Corporation: organizational structure and function

Corporation

Starbucks is a successful coffee chain. The organizational structure is geographic, and decision making is mainly centralized with respect to strategy, and many operational decisions even at the local level come with strong guidance from head office. There are a few key issues, however, that need to be addressed. One is the relatively weak leadership pipeline within the organization, another is the distribution of resources to facilitate expansion and finally there is also the issue of maintaining quality standards despite a still-rapid pace of expansion.

General Description

Starbucks is a company operating in the quick service restaurant business, where it is the 3rd-largest firm in the industry in the U.S. By revenue (Oches, 2014). The company name is Starbucks Corporation. To nobody's big surprise, it is a corporation. Starbucks is publicly traded, on the NASDAQ under the ticker symbol SBUX. The company has a 97.33% float, with 2.74% inside ownership (MSN Moneycentral, 2014).

The company has 191,000 employees. It does not publish internal demographic information -- not sure if any company does that. The company was formed in 1985 in its current organization, though it has an antecedent that traces back to the early 1970s. The current company was organized after Howard Schultz adopted the name and applied it to his coffee chain vision. Today, Starbucks operates in 65 countries around the world (MSN Moneycentral, 2014). There is a split between company-owned stores and franchised stores. In some markets, there is a strong preferences one way or the other. Overall, there are 19,767 stores, with 10,194 (52%) being company-owned stores and the rest being franchise stores. In the Americas, 60% of stores are company-owned. In Europe and the Middle East, 57% of stores are franchised. In Asia-Pacific, 77% of stores are franchised. Starbucks also has stores in other segments, like juice and tea, and most of these are company-owned (Starbucks 2013 Annual Report).

Most of those are Teavana stores. Teavana is a brand that the company acquired in 2012, with the idea of utilizing its core competencies developed in coffee to roll out teahouses (Choi & Skidmore, 2012).

The major growth markets for Starbucks right now are China (206 new stores in 2013) and the U.S. (193 new stores). Canada, Mexico and South Korea are also decent growth markets. The split of revenues is 74% beverages, 20% food, 3% packaged coffees and 3% merchandise and equipment (2013 Starbucks Annual Report). The company also acquired a juice business in order to do the same thing, basically trying diversify within the beverage business (Jargon, 2011).

The company also has some other, non-shop, revenue streams. It has the K-cup, which is one of those single-serve coffee systems, and it has a licensing agreement with Pepsi to produce Starbucks-branded beverages. These other businesses are worth around $1.42 billion in revenue and $415 million in net income in 2013 (2013 Starbucks Annual Report). The company overall earned revenue of $16.447 billion in FY 2014 with net income for the year of $2.068 billion. This represents an improvement, significantly so, from 2013 when a $2.7 billion charge relating to a distribution deal with Kraft that Starbucks terminated in order to gain freedom for control over its packaged products (Schultz, 2013).

The customer base for Starbucks is generally middle class. This base is more or less the same around the world. Starbucks competes with a differentiated strategy, which implies that the company seeks to market its goods at a premium, and uses branding, services and other uniquenesses in order to justify these higher prices. As a consequence, the company has tried to create a new market for its products. The Starbucks experience defines the service experience for the company (Michelli, 2007). The company thus provides an experience that is basically symbolic of affordable luxury, and a statement of one's belonging to the middle class, able to afford pricier coffee and a premium service experience, all within the constraint of being a quick service company focused on a mainstream market. Starbucks does appeal both urban and suburban, and increasingly has a presence in rural areas, though the QSR emphasis on high volume of transaction necessitates that Starbucks must be present in high-traffic areas, and real estate has always been a key success factor for the company. The target market tends to be of middle income or higher, is usually a repeat customer with a high degree of loyalty, and one who probably is close to a Starbucks location -- people don't go out of their way too far for a Starbucks. The target customer is likely of working age, and has a college education or maybe is working towards one. The company thus targets a large segment of total consumers. It is worth noting that this targeting, when Starbucks first started to get big in the 1990s, was unique, and many coffee shops didn't have this sort of targeting at the time. Now, of course, the competitive marketplace is intense, notably with companies attempting to replicate the Starbucks business model.

Most such competitors are either mom-and-pop player that specifically try to compete on the basis of not being a big chain, or other regional chains that try to emulate the Starbucks business model, including service, and premium drinks. Starbucks is much bigger than any of these. In the coffee QSR market, the most serious competitors for Starbucks are McDonalds, especially since it institute the McCafe concept (Lim, 2014). While McDonalds is much larger than Starbucks, most of its money comes from the burger side of things, so in coffee it is much smaller. Dunkin' Donuts and Tim Horton's are two more competitors in the QSR Top 50, but they are both in the donut shop/coffeeshop model, which competes for a more mainstream market than Starbucks, and seldom legitimately wins business from Starbucks (Lim, 2014). This is because of Starbucks' aspirational positioning that allows customers to have a sense of class belonging from going to Starbucks instead of a downmarket coffee/donut operation of a burger joint.

The key resources for Starbucks are its brand, its people and its products. The brand is perhaps the most important thing. In the quick service business, the brand is what you can sell to the customer because the brand is a promise of product and experience. When this experience and product are replicated anywhere, that becomes attractive to a consumer because it reduces overall risk associated with the purchase -- you know what you are getting when you go to a Starbucks. This consistency and the business that goes along with that is what you franchise out as well, so the brand is important in allowing Starbucks to expand its business more rapidly.

