HelloI need help creating a short discussion post for the following:Over the past seven weeks, we have explored the foundational concepts
and principles of microeconomics (Price Elasticity, Oligopolies and Supply & demands) and we have applied them to the world
around us. Take this time to share what you have learned with your
classmates. In your initial post, respond to the following:Choose one microeconomic concept applied in your final project.
Explain your findings and the implications to your chosen firm’s
sustainability.Using the same microeconomic concept chosen above, explain how it
would be applied to the firm where you work or the type of firm you hope
to work for in the future. What does this imply about this firm’s
future?Please review rubric & I have attached my final paper for review to come up with ideas for this assignment. Thank you
rubric.pdf
final_project.doc
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Name: Discussion Rubric: Undergraduate
Grid View
Comprehension
Timeliness
Engagement
Writing
(Mechanics)
Exit
List View
Exemplary
Proficient
Needs Improvement
Not Evident
20 (40%)
17 (34%)
11 (22%)
0 (0%)
Develops an initial post with an
organized, clear point of view or
idea using rich and significant
detail
Develops an initial post with a
point of view or idea using
adequate organization and detail
Develops an initial post with a
point of view or idea but with
some gaps in organization and
detail
Does not develop an initial post
with an organized point of view
or idea
5 (10%)
5 (10%)
2.75 (5.5%)
0 (0%)
N/A
Submits initial post on time
Submits initial post one day late
Submits initial post two or more
days late
15 (30%)
12.75 (25.5%)
8.25 (16.5%)
0 (0%)
Provides relevant and
meaningful response posts with
clarifying explanation and detail
Provides relevant response posts
with some explanation and detail
Provides somewhat relevant
response posts with some
explanation and detail
Provides response posts that are
generic with little explanation or
detail
10 (20%)
8.5 (17%)
5.5 (11%)
0 (0%)
Writes posts that are easily
understood, clear, and concise
using proper citation methods
where applicable with no errors
in citations
Writes posts that are easily
understood using proper citation
methods where applicable with
few errors in citations
Writes posts that are
understandable using proper
citation methods where
applicable with a number of
errors in citations
Writes posts that others are not
able to understand and does not
use proper citation methods
where applicable
Name:Discussion Rubric: Undergraduate
Exit
2-2 Final Project: STARBUCKS MICROECONOMIC ANALYSIS
Starbucks Microeconomic Analysis
Southern New Hampshire University
STARBUCKS MICROECONOMIC ANALYSIS
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Starbucks Microeconomic Analysis
Abstract
The growth in demand for coffee in the United States has led to the changes in the
consumption patterns of the consumers, and this leads to the increase in demand of the coffee in
the market. The observation of the trends is important in making decisions that help in meeting
the demands of the market and the increase in the growth of the revenues for the company. It is
important that there is the analysis of the commodities that affect the supply of the coffee to the
various markets. In Starbucks, identifying the various changes helps the company in coming up
with the strategies that enhance the competitiveness of the business in the market and ensuring
that there is the determination of the price elasticity of demand.
With the overall change in the market structure, the company has to take a keen look at
the future market and try to come up with strategies that would help them expand through
incentives like creating a global brand. Such avenues would make sure that the firm remains
relevant in the market.
Purpose
The demand and the supply of coffee have led to the importance of looking at the
microeconomic aspects of Starbucks. Starbucks is one of the companies that have led to the
revolutionizing of the habits of the American when it comes to drinking coffee. It was
incorporated in 1971 and has grown to have stores in all parts of the world that amount to
16,000. The change in the preferences of the consumers leads to the effects of the demand for the
coffee, and this influences the profitability of the company. With the increased demand, the
prices of coffee also increase. The supply of coffee to different parts of the world is influenced
STARBUCKS MICROECONOMIC ANALYSIS
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by the demand (Colander, 2013). The changes in the tastes of the American when it comes to
consumption of the coffee led to the increase of competitors in the market, and this has grown
the number of retailers in the market. It has resulted in the volatility of the prices of coffee, and
this raises the prices of the coffee.
