Comparing the accuracy of the volatility forecasting models, GARCH, SV and EWMA under different scenarios The WritePass Journal

Comparing the accuracy of the volatility forecasting models, GARCH, SV and EWMA under different scenarios Comparing the accuracy of the volatility forecasting models, GARCH, SV and EWMA under different scenarios Introduction Because of the rapid development of new and complex financial instruments in financial markets, the forecasting volatility of assets is playing a central role on risk management tasks and evaluating asset in finance. However, interestingly, the ability of forecasting accuracy of stochastic volatility always catches people’s eyes, because nobody wants loss his/her profits by inaccurate predictions. Opportunities might be lost due to overestimating of volatility; investors bear risk due to underestimating of volatility. In addition, risk control strategies and profitable portfolio are deeply influenced by accuracy of volatility forecasting models. After the financial crisis happened in 2008, generally, investors concentrate on risk-free investment rather than a risk one. Therefore, my paper is going to examine three different models, GARCH (see, for example, Bollerslev (1986)), SV (Taylor, 1986) and EWMA (see McAleer (2005)), under diverse volatility scenarios. By using those vo latility models, a simulation experiment will take a wide series of volatility scenarios representatives, which are typical in financial market or real assets market, to test their rates of return separately. My dissertation is consisted of 5 chapters including the introduction, literature review, methodology and empirical research, as well as the conclusion. Different chapters focus on different key points, but there are tight relationships within each other and they are constructed as follows. The introduction presents my personal ideas and understanding of fundamental concepts about negative relation between investment return and volatility, as well as three volatility forecasting models mentioned above. Generally, Generalised Autoregressive Conditional Heteroscedasticity (GARCH) and Stochastic Volatility (SV) are main two forecasting volatility methodology, nonetheless, considering the diversification of data source would have different effects on different models, it would be better to employ other forecasting volatility model, like EWMA model, to perform the simulation experiment which makes my results more convincing. Employing other people’s ideas of forecasting volatility from journals and papers, literature review will provide the historical developments of volatility forecasting models in asset markets. Simultaneously, several sparking ideas will be explained with the frame work of previous approaches of volatility forecasting models. Moreover, the problems founded in previous researches can also be avoided. For example, the inherent problem of the conditional variance indirect observed in using models measuring volatility, GARCH family models, SV models or EWMA have been advocated widely in literatures related (Michael, M. (2010)). Fundamentally, the journal of Autoregressive Conditional Heteroscedasticity with Estimated of the Variance of United Kingdom Inflation illustrated the frame work of ARCH model (Engle (1982)) that helps us deepen understanding of negative correlation between stock return and volatility, as well as the basic frame of forecasting volatility model. Other academi c journals, like Answering the sceptics:Yes, standard volatility models do provide accurate forecasts (Andersen, T. Bollerslev, T. (1988)), ARCH modelling in finance: a review of the theory and empirical evidence (Bollerslev, T. Chou, R. Kroner, K (1992)), Return to RiskMetrics: The Evolution of a Standard (RiskMetrics Group, Inc. (2001)), Forecasting accuracy of stochastic volatility, GARCH and EWMA models under different volatility scenarios (Nigel, M D. Jie (2010)), which provides strong fundamental theoretical evidences, will be referred to my dissertation and support my original hypothesis accuracy comparison of three different volatility forecasting models in the dissertation. From those academic journals or papers with different approaches with volatility forecasting models, some drawbacks of models can be modified. For instance, as observed by Bollerslev, T. (1987), several stylized facts cannot be predicted precisely by a majority of the latent volatility models. Nonethe less, those factors can be caught effortlessly on financial time series. The methodology discusses briefly empirical demonstration of GARCH, SV and EMWA models separately, including notations and data sources, the results of simulation experiment will also be shown in this section. As mentioned by Nigel(2010), â€Å" for the simulated data, we contrast the accuracy of volatility estimated in-sample and out-of sample using a range of error measures.† Besides, another critical point is to make suitable definition of the volatility space according to three different volatility forecasting models with a triplet of coefficients, for instance, CV2garch is determined by coefficients (). Afterwards, applying the process of realized variance, 100 examples of length=500, 1000, 3000 will be generated corresponding to each parameters. Utilizing 100 examples with T=1100 realization, an SV model, a GARCH model and an EWMA model are used to assess volatility with the decay factor suggested (RiskMetrics, 2001). The front 1000 data points are used for in-sample for ecasting, while the remainder is served as out-of-sample estimation. In order to achieve effectively comparison within three models with observed and estimated volatilities (Brailsford and Faff, 1996), three measures of forecasting accuracy are used (RMSE, MME(U),MME(0)). Empirical research section illustrates the findings employing real data source, which is consisted of 16 financial data sets. The data source is comprised of four equities, four commodities, four FX series and four equity indexes. All data are collected between 1 January 2000 and 31 December 2010 from data-stream. With difference logarithms of consecutive closing prices, the rates of return of different assets are figured out. In consideration of covering sufficient volatility scenario as much as possible, therefore, in diversified main financial markets, especially, small number of samples with frequent floating price in asset markets would be included. In addition, cross-section data with capturing examples would be chosen and then examined in the simulation experiment. In a word, the empirical research will present strong evidence, with real-financial data source, to prove the original ideas about accuracy comparison of three volatility forecasting models. Meanwhile, due to the im perfection of data source and the volatility forecasting models, which would affect the results of simulation, some acceptable biased results of the simulation experiments will be explained exhaustively. The final section (conclusion) will give a succinct summary of the simulation experiments under a series of volatility scenarios defined with persistence and volatility of volatility. Furthermore, unavoidable drawbacks of the simulation experiments will be explained, and feasible improvements will be promoted in this part, as well as bringing up further research about this topic and its trend of development. For example, analysing typical high frequency data with the seasonal changes, the results of accuracy of these three forecasting volatility models would show any empirical change or not. Reference Anderson, T.G. and T. Bollerslev (1998) Answering the skeptics: yes, standard volatility models do provide accurate forecasts, International Economic Review, 39, 885-905. Bollerslev, T. (1986) Generalized autoregressive conditional heteroscedasticity, Journal of Econometrics, 31,307-27 Bollerslev, T. (1987) A conditionally heteroscedasticity time series model for speculative prices and rates of return,   Review of Economics and Statistics, 69, 542 – 547. Bollerslec, T., R. Chou and K. Kroner (1992) ARCH modeling in finance: a view of the theory and empirical evidence, Journal of Econometrics, 52, 2-59 Brailsford, T. and R. Faff (1996) An evaluation of volatility forecasting techniques, Journal of Banking and Finance, 20, 419-38 Ding J. and N. Meade (2010), Forecasting accuracy of stochastic volatility, GARCH and EWMA models under different volatility scenarios, Applied Financial Economics, 20, 771-783 Engle, R. (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation, Econometrica, 50, 987-1008 McAleer, M. (2005) Automated inference and learning in modeling financial volatility, Econometric Theory, 21, 232 – 261. McAleer, M. (2010) Modelling and Forecasting Noisy Realized Volatility, Department of Economics and Finance, College of Business and Economics, University of Canterbury RiskMetrics Group, Inc. (2001) Return to Risk Metrics: The Evolution of a Standard, New York Taylor, S.J. (1986) Modelling Financial Time Series, Wiley, Chichester.

Cursive Writing for Learning Disabled

Cursive Writing for Learning Disabled Its not uncommon for special education students to struggle with writing. Dyslexia, dysgraphia, and various kinds of language-based disorders make themselves very pronounced when children are learning to write. But its less common for teachers to make this counter-intuitive move: Try cursive.   Generally considered to be more difficult for children than writing in manuscript (block letters) and losing ground in the battle for productive class time, script is finding a late-career resurgence with the special-ed crowd. Not only are there benefits to cursive writing that bleed into other skills (for example, the fine-motor workout of cursive writing has salutary effects on similar fingerwork), some scientists believe that children who can write neatly in script are better at math and other analysis. Why You Should Consider Cursive If handwriting is a struggle, give cursive writing a shot. Dont worry that handwriting (and reading handwriting) is becoming something of a lost art- all students, especially special ed kids, benefit from successes. Here are some reasons you may want to flip the script in your classroom: The letters flow much more easily, and usually only one movement is necessary. Children often struggle with the many fine movements required to print. For children with motor-planning issues, remembering where to put the circles and sticks, crossing ts and dotting is, and remembering the orientation of each letter is no easy task. How often have you seen these children confuse bs and ds and put the circles on ps on the wrong side?Spaces separate words in cursive, while the letters are joined. Therefore, phonetics are joined together. Many students find that script writing is conceptually easier to grasp in this regard.  Rarely will you see reversals in cursive writing, unlike printing. Children respond well to the left-to-right flow of writing.Teaching cursive saves time. Why spend time to learn printing first, when children will learn it through reading? Its simply not essential to have students print and learn cursive at the same time.  Most teachers report that children who le arn handwriting exclusively show no difficulties reading print. Thats not always the case when children learn printing first. In fact, many teachers moving to cursive writing instead of print report that it was the best move for their students. Some Advice for Teaching Cursive Stick with it.Begin with the letters without loops (t, i, d, p, m, n, r).Show the child how to slant the paper to make writing more natural.Begin with lowercase letters.Remember that motor skills of children with learning disabilities are often weak, provide dotted cursive writing paper for ease and guide the childs hand. Direct teaching is recommended. Remember to be patient, in the long run youre saving teaching time!

