BUSSPP 0200 1st Edition Lecture 2Outline of Last Lecture Evidence of Starbucks’ Success through:I. FinanceII.Market ShareIII. Advertising TrendsIV. CSRV. Human Resources Outline of Current LectureI. Brainstorming: What’s happening?II. Analysis of stock III. Profit IV. Conclusion about Starbucks stock V. Take-awaysVI. Organizations and Firms Current LectureI. Brainstorming: What’s happening?A. If Starbucks has had financial success, a strong handle on market share, a successful CSR, and excellent HR, why is stock price falling?1.Ideas: a. Maybe CSR policy is too aggressive etc. b. competition increasing c. company splits: increase in stock = decrease in price d. already expanded, so possible that growth (# of stores) has stunted (i.e. market is maturing – everyone that wanted the product already got it) e. new concepts f. high dairy costs These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. What do all of these things have in common? a. They all pertain to the FUTURE. II. Analysis of stock A. What prompts people to hold onto stocks? 1. Potential to increase in value 2. Likely to increase in value MORE THAN something else equivalent 3. Growth is relatively constantB. What prompts people to sell stocks? 1. Price is more likely to dropC. Stock price is a function of: 1. supply and demand a. supply and demand for stocks 2. When a firm goes public, it makes its stock available for purchase to the publica. amount of stocks stays relatively constant b. at times, companies will buy back shares to increase price, but in general the number of stocks is constant D. So what’s driving the price if it’s not supply??!!! 1. DEMANDa. if price is falling, it indicates demand is fallingb. people value that particular stock less than other investmentsE. Pure speculation: why is demand going down? 1. If CSR was the issue, stock price probably wouldn’t have been growing up to [whatever point] a. competition MAY be the culprit b. data in the case has been adjusted for stock splits: probably not the issue c. market MAY be maturing and consumers are becoming increasingly satiated: don’t reject this possibility d. although this case is based in 2007, the stock chart included in the case indicates that the stock prices of this market will not be drastically affected until well into 2008III. Profit A. Accounting profit vs. economic profit 1. Accounting profit: historical (rearview mirror) 2. Economic profit: both historical and predictiona. Difference in revenue vs. expenses b. will not grow as rapidly in the future if revenue growth slows down (even if expenses stays the same) c. Will not grow as rapidly in the future if expenses decrease (even if revenue stays the same)B. Issues facing revenue growth: 1. New competition 2. Strong players (i.e. McDonalds) a. New competition is selling same products for less (Starbucks is the premium seller while McDonalds is a discount seller) b. McDonalds coffee reported better in at least one study C. Issues with expenses: 1. Beginning to spend more in advertising/marketing (not necessarily shown in the case but this is a reasonable assumption in the face of growing competition) a. hit is not going to be overwhelming but it will be significant 2. More competition  need new products?  $$ for product development and research 3. Coffee supply: with increased competition, Starbucks may be required to pay their suppliers more in order to remain “the favorite/preferred” buyer IV. Conclusion about Starbucks stock A. Let’s back it up for a second: 1. What two things in our lifetimes have been getting RIDICULOUSLY EXPENSIVE?? a. Tuition b. Healthcare!!! i. Starbucks spent $200 million in healthcare expenses in 2007 - that’s about half of revenue - this looks like a time bomb B. Coffee comes from a semi-tropical band of the world 1. What processes does coffee go through? a. Picking, washing, etc b. Roasting i. Starbucks roasts its own coffee ii. McDonald’s and other competitors do not iii. Retailing and roasting are two separate industries 2. Starbucks has 5 roasting plants: 4 in the US and 1 in Holland a. Starbucks RETAILS all over the worldb. so one batch of coffee may come from Sumatra, be shipped to Seattle to be roasted, and then shipped back to Australia to retail i. Now we’re including massive shipping and tax costs ii. Coffee is an agricultural product – it’s going to spoil at some point iii. Dealing with currency exchange – massive risk iv. Selling in AUD: convert that back to USD, you’re making 81 cents on the $13. Starbucks is investing in WEIRD STUFF: Music a. It’s 2007: illegal downloading has peaked b. Now producing 3 groups/artists: Paul McCartney, Joni Mitchell, & Dave Matthews i.This music isn’t selling to Starbucks’ target market ii. Starbucks, what the heck are you doing? 4. So why is stock price going down? a. Demand is going down b. It’s a reasonable guess that Starbucks’ economic profit going forward is not going to increase (and will most likely decrease)V. Take-awaysA. The performance of a firm is multi-dimensional 1. Data: qualitative and quantitative. Both are important a. no guarantee that data will tell a consistent story b. we can anticipate performance c. performance is a good indicator of what stock will doB. Expectations of the future ARE IMPORTANT 1. History is no predictor of performance in and of itself a. Just because it’s been successful, doesn’t mean it will continue to be successful, and vice versa C. Sometimes data are in our face, sometimes they’re in our face and we must manipulate them, and sometimes we have to push really hard to make good conclusionsVI. Organizations and Firms A. Organizations have 4 Characteristics 1. Boundaries: separate the organization in two waysa. External (from other things in the world)b. Internal 2. Goalsa. Econ  one goal model b. MCE  more than