Business Studies: Exam Style Questions – 3
Starbucks
Starbucks Economics - Solving the mystery of the elusive "short"
cappuccino.
Here's a little secret that Starbucks doesn't want you to know: They will serve you a
better, stronger cappuccino if you want one, and they will charge you less for it. Ask
for it in any Starbucks and the barista will comply without batting an eye. The puzzle
is to work out why.
The drink in question is the elusive "short cappuccino"—at 8 ounces, a third smaller
than the smallest size on the official menu, the "tall," and dwarfed by what Starbucks
calls the "customer-preferred" size, the "Venti," which weighs in at 20 ounces and
more than 200 calories before you add the sugar.
The short cappuccino has the same amount of espresso as the 12-ounce tall,
meaning a bolder coffee taste, and also a better one. The World Barista
Championship rules, for example, define a traditional cappuccino as a "five- to sixounce beverage." This is also the size of cappuccino served by many continental
cafés. Within reason, the shorter the cappuccino, the better.
The problem with large cappuccinos is that it's impossible to make the fine-bubbled
milk froth ("microfoam," in the lingo) in large quantities, no matter how skilled the
barista. A 20-ounce cappuccino is an oxymoron. Having sampled the short
cappuccino in a number of Starbucks across the world, I can confirm that it is a
better drink than the buckets of warm milk—topped with a veneer of froth—that the
coffee chain advertises on its menus.
This secret cappuccino is cheaper, too—at my local Starbucks, $2.35 instead of
$2.65. But why does this cheaper, better drink—along with its sisters, the short latte
and the short coffee—languish unadvertised? The official line from Starbucks is that
there is no room on the menu board, although this doesn't explain why the short
cappuccino is also unmentioned on the comprehensive Starbucks Web site, nor why
the baristas will serve you in a whisper rather than the usual practice of singing your
order to the heavens.
Economics has the answer: This is the Starbucks way of sidestepping a painful
dilemma over how high to set prices. Price too low and the margins disappear; too
high and the customers do. Any business that is able to charge one price to pricesensitive customers and a higher price to the rest will avoid some of that awkward
trade-off.
It's not hard to identify the price-blind customers in Starbucks. They're the ones
buying enough latte to bathe Cleopatra. The major costs of staff time, space in the
queue, and packaging are similar for any size of drink. So, larger drinks carry a
substantially higher mark-up, according to Brian McManus, an assistant professor at
the Olin School of Business who has studied the coffee market.
The difficulty is that if some of your products are cheap, you may lose money from
customers who would willingly have paid more. So, businesses try to discourage their
more lavish customers from trading down by making their cheap products look or
sound unattractive, or, in the case of Starbucks, making the cheap product invisible.
Page 1 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
The British supermarket Tesco has a "value" line of products with infamously ugly
packaging, not because good designers are unavailable but because the supermarket
wants to scare away customers who would willingly spend more. "The bottom end of
any market tends to get distorted," says McManus. "The more market power firms
have, the less attractive they make the cheaper products."
That observation is important. A firm in a perfectly competitive market would suffer if
it sabotaged its cheapest products because rivals would jump at the opportunity to
steal alienated customers. Starbucks, with its coffee supremacy, can afford this kind
of price discrimination, thanks to loyal, or just plain lazy, customers.
The practice is hundreds of years old. The French economist Emile Dupuit wrote
about the early days of the railways, when third-class carriages were built without
roofs, even though roofs were cheap: "What the company is trying to do is prevent
the passengers who can pay the second-class fare from travelling third class; it hits
the poor, not because it wants to hurt them, but to frighten the rich."
The modern equivalent is the airport departure lounge. Airports could create nicer
spaces, but that would frustrate the ability of airlines to charge substantial premiums
for club-class departure lounges.
Starbucks' gambit is much simpler and more audacious: Offer the cheaper product
but make sure that it is available only to those customers who face the uncertainty
and embarrassment of having to request it specifically. Fortunately, the tactic is
easily circumvented: If you'd like a better coffee for less, just ask.
Source: http://www.slate.com/id/2133754/
Questions
Why is the cheaper coffee a) offered but not b) advertised?
Page 2 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Fraud
When the world gives you lemonade, some people brew coffee (or something like
that.) In a smart publicity move, Caribou Coffee announced they would accept
fraudulent coupons from the cancelled Starbuck’s free coffee offer. You may recall
that last week, Starbucks emailed a coupon to employees for a free grand iced
coffee to be used by their family and friends. Well as you might expect, the coupon
quickly morphed into a widely distributed offer reaching almost everyone in the free
and non-communist world. Starbucks was forced to withdraw their offer citing the
free coupon was "redistributed beyond the original intent and modified beyond
Starbucks' control." But—aha—rival Caribou Coffee decided to seize the opportunity
honour the fraudulent coupons (for one day) for a free medium Cold Press Iced
Coffee, Iced Americano or Iced Tea. Marketing Blurb thinks this is a fine idea—
although we missed the whole deal. We always blog about Starbucks, but have
enjoyed countless brews at Caribou as well.