The Transforming Power of Suffering Essay Example | Topics and Well Written Essays - 1250 words

The Transforming Power of Suffering - Essay Example   At the time that this poem is written, Milton is one of the greatest writers of England, and this horrible condition called blindness is about to end his career, thus rendering him useless, much like the talent in the Bible which the third man buries and eventually becomes the reason for God to punish him (Matt. 25:26-30, The New International Version). For the poet, it seems that being blind is being useless, and being useless is tantamount to preparing oneself to get punished. This is the true cause of Milton’s suffering as he is writing this poem. ... H. Lawrence’s â€Å"The Blind Man.† In the story, Maurice secretly struggles with his blindness by keeping himself busy with daily chores on the farm: â€Å"He milked the cows, carried in the pails [and] attended to the pigs and horses† (Lawrence). These are actually a few things that a normal blind man can never get himself to do. Nevertheless, Maurice seems to be pushing himself to do these tasks. Why? The reason is one that he reveals to Bertie toward the end of the story: â€Å"What I am afraid of†¦is that [my wife Isabel will] find me a dead weight [and that] I feel it isn’t fair she’s saddled with me† (Lawrence). Maurice, therefore, just like the poet Milton, feels the same kind of suffering particularly because of their fear of being useless. Nevertheless, what Jernigan states – that â€Å"the blind tend to see [themselves] as others see [them]† (4) – is somehow true as most blind people tend to suffer only un til they realize that suffering brings them the gifts of humility, compassion, and hope. The virtue of humility is evident in the following lines of Milton’s â€Å"On His Blindness†: â€Å"†¦though my soul more bent/ To serve therewith my Maker, and present My true account, lest He returning chide† (Milton 4-6). In these lines of the poem, the poet himself admits that although he is ready to serve God, he has no choice but to humbly admit his â€Å"true account† – his actual circumstances or the fact that he is blind and that he cannot do anything about it. Indeed, humility is all about mustering enough courage to admit the true state of things and at the same time admitting one’s helplessness in the face of it.  

Willow Garage Essay Example | Topics and Well Written Essays - 1000 words

Willow Garage - Essay Example Among the positive values that other companies should emulate is sharing information as well as not concentrating on monetary gains. This way such companies remain productive and relevant, which in turn increases their consumer base relating to more profits. There is a common clichà © that knowledge is power, and information not shared is useless. This, in my opinion, is the light that guided the Willow Garage in its endeavors. The company availed ROS, which was associated with a library of information and tools that equip other researchers with the necessary software needed to develop robot applications. In addition, ROS also provided visualizers, device drivers, package management and message-passing that facilitated engineers’ understanding of video, 3D data and camera (Tobe, 2011). By availing this information, other robotics researchers are able to build off from the company’s foundation, as opposed to starting their research work afresh (Ashlee, 2014). In so doing, Willow garage emerges as the greater party compared to other companies. This is because it shares its findings with the world. In other words, it is more concerned with the advancement of robotics for the benefit of the world than building its own name. F urthermore, the work of the company is not lost as other researchers carry on with it. Similarly, companies should share their work and findings with others so that in the occurrence of any event leading to shutting down of the company, others can continue their legacy. Most businesses are profit-oriented. Because of this, most of their dealings are quantitative as opposed to qualitative. Such businesses do not care much about quality of their products and services. Moreover, their dealings are often confidential so that their competitors do not get wind of their work. In cases where they avail some of their information, there is always a cost involved. This is contrary to Willow Garage’s

Energy output of Bioethanol and Industrial Ethanol Essay Example for Free

Energy output of Bioethanol and Industrial Ethanol Essay Aim The aim of this investigation is to determine which of the two derivatives of ethanol releases more energy, Bioethanol or Industrial Ethanol. Hypothesis The main compound in both alcohols has the same chemical formulae C2H5OH, and the other compounds are unknown therefore the Energy output cannot be calculated exactly by using standard bond enthalpies. However, as the main compound is known and the same for both ethanols the energy output should be very similar. Therefore the difference in energy output only depends on the compounds which are blended to the alcohols. Apparatus Thermometer Metal can x2 Draught shield x4 Gloves Safety spectacles Heat-resistant mat Insulation card 100cm3 measuring cylinder x2 Spirit burner Clamp stand Balance Matches Substances E100 Bioethanol Industrial Ethanol Water Method The idea to do the experiment the way described is due to knowledge from past experiments and the IB textbook. Follow these steps 10 times, five times for each alcohol. Step 1: Measure 50cm3 of alcohol in a measuring cylinder Step 2: Weigh and record the empty spirit burner Step 3: Fill the 50cm3 of alcohol in the spirit burner Step 4: Weigh and record the filled spirit burner Step 5: Measure 100cm3 of Water in a measuring cylinder Step 6: Fill the water into the metal can Step 7: Set up the Apparatus as displayed (1 draught shield in each direction, south, north, west and east, forming a box around the apparatus; assure there are 2cm of space between the bottom of the metal can and the cotton wick) Step 7: Record the initial temperature of water Step 8: Light the cotton wick of the spirit burner Step 9: Record the temperature every 15 seconds until the cotton wick loses its flame Step 10: Weigh the spirit burner with the remaining alcohol to calculate how many grams of alcohol have been used Varables Temperature: Temperature of Water will be measured before every experiment. The whole experiment takes place at room temperature. Volume of Water: 100cm3 Mass of alcohol: 50cm3 filled in spirit burner. The mass will be measured before and after the experiment to figure how much has been used. Time: record every 15 seconds Concentration of alcohol: 1M Surface area of metal can which flame is heating up: same cans will be used and positioned at same place above the cotton wick to keep this constant. Length of cotton wick: 0.5cm Distance from cotton wick to bottom of metal can: 2cm Hazard Warnings Industrial Ethanol: Highly flammable. Therefore wear gloves and safety spectacles Bioethanol: Highly flammable. Therefore wear gloves and safety spectacles Chemistry HL Plan of Investigation

A Pentadic Analysis of Two Pleas for Christian Unity :: Religion Christians Christianity Burke Papers

A Pentadic Analysis of Two Pleas for Christian Unity Introduction The prayer for Christian unity began with Christ, himself (John 1:21), and continues today. This essay proposes to examine two pleas for Christian unity using the rhetorical theory of Kenneth Burke. According to Em Griffin, "Kenneth Burke was the foremost rhetorician of the twentieth century. Burke wrote about rhetoric; other rhetoricians write about Burke" (319). Burke's theory seems especially relevant to the study of pleas for unity because of his focus on identification. For Burke, rhetoric is identification. "You persuade a man only insofar as you can talk his language by speech, gesture, tonality, order, image, attitude, idea, identifying your ways with his" (Rhetoric 55). Additionally, Burke equates identification with consubstantiality. "To identify A with B is to make A 'consubstantial' with B" (Rhetoric 21). The two calls for Christian unity to be analyzed are Thomas Campbell's "Declaration and Address" and E. Glenn Wagner's The Awesome Power of Shared Beliefs. Campbell's address is important because of its historical significance. "This document, which calls for Christian unity through a return to the clear and unambiguous teachings of the New Testament, in many ways chartered the course for the movement the Campbells led" (Hughes 11). Wagner's book is chosen because of the contemporary prominence of the Promise Keepers movement. This essay will proceed by explaining relevant aspects of Kenneth Burke's works, including the methodology to be used, applying the methodology to the two pleas, and discussing the results. Dramatism and the Pentad Burke saw life as a drama played out in our language. By examining the words of a person, you can determine his or her motives. Motives are grammatical creations which explain "what people are doing and why they are doing it" (Grammar x). Foss provides the following explanation: We use rhetoric to constitute and present a particular view of our situation, just as the presentation of a play creates a certain world or situation inhabited by characters who engage in actions in a setting. Through rhetoric, we size up situations and name their structures and outstanding ingredients. How we describe a situation indicates how we are perceiving it, the choices we see available to us, and the action we are likely to take in our situation. (456) The pentad is a the tool used to investigate motives. Burke writes, ". . . any complete statement about motives will offer some kind of answer to these five questions: what was done (act), when or where it was done (scene), who did it (agent), how he did it (agency), and why (purpose)" (Grammar x).

