Entrepreneurship and the Background of People:

Starbucks Story
Jing Chen
Comm 421
Prepared by:
ndy !eung
Jim "uan
#ntroduction
n entrepreneur comes in many forms$ %he definition of entrepreneurs can be
&aguely defined as the practice of starting ne' businesses in response to identified
opportunities$ Entrepreneurship is &aluable to the economy and 'e can measure the
positi&e impact through thermodynamics$ %o e&aluate the impact of entrepreneurs( this
paper 'ill analy)e the background of entrepreneurs and ho' these special indi&iduals can
change the economic system through the Starbucks case study$
#nformation %heory:
#n the information &alue theory in The Physical Foundations of Economics( the
formula for the &alue of information is defined as * +P, - .log+b, P $ #n this formula( the
&alue of information increases as the probability of obtaining such information$ /or
e0ample( the information that is re&ealed in stock maga)ines is not as &aluable as insider
information about certain companies$ Since e&eryone has access to stock maga)ine(
in&estors 'ill generally make the same choice( gi&ing no competiti&e edge to each other$
%his information &alue is important to understand because the success of entrepreneur is
tied 'ith the amount of information they recei&e$ So is it fair to say that anyone 'ith
greater access to &aluable information 'ill become a successful entrepreneur1
E0pert &ersus 2o&ice:
E0perts can be broadly defined as any indi&idual 'ith &aluable information in any
fields$ 2o&ice can be defined as any indi&idual 'ith no specific &aluable information in
any field and is al'ays seeking ne' information$ /rom this definition( e0perts seem to be
the entrepreneurs because they ha&e &aluable information on their hands to start ne'
businesses$ *o'e&er( through se&eral theories in The Physical Foundation of Economics(
it can be pro&ed that it is the no&ice that tends to become successful entrepreneurs$
Conser&atism:
Conser&atism is part of the entropy theory of human psychology$ Conser&atism in
human beings maybe characteri)ed as beha&ior by indi&iduals 'ho possess a reluctance
to update their beliefs in the face of ne' information$ Based on Shannon3s entropy theory
of information( the amount of information recei&ed is reduced by the prior kno'ledge of
the indi&idual$ /rom an e0pert point of &ie'( they are reluctant to accept ne' information
'hich hampers their ability to become entrepreneur$ Entrepreneur has to ha&e a dynamic
factor because they al'ays seek to in&ent ne' business in the light of ne' opportunities$
%he e0pert 'ill more likely ignore these ne' opportunities because of their inability to
effecti&ely process ne' information$ no&ice( on the other hand( al'ays seeks ne'
information and because their prior kno'ledge is not as much as an e0pert( they ha&e
greater capability to effecti&ely process ne' information and use it to their ad&antage$
/raming:
/raming is part of the entropy theory of human psychology$ /raming can be
defined as the selecti&e influence o&er the indi&idual3s perception of the 'orld$ #n the
e0pert.no&ice frame'ork( e0perts3 perception of the 'orld is pre.determined 'hile the
no&ice is skeptical to the 'orld en&ironment$ #n a stable en&ironment( the e0pert
performs &ery 'ell because of accurate forecasts( so their returns 'ould be significant$
%he no&ice( due to its lack of perception( 'ill not ha&e these forecasts$ *o'e&er( in a
dynamic en&ironment( the speculations from the e0perts are usually 'rong and 'ill use
their po'ers to limit &ariance in their portfolio or business$ /or a no&ice( due to its lack
of perception( 'ill be more 'illing to take risk and achie&e a greater return in a dynamic
en&ironment$ E0pert 'ill al'ays a&oid risk because they feel they ha&e perception of
'hat 'ill happen and they strong belie&e a certain e&ent 'ill happen( gi&ing them limited
return$ no&ice 'ith no specific preference 'ill tend to risk more of their capital( and in
some instances the return in this dynamic en&ironment 'ill be far greater than the e0pert$
4pportunities and #nformation relation:
/rom the abo&e e0amples( the paper sho's that information &alue is not directly
related to entrepreneurs$ #f anything( it re5ects the idea that anyone 'ho obtains scarce
