10/31/2018 Starbucks Reinvented

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CATEGORIES Nancy Koehn's new case on the rebirth of Starbucks under Howard Schultz ECONOMIST'
"distills 20 years of my thinking about the most important lessons of
Popular strategy, leadership, and managing in turbulence." 24 OCT 2018 OP-ED

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Harvard Business School Professor and historian Nancy Koehn has studied 22 OCT 2018 SHARPENING YOUR
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Starbucks and its leader, Howard Schultz, for close to 20 years. For her,
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the company represents much more than a phenomenal success story.
11 SEP 2017 RESEARCH & IDEAS
In a recently published case, "Starbucks Coffee Company: Transformation WHY EMPLOYERS FAVOR
and Renewal," (available soon) Koehn and coauthors Kelly McNamara, Nora MEN
Khan, and Elizabeth Legris trace the dramatic arc of the company's past
17 MAY 2017 RESEARCH & IDEAS
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 MINORITIES WHO
launch itself in new, untested arenas that define the company as it exists 'WHITEN' JOB RESUMES
today. GET MORE INTERVIEWS

"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 FEATURED FACULTY
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 NANCY F. KOEHN
entrepreneur who acquired the company in 1987, and was struck by his
seriousness of purpose and the breadth of what he wanted to accomplish. James E. Robison Professor
of Business Administration
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 CONTACT
company is losing its ability to be true to its values while providing a store Send an email
experience that conveys a sense of comfort, connection, and respect for its
product and the communities Starbucks serves. → More Articles

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10/31/2018 Starbucks Reinvented
CHANGE MANAGEMENT ETHICS

FOOD AND BEVERAGE

GROWTH MANAGEMENT

LEADERSHIP

MOTIVATION AND INCENTIVES

ORGANIZATIONS

TRANSFORMATION

UNITED STATES

CEO Howard Schultz has reignited Starbucks with innovative new offerings Photo: iStockPhoto
and by refocusing workers on the company's core values.
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.

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10/31/2018 In January 2008, Schultz returned as Starbucks CEO,
Starbucks replacing Jim
Reinvented

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":

1. Be the undisputed coffee authority;

2. Engage and inspire our partners;
3. Ignite the emotional attachment with our customers;
4. Expand our global presence—while making each store the heart of a local
neighborhood;
5. Be a leader in ethical sourcing and environmental impact;
6. Creative innovation growth platforms worthy of our coffee;
7. 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
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10/31/2018 Soul. The answer, in Schultz's mind, was a Starbucks
three-day conference in New
Reinvented

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.

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10/31/2018 Starbucks Reinvented

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ABOUT THE AUTHOR

Julia Hanna is Associate Editor of the HBS Alumni Bulletin.

Comments 21 Email Print Share Recommend 2 Share

COMMENTS

MARTY FORMAN SR PRESIDENT/CEO, CMI GLOBAL INC..

I'm happy to advise..that I've been envolved and a supporter of Starbuck's concept..sense it
inception and ownership under Howard Schultz's stewartship....I've been an International Business
consultant for over 40 years...
Having traveled to all 50 states and over 90 countries numerous times...It became instantly
apparent to me
that the friendly environment..the excellent coffee and services...Was my calling card.. in meeting
with clients..
and taking the stiffness of an office visit out of the equation...was with out doubt an inherent
factor in my business and still is today....Thanks Howard...
Regards
Marty

CHRIS GALLUP SOLUTIONS ARCHITECT, SAVVY NETWORK LOGIC

I like your article, it's a fresh take on a house hold name. It does not matter which vertical or
industry, we can all learn from a company that continues to be Innovative and engage their
customers in a positive manner.