The weather in South America influences the supply of the coffee as it is harsh to the
product, and this tends to reduce the supply to the producers leading to an increase in prices. The
elasticity of the prices of the company is necessary for the analysis of the responsiveness of the
business when it comes to the changes in prices. There is the analysis of capital and labor applied
to the firm and the productivity expected as it is through this that there is the analysis of the
issues that the firm needs to improve (Derousseau, 2017). The analysis of the competition that
the company faces is necessary for the determination of the substitution of the product and the
various improvements to increase the profitability of the company.
Starbuck’s History
The first Starbucks store opened in 1971 in Seattle, and this was a partnership with three
teachers and the inspiration was the selling of the high quality beans. The growth of the company
is the expansion to the different countries and the selection of the products that the market
prefers. The company has faced different challenges in the downturns of the economy, but it has
survived the tides to emerge profitable in the organization (Foroohar, 2015). The utilization of
the various technological advancements is important as it ensures that there is progress in the
performance of the company and that there is the identification of the campaigns that the
company needs to utilize to meet the needs of the consumers.
STARBUCKS MICROECONOMIC ANALYSIS
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The use of the different systems in the stores has increased the efficiency of the company
and ensured that there is the attraction of the different customers depending on their preferences.
The increase in the access of the stores has led to the growth in demand for the products and has
ensured that the company continues to grow and improve its profitability in the business. The
implementation of the feedback from the consumers has helped the company in the steady
increase of meeting the preferences of the customers, and this helps in increasing the demand for
the products. It is important for Starbucks to continue with the improvement of the product as it
is through this that there is a decrease of the choices of the customers going to the competitors.
Supply and Demand
The trends in demand for coffee are identified from consumption patterns of the
customers where there is the increase in demand due to the lifestyle that people embrace. The
demand for the coffee in the shops then increases to make sure that there is the continuous
supply to meet the growing demand in the market. It is estimated that the adults that drink coffee
in the United States are 75% and those that consume it daily are 58%. It shows that there is a
need to ensure that supply of the coffee is enhanced to keep on with the increasing trend.
As compared to the competitors in the market, the demand for the Starbucks coffee continues to
increase, and this is evident in the sales that the company makes as compared to their
competitors where in 2016 it made sales of $21.31B (Berger & Blake, 2016). It is important then
to ensure that there is the focus on the issues that continue to face the market in the identification
of the trends. With the increase in the demand for coffee, there is also the increase in demand of
STARBUCKS MICROECONOMIC ANALYSIS
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supply to Starbucks and this means that the investigation of the relationship helps in analysis of
the preferences of the markets.
YEAR
SALES
2012
13.3B
2013
14.89B
2014
16.44B
2015
19.15B
2016
21.31B
The table shows the continuous increase in sales of the company that indicates that the
demand for the coffee continues to grow. There is a continous increase in the demand for coffee,
and this means that there is the need for the company to increase its supply. There are different
challenges met in the supply of the product such as the decline in production due to climatic
conditions, and this leads to increase in the price of the coffee in the market (Wade, 2015).
Price Elasticity of Demand
Price elasticity of demand is the responsiveness of the change in the change in the
demanded quantity due to an increase in the price of the commodity. Looking at the price
elasticity of demand for the coffee in Starbucks there is need to identify the perception of the
consumers towards the product as it is through this that there is the determination of the different
elasticity (Horvat, Antic & Jeremic, 2015). Where there is an increase in price, and the demand
continues to grow, it is seen that there is inelastic demand.
STARBUCKS MICROECONOMIC ANALYSIS
Price per
6
9
8
7
6
5
4
10
15
20
25
30
35
pound($)
Quantity
demanded
per month
The diagram shows the demand of the coffee where Y axis shows the price and the X
axis shows the quantity demanded. As seen in the graph, an increase in the price of the coffee
leads to the decline in the quantity demanded and this implies that the consumers easily switch to
the substitutes of the company products. The availability of alternatives is a critical analysis of
the company as it ensures that they are aware of the changes that take place in the market due to
the elastic demand of the market. The fact that there is elastic demand is dependent on the
perception of the consumer towards the product, and this means that there are other factors that
determine the changes in the demand of the market (Macdonald, 2007). The consumers consider
factors, such as the purchasing power and the improvement in the quality of the product, as they
help in making sure that there is the maintenance of the demand of the product.