information 'ill become successful entrepreneurs$ #t 'ould be 'rong to re5ect this idea
because entrepreneurship does ha&e a relation 'ith information &alue theory( but an
additional &ariable must be added$ #n order to become a successful entrepreneur( the
indi&idual +e0pert or no&ice, must reali)e the opportunity associated 'ith the &alue of
information and turn it into economic &alue$ E0perts may ha&e all the information they
need( but if they fail to generate opportunities presented by the information( they are not
entrepreneurs$ #n the Starbucks case( it presents us 'ith a good e0ample of ho' three
e0perts fail to utili)e their &aluable kno'ledge and ho' a no&ice came in and took this
information and turns it into great economic &alue$
Starbucks story:
%he original Star Bucks store 'as opened in 1671 by three coffee enthusiasts:
Jerry Bald'in( 8e& Seigal( and "ordan Bo'ker$ %he three partners 'ere passionate about
coffee making and sold high 9uality coffee beans and e9uipment$ %his store acted as a
retail outlet( and did not sell any coffee drinks$
Jerry Bald'in( 8e& Seigal( and "ordan Bo'ker 'ere truly e0perts in their
respecti&e field$ Coffee 'as introduced to merica centuries ago( but the three belie&ed
the 9uality of coffee that 'as ser&ed at fast food restaurant and supermarket 'ere belo'
par$ Starbucks e0clusi&ely sold green coffee beans( 'hich 'as rare in merica e&en in
today$ :ost supermarkets sold roasted coffee beans that 'ere roasted in factories that
'ere not located in the ;nited States$ %he three partners belie&e once the coffee beans are
roasted( they are sub5ect to o0idi)e( therefore losing most of its fla&or$ %o ensure that
roasted coffee beans do not get eroded( they belie&e the roasting process should be done
at home$ 4nce the coffee beans are roasted( Starbucks sold grinder as 'ell to grind the
roasted coffee beans$ #n order to make coffee( a grinder 'as needed to bre' the coffee$
%he grinding process usually happens right before bre'ing( because once the roasted
coffee beans are grinded( they erode &ery fast and the fla&or lea&es the beans$ %he
Starbucks store sold all three e9uipments to ensure fresh coffee: the roaster( the grinder(
and the bre'er$ %o ensure customer satisfaction( they spend a great deal of time
e0plaining to customer on ho' long to roast coffee beans and the o0idation factor
associated 'ith roasted coffee beans$
*o'ard Schult)( an entrepreneur from 2e' <ork( &isited Seattle in 16=1 because
he disco&ered a store by the name of Starbucks that 'as purchasing a lot of coffee
making e9uipment$ 4nce he made the stop at Starbucks and tried some of its coffee( he
fell in lo&e 'ith it$ *e admired the 9uality of coffee that they bre'( but also admired the
passion in 'hich the three partners ha&e for coffee$ *e 'as relati&ely a no&ice in terms of
understanding coffee and decided to 5oin the Starbucks team as a director of marketing
and consultant$
#n 16=2( *o'ard Schult) made a trip to Europe that changes his life fore&er$ *e
'ent to Europe and fell in lo&e 'ith espresso drink and coffee on the go$ *e en&ision
coffee shops in the ;nited States selling coffee on the go( selling to consumers 'ho
'anted to en5oy a cup of coffee 'hile chatting it up in a Starbucks store$ >hen he 'ent
back to Seattle to introduce this ne' concept to Jerry Bald'in( 8e& Seigal( and "ordan
Bo'ker( the three partners immediately re5ected his idea$ %hey belie&e if they tried to
make coffee on the go( it 'ould not be possible to sell the highest 9uality coffee to
consumers because it takes a great deal of time to complete the coffee making process:
roast( grind( and bre'$ /urthermore( the partners belie&e coffee should be a be&erage
en5oyed at home 'hile sitting on the li&ing couch$
*o'ard Schult) 'asn3t afraid of taking risk and he opened a coffee chain a fe'
years later in Seattle that sold coffee on.the.go$ #t pro&ed to be a great success( but he still
respected the kno'ledge that the three original Starbucks o'ners ha&e$ /urthermore(
despite its limited e0pansion( Starbucks had a positi&e presence on the Seattle
community$ So in 16=7( after *o'ard3s success 'ith its o'n coffee chain( he bought
