Starbucks: A Continuing Case Study on Community, Connection, and Coffee

The Essence of Starbucks Corporation

Part One Continuing Case: Starbucks

Community. Connection. Caring. Committed. Coffee. Five Cs that describe the essence of Starbucks Corporation—what it stands for and what it wants to be as a business. With more than 24 000 stores in 70 countries, Starbucks is the world’s number one specialty coffee retailer. The company also owns Seattle’s Best Coffee, Teavana, Tazo, Starbucks VIA, Starbucks Refreshers, Evolution Fresh, La Boulange, and Verismo brands. It’s a company that truly epitomizes the challenges facing managers in today’s globally competitive environment. To help you better understand these challenges, we’re going to take an in-depth look at Starbucks through these continuing cases, which you’ll find at the end of every part in the textbook. Each of these six part-ending continuing cases will look at Starbucks from the perspective of the material presented in that part. Although each case “stands alone,” you’ll be able to see the progression of the management process as you work through each one.

“We aren’t in the coffee business, serving people. We’re in the people business, serving coffee.” That’s the philosophy of Howard Schultz, former chairman and chief global strategist of Starbucks. It’s a philosophy that has shaped—and continues to shape—the company.

The first Starbucks, which opened in Seattle’s famous Pike Place Market in 1971, was founded by Gordon Bowker, Jerry Baldwin, and Zev Siegl. The company was named for the coffeeloving first mate in the book Moby Dick, which also influenced the design of Starbucks’s distinctive two-tailed siren logo. Schultz, a successful New York City businessperson, first walked into Starbucks in 1981 as a sales representative for a Swedish kitchenware manufacturer. He was hooked immediately. He knew that he wanted to work for this company, but it took almost a year before he could persuade the owners to hire him. After all, he was from New York, and he hadn’t grown up with the values of the company. The owners thought Schultz’s style and high energy would clash with the existing culture. But Schultz was quite persuasive. They asked him to join the company as director of retail operations and marketing, which he enthusiastically did. Although some of the company’s employees resented the fact that he was an “outsider,” Schultz had found his niche.

About a year after joining the company, while on a business trip to Milan, Schultz walked into an espresso bar and right away knew that this concept could be successful in the United States. He said, “There was nothing like this in America. It was an extension of people’s front porch. It was an emotional experience. I believed intuitively we could do it. I felt it in my bones.” The Italian coffee bars were more like an experience—a warm, community experience. That’s what Schultz wanted to recreate in the United States. However, Starbucks’s owners weren’t really interested in making Starbucks big and didn’t really want to give the idea a try. Two years later when Starbucks’s owners finally wanted to sell, Schultz raised $3.8 million from local investors to buy them out. That small investment has made him a very wealthy person indeed!

Starbucks’s History of Success

Starbucks’s main product is coffee—more than 30 blends and single-origin coffees. In addition to fresh-brewed coffee, here’s a sampling of other products the company also offers:

• Handcrafted Beverages: Hot and iced espresso beverages, coffee and noncoffee blended beverages, Tazo^® teas, and smoothies
• Merchandise: Home espresso machines, coffee brewers and grinders, premium chocolates, coffee mugs and coffee accessories, compact discs, and other assorted items
• Fresh Food: Baked pastries, sandwiches, salads, hot breakfast items, and yogurt parfaits
• Global Consumer Products: Starbucks Frappuccino coffee drinks, Starbucks Iced Coffee drinks, Starbucks Liqueurs, and a line of super-premium ice creams
• Starbucks Card and my starbucks rewards Program: A reloadable stored-value card and a consumer rewards program
• Brand Portfolio: Starbucks Entertainment, Ethos Water, Seattle’s Best Coffee, and Tazo Tea

At the end of 2016, the company had more than 254 000 full- and part-time partners (employees) around the world. Howard Schultz was the chairman, president, and CEO of Starbucks. Some of the other “interesting” executive positions include chief operating officer; global chief marketing officer; chief creative officer; executive vice president of partner resources and chief community officer; executive vice president, global supply chain; executive vice president, global coffee; learning business partner; and international partner resource coordinator.

Howard Schultz, at age 46, stepped out of the CEO job in 2000 (he remained as chairman of the company) because he was “a bit bored.” By stepping down as CEO—which he had planned to do, had prepared for, and had no intention of returning to—he was saying that he agreed to trust the decisions of others. At first the company thrived, but then the perils of rapid mass-market expansion began to set in and customer traffic began to fall for the first time ever. Schultz couldn’t shake his gut feeling that Starbucks had lost its way.

