Case Analysis Starbucks CEO Kevin Johnson: ‘I’m not Howard Schultz

Order InstructionsStarbucks CEO Kevin Johnson: “I’m not Howard Schultz”STARBUCKS HAS MORE than 30,000 stores and $26 billion in annual revenues, making it the largest coffee-house chain in the world. Starbucks has also experienced a sustained competitive advantage. Exhibit MC2.1 shows that since its IPO in 1992, Starbucks has outperformed the wider stock market by a huge mar-gin—23,500 percentage points!—with an especially pronounced performance increase since 2008, when former CEO Howard Schultz came out of retirement. How did all this start, especially since the UnitedStates is not known for its coffee culture? Inspired by Italian coffee bars, Schultz set out to provide a completely new consumer experience. The trademark of any Starbucks location is its ambience—the music and comfortable chairs and sofas draw customers in to sit and visit with friends while enjoying their beverages (and in some locations wine), food (a more recent addition), and complimentary WiFi. The menu boasts an array of offerings: Caffé Misto, Caramel Macchiato, Cinnamon Dolce Latte, Espresso Con Panna, and Mint Mocha Chip Frappuccino, as well as nearly 30 different coffee blends. Impressed customers then pay up to $4.50 for a Venti-sized drink. Starbucks has been so successful at creating its Starbucks experience that customers keep going back for more.Starbucks’ Core CompetencyStarbucks’ core competency is to create a unique consumer experience the world over. When buying out the original owners of Starbucks (a coffee bean roaster initially) in 1987, Schultz’s strategic intent was to create a “third place,” between home and work, where people would want to visit, ideally daily, and enjoy a sophisticated cup of coffee. Customers would pay for the unique experience and ambience, not just for the 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 13-fold, from less than $2 billion to nearly $26 billion in 2019. While core competencies are often built throughlearning from experience, they can atrophy through forgetting. This is what happened to Starbucks between 2004 and 2008, when it rapidly expanded operations by doubling its stores from 8,500 to almost 17,000 (see Exhibit MC2.2). It also branched out into ice cream, desserts, sandwiches, books, music, and other retail merchandise, straying from its core business. In trying to keep up with its explosive growth in bothstores and diverse product offerings, Starbucks began to forget its core competency. It lost the appeal that made it special and its unique culture became diluted. For example, it used to be that baristas would grind coffee beans each time a new pot of coffee needed to be brewed (which was at least every eight minutes, so basically throughout the day). The sound of coffee beans grinding and the fresh aroma of coffee filling the air were ubiquitous across all Starbucks stores. But to accommodate the brand’s rapid growth, many baristas began to take shortcuts: They would grind all the coffee beans in the morning and then store the ground beans for use throughout the day. The new espresso machines that were great for efficiency were not so great for customer service; they were so tall, they blocked interaction between baristas and customers. Although these and other operational changes allowed Starbucks to reduce costs and improve efficiency, they undercut Star-bucks’ primary reason for success—going to Starbucks not simply for the quick cup of coffee, but for the whole Starbucks coffee experience. Losing a blind taste-test to fast food giant McDonald’s further underscored the negative impact of cost-reduction measures. As one of among six coffees tested, Starbucks came in last. Even run-of-the-mill supermarket brands rated higher. Customers that not fans of the Starbucks flavor had nicknamed the chain “Charbucks” to reflect what some critics claimed to be an apt description: overly roasted, dark, and bitter. To make matters worse, the 2008 global financial crisis hit Starbucks hard. As is usually the case during a recession, the first items consumers tend to sacrifice are luxury items—people were no longer ordering $4.50 Venti cups of Starbucks coffeeHoward Schultz’s ReturnIn January 2008, Howard Schultz came out of an eight-year retirement to once again take the reins as CEO of Starbucks. His mission was to re-create what had made Starbucks so special from the start. Upon his return, 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 baristas could relearn the perfect way to prepare coffee. The company lost over $6 million in revenue that day, which heightened investor jitters. The financial hit and investor anxiety notwithstanding, Schultz knew it was critical for Starbucks employees to relearn what made the Starbucks experience so unique—he saw this as the key to restoring its corporate culture.NEW STRATEGIC INITIATIVES. 