Starhuclrs after $chultz: How to $ustain a Competitive Advantage?

INSPIRED BY ITALIAN coffee bars, Starbucks CEO

Howard Schultz set out to provide a completely new
consumer experience. The trademark of any Starbucks
is its ambience-where music and comfortable chairs
and sofas encourage customers to sit and enjoy their
beverages and, more recently, food and (at some loca-
tions) even wine. Customers can use the complimen-
tary wireless service or just visit with friends. The
barista seems to speak a foreign language as she rattles
off the offerings: Caff6 Misto, Caramel Macchiato,
Cinnamon Dol ce Latte, Espresso Con Panna, or Mint
Mocha Chip Frappuccino, among some 30 different
coffee blends . Dazzled and enchanted, customers pay
$4 or more for a venti-srzed drink. Starbucks has been
so successful in creating its ambience that customers China represents a significant future growth opportunity for Starbucks, assuming
it can transfer its core competency successfully.
keep coming back for more. @Step he n S have r/ZU MAPRESS.co m/Al amy Stock Photo
Starbucks' core competency is to create a unique
consumer experience the world over. Schultz' strate-
gic intent was to create a "third place," between home
and work, where people wanted to visit, ideally daily. For example, baristas used to grind beans throughout
Customers are paying for the unique experience and the day whenever a new pot of coffee had to be brewed
ambience, not just for the cup of coffee. The consumer (which was at least every eight minutes). The grind-
experience that Starbucks created is a valuable, rare, ing sounds and fresh coffee aroma were trademarks
and costly to imitate intangible resource. This allowed of Starbucks stores. Instead, to accommodate its fast
Starbucks to gain a competitive advantage. Since growth, many baristas began to grind all of the day's
2000, Starbucks' revenues have grown almost l5-fold, coffee beans early in the morning and store them for
from less than $2 billion to some 527 billion tn 2017 . the rest of the day. New espresso machines, designed
While core competencies are often built through for efficiency, were so tall that they physically blocked
learning from experience, they can atrophy through interaction between baristas and customers. Although
forgetting. This is what happened to Starbucks. these and other operations changes allowed Star-
Between 2004 and 2008, Starbucks expanded opera- bucks to reduce costs and improve efficiency, they
tions rapidly by doubling the number of stores from undercut Starbucks' primary reason for success-that
8,500 to almost 17,000 stores (see Exhibit MC8.1). going to Starbucks was not simply a stop for caffeine;
It also branched out into ice cream, desserts, sand- it was a sensory experience. The negative impact of
wiches, books, music, and other retail merchandise.
straying from its core business.
Trying to keep up with its explosive growth in both Frank r. Rothaermel prepared this Minicase from public sources.
This MiniCase is developed for the purpose of class discussion. It is not
number of stores and product offerings, Starbucks intended to be used for any kind of endorsement, source of data, or depiction
began to forget what made it unique. It lost the appeal of efficient or inefficient management. All opinions expressed, all errors and
omissions are entirely the author's. Revised and updated: Augu st 3, 2017 .
that made it special, and its unique culture got diluted. @ Frank T. Rothaermel.

470
 MINICASE
ffiKFE$ffifiT ffi#ffi.$ to,ur Number of Starbucks Stores and Revenues ($ billions) ,1971-2017
/
30,000
25,000
20,000
15,000
.|0,000
5,000
0
1971 1996 1998 2000 2002 2004 2006 2008 2009 2010 2011 2012
SOURCE: Depiction of data drawn from various Starbucks annual reports.
cost-reduction measures was underscored when Star-
bucks lost a blind taste-test to fast food giant McDon-
ald's. Among six coffees tested, Starbucks came in
last. Even run-of-the-mill supermarket coffees sold
in huge cans were rated higher. Some customers don't
like Starbucks coffee and gave the chain the nickname
"Charbssfts"-fecause critics say that a lot of the cof-
fee has an overly roasted quality, a dark and bitter taste.
To make matters worse, the global financial crisis
(2008-2009) hit Starbucks hard. The first items con-
sumers go without during recession are luxury items
such as a $4 coffee at Starbucks (see revenue drop in
Exhibit MC8.1).
