Business Economics

The economic downturn and competition from rival Costa Coffee deepened the UK losses of coffee chain Starbucks to £9.9m in the year to September 2009, compared with a pre-tax loss of £1.9m in the previous year. The tough trading climate in Western Europe was predicted last year by Starbucks chief executive Howard Schultz, who said: "Unemployment, the sub-prime mortgage crisis, and I think consumer confidence, particularly in the UK, is very, very poor." (Guardian.co.uk, 2010)
However, a spokesperson for Starbucks said that heavy investment was paying off in terms of a record number of customers and a return to solid sales growth. The group has put aside £24m this year to continue refurbishing its UK stores. It is also focused on rolling out free Wi-Fi, sourcing Fairtrade coffee for its espresso-based drinks, and experimenting with an instant coffee brand to fight off competition from JD Wetherspoon and McDonald 's. Starbucks competes in the Service Sector, Specialty Eateries Industry and is the dominant player in the Gourmet Coffee segment. This essay is going to explain its major external and internal environmental factors impacting upon its operations in its appropriate market structure.

US companies invest in UK success. With its depth of talent and global reputation as an international financial centre, the UK remains a crucial destination for large and small American firms. The challenging global economic situation has created financial turbulence across the world; yet investment in the UK from international firms, including large and small US companies, remains strong. The UK has always proved an attractive and important destination for US firms. Hundreds have located here including globally popular mainstream brands such as Google, Microsoft and Starbucks. And, despite the challenges of the global economic downturn, US financial services companies continue to choose the UK as a basic, viewing it as an important investment location. Structural Change is often discussed in terms of the even more widely drawn “primary”, “secondary” and “tertiary” (service) sectors. Starbucks is part of the service industry because, they provide a service, thus they are part of the tertiary sector. The tertiary sector of industry (also known as the service sector or the service industry). Services are defined in conventional economic literature as "intangible goods". According to some economists, the service tends to be wealth consuming, whereas manufacturing is wealth producing. The tertiary sector of industry involves the provision of services to businesses as well as final consumers. Services may involve the transport, distribution and sale of goods from producer to a consumer as may happen in wholesaling and retailing, or may involve the provision of a service, such as in best control or entertainment. Goods may be transformed in the process of providing a service, as happens in the restaurant industry. However, the focus is on people interacting with people and serving the customer rather than transforming physical goods. The personal services are provided specifically to individuals, but what is most important, every business also seeks to offer goods or services which better meet the needs of consumers than those of rival firms.
“The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favour … The key for developing strategy is to delve below the surface and analyse the sources of each.” (Porter, 1998)
Analysis and investigation of decision-making in the business environment must take into consideration a number of influential and competing factors, both at the macroeconomic and microeconomic level.
The economics is how the society deals with the problem of scarcity and the resultant problems of how to produce, what to produce and how to distribute. Macroeconomics analysis, which is concerned with interactions in the economy as a whole dealing with such questions as the overall level of the employment, the rate of inflation, the percentage growth of output in the economy. Macroeconomics is focused on the performance of the economy as a whole to explain broad aggregates and their interactions “top down”, that is, using a simple field from of general equilibrium theory what is a brand of the theoretical neoclassical economics. The influence of Macroeconomic factors helps the firms to determine the current market conditions and how beneficial will they be for the success of their business. Economic Growth in economic activities refers to the level of buying and selling activities happening in an economy over a time period. Economic activity is not constant and can change rapidly, thereby affecting the business.
Economic activity changes could happen due to the following reasons: changes in income levels; future prospects of individuals; future of the economy; the level of economic activity in the world as a whole; political activities around the world; natural disasters - like hurricanes, earthquakes, or flood etc; changes in prices of raw materials - oil, metals, fuel, energy and so on; changes in world stock markets.
According to Wikipedia: “The level of economic activity is usually measured by GDP (Gross Domestic product). It refers to the total amount of goods and services a country produces. Businesses are greatly influenced by the economic activities. When GDP rate falls or slows down, there will be a fall in demand for goods or services offered by businesses. As a result, businesses will witness a fall in revenues and profit margins. To curb this business will have to reduce their prices to increase the sales. This could further lead to increase in unemployment.”