STARBUCKS MICROECONOMIC ANALYSIS
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The consideration of the period that the consumers respond to the changes in price is important,
as it makes sure that there is the use of the strategies important in maintaining the sales of the
company. It means that the quantity demanded of the product will only decrease with a small
margin as compared to the expectation. Where there is the continuous increase in prices, then it
is likely that there is the alteration of the consumption patterns in the long run. It is because there
is an increase in the demand for the substitutes making the quantity consumed to reduce in the
long term. It affects the decisions of the company in consideration to the changes in demand. It is
important then that the company gives consideration to the supply and demand factors, as it is
through thus that there is the determination of the prices of the company products.
Cost of Production.
Costs can be classified into two. The first being fixed costs which are costs that are
incurred independent of production. No matter the number of output produced this costs do not
change. The second is variable costs. This costs depend on production. If a firm produces more
units of a product, they will have to incur a larger cost on raw materials and labor, causing the
variable costs to also increase.
Variable costs can also be referred to as the cost of goods sold (COGS). This is the cost
incurred for every product sold. The COGS for Starbucks has been rising steadily since 2012
until the year 2016 as shown in the graph below (Anonymous, 2017).
STARBUCKS MICROECONOMIC ANALYSIS
8
The observed rise can be attributed to the rise in production as Starbucks grows and expands its
areas of production. Increasing the number of coffee shops in America and abroad as well as an
increase in the demand for Starbucks coffee has definitely caused an increase in the cost incurred
for obtaining raw materials
Fixed costs can be referred to as operating expenses. This are expenses like marketing,
advertising, insurance, utilities, rent, salaries, and depreciation which are not dependent on
output. If output increase, this costs stay constant but rise in the long run if the firm expands and
acquires new building, equipment and other utilities. The operating expenses for Starbucks for
the last five financial years are as shown below. Operating expenses in Starbucks have steadily
increased since 2012 with a little hiccup in 2013 where the expenses were high due to abnormal
expenses within the firm .The hiccup was attributed to the litigation case against the company on
the grounds that the contact they had with Kraft was prematurely terminated. This resulted to a
STARBUCKS MICROECONOMIC ANALYSIS
9
pretax charge of $2.8billion to its operating expenses. Due to this, the company experienced and
operating loss of $299 million. (Junghwan, 2014).
It is important that the variable and fixed costs of a firm be monitored since they contribute
directly to the output decisions of a firm. A decrease in the price of raw materials may cause a
firm to increase production. In the same way am increase in salaries and wages can cause a
decrease in production since firms do not want to incur the extra cost. The total variable costs
coupled with total fixed costs determine how much the firm will incur for the level of output that
they have chosen. To ensure profit maximization, the revenue gained for every extra unit of
output produced should be equal to the cost incurred in production of the same and also equal to
the minimum price this unit of production will be sold at in the market (Foley, 2016).
MR=MC=P
STARBUCKS MICROECONOMIC ANALYSIS
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Over the years the Starbucks has increased production by about 60% hence the increase on cost
of goods sold. At the same time, operating expenses have increased by about 58% due to the
firm’s tremendous expansion (Geereddy, 2012). The firm’s choice in 2013 to increase coffee
prices in their shop despite of the fall in global coffee prices is one of the decisions that had to be
made to ensure the firm remained profitable despite its rising total costs. Since 2012 to 2016,
Starbucks net profit has increased steadily from $1.3B to $2.8B meaning that the output
decisions to increase production and venture into providing food in their restaurants have
benefited the firm’s profitability greatly.
Market Structure
Starbucks belongs to the coffee chain industry in the USA. It shares this industry with
other coffee shops such as Dunkin Donuts, the McDonalds chain and many more. Over the years,
Starbucks has been at the top of this industry with market shares almost always more than a
thorn of the whole industry. How the market has been shared in this industry is showed in the
graph below
STARBUCKS MICROECONOMIC ANALYSIS
11
Considering the data above, the coffee chain industry is clearly not a perfect competition market.
This means that there are barriers to entry of new firms into this industry (Bertoletti & Etro,
2016). Some of the barriers that are experienced in this kind of market are highlighted below.
Economies of scale
This refers to the decrease in production cost as the quantity of output increases.
Starbucks and other firms have existed in the industry for a long time and enjoy economies of
scale. In order to compete favorably in the coffee industry, new firms would have to produce in
large scale which would not sit well with the already existing firms, or produce in smaller scale
and suffer high cost of production.
STARBUCKS MICROECONOMIC ANALYSIS
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Product differentiation
The incumbent coffee chains enjoy loyalty from customers for their specialized brands.
New firms would have to incur large costs in order to introduce a new product in the market and
convince the target consumers of its benefits. Most times startup firms do not have the financial
capability for this.
Capital constraints
Existing firms have established themselves and new entrants would need a lot of capital
for infrastructure, advertising and equipment in order to compete with the existing firms in the
industry. Since the coffee shop industry is well established already the capital required is also
fairly large which could cause a serious strain on startup companies,
Switching costs
If an already existing firm desires to join the coffee industry, even with available capital
they would have to incur a cost in order to switch industries. This costs include new equipment
and training of employees.
Cost disadvantages independent of scale
The existing firms will always have an advantage when it comes to cost due to prior
experience and knowledge of the market, access to the raw materials subsidies by the
government, favorable locations and distribution channels.
STARBUCKS MICROECONOMIC ANALYSIS
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Starbucks operates in a monopolistic market. There are many competitors in this market
due to the low entry and exit cost, however due to the limitation in the product produced, each
firm has to differentiate its product to suit its clientele. The firms differentiate based on location,
shop ambience and product mix. Starbucks being a premium shop sets its price at a level which
the consumer is willing to pay if they are satisfied with the services. It therefore ensures that the
standards of coffee as well as customer service are maintained at an all-time high.
Starbucks has come up with their own language to give their customers a sense of
sophistication as they order. A small cup of coffee is referred to as “venti” while a medium is
known as “Grande” and the large as “tall”. It also offers drive through services for customers
who wish to take their coffee to go. This has proven to be a worthy cause since the number of
customers who take Starbucks coffee increases every year.
Since competitors deal with differentiated products with each product pulling in its own
customers, firms concentrate on growing their brand and increasing customer loyalty. Starbucks
has little or no influence on the coffee industry. The little influence it has is owed to the fact that
it controls the highest market share. It is therefore difficult for any firm to swing the market in its
favor. The presence of competition in the market as well as the risk of potential competition
limits the pricing power of Starbucks or any other firms.
Recommendation.
Starbucks controls majority of the market shares in the coffee industry. Its profits have
been rising over the years and consequently has the number of shops and customers. However, in
order to maintain this there needs to be a plan to manage future production. One such plan is to
predict market expectations (Casson, 2016). From history Starbucks’ competitors have stayed in
STARBUCKS MICROECONOMIC ANALYSIS
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the market by introducing new differentiated products. It is therefore important that the
innovation team stay at toes to ensure that new products of high quality are introduced in order to
stay on top of the competition.
Starbucks being a premium shop selling a luxurious good enjoys inelastic demand. Even when
prices increase, demand doesn’t decrease as expected. This therefore means that it should
concentrate on non-cost strategies that appeal to the customer other than cost strategies only.
This will help in solidifying customer loyalty.
With the company introducing its products to markets overseas, costs are bound to rise.
This is a good strategy because Starbucks has already been recognized as a global brand and the
global market is ready for its coffee. Even as costs of production and other fixed costs rise,
revenues will continue to rise keeping the firm profitable.
Being at the top of the industry and controlling more than a third of the market shares as
seen in the graph above, Starbucks has the advantage of a bigger clientele as well as better
profits. This means that if they embark on the non-cost strategies they will have more loyal
customers than any other coffee shop, ensuring that they stay at the top.
Investors looking to invest in the coffee chain industry will automatically be drawn to
Starbucks due to its pres …
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