What are your instinctive "first reflections" on this piece? What have you learned from the Module 1 chapter readings that you believe should be taken into account as Starbucks tries to equate MB with MC, in making plans for expansion? Finally, lay out one scenario in decision making in your life where you believe that the equalization of MB with MC would be a useful tool in optimizing your personal satisfaction.

READING:

Starbucks launched as a single neighborhood coffee shop in Seattle in 1971. It started adding additional branches rapidly in the late 1980s and now boasts over 14,000 outlets in the United States and an additional 14,000 outlets abroad.

Starbucks' success has been driven by applying fundamental economic principles. In particular, Starbucks' management team makes business decisions based on a careful comparison of marginal cost and marginal benefit.

New Store Placement

Consider store placement and store saturation. Where should new branches go? How many locations are too many for a given city? These decisions have to be made very carefully because setting up a new location is costlyabout $450,000 for equipment, furniture, dcor, and business licenses. That's a lot of money, even for a company that sells $25 billion of coffee and food each year. So a great deal of research goes into selecting new locations.

The goal is to make sure every outlet can recoup its setup costs and then make a nice profit. Since both the cost of setting up a new location and the size of ongoing operating costs like wages and rent can be estimated accurately in advance, the marginal cost of setting up a new location is pretty well known. That makes it necessary to focus on the marginal benefit of setting up each new locationthe marginal (additional) revenue that a new location will generate.

The best potential locations are those for which the projected marginal benefit (MB) exceeds the projected marginal cost (MC) by the greatest amount. Research on potential locations will always reveal some for which profits are projected to be negative. Starbucks will only continue to build new locations until it runs out of profitable potential locations. When that limited set of locations is exhausted, it will stop building new stores in a given city.

If Starbucks has done its job right, MB will equal MC for the very last store that it builds in a particular city. Any additional stores would generate negative profits (MB < MC) since Starbucks will have already opened all the stores for which MB > MC.

Menu Maneuvers

Starbucks also uses marginal analysiscomparing MB and MCto make ongoing business decisions. Consider menu items. Any new menu item will generate marginal costs and marginal benefits. The MC includes advertising expenditures to let people know the new item is available and equipment costs if new cooking equipment is necessary to produce it. The MB boils down to higher potential revenue. For each potential new menu item, Starbucks will estimate MB and MC. Only items for which MB > MC will even be considered. The top candidate will be the one for which MB exceeds MC by the largest amount.

One final issue. Should Starbucks bump an existing menu item to make room for a new menu item?

The answer depends on whether the amount by which MB > MC for the potential new item exceeds the amount by which MB > MC for the existing item. If so, the new item would be more profitable than the existing item and the substitution should be made. The fact that Starbucks compares MB with MC when making its business decisions is highly beneficial for society because the more MB that Starbucks can get from any given amount of MC, the better the company becomes at dealing with scarcity and getting the most of what people want out of the limited resources available to produce goods and services.

What are your instinctive "first reflections" on this piece? What have you learned from the Module 1 chapter readings that you believe should be taken into account as Starbucks tries to equate MB with MC, in making plans for expansion? Finally, lay out one scenario in decision making in your life where you believe that the equalization of MB with MC would be a useful tool in optimizing your personal satisfaction.