Starbucks: Business Structure

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Table of Contents

Starbucks
Sole Proprietorship
Partnership
Private Limited Company
Internal Business Structure of Starbucks
Work Culture at Starbucks
Starbucks and Ethics
Conclusion
Bibliography

This memo refers to a particular business (Starbucks) and its structure, as well as descriptions of other business structures that will help investors take a better decision. It will also help them see the affects the structure will have on the organization’s culture and work ethics.

Starbucks

Starbucks, the famous coffee house, set up its first outlet in the 1970s in Seattle. It is famous for importing the finest coffee beans to deliver superior quality to its customers. As its popularity increased, Starbucks opened up outlets all over the United States and then finally became a public limited company in the 1990s. Starbucks entered the market of the United Kingdom in 1998, with its head office in Chiswick in South West London. Starbucks now has over 15000 outlets all over the world and has added other beverages to its menu.

Why Starbucks?

Starbucks is a successful brand today. It is unique and ever-growing. Starbucks pays a lot of attention to quality of inputs (the coffee beans and the labor) as well as quality of its output. The good thing about this brand is that besides quality, it also gives a lot of importance to its customers to ensure their satisfaction. Its stores are designed in a way that helps people relax and break free from their stressful, everyday routines.

The History of Starbucks

Bowker, Baldwin and Siegl set up the first Starbucks store in 1971 in Seattle. Starbucks became a public limited company in 1992. Since then, the business expanded to various areas of the United States, and eventually outside it as well. Starbucks formed partnerships with companies such as Pepsi and Dreyer that enabled it to diversify into other areas namely Frappuccino and ice cream. After a major overseas expansion, Starbucks is now also involved in the business of music and film making.

Legal Structure of Starbucks

In 1992, Starbucks carried out its initial public offering (IPO) and became a public limited company. It was after this that Starbucks opened up outlets in places outside the United States. It now has various business alliances and joint ventures with other companies who have helped it add diversity to its menu (Clayton, 2004).

Advantages of a Public Limited Company

Shares can be easily traded on the stock exchange
Easy access to capital either through borrowing or raising capital by issuing new shares
Cost advantage from cheap borrowing and bulk buying
Liquidity
Limited liability for shareholders
Unlimited life of business
Easy to transfer ownership

Disadvantages of a Public Limited Company

Loss of ownership and control
May become too large and hence mismanaged
Risk of takeover
Decisions tend to take longer because board of directors need to be consulted and more people are involved in the process
There are more chances of disagreement amongst stakeholders
The company has to make its reports public which are subject to scrutiny. This results in a loss of confidentiality.
Lack of personal touch for customers
Expensive to set up and run

Sole Proprietorship

This form of business structure exists when one person is the sole owner of the business. He takes all the decisions, gets all the profits and bears all the losses. He runs the business on his own. The only skills available to him are his own. These types of businesses tend to be small scale. Hence the owner has limited capital: all the capital he has is his personal wealth. Sole proprietors find it difficult to borrow from banks since the latter are reluctant to lend money to small businesses due to the default risk associated with it.

Moreover, sole proprietors have unlimited liability. This implies that should the business fail, the owner has to give up his personal belongings to pay up the debt. The business has limited life, implying that if the owner dies, the business ceases to exist. Hence sole proprietorship, although inexpensive to set up, is risky. There are no legal requirements before setting up a sole proprietorship, and the business tends to be personal for customers (Epstein, Michael, Freer, Robert & Shepherd, 2006).

When the business grows bigger and the owner cannot handle it on his own, he may hire a group of people to run it.

Partnership

A partnership exists when two or more individuals start up a business. The number of people in a partnership can range from two to twenty. A partnership agreement can be written or oral, but for clarity, it is better to have all the terms of the partnership in writing.

The partners share the profits and bear the losses based on the pre-agreed proportions. The capital of the partnership is made up of the personal wealth of all partners. Thus there is more capital in a partnership than there is in a sole proprietorship where only one person’s wealth makes up the business’s capital. In terms of decision making, all partners lend their opinions. This improves the quality of decision making but increases the time taken. Hence decision making tends to be slow. There are more chances of disagreement amongst partners. However all partners need to agree before a decision can be reached.

