Susan M. Jensen Srivatsa Seshadri Larry G. …perpustakaan.unitomo.ac.id/repository/Barista's Battle...etap_518 133..146 Barista’s Battle Scars Susan M. Jensen Srivatsa Seshadri

etap_518 133..146

Barista’s Battle ScarsSusan M. JensenSrivatsa SeshadriLarry G. Carstenson

This case tells the story of an entrepreneur couple who launched an upscale retail coffeebusiness in a mid-sized college town in the Midwest. Barista’s enjoyed immediate andoverwhelming market acceptance and was even named “Entrepreneur of the Year,” yet hadtremendous difficulty in obtaining expansion capital. The choice of legal advisor also provedto have enormous impact on the future viability of the business. Written from the perspectiveof the entrepreneurs, the case provides unique insight regarding the importance of cultivat-ing the effective professional relationships needed for business success.

Act One, June 2001: The Eternal Line at the Drive-Through

“We can never close!” Kelly1 realized, with a mixture of wonder and dread. As sheworked feverishly to fill orders, Kelly watched the line of cars waiting to be served stretchacross two city blocks. Since opening 6 months ago with a loan from Community Bank,sales had been booming at the drive-through coffee shop. With its distinctive Europeandesign, unique products, and commitment to personalized service, Barista’s had quicklybuilt a reputation as the quality place for gourmet coffee.

Kelly felt so proud to have realized her dream of creating a drive-through setting thatmirrored the experience of an upscale sit-down indoor restaurant, with beautifully tendedgardens, waterfalls, and soft music coming from outdoor speakers. The shop was built ona small plot of land that was surrounded on all sides by other businesses. She utilized herprior experience as an interior designer to create a uniquely welcoming location (seeFigure 1). No impersonal, scratchy loudspeaker ordering system here; instead, Kelly andher staff fostered a close interaction with customers by taking their orders face to face atthe window. And no operating hours were posted. The business operated on the policy that“if the lights are on, the business is open.” Kelly chuckled as she recalled how she spentmonths selecting the right type of equipment for the new business but had forgotten allabout buying a “closed” sign for the store. That oversight actually offered Kelly greatopportunity, especially since she had been confident there was unmet demand for “after-dinner” coffee in this Midwestern college town of 40,000 people. Barista’s was one of thevery first coffee shops in the region, so Kelly found herself educating customers (who

Please send correspondence to: Susan M. Jensen, tel.: (308) 865-8189; e-mail: [email protected] case was presented by the authors at the Midwest Academy of Management Conference, St. Louis,Missouri in September 2008.1. Names, years, and months have been disguised to protect the entrepreneurs from any legal problems fromtheir ex-attorney as a result of publicizing their experiences, however remote such a possibility might be. Theprogression of the case, however, is authentic.

PTE &

1042-2587© 2012 Baylor University

133January, 2013DOI: 10.1111/j.1540-6520.2012.00518.x

typically viewed coffee as a “morning” drink and were most familiar with coffee brewedat home or available at gas stations) on the different qualities and types of coffee. Barista’snot only offered a wide variety of coffees, but also specialty teas, cocoas, fruit smoothies,Italian sodas, organic juices, pastries, shortbreads, and organic food bars. Kelly created a“happy hour” from 5 to 7 pm to build awareness of different “after dinner” drinks. At first,sales in the evening were slow, but it did not take long before traffic was steady throughoutthe day and night. Kelly just continued to extend the operating hours, and customers soondiscovered they would be served any time the lights were on, day or night. Of course, thatmeant somebody needed to serve those customers, day or night!

Kelly had initially chosen a drive-through facility since she was convinced most of usseem to live in our cars. But now customers drawn in by the beautiful surroundings wereasking for a place to sit down and enjoy their coffee and the gardens, and Kelly noticedpeople often parked on streets nearby to drink their coffee. While space was limited, Kellyinstalled a bike rack and a few benches by the waterfall, which always seemed to beoccupied.

Her customers’ eagerness to linger and savor their coffee (as well as their patience inwaiting for their custom order to be freshly prepared) gave Kelly a great sense ofsatisfaction. Barista’s was quickly establishing a reputation as a distinctive specialtycoffeehouse, and customers appreciated the art and skill involved in crafting the perfectcup of coffee. Kelly’s skilled staff did not simply flip open a coffee pot tap and fill amug—they took the time needed to blend delicious brews, use proper foaming techniques,and even create unique “coffee art” (e.g., pouring steamed milk into a piping hot cup ofespresso and generating a rosette design on the surface) to delight customers.