Starbucks from the three o'ners$ /rom then on( the e0pansion of Starbucks gre' at an
e0ponential rate( creating the legend of Starbucks and another successful entrepreneur
story$
#nformation ?alue &ersus 4pportunity
Earlier in the paper( it stated that scarce information is &aluable and any
information of &alue is usually turned into great economic 'ealth$ %he person that can
process and turn it into 'ealth is an entrepreneur( and it is usually the no&ice that can
conduct this act because of its ability to identify opportunity( as 'ell as its 'illingness to
take risk$ %he three original Starbucks o'ners had access to &aluable information in
regards to coffee making( but they fail to fully reali)e the potential of selling high 9uality
coffee to the public$ %hey partially reali)e the economic &alue by selling e9uipment and
ra' green coffee beans to the public$ *o'ard Schult) belie&ed selling coffee on the go
'ould be more effecti&e and reali)e the opportunity in the coffee business$
Conser&atism: *o'ard3s brilliant idea
Before Starbucks 'as introduced( there has been multiple coffee chains in Europe
in 'hich coffee are freshly roasted and bre'ed from the store$ %he problem 'ith this 'as
e0pansion$ E0pansion of stores 'ould be slo' and tedious because roasting machines are
9uite e0pensi&e to implement$ /urthermore( the roasting process is the most important
steps in coffee making so additional cost is needed to skillfully train the 'orker to roast
the coffee$ Conser&atism has put a constraint in most coffee franchises in this regard$
%hey reali)e that it is hard to e0pand due to roasting machine costs and training$ *o'ard
Schult) is less reluctant to accept this fact and continues to seek ans'ers to this problem$
/inally( he reali)es that if roasted coffee beans are immediately stored in a compressed
bag( the roasted coffee beans 'ould not o0idi)e( hence retaining the fla&or$ /urthermore(
he decided to mass roast coffee beans to cut cost( creating economies of scale$ *is plan
'as to mass produce in an area and compress the roasted beans in the bag@ therefore it
cuts the cost to both roast machine and training costs of 'orkers$
Entropy of the Economic System
#n thermodynamics( the economy system is &ie' as entropy$ #t is a dynamic
system in 'hich particles flo'$ %he system is constantly dynamic since there is al'ays
constant entropy that enters the system( creating shock'a&e effect in the entire system$ #n
the case of Starbucks( the introduction of coffee creates entropy in the system 'hich
positi&ely affects the economy$ /rom appendi0( 'e see the gro'th in the coffee
production market from 166A and 2BBB$ Starbucks( during that time( has e0perience
e0ponential gro'th and continues to gro' at this rate$ lthough there is not concrete
e&idence that sho's Starbucks is the main reason for the coffee boom( it certainly
encourages it$ Because of the recent globali)ation trends such as reduction in trade
barrier( this could be a ma5or factor in the increased coffee production due to friendly
trading en&ironment$
Conclusion:
#n conclusion( the paper suggests that it is typically the no&ice that becomes the
entrepreneur$ Starbucks pro&ides us 'ith a good e0ample that e0perts( if anything( are
less likely to become entrepreneur$ #nformation is some'hat related to the creation of
entrepreneur( but it is not the root$ %he root for the creation of entrepreneurship is
identification of opportunity in light of the information$ Coffee making has been kno'n
for centuries but it isn3t until 16=2 'hen someone had the ambition to turn it into a global
lifestyle$ E0perts are content 'ith 'hat they learn and they 'ill li&e a stable life$ 2o&ice
al'ays seeks ne' information and adapt to changing en&ironment$ #t is entrepreneurs like
Bill "ates 'ho refuses to li&e the con&entional 'hite collar life style$ #t is those people
that make our li&es more efficient as an economy$ Entrepreneurship is positi&e entropy
that keeps the economy dynamic and gro'ing$
>ork Citations
1$ http:CC'''$coffeeresearch$orgCmarketCproduction$htm
2$ Jing Chen$ %he Physical /oundation of Economics: an analytical thermodynamic
theory$ >orld Scientific( 2BBA
D$ http:CCen$'ikipedia$orgC'ikiCStarbucks
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