Starbucks case for Aol

McDonalds Corp. has recently announced that it was determined to increase sales of coffee beverages, which it deems a profitable and relatively underexploited opportunity. McDonalds Corp. plans to achieve its goals by further reducing the prices of its specialty coffeeswhich are already much cheaper than those at coffee chains such as Starbucks. Several market analysts have suggested that Starbucks should react with major price cuts to its own offerings, even though it is unlikely that it could reach prices as low as those offered by McDonalds. However, other analysts have criticized this recommendation, noting that it, in order to lower its prices Starbucks will have to also engage in significant cost reductions. Starbucks main cost drivers are the cost of its high quality beans, labor and rent.

Should Starbucks lower its prices as advised by some market analysts in order to prevent McDonalds from making significant inroads in Starbucks business? If you conclude that Starbucks should not lower its prices, what would you suggest that the company do instead?