Figure 1

Sketch of the Original Concept of Barista’s Drive-Through Location

134 ENTREPRENEURSHIP THEORY and PRACTICE

During the next few months, revenues continued to grow steadily, with sales revenuemore than 10% above what Kelly had expected. Her pride at achieving success beyondexpectations in such a short period of time was tempered by both pure exhaustion andconcern about how to capitalize on this growing demand—especially since Kelly hadinvested nearly $40,000 (a huge chunk of her savings) to launch the business. Kelly tooka deep breath, gave her head a little shake, and told herself to practice the advice she gaveto her staff: “Don’t look at the end of the line . . . just look at the next car.” Still, Kellyknew she needed to look ahead to determine the future of Barista’s.

How could she manage the seemingly eternal rush of cars? Was it time to considerexpanding the business . . . and if so, how?

Act Two, October 2001: Time to Educate Bankers, Not Just Customers

Ten months to the day that Barista’s had opened its doors, Kelly stormed out ofCommunity Bank, holding back tears of frustration. She had just spent the last hourexplaining her plans to expand the business by opening a second location in the downtownshopping area. After an exhaustive search, Kelly and her business partner, Bob Jones, hadfound the perfect spot. This location would not only have a drive-through, but also a largeoutdoor patio, indoor seating, and ample space for future expansion (see Figure 2 for asketch of the proposed new location). Keeping with the “landscape as a billboard”approach, Kelly was confident this downtown location would best meet the customers’needs, as they could drive through for their morning coffee, meet at the patio in theafternoon or evening, and enjoy their beverages indoor by the fireplace on chilly days. Thedowntown site would also be appealing to patrons of nearby stores, theatres, andmuseums.

Kelly had arrived at the bank with her business plan outlining the expected costs,design, and anticipated sales associated with the expansion and had worked hard to writea clear and concise executive summary of the plan (see Appendix). With nearly $40,000as her original owner investment, she requested a loan of $290,000 to be used for buildingconstruction, landscaping, purchase of equipment and fixtures, and working capital. Kellyhad initially borrowed $158,000 to launch the business, so this additional loan wouldincrease her outstanding debt to the bank to a total of 488,000. Traffic at the original

Figure 2

Sketch of the Proposed New Downtown Location

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drive-through location continued to be so overwhelming they had begun a free deliveryservice as a way to help shorten the queue and wait time, and their loyal customers kepturging them to open another location. Strong demand for premium coffee was evident, asBarista’s was now one of seven coffee shops in town. Barista’s marketing approach, whichincluded a “frequent guest card” and visible support for the local children’s museum andother activities, had helped to heighten awareness and generate a loyal customer base.Kelly was also armed with Barista’s historical financial statements depicting that strongsales volume (see Table 1). “The banker laughed when we told him we would generate$300,000 in sales our first year . . . and we actually had $329,000 in sales!” Kelly recalledwith pride as she prepared for the meeting that morning. But her hope that the lenders atCommunity Bank would share that excitement was quickly dashed.

As the meeting began, Cal Smith, the Vice President of Community Bank who hadbeen recently assigned to the Barista’s account, was cordial but cool. After reviewing theinformation Kelly provided and listening to her plans for the new location, he stated,“Well, Kelly—it does look like you met your first year’s sales projections, but you haven’tshown a profit yet, and your gross margins are way below the industry averages forrestaurants. The wages you are paying your employees are much too high.” Kelly tried toexplain that Barista’s should not be considered a restaurant, since the employees arehighly trained and earn nearly $10 per hour (the industry average for baristas), ascompared with the typical restaurant server who relies primarily on tips as their hourly payis well below the minimum wage. But Cal simply responded “Restaurant industry aver-ages are the closest we have to use for comparison, and your business just doesn’t comparewell. We use the Robert Morris Associates Annual Statement Studies book as our refer-ence, which shows an average gross margin for restaurants of 60%, compared to yourgross margin of just 45%.2 Besides, you’ve only been in operation for a year, so it’s justtoo soon to think about expanding, especially since you already pledged all your assets assecurity for your first loan. And your design for this new location seems to include anawful lot of “fluff” that isn’t really needed. Why, you want $35,000 just for landscaping?That is odd and unrealistic.” Trying hard to keep her temper in check, Kelly responded, “Ifyou come by our business any time of the day, you’ll see the tremendous demand for ourproducts. As the first gourmet coffee shop in town, we’ve transformed skeptical peoplewho considered coffee a cheap commodity into loyal customers who understand andappreciate our specialty products and service. And that ‘oddness’ of Barista’s, withattention paid to the surroundings and ambience, is what has made us so successful andcreated such passion in our employees and customers. I know you’ve always told meyou’re not a coffee drinker, and you have never taken us up on the invitation to stop by forsome free samples. But if you did, you would see how the demand for our business isreally growing in this region. We need to expand and take advantage of that growth, or elsebe left behind.”

