Starbucks after Schultz
This activity is important because, as a manager, you must beable to identify your company’s core competency and select anappropriate business-level strategy to optimize its competitivevalue.
The goal of this exercise is to demonstrate your understandingof core competency and business-level strategies by applying theseconcepts to Starbucks’ recent experience in identifying andregaining its competitive advantage.
Read the case below and answer the questions thatfollow.
Case
Inspired by Italian coffee bars, Starbucks CEO Howard Schultzset out to provide a completely new consumer experience. Thetrademark of any Starbucks is its ambience—where music andcomfortable chairs and sofas encourage customers to sit and enjoytheir beverages and, more recently, food and (at some locations)even wine. Customers can use the complimentary wireless service orjust visit with friends. The barista seems to speak a foreignlanguage as she rattles off the offerings: Caffé Misto, CaramelMacchiato, Cinnamon Dolce Latte, Espresso Con Panna, or Mint MochaChip Frappuccino, among some 30 different coffee blends. Dazzledand enchanted, customers pay $4 or more for a venti-sized drink.Starbucks has been so successful in creating its ambience thatcustomers keep coming back for more.
Starbucks’ core competency is to create a unique consumerexperience the world over. Schultz’ strategic intent was to createa “third place,” between home and work, where people wanted tovisit, ideally daily. Customers are paying for the uniqueexperience and ambience, not just for the cup of coffee. Theconsumer experience that Starbucks created is a valuable, rare, andcostly to imitate intangible resource. This allowed Starbucks togain a competitive advantage. Since 2000, Starbucks’ revenues havegrown almost 15-fold, from less than $2 billion to some $27 billionin 2017.
While core competencies are often built through learning fromexperience, they can atrophy through forgetting. This is whathappened to Starbucks. Between 2004 and 2008, Starbucks expandedoperations rapidly by doubling the number of stores from 8,500 toalmost 17,000 stores (see Exhibit MC8.1). It also branched out intoice cream, desserts, sandwiches, books, music, and other retailmerchandise, straying from its core business.
Trying to keep up with its explosive growth in both number ofstores and product offerings, Starbucks began to forget what madeit unique. It lost the appeal that made it special, and its uniqueculture got diluted. For example, baristas used to grind beansthroughout the day whenever a new pot of coffee had to be brewed(which was at least every eight minutes). The grinding sounds andfresh coffee aroma were trademarks of Starbucks stores. Instead, toaccommodate its fast growth, many baristas began to grind all ofthe day’s coffee beans early in the morning and store them for therest of the day. New espresso machines, designed for efficiency,were so tall that they physically blocked interaction betweenbaristas and customers. Although these and other operations changesallowed Starbucks to reduce costs and improve efficiency, theyundercut Starbucks’ primary reason for success—that going toStarbucks was not simply a stop for caffeine; it was a sensoryexperience. The negative impact of cost-reduction measures wasunderscored when Starbucks lost a blind taste-test to fast foodgiant McDonald’s. Among six coffees tested, Starbucks came in last.Even run-of-the-mill supermarket coffees sold in huge cans wererated higher. Some customers don’t like Starbucks coffee and gavethe chain the nickname “Charbucks”—because critics say that a lotof the coffee has an overly roasted quality, a dark and bittertaste.
To make matters worse, the global financial crisis (2008–2009)hit Starbucks hard. The first items consumers go without duringrecession are luxury items such as a $4 coffee at Starbucks (seerevenue drop in Exhibit MC8.1).
Coming out of an eight-year retirement, Howard Schultz againtook the reins as CEO in January 2008, attempting to re-create whathad made Starbucks special. He immediately launched severalstrategic initiatives to turn the company around. Just a monthafter coming back, Schultz ordered more than 7,000 Starbucks storesacross the United States to close for one day so that baristascould learn the perfect way to prepare coffee. The company lostover $6 million in revenue on that one day. This exacerbatedinvestor jitters, but Schultz felt the importance of relearning howto create a unique Starbucks experience was key to bringing backits corporate culture.
