25 Aug 2014 HBS Cases

Starbucks Reinvented

Nancy Koehn's new case on therebirth of Starbucks underHoward Schultz "distills 20 yearsof my thinking about the mostimportant lessons of strategy,leadership, and managing inturbulence."

by Julia Hanna

Harvard Business School Professorand historian Nancy Koehn hasstudied Starbucks and its leader,Howard Schultz, for close to 20years. For her, the companyrepresents much more than aphenomenal success story.

In a recently published case,"Starbucks Coffee Company:Transformation and Renewal,"(available soon) Koehn andcoauthors Kelly McNamara, NoraKhan, and Elizabeth Legris tracethe dramatic arc of the company'spast seven-plus years—a periodthat saw Starbucks teeter on thebrink of insolvency, dig deep torenew its sense of purpose anddirection, and launch itself in new,untested arenas that define thecompany as it exists today.

"This case distills 20 years of mythinking about the most important

lessons of strategy, leadership, andmanaging in turbulence in theframe of a very relevant company,"says Koehn, the James E. RobisonProfessor of BusinessAdministration. "As a brand,leadership, and entrepreneurshipscholar, I've been doggingStarbucks for a long time."

On a 1995 trip to Seattle, Koehnvisited a Starbucks store for thefirst time and was struck by whatshe saw and felt. The notion of a"third place" between home andwork to relax and enjoy the small,affordable luxury of a specialcoffee beverage seemed to resonatewith the social and economicmoment, she recalls. Six monthslater she met Howard Schultz, anentrepreneur who acquired thecompany in 1987, and was struckby his seriousness of purpose andthe breadth of what he wanted toaccomplish.

The case, Koehn's fourth to focuson Starbucks, opens in February2007. Schultz, no longer Starbucks'CEO but still its chairman, isworried the company is losing itsability to be true to its values whileproviding a store experience thatconveys a sense of comfort,connection, and respect for itsproduct and the communitiesStarbucks serves.

So Schultz composed a heartfelt,searching memo to seniorleadership. In it, he bemoaneddecisions (for which he acceptedresponsibility) that improvedefficiency and increased economiesof scale but robbed stores of someof their essential magic, such as thesmell of roasting coffee and thesights and sounds of traditionalItalian espresso machines andbaristas at work.

He also cited the company's rapidexpansion and the potential"commoditization" of theStarbucks brand. "[W]e desperatelyneed to look into the mirror andrealize it's time to get back to thecore and make the changesnecessary to evoke the heritage, thetradition, and the passion that weall have for the true StarbucksExperience," Schultz wrote.

The scope and richness of Koehn'scase gives it the feel of apage-turning novel; in that sense,Schultz's memo is the incitingaction for all that follows.

REMAINING TRUE TOCORE VALUES

The challenge that had confrontedStarbucks in the early- andmid-2000s was one common tomany organizations: Could the

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company continue to grow whilepreserving its culture and values?In some areas, the drive to expand,egged on by Wall Street, wascompromising the company'sability to invest in its partners(Starbucks' term for its employees),deliver personalized customerservice, and maintain a closeconnection to the local community.

In addition, McDonald's andDunkin' Donuts had emerged asserious competitors, offering theirown lines of specialty coffeebeverages. Even so, Starbucks'financials for 2007, the yearSchultz composed his memo, didn'tlook so bad. But the entrepreneurbecame concerned as he dug moredeeply into the numbers. Sure,revenues were up almost 21percent over the previous year, buthad slowed by over a third;transactions per store were up 1percent, versus 5 percent the yearbefore. Same-store sales rose only5 percent, the smallest increase infive years.

In January 2008, Schultz returnedas Starbucks CEO, replacing JimDonald, the man he and othersenior colleagues had chosen tolead the company.

Starbucks Sails Again

The case chronicles the blizzard ofdecisions and initiatives that followwhat could have been thecompany's death knell as thefinancial crisis hit home andconsumers cinched their belts.