As she walked to her car after the meeting, Kelly was dumbfounded that after allthe information she had shared, Cal simply led her to the door stating “maybe afteryou’ve been in business for another year or two, we can consider your expansionplans. But as of now, Community Bank won’t extend any additional financing toBarista’s.” How in the world could she convince the bank that the time to expandwas now, not later? She had helped educate customers about the gourmet coffeeindustry; why couldn’t she seem to educate the banker? Kelly thought back to thecountless hours she had devoted to the business this past year. Nobody spent more

2. The banker told one of the case authors that he used SIC 5812 for the industry comparative data.


Table 1

Income Statement—Actual 1st Year Operations and Year 2 Projections

Year 1 (8 months actual) Year 2 (projected)

Sales revenue $329,000 $673,750Less sales tax (7%) ($23,030) ($47,163)Net sales revenue $305,970 $626,587Cost of goods sold ($168,283) $187,976

Gross profit $137,687 $438,611Operating expenses: ($198,576) ($355,160)

Employee wages ($96,000) ($192,000)Owner salaries ($60,000) ($60,000)Payroll taxes ($10,176) ($20,160)Advertising ($4,500) ($5,200)Insurance—liability ($1,200) ($2,400)Insurance—buildings ($1,500) ($3,000)Cash register lease ($2,400) ($4,800)Maintenance expense—buildings ($1,800) ($3,600)Maintenance expense—landscape ($1,500) ($4,000)Utilities ($5,300) ($10,600)Professional fees ($1,800) ($2,000)Rent $0 ($13,200)Interest expense ($12,400) ($34,200)

Net income before tax ($30,596) $83,451

Proposed sources and uses of funds:

Sources: Uses:

Owner investment $26,000 Leasehold improvements $220,000Bank loan $290,000 Landscaping $35,000Total sources $316,000 Equipment/fixtures $40,000

Inventory $5,000Working capital $16,000Total uses $316,000

Balance sheet (as of August 31, 2001)

Assets Liabilities and equity

Cash $7,500 Accounts payable $44,296Inventory $6,200 Long-term debt $158,000Total current assets $13,700 Total liabilities $202,296Fixtures/equipment $28,000 Initial investment $40,000Real estate $170,000 Year 1 earnings ($30,596)Total fixed assets $198,000 Owner’s equity: $9,404Total assets $211,700 Total liab. & equity $211,700

Financial statements presented to Community Bank with the business plan.

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time in the business than she did and, frankly, she knew the business and industry farbetter than anyone else, including the banker! Bob had less of a hands-on role in thedaily operations of Barista’s; he had kept his full-time job so they would not be solelydependent on the new business for their income. Bob played a key strategic visioningrole, however, and Kelly always valued his keen business sense. She and Bob bothknew in their hearts that the time for expansion was now, and they must be proactiveor lose their competitive advantage. How could they get the banker’s support? WhenKelly and Bob had first started Barista’s, they had borrowed $158,000 from CommunityBank since Bob had banked there for years. In fact, they hadn’t taken their fundingproposal anywhere else, and had just accepted Community Bank’s terms withoutquestion.

Why did the banker not share her excitement about market opportunities? How couldshe find a banker who understood the industry and was willing to help Barista’s grownow? What other funding options might exist?

Act Three, June 2002: Popularity Creates New Problems

As Kelly sat in the patio garden of the downtown Barista’s, she reflected back onthe frustration she had endured the previous year when trying to obtain additionalfinancing from Community Bank. Irritated because their banker had never set foot inthe business, nor been willing to learn about the gourmet coffee industry, Kelly had leftthat meeting a year ago determined to expand, with or without bank support. And, asshe gazed about the new location, filled with customers chatting and enjoying the gor-geous summer evening, Kelly realized her determination had proven rather costly. “Wedid make some poor choices, such as cashing in our retirement accounts (and paying a$30,000 penalty) and maxing out our credit cards. But it seems to have been worth it,”she mused. Kelly and her business partner, Bob, had considered the possibility of bring-ing in an outside investor but were afraid nobody else would truly share their vision. Sothey scraped together all they could of their own money and proceeded with the expan-sion plans for a combined drive-through and a sit-down coffee place, including theupscale design and landscaping that the banker had considered to be unnecessary“fluff.” The bank considered them foolish, and the construction of the new location wasa hot topic of conversation in town as the tile roof, brick patio, water fountains, andextensive gardens made the downtown Barista’s the most unique (and, some argued,most expensive) building in the county. Although Kelly liked to say they “paid the priceof being pioneers” in the gourmet coffee business, the steady flow of customers at boththeir locations, despite the opening of two Starbucks locations and a Caribou Coffee intown, proved that the risk was worthwhile. Annual sales volume now exceeded$670,000, and just as customers had urged Kelly to create another location in town,customers who came from across the state and even from neighboring states were nowtelling Kelly, “we need one of these Barista’s in my home town!” Kelly was excitedabout the idea of expanding Barista’s to other cities but was not sure how to finance ormanage more locations.