On the other hand when there is an increase in GDP, the demand for products will automatically increase and hence the prices will go up. To cope with the increase in demand business will need to employ new people resulting in reduction in unemployment rates. In inflation there will be an increase in the level of prices of products and services over a specific period of time. As a result the firms will have to incur higher costs of operations. This will be also due to the increase in wages of the employees. Interest rates are charged by the banks for lending a loan. Increase in interest rates will directly influence the business as businesses borrow money from the banks from time to time. Increase in interest rates will lead to higher interest expense: businesses will have to incur higher costs to repay the loan. Interest rate changes also affect customers who in turn will affect the business. In case of increase in interest rates the amount that individuals need to pay to borrow the money will increase thereby, reducing the demand for large products in the market. Further, if the interest rates decrease then the charges on a loan to buy larger items like cars, electrical equipments are likely to fall. As a result, a large number of people might be willing to buy such items. There will be a sudden increase in the demand for the products offered by such businesses.
“ Business organisations operate in an economic environment which shapes, and is shaped by, their activities. In marked-based economies this environment comprises variables which are dynamic, interactive and mobile and which, in part are affected by government in pursuit of its various roles in the economy. As a vital component in the macroeconomic, government exercises a significant degree of influence over the flow of income and hence over the level and pattern of output by the public and private sectors. Other key influences include a country’s financial institutions and the international economic organisations and groupings to which it belongs or subscribes.” (Worthington, 2000)
Microeconomic analysis which is concerned with the decisions making by both individual and firms. The market for a product is a situation between buyer and seller of a product communicate with each other for the purpose of exchange. For the buyers who want to buy their needs determine the market demand for a particular product while the collective actions of the sellers determine the market supply. The interactions of these two such as buyers and sellers (known as market forces) which determines the market price for the product. The market demand for the product means the total amount that consumers demand at a particular price over a period of time. The demand for a product for example cup of Starbucks coffee depends upon a number of factors, namely: the price of the product; the price of all the other related products in the economy; the level of household income; the taste of the consumers; advertising. All these factors are interacting the price of Starbucks coffee and its product. Business draws upon microeconomic data to make a variety of critical choices, any one of which could mean the success or failure of their enterprise. The reliability and currency of the information a business uses, therefore, is of the most importance. The decision making by small economic units, including individuals, households, businesses, and industries. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. Microeconomics examines issues such as pricing, supply, demand, costs, and revenues. The supply of a Starbucks coffee is the quantity of the product that for example firms are willing and able to put onto the market at a particular price such as a Starbucks special cup of coffee in over particular period of time. Assuming that the prime motive for supplying Starbucks products is to make a profit and that supply’s the market supply. Mostly there are factors which influence the quantity supplied is: the price; the price of all other products in the economy; the price of the factors of productions; the state of technology; all other factors which might influence the quantity supplied. So far demand and supply have been out lined separately. To bring these two factors together they interact to determine the equilibrium and quantity.
“ Equilibriumprice relates to the price at wich the wuantity demanded equals the quantity supplied” (Ison & Wall, 2007)
On a conceptual level, it has allowed Starbucks to maintain a strong vision for expansion, managers on a local level do not have to worry about the overall strategy of Starbucks nor the competitive landscape they occupy. Each level of management only has to worry about their specific niche function within the company and this has done wonders for the overall growth of their brand as well as physical locations.
Another important conceptual advantage is that at the micro-economic level Starbucks grants almost complete autonomy to their managers and their employees, thus allowing them to deal with the specifics of their locality and present a very informal and localizing affect for their customers. The actual returns from this practice have been tremendous; Starbucks has grown into one of the foremost admired companies in the world, with the highest overall revenue within the industry.
To identify main environmental factors impacting upon on service operations, it is necessary to identify the market structure. Market structure refers to the number and size of firms, which limit the freedom of action for any firm in setting prices or in product specification such as Starbucks coffee products, Wetherspoon or local coffee shops. Theoretically they have high cross-elasticises of demand. Firms often produce more than one type of product so for the purpose of official an industry according to their most important product in terms of sales. The most appropriate for Starbucks is monopolistic competition - refers to a market structure that is a cross between the two extremes of perfect competition and monopoly.
According to a Tata Teleservices Limited part of the Tata Group of Companies they refer that: “A monopolistic market is a market structure in which there is only one producer/seller for a product. In other words, the single business is the overall industry whereas in an oligopolistic market, there are a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly; an oligopolistic market has high barriers to entry”
A good example for a monopolistically competitive industry could be the coffee shop industry:
“While Starbucks and Caribou basically sell the same thing, their products are different enough that at least some people will have a preference between them” ( Badur, 1999).
The internal and external factors in organization have a deep impact on its workings.
The External Environmental Factors are those factors that are external to an organization. These factors are beyond the control of an organizations management. An organization has to see these forces as a challenge.
“ Business organisation differ in many ways, but they also have a common feature: the transformation of inputs into output. This transformation process takes place agains a background of external influences which affect the firm and its activities. This external environmental is complex, volatile and interactive, but it cannot be ignored in any meaningful analysis of business activity” (Worthington, 2000)

