Decision and Control the Organization

Decision and Control

The organization for which I work is Starbucks. The organizational structure of Starbucks is largely based on geography for the main business unit (coffeeshops). Other business units are broken down by product, such as packaged beverages and institutional coffee products. The retail arm of the company distinguishes between company-owned outlets and franchised outlets, as there are differences in the control over each (2011 Starbucks Annual Report). This structure allows for there to be a fairly central level of control over the key elements of the Starbucks experience. The level of control is important because consistency is a major selling point of the company, and therefore the company enforces this consistency across all geographic regions, regardless of the form of ownership of a given store.

The text makes the point that there are sometimes agency problems that arise when there are conflicts in incentives between actors. While it is not known if there are any such agency problems at Starbucks, some agency problems can be conceived. One example of an agency problem is owner-manager conflict. This can occur, for example, between the manager of a store and either the corporation or the franchise owner. One cause could be differential time horizons. For example, the manager of the store could be motivated to boost sales each month in order to meet quotas. This could compel the manager to undertake activities to boost sales in the short run that are contrary to the long-run interests of the company. Over the long-run, for example, Starbucks is oriented towards building a strong brand that allows for it to charge higher-than-average prices for its products. A manager in the short run could use cut-rate pricing to increase sales or market share to meet a monthly quota, but could in doing that be degrading the value of the brand in that market for the long run.

Agency problems like this arise when the employees of the firm have only a short-term motivation, because they are not encouraged to think about the long-term ramifications of their actions. Control can be improved using both perquisites and non-perquisites. In the latter category, if the manager believes that there is a long career path with the company available, that alone could serve to more closely align that manager's behavior with the long-run interests of the company. Perquisites are useful as well. For example, the manager could be oriented not with bonuses based on short-term performance alone, but with a mix of performance incentives for the short-term and the long-term, and for the branch and the company both. Thus, the manager would be incentivized to find the solutions that best align both sets of perquisites.

3. The current design is appropriate for the firm. The different business units are all large, some in the billion dollar class and others the company feels have billion-dollar potential. The businesses all utilize the same brand, but are otherwise quite different from one another. Within the main retail business, the breakdown by geography is also logical, because there are some product and service differences between the geographic regions. The regional breakdowns also allow for better management and more direct corporate control. For example, having a manager for the Asia Pacific region who is based in the region allows for closer monitoring of the company's efforts in each different market, essential since for the most part Starbucks' Asian properties are owned by large franchise operators.

There is little cause for making changes to the job design. The functional design with geographic groupings subordinated reflects that first and foremost Starbucks is about a set of product/service offerings. The geographical scope of those offerings is secondary to the offering itself. The cafe business, for example, cannot have much meaningful input into the packaged beverages business, so there is no need for the company to be organized geographically. A matrix structure would imply that the geographic divisions are not subordinated, but again would also be more suitable for a company where the different product/service units require some degree of coordination with each other. That simply is not the case with Starbucks, so the existing organizational design is both appropriate and effective.

4. According to the 2011 Annual Report, Starbucks offers a number of different equity incentive plans to its employees, depending on the status of the employee within the company. The offerings in these plans include a variety of stock options, restricted stock units and employee stock purchase plans. These plans orient the employees in particular to long-term objectives, as shareholders of the company. Managers are oriented both long-run with the stocks and short-run with options, as they orient only until the expiration date.