As gourmet coffee became increasingly popular in the region, with more local shopsopening, she was also concerned about “copy-cat” operations. Kelly’s concern grew whenshe noticed on more than one occasion people taking photos of the downtown anddrive-through locations, or sketching the design of the building and patio. She had alsoheard rumors on various occasions that some of these “admirers” were actually hoping tomimic Barista’s in their towns.


She was now pondering how to prevent these “copy-cats.” Having exhausted all of herand Bob’s personal finances, she had few financial resources to open her outlets in othertowns and move in before other competitors established their presence.

What alternatives did she have? How could she prevent others from stealing her idea?

Act Four, October 2002: Barista’s Achilles’ Heel?

Franchising appeared to be a viable way to expand the business and hopefully protecttheir business concept. Kelly had purchased a book about franchising and talked to hercontacts in the Specialty Coffee Association of America, the trade association that hadbeen a wealth of information ever since Kelly first considered starting a gourmet coffeebusiness. As she researched franchising, Kelly still needed a banker who understood thecoffee business. Who would have dreamed one could find a bank by purchasing a bag ofcoffee beans? Several months earlier, still stinging from her frustrating attempts to educatethe local bankers, Kelly tried a creative way to identify banks familiar with the coffeeindustry. She purchased a bag of beans from The Grist, the very first coffee shop in theMidwest, located approximately 300 miles from her store. Kelly paid for the beans bypersonal check, and when the check cleared she could tell from the imprint on the backthat the check was processed by Commerce Trust. Kelly then contacted Commerce Trustand, after a few short phone calls, had a banker who was enthusiastic (and informed) aboutopportunities for Barista’s.

However, Kelly soon had to grapple with another challenge. How could she findsomeone to help create and promote a franchise? Kelly had contacted a lawyer who wasa family friend, but he told Kelly he was not familiar with franchising and suggestedshe and Bob check the websites of various firms to find attorneys with franchisingexpertise. She followed his advice and found Olsen & Olsen, a local firm whose websitetouted its experience in franchising. Kelly and Bob asked people in the community whohad worked with this firm, and all the clients of Olsen & Olsen with whom they spokegave the firm glowing reviews. With the help of an attorney from Olsen & Olsen, a newfranchising division (wholly owned by Kelly and Bob) was created: Barista’s &Buddies.

Just months after the downtown location was open, the first franchise was sold. Soonothers followed. The cash flow generated from selling franchises (which included a$45,000 initial franchise fee and 4% royalty rate) made it possible for Barista’s tosubstantially increase its market reach. Kelly was, however, disturbed by a telephoneconversation she had with a prospective franchisee in March. Kelly remembered himsaying that his lawyer indicated the franchise documents did not satisfy Federal TradeCommission standards and suggested he not sign the franchise documents, but he wentahead and signed. Something about this conversation kept nagging her. Kelly realized shehad placed a great deal of trust in her attorney.

What steps should Kelly take now to address her concern about the conversation withthe prospective franchisee?

Act Five, December 2004: The Devil Is in the (Franchising) Details

“Cease and desist franchising activity. You are facing a charge of fraud with a$500,000 fine and potential prison time.” Kelly’s hands shook as she read the letter fromthe Federal Trade Commission (FTC). How had it come to this?

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Two years after the first franchise was awarded, the franchise division of Barista’s &Buddies included 21 franchises in three states. Kelly was proud not only of their successin obtaining eager franchisees, but also that Barista’s had recently been recognized as thestate’s “Entrepreneur of the Year” by the Small Business Administration. What an honorand validation of their ideas and hard work! As she held the letter from the FTC, however,she felt nothing but fear. In no ambiguous terms, it demanded Barista’s & Buddies ceaseand desist franchising activity as the company was faced with the very serious legal chargeof fraud. What was she to do? She and Bob had invested their life savings in this venture,and now this?!

Kelly recalled that troubling phone call from a franchisee a year ago who hadchallenged the validity of the franchise document. At that time, the franchisee told Kellythat his attorney had advised him to not sign any documents, as they did not satisfy FTCstandards. That franchisee, however, had been so impressed with the Barista’s concept andthe hands-on approach Kelly used to select franchisees, he opted to sign the contractdespite his lawyer’s concerns. Immediately following that phone conversation with thefranchisee, Kelly had contacted her franchise lawyer for clarification. This attorney hadbeen selected based on information on his firm’s website touting his franchise expertise,and he reassured Kelly that the documents were fine. According to the FTC, however, thefranchises were, in fact, illegal! It appeared that the franchisee who told Kelly that hislawyer advised him not to sign the documents was right! Now, a year later with the FTCletter in hand, Kelly again called her franchise attorney. Once again, he reassured Kellythat she had nothing to worry about and that he would take care of it. Kelly hung up thephone, feeling only a little less worried.