"Schultz understood that you can'tlift your foot off the gas pedalwhen you're attempting totransform a company," Koehnsays. "Severe as its financial needs

may be, you also have to figure outwhat you will invest in. Schultzknew that if he waited until thecompany was out of the woods toinvest in new products,communication channels, and waysof doing business it would be toolate—Starbucks would no longerbe relevant."

From the start, Schultz sent theclear, unwavering message thatStarbucks' transformation wouldrepresent a return to its roots andan uncompromising commitmentto core values, such as health carebenefits for any partners workingat least 20 hours a week.

At a March 2008 gathering of 200senior-level company leaders,Schultz unveiled a TransformationAgenda that included seven "BigMoves":

1. Be the undisputed coffeeauthority;

2. Engage and inspire our partners;3. Ignite the emotional attachment

with our customers;4. Expand our global

presence—while making eachstore the heart of a localneighborhood;

5. Be a leader in ethical sourcingand environmental impact;

6. Creative innovation growthplatforms worthy of our coffee;

7. Deliver a sustainable economicmodel.

The case provides abehind-the-scenes look at how thecoffee company moved forward onthese goals, including theintroduction of the milder PikePlace Roast; the story of its VIAReady Brew line; the launch of aloyalty program; investment in andengagement with social media;

focus on a global expansionstrategy; and the extension ofsocial programs. The companyclosed stores, restructured itsmanufacturing and supplyoperations, and, perhaps mostsignificantly, took steps toreengage its partners and storemanagers. In February 2008,Starbucks closed more than 7,000of its stores across the country for"Espresso Excellence Training,"taking the time to work withapproximately 135,000 baristas toensure they could pour a perfectespresso shot and steam milkproperly.

For Schultz, however, that wasn'tenough—he wanted to reach thecompany's store managers,recognizing them as essential to thetransformation process.

"I needed an unfiltered venue forexpressing my empathy about allthat we were asking our partners todo and telling them plainly whatwas at stake," he wrote in Onward:How Starbucks Fought for Its Lifewithout Losing Its Soul. Theanswer, in Schultz's mind, was athree-day conference in NewOrleans in October 2008, amoment when the global economyhappened to be tanking. Starbucks'fourth quarter profits were down97 percent from the same time ayear earlier; for the fiscal year, netearnings were down 53 percent to$316 million. The Starbucks boardwas reluctant to send 10,000partners to New Orleans at a costof $30 million, but Schultz stuck tohis guns.

In addition to rolling up theirsleeves and taking part incommunity service projects to aidareas of the city still recovering

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from Hurricane Katrina, partnersparticipated in team-buildingevents that reviewed the company'sguiding principles and remindedthem of their central role in thecustomer experience. Schultz alsobrought in Bono, lead singer of U2,to announce a partnership tochannel proceeds from holidaybeverage sales to the Global Fundin support of AIDS relief programsin Africa.

The New Orleans conference was aturning point for Starbucks; in the"novel" of Koehn's case, it's theclimax.

"Investing in a conference of thatsize is such an unusual thing to dowhen faced with a cash crunch,"Koehn says. "Schultz understoodthat what saves and breaksbusinesses is much more than cash.In the midst of so much turbulence,it's all too easy to pull levers on thelow-hanging fruit of cash andlogistics. But you don't save abusiness and turn it around withoutspeaking to, focusing, and callingon the spirit of your people."

Schultz's experience qualifies himfor closer study in Koehn's HBScourse Power and Glory inTurbulent Times: The History of

Leadership from Henry V to SteveJobs. Not all managers areconfronted in their careers with thesort of transformation challengefaced by Starbucks, but Schultz'sreflections and actions areinstructive for anyone charged withfinding sources of strength,innovation, and renewal in today'sturbulent business environment,Koehn says.

About the author

Julia Hanna is associate editor ofthe HBS Alumni Bulletin.

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