Coming out of an eight-year retirement, Howard
Schultz again took the reins as CEO in January 2008,
attempting to re-create what had made Starbucks
special. He immediately launched several strategic
initiatives to turn the company around. Just a month
after coming back, Schultz ordered more than 7,000
Starbucks stores across the United States to close for
one day so that baristas could learn the perfect way
to prepare coffee. The company lost over $6 million
in revenue on that one day. This exacerbated investor
jitters, but Schultz felt the importance of relearning
S Starbucks after Schultz: How to Sustain a Competitive Advantage? i 471
$30
how to create a unique Starbucks experience was key
to bringing back its corporate culture.
In 2009, Starbucks introduced Via, its new instant
coffee, a move that some worried might further dilute
the brand. In 2010, Schultz rolled out new customer
service guidelines: Baristas would no longer mul-
titask, making multiple drinks at the same time, but
would instead focus on no more than two drinks at a
time, starting a second one while finishing the first.
Schultz also focused on readjusting store managers'
goals. Before Schultz' return, managers had been
given a mandate to focus on sales growth. Schultz,
however, knew that Starbucks' main differentiator was
its special customer experience. The CEO instructed
managers to focus on what had made the Starbucks
brand successful in the first place.
Although its earlier attempt to diversify away from
its core business in the mid-2000s failed, under Schultz,
Starbucks was able to successfully introduce food items.
Attempting to drive more store traffic in other than the
morning hours where customers need their daily caf-
feine shot, the chain has added baked goods, sand-
wiches, and other food items to its menu. To get more
customers into its stores in the late afternoon and early
 172 i ttlttlCASE S Starbucks after Schultz: How to Sustain a Competitive Advantage?
,,:
f!.
evening-traditionally its slowest time-Starbucks
stores now offer items such as vegetables, flatbread
pizza, plates of cheese, and desserts. It even introduced
alcoholic beverages such as wine and beer, available
after 4 p.m., as part of an "Evenings" program.
Starbucks also continues its efforts to find new
levels of luxury offerings catering to higher end cus-
tomers within its existing customer base. Online and
in stores it produces limited-run exclusive batches of
varietal coffees for home use, at high price points.
Some stores also offer individually brewed cups of the
same higher-priced roasts. Since 2014 Starbucks has
created something called a Starbucks Reserve Roast-
ery and Tasting Room. The first of super high-end
stores appeared in Starbucks' home, in Seattle, with
more planned domestically and around the world.
Most of these initiatives continue. It has retooled
its Evenings program of alcohol, for example, and in
2017 announced such offerings would be scaled back
to continue only at its Roastery locations. Otherwise
its ambitions continue. Starbucks' goal is to double
its revenues from food over the next few years and to
be seen as an evening food-and-wine destination. To
symbolize its transition from a traditional coffeehouse,
Starbucks dropped the word coffee from its logo.
Schultz also pushed the adoption of new tech-
nology to engage with customers more intimately
and effectively. Starbucks now uses social media
I
EXHIBIT ilIC8-2 / Starbucks (SBUX) Normalized (% Change) Stock Appreciation from Initial Public Offering (lPO) on
' June 26,1992,to July 28,2017. Comparison is Dow Jones Industrials.
* Starbucks Price % Change Jul 28
Dow Jones Industrials Level % Change Jul 28
r8.75K% -
r6.75K%
r3.75K%
fl.25K%
April 6, 2000
8.75K% 'Howiid'Sihrilii;
6.25K%
3.75K%
r.25K%
-1.25K%
1995 2000
SOURCE: Depiction of publicly available data.
platforms Facebook and Twitter to communicate with
customers more or less in real time. Its highly suc-
cessful Starbucks loyalty program has over 12 million
regular users. Some 27 percent of all transactions in
U.S. stores are now made using mobile devices. The
Starbucks app allows customers to order and pay for
drinks and food ahead of time, So that they can bypass
standing in line and just need to pick up their order.
Finally, &s the U.S. market appears to be saturated
with some 12,000 stores, Schultz believes that Star-
bucks has a great growth opportunity by opening more
caf6s overseas. Starbucks is planning to have more than
3,000 stores in China by 2019, up from 1,500 in 2015.
Starbucks also plans to double its number of caf6s else-
where in Asia to more than 4,000 in the next few years.