Kelly also had another troubling issue demanding her attention at the time. A fewweeks prior, Barista’s & Buddies had decided to revoke a franchise. This franchise wasowned by a man in a neighboring state who appeared to have ulterior motives. Kelly andher business partner, Bob, were uncomfortable with how this franchisee would bringgroups of people to tour the Barista’s downtown location, always without permission andwhile Kelly and Bob were out of town. Further investigation indicated this franchisee wasopening his own chain of coffee shops and appeared to be using Barista’s as a training andidea generation source, contrary to the spirit of the franchise agreement. The decision torevoke the franchise was a difficult one for Kelly, as she prided herself in “buildingrelationships and being able to assess people’s character.” Yet within weeks of revokingthis franchise, Kelly now stood with this letter in her hand, claiming the franchises wereillegal and rescission payments were due each franchisee. Her heart racing, she askedherself: Was there some connection between the revoked franchise and this FTC letter?

What (if any) recourse does she have against the lawyer who drafted the documentsand who assured her all was fine? What is in store for Barista’s? How does she get out ofthis mess?


Appendix

Executive Summary of Barista’s Business Plan—September, 2001(Presented to Community Bank when requesting funding for expansion to downtown

location)Nothing beats a great cup of coffee; it’s the American way. Some of us drink coffee

in the morning and some of us drink it all day long. As a matter of fact, decaf coffeedrinkers make up a considerable portion of the market, starting with caffeinated beveragesin the morning and switching to decaffeinated for the remaining part of the day andevening. The National Coffee Association reports that 80% of adults over 18 drink coffeeon a daily or occasional basis. Year-over-year coffee consumption continues to grow at anaverage of 12.8%. Great coffee and espresso drinks are a staple in many countries and arenow accelerating in popularity across America. Sixty-two percent of adults report drinkinggourmet coffees on a regular or occasional basis, and 14% drink gourmet coffees daily. Weare learning to appreciate and understand coffee and tea in very much the same way weappreciate select wines and fine foods. Barista’s offers customers a selection of beveragechoices that not only include espresso drinks, but teas, smoothies, juices, Italian sodas,and all-natural health and energy drinks. We also feature freshly prepared pastries andsnacks.

Barista’s provides more than just a great cup of coffee. Imagine a stucco covered villacovered with a curved Italian tile roof, awnings, hanging baskets of flowers, invitinglandscaped and lawn areas, old brick paths, and a place to sit and enjoy a friends’ company[see Figure 1]. That’s Barista’s and we’re so much more than a “drive thru.” Our businessapproach is diverse providing drive-thru espresso for convenience, a sit down patio forrelaxation and the ability to purchase retail items. Customers enjoy our full menu ofproducts from a walkup window. These amenities are surrounded by a beautiful outdoorcourtyard designed to appeal to all of your senses. We also understand that it’s critical thatevery experience meet our customer’s expectations. All employees receive intensivetraining, which includes beverage preparation and equipment use, as well as customerservice training

The tremendous popularity of our drive-through location demands that we expand ouroperations to a second location. Based on feedback from customers, a larger facility withindoor dining and relaxing outdoor patio is needed and would be well received. An idealsite has been located in the downtown region. This location has great visibility, readyaccess to parking, and is located near the Museum of Art and other boutiques which appealto Barista’s customers. We plan to lease the location and construct a building onsite.Start-up costs for this location are estimated to be $316,000 resulting in estimated firstyear sales of between $449,000 and $673,000, and an estimated net profit of $49,440–$110,185. We are seeking a loan in the amount of $290,000 which will be used forbuilding construction, landscaping, purchase of equipment and fixtures, and workingcapital. The remainder of the new location start-up costs will be funded by our personalinvestment.

Susan M. Jensen is an Associate Professor of Management at University of Nebraska at Kearney, College ofBusiness and Technology, Kearney, NE.

Srivatsa Seshadri is a Professor of Marketing at University of Nebraska at Kearney, College of Business andTechnology, Kearney, NE.

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Larry G. Carstenson is a Professor of Business Law at University of Nebraska at Kearney, College of Businessand Technology, Kearney, NE.

The authors wish to express their deep gratitude to the entrepreneurs for their willingness to not only sharetheir story but also to relive their painful experience while sharing their story.