Source:
http://www.marketingblurb.com/2006/09/caribou_coffee_accepts_fraudul.html
Questions
How has fraud benefited Caribou?
Page 3 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Bleak Christmas for hamper firm
Thousands of families are facing a bleak Christmas after a UK hamper company
suddenly ceased trading.
Customers of Farepak, owned by European Home Retail (EHR), paid money monthly
to the firm or its agents towards food hampers for the festive season.
BDO Stoy Hayward has now been appointed administrator of the Swindon firm. It
said Farepak was "unable to honour its commitments to make deliveries of any
vouchers, hampers or other items" to its tens of thousands of customers.
The firm's full-time workforce of 20 has been made redundant, and 75 temporary
staff usually taken on for Christmas will not be employed this year.
Their only hope for some sort of recompense is to put in a claim for compensation
from any assets that are realised in Farepak.
It said there were "a number of circumstances that affected Farepak's demise" that it
was investigating.
Meanwhile, Farepak agents holding customer payments that have not yet been paid
to the firm have been told to return them to consumers. And customers who paid by
direct debit to Farepak should now cancel those.
Shares in parent firm EHR had been suspended in August, after funding difficulties.
On Friday, home shopping firm Findel bought a number of EHR business assets,
including sports outfit firm Kitbag and network marketing firm Kleeneze.
Source: BBC News 16th October 2006 (adapted)
Questions
1. Outline THREE possible reasons why a firm may cease trading?
2. If the business is a limited company what protection does this offer to
investors?
3. What is meant by ‘appoint an administrator’?
4. What is a ‘network marketing firm’?
5. If a business thinks it may soon close down what are it’s a) ethical and b)
legal responsibilities?
Page 4 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Barbie helps boost Mattel profit
Sales of Barbie dolls and a Sesame Street cuddly toy have boosted Mattel's thirdquarter profit.
The US toymaker reported a better-than-expected net income of $239m (£128m), up
6.1% on the same time last year.
The Barbie doll maker has introduced new lines to counter strong competition from
MGA Entertainment's Bratz doll.
The new Elmo doll, which laughs and slaps its knees when tickled, was launched in
September and has proved very popular with children since.
Barbie sales in the US rose for the third consecutive quarter, while toys based on the
animated film Cars have also been strong.
Source: BBC News October 16th 2006 (adapted)
Questions
1.
2.
3.
4.
How much was the net income last year?
Suggest ways in which MGA and Mattrelk compete with one another?
Is the marketing mix the same for all businesses?
Outline possible factors that affect demand for dolls – given that the final
consumer is not the purchaser.
Page 5 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
US firm pulls out of steel plant
A US steel giant is stopping production of steel tubes at its Leicestershire plant
putting 400 jobs under threat. US engineering firm Timken said it is pulling out of its
seamless steel tube-making operation plant at Desford, near Leicester. The firm said
it was seeking "alternative solutions to closure".
Company president Salvatore Miraglia Jr said: "The proposed action is part of the
company's strategy to focus on lines of business that produce differentiated products
while driving profitable growth."
The decision to stop production at Desford will not affect jobs at the other UK sites,
the firm said.
The company is due to meet with trade union officials soon to discuss the
announcement.
Source: BBC News 12th October 2006 (adapted)
Questions
1.
2.
3.
4.
5.
When a business slows down production, how may it reduce its labour costs?
Outline the main law on redundancy.
Examine what the ‘alternative solutions to closure’ may be.
What is a ‘differentiated product’?
What is a Trade Union? What might the Trade Union hope to accomplish at
the meeting?
Page 6 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Motivation scheme 'has no effect'
A motivational programme used in many British schools and colleges to improve
performance has had little benefit for most pupils, a study suggests.
The Go For It scheme is meant to raise children's self-esteem and relieve stress
through various activities.
Staffordshire University compared five schools using Go For It with five which do not
- and found little difference.
The programme is used by more than 20 local education authorities as well as
colleges and education improvement projects around the country.
It is designed for 14 to 16-year-olds and claims to have a "strong link to the
development of emotional intelligence".
Source: BBC News 15th October 2006 (adapted)
Questions
1. With reference to motivational theorists, comment on the motivational
programme.
2. Explain what ‘emotional intelligence’ is and how this may affect motivational
schemes at work.
Page 7 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Power station steps up production
A power station in the New Forest is increasing its production of energy to meet the
growing electricity demand. A mothballed turbine, which was made redundant 12
years ago, was restarted at Fawley in Hampshire on Thursday.
By running two out of its four oil-fired units, the power station can now supply one
and a half million homes - an extra half - with energy.
The Fawley station is only used to "top up" the nation's electricity grid at times of
high demand.
Source: BBC News 12th October 2006 (adapted)
Questions
1. The power station is increasing supply to meet demand. Examine three ways
in which a firm many ‘increase supply’.
2. What problems are faced by a firm when there is uneven demand?
3. How may a government increase demand in the economy?
Page 8 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Creative Outlook
If you are embarking on something different, new and creative, you can't be sure
how it will turn out. You can hope, quite reasonably, that putting together
ingredients with known actions will produce a particular effect, much the same as a
cook creating a new dish.