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 make multiple drinks at the same time, but, rather, concentrate 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’s return, managers had been mandated to focus on sales growth. Schultz, however, knowing that Starbucks’ main differentiator was its special customer experience, instructed managers to shift their attention and efforts accordingly. Although its earlier attempt to diversify away from itscore business in the mid-2000s failed, it succeeded under Schultz. Late afternoons and early evenings were traditionally always the slowest times for Starbucks, so it became Schultz’s goal to increase store traffic beyond the regular morning hours, when customers typically visited for their daily shots of caffeine. Schultz started by adding baked goods, sandwiches, and other small food items to the menu. To invite an even later crowd, he then introduced fresh vegetable plates, flatbread pizza, cheese plates, and desserts. Eventually, he added alcoholic beverages such as wine and beer (to be served after 4 p.m. only) as part of Starbucks’ “Evenings” program. Starbucks continued in these efforts by introducingnew luxury items, catering to the wealthier customers within its existing customer base. It introduced limited-run, exclusive batches of varietal coffees for home use and sold them at high price points online and in stores. Some stores also included these same higher-priced roasts on their menus. By 2014, Starbucks had launched its new StarbucksReserve Roastery and Tasting Room. The first of these super high-end stores—with more on the horizon—wasopened in Starbucks’ home city, Seattle. Indeed, Schultz’s plan was to open as many as 1,000 of these large-format, high-end roasteries in both national and international locations with the hopes they would improve declining sales and refresh the brand. Schultz believed that customers would enjoy the experience of watching baristas brew speciality coffees using the latest techniques (and thus willing to pay $12 a cup), mixing cocktails, and serving artisanal baked goods and other food items. Schultz wanted these roasteries to be a new “third place” for people to visit between work and home.MODIFIED STRATEGIC INITIATIVES. Many of the new initiatives just discussed have since been modified. For example, Starbucks has retooled its Evenings program, announcing in 2017 that it would serve alcohol only at its roastery locations. These modification have not dampened its ambitions. Over the next few years, Starbucks aims to double its food revenues and be recognized 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. It now uses Facebook and Twitter to communicate with customers more or less in real time. In 2019, Starbucks had 26 million mobile payment users, more than that of Apple Pay (25 million), Google Pay (13 million), and Samsung Pay (12 million). Experts predict that by 2022, Starbucks will have 30 million users on its mobile ordering and payment app, and will continue to lead Apple, Google, and Samsung. Some 30 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 simply pick up their order when they arrive at a location. With more than 14,000 stores in the U.S. market,Schultz started looking overseas for growth opportunities. Although traditionally a tea-drinking nation, coffee is catching on with urban professionals in China. In 2019, Starbucks had more than 3,500 stores in China, up from 1,500 in 2015. Starbucks plans to continue its rapid penetration of the Chinese market, aiming to operate 6,000 stores by 2022. Over the next few years, Starbucks also plans to double its presence in other areas of Asia(opening more than 4,000 cafes).In 2017, nine years after coming out of retirement to initiate a successful turnaround, Howard Schultz once again stepped down as Starbucks CEO in a second at-tempt at retirement (see Exhibit MC2.1).1 After his return, Starbucks’ market valuation had appreciated approximately five-fold. Schultz’s strategic leadership was clearly critical inturning Starbucks around. Some worry that Starbucks’ success is uniquely dependent on Schultz, suggesting that Schultz (and Starbucks) may have a strategic weakness in executive leadership succession planning. The primary evidence of this is that Starbucks stagnated and even went into decline during Schultz’s absence. Some argue that Starbucks’ struggle after Schultz’s first departure is similar to Microsoft’s challenges after Bill Gates stepped down from day-to-day business, Dell Computer after the first retirement of Michael Dell (now back), Walmart after the retirement of Sam Walton, and Apple after Steve Jobs was forced out in 1985. Although technically speaking, Howard Schultz is not a founder of Starbucks, he is the one who created the company as we know it today. Schultz hopes that this second retirement from thecompany that he built from the ground up will be his last. In the meantime, new CEO Kevin Johnson, who transitioned from Microsoft, faces several challenges—China represents a significant future growth opportunity for Starbucks, assuming it can transfer its core competency successfully. By 2022, the Seattle-based coffee chain plans on operating more than 6,000 stores in China, up from a mere 1,500 in 2015. Stephen Shaver/Zumapress.com/Alamy Stock Photoin particular, how to maintain Starbucks’ core competencies and how to achieve future growth—both domestically and internationally. The maturing sales of the more than 14,000 U.S.