Note to Instructors Belonging to Teaching Case “Barista’s Battle Scars”

This case presents a true-life (albeit disguised) account of an entrepreneur couple’sexperience of optimism, success, frustration, and mistakes. This case demonstrates thechallenges entrepreneurs face in managing growth and building the professional relation-ships needed for business success. The importance associated with educating consumersand professionals (including bankers, accountants, and lawyers) about the potential of thegourmet coffee industry is also highlighted.

Case studies often document a successful application of all aspects of businessstrategy. Learning from the successes of others can be valuable; however, the lessons thatcan be learned from cases highlighting unsuccessful business practices are far more useful(Abraham & Brajac, 1997). Focusing on the causes of failure has, for example, resulted insignificant improvements in both the airline and healthcare industries. Unfortunately,public dissemination of information regarding failed businesses is limited. Rarer still arecases that highlight a business like Barista’s, which appears to be successful and a modelfor others, and was even the proud recipient of the state’s “Entrepreneur of the Year”award. Yet after a short life span of just 48 months (and just 1 year after having won thataward), the owners of Barista’s face the heart-wrenching decision of having to potentiallyshut down the business. The case is written in sequential “acts” that demonstrate theevolving challenges faced by the entrepreneurs involved in Barista’s. The executivesummary and financial section of the business plan created by the owners when they wereseeking expansion financing are provided as exhibits following the case. The entirebusiness plan is also provided as part of the Teaching Note.

Key Issues and Discussion PointsThe case focuses on the creation and potential demise of a specialty coffee retailer and

highlights the challenges faced by the entrepreneurs as they managed growth and estab-lished the professional relationships needed for business success. Each “act” concludeswith questions the entrepreneur must address (and reflects the actual issues that “Kelly andBob” were grappling with at that time). Key issues and points for class discussion include:

1. the need for an entrepreneur to not only have a passion for the business, but alsothe ability to convey the business potential to key stakeholders (such as bankers,accountants, and lawyers) and to understand the unique needs and concerns of thosestakeholders;

2. the importance of due diligence when selecting professionals who will be involved asadvisors in the enterprise;

3. ways to engage in relationship marketing with customers and transform a perceivedcommodity into a specialty product;

4. understanding the product is more than the core offering (coffee) and includes intan-gibles such as the appearance of the store, friendliness of staff, etc.; and

5. the financial and emotional cost of rapid business growth.


Potential UsesThis case can be used to illustrate the decisions faced by entrepreneurs regarding (1)

expansion and modes of expansion; (2) judicious choice of creditors and service provid-ers; and (3) the painful emotional and financial costs faced by entrepreneurs even whentheir business is well accepted by the marketplace. Additionally, it can used to demon-strate the role of creativity in differentiating a commodity product in ways beyond justbranding.

Potential AudienceThis case has direct potential for entrepreneurship, small business management, and

new venture marketing courses, at both the undergraduate and graduate levels. Addition-ally, the case can be used in workshops directed toward nascent entrepreneurs. It alsohighlights issues commonly addressed in strategic management courses, as well as morespecialized classes in entrepreneurship programs focusing on new venture financing andintellectual property.

Suggested Teaching ApproachWith its rich and complex content, the Barista’s story has been discussed in each of

the co-authors’ classes, which include entrepreneurship, marketing, and business law, atboth the undergraduate and graduate levels.

Users of this case can apply a variety of pedagogical techniques. The case is writtenin sequential “acts” to expand the ways it can be used in various courses. Small businessmanagement and entrepreneurship classes might wish to use the entire case, or simply usesome acts as background information and select one act as the primary focus (e.g., use ActFour to examine the advantages and disadvantages of franchising). The executivesummary and financial section of the business plan prepared by the entrepreneur areprovided as Appendix and Table 1 to offer additional richness for analysis and discussion,and the plan in its imperfect entirety is also included as part of the Teaching Note.Instructors wishing to focus on accounting and financing aspects could also find thefinancial statements included in the business plan useful for analysis, and might wish toassign students the task of developing their own projected financial statements, perhapsusing more conservative estimates than those shown in the business plan. Please note thatthis business plan (while modified slightly to retain confidentiality) reflects the imperfectdocument originally created by Barista’s owners. Instructors may wish to challengestudents to critique this “real life, messy business plan” and offer suggestions for improve-ment, and/or invite local lenders to speak to students about how a lender would critiquethis plan. Suggested guidelines for these forecasting and business plan critique assign-ments are included in the Teaching Note. Also included in the Teaching Note are guide-lines for additional supplemental assignments, including a SWOT analysis, product lifeanalysis, and industry analysis.