That the company has generally been able to create its own markets is a major strength, highlighting the management skills and understanding of the markets that have allowed Starbucks to sell coffee shops where maybe there weren't so many (U.S.) and where there were none at all (Japan, China). Interesting, Starbucks has struggled to sell in locations where coffee culture was strong before Starbucks' arrival -- it has few stores in Australia and absolutely none in Italy.

The training in particular has been a strength for Starbucks, though arguably it is struggling with this as it grows. The company seeks to get people who are otherwise not going to work in quick service, by offering superior benefits and working environment to most firms in the industry. This allows Starbucks to skim the top available talent, train them better, and have them deliver service to a superior standard than what might be experienced by a customer of any of the lower-end competitors.

Lastly, Starbucks has a geographic structure. Right now, its other segments are small enough that they do not constitute the need for major recognition within the context of the organizational structure. So the Americas, Europe/Middle East/Africa, China/Asia-Pacific are three of the major operating divisions within the company. Strategy for these is often made at head office, however, because of the desire for centralized command of resource deployment.

Section II. There are four major management functions: planning, organizing, leading and controlling. These are done at different levels of the organization and this section will discuss each in turn.

For the most part, planning is done centrally at Starbucks, at the headquarters in Seattle. This reflects major strategic planning, not materials planning or staff scheduling or any of that sort of planning. Starbucks runs its stores more or less the same way around the world. Thus, there is not a whole lot of planning that is needed at lower levels. The planning function reflects the company's need to determine what markets to enter, what acquisitions to make, and how to extend the brand. This is all done centrally. When Starbucks talks about this sort of planning, the communication comes from head office, which indicates that this is where the decisions are made. For example, when the company said that it was targeting China as a critical growth market, that was the CEO talking, and the head office backed that up by renaming the Asia-Pacific division as the China Asia-Pacific division (Sandholm, 2014).

The centralized planning development has guided in particular the way that the company has expanded internationally, and its moves to new businesses. Typically, an existing Starbucks executive will be tapped to head up a critical new division. Head office was also involved in decisions with respect to the push into breakfast, including determining what kind of cheese the company was going to use. So there is a high degree of centralization in planning at Starbucks. Where regional planning occurs is more on the operations side of things, and also determining the specific details of where stores are going to open. So for example, head office might say that China is a priority, and put a lot of resources there, then leave it to the local office for the country to determine what the key target cities are going to be. This allows the head office to leverage local knowledge about new malls, and the trade-offs between deeper penetration into major markets, or the pursuit of smaller markets where the company has yet to become established.

Decisions regarding franchises are made at the head office level. So when the company went to Japan, it sought a franchise partner that could guide it to a high level of growth by owning almost all the franchises. This is a mode of entry that the company preferred to utilize, and has adopted in many countries. Later, when the company made the decision to start buying back franchises in China, this again was a strategic head office decision, indicating that planning remains highly-centralized for many types of decisions within the company (Tang, 2011).

So the organizing function is more at the regional level. Once the plans have been made, and the company has dedicated resources to ensuring that those plans come to fruition, local units are left to do much of the organizing. Organizing on this level includes local marketing efforts, working with franchisees, determining where to open stores, and managing the supply chain. Most of these types of decisions are done at the national level, or sub-national level (like state level, for example).

Layout decisions are actually not done at this level. Starbucks has only a handful of basic layouts, and the behind-the-counter layout can be very similar from store-to-store. For an individual store, the layout design will be adapted from an archetype that was created at head office, under the management of the local manager, cutting regional staff out of the decision. This delegation of authority reflects two things. First, it reflects a basic understanding that a lot of the value at Starbucks comes from replicability, and that requires the head office to produce basic design principles that all Starbucks will adhere to. Second, adaptation at the individual location level is not something for head office. Once the regional office determines the value of a location, the local manager will be the one who must sort out the details as to which store design can be applied and adapted to the specific site.

The company's organizational structure, as noted, is primarily geographic. The other businesses are grouped into two units, which are smaller than any one geographical unit. Within this structure, subdivisions are also geographical, because the company's stores are all roughly the same. With little change in the business, the only logical structure is geographic. So there will be sub-geographies where needed. The structure is hierarchical in nature, and there are fairly clear divisions about what level handles what tasks with regards to the four functions of management. The lowest level, the store management level, for example, handles matters of human resources, ordering, and implementing the strategy. But head office or regional offices are responsible for product mix decisions and store locations, and the corporate level is where basic policies on human resources and resource allocation decisions are made.

The next management task is leading. Starbucks centralizes a lot of the motivation of its employees. The company has developed what it believes is a human resources system that will attract and retain better people than at QSR competitors. The policies driving this were developed centrally in the early days of the company, and they are communicated on the company website as a means of initial communication. Beyond that, they are communicated internally, as part of the corporate culture, to franchise partners and to managers throughout the organization. There is a very high level of buy-in with respect to the motivation strategies.

Because a lot of the decisions are made either centrally or regionally, there needs to be a high level of communication within the company, in order to ensure that strategies are understood. The system of internal communications is electronic, so managers need to be connected, and pay close attention to their internal inboxes. Both head office and the regional offices will have specific communications departments that focus on these internal communications, ensuring that all communication is done in a timely manner. There is little evidence to suggest that the systems Starbucks is currently using are not effective.

The leadership of the company is focused on CEO Howard Schultz, who is basically the founder of Starbucks in its modern form. The company struggled without him, and has really enjoyed success under his guidance. The reason that control is so centralized is because Schultz has a strong vision for what the company should be, and then communicates this vision via his lieutenants. So leadership tends to be highly centralized, with other leaders within the organization more being charged with implementing strategy or providing insight, rather than providing inspiration.