 2000, one-third of India’s population was below 15 years
EXHIBIT 3
India’s Performance
against Competing
Nations
Parameter
India
Indonesia
China
Philippines
Mexico
Russia
Availability of workforcequantity
Availability of skilled
workforce
Cost of labor
English-language skills
Cost and quality of telecom
infrastructure
Labor productivity
(PPP)(1)
Perceived stability of
government policies
Perceived operational risk
• Risk of personal harm
• Risk of business disruption
Very favorable
Unfavorable
(1) Labor productivity for India highest in IT services vis-à-vis competing nations
Note: Russia and China included as they will compete in specific areas despite aggregate shortages: Israel and Ireland
not included because they are not expected to be significant competitors due to lack of manpower
SOURCE: “India’s new opportunity – 2020,” Report of the High level strategic group in consultation with The Boston
Consulting Group.
EXHIBIT 4
Pricewaterhouse
Coopers 2004/2005
Global Retail &
Consumer Study
from Beijing to
Budapest–India
Key economic
indicators
1999-00
2000-01
2001-02
2002-03
2003-04
GDP
growth (%)
6.0
4.4
5.6
4.3
8.1
CPI (%)
3.4
3.7
4.3
4.0
4.6
SOURCE: Reserve Bank of India.
CASE 5
Starbucks Coffee Company
5-9
EXHIBIT 5
Growing Middle
Class and Increase
in Spending
Growing middle class
Consumer spending rises
m households by income group
INR tr
1992-1993
120
1998-1999
100
2005-2006 (estimate)
25
Food
Clothing
Housing
Furniture
Health
Transport
Recreation
Misc.
20
80
15
60
40
10
20
5
0
0
140
2002
2003
2004
2005
Annual income ‘000 INR
SOURCE: NCAER, DB Research.
SOURCE: MSPI, DB Research.
EXHIBIT 6
Population
Distribution
Aging population
2001
0–14 years (%)
35.6
32.5
29.7
27.1
15–59 years (%)
58.2
60.4
62.5
64.0
60 and above (%)
6.3
7
7.9
8.9
2006
2011
2016
(projected) (projected) (projected)
SOURCE: Statistical Outline of India (2003–2004).
of age and close to 20% of its people were in the age group of 15–24 years. The population of
Indians in the age group of 15–24 years in 2000 was around 190 million, which increased to around
210 million by 2005. The average age of an Indian in 2020 would be 29 years, compared to
37 years in China and the United States, 45 years in Western Europe, and 48 years in Japan.49
India had emerged as a prime destination for business process outsourcing (BPO) companies, which
employed mainly the young people. The real estate market in India was also undergoing a boom.
Mumbai was considered the economic and financial center of India. It housed headquarters of numerous Indian companies and many foreign financial service providers.50 Many IT
companies, financial service providers, and business process outsourcing companies had
sprung up in Mumbai. Delhi was the third biggest city in India, had the seat of the government
and the most important city in the northern India. Delhi and the neighboring towns of Gurgaon
and Noida were established as the call-center hubs. Another prominent city was Bangalore,
which was also known as India’s Silicon Valley. Many famous Indian and global IT companies were present in Bangalore. In 2005, there were a total of 35 cities with population more
than 1 million in India (see Exhibit 7).
However, there were certain factors that constrained economic growth. The factors included inadequate infrastructure, bureaucracy, regulatory and foreign investment controls, the
reservation of key products for small-scale ind