‘God’ is nothing but the Supreme Truth Essay

Differing from world’s other great religions Buddhism, is not based on any conception of a Supreme Being or Godhead (Myss, 2006). Buddhism relies on human effort to relieve suffering, â€Å"These wise ones, meditative, persevering, always using strong effort attain Nirvana – the supreme peace and happiness† (Buddha, 5th Century B. C). The Buddha, the founder of Buddhism, is a human being who achieved great enlightenment or ‘Nirvana’; but, even the Buddha is not ‘God’. The acceptance of a Supreme Truth is the closest to the concept of ‘God’ in Buddhism. This Truth is to be realized by every individual, by following â€Å"Dharma†; one â€Å"who with clear understanding perceives the four noble truths: namely suffering, the origin of suffering, the cessation of suffering, and the eightfold holy way that leads to the cessation of suffering†¦Ã¢â‚¬  (Buddha, 5th Century B. C). By being righteous and practicing ‘ahimsa’ or non-violence, the misery-filled human life can be transcended to a state of Nirvana or ‘Self-Realization’. In this enlightened state, there is neither happiness nor misery; when questioned by a disciple about the state of ‘Nirvana’, Buddha is said to have answered â€Å"I am the State of Pure Consciousness, that is reflected in all beings† (as cited by Swami Sukhabhodanda, 1997). Buddhism initially evolved as a repudiation of Hindu God and God-heads. Hence, even the so-called god-heads have to attain perfection. Supreme State of Enlightenment is achieved only by the individual’s efforts and thus the soul undergoes the cycle birth-death-and re-birth according to its â€Å"Karma†- or its doings in adherence to the path of Dharma, until it reaches ‘Nirvana’. While accepting the Karmic cycle of Hinduism, the eight-fold path of Buddhism are very similar to the Biblical sayings; for example Buddha’s Dharma of Right Action is very similar to â€Å"Faith by itself, if it is not accompanied by action, is dead† (James 2:17). But differs from Christianity in that, 1) there is no ‘God’, 2) there is no Judgment Day, and 3) the acceptance of the concept of re-birth. ‘That Thou Art’ The Vedas or the Holy Scriptures are the basic foundation on which Hinduism stands. And in the Upanishads, which are a part of the Vedas, one finds a numbers of instances in which the concept of the Supreme Being or ‘God’ is analyzed. The Atharva Veda says â€Å"Verily He is One/ Single, Indivisible, Supreme Reality† (Atharva Veda 13/4/20). In fact, the Rg Veda, the oldest of the existing Vedas, elaborates the concept of ‘God’ thus: â€Å"He is One Brahma/ The Creator of the cosmos/ Who pervades and protects/ And enlightens aft beings/ He is One Supreme Entity/ Whom sages call by various names/ Such as Indra, the glorious/ Mitra, the benign friend/ Varuna, the greatest, the noblest/ Agni, the resplendent, the bright/ Yama, the dispenser of justice/ Matarishwa, the almighty† (Rig Veda 1/164/46). ‘God’ is neither male, nor female, the Supreme Sovereign of all creation, animate and inanimate, Mother and Father. It is important to note, that ‘God’is all this but not limited to this. Therefore, it is not possible to merely say ‘God’ is ‘He’ or ‘She’, or ‘It’. Nameless and formless, infinite and incomprehensible, pervading all things yet not confined to anything. The various names by which ‘It’ is addressed denote the names by which human beings identify ‘It’, the name â€Å"Brhaman† including. The Kenopanishad (2/1/3), puts the concept as difficult to comprehend for the limited human mind, â€Å"He who thinks that he knows (Him) really, does not understand anything and proves himself ignorant. He who realizes that he cannot know (Him) has best understood†. The same concept is further explained in the Bhagavad Gita (2/25) too, â€Å"This Atman (the ParaBrhman) is beyond the comprehension of the five senses; Unconceivable by the mind; Unchanging. Hence, O Arjuna, perceive the Atman truly as such, since it does not become you to grieve†.

The King’s Storm- A Point of No Return

Shakespeare’s King Lear examines the politics of betrayal and the awful costs paid by its victims.   Nowhere in the play are these costs more apparent than in those scenes in which Lear and his exiled companions find themselves caught in the midst of a thunderstorm unsheltered.   As King, Lear embodied the basic assumptions of monarchy, one being that the universe is ordered according to a divine logic.   Within this ideological construct, natural phenomena works as the hand of God.Therefore, thunderstorms, earthquakes, and floods are all extensions of God’s judgment- Biblical examples include the destruction of Sodom and Gomorrah, the Great Flood, the Parting of the Red Sea, etc., etc.   Though King Lear is set in pre-Christian Britain, the dynamic enshrined in these examples operates here as well- the wicked shall be punished and the righteous shall be rewarded.   This order of due punishment and reward is shocked when Lear is betrayed by his ungrateful daug hters, Regan and Goneril.   The ensuing storm is a manifestation of this order overthrown, and is as notable for its symbolic function as it is for its direct effect on King Lear.Just as a storm will cover the sun’s rays, many of the characters left in the storm have been forced to cover or mask their true, righteous natures.   Kent and Edgar both don the apparel and manners of unlearned beggars in order to help those they serve in a time of crisis.   Lear similarly adopts the apparel of madness, though unlike the previously mentioned characters, he does so by compulsion rather than artifice.   For Kent and Edgar, these transformations aren’t permanent, as the indignity symbolized by the storm does not conquer them.   But for Lear, the storm is the last stand for his sanity.   He’s simply unable to think of his daughters’ betrayal, for â€Å"that way Madness lies† (Act III, scene 4, line 21).Another interesting parallel between the natu re of the storm and that of Lear’s madness can be drawn here.   A storm is by definition the release of pent-up energies, energies that either implode or explode but will not dissipate.   As the horrible knowledge of his misjudgments dawns on Lear, this knowledge takes the form of psychosomatic energies which must either implode as madness or explode as acts of revenge.Perhaps if Lear were a younger man, he might have tried at revenge, but madness is the seemingly inevitable result of such extreme misfortune at such advanced age.   Just as the storm explodes with its torrential rains and its deafening thunder, Lear begins his implosion in counterpoint, descending into madness.   As he cannot match the explosive rage of the storm with an act of revenge, he must mount an equally powerful attack on his own psyche.His pain runs so deep by this point that the literal gales cannot compare to â€Å"the Tempest in [his] Mind† (III, 4, 12).   Pragmatically, implosion serves not only the purpose of dispersing irrepressible psychosomatic energies, but also sets up a bulwark through which further pains cannot penetrate.   Thus, the aforementioned â€Å"Tempest in [Lear’s] Mind / Doth from [his] Sense take all Feeling else / Save what beats there, Filial Ingratitude† (III, 4, 12-14).Viewed from a different perspective, the storm can be seen as a challenge to Lear- can he show the strength and resolve that’s necessary to right the wrongs that have been done to him?   His answer to that challenge is a resounding no.   Though at some points he seems resolute, as when he calls out to the storm to â€Å"Pour on, I will endure,† his ensuing madness betrays such exclamations (III, 4, 16).Lear does endure, but only behind the aforementioned shield of implosion, a purgatorial state in which neither engagement with reality nor death is possible.   It’s only a little later that he effectively renounces what was left o f his regal spirit, crying, â€Å"†¦-Take Physic, Pomp:/ Expose thy self to feel what Wretches feel,/ That thou mayst shake the Superflux to them/ And shew the Heavens more Just† (Lear, III, 4, 33-36).   Though this statement could be interpreted as a positive call for royal humility in another context, here it is nothing more than a slightly veiled admission of surrender.   In lowering himself to the level of a common â€Å"Wretch,† he does not take dignity with him, but leaves it a memory of his once-glorious past.When considering the effects of the storm on Lear, one must consider not only the storm in itself, but the circumstances in which he experiences it.   If he had experienced such a storm in even a poor peasant’s cottage, the deposed king might have been able to clutch onto a final shred of royal composure and dignity.   But lost in the wilderness, Lear realizes that he has truly lost control of a land he once ruled, and of himself as well for that matter.   To build a shelter for oneself from cold and wind and rain is at bottom an attempt to control the elements, to moderate their rule over one’s life.Lear has, by this point, fallen so far from his earlier height that he no longer has this basic semblance of control to shield him from the whims of nature.   The former king has effectively fallen from the highest station one could possess to the very lowest.   This extreme transformation finds its expression in the extreme nature of the storm.   It is not a polite storm but one in which â€Å"Sheets of Fire,†¦Bursts of horrid Thunder,†¦[and] Groans of roaring Wind and Rain† paint a picture of hell on Earth (Kent, III, 2, 46-47).With these symbolic cues, one is meant to understand that Lear has fallen from the paradise of his court to the hell of a stormy wilderness.   His fall bears some resemblance to the Biblical story of Adam and Eve who were tempted by the flattery and promises o f Satan into actions forbidden by God and thus were expelled from paradise.   Accordingly, the idea of devils, or â€Å"Fiends,† permeates the speech of Edgar in his guise as Old Tom, the beggar, and though it’s never explicitly stated, these â€Å"Fiends† are likely the betrayers Edmund, Goneril, Regan and Cornwall.   The flattery of these betrayers preys on the good-natured faith of their victims, just as the snake preyed on that of Adam and Eve.But whereas Adam and Eve understood the consequences of their actions, Lear does not, and therefore his actions cannot be considered â€Å"sinful,† only misguided.   So fittingly, it is not through the will of God but by the machinations of his betrayers, that Lear is sentenced to a wilderness, the character of which would usually be reserved for criminals and evil-doers.   It is a realm in which, according to Edmund, â€Å"†¦revenging Gods/ ‘Gainst Parricides did all the Thunder Bend† (II, 1, 46-47).   Thus, Lear is unjustly submitted to the thunderbolts that should be reserved for his betrayers.   So it is that the storm appears at this critical time in the play as a manifestation of a judgmental wrath that has been rendered impotent.This is perhaps the nadir in the fortunes of the righteous, when all are gathered a collective of exiles, and the plans of the wicked have yet to begin their slow unraveling.   The spaces normally reserved for the righteous (the royal courts) are occupied by the wicked, and those normally reserved for the wicked (the stormy wilderness) are occupied by the righteous.   The hand of judgment seems to have been momentarily confused.   At the conclusion of the play, Albany attempts to set things back in their rightful order, despite great losses already suffered, stating â€Å"All Friends shall taste/ The Wages of their Virtue, and all Foes/ The Cup of their Deservings†¦Ã¢â‚¬  (V, 3, 295-301).Exposed to the ravages of st orm, such a sense of justice seems unattainable to Lear, an ideal lost in an age of treachery.   The storm serves as his personal point of no return, after such a fall from grace it seems impossible that he could rise again.   And he cannot- the storm is Lear’s crucifixion, though he still lived after its passing, something in him recognizes that as he inadvertently birthed the chaos that engulfs him, he must die for it to pass.