As the creator of Starbucks, however, Schultz
enjoyed a degree of freedom that an ordinary CEO
would not have had. Howard Schultz is to Starbucks
much like Steve Jobs was to Apple. Schultz has the
reputation and power of personality to implement a
change that reduces operational effectiveness in favor
of delighting customers. Schultz was able to orches-
trate a successful turnaround, and with it Starbucks
was able to gain and sustain a competitive advantage.
Exhibit MC8.2 shows that Starbucks outperformed the
wider stock market by a huge margin.
In April 2017, Howard Schultz stepped down
as Starbucks CEO, in a second attempt to retire.
'17 15.97K%
'.|7 565..|0%
2nd retirement 15.S7K%
January 8, 2008
" "'H'owaid'Schtllt'i" "" "'
65.10%
20r0 20r5 2017
 MINf CA$E S Starbucks after Schultz: How to Sustain a Competitive Advantage?
Starbucks' new CEO is Kevin Johnson, who served as
chief operating officer and second in command under
Schultz. Schultz came out of retirement in 2008 when
Starbucks was failing, and initiated a successful turn-
around. His struggles are captured well in the title of
his New York Times bestseller: Onward: How Star-
bucks Fought fo, Its Lift without Losing lts Soul. After
his return, Starbucks' market valuation appreciated
some five-fold! Although Schultz clearly engineered
a hugely successful turnaround of his beloved Star-
bucks, the question is whether the new CEO can sus-
tain Starbucks' competitive advant age.
Dl $CU$Sl01il QUE$Tl 0NS
l. How did Starbucks create its uniqueness in the first
place? Why was this uniqueness so successful?
2. To be a source of competitive advantage over time,
core competencies need to be continuously honed
and upgraded. Why and how did Starbucks lose its
uniqueness and struggle in the mid-2000s?
3. What strategic initiatives did Howard Schultz put
in place to re-create Starbucks' uniqueness after his
return in 2008? Detail each strategic initiative, and
explain why each initiative was successful, if so.
i 473
4, What is your assessment of Howard Schultz as a
strategic leader? Where on the Level-5 pyramid
of strategic leadership would you place Schultz?
Why? Explain.
5. How can new Starbucks CEO Kevin Johnson
sustain the company's competitive advantage? What
are some growth opportunities he could pursue?
What recommendations would you give him?
Sources: Jargon, I. (2017, April 3), "New Starbucks CEO sees growth
in suburbs, Midwest and lunch," The Wall Street Journal, Trefis Team
(2017, Jan. l3), "Starbucks is ending its 'Evenings' beer and wine
program," Forbes, January l3; Lublin, J.S., and J. Jargon (2016, Dec. 7),
'At Starbucks, CEO transition plan includes vow not to hover," The Wall
Street Journal, "Starbucks raises prices despite declining coffee costs,"
The Wall Street Journal, July 6, 2Ol5 "Starbucks profit jumps, as revenue
surges l8%," The Wall Street Journal, July 23,2015; "Starbucks aims to
double U.S. food sales," The Wall Street Journal, December 4,,2014; "Forty
years young: A history of Starbucks," The Telegraph, May I 1,2011; Schultz,
H. (201 l), Onward: How Starbucks Fought for lts Life without Losing
Its Soul (New York: Rodale Books); 'At Starbucks, baristas told no more
than two drinks," The Wall Street Journal, October 13,2010: "Latest
Starbucks buzzword: 'Lean' Japanese techniques," The Wall Street Journal,
August 4,2009; Behar, H. (2007), It's Not About the Coffee: Leadership
Principles from a Lfe at Starbucks (New York: Portfolio); Clark, T.
(2007), Starbucked: A Double Tall Tale of Caffeine, Commerce, and Culture.
(New York: Little, Brown, 2007); Schultz, H., and D.J. Yang (1999), Pour
Your Heart Into It: How Starbucks Built a Company One Cup at a Time
(New York: Hyperion); "Five things Starbucks won't tell you," The Wall
S t re et J o urna I video, http: I I on. mktw. net/ I UVSIO6 ; and http //investor.
:
starbucks.com. See also "The Roastery experience: An unofficial guide to
the Starbucks Roastery," http://www.thestarbucksroastery.com/, accessed
August 3,2017 .