Starbucks Reinvented
Harvard
Business School Professor and historian Nancy
Koeh
has studied Starbucks and its leader, Howard Schultz, for close to 20
years. For her, the company represents much more than a phenomenal
success story.
In
a recently published case, "Starbucks Coffee Company:
Transformation and Renewal," (available soon) Koehn and
coauthors Kelly McNamara, Nora Khan, and Elizabeth Legris trace the
dramatic arc of the company's past seven-plus years—a period that
saw Starbucks teeter on the brink of insolvency, dig deep to renew
its sense of purpose and direction, and launch itself in new,
untested arenas that define the company as it exists today.
"This
case distills 20 years of my thinking about the most important
lessons of strategy, leadership, and managing in turbulence in the
frame of a very relevant company," says Koehn, the James E.
Robison Professor of Business Administration. "As a brand,
leadership, and entrepreneurship scholar, I've been dogging Starbucks
for a long time."
On
a 1995 trip to Seattle, Koehn visited a Starbucks store for the first
time and was struck by what she saw and felt. The notion of a "third
place" between home and work to relax and enjoy the small,
affordable luxury of a special coffee beverage seemed to resonate
with the social and economic moment, she recalls. Six months later
she met Howard Schultz, an entrepreneur who acquired the company in
1987, and was struck by his seriousness of purpose and the breadth of
what he wanted to accomplish.
The
case, Koehn's fourth to focus on Starbucks, opens in February 2007.
Schultz, no longer Starbucks' CEO but still its chairman, is worried
the company is losing its ability to be true to its values while
providing a store experience that conveys a sense of comfort,
connection, and respect for its product and the communities Starbucks
serves.
So
Schultz composed a heartfelt, searching memo to senior leadership. In
it, he bemoaned decisions (for which he accepted responsibility) that
improved efficiency and increased economies of scale but robbed
stores of some of their essential magic, such as the smell of
roasting coffee and the sights and sounds of traditional Italian
espresso machines and baristas at work.
He
also cited the company's rapid expansion and the potential
"commoditization" of the Starbucks brand. "[W]e
desperately need to look into the mirror and realize it's time to get
back to the core and make the changes necessary to evoke the
heritage, the tradition, and the passion that we all have for the
true Starbucks Experience," Schultz wrote.
The
scope and richness of Koehn's case gives it the feel of a
page-turning novel; in that sense, Schultz's memo is the inciting
action for all that follows.
REMAINING TRUE TO CORE VALUES
The
challenge that had confronted Starbucks in the early- and mid-2000s
was one common to many organizations: Could the company continue to
grow while preserving its culture and values? In some areas, the
drive to expand, egged on by Wall Street, was compromising the
company's ability to invest in its partners (Starbucks' term for its
employees), deliver personalized customer service, and maintain a
close connection to the local community.
In
addition, McDonald's and Dunkin' Donuts had emerged as serious
competitors, offering their own lines of specialty coffee beverages.
Even so, Starbucks' financials for 2007, the year Schultz composed
his memo, didn't look so bad. But the entrepreneur became concerned
as he dug more deeply into the numbers. Sure, revenues were up almost
21 percent over the previous year, but had slowed by over a third;
transactions per store were up 1 percent, versus 5 percent the year
before. Same-store sales rose only 5 percent, the smallest increase
in five years.
In
January 2008, Schultz returned as Starbucks CEO, replacing Jim
Donald, the man he and other senior colleagues had chosen to lead the
company.
STARBUCKS SAILS AGAIN
The
case chronicles the blizzard of decisions and initiatives that follow
what could have been the company's death knell as the financial
crisis hit home and consumers cinched their belts.
"Schultz
understood that you can't lift your foot off the gas pedal when
you're attempting to transform a company," Koehn says. "Severe
as its financial needs may be, you also have to figure out what you
will invest in. Schultz knew that if he waited until the company was
out of the woods to invest in new products, communication channels,
and ways of doing business it would be too late—Starbucks would no
longer be relevant."
From
the start, Schultz sent the clear, unwavering message that Starbucks'
transformation would represent a return to its roots and an
uncompromising commitment to core values, such as health care
benefits for any partners working at least 20 hours a week.
At
a March 2008 gathering of 200 senior-level company leaders, Schultz
unveiled a Transformation Agenda that included seven "Big
Moves":
- Be the undisputed coffee authority;
- Engage and inspire our partners;
- Ignite the emotional attachment with our customers;
- Expand our global presence—while making each store the heart of a local neighborhood;
- Be a leader in ethical sourcing and environmental impact;
- Creative innovation growth platforms worthy of our coffee;
- Deliver a sustainable economic model.
The
case provides a behind-the-scenes look at how the coffee company
moved forward on these goals, including the introduction of the
milder Pike Place Roast; the story of its VIA Ready Brew line; the
launch of a loyalty program; investment in and engagement with social
media; focus on a global expansion strategy; and the extension of
social programs. The company closed stores, restructured its
manufacturing and supply operations, and, perhaps most significantly,
took steps to reengage its partners and store managers. In February
2008, Starbucks closed more than 7,000 of its stores across the
country for "Espresso Excellence Training," taking the time
to work with approximately 135,000 baristas to ensure they could pour
a perfect espresso shot and steam milk properly.
For
Schultz, however, that wasn't enough—he wanted to reach the
company's store managers, recognizing them as essential to the
transformation process.
"I
needed an unfiltered venue for expressing my empathy about all that
we were asking our partners to do and telling them plainly what was
at stake," he wrote in Onward:
How Starbucks Fought for Its Life without Losing Its Soul.
The answer, in Schultz's mind, was a three-day conference in New
Orleans in October 2008, a moment when the global economy happened to
be tanking. Starbucks' fourth quarter profits were down 97 percent
from the same time a year earlier; for the fiscal year, net earnings
were down 53 percent to $316 million. The Starbucks board was
reluctant to send 10,000 partners to New Orleans at a cost of $30
million, but Schultz stuck to his guns.
In
addition to rolling up their sleeves and taking part in community
service projects to aid areas of the city still recovering from
Hurricane Katrina, partners participated in team-building events that
reviewed the company's guiding principles and reminded them of their
central role in the customer experience. Schultz also brought in
Bono, lead singer of U2, to announce a partnership to channel
proceeds from holiday beverage sales to the Global Fund in support of
AIDS relief programs in Africa.
The
New Orleans conference was a turning point for Starbucks; in the
"novel" of Koehn's case, it's the climax.
"Investing
in a conference of that size is such an unusual thing to do when
faced with a cash crunch," Koehn says. "Schultz understood
that what saves and breaks businesses is much more than cash. In the
midst of so much turbulence, it's all too easy to pull levers on the
low-hanging fruit of cash and logistics. But you don't save a
business and turn it around without speaking to, focusing, and
calling on the spirit of your people."
Schultz's
experience qualifies him for closer study in Koehn's HBS course Power
and Glory in Turbulent Times: The History of Leadership from Henry V
to Steve Jobs. Not all managers are confronted in their careers with
the sort of transformation challenge faced by Starbucks, but
Schultz's reflections and actions are instructive for anyone charged
with finding sources of strength, innovation, and renewal in today's
turbulent business environment, Koehn says.
ABOUT THE AUTHOR
Julia
Hanna is
associate editor of the HBS Alumni
Bulletin.
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