Coffee and Starbucks Essay Example

Coffee and Starbucks Essay Example Coffee and Starbucks Essay Coffee and Starbucks Essay Essay Topic: A Modest Proposal and Other Stories had enjoyed phenomenal growth and become one of the great retailing stories of recent history by making exceptional coffee drinks and selling dark-roasted coffee beans and coffee-making equipment that would allow customers to brew an exceptional cup of coffee at home. The Starbucks brand was regarded as one of the best known and most potent brand names in America and the company had firmly established itself as the dominant retailer, roaster, and brand of specialty coffee in North America. It already had over 1,500 stores in North America and the Pacific Rim and was opening new ones at a rate of more than one per day. Sales in fiscal year 1997 were a record $967 million and profits reached an all-time high of $57. 4 million. The companys closest competitor had fewer than 300 retail locations. And since going public in 1992, Starbucks has seen its stock price increase nearly ninefold. Exhibit 1 contains a summary of Starbucks key performance statistics for the 1992–97 period. Company Background Starbucks began in 1971 when three academics- English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker- opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The three partners shared a love of fine coffees and exotic teas and believed they could build a clientele in Seattle much like that which had already emerged in the San Francisco Bay area. Each invested $1,350 and borrowed another $5,000 from a bank to open the Pikes Place store. Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first mate in Herman Melvilles Moby Dick(so company legend has it), and because they thought the name evoked the romance of the high seas and the seafaring tradition of the early coffee traders. The new companys logo, designed by an artist friend, was a two-tailed mermaid encircled by the stores name. The inspiration for the Starbucks enterprise was a Dutch immigrant, Alfred Peet, who had begun importing fine arabica coffees into the United States during the 1950s. Peet viewed coffee as a fine winemaker views grapes, appraising it in terms of country of origin, estates, and harvests. Peet had opened a small store, Peets Coffee and Tea, in Berkeley, California, in 1966 and had cultivated a loyal clientele. Peets store specialized in importing fine coffees and teas, dark-roasting its own beans the European way to bring out their full flavor, and teaching customers how to grind the beans and make freshly brewed coffee at home. Baldwin, Siegel, and Bowker were well acquainted with Peets expertise, having visited his store on numerous occasions and spent many hours listening to Peet expound on quality coffees and the importance of proper bean-roasting techniques. All three were devoted fans of Peet and his dark-roasted coffees, going so far as to order their personal coffee supplies by mail from Peets. The Pikes Place store featured modest, hand-built nautical fixtures. One wall was devoted to whole-bean coffees; another had shelves of coffee products. The store did not offer fresh-brewed coffee by the cup, but samples were sometimes available for tasting. Initially, Siegel was the only paid employee. He wore a grocers apron, scooped out beans for customers, extolled the virtues of fine, dark-roasted coffees, and functioned as the partnerships retail expert. The other two partners kept their day jobs but came by at lunch or after work to help out. During the start-up period, Baldwin kept the books and developed a growing knowledge of coffee; Bowker served as the magic, mystery, and romance man. 1 The store was an immediate success, with sales exceeding expectations, partly because of a favorable article in the Seattle Times. In the early months, each of the founders traveled to Berkeley to learn more about coffee roasting from their mentor, Alfred Peet, who urged them to keep deepening their knowledge of coffees and teas. For most of the first year, Starbucks ordered its coffee beans from Peets, but then the partners purchased a us ed roaster from Holland and set up roasting operations in a nearby ramshackle building. Baldwin and Bowker experimented with Alfred Peets roasting procedures and came up with their own blends and flavors. A second Starbucks store was opened in 1972. By the early 1980s, the company had four Starbucks stores in the Seattle area and could boast of having been profitable every year since opening its doors. But the roles and responsibilities of the cofounders underwent change. Zev Siegel experienced burnout and left the company to pursue other interests. Jerry Baldwin took over day-to-day management of the company and functioned as chief executive officer; Gordon Bowker remained involved as an owner but devoted most of his time to his advertising and design firm, a weekly newspaper he had founded, and a microbrewery he was launching (the Redhook Ale Brewery). Howard Schultz Enters the Picture In 1981, Howard Schultz, vice president and general manager of U. S. operations for Hammarplast- a Swedish maker of stylish kitchen equipment and housewares- noticed that Starbucks was placing larger orders than Macys was for a certain type of drip coffeemaker. Curious to learn what was going on, he decided to pay the company a visit. The morning after his arrival in Seattle, Schultz was escorted to the Pikes Place store by Linda Grossman, the retail merchandising manager for Starbucks. A solo violinist was playing Mozart at the door, with his violin case open for donations. Schultz immediately was taken by the powerful and pleasing aroma of the coffees, the wall displaying coffee beans, and the rows of red, yellow, and black Hammarplast coffeemakers on the shelves. As he talked with the clerk behind the counter, the clerk scooped out some Sumatran coffee beans, ground them, put the grounds in a cone filter, poured hot water over the cone, and shortly handed Schultz a porcelain mug filled with the freshly brewed coffee. After three sips, Schultz was hooked. He began asking the clerk and Grossman questions about the company, about coffees from different parts of the world, and about the different ways of roasting coffee. Next, Schultz met with Jerry Baldwin and Gordon Bowker, whose offices overlooked the companys coffee-roasting operation. The atmosphere was informal. Baldwin, dressed in a sweater and tie, showed Schultz some new beans that had just come in from Java and suggested they try a sample. Baldwin did the brewing himself, using a glass pot called a French press. Bowker, a slender, bearded man with dark hair and intense brown eyes, appeared at the door and the three men sat down to talk about Starbucks. Schultz was struck by their knowledge of coffee, their commitment to providing high-quality products, and their passion for educating customers about the merits of dark-roasted coffees. Baldwin told Schultz, We dont manage the business to maximize anything other than the quality of the coffee. 2 Starbucks purchased only the finest arabica coffees and put them through a meticulous dark-roasting process to bring out their full flavors. Baldwin explained that the cheap robusta coffees used in supermarket blends burn when subjected to dark roasting. He also noted that the makers of supermarket blends prefer lighter roasts because they allow higher yields (the longer a coffee is roasted, the more weight it loses). Schultz was struck by the business philosophy of the two partners. It was clear from their discussions that Starbucks stood not just for good coffee, but rather for the dark-roasted flavor profiles that the founders were passionate about. Top-quality, fresh-roasted, whole-bean coffee was the companys differentiating feature and a bedrock value. It was also clear to Schultz that Starbucks was strongly committed to educating its customers to appreciate the qualities of fine coffees, rather than just kowtowing to mass-market appeal. The company depended mainly on word-of-mouth to get more people into its stores, then relied on the caliber of its product to give patrons a sense of discovery and excitement. It built customer loyalty cup by cup as buyers of its products developed their palates. On his trip back to New York the next day, Howard Schultz could not stop thinking about Starbucks and what it would be like to be a part of the Starbucks enterprise. Schultz recalled, There was something magic about it, a passion and authenticity I had never experienced in business. 3 Living in the Seattle area also had a strong appeal. By the time Schultz landed at Kennedy Airport, he knew he wanted to go to work for Starbucks. Though there was nothing in his background (see Exhibit 2) that prepared him for the experience, Schultz asked Baldwin at the first opportunity whether there was any way he could fit into Starbucks. The two quickly established an easy, comfortable rapport, but it still took a year of numerous meeting s and a lot of convincing to get Baldwin, Bowker, and their silent partner from San Francisco to agree to hire Howard Schultz. Schultz pursued a job at Starbucks far more vigorously than Starbucks pursued him. There was some nervousness at Starbucks about bringing in an outsider, especially a high-powered New Yorker, who had not grown up with the values of the company. Nonetheless, Schultz continued to press his ideas about the tremendous potential of expanding the Starbucks enterprise outside Seattle and exposing people all over America to Starbucks coffee- arguing there had to be more than just a few thousand coffee lovers in Seattle who would like the companys products. Schultz believed that Starbucks had such great promise that he offered to take a salary cut in exchange for a small equity stake in the business. But the owners worried that by offering Schultz a job as head of marketing they would be committing themselves to a new direction for Starbucks. At a spring 1982 meeting with the three owners in San Francisco, Schultz once again presented his vision for opening Starbucks stores across the United States and Canada. He flew back to New York thinking a job offer was in the bag. But the next day Baldwin called Schultz and indicated that the owners had decided against hiring him because geographic expansion was too risky and because they did not share Schultzs vision for Starbucks. Schultz was despondent; still, he believed so deeply in Starbucks potential that he decided to make a last-ditch appeal. He called Baldwin back the next day and made an impassioned, though reasoned, case for why the decision was a mistake. Baldwin agreed to reconsider. The next morning Baldwin called Schultz and told him the job of heading marketing and overseeing the retail stores was his. In September 1982, Howard Schultz took on his new responsibilities at Starbucks. Starbucks and Howard Schultz: The 1982–85 Period In his first few months at Starbucks, Schultz spent most of his waking hours in the four Seattle stores- working behind the counters, tasting different kinds of coffee, talking with customers, getting to know store personnel, and educating himself about the retail aspects of the coffee business. By December, Jerry Baldwin decided that Schultz was ready for the final part of his training- roasting coffee. Schultz spent a week at the roaster examining the color of the beans, listening for the telltale second pop of the beans during the roasting process, learning to taste the subtle differences among Baldwin and Bowkers various roasts, and familiarizing himself with the roasting techniques for different beans. Meanwhile, he made a point of acclimating himself to the informal dress code, blending in with the culture, and gaining credibility and building trust with colleagues. Making the transition from the high-energy, coat-and-tie style of New York to the more casual ambience of the Pacific Northwest required a conscious effort on Schultzs part. One day during the busy Christmas season that first year, Schultz made real headway in gaining the acceptance and respect of company personnel at the Pikes Place store. The store was packed and Schultz was behind the counter ringing up sales when someone shouted that a customer had just headed out the door with some stuff- two expensive coffeemakers it turned out, one in each hand. Without thinking, Schultz leaped over the counter and chased the thief up the cobblestone street outside the store, yelling Drop that stuff! Drop it! The thief was startled enough to drop both pieces and run away. Schultz picked up the merchandise and returned to the store, holding up the coffeemakers