Like a sole proprietorship, partnerships have limited life, that is they cease to exist on the death of a partner. Every time a new partner comes in, or an existing one leaves, a new partnership must be formed in order for the business to continue. Again similar to the sole proprietor, partners have unlimited liability. There is a concept known as limited partnership in which there are two kinds of partners: those that have limited liability and at least one partner who must have unlimited liability. In this case, partners with limited liability are those who are not actively involved in the business and have no say in decision making (Epstein, Michael, Freer, Robert & Shepherd, 2006).

Partnerships are easy to form. Transfer of ownership requires the consent of all partners.

Private Limited Company

A private limited company is one which is owned by a small group of people who know each other, usually family and friends. They cannot sell their shares to the general public. The stocks of a private limited company cannot be openly traded on the stock exchange which is a major disadvantage since it limits the owners’ access to equity. However as compared to sole proprietorships and partnerships, private limited companies have greater access to capital and the business is better managed. The owners have limited liability because the business has a separate legal existence apart from its owners.. The business has unlimited life.

Internal Business Structure of Starbucks

Starbucks is a public limited company. This means that the owners of Starbucks are its shareholders. Starbucks’ shares are openly traded on the stock exchange. It is a large company that operates in over 35 countries.

A public limited company is one in which the shareholders are the investors and owners of the company. There is a board of directors who together with the shareholders take the important decisions of the company. Public limited companies are usually run on a large scale. They and registered and their shares are openly traded on the stock exchange. They employ a large number of people and enjoy economies of scale. Shareholders have limited liability. This implies that should the business fail, the owners only loose the amount they had invested in the business. They do not have to give up personal possessions to pay off the debt (Epstein, Michael, Freer, Robert & Shepherd, 2006).

In a public limited company, shareholders receive awards for investing called dividends. These are usually paid in cash and their amount varies depending on how much profit a firm makes and how much it reinvests into the business.

Starbucks is a public limited company because the latter has many advantages. Firstly, being a public limited company provides the managers of Starbucks with sufficient cash to operate profitably and carry out the company’s expansion plans. Secondly, banks are more willing to lend money to such a big and well-renowned brand. This makes it easier for Starbucks to borrow money for investment.

Moreover, Starbucks’ shareholders (or owners) have limited liability which is one of the major advantages of a public limited company. Due to the prestigious reputation that Starbucks enjoys, it tends to experience high share prices which are a reward for its investors. Furthermore, this makes it shares more attractive. Another main reason why Starbucks initially went public was because it had become too large and was growing too rapidly for it to remain a partnership or even a private limited company (Lennon, 2008).

Work Culture at Starbucks

The rapid growth and success of Starbucks can be attributed to its committed workers. Workers are the biggest asset a company can have, and if accurately utilized, can give the firm competitive advantage. Starbucks has always given a lot of importance to its labor. It is known to provide generous fringe benefits to all its workers, whether part time or full time. This is the reason why the employees of Starbucks are so motivated and their turnover is very low. The human resource policies of Starbucks have always favored the employees. Motivated employees have led the success of Starbucks today.

Human resource policies at Starbucks begin from hiring. The human resource managers are very careful in hiring the right people for the right jobs. When hiring, Starbucks managers look for people who are flexible, passionate, enjoy their job and are good at team work. After hiring, their aim is to train and retain as many of them as they can. Since Starbucks is in the service industry, it is very important to train the frontline staff that interact the most with its customers.

All Starbucks employees receive training for about two to four weeks after they are hired. The training includes the history of coffee, how to prepare the beverages, how to deal with customers and the final training which is known as “brewing the perfect cup” (Thompson & Gamble, N.D.). Hence the human resource department at Starbucks goes out of its way to ensure quality training of frontline employees.

Other than the basic forms of training, Starbucks also focuses on teaching its restaurant employees how to make eye contact with customers and how to take personal responsibility for cleanliness of the outlet. Moreover, other work ethics are given emphasis as well such as maintaining self-esteem, asking for help and listening to others and acknowledging them. Starbucks is popular for its diversity. However, out of all its employees, around eighty percent of them are white. An even greater percentage is educated beyond high school, the average age being twenty-six (Thompson & Gamble, N.D.)