In 2009, Starbucks introduced Via, its new instant coffee, amove that some worried might further dilute the brand. In 2010,Schultz rolled out new customer service guidelines: Baristas wouldno longer multitask, making multiple drinks at the same time, butwould instead focus on no more than two drinks at a time, startinga second one while finishing the first. Schultz also focused onreadjusting store managers’ goals. Before Schultz’ return, managershad been given a mandate to focus on sales growth. Schultz,however, knew that Starbucks’ main differentiator was its specialcustomer experience. The CEO instructed managers to focus on whathad made the Starbucks brand successful in the first place.
Although its earlier attempt to diversify away from its corebusiness in the mid-2000s failed, under Schultz, Starbucks was ableto successfully introduce food items. Attempting to drive morestore traffic in other than the morning hours where customers needtheir daily caffeine shot, the chain has added baked goods,sandwiches, and other food items to its menu. To get more customersinto its stores in the late afternoon and earlyevening—traditionally its slowest time—Starbucks stores now offeritems such as vegetables, flatbread pizza, plates of cheese, anddesserts. It even introduced alcoholic beverages such as wine andbeer, available after 4 p.m., as part of an “Evenings” program.
Starbucks also continues its efforts to find new levels ofluxury offerings catering to higher end customers within itsexisting customer base. Online and in stores it produceslimited-run exclusive batches of varietal coffees for home use, athigh price points. Some stores also offer individually brewed cupsof the same higher-priced roasts. Since 2014 Starbucks has createdsomething called a Starbucks Reserve Roastery and Tasting Room. Thefirst of super high-end stores appeared in Starbucks’ home, inSeattle, with more planned domestically and around the world.
Most of these initiatives continue. It has retooled its Eveningsprogram of alcohol, for example, and in 2017 announced suchofferings would be scaled back to continue only at its Roasterylocations. Otherwise its ambitions continue. Starbucks’ goal is todouble its revenues from food over the next few years and to beseen as an evening food-and-wine destination. To symbolize itstransition from a traditional coffeehouse, Starbucks dropped theword coffee from its logo.
Schultz also pushed the adoption of new technology to engagewith customers more intimately and effectively. Starbucks now usessocial media platforms Facebook and Twitter to communicate withcustomers more or less in real time. Its highly successfulStarbucks loyalty program has over 12 million regular users. Some27 percent of all transactions in U.S. stores are now made usingmobile devices. The Starbucks app allows customers to order and payfor drinks and food ahead of time, so that they can bypass standingin line and just need to pick up their order.
Finally, as the U.S. market appears to be saturated with some12,000 stores, Schultz believes that Starbucks has a great growthopportunity by opening more cafés overseas. Starbucks is planningto have more than 3,000 stores in China by 2019, up from 1,500 in2015. Starbucks also plans to double its number of cafés elsewherein Asia to more than 4,000 in the next few years.
As the creator of Starbucks, however, Schultz enjoyed a degreeof freedom that an ordinary CEO would not have had. Howard Schultzis to Starbucks much like Steve Jobs was to Apple. Schultz has thereputation and power of personality to implement a change thatreduces operational effectiveness in favor of delighting customers.Schultz was able to orchestrate a successful turnaround, and withit Starbucks was able to gain and sustain a competitive advantage.Exhibit MC8.2 shows that Starbucks outperformed the wider stockmarket by a huge margin.
1.The success of Starbucks lies in its ability to create for thecustomer a unique experience or “third place” between home andwork. This unique experience is also known as Starbucks’
A. patch dependence
B. core competency
C. tangible resources
D. value chain
E. resource heterogeneity
2.Between 2004 and 2008, Starbucks expanded operations rapidlyand attempted to diversity from its core business. These effortsdiluted its core culture, resulting in competitive parity becausethe customer experience that was its core competency was nolonger
A. tangible
B. rare
C. valuable
D. organized to capture value
E. imitable
3. Starbucks’ adoption of social media and an app that focuseson customer satisfaction suggests that competitive advantage ismore likely to spring from ___________ resources than from__________ resources.
A.equivalent; substitutable
B.intangible; tangible
C. costly; reputational
D. visible; rare
E. tangible; intangible
4.One of Howard Schultz’s strategic initiatives after retainingthe reins of Starbucks in 2008 was to shut the company’s 7,000stores for one day so baristas could relearn what makes theStarbucks brand unique. This initiative reflects a focus on whichtype of strategy?
A. Differentiation
B. cost leadership
C. blue ocean
D. industry effect
E. strategic tradeoff
