Control Mechanisms of Starbucks

Control Mechanisms of Starbucks

Control systems eliminate idiosyncratic behavior and keep employees directed toward achieving the goals of the firm. Control systems are a steering mechanism for guiding resources, for helping each individual act on behalf of the organization (Bateman & Snell, 2009). The types of control mechanisms used in Starbucks' organization are budgetary, feedforward, financial, and market controls. The fundamental force of control is one way of keeping the organization together and headed in the right direction.

Although control systems are used to constrain people's behavior and make their future behavior predictable, people are not machines that automatically fall into line as the designers of control systems intend. A control system cannot be effective without consideration of how people will react to it (Bateman & Snell, 2009).

Comprehensive control systems increase the accuracy of performance data and make employees more accountable for their actions. Control systems uncover mistakes, threaten people's job security and status, and decrease people's autonomy. Effective control systems maximize potential benefits and minimize dysfunctional behaviors (Bateman & Snell, 2009). In order for these controls of be effective at Starbucks, management needs to establish a strong control system. The controls have to adhere to performance standards, ensure employees of open communication, provide appropriate information to employees, guarantee employee acceptance, and use of a combination of systems.

Budgetary Control System

Budgetary controls forecast expected sales over a specific period. For most, budgeting refers to the flow of money in and out of the company (Bateman & Snell, 2009). By budgeting, companies such as Starbucks can monitor and compare the actual sales to the forecasted sales over a period. This allows upper level management to make adjustments to items such as coffee inventory or staffing levels. This budgetary control system is highly efficient for the funding of future growth and current global operations because it pushes control to the regional manager level. Many of Starbucks' expenses are at the store level so control at the regional level allows closer tabs to be kept and necessary adjustments to be made quickly.

The budgetary control of Starbucks takes into consideration an estimate of sales and expected income on an annual basis. For fiscal 2010, they estimate profit of .92 cents and sales of $9.95 billion. Starbucks expects operating cash flow for fiscal 2010 to reach approximately $1.4 billion and capital expenditures to range from $500 million to $550 million (Starbucks, 2009). Budget-setting can become tugs-of-war between upper management, trying to minimize the slack in the budget, and subordinates trying to add slack into the budget (Bateman & Snell, 2009).

Feedforward Control System

Feed forward control, sometimes called preliminary control, is aimed to prevent problems before they arise. It is a way of being proactive instead of reactive. Starbucks is very serious about conducting business ethically. They believe that doing the right thing is vital to the success of the company. Starbucks has put a Business Ethics and Compliance program in place to help distribute information such as the Standards of Business Conduct to their employees (Starbucks, 2009).

The managers of Starbucks have a responsibility of adhering to the internal controls over financial reporting. The managers have to make sure that documentation is accurate and fair; they help to ensure that the transactions recorded are necessary for financial statements; and detection of materials that could have a negative effect in a timely fashion. Starbucks adopted a code of ethics applicable to its chief executive officer, chief financial officer, controller, and other finance leaders. This feedforward control approach may cause negative reactions as it may cause Starbucks' employees to be overly conscious about doing the right thing and therefore slowing their reactions (Starbucks, 2009).

Deloitte & Touche, LLP, an Independent Registered Public Accounting Firm, audits Starbucks' financial reporting. The firm is responsible for expressing an expert opinion on Starbucks' effectiveness for internal control over financial reporting in all material aspects. According to Deloitte & Touche's report on November 20, 2009, Starbucks "maintained, in all material respects, effective internal control over financial reporting" (Deloitte & Touche, 2009, p. 80).

Financial Control System

Financial controls include key financial targets for