The instructor could choose to provide the student with the entire case and discuss thehistory of the business, from its inception to its potential demise. Alternatively, instructorsmay release the case in a piecemeal manner. They could (1) share each act sequentially,ending with the problem facing the entrepreneurs; (2) ask students what the entrepreneursshould do; (3) reveal to students what the entrepreneurs actually did and elicit studentinput as to what the consequences of the entrepreneurs’ actions might be; and, finally, (4)reveal the actual outcomes. This latter method would be best suited for an upper-level

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undergraduate seminar or a graduate level course or a workshop targeted toward nascententrepreneurs. Each act of the case offers opportunity for reflection and consideration of“What should Kelly and Bob do now?” and “What might they have learned from thisexperience?” The Teaching Note also offers some additional reflection questions beyondthose provided at the end of each act in the case.

Finally, students can be asked to submit a one-page reflective paper on what theylearned from the experiences of the entrepreneurs. This latter method was used by one ofthe authors in executive MBA classes taught in Europe, with excerpts of those MBAstudents’ responses included in the Teaching Note.

Role of the AuthorsAll events and individuals in this case are real. Information has been disguised to

protect proprietary interests without compromising the learning value of the case. Theentrepreneur featured in the case, Kelly, was a frequent guest speaker at the entrepreneur-ship class taught by one of the co-authors. All three co-authors were customers ofBarista’s. When Barista’s troubles became the focus of local media, the co-authorsapproached Kelly to better understand what had transpired to this seemingly very suc-cessful business. Kelly eagerly agreed to share her story with the authors so others couldlearn from her experiences and mistakes. Kelly worked closely with the co-authors in thedevelopment of the case.

Outside or Supplementary ReadingsAbraham, B. & Brajac, M. (1997). Real experiments, real mistakes, real learning. In S.Ghosh, W.R. Schucany, W.B. Smith, & D.B. Owen (Eds.), Statistics of quality (pp.121–136). Boca Raton, FL: CRC Publications.

We used this article as supplementary reading in an EMBA class to focus on theconcept that there is much to learn from mistakes. The greatest insight the EMBA studentsgained from this reading was that while learning from mistakes is a cliché, it cannot beaccomplished if there is no transparency, and transparency cannot occur if there is fear ofreprisals. The willingness of Kelly to go public with the mistakes they committed wasseen by the students as an act of generosity and community service. Furthermore, theygenerally concluded that learning from mistakes is much more significant than learningfrom the successes that are related in most case studies. As Narayan Murthy, Chairman ofInfosys India, said to graduating students in his graduation address to New York Univer-sity on May 9, 2007, “It can be much more difficult to learn from success than fromfailure. If we fail, we think carefully about the precise cause. Success can indiscriminatelyreinforce all our prior actions.”

Adam, D. (2009). With less computing power than a washing machine. Available athttp://www.guardian.co.uk/science/2009/jul/02/apollo-11-moon-technology-engineering,accessed 12 August 2009.

This story is about NASA’s efforts in launching a multistage spacecraft, accomplish-ing mid-space docking maneuvers, managing the heart-stopping final descent in a clumsylunar lander, and finally getting the astronauts back to earth. The main point the studentsidentified after analyzing “Barista’s Battle Scars” in conjunction with this article is thatthere can be several “single points of failure” in any venture, any of which could crashthe entire system. In business, as in space flight, one single point of failure can be the


difference between survival and demise, between life and death. Additionally, the studentsbecame acutely aware that multiple mistakes in business (such as attempting aggressivegrowth, choosing the wrong attorney, and taking on all liabilities of the business) cancombine multiplicatively, not summatively, to create a “tsunami” for an entrepreneur.

Adamy, J. (2008, January 7). McDonald’s takes on a weakened Starbucks—food giant toinstall specialty coffee bars, sees $1 Billion business. Wall Street Journal, p. A1.Ruggles, R. (2006, May 8). Coffee margins heat up, inspire gourmet-brew binge amongQSRs. Nation’s Restaurant News, pp. 6 and 121.

These two articles describe the efforts of McDonald’s and other firms to poachStarbucks’ customers, and provide students an overview and future prospects of thisindustry. Experts argue that “cups continue to runneth over with upgraded premium andhigher-quality coffees at quickservice restaurants” and forecast that “premium coffees,following demographic trends, will continue to percolate.” Starting in 2008, MacDonald’sinstalled coffee bars in nearly 14,000 of its U.S. restaurants, with “baristas” servingcappuccinos, lattes, mochas, and the Frappe, similar to Starbucks’s ice-blended Frappuc-cino. Burger King has introduced premium coffee, as have smaller chains such as the460-unit Del Taco of Lake Forest, California. Coffee bean behemoth Dunkin’ Donuts,which serves 2.7 million cups a day, extended its coffee and espresso lines with newgourmet offerings. These articles provide students an idea of the lucrativeness of thisindustry. In the EMBA class, one of the authors used these articles as part of an assignmentthat required students to apply Porter’s 5-forces model of competitive forces to thecoffee-beverage-serving industry.

