Starbucks Reinvented

Nancy Koehn's new case on the rebirth of Starbucks under Howard Schultz "distills 20 years of my thinking about the most important lessons of strategy, leadership, and managing in turbulence."
by Julia Hanna

Harvard Business School Professor and historian Nancy Koehn 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.

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

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":

  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 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.
    • 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...
    • 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)
    • 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! 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.
    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 as well. We were the first mechanized coffee plantation in the USA, and later, I was the first US 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,
    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 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!