Chris Gallup
Savvy Network Logic LLC

MARY SETTERHOLM BARISTA AND HARVARD GRADUATE

Well, I do believe Schultz has admirably modeled connection with workers but this does not mean
the model is taken to heart by a store manager or shift manager hungry to climb up a chain of
hierarchy, eschewing authentic care for fellows, as is the predominant socialized model. I am a
Harvard graduate and a barista as a social experiment and there are two competing realities in
need of reconciliation - Schultz theory and lived experience at the bottom of the chain, of which I
speak of. Enjoy your lattes! (really)
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10/31/2018 Starbucks Reinvented

PAUL DONHAM WEB MANAGER, SAILING SHIP ADVENTURES (.COM)

Over time I had become quite friendly with staff at my local Starbucks yet I've noticed significant
turnover of staff during the past year which negated the familiar and friendly atmosphere. Also,
product pricing has become increasingly more expensive so I've resorted to Whole Foods coffee
which is about 20% less expensive and generally an equally good product. I still frequent Star
Bucks but not nearly as often.

STEVE GLAZER CEO, STEVENS WORLD

The only thing that saved them was the economy rebounding, they were sucking wind for quite a
few years. I think they will go back into the dumpster once the economy falters again. Who needs a
5.00 coffee, so although I respect howard and his concepts, I think he really lucked out, as nobody
is stupid enough to compete with him. I think his concept is going to fail in the next recession, it is
a high priced concept. Everything in the place is overpriced.

PAT MCGILLYCUDDY REGIONAL CEO, IDI GAZELEY - BROOKFIELD LOGISTICS PROPERTIES.

There are excellent lessons for any business in the Starbuck's case study. Well done NK.

DOUG SVP, CHILDREN'S HOSPITAL

For me this is all great stuff but it's about the coffee! In order to get me back in the store they will
need to actually have hot brewed coffee ready when I get there. It seems every "partner" thinks a
pour over is coffee so it is "good enough." Frankly I stopped trying to get coffee from Starbucks
which still strikes me as enigmatic.

GRETCHEN
I though Starbucks was passe until my 13 year old son became obsessed with going to Starbucks
and filling his rewards card about a year ago...he loves the Lime Cooler and he thinks Starbucks is
"cool" - how did that happen? Second, I was traveling throughout England and Wales with a few
days in Berlin this summer and Starbucks was in many of the small towns as well as prominent in
London and Berlin. What was very surprising to me, is that EVERY Starbucks I saw was packed - all
day - with people waiting in line to buy something...wow! There were local cafes nearby but still,
Starbucks was crowded. That was a big surprise!

MERLE BONIFACE DIRECTOR OF BUSINESS AND PLANNING, DIOCESAN SCHOOL FOR

GIRLS
Nancy continues to engage readers and students with her ability to draw on experiences in history
to highlight relevance and meaning within today's turbulent environment. Nice to see her attention
turned to a household name and to share their success by way of a case study. No doubt this case
will be used to inspire and challenge many future students!

ARCHIE MUTYAMBIZI ENTREPRENEUR, GRATESTROKE INVESTMENTS

I am not a coffee fanatic but can see how Starbucks' success depends on acceptance in alternative
global markets. "Partner" oriented approaches are even more important linking localised coffee
preferences or gaps to Starbucks offerings.

JANE EGERTON-IDEHEN KEY ACCOUNT MANAGER, ERICSSON GHANA

I love the fact that Nancy uses stories to teach great leadership insights. In reality that is how we
learn, via experiences and through a deep understanding and awareness of ourselves. The
leadership story for Starbucks shows that it is a journey, no company or Leader can claim to know
it all or " Have arrived", we continuously should accept our shortfalls and keep learning / growing.
That in itself is a strength.

ERIC PIETRAC HR VP, SUBSEA7

What is really interesting in this article is that, in an "experience" economy, remaining true to the
core values is absolutely key.

P.G.SUBRAMANIAN DIRECTOR, CATALYST PROFIN CONSULTANTS PVT.LTD

Gut wrenching story Juila. Any other leader would have called it a day when faced with the
situation in which Schultz was placed. I propose to talk about this valuable lesson to my aspiring
Chartered Accountant friends who need a tip or two from this. Thanks for such a wonderful piece.