For success in the present world, one need to consider not only the internal environment of the company consisting of its resources and employees, but also needs to consider the external factors. External Macro Environmental aspects cannot be stopped but one can adjust accordingly as per the changes in the economical, social or political pressures. Political/Legal Factors: These factors are the factors that relate to the government and the political situation of a country. The government defines the laws and regulations so Starbucks are affected deeply by this factor. Economic Factor: The stage of Starbucks business cycle that is attributed with the country, the interest rates and the monetary and fiscal policies all come under this factor. Furthermore, the economic conditions also define the buying power of the consumers. Socio/Cultural Factors: A Starbucks can only sell and produce what is acceptable to the society and the culture of a certain area. Technology - Competition: Starbucks need to know what their competitor is up to. This will let Starbucks remain ahead of Starbucks competitor at all times. One the other hand the Internal Micro environmental factors include the whole supply chain of the organization. These factors can be controlled to a limited extend. The microenvironment consists of six forces. The first force is the company itself and the role it plays in the microenvironment. This could be deemed the internal environment. The organization’s internal environment—its several departments and management levels—as it affects marketing management 's decision making the company itself. The second includes the marketing channel firms that cooperate to create value: the suppliers and marketing intermediaries. Suppliers are firms and individuals that provide the resources needed by the company and its competitors to produce goods and services. They are an important link in the company’s overall customer “value delivery system.” Third force is marketing intermediaries are firms that help the company to promote, sell, and distribute its goods to final buyers. The fourth factor consists of the five types of markets in which the organization can sell: the consumer, producer, reseller, government, and international markets. The fifth component consists of the competitors facing the organization. The last force consists of all the public’s that have an actual or potential interest in or impact on the organization’s ability to achieve its objectives: financial, media, government, citizen action, and local, general, and internal publics. So the Internal Microenvironment consists of six forces close to the company that affect its ability to serve its customers.

References:
Bowers, S. (2010) Oligopoly and its Dual Features. [Online] Thinking Made Easy. Accessed on: 27th June 2010. Available at: http://www.guardian.co.uk/business/2010/jul/09/starbucks-losses-rise-recession Dunnett, A. (1997) Changes in the UK economy structure. [eBook] Pearson Education: London, p. 2
Porter, E. (1998) Competitive strategy: techniques for analyzing industries and competitors . The Free Press: United States of America, p. 4
Wikipwdia (2010) Gross domestic product. [Online]. Accessed on: 27th June 2010. Available at: http://en.wikipedia.org/wiki/Gross_domestic_product Worthington, I. & Britton, C. (2000) The Business Environment 3rd edition. Pearson: Great Britain, p. 79
Dockett, M. , Romano, M. & Ferguson, W. (2007) About Starbucks. [Online] SBUX. Accessed on: 6th July 2010. Available at: http://www.stjohns.edu/media/3/1777fbd1bc794c54adc4265a33eea786.pdf
Ison, S. & Wall, S.(2007) Economics 4 th edition. Pearson: Great Britain, p. 39
Idanan, J. (2009) Business Economics. [Online] Thinking Made Easy. Accessed on: 27th June 2010. Available at: http://ivythesis.typepad.com/term_paper_topics/2009/03/business-economics-tata-teleservices-limited.html Badur, K. (1999) Principles of Microeconomics [Online] ECON. Accessed on: 27th June 2010. Available at: http://www.econ.umn.edu/~kemal/academic/teaching/ECON1101/Files/13.pdf Worthington, I. & Britton, C. (2000) The Business Environment 3rd edition. Pearson: Great Britain, p. 3
2007-2010 What Are The Four External Environmental Factors And Six Internal Factors That Help Organizations Achieve Optimal Function? [Online] Blurtit. Accessed on: 28th June 2010. Available at: http://www.blurtit.com/q123598.html

References: Bowers, S. (2010) Oligopoly and its Dual Features. [Online] Thinking Made Easy. Accessed on: 27th June 2010. Available at: http://www.guardian.co.uk/business/2010/jul/09/starbucks-losses-rise-recession Dunnett, A. (1997) Changes in the UK economy structure. [eBook] Pearson Education: London, p. 2 Porter, E Wikipwdia (2010) Gross domestic product. [Online]. Accessed on: 27th June 2010. Available at: http://en.wikipedia.org/wiki/Gross_domestic_product Worthington, I. & Britton, C. (2000) The Business Environment 3rd edition. Pearson: Great Britain, p. 79 Dockett, M Ison, S. & Wall, S.(2007) Economics 4 th edition. Pearson: Great Britain, p. 39 Idanan, J