Managerial Econ the Company That Is Going Term Paper

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Managerial Econ

The company that is going to be discussed in this analysis is Starbucks. Starbucks is in the quick service restaurant business, with a focus on the coffeeshop industry. The outlets are a combination of company-owned stores and franchises, most of the latter being overseas. There is an agency problem in the way that some of these franchise businesses are structure. Starbucks, in going overseas, frequently utilizes local partners to run franchises.

Organizational architecture involves three main considerations: the assignment of decision rights, the reward system and the performance-evaluation system (Brickely et al., 2009). At Starbucks, there is a dual architecture for foreign franchises, especially in the countries were foreign franchises compete directly against store-owned franchises. In such situations, the decision rights are primarily with the company, and the franchisee has its decision rights subordinated. The reward system is based on store performance. The rewards range from more territory rights being awarded to financial incentives. The performance-evaluation system is based on metrics like profit, revenue and market share. In addition, there are cost control metrics involved, and customer service/reputational metrics.

2. Agency problems arise when "one party in a relationship is expected to act in another's best interests" (Investopedia, 2012). One agency problem that sometimes arises exists when Starbucks competes in a market in which it has sold franchise rights (Layne & Sloan, 2010). The franchisees have an expectation that they will be able to enjoy exclusivity in a region or area in exchange for their efforts in running the stores. What happens, however, is that sometimes they find themselves in competition with other businesses within the Starbucks family. Sometimes, these are company-owned stores that encroach on the franchisee's territory. Other times, these conflicts arise when Starbucks markets its other products nearby. For example, if Starbucks has a franchise-owned outlet in a large Asian shopping mall, and then it sells its packaged coffee to a hotel adjacent to that mall, the store risks losing customers from that hotel who otherwise would seek out Starbucks coffee.

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What is causing the problem is a business model that creates two distinct types of stakeholders operating in the same market. The franchisees are seeking to maximize the value from their assets, and they must contend with a wide range of competition. They do not need to compete with the same company that is licensing its brand to them. Worse, because Starbucks undertakes periodic evaluations of the performance of its franchisees, the franchisee might find itself subject to negative performance due to competition from Starbucks, and then be penalized for that negative performance. If the franchisee feels the need to compete with the company, it could damage the company's results. The potential for cannibalization in markets where franchisees compete with company-owned lines of business creates an agency problem because both entities are incentivized to pursue the same customers.

This problem might be better controlled in two ways. The first is to eliminate the problem by buying back franchise rights, so that all the company's business is company-owned. A second solution is to ensure that franchisees have some say in the in-house competition that they have to deal with. There may be times when other Starbucks businesses are more complementary than competitive, but for the most part franchisees still have an incentive to resent this competition. Either Starbucks could curtail such activities, or extend franchise rights to all Starbucks branded business in the region. Either of those approaches would satisfy the agency problem.

3. From a job design perspective, one of the keys to resolving this agency problem lies in decision rights. At present, these are very much centralized at Starbucks head office, or at least the regional head office. The franchisees are primarily only empowered to make decisions that affect their own businesses. If they had more control over the totality of the company decisions that would affect their business the agency problem would no longer exist.

The organizational structure of the firm should be oriented towards a geographic structure. Right now, the company.....

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