In a memo dubbed the “espresso shot heard round the world,” Schultz wrote to his top managers explaining in detail how the company’s unprecedented growth had led to many minor compromises that when added up led to a “watering down of the Starbucks experience.” Starbucks had lost its “cool” factor, and Schultz’s criticism of the state of the company’s stores was blunt and bold. There was no longer a focus on coffee but only on making the cash register ring. Within a year of the memo Schultz was back in charge and working to restore the Starbucks experience. The first thing he did was to apologize to the staff for the decisions that had brought the company to this point. To restore quality control he closed all 7100 U.S. stores for one evening to retrain 135 000 baristas on the coffee experience … what it meant, what it was. It was a bold decision and one unsupported by many “experts,” but Schultz felt it was absolutely necessary to revive and reenergize Starbucks.

Another controversial decision was to hold a leadership conference with all store managers (some 8000 of them) and 2000 other partners—all at one time and all in one location. Why? To energize and galvanize these employees around what Starbucks stands for and what needed to be done for the company to survive and prosper. The cost was around $30 million total (airfare, meals, hotels, etc.).

Starbucks’s Management Challenges

Schultz chose New Orleans as the site for the conference, not the home base of Seattle. Here was a city still recovering from Hurricane Katrina. Talk about a logistical nightmare—and it was. But the decision was a symbolic choice. New Orleans was in the process of rebuilding itself and succeeding, and Starbucks was in the process of rebuilding itself and could succeed, too. While there, Starbucks partners volunteered some 50 000 hours of time, reinforcing to Schultz and to all the managers that despite all the problems, Starbucks had not lost its values. Other decisions, like closing 800 stores and laying off 4000 partners, were more difficult. Starbucks has again come back even stronger in what it stands for, achieving record financial results.

So we’re beginning to see how Starbucks epitomizes the five Cs—community, connection, caring, committed, and coffee. In this Continuing Case in the Management Practice section at the end of Parts 2–6, you’ll discover more about Starbucks’s unique and successful ways of managing. As you work on these remaining continuing cases, keep in mind that there may be information included in this introduction you might want to review.

Starbucks presents an interesting opportunity to discuss how managers manage in today’s workplace and where they must be aware of some specific integrative issues that can affect the way they plan, organize, lead, and control. The characteristics and nature of these integrative issues will influence what managers and other employees do and how they do it. And more important, they will affect how efficiently and effectively managers do their job of coordinating and overseeing the work of other people so that goals—organizational and work-level or workunit—can be accomplished.

The original Starbucks was a company passionately committed to world-class coffee and dedicated to educating its customers, one-on-one, about what great coffee can be. Schultz was the visionary and soul behind the Starbucks of today. Prior to his departure as CEO in April 2017, he visited at least 30 to 40 stores a week, talking to partners (employees) and to customers. One member of the company’s board of directors says about him, “Howard is consumed with his vision of Starbucks. That means showing the good that a corporation can do for its workers, shareholders, and customers.”

The company’s mission and guiding principles have significantly influenced the organization’s culture. Starbucks’s culture emphasizes keeping employees motivated and content. Schultz treasured those relationships and believed they’re critically important to the way the company develops its relationships with its customers. “We know that our people are the heart and soul of our success.” Starbucks employees worldwide serve millions of customers each week. The experiences customers have in the stores ultimately affect the company’s relationships with its customers. Starbucks has created a unique relationship with its employees—in Canada it even provides all employees who work more than 20 hours a week a Special Blend package that might include bonuses, retirement savings matching, and discounted stock purchase options. The company also provides adoption assistance and health coverage for employees and their dependents, including domestic partners.

Starbucks’s Main Products and Services

You could say that Starbucks has been a global business from day one. Today, the company has more than 24 000 stores in 70 countries and is the world’s number one specialty coffee retailer. Doing business globally, can be challenging. Since much of the company’s future growth prospects are global, the company has targeted some markets for additional global expansion, including China, Brazil, and Vietnam. Schultz was clear about the fact that the company sees China as the number one growth opportunity for Starbucks. Starbucks must be cognizant of the economic, legal, political, and cultural aspects that characterize those markets. For instance, in Europe—the “birthplace of café and coffeehouse culture”—Starbucks is struggling. The biggest challenge for Starbucks may be trying to appeal to the vast array of European tastes. Although the growth potential seems real, cultural challenges still remain, not only in Europe but in Starbucks’s other markets as well. As Starbucks continues its global expansion, it’s attempting to be respectful of the cultural differences, most especially in that important market of China.