However despite its focus on excellent human resource policies, Starbucks did face challenges in the 2000s. It was finding it hard to maintain the work culture due to the speed at which it was expanding. Nonetheless, Starbucks survived the expansion program and its success was reflected in its financial progress. It is said that Starbucks spends more on training and hiring its employees than it does on advertising its brand (Thompson & Gamble, N.D.)

Other than employees, Starbucks invests a lot in its stores and their layout. The idea is to make all outlets relaxing and have a theme that is consistent in all outlets regardless of city or country. It attempts to establish uniformity in all its outlets so that people associated the same feeling regardless of which outlet they visit. The managers of Starbucks want people to associate the smell of pure coffee with the name Starbucks. Hence all employees are prohibited from smoking or wearing any form of perfume. Even the food at the outlets is covered to that it does not interfere with the smell of coffee beans (Thompson & Gamble, N.D.).

The internal structure of a business has an impact on its work culture. In the case of Starbucks, the business is so large that there is a lot of delegation. Each outlet has its own manager. All restaurant managers are trained in the same way and sometimes together to ensure consistency. They are given instructions on how to train restaurant staff. Since it is so decentralized, the operations of Starbucks must be very organized for it to function well.

Starbucks and Ethics

Business ethics is so important to Starbucks that it is part of its mission. The managers of Starbucks are of the view the being ethically sound is one of the major contributors to the firm’s success. Starbucks is a member of the Ethics and Compliance Office Association and the Ethics Resource Centre.

Starbucks buys its coffee beans from Africa. It claims to pay premium prices for high quality beans. It also claims to protect the environment and improve the lives of the farmers involved. According to critics, despite all this propaganda, the reality is quite different. Ethiopia continues to remain in poverty although it produces the bulk of the coffee beans (Leroux, 2008).

Last year, Starbucks closed down around 700 outlets in the United States, Australia and the United Kingdom. This led to hundreds of people losing their jobs and severely damaged its reputation. It was rated worst than all fast food and coffee outlets except McDonald’s, KFC and Burger King. Other than shutting down outlets, Starbucks was accused of wasting water and using unclean utensils. Loss of reputation led to a loss in sales as people greatly reduced their visits to Starbucks outlets (Leroux, 2008).

Conclusion

The type of business structure adopted depends on the nature of the business, the resource availability, the demand for the firm’s product, the management objectives and future plans. All types of business structures have their benefits and drawbacks. However, most large businesses tend to be public limited companies as in the case of Starbucks.

In most cases, the culture of the company is the result of its business structure. Sole proprietorships and partnerships tend to be small and hence closely knit. The owners tend to have a lot of control over the running of the business as compared to a public limited company, where the business is too large for such centralized control.

In short there is no best business structure. The most appropriate choice depends on the particular company and the resources available to its managers.

Bibliography

Clayton, P. (2004). Forming a limited company. Published by Kogan Page.

Epstein, D, Michael, J, Freer, R, Roberts, M & Shepherd, G. (2006) Business Structures. Published by West Group.

Haig, M. (2004) Brand royalty: how the world’s top 100 brands thrive and survive. Published by Kogan Page Publishers.

Schultz, H. & Yang, D. (1997) Pour Your Heart Into it: How Starbucks Built a Company One Cup at a Time. Published by Hyperion.

Steingold, F. (2008). Legal Guide for Starting & Running a Small Business. Published by Nolo.

Lennon, J. (2008) The organizational structure of Starbucks, Unilever, and Walmart. Business & Finance. Web.

Leroux, M. (2008) Ethical Approach of Starbucks is hard to swallow. Times Online. Web.

McClelland, K. (2007) Starbucks founder speaks on ethics. The Observer Online. Web.

Starbucks Website team. (2008) Starbucks makes organizational changes to enhance customer experience. Web.

Thompson, A. and Gamble, J. Starbucks becomes a Public Company. Web.

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