Feld, B. (2004, March 24). The entrepreneur’s financial fitness checklist. Business WeekOnline.

While creating a growth business can be exhilarating, many entrepreneurs, especiallythose starting a company for the first time, do not pay enough attention to some of coreissues surrounding the financial management of their businesses. This article offers achecklist that students can use when analyzing the case to evaluate Kelly’s business planand her financial fitness.

Field, A. (1999, May). Getting the bank to yes. Success, 46, 67–71.

This article lists the basic questions that most bankers ask before approving businessloans and which should be addressed in the business plan: expected cash flow, experienceof the entrepreneurs, entrepreneurs’ current assets, break-even analysis, staffing plans,other investors sharing the risks, and credit history of the entrepreneurs. Instructors canuse this article and ask students to create a checklist that banks can use to approvesmall-business loans, thus placing students in the role and mindset of a small-town banker.One of the authors had students use this article to develop questions to ask local lenderswho were guest speakers.

Gray, S. (2005, April 12). Coffee on the double. Wall Street Journal, p. B1.

This article was used by the authors to offer students insight into the inner-workingsof a coffee bar. In particular, students learn the operational intricacies of running a coffeeshop that serves a market with diverse tastes and needs. After reading the article, studentsshould come away with a clear understanding of how speed, skills, and product mixdetermine the success of a coffee shop. As Silvia Peterson, Starbucks’s director of store

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operations said, “This is a game of seconds,” adding that she and her team of 10 engineersare constantly asking themselves, “How can we shave time off this?” For example, a fewyears ago, engineers noticed that “baristas”—the Starbucks employees who preparedrinks—had to dig into ice bins twice to scoop up enough ice for a Venti-size coldbeverage. “The old Venti scoop didn’t give you enough ice,” Ms. Peterson says. Engineersexperimented with ceramic coffee mugs, which then led them to develop one-piece plastic“volumetric ice scoops.” But the handles kept breaking, so engineers had stronger onesmade. The new scoops helped cut 14 seconds off the average preparation time for blendedbeverages of about 1 minute.

Mackey, J. & Valinkangas, L. (2004). The myth of unbounded growth. Sloan ManagementReview, Winter, 89–92.

There is a deeply held assumption that neither a company nor its management is viableunless it is able to grow. Growth gives investors a feeling that management is doing its job.Growth is typically perceived as a proactive (rather than a defensive) strategy. Or maybe, asthe Red Queen says in Lewis Carroll’s Through the Looking Glass, “Here it takes all therunning you can do to keep in the same place. If you want to get somewhere else, you mustrun at least twice as fast as that!” The authors had graduate-level students discuss this articleto help them understand why Kelly was so eager to grow the business so quickly.

Politis, D. & Gabrielsson, J. (2009). Entrepreneur’s attitudes toward failure: An experi-ential learning approach. International Journal of Entrepreneurial Behaviour & Research,15(4), 364–383.

This article has helped students gain a unique perception of entrepreneurs who fail.Most importantly, students realize there is much to learn from failure. The authors employtheories of experiential learning to examine why some entrepreneurs have developed a morepositive attitude toward failures compared with others. Empirical findings support theguiding proposition that more favorable attitudes towards failing can be learned throughentrepreneurs’ life and work and previous start-up experience is strongly associated with amore positive attitude toward failure. Moreover, the authors found that experience fromclosing down a business is associated with a more positive attitude toward failure. Theseresearch findings add to our knowledge of why some entrepreneurs have a more positiveattitude toward failures compared with others. It also provides some general implicationsfor our understanding of entrepreneurial learning as an experiential process.

Spors, K. (2009, February 23). So, you want to be an entrepreneur? Wall Street Journal.Small Business Report.

This article lists 10 questions to ask to see whether one is up for the challenge ofentrepreneurship. In particular, it addresses the ability to bear financial risks. The authorshave used this article to help undergraduate students explore the potential advantages anddisadvantages of business ownership.

Sull, N.S. (2007, June 16). So you’re ready to seize that business opportunity? Wall StreetJournal Online.

The rapid growth required to seize an opportunity places enormous strains on acompany’s resources, organization, balance sheet, and management. This article posesfive key questions entrepreneurs and managers should ask themselves before scaling apromising initiative and can be used as a framework to analyze the launch and expansionof Barista’s.


Susan M. Jensen Srivatsa Seshadri Larry G. …perpustakaan.unitomo.ac.id/repository/Barista's Battle...etap_518 133..146 Barista’s Battle Scars Susan M. Jensen Srivatsa Seshadri

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