like trophies. Everyone applauded. When Schultz returned to his office later that afternoon, his staff had strung up a banner that read Make my day. 4 Schultz was overflowing with ideas for the company. Early on, he noticed that first-time customers sometimes felt uneasy in the stores because of their lack of knowledge about fine coffees and because store employees sometimes came across as a little arrogant. Schultz worked with store employees on developing customer-friendly sales skills and produced brochures that made it easy for customers to learn about fine coffees. Schultzs biggest idea for Starbucks future came during the spring of 1983 when the company sent him to Milan, Italy, to attend an international housewares show. While walking from his hotel to the convention center, Schultz spotted an espresso bar and went inside to look around. The cashier beside the door nodded and smiled. The barista (counter worker) greeted Howard cheerfully, then gracefully pulled a shot of espresso for one customer and handcrafted a foamy cappuccino for another, all the while conversing merrily with those standing at the counter. Schultz judged the baristas performance as great theater. Just down the way on a side street, he entered an even more crowded espresso bar, where the barista, whom he surmised to be the owner, was greeting customers by name; people were laughing and talking in an atmosphere that plainly was comfortable and familiar. In the next few blocks, he saw two more espresso bars. When the trade show concluded for the day, Schultz walked the streets of Milan exploring espresso bars. Some were stylish and upscale; others attracted a blue-collar clientele. What struck Schultz was how popular and vibrant th e Italian coffee bars were. Most had few chairs, and it was common for Italian opera to be playing in the background. Energy levels were typically high, and the bars seemed to function as an integral community gathering place. Each one had its own unique character, but they all had a barista who performed with flair and exhibited a camaraderie with the customers. Schultz was particularly struck by the fact that there were 1,500 coffee bars in Milan, a city about the size of Philadelphia, and a total of 200,000 in all of Italy. His mind started churning. Schultzs first few days in Milan produced a revelation: The Starbucks stores in Seattle completely missed the point. Starbucks, he decided, needed to serve fresh-brewed coffee, espresso, and cappuccino in its stores (in addition to beans and coffee equipment). Going to Starbucks should be an experience, a special treat; the stores should be a place to meet friends and visit. Re-creating the Italian coffee-bar culture in the United States could be Starbucks differentiating factor. Schultz remained in Milan for a week, exploring coffee bars and learning as much as he could about the Italian passion for coffee drinks. In one bar, he heard a customer order a caffe latte and decided to try one himself- the barista made a shot of espresso, steamed a frothy pitcher of milk, poured the two together in a cup, and put a dollop of foam on the top. Schultz concluded that it was the perfect drink, and thought to himself, No one in America knows about this. Ive got to take it back with me. 5 Schultzs Growing Frustration On Schultzs return from Italy, he shared his revelation and ideas for modifying the format of Starbucks stores with Baldwin and Bowker. But instead of winning their approval, Schultz encountered strong resistance. Baldwin and Bowker argued that Starbucks was a retailer, not a restaurant or bar. They feared that serving drinks would put them in the beverage business and dilute the integrity of Starbucks mission as a coffee store. They pointed out that Starbucks was a profitable small, private company and there was no reason to rock the boat. But a more pressing reason for their resistance emerged shortly- Baldwin and Bowker were excited by an opportunity to purchase Peets Coffee and Tea. The acquisition took place in 1984; to fund it, Starbucks had to take on considerable debt, leaving little in the way of financial flexibility to support Schultzs ideas for entering the beverage part of the coffee business or expanding the number of Starbucks stores. For most of 1984, Starbucks managers were dividing their time between their operations in Seattle and the Peets enterprise in San Francisco. Schultz found himself in San Francisco every other week supervising the marketing and operations of the five Peets stores. Starbucks employees began to feel neglected and, in one quarter, did not receive their usual bonus due to tight financial conditions. Employee discontent escalated to the point where a union election was called, and the union won by three votes. Baldwin was shocked at the results, concluding that employees no longer trusted him. In the months that followed, he began to spend more of his energy on the Peets operation in San Francisco. It took Howard Schultz nearly a year to convince Jerry Baldwin to let him test an espresso bar. After Baldwin relented, Starbucks sixth store, which opened in April 1984, became the first one designed to sell beverages and the first one in downtown Seattle. Schultz asked for a 1,500-square-foot space to set up a full-scale Italian-style espresso bar, but Jerry agreed to allocating only 300 square feet in a corner of the new store. There was no pre-opening marketing blitz and no sign announcing Now Serving Espresso- the lack of fanfare was part of a deliberate experiment to see what would happen. By closing time on the first day, some 400 customers had been served, well above the 250-customer average of Starbucks best-performing stores. Within two months the store was serving 800 customers per day. The two baristas could not keep up with orders during the early morning hours, resulting in lines outside the door onto the sidewalk. Most of the business was at the espresso counter; sales at the regular retail counter were only adequate. Schultz was elated by the test results; his visits to the store indicated that it was becoming a gathering place and that customers were pleased with the beverages being served. Schultz expected that Baldwins doubts about entering the beverage side of the business would be dispelled and that he would gain approval to take Starbucks to a new level. Every day he went into Baldwins office to show him the sales figures and customer counts at the new downtown store. But Baldwin was not comfortable with the success of the new store; he believed that espresso drinks were a distraction from the core business of selling fine arabica coffees at retail and rebelled at the thought that people would see Starbucks as a place to get a quick cup of coffee to go. He adamantly told Schultz, Were coffee roasters. I dont want to be in the restaurant business . . . Besides, were too deeply in debt to consider pursuing this idea. 6 While he didnt deny that the experiment was succeeding, he didnt want to go forward with introducing beverages in other Starbucks stores. Schultzs efforts to persuade Baldwin to change his mind continued to meet strong resistance, although to avoid a total impasse Baldwin finally did agree to let Schultz put espresso machines in the back of two other Starbucks stores. Over the next several months, Schultz- at the age of 33- made up his mind to leave Starbucks and start his own company. His plan was to open espresso bars in high-traffic downtown locations that would emulate the friendly, energetic atmosphere he had encountered in Italian espresso bars. Schultz had become friends with a corporate lawyer, Scott Greenberg, who helped companies raise venture capital and go public. Greenberg told Schultz he believed investors would be interested in providing venture capital for the kind of company Schultz had in mind. Baldwin and Bowker, knowing how frustrated Schultz had become, supported his efforts to go out on his own and agreed to let him stay in his current job and office until definitive plans were in place. Schultz left Starbucks in late 1985. Schultzs Il Giornale Venture Ironically, as Schultz was finalizing the documents for his new company, Jerry Baldwin announced he would invest $150,000 of Starbucks money in Schultzs coffee-bar enterprise, thus becoming Schultzs first investor. Baldwin accepted Schultzs invitation to be a director of the new company, and Gordon Bowker agreed to be a part-time consultant for six months. Bowker urged Schultz to make sure that everything about the new stores- the name, the presentation, the care taken in preparing the coffee- was calculated to lead customers to expect something better than competitors offered. Bowker proposed that the new company be named Il Giornale (pronounced ill jor-nahl-ee ) Coffee Company, a suggestion that Schultz accepted. In December 1985, Bowker and Schultz made a trip to Italy during which they visited some 500 espresso bars in Milan and Verona, observing local habits, taking notes about decor and menus, snapping photographs, and videotaping baristas in action. Greenberg and Schultz then drew up plans to raise an initial $400,000 in seed capital and another $1. 25 million in equity- enough to launch at least eight espresso bars and prove the concept would work in Seattle and elsewhere. The seed capital was raised by the end of January 1986, primarily from Starbucks and two other investors who believed in Schultz and his ideas, but it took Schultz until the end of the year to raise the remaining $1. 25 million. He made presentations to 242 potential investors, 217 of whom said no. Many who heard Schultzs hour-long presentation saw coffee as a commodity business and thought that Schultzs espresso-bar concept lacked any basis for sustainable competitive advantage (no patent on dark roast, no advantage in purchasing coffee beans, no way to bar the entry of imitative competitors). Some noted that consumption of coffee had been declining since the mid-1960s, others were skeptical that people would pay $1. 50 or more for a cup of coffee, and still others were turned off by the companys hard-to-pronounce name. Being rejected by so many potential investors was disheartening (some who listened to Schultzs presentation ? didnt even bother to call him back; others refused to take his calls). Nonetheless, Schultz continued to display passion and enthusiasm in making his pitch and never doubted that his plan would work. He ended up raising $1. 65 million from about 30 investors; most of this money came from nine people, five of whom became directors of the new company. One of Howard Schultzs earliest moves during the start-up process was to hire Dave Olsen, who in 1974 had opened a coffee bar, Cafe Allegro, near the busiest entrance to the University of Washington campus. Olsen was a long-standing Starbucks customer, having discovered the quality of Starbucks coffee beans, gotten to know the owners, and worked with them to develop a custom espresso roast for use in his cafe. Olsens successful Cafe Allegro had become known for cafe au lait, a concoction equivalent to the Italian caffe latte. When Olsen heard of Schultzs plans for Il Giornale, he called Schultz and expressed an interest in being part of the new company- he was intrigued by the Italian coffee-bar concept and was looking for a more expansive career opportunity. Olsen not only had coffee expertise but also had spent 10 years in an apron behind the counter at Cafe Allegro. Schultz immediately picked up on the synergy between him and Olsen. His own strengths were in forming and communicating a vision, raising money, finding good store locations, building a brand name, and planning for growth. Olsen understood the nuts and bolts of operating a retail cafe, hiring and training baristas, and making and serving good drinks. Plus, Olsen was fun to work with. Schultz put Olsen in charge of store operations, made him the coffee conscience of the company, and gave him the authority to make sure that Il Giornale served the best coffee and espresso possible. The first Il Giornale store opened in April 1986. It had a mere 700 square feet and was located near the entrance of Seattles tallest building. The decor was Italian, the menu contained Italian words, and Italian opera music played in the background. The baristas wore white shirts and bow ties. All service was stand-up- there were no chairs. National and international papers hung from rods on the wall. By closing time on the first day, 300 customers had been served, mostly in the morning hours. Schultz and Olsen worked hard to make sure that all the details were executed perfectly. For the first few weeks, Olsen worked behind the counter during the morning rush. But while the core idea worked well, it soon became apparent that several aspects of Il Giornales format werent appropriate for Seattle. Some customers objected to the incessant opera music, others wanted a place to sit down, and many didnt understand the Italian words on the menu. These mistakes were quickly fixed, without compromising the style and elegance of the store. Within six months, Il Giornale was serving more than 1,000 customers a day and regulars had learned how to pronounce the companys name. Because most customers were in a hurry, it became apparent that speedy service was a competitive advantage. Six months after opening the first store, Il Giornale opened a second store in another downtown building. A third store was opened in Vancouver, British Columbia, in April 1987. Vancouver was chosen to test the transferability of the companys business concept outside Seattle. To reach his goal of opening 50 stores in five years, Schultz needed to dispel his investors doubts about geographic expansion. By mid-1987 sales at the three stores were equal to $1. 