Question

Starbucks after Schultz

This activity is important because, as a manager, you must be able to identify your company’s core competency and select an appropriate business-level strategy to optimize its competitive value.

The goal of this exercise is to demonstrate your understanding of core competency and business-level strategies by applying these concepts to Starbucks’ recent experience in identifying and regaining its competitive advantage.

Read the case below and answer the questions that follow.

Case

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 locations) even wine. Customers can use the complimentary wireless service or just visit with friends. The barista seems to speak a foreign language as she rattles off the offerings: Caffé Misto, Caramel Macchiato, Cinnamon Dolce 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-sized drink. Starbucks has been so successful in creating its ambience that customers keep coming back for more.

Starbucks’ core competency is to create a unique consumer experience the world over. Schultz’ strategic intent was to create a “third place,” between home and work, where people wanted to visit, ideally daily. Customers are paying for the unique experience and ambience, not just for the cup of coffee. The consumer experience that Starbucks created is a valuable, rare, and costly to imitate intangible resource. This allowed Starbucks to gain a competitive advantage. Since 2000, Starbucks’ revenues have grown almost 15-fold, from less than $2 billion to some $27 billion in 2017.

While core competencies are often built through learning from experience, they can atrophy through forgetting. This is what happened to Starbucks. Between 2004 and 2008, Starbucks expanded operations rapidly by doubling the number of stores from 8,500 to almost 17,000 stores (see Exhibit MC8.1). It also branched out into ice cream, desserts, sandwiches, books, music, and other retail merchandise, straying from its core business.

Trying to keep up with its explosive growth in both number of stores and product offerings, Starbucks began to forget what made it unique. It lost the appeal that made it special, and its unique culture got diluted. For example, baristas used to grind beans throughout the day whenever a new pot of coffee had to be brewed (which was at least every eight minutes). The grinding sounds and fresh coffee aroma were trademarks of Starbucks stores. Instead, to accommodate its fast growth, many baristas began to grind all of the day’s coffee beans early in the morning and store them for the rest of the day. New espresso machines, designed for efficiency, were so tall that they physically blocked interaction between baristas and customers. Although these and other operations changes allowed Starbucks to reduce costs and improve efficiency, they undercut Starbucks’ primary reason for success—that going to Starbucks was not simply a stop for caffeine; it was a sensory experience. The negative impact of cost-reduction measures was underscored when Starbucks lost a blind taste-test to fast food giant McDonald’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 “Charbucks”—because critics say that a lot of the coffee 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 consumers 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 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 multitask, 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 caffeine shot, the chain has added baked goods, sandwiches, and other food items to its menu. To get more customers into its stores in the late afternoon and early 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 customers 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 Roastery 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 technology to engage with customers more intimately and effectively. Starbucks now uses social media platforms Facebook and Twitter to communicate with customers more or less in real time. Its highly successful 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, as the U.S. market appears to be saturated with some 12,000 stores, Schultz believes that Starbucks has a great growth opportunity by opening more cafés 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 cafés elsewhere 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 orchestrate 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. Starbucks’ new CEO is Kevin Johnson, who served as Schultz’s chief operating officer and second in command. Schultz came out of retirement in 2008 when Starbucks was failing, and initiated a successful turnaround. His struggles are captured well in the title of his New York Times bestseller: Onward: How Starbucks Fought for Its Life without Losing Its Soul. After his return, Starbucks’ market valuation appreciated some five-fold! Although Schultz clearly engineered a hugely successful turnaround of his beloved Starbucks, the question is whether the new CEO can sustain Starbucks’ competitive advantage.

1.The success of Starbucks lies in its ability to create for the customer a unique experience or “third place” between home and work. This unique experience is also known as Starbucks’

A. path dependence

B. core competency

C. tangible resources

D. value chain

E. resource heterogeneity

2.Between 2004 and 2008, Starbucks expanded operations rapidly and attempted to diversity from its core business. These efforts diluted its core culture, resulting in competitive parity because the customer experience that was its core competency was no longer

A. tangible

B. rare

C. valuable

D. organized to capture value

E. imitable

3. Starbucks’ adoption of social media and an app that focuses on customer satisfaction suggests that competitive advantage is more 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 retaining the reins of Starbucks in 2008 was to shut the company’s 7,000 stores for one day so baristas could relearn what makes the Starbucks brand unique. This initiative reflects a focus on which type of strategy?

A. Differentiation

B. cost leadership

C. blue ocean

D. industry effect

E. strategic tradeoff

Answer 1

1. The success of Starbucks lies in its ability to create for the customer a unique experience or “third place” between home and work. This unique experience is also known as Starbucks’

B. core competency

Reason - A firm’s core competence is embedded in the firm itself; it represents that firm’s unique, distinctive strength.

2. Between 2004 and 2008, Starbucks expanded operations rapidly and attempted to diversity from its core business. These efforts diluted its core culture, resulting in competitive parity because the customer experience that was its core competency was no longer

B. rare

Reason - If a resource is no longer rare, then competitive parity results. As the case explains, in its attempt to keep up with its explosive growth, Starbucks madecertain sacrifices that diluted its uniqueness, for example, grinding coffee beans in the morning and storing them for later, rather than grinding them everyeight minutes in order to maintain the aromas of freshly brewed coffee throughout the day.

3. Starbucks’ adoption of social media and an app that focuses on customer satisfaction suggests that competitive advantage is more likely to spring from ___________ resources than from __________ resources.

B. intangible; tangible

Reason - As the case notes, then-CEO Howard Schultz recognized that Starbucks’ main differentiator, andthus its competitive advantage, is its customer service experience, by definition an intangibleresource. If the unique customer experience is maintained through the use of social media andother technological innovations, so is the firm’s competitive advantage

4. One of Howard Schultz’s strategic initiatives after retaining the reins of Starbucks in 2008 was to shut the company’s 7,000 stores for one day so baristas could relearn what makes the Starbucks brand unique. This initiative reflects a focus on which type of strategy?

A. Differentiation

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