There are ways of exploring the impact of creativity through a new idea or product,
such as pilot schemes, test-marketing, etc. While valuable, these may not be as
simple as they seem.
Some years ago, McDonald's had the idea of serving breakfasts. They already had
the image, the restaurants and the staff, so why not open up this new source of
revenue?
The company lost money on this venture for four years because people just weren't
in the habit of eating breakfast outside their homes. During that time of failure, the
new venture could have been scrapped as a bad idea. However, McDonald's did not
give up and after those four difficult years breakfasts became the most profitable
part of the business. So how long should a pilot scheme last? It is a question that is
impossible to answer. It takes a long time to change culture and habits. So the test
could be over the long term. But how long is long term? Three, four, five years?
You need to foresee risks and creative ideas have to be designed to minimise them.
It's not sufficient just to have a basic creative idea and then go ahead and use it.
There have been many excellent creative ideas that have failed due to insufficient
attention to the design stage. The creative idea is tried in its original, unsophisticated
form, fails to work and so is shelved. But with some design effort, the idea could
have been very successful. Don't assume, however, that creative ideas are always
high-risk ventures. When this assumption is made, there can be a tendency to avoid
creativity altogether, and this will result in an organisation or enterprise operating
well below potential. The greater the efficiency of an organisation, the greater the
need is for creativity. Efficiency will extract the maximum benefit from a new idea. If
an organisation is inefficient, it will be inefficient with new ideas. Efficiency and
creativity complement, not oppose, one another.
Source: www.management-issues.com
Questions
1. Examine three ways in which a new product may be tested.
2. With reference to Ansoff’s Matrix, is the development of new products the
only strategy available to a business wishing to expand?
3. Outline the development stages a new product goes through.
4. Why did the McDonald’s scheme eventually work?
5. How may creativity be stimulated in a business?
6. How important is creativity to economic growth?
Page 9 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Dynamic self-starters need not apply
International recruitment outfit, Robert Walters, has issued a blanket ban on using a
whole raft of words and phrases in any of its recruitment ads for fear of falling foul
of the UK's increasingly foolish-looking new legislation designed to combat age
discrimination.
According to the Daily Telegraph, it isn't just the obvious words like "young", "old"
and "mature" that the company thinks will fall foul of the Employment Equality (Age)
Regulations.
Energetic, youthful, vibrant, quick-learner, self-starter, high-flyer, gravitas, newlyqualified, soon-to-be-qualified, dynamic, experienced, ambitious, hungry, fit,
energetic and recent graduate are also on its proscribed list.
Thankfully, however, the Telegraph hasn't lost its sense of humour, pointing out that
it feels that "literate" and "knowledgeable" should be added to the list because they
would surely deter most applicants under 30.
Meanwhile, the first of the new generation of recruitment ads, commissioned by the
Government itself, has fallen into our hands.
"Someone needed to redraft sloppily worded legislation that will subject thousands of
employers to needless inconvenience and make the law a laughing stock. If you can
read this without moving your lips, you might just be the person we're looking for."
Source: www.management-issues.com
Questions
1. What types of discrimination are now illegal?
2. Are anti-discrimination laws likely to lead to an increase in the firm’s costs?
3. Are there any other categories of discrimination that may become against the
law?
4. How can firms use current anti-discrimination law as a marketing
opportunity?
Page 10 of 11
Provided by: www.osltraining.co.uk
Business Studies: Exam Style Questions – 3
Engagement & Motivation. Leadership. -Empowering leaders who give their employees room to think and behave
independently are often perceived as more effective than the traditional directive
leader who issues specific orders. But according to U.S. researchers, this isn't
necessarily so.
"The empowering style of leadership has been oversold regarding new ventures with
heterogeneous teams in dynamic environments," says Dr. Hmieleski, assistant
professor of management at the Neeley School of Business at Texas Christian
University.
"In fact this combination works terribly."
Directive leaders are seen as old-fashioned and possibly downright stifling
As Dr Hmieleski acknowledges, conventional wisdom increasingly holds that
companies with empowering leaders possess the competitive advantages of
flexibility, innovation and creativity,. Directive leaders – those who instruct people to
carry out designated tasks and reprimand those who stray - are seen as oldfashioned and possibly downright stifling.
But the reality, he says, is not that simple. Leadership is contextual and highly
complex and both styles of leadership have pros and cons depending on the internal
team variables and the external variable of industry dynamism.
Most striking among the findings is that the empowering style of leadership,
commonly thought to be most effective with heterogeneous teams in environments
of rapid change, was clearly shown to be less effective under those very conditions.
"Fast-moving environments demand fast decisions," said Dr Hmieleski. "That's where
directive leadership comes in. A directive leader can rapidly clarify what work needs
to be done in the moment and by whom."
Source: Financial Times 16th October 2006 (adapted)
Questions
1. Outline the main styles of leadership?
2. Why may empowering leaders not be as effective as at first thought?
3. Explain this: “…empowering style of leadership has been oversold regarding
new ventures with heterogeneous teams in dynamic environments…”
4. What factors affect the style of leadership?
Page 11 of 11
Provided by: www.osltraining.co.uk