5 million annually. Il Giornale Acquires Starbucks In March 1987 Jerry Baldwin and Gordon Bowker decided to sell the whole Starbucks operation in Seattle- the stores, the roasting plant, and the Starbucks name. Bowker wanted to cash out his coffee-business investment to concentrate on his other enterprises; Baldwin, who was tired of commuting between Seattle and San Francisco and wrestling with the troubles created by the two parts of the company, elected to concentrate on the Peets operation. As he recalls, My wife and I had a 30-second conversation and decided to keep Peets. It was the original and it was better. 7 Schultz knew immediately that he had to buy Starbucks; his board of directors agreed. Schultz and his newly hired finance and accounting manager drew up a set of financial projections for the combined operations and a inancing package that included a stock offering to Il Giornales original investors and a line of credit with local banks. While a rival plan to acquire Starbucks was put together by another Il Giornale investor, Schultzs proposal prevailed and within weeks Schultz had raised the $3. 8 million needed to buy Starbucks. The acquisition was completed in August 1987. A fter the papers were signed, Schultz and Scott Greenberg walked across the street to the first Il Giornale store, ordered themselves espresso drinks, and sat at a table near the window. Greenberg placed the hundred-page business plan that had been used to raise the $3. 8 million between them and lifted his cup in a toast- We did it, they said together. 8 The new name of the combined companies was Starbucks Starbucks as a Private Company: 1987–92 The following Monday morning, Schultz returned to the Starbucks offices at the roasting plant, greeted all the familiar faces and accepted their congratulations, then called the staff together for a meeting on the roasting-plant floor. He began: All my life I have wanted to be part of a company and a group of people who share a common vision . . . I’m here today because I love this company. I love what it represents . . . I know you’re concerned . . . I promise you I will not let you down. I promise you I will not leave anyone behind . . . In five years, I want you to look back at this day and say I was there when it started. I helped build this company into something great. 9 Schultz told the group that his vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. He indicated that he wanted to include people in the decision-making process and that he would be open and honest with them. Schultz said he believed it was essential, not just an intriguing option, for a company to respect its people, to inspire them, and to share the fruits of its success with those who contributed to its long-term value. His aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility. In the next few days and weeks, however, Schultz came to see that the unity and morale at Starbucks had deteriorated badly in the 20 months he had been at Il Giornale. Some employees were cynical and felt unappreciated. There was a feeling that prior management had abandoned them and a wariness about what the new regime would bring. Schultz determined that he would have to make it a priority to build a new relationship of mutual respect between employees and management. The new Starbucks had a total of nine stores. The business plan Schultz had presented investors called for the new company to open 125 stores in the next five years- 15 the first year, 20 the second, 25 the third, 30 the fourth, and 35 the fifth. Revenues were projected to reach $60 million in 1992. But the company lacked experienced management. Schultz had never led a growth effort of such magnitude and was just learning what the job of CEO was all about, having been the president of a small company for barely two years. Dave Olsen had run a single cafe for 11 years and was just learning to manage a multistore operation. Ron Lawrence, the company’s controller, had worked as a controller for several organizations. Other Starbucks employees had only the experience of managing or being a part of a six-store organization. When Starbucks’ key roaster and coffee buyer resigned, Schultz put Dave Olsen in charge of buying and roasting coffee. Lawrence Maltz, who had 20 years of experience in business and eight years of experience as president of a profitable public beverage company, was hired as executive vice president and charged with heading operations, finance, and human resources. In the next several months, a number of changes were instituted. To symbolize the merging of the two companies and the two cultures, a new logo was created that melded the Starbucks and Il Giornale logos. The Starbucks stores were equipped with espresso machines and remodeled to look more Italian than Old World nautical. The traditional Starbucks brown was replaced by Il Giornale green. The result was a new type of store- a cross between a retail coffee-bean store and an espresso bar/cafe- that became Starbucks’ signature format in the 1990s. By December 1987, employees at Starbucks had begun buying into the changes Schultz was making and trust had begun to build between management and employees. New stores were on the verge of opening in Vancouver and Chicago. One Starbucks store employee, Daryl Moore, who had voted against unionization in 1985, began to question his fellow employees about the need for a union. Over the next few weeks, Moore began a move to decertify the union. He carried a decertification letter around to Starbucks stores and secured the signatures of employees who no longer wished to be represented by the union. After getting a majority of store employees to sign the letter, he presented it to the National Labor Relations Board and the union representing store employees was decertified. Later, in 1992, the union representing Starbucks’ roasting plant and warehouse employees was also decertified. Expansion into Markets Outside the Pacific Northwest Starbucks’ entry into Chicago proved far more troublesome than management anticipated. The first Chicago store opened October 27, 1987, the same day the stock market crashed. Three more stores were opened in Chicago over the next six months, but customer counts were substantially below expectations- Chicagoans didn’t take to dark-roasted coffee as fast as Schultz had anticipated. At the first downtown store, for example, which opened onto the street rather than into the lobby of the building where it was located, customers were hesitant to go out in the wind and cold to get a cup of coffee in the winter months. Store margins were squeezed for a number of reasons: It was expensive to supply fresh coffee to the Chicago stores out of the Seattle warehouse, and both rents and wage rates were higher in Chicago than in Seattle. Gradually, customer counts improved, but Starbucks lost money on its Chicago stores until 1990, when prices were raised to reflect higher rents and labor costs, more experienced store managers were hired, and a critical mass of customers caught on to the taste of Starbucks products. Portland, Oregon, was the next market entered, and Portland coffee drinkers took to Starbucks products quickly. By 1991, the Chicago stores had become profitable and the company was ready for its next big market entry. Management decided on California because of its host of neighborhood centers and the receptiveness of Californians to innovative, high-quality food. Los Angeles was chosen as the first California market to enter, principally because of its status as a trendsetter and its cultural ties to the rest of the country. L. A. onsumers embraced Starbucks quickly- the Los Angeles Times named Starbucks as the best coffee in America before the first L. A. store opened. The entry into San Francisco proved more troublesome because of an ordinance there against converting stores to restaurant-related uses in certain prime urban neighborhoods; Starbucks could sell beverages and pastries to customers at stand-up counters but could not offer seating in stores that had formerly been used for general retailing. However, the city council was soon convinced by cafe owners and real estate brokers to change the code. Still, Starbucks faced strong competition from Peet’s and local espresso bars in the San Francisco market. When Starbucks’ store expansion targets proved easier to meet than Schultz had originally anticipated, he upped the numbers to keep challenging the organization. Starting from a base of 11 stores, Starbucks opened 15 new stores in fiscal 1988, 20 in 1989, 30 in 1990, 32 in 1991, and 53 in 1992- producing a total of 161 stores. The opening of 150 new stores in five years significantly exceeded the 1987 business plan’s objective of 125. From the outset, the strategy was to open only company-owned stores; franchising was avoided so as to keep the company in full control of the quality of its products and the character and location of its stores. But company ownership of all stores required Starbucks to raise new venture capital, principally by selling shares to new or existing investors, to cover the cost of expansion. In 1988 the company raised $3. 9 million; in 1990, venture capitalists provided an additional $13. 5 million; and in 1991 another round of venture capital financing generated $15 million. Starbucks was able to raise the needed funds despite posting losses of $330,000 in 1987, $764,000 in 1988, and $1. 2 million in 1989. While the losses were troubling to Starbucks’ board of directors and investors, Schultz’s business plan had forecast losses during the early years of expansion. At a particularly tense board meeting where directors sharply questioned him about the lack of profitability, Schultz said: Look, we’re going to keep losing money until we can do three things. We have to attract a management team well beyond our expansion needs. We have to build a world-class roasting facility. And we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores. 10 Schultz argued for patience as the company invested in the infrastructure to support continued growth well into the 1990s. He contended that hiring experienced executives ahead of the growth curve, building facilities far beyond current needs, and installing support systems laid a strong foundation for rapid, profitable growth on down the road. His arguments carried the day with the board and with investors, especially ince revenues were growing approximately 80 percent annually and customer traffic at the stores was meeting or exceeding expectations. Starbucks became profitable in 1990 and profits had increased every year thereafter. Getting into the Mail-Order Business The original Starbucks had begun a small mail order operation in the 1970s to serve travelers who had visited a Seattle store or former store c ustomers who had moved away from Seattle. Sales were solicited by mailing out a simple brochure. In 1988, Starbucks developed its first catalog and began expanding its mail-order base to targeted demographic groups. In 1990 a toll-free telephone number was set up. Sales grew steadily as the company’s name and reputation began to build. The company’s market research indicated that its average mail-order customer was a well-educated, relatively affluent, well-traveled connoisseur interested in the arts and cultural events, and usually a loyal buyer of the company’s products. As time went on, the cities and neighborhoods in which the company’s mail-order customers were located became one of the beacons used to decide where to open new stores. Schultz’s Strategy to Make Starbucks a Great Place to Work Howard Schultz strongly believed that Starbucks’ success was heavily dependent on customers having a very positive experience in its stores. This meant having store employees who were knowledgeable about the company’s products, who paid attention to detail, who eagerly communicated the company’s passion for coffee, and who had the skills and personality to deliver consistently pleasing customer service. Many of the baristas were in their 20s and worked part-time, going to college or pursuing other career activities on the side. The challenge to Starbucks, in Schultz’s view, was how to attract, motivate, and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would result in higher levels of performance. Moreover, Schultz wanted to cement the trust that had been building between management and the company’s workforce. One of the requests that employees had made to the prior owners of Starbucks was to extend health care benefits to part-time workers. Their request had been turned down, but Schultz believed that expanding health care coverage to include part-timers was the right thing to do. His father had recently died of cancer, and he knew from having grown up in a family that struggled to make ends meet how difficult it was to cope with rising medical costs. In 1988 Schultz went to the board of directors with his plan to expand the company’s health care coverage to include part-timers who worked at least 20 hours per week. He saw the proposal not as a generous gesture but as a core strategy to win employee loyalty and commitment to the company’s mission. Board members resisted because the company was unprofitable and the added costs of the extended coverage would only worsen the company’s bottom line. But Schultz argued passionately, pointing out that if the new benefit reduced turnover, which he believed was likely, then it would reduce the costs of hiring and training- which equaled about $3,000 per new hire. He further pointed out that it cost $1,500 a year to provide an employee with full benefits. Part-timers, he argued, were vital to Starbucks, constituting two-thirds of the company’s workforce. Many were baristas who knew the favorite drinks of regular customers; if the barista left, that connection with the customer was broken. Moreover, many part-time employees were called upon to open the stores early, sometimes at 5:30 or 6 am; others had to work until closing- 9 pm or later. Providing these employees with health care benefits, he argued, would signal that the company honored their value and contribution. The board came round and approved Schultz’s plan. Starting in late 1988, part-timers working 20 or more hours were offered the same health coverage as full-time employees. Starbucks paid 75 percent of an employee’s health insurance premium and, over the years, extended its coverage to include preventive care, crisis counseling, dental care, eye care, mental health care, and treatment for chemical dependency. Coverage was also offered for unmarried partners in a committed relationship. Since most Starbucks employees are young and comparatively healthy, the company has been able to provide broader coverage while keeping monthly payments relatively low. The value of Starbucks’ health care program struck home when one of the company’s store managers and a former barista walked into Schultz’s office and told him he had AIDS. Schultz said later: I had known [Jim] was gay but had no idea he was sick. His disease had entered a new phase, he explained, and he wouldn’t be able to work any longer. We sat together and cried, for I could not find meaningful words to console him. I couldn’t compose myself. I hugged him. At that point, Starbucks had no provision for employees with AIDS. We had a policy decision. Because of Jim, e decided to offer health-care coverage to all employees who have terminal illnesses, paying medical costs in full from the time they are not able to work until they are covered by government programs, usually twenty-nine months. After his visit to me, I spoke with Jim often and visited him at the hospice. Within a year he was gone. I received a letter from his family afterward, telling me how much they appreciated our benefit plan. 11 In 1994 Howard Schultz was invited to the White House for a one-on-one meeting with President Clinton to brief him on the Starbucks health care program. By 1991 the company’s profitability had improved to the point where Schultz could pursue another employee program he believed would have a positive long-term effect on the success of Starbucks- a stock option plan for all employees. 12 Schultz wanted to turn all Starbucks employees into partners, give them a chance to share in the success of the company, and make clear the connection between their contributions and the company’s market value. Even though Starbucks was still a private company, the plan that emerged called for granting every employee companywide stock options in proportion to base pay. In May 1991, the plan, dubbed Bean Stock, was presented to the board. Though board members were concerned that increasing the number of shares might unduly dilute the value of the shares of investors who had put up hard cash, the plan received unanimous approval. The first grant was made in October 1991, just after the end of the company’s fiscal year in September; each partner was granted stock options worth 12 percent of base pay; the value of these first shares was pegged at $6 per share. Each October since then, Starbucks has granted employees options equal to 14 percent of base pay, awarded at the stock price at the start of the fiscal year (October 1). Employees, if they wish, can cash in one-fifth of the shares granted each succeeding year, paying the initial year’s price and receiving the current year’s price. It took five years for the shares to fully vest. Each of the shares granted in 1991 was worth $132 in October 1996; thus, an employee making $20,000 in 1991 could have cashed in the options granted in 1991 for more than $50,000 in October 1996. In 1991 when the Bean Stock program was presented to employees, Starbucks dropped the term employee and began referring to all its people as partners because everyone, including part-timers working at least 20 hours per week, was eligible for stock options after six months. At the end of fiscal year 1997, there were 8. 7 million shares in outstanding options at an average exercisable price of $19. 72 (which compared very favorably to the current stock price of $43. 50). In 1995, Starbucks implemented an employee stock purchase plan. Eligible employees could contribute up to 10 percent of their base earnings to quarterly purchases of the company’s common stock at 85 percent of the going stock price. The total number of shares that could be issued under the plan was 4 million. After the plan’s creation, nearly 200,000 shares were issued; just over 2,500 of the 14,600 eligible employees participated. Exhibit 3 shows the performance of Starbucks’ stock since 1992. Starbucks was able to attract motivated people with above-average skills and good work habits not only because of its fringe benefit program but also because of its pay scale. Store employees were paid $6 to $8 per hour, well above the minimum wage. Starbucks believed that its efforts to make the company an attractive, caring place to work were responsible for its relatively low turnover rates. Whereas most national retailers and fast-food chains had turnover rates for store employees ranging from 150 to 400 percent a year, the turnover rates for Starbucks’ baristas ran about 65 percent. Starbucks’ turnover for store managers was about 25 percent compared to about 50 percent for other chain retailers. There was evidence that Schultz’s approaches, values, and principles were affecting company performance in the intended manner. One Starbucks store manager commented, Morale is very high in my store among the staff. I’ve worked for a lot of companies, but I’ve never seen this level of respect. It’s a company that’s very true to its workers, and it shows. Our customers always comment that we’re happy and having fun. In fact, a lot of people ask if they can work here. 13 Exhibit 4 contains a summary of Starbucks’ fringe benefit program. In 1996, the projected cost of benefits was $2,200 for each of the company’s 19,900 employees. Starbucks’ Mission Statement In early 1990, the senior executive team at Starbucks went to an off-site retreat to debate the company’s values and beliefs and draft a mission statement. Schultz wanted the mission statement to convey a strong sense of organizational purpose and to articulate the company’s fundamental beliefs and guiding principles. The draft was submitted to all employees for review. Changes were made based on employees’ comments. The resulting mission statement appears in Exhibit 5. To make sure the company lived up to the elements of the mission statement, a Mission Review system was formed. Employees were urged to report their concerns to the company’s Mission Review team if they thought particular management decisions were not supportive of the company’s mission statement. Comment cards were given to each newly hired employee and were kept available in common areas with other employee forms. Employees had the option of signing the comment cards or not. Hundreds of cards were submitted to the Mission Review team each year. The company promised that a relevant manager would respond to all signed cards within two weeks. Howard Schultz reviewed all the comments, signed and unsigned, every month. As the company continued to grow, resulting in a large and geographically scattered workforce, Starbucks assembled a team of people from different regions to go over employee concerns, seek solutions, and provide a report at the company’s Open Forums. At these Open Forums, held quarterly in every geographic region where the company did business, senior managers met with all interested employees to present updates on Starbucks’ performance, answer questions, and give employees an opportunity to air grievances. Values and Principles During these early building years, Howard Schultz and other Starbucks senior executives worked to instill some key values and guiding principles into the Starbucks culture. The keystone value in the effort to build a company with soul was that the company would never stop pursuing the perfect cup of coffee. Schultz remained steadfastly opposed to franchising, so that the company could control the quality of its products and build a culture common to all stores. He was adamant about not selling artificially flavored coffee beans- We will not pollute our high-quality beans with chemicals; if a customer wanted hazelnut-flavored coffee, Starbucks would provide it by adding hazelnut syrup to the drink rather than by adding hazelnut flavoring to the beans during roasting. Running flavored beans through the grinders would leave chemical residues that would alter the flavor of beans ground afterward; plus, the chemical smell given off by artificially flavored beans would be absorbed by other beans in the store. Furthermore, Schultz didn’t want the company to pursue supermarket sales because pouring Starbucks’ beans into clear plastic bins, where they could get stale, would compromise the company’s distinctive product: fresh, dark-roasted, full- ? flavored coffee. Starbucks’ management was also emphatic about the importance of pleasing customers. Employees were trained to go out of their way, taking heroic measures if necessary, to make sure customers were fully satisfied- the theme was just say yes to customer requests. Employees were also encouraged to speak their minds without fear of retribution from upper management- senior executives wanted employees to be vocal about what Starbucks was doing right, what it was doing wrong, and what changes were needed. Management wanted employees to contribute to the process of making Starbucks a better company. A values and principles crisis arose at Starbucks in 1989 when customers started requesting nonfat milk in cappuccinos and lattes. Howard Schultz, who read all customer comment cards, and Dave Olsen, head of coffee quality, conducted taste tests of lattes and cappuccinos made with nonfat and skim milk and concluded they were not as good as those made with whole milk. Howard Behar, recently hired as head of retail store operations, indicated that management’s opinions didn’t matter; what mattered was giving customers what they wanted. Schultz responded, We will never offer nonfat milk. It’s not who we are. Behar stuck to his guns, maintaining that use of nonfat milk should at least be tested- otherwise, all the statements management had made about the importance of really and truly pleasing customers were a sham. A fierce internal debate ensued. One dogmatic defender of the quality and taste of Starbucks’ coffee products buttonholed Behar outside his office and told him that using nonfat milk amounted to bastardizing the company’s products. Numerous store managers maintained that offering two kinds of milk was operationally impractical. Schultz found himself torn between the company’s commitment to quality and its goal of pleasing customers. One day after visiting one of the stores in a residential neighborhood and watching a customer leave and go to a competitor’s store because Starbucks did not make lattes with nonfat milk, Schultz authorized Behar to begin testing. 14 Within six months all 30 stores were offering drinks made with nonfat milk. In 1997, about half the lattes and cappuccinos Starbucks sold were made with nonfat milk. Schultz’s approach to offering employees good compensation and a comprehensive benefits package was driven by his belief that sharing the company’s success ith the people who made it happen helped everyone think and act like an owner, build positive long-term relationships with customers, and do things efficiently. He had a vivid recollection of his father’s employment experience- bouncing from one low-paying job to another, working for employers who offered few or no benefits and who conducted their business with no respect for the contributions of the workforce- and he vowed that he would never let Starbucks employees suffer a similar fate, saying: My father worked hard all his life and he had little to show for it. He was a beaten man. This is not the American dream. The worker on our plant floor is contributing great value to the company; if he or she has low self-worth, that will have an effect on the company. 15 The company’s employee benefits program was predicated on the belief that better benefits attract good people and keep them longer. Schultz’s rationale was that if you treat your employees well, they will treat your customers well. Starbucks Becomes a Public Company Starbucks initial public offering (IPO) of common stock in June 1992 turned into one of the most successful IPOs of the year (see Exhibit 3 for the performance of the companys stock price since the IPO). With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network (see Exhibit 1). Starbucks success helped specialty coffee products begin to catch on across the United States. Competitors, some imitating the Starbucks model, began to spring up in many locations. The Specialty Coffee Association of America predicted that the number of coffee cafes in the United States would rise from 500 in 1992 to 10,000 by 1999. The Store Expansion Strategy In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favorable demographic profiles but which also could be serviced and supported by the companys operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a hub; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, then additional stores were opened in smaller, surrounding spoke areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores. All of the new zone vice presidents Starbucks recruited came with extensive operating and marketing experience in chain-store retailing. Starbucks store launches grew steadily more successful. In 1995, new stores generated an average of $700,000 in revenue in their first year, far more than the average of $427,000 in 1990. This was partly due to the growing reputation of the Starbucks brand. In more and more instances, Starbucks reputation reached new markets even before stores opened. Moreover, existing stores continued to post year-to-year gains in sales (see Exhibit 1). Starbucks had notable success in identifying top retailing sites for its stores. The company had the best real estate team in the coffee-bar industry and a sophisticated system that enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. The companys site location track record was so good that as of 1997 it had closed only 2 of the 1,500 sites it had opened. Real Estate, Store Design, Store Planning, and Construction Schultz formed a headquarters group to create a store development process based on a six-month opening schedule. Starting in 1991, the company began to create its own in-house team of architects and designers to ensure that each store would convey the right image and character. Stores had to be custom-designed because the company didnt buy real estate and build its own freestanding structures like McDonalds or Wal-Mart did; rather, each space was leased in an existing structure and thus each store differed in size and shape. Most stores ranged in size from 1,000 to 1,500 square feet and were located in office buildings, downtown and suburban retail centers, airport terminals, university campus areas, or busy neighborhood shopping areas convenient to pedestrian foot traffic. Only a select few were in suburban malls. While similar materials and furnishings were used to keep the look consistent and expenses reasonable, no two stores ended up being exactly alike. In 1994, Starbucks began to experiment with a broader range of store formats. Special seating areas were added to help make Starbucks a place where customers could meet and chat or simply enjoy a peaceful interlude in their day. Grand Cafes with fireplaces, leather chairs, newspapers, couches, and lots of ambience were created to serve as flagship stores in high-traffic, high-visibility locations. The company also experimented with drive-through windows in locations where speed and convenience were important to customers and with kiosks in supermarkets, building lobbies, and other public places. To better reduce average store-opening costs, which had reached an undesirably high $350,000 in 1995, the company centralized buying, developed standard contracts and fixed fees for certain items, and consolidated work under those contractors who displayed good cost-control practices. The retail operations group outlined exactly the minimum amount of equipment each core store needed, so that standard items could be ordered in volume from vendors at 20 to 30 percent discounts, then delivered just in time to the store site either from company warehouses or the vendor. Modular designs for display cases were developed. And the whole store layout was developed on a computer, with software that allowed the costs to be estimated as the design evolved. All this cut store-opening costs significantly and reduced store development time from 24 to 18 weeks. A stores of the future project team was formed in 1995 to raise Starbucks store design to a still higher level and come up with the next generation of Starbucks stores. Schultz and Olsen met with the team early on to present their vision for what a Starbucks store should be like- an authentic coffee experience that conveyed the artistry of espresso making, a place to think and imagine, a spot where people could gather and talk over a great cup of coffee, a comforting refuge that provided a sense of community, a third place for people to congregate beyond work or the home, a place that welcomed people and rewarded them for coming, and a layout that could accommodate both fast service and quiet moments. The team researched the art and literature of coffee throughout the ages, studied coffee-growing and coffee-making techniques, and looked at how Starbucks stores had already evolved in terms of design, logos, colors, and mood. The team came up with four store designs- one for each of the four stages of coffee making: growing, roasting, brewing, and aroma- each with its own color combinations, lighting scheme, and component materials. Within each of the four basic store templates, Starbucks could vary the materials and details to adapt to different store sizes and settings (downtown buildings, college campuses, eighborhood shopping areas). In late 1996, Starbucks began opening new stores based on one of the four templates. The company also introduced two ministore formats using the same styles and finishes: the brevebar, a store-within-a-store for supermarkets or office-building lobbies, and the doppio, a self-contained 8-square-foot space that could be moved from spot to spot. Management believed the project accomplished three objectives: better store designs, lower store-opening costs (about $315,000 per store on average), and formats that allowed sales in locations Starbucks could otherwise not consider. For a number of years, Starbucks avoided debt and financed new stores entirely with equity capital. But as the companys profitability improved and its balance sheet strengthened, Schultzs opposition to debt as a legitimate financing vehicle softened. In 1996 the company completed its second debt offering, netting $161 million from the sale of convertible debentures for use in its capital construction program. Exhibit 6, Exhibit 7, and Exhibit 8 present Starbucks income statement and balance sheet data for recent years. Product Line Starbucks stores offered a choice of regular or decaffeinated coffee beverages, a special coffee of the day, and a broad selection of Italian-style espresso drinks. In addition, customers could choose from a wide selection of fresh-roasted whole-bean coffees (which could be ground on the premises and carried home in distinctive packages), a selection of fresh pastries and other food items, sodas, juices, teas, and coffee-related hardware and equipment. In 1997, the company introduced its Starbucks Barista home espresso machine featuring a new portafilter system that accommodated both ground coffee and Starbucks new ready-to-use espresso pods. Power Frappuccino- a version of the companys popular Frappuccino blended beverage, packed with protein, carbohydrates, and vitamins- was tested in several markets during 1997; another promising new product being tested for possible rollout in 1998 was Chai Tea Latte, a combination of black tea, exotic spices, honey, and milk. The companys retail sales mix was roughly 61 percent coffee beverages, 15 percent whole-bean coffees, 16 percent food items, and 8 percent coffee-related products and equipment. The product mix in each store varied, depending on the size and location of each outlet. Larger stores carried a greater variety of whole coffee beans, gourmet food items, teas, coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers, and other accessories. Smaller stores and kiosks typically sold a full line of coffee beverages, a limited selection of whole-bean coffees, and a few hardware items. In recent years, the company began selling special jazz and blues CDs, which in some cases were special compilations that had been put together for Starbucks to use as store background music. The idea for selling the CDs originated with a Starbucks store manager who had worked in the music industry and selected the new tape of the month Starbucks played as background in its stores. He had gotten compliments from customers wanting to buy the music they heard and suggested to senior executives that there was a market for the companys music tapes. Research that involved looking through two years of comment cards turned up hundreds asking Starbucks to sell the music it played in its stores. The Starbucks CDs, created from the Capitol Records library, proved a significant addition to the companys product line. Some of the CDs were specifically collections designed to tie in with new blends of coffee that the company was promoting. Starbucks also sold Oprahs Book Club selections, the profits of which were donated to a literacy fund supported by the Starbucks Foundation. The company was constantly engaged in efforts to develop new ideas, new products, and new experiences for customers that belonged exclusively to Starbucks. Schultz and other senior executives drummed in the importance of always being open to re-inventing the Starbucks experience. Store Ambience Starbucks management looked upon each store as a billboard for the company and as a contributor to building the companys brand and image. Each detail was scrutinized to enhance the mood and ambience of the store, to make sure everything signaled best of class and that it reflected the personality of the community and the neighborhood. The thesis was Everything matters. The company went to great lengths to make sure the store fixtures, the merchandise displays, the colors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the companys passion for coffee, and that re