JOHN T HAYS MBA '64 FOUNDER AND FIRST CEO, COFFEES OF HAWAII INC.
I enjoyed reading about Starbucks. I have known the company since founder Jerry Baldwin handed
management over to Howard Schultz and ownership to the Seattle investor group, part of which
invested in Coffees of Hawaii as well. Dr. Ron Margolis, from Starbucks' board, served on our board
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10/31/2018 as well. We were the first mechanized coffee plantation in the USA,
Starbucks and later, I was the first US
Reinvented
delegate to the ICO from the Producing Sector. For many years I was happy to exchange
information with Howard and his chief green coffee buyer, EVP Dave Olson. I have a few relevant
photographs, which I can send you if you are interested in posting them.

HUGH QUICK HOME, NONE

I am not at all confident about commenting as I do not have relevant expertise but HBS has always
tried to be realistic and most people have no expertise. It seems to me that Starbuck's identified a
potential market, for a place to relax with friends and enjoy coffee, and devised a practical plan to
meet it. It was a real need and I think Professor Koehn is right to emphasize that aspect. I think
many enterprises fail because they seek to meet a need that is not widely felt.

ANKUR RAI SOLUTION SALES MANAGER, ERICSSON

A great article..Another example as to its about cash but still not about cash. With his smart goals
he actually put acros a hit formula. in general the goals touch on Customer Experienc, Employ
engagement & skill, innovation & Branding.

Most of all people mater.

DR. R. KRISHNA DIRECTOR, STRATEGIC SOLUTIONS

So much learning. Transferable lessons. We are always on a turnaround strategic mode. Will use
this as a great case study. Great job Julia. Thanks.

EMMANUEL ALFIERIS EXECUTIVE DIRECTOR, COMMONWEALTH BANK OF AUSTRALIA

They are truly a great case study or an organisation consistently reforming itself.

Julia, are there any insights on how the community backlash in Europe on Starbuck's tax structures
has been internalised by the Company?

Will we see more voluntary tax payments in jurisdictions where little corporate tax is paid as was
done in the UK?

I should note for those unaware that all reporting on the topic confirms Starbucks has completely
legal organsational and tax structures in Europe.

KAPIL KUMAR SOPORY COMPANY SECRETARY, SMEC(INDIA) PRIVATE LIMITED

There is lot to learn from the growth-oriented approach of this Company which is employing
strategies which are relevant and practical. These can be applied in companies engaged in
manufacture of a variety of other products as well. Valuing staff and adopting unique marketing
techniques to attract customers is in particular noticeable.

VICTOR MARTINEZ DIRECTOR, KAWASAKI

I thoroughly enjoyed your article as it concisely brought out the early response, fortitude and risk
that a business leader must take to reignite the creation of their passion. I do agree that Starbucks
is a bit costly, yet I find myself and my teenage children still taking time to settle in at one of their
stores to just enjoy the atmosphere while drinking our favorite drinks. I guess that our enjoyment is
beyond the cost. Thanks for the read.

BERNARD ROSAUER PRESIDENT, WWW.THREEBELLCURVES.COM

I enjoyed reading this article. Howard definitely knows how to engage employees and customer
communities. Between the two important things take place - provision and consumption. Schultz
has also maximized the Starbucks penetration in that space (though I would argue there's room for
innovation delivery-wise).

As a business person for thirty years (not a consultant, not an academic), I have had the luxury of
watching competitors come and go, some on short order, some after years. Then there are those
companies who have survived and thrived 100's of years.

It has been my view that culture emerges out of the combination of people, the work and the
customer. What Schultz is really doing is taking this model to an even higher level. He's
managing/leading people, continuously improving process/work, and maximizing customer value.
This reminds us that when we're in the lead, there's no room for relaxing the effort. Schultz is the
master of that. All creat CEO's are the master of that!

There's a free white paper at www.ThreeBellCurves.com that explains the nature of business
culture. When you read it, think of Howard and lesser leaders and think about where they excel and
where they miss the mark. If YOU are a CEO think of yourself and where you excel and need room
for improvement. Good luck!

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 10/31/2018 Starbucks Reinvented

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