-based stores is one of the biggest challenges facing Johnson today. Exhibit MC2.3 displays the growth of same-store sales (same-store sales is an important performance metric in the retail industry; it applies to stores that have been inxistence for at least one year). Such sales have not only declined over the past decade, but have also fallen under its historic 5-percent growth threshold—a number that Starbucks has achieved for most of the past three decades. To address the issue of declining same-store-salesgrowth, Johnson is taking a more rational and data-driven approach than did Schultz, who led by intuition and emotion. First, Johnson drastically scaled back on Schultz’s vision to open 1,000 new high-end roasteries and tasting rooms, capping this number to a mere 10. He wants to see whether they provide an appropriate return on investment before expanding further and has laid out a stringent and disciplined approach to test the new store concept. By terminating this strategic initiative, Johnson freed up capital to refresh its existing stores, and to return cash to shareholders, one of Johnson’s stated goals. Johnson also plans to grow revenue by 10 percent and open an additional 12,000 traditional stores around the world by 2021. In addition, he plans to expand Starbucks’ coffee delivery business, even though some observers are skeptical, claiming this runs counter to the entire “third place” idea on which Starbucks was created. During his first year as CEO, Kevin Johnson wouldoften open meetings with Starbucks executives and employees by saying “I’m not Howard, I’m Kevin.”2 One of Johnson’s overarching goals is to bring more financial discipline to Starbucks, to run it based on hard data analysis, cutting-edge management and operational practices. Whether Kevin Johnson will be as successful as Howard Schultz remains to be seen.*****Assignment Criteria******The first step in analyzing a case is to skim it for the basic facts. As you read, jot down your notes regarding the following basic questions: • What company or companies is the case about? • Who are the principal actors? • What are the key events? When and where do they happen (in other words, what is the timeline)?Second, go back and reread the case in greater de-tail, this time with a focus on defining the problem. Which facts are relevant and why? Just as a doctor be-gins by interviewing the patient (“What are the symp-toms?”), you likewise gather information and then piece the clues together to figure out what is wrong. Your goal at this stage is to identify the symptoms in order to figure out which tests to run in order to make a definitive diagnosis of the main disease. Only then can you prescribe a treatment with confidence that it willactually help the situation. Rushing too quickly through this stage often results in malpractice (that is, giving a patient with an upset stomach an antacid when she re-ally has the flu), with effects that range from unhelpful to downright dangerous. The best way to ensure that you do no harm is to analyze the facts carefully, fighting the temptation to jump right to proposing a solution. The third step, continuing the medical analogy, is todetermine which analytical tools will help you to most accurately diagnose the problem(s). Doctors may choose to run blood tests or take an X-ray. In doing case analysis, we follow the steps of the strategic management process. You have any and all of the following models and frameworks at your disposal:1. Perform an external environmental analysis of the: • Macro-level environment (PESTEL analysis). • Industry environment (e.g., Porter’s five forces). • Competitive environment. • Strategic group analysis.2. Perform an internal analysis of the firm using the resource-based view: • What are the firm’s resources, capabilities, and competencies?• Does the firm possess valuable, rare, costly to imitate resources, and is it organized to capture value from those resources (VRIO analysis)? • What is the firm’s value chain?3. Analyze the firm’s current business-level and corporate-level strategies: • Business-level strategy (product market positioning).• Corporate-level strategy (diversification). • International strategy (geographic scope and mode of entry).• How are these strategies being implemented?4. Analyze the firm’s performance: • Use both financial and market-based measures. • How does the firm compare to its competitors as well as the industry average?• What trends are evident over the past three to five years?• Consider the perspectives of multiple stakeholders (internal and external).• Does the firm possess a competitive advantage? If so can it be maintained?Other guidelines to business case analysis:Review the Case Analysis project rubric for objectives and develop your case study using the following questions as an outline:

How did Starbucks create its uniqueness in the first place? Why was this uniqueness so successful?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? What strategic initiatives did Howard Schultz, following his return as CEO in 2008, put in place to re-create Starbucks’ uniqueness?What is your assessment of Howard Schultz as a strategic leader? Where on the Level-5 pyramid of strategic leadership (see Exhibit 2.2) would you place Schultz? Why? Explain.Howard Schultz, as the creator of the Starbucks brand that we know today, is a larger than life figure in the company and business community. Do you think it is difficult to follow such an iconic leader? Why, or why not?How is Kevin Johnson as CEO different from Howard Schultz? What leadership style is Johnson pursuing? Do you think he will be successful? Why, or why not?

****Please read all instructions before doing the case analysis******Thank you

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