Successful Entrepreneur: Howard Schultz of Starbucks Corporation
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Executive Summary
Everyone is familiar with Starbucks, the ubiquitous retail chain that sells coffee beverages, beans and accessories all over the world. Starbucks is the perfect example of a product that could have gone the route of a shallow brand. After all, what is so special about serving coffee? As the Starbucks brand proves, this is a question that other retailers would have benefited from asking. For centuries, bakeries have devised ways of getting the smell of freshly baked bread out onto the street to evoke a pleasant memory in passers-by. Starbucks has adopted this principle for distinction. Even before entering, you experience the intricate and complex smell of brewed coffee (LePla & Parker, 1999).
Everyone knows Starbucks, but only very few know Howard Schultz, the self-effacing chairman and mastermind behind Starbucks' astonishing growth from the time it was under Schultz’ hands. Howard Schultz, born on July 19, 1953, is an American businessman and entrepreneur who is most widely known as the chief global strategist and chairman of the coffee giant Starbucks.
For the remainder of this paper, Howard Schultz’ role as the business man and entrepreneur who brought Starbucks to be the coffee giant that it is today will be discussed. Issues and problems that the company has faced, and strategies that Schultz used as well as his reasons for doing them will also be presented in this paper. Schultz’ entrepreneurial skills are mainly responsible for the success that Starbucks now has.
Background
With more than 7,300 retail outlets around the world, approximately 25 million customers visit Starbucks every week – a true reflection of business on a global scale. Until Schultz arrived, Starbucks simply sold whole roasted beans to consumers who ground and brewed them at home. The charismatic Schultz changed all that, selling his vision of a Starbucks chain that would deliver espresso-based coffee drinks to upscale consumers in retail stores across the country. He cleaned up the Starbucks mermaid, covering her bare breasts, and went to work (Pendergrast, 2002).
Based on his 1983 trip to Milan, Schultz recognized "an enormous opportunity for Starbucks to recreate the Italian coffee bar culture in the U.S. The opportunity was to reframe coffee drinking into a social experience in America by providing a high-end product in a personalized environment to consumers wanting "affordable luxury" (Koehn, 2001).
In 1987, during Schultz's first year of ownership, Starbucks lost $330,000. The next year, $764,000, and by 1989, the firm dropped $1.2 million. There were then 55 Starbucks locations in the Pacific Northwest and Chicago. Investors simply had to have faith, delivering repeated infusions of venture capital. In 1990, the company turned the corner, building a new roasting plant and showing a small profit. The following year, Starbucks invaded Los Angeles, where many feared the warm weather would deter hot coffee sales, but it was an immediate hit. "Almost overnight, Starbucks became chic," Schultz remembers. "Word of mouth, we discovered, is far more powerful than advertising’ (Pendergrast, 2002).
Schultz began to hire MBAs and corporate executives with experience running chain franchises, creating complex computer systems, and training employees nationwide to deliver standardized consumer goods. He recruