Project planning and organizational structure at Starbucks Coffee Company

¶ … efficacy of different mechanisms, techniques, models, and frameworks that are used in planning a project. In order to tie the discussion to a particular industry and to provide real world examples of principles, forms, and structures I discuss, I will address project planning within the coffee service industry. Where specifics will enhance understanding of the discussion tenets, I will use the Starbucks Coffee Company as the corporate example.

Organizational structure. Starbucks Coffee Company provides a distinctive corporate model that can serve as a frame of reference when addressing corporate strategy and types of organizational structure. The coffee shops associated with the Starbucks Coffee Company chain create a large network of stores / java cafes. The Starbucks brand is sizable and the organizational structure reflects the complexity of brand management on such a large scale. Starbucks' corporate operations are overseen by teams of executives located in its Seattle, Washington, headquarters. The regional groups of Starbucks' stores located across the country are overseen by district mangers, who, in turn, report directly to Starbucks' headquarters. A store manager and an assistant store manager provide leadership at the retail store level. Shift supervisors at the stores may function as managers-on-duty when store managers or assistant store managers are not present. Baristas make up the lowest tier of employees at the retail store level. Regardless of the official position titles of Starbucks employees, all workers are referred to as Starbucks' partners. Starbucks employees are considered integral to corporation's success. Notably, Starbucks also works to establish close relationships with their customer base. These corporate attitudinal markers are indicative of the Starbucks' culture, which has had a profound impact on operations -- and many say on the company's overall success through several volatile decades.

From this brief description of the component parts of the organizational structure of Starbucks Coffee Company, I propose that a matrix structure is used to group employees by function and product. Teams of employees are charged with accomplishing the functional work across many different products. Starbucks application of the matrix (Kloppenberg, 2009) structure supports their focused corporate strategies, combing product-based and functional divisions such that most employees report to two supervisors. This configuration acts to promote team spirit and corporate identity. Within the matrix, employees are trained and empowered to make substantive decisions. That this system works well is evidenced by the superior customer service and customer-brand engagement that is a trademark of Starbucks Coffee Company. The matrix organizational structure could easily be a barrier to effective operations (Kloppenberg, 2009), but Starbucks has finessed the networking and connections within the matrix such that it supports, rather than inhibits, operations.

It is important to recognize that the Starbucks Coffee Company has many subdivisions that are focused on coffee bean processing, prepared foods, and vendor relations to address procurement, supply chain, and research and development. In addition, Starbucks retail stores also include licensed storefronts, but they are not true franchises. The licensed stores may be found in bookstores, grocery stores, or other places where a Starbucks store is not located in a stand-alone building, which is typically owned by Starbucks. All Starbucks stores, licensed or conventional retail operations, are held to the same strict standards -- the Starbucks reputation depends on it. Indeed, consistency across Starbucks sites is a hallmark of the brand. For this reason, all of the items that are sold in the retail stores and the licensed stores are established and approved by the pertinent executives at Starbucks corporate offices. This measure of control is critical to effective brand management. The Starbucks Coffee Company name is synonymous with the brand, the products sold, and the services provided.

Starbucks Corporate Strategy & Strategic Management

Starbucks' overall corporate strategy is to introduce relevant new products in all its channels and to selectively develop new channels of distribution. Specifically, Starbucks will focus on a continuation of its disciplined global expansion of its retail and licensed store base, the evolution of the Global Responsibility strategy, and a focus on being an employer of choice.

Starbucks is using acquisitions plus innovation to fuel growth. This is a stronger position than moving up on acquisitions alone. International expansion is a target and the plan is to open approximately 500 net new stores globally in the next several years, with approximately 100 new stores in the U.S. And approximately 400 new stores located internationally, the majority of which are expected to be licensed stores.

Strategic management will focus on leveraging the valuable lessons learned in the U.S., capitalizing on large expansion opportunities outside the U.S., growth and scale in the more mature existing markets, and emphasizing expansion in key emerging markets like China and Brazil, and continuation of disciplined global expansion of its retail and licensed store base.

Starbucks plans to aggressively go after the at-home and office single-served market, as well as the $21 billion global instant coffee category. Diversification will include brew in the grocery channel and the introduction of a new customizable Frappuccino® blended beverage. Market research provides evidence of "new muscle on how to go to market at retail as evidenced by the fantastic customer and partner response to Starbucks VIA in our stores" ("Earnings call transcript," 1Q 2010). Marketing expenses are anticipated to be higher in order to support the launch of Starbucks VIA® Ready. The company's brand portfolio includes Tazo tea, Ethos water, Seattle's Best Coffee, and Torrefazione Italia Coffee. The Global Responsibility Strategy is based on Starbucks' commitments to sustainability of quality coffee and the communities in which it does business.

With regard to the single cup serving strategy that is the focus of this project proposal, Starbucks plans to supply coffee for Courtesy Products' CV1 one-cup brewers in as many as 500,000 upscale U.S. hotel rooms. In the international markets, Starbucks' CEO Howard Schultz said almost 40% of households in Germany own single-cup brewers, versus about 6% in the United States. In Germany, the market leader has an "open system" -- meaning any coffee roaster can provide so-called "coffee pods" for the machine. Keurig, on the other hand, is a closed system with U.S. patents set to expire next year. Schultz is quoted as saying that, "The single-serve segment of the coffee industry is poised for a sea change of innovation." ("Starbucks Annual Report," 2010)

U.S. store operating expenses were 36.6% of total revenues, a 350 basis point improvement over last year, primarily driven by the continued application of lean principles in our store operating model, plus the effect of company-operated store closures. I will point out here that we improved labor management and labor costs in our stores over the past year at the same time as we've seen a dramatic improvement in customer satisfaction scores.

The U.S. operating margin improvement is largely the result of the comp store sales growth as well as the work we started at the beginning of fiscal 2009 to better align our cost structure to the changing business environment. As a reminder, we reported $580 million in savings in fiscal '09, but only $75 million fell into the first quarter with the cumulative impact growing as the year progressed (Earnings Call, Q1 2010)

Organizing knowledge and expertise: T-shaped management. The complexities of a matrix organizational structure can be addressed through effective communications. According to (Hansen & Von Oetinger, 2001), the greatest assets that companies may possesses could well be the "wealth of expertise, ideas, and latent insights that lies scattered across or deeply embedded in their organizations." The most effective way to address this situation and co-opt these important assets is an approach known as T-shaped management.

In order to implement a T-shaped management strategy, the traditional lines of corporate hierarchy and communication may need to be breached. In effect, a manager who implements a T-shaped approach will work to ensure that function-based silos are not established by ensuring the knowledge flows freely horizontally across the organization in a horizontal manner. Moreover, the T-shaped management approach requires the same degree of diligence with regard to the flow of information and monitoring of performance in a vertical direction, encompassing the individual business units. In consideration of the matrix organizational structure adopted by Starbucks Coffee Company, the T-shaped management approach would address the horizontal functional units and the vertical product-related teams as they interface with the function-focused teams. In this manner, T-shaped management can be used to effectively counterbalance the tendency of business units to compete rather than collaborate. Hansen & Von Oetinger (2001) assert that this approach is especially effective in large corporations like Starbucks Coffee Company where the business units function with considerable autonomy.

Starbucks has not always been a nimble company and it has, on more than one occasion, tended to grow too fast and has suffered from the impact of cannibalization. Moreover, since the company has been round for several decades, it has seen its fair share of economic disruption. The corporate strategy of Starbucks has sometimes had to change course in order to address substantive changes in the space. Strategic measures have included focused attention on diversification, customer-centric operations, lower labor costs, improved product delivery, and so forth. Shifts in the company's organizational design have included downsizing, new lines of business, and collaboration with other companies. Organizational design follows organizational strategy in the same way that architects are said to assert that "form follows function." For changes to be made in smart manner -- that benefits the organization, the shareholders, and the consumers -- the question of feasibility is paramount. Indeed, the first step in project management -- following initial conceptualization -- is feasibility.

Measures of Fiscal Feasibility

In my paper, I discuss several measures of fiscal feasibility when considering a new project. Below, I discuss Return on Equity, Return on Capital, Internal Rate of Return, and Net Present Value. My recommendations for use of financial ratios when evaluating the fiscal feasibility of a project follow, and it should be apparent that no single financial ratio is recommended as an absolute guide to project valuation.

Return on Equity definition. Return on equity (ROE) is the most commonly used yardstick of financial performance by executive managers and investors (Higgins, 2004). The return on equity ratio is determined by the following formula:

Return on equity = Net income / Shareholders' equity

ROE is a measure of the efficiency with which a company uses the business owners' capital. Higgins (2004) suggests a colloquial description of ROE may be as a measure of "bang for buck." In the simplest of terms, there are two ways to look at ROE: (1) A measure of how the earnings achieved per dollar of equity capital invested in a company; and (2) the percentage of return given to the owners' as a result of their investment (Higgins, 2004).

Return on Equity vs. Return on Capital. Return on invested capital (ROIC) [also referred to as return on net assets (RONA)] is a measure of the rate of return that is earned by all of the capital invested in the company -- but without consideration of the debt or equity labels attached to the capital in the financial statements (Higgins, 2004). Return on assets (ROA) is a "basic measure of the efficiency with which a company manages and allocates its resources" (Higgins, 2004). The fundamental difference between ROE and ROA is that return on assets (ROA) considers business profit as a percentage of money provided by creditors as well as money invested by owners (Higgins, 2004). Return on equity (ROE) and return on assets (ROA) do not reflect the capital structure of a company (Higgins, 2004). In other words, ROE and ROA do not contribute information to a financial analysis or company valuation about a business's financial leverage (Higgins, 2004).

Internal Rate of Return. The formal definition of internal rate of return (IRR) is as follows:

IRR = Discount rate at which the investment's NPV equals zero

NPV = Net Present Value

The Net present value subtracts the time dimension and permits a direct comparison of the present value of cash inflows against the present value outflows (Higgins, 2004). IRR is considered against the opportunity cost of capital. If the opportunity cost of capital equals the IRR, an investment is considered to be marginal. If, on the other hand, the IRR is greater than the opportunity cost of capital, an investment is considered to be attractive.

Net Present Value. Consideration of an opportunity can be thought of within the "call option" framework (Dixit & Pindyck, 1995). An investment decision to go or not to go with a project is like exercising an option (Dixit & Pindyck, 1995). Some circumstances will constrain a green and go decision -- for example if the market shows less demand for your product -- then the decision may be to wait until demand is up before going ahead with the project (Dixit & Pindyck, 1995). This is the same sort of thinking that is put in play to consider the time value or holding premium of an option (Dixit & Pindyck, 1995). If an option is "in the money" -- which means that there would be a positive NPV yield -- it doesn't necessarily mean that you should exercise the option -- that is, go ahead with the production (Dixit & Pindyck, 1995). The prudent course of action would be to wait until the option is deeper in the money -- that is, the project should be postponed until the net present value of proceeding with the project is large enough to offset any loss of value that the market will cost (Dixit & Pindyck, 1995).

Keep your eye on the ROE. In order to evaluate the benefits and risks of relying on ROE for valuation, it is necessary to consider the defining formula in greater depth. Given the formula for ROE,

Return on equity = Net income / Shareholders' equity, it is important to deconstruct the elements to show that:

Net income / Shareholders' equity =

Net income / Sales X Sales / Assets X Assets / Shareholders' equity

Alternately, these ratios can referred to in the following manner:

Return on equity = Profit margin X Asset turnover X Financial leverage

From this, it is apparent that there are three managerial levers for control of ROE (Higgins, 2004). These levers consist of the earnings that are rung from each dollar of sales (profit margin), the sales resulting form each dollar's worth of assets utilized (asset turnover), and the amount of equity that has been employed to finance the company's assets (financial leverage) (Higgins). A company can expect to increase ROE by increasing the ratio of any one of these financial levers (Higgins, 2004). That said, it is still fair to ask to what degree ROE a reliable measure of the financial performance of a company.

ROE should not be considered an unambiguous and absolute indicator of business performance since three important relatively obscure deficiencies impact the ROE measurement (Higgins, 2004). Higgins (2004) refers to these deficiencies as problems of timing, risk, and value. With regard to timing, ROE is a backward looking indicator that is focused on a single year (Higgins, 2004). What this means from a practical standpoint is that ROE does not fully capture decisions that have impact across multiple fiscal periods (Higgins, 2004). Another concern with ROE is that it considers only return without folding in the impact of risk on the numbers (Higgins, 2004). Two companies can have very similar ROE but the numbers can pose very different risk scenarios, which would certainly impact the quality of the numbers in a financial analysis (Higgins, 2004). Finally, ROE presents a value problem since it uses the book value and not the market value of shareholders' equity (Higgins, 2004). Book value is an historical measure, but market value represents the current and realizable share worth (Higgins, 2004). And high ROE in companies that are well-known are rapidly eroded by increases in the price of the stocks (Higgins, 2004).

Industry example. A comparison of Starbucks and Green Mountain coffee companies shows the following financial ratios. Explanations are provided in the text above about why simple comparisons of the financial ratios of businesses in a valuation are inadequate.

Starbucks Coffee Company

Green Mountain Coffee Roasters

Profitability

Profit Margin

10.67%

9.55%

Operating Margin

13.09%

14.68%

Management Effectiveness

Return on Assets (ROA)

13.77%

10.70%

Return on Equity (ROE)

28.45%

17.08%

Source: GMCR Yahoo! Financial and STBX Yahoo! Financial

The most popular approach to valuing potential investments employs the use of return on investment (ROI) (Higgins, 2004). But a second method warrants consideration: valuation through residual income (Edmonds, et al., 2012). Residual income is the essentially the amount of operating income less operating assets minus desired ROI (Higgins, 2004). Return on investment (ROI) is a measure of the productivity of a profit center or an investment as income divided by book value of the investment or profit center (Higgins, 2004). Return on investment is based on two ratios: margin (operational income) and turnover (operational assets). Residual income or residual profits is a measure of the profit center performance, which is defined as income less the annual cost of the capital employed by the profit center (Higgins, 2004).

Measures of Investment Feasibility

A residual income approach. When applied to valuation of investment in a potential project, residual income also includes a desired benchmark ROI (Edmonds, et al., 2012). That is, a company identifies a return on investment in a project to function as a benchmark for investments, and this desirable ROI benchmark is an element in the calculation of residual income (Edmonds, et al., 2012). The primary benefit to using residual income as a method of evaluating potential investment in projects is related to a concept termed sub-optimization (Edmonds, et al., 2012). Sub-optimization presents as a hazard to transparent valuation of investments in situations where the average profit of a division or business unit is superior to the average profit of the company overall -- and when going forward with an investment, under these conditions, the average profit of the division or business unit will drop as it takes on the new investment (Edmonds, et al., 2012). By relying on a residual income approach to investment evaluation, a manager is enabled to consider the value of an investment to the company as a whole and not put the potential impact of that investment on a particular business unit profit center above consideration of the overall impact on the company's performance (Edmonds, et al., 2012).

Managerial considerations of residual income. The main drawback of using a residual income approach is that performance is measured in absolute dollars (Edmonds, et al., 2012). What this means from a practical standpoint is that a manager's income may be superior because of a greater investment base and not be an artifact of the quality of the manager's performance (Edmonds, et al., 2012). From a managerial accounting perspective, there are distinct advantages to employing the residual income approach to the evaluation of investments (Edmonds, et al., 2012).

A residual income approach to consideration of investment in a new project can help to mediate the focus of attention by boards of directors and stockholders (Higgins, 2004). Stockholders exercise influence over companies -- and, thus, managers -- through the board of directors (Higgins, 2004). The need to compete in industry markets places one constraint on managers -- company performance must be competitive and, as such, the actions of managers are of keen interest to stockholders (Higgins, 2004). A second constraint on managers is the securities market (Higgins, 2004). Investors are attracted by the profitability of a company. The performances of managers are under scrutiny by directors and stockholders -- managers who are considered to be poor performers are frequently replaced (Higgins, 2004). For example, the influence of stockholders has been publicly revealed and acutely felt in a number of large corporations, such as Xerox, Aetna, Proctor & Gamble, Mattel, Hewlett-Packard, and Campbell Soup, to name a few (Higgins, 2004).

At a time when stockholder influence over managers seems to be at an all-time high, having alternative ways to evaluate the potential value of an investment is a boon to managerial survival in their organizations and invariably strengthens the valuation process, increasing accuracy and reducing subjectivity. In addition, the use of a residual income approach to investment evaluation aids efforts to infuse transparency into corporate decision-making. Since these are inherently the goals of managerial accountants -- accuracy, objectivity, transparency -- the residual income approach is likely to retain a placeholder in investment valuation for the foreseeable future.

Process Quality Management

In my paper, I argue that the strategy that process-oriented quality management enables a holistic approach that can utilize all four of the main quality management techniques, including, for instance, Total Quality Management (TQM) (Ishikawa, 1987), Six Sigma (Harry & Schroeder, 2005), Business Process Reengineering (BPR), and KAIZEN (Imai, 1986, 1997). Quality management has undergone an evolution that has improved effectiveness of the strategies. Three different orientations (customer, process, and quality) have been integrated in the process of this evolution. Total Quality Management provides an integrated management configuration through the Plan-Do_Check_Act format and reasonably illustrates that continuous improvement is never complete in the long-term (Deming, 1982). With evaluation and development continuous and unfinished, "quality will be remaining the complex crucial success factor for the entire management in the future" (Stracke, 2006).

Critical Path Method (CPM). A number of techniques can be used for project planning, one of which is the Critical Path Method (CPM) (Baker, 2004). Projects that consist of several activities can be planned using Critical Path Method (CPM), including those projects in which some activities are dependent upon the completion of other activities before they can commence. The CPM approach can be used to determine the duration of a project from start to finish, and to identify which of the various activities are of the critical nature. That is, those activities that must be completed by a certain time or they will cause delays in the entire project. When cost information is paired with the time and path information, it becomes possible to determine the cost of speeding up any of the various activities that make up the project. In this way, informed decisions can be made about whether or not to speed up activities in the project and the least expensive way to arrive at faster solutions for the project.