Starbucks is committed to being an organization that embraces and values diversity in how it does business. The company-wide diversity strategy encompasses four areas: customers, suppliers, partners (employees), and communities. Starbucks attempts to make the Starbucks

Experience accessible to all customers and to respond to each customer’s unique preferences and needs. Starbucks’s supplier diversity program works to provide opportunities for developing a business relationship with women- and minority-owned suppliers. As far as its partners, the company is committed to a workplace that values and respects people from diverse backgrounds. The most current company diversity statistics available show that 33 percent of employees are minorities and 64 percent are women. And Starbucks aims to enable its partners to do their best work and to be successful in the Starbucks environment. Although the company is committed to practising and valuing diversity, by no means is it perfect. For instance, an Americans with Disabilities Act (ADA) case was filed against a specific Starbucks store in the United States by a little person who for applied for a job as a barista. The store management refused to hire her even though she explained she could do the job using a step stool, and they did even offer to try this accommodation. Starbucks quickly settled the case and agreed to provide training to managers on proper ADA procedures.

Starbucks takes its social responsibility and ethical commitments seriously. In 2001, the company began issuing an annual corporate social responsibility report, which addresses the company’s decisions and actions in relation to its products, society, the environment, and the workplace. These reports aren’t simply a way for Starbucks to brag about its socially responsible actions, but are intended to stress the importance of doing business in a responsible way and to hold employees and managers accountable for their actions.

Starbucks focuses its corporate responsibility efforts on three main areas: ethical sourcing (buying), environmental stewardship, and community involvement. Starbucks approaches ethical sourcing from the perspective of helping the farmers and suppliers who grow and produce their products to be successful and to use responsible growing methods, thus promoting long-term sustainability of the supply of quality coffee. It’s a win-win situation. The farmers have a better (and more secure) future, and Starbucks is helping create a long-term supply of a commodity it depends on.

Starbucks is also very serious about doing business ethically. In 2017, the company was one of World’s Most Ethical Companies, as it had been for the last 11 years. From the executive level to the store level, individuals are expected and empowered to protect Starbucks’s reputation through how they conduct business and how they treat others. And individuals are guided by the Standards of Business Conduct, a resource created for employees in doing business ethically, with integrity and honesty. The company also strongly states that it does not tolerate any retaliation against or victimization of any partner who raises concerns or questions.

Starbucks has always thought “outside the box.” From the beginning, it took the concept of the corner coffee shop and totally revamped the coffee experience. And the company has always had the ability to roll out new products relatively quickly. The company’s R&D (research and development) teams are responsible for innovating food and beverage products and new equipment. In 2011, the company spent nearly $15 million on technical R&D, product testing, and product and process improvements in all areas of the business. That was a 67 percent increase over 2010 expenditures and a 114 percent increase over 2009 expenditures.

With that being said, successful innovations sometimes lead to unexpected consequences. Starbucks Mobile Order & Pay app showed rapid customer adoption, leading to operational challenges. The intent was to reduce long queues at Starbucks restaurants, but it instead created congestion at the hand-off plane due to unexpectedly high volumes (almost 16 percent of orders are now placed using the app). This has led to a decline in sales to walk-in customers. The irony is that the company succeeded in its innovation, but the “law of unintended consequences” led to negative consequences in other parts of the business.

Discussion questions:

1. What management skills do you think would have been most important for Howard Schultz to have? Why? What skills do you think would be most important for a Starbucks store manager to have? Why?

2. Choose three of the current trends and issues facing managers, and explain how Starbucks might be impacted. What might be the implications for first-line managers? Middle managers? Top managers?

3. Look at Howard Schultz’s philosophy of Starbucks. How will this affect the way the company is managed? Do you think Howard Schultz viewed his role more from the omnipotent or from the symbolic perspective? Explain.

4. What has made Starbucks’s culture what it is? How is that culture maintained? Does Starbucks encourage a customer-responsive culture? An ethical culture? Explain.

5. What types of global economic and legal-political issues might Starbucks face as it does business globally?