Question

Starbucks has more than 10,000 employees, 6,700 stores, which serve some 50 million customers in 51 countries each week. Geoffrey mwa Ngulumbi runs the family-owned fair trade farm in Tanzania and supplies Starbucks with coffee beans and other raw materials. a. How does Starbucks coordinate its activities? Is it likely to use mainly a command system or an incentive system? Explain. b. How do you think Geoffrey mwa Ngulumbi coordinates the activities of his farm? Is he likely to use mainly a command system or also to use incentive systems? Explain. c. Describe, compare, and contrast the principalagent problems faced by Starbucks and Geoffrey mwa Ngulumbis farm. How might these firms cope with their principal-agent problems?

Short answer

Starbucks uses a mix of command and incentive systems, while Geoffrey's farm likely uses more incentive approaches. Starbucks faces more significant principal-agent problems due to its size but handles them with detailed contracts and monitoring, whereas Geoffrey’s farm deals with these through personal oversight and shared profits.

Step-by-step solution

Understand the Coordination Mechanisms

Organizations coordinate their activities through either a command system or an incentive system. The command system relies on hierarchical structures where decisions flow from top management to employees, while the incentive system uses rewards to motivate employees to meet company goals.

Analyze Starbucks' Coordination Mechanism

Given Starbucks' size with over 10,000 employees and 6,700 stores, it is likely to use a combination of both command and incentive systems. The command system helps maintain structure and order, while incentives such as salary bonuses, stock options, and employee benefits encourage productivity and efficiency.

Examine Geoffrey Mwa Ngulumbi's Farm Coordination

For a family-owned farm like Geoffrey Mwa Ngulumbi’s, the coordination is more personal and direct. Although a command system might be used to some extent, the farm is likely to rely more on incentive systems, possibly through profit-sharing and personal investments in the farm’s success. Family ties also offer natural incentives for dedication and effort.

Compare Principal-Agent Problems

The principal-agent problem occurs when the interests of the principal (owners) and the agents (employees) do not align. At Starbucks, this problem is more pronounced due to its large size and many levels of management. The company can address this with performance appraisals, detailed contracts, and monitoring systems. For Geoffrey's farm, the principal-agent problem may be less severe because family-owned businesses often have inherent trust and shared goals. However, it might still employ measures like performance-based rewards and direct oversight to mitigate any issues.

Address Principal-Agent Problems

Starbucks can cope with principal-agent problems by aligning employee goals with company objectives through incentives, rigorous monitoring, and transparent communication. Geoffrey’s farm might use personal oversight and family loyalty, supplemented by sharing profits and responsibilities to ensure that all members work towards a common goal.

Key concepts

principal-agent problem

The principal-agent problem arises when the interests of the principal (owners) and the agents (employees or managers) do not align. In large organizations like Starbucks, this problem is particularly significant due to the sheer size and hierarchical structure.
Employees might not always act in the best interest of the owners, leading to inefficiencies. Starbucks can manage this issue by:

• Implementing performance appraisals
• Providing detailed contracts
• Using monitoring systems

These methods help align the goals of the employees with those of the company.
On the other hand, in smaller, family-owned businesses like Geoffrey Mwa Ngulumbi’s farm, the principal-agent problem is typically less severe.
This is because family members often share common goals and exhibit a natural level of trust.
However, even these businesses might face some principal-agent issues, which they can address through:

• Direct oversight
• Performance-based rewards
• Shared responsibility

command system

A command system is a hierarchical organizational structure where decisions are made by top management and flow downward to employees. This system ensures order and control, making it essential for large enterprises like Starbucks.
Here, managers and supervisors at various levels ensure that strategies and policies are implemented effectively.
For instance, policies regarding customer service or product quality would be communicated from top management to store managers, and then to individual employees.
While effective for maintaining consistency, a command system can sometimes hinder creativity and flexibility.
In smaller settings like Geoffrey Mwa Ngulumbi’s farm, the command system might be limited. Decisions are likely made by the owner and directly communicated to a small team of workers. This direct approach can be efficient but may not fully utilize the potential of each team member.

incentive system

An incentive system motivates employees by offering rewards for meeting certain performance criteria. This approach is popular in large organizations such as Starbucks, where financial incentives like bonuses, stock options, and employee benefits encourage productivity and efficiency.
Incentives are crucial for steering employees toward company goals and maintaining high levels of motivation.
Starbucks might offer:

• Performance bonuses for meeting sales targets
• Stock options to align employee interests with company performance
• Health benefits to enhance job satisfaction

On smaller farms like Geoffrey Mwa Ngulumbi’s, incentive systems can be more personalized.
For instance, profit-sharing might be used to ensure that all workers have a vested interest in the farm’s success.
Additionally, personal investments and shared goals among family members can serve as powerful incentives to work diligently and ensure the farm’s prosperity.

organizational structure

Organizational structure defines how tasks are coordinated and who makes decisions within a company. In large entities like Starbucks, a complex structure helps manage thousands of employees and multiple layers of management.
This structure might include regional managers, store managers, and supervisors to ensure smooth operations.
A well-defined organizational structure promotes efficiency and clarity in roles, helping everyone understand their responsibilities.
Starbucks' structure typically features:

• Clear hierarchical roles
• Defined reporting lines
• Specialized departments

Geoffrey Mwa Ngulumbi’s farm, by contrast, most likely has a simple and direct organizational structure.
With fewer employees and a more intimate setting, decisions can be made quickly and communicated directly. Such simplicity allows for greater flexibility and adaptability but might lack the formal processes seen in larger organizations.

performance-based rewards

Performance-based rewards are incentives given to employees based on their output or achievements. These rewards align employee efforts with company goals and encourage them to perform at their best.
At Starbucks, performance-based rewards could include:

• Bonuses for meeting sales targets
• Employee of the month recognitions
• Promotion opportunities

These rewards motivate employees to be more productive and maintain high standards.
On Geoffrey Mwa Ngulumbi’s farm, performance-based rewards might be more informal but equally effective.
Examples include profit-sharing, where workers receive a portion of the profits proportional to their contributions, or special bonuses for exceptional work.
These rewards foster a sense of ownership and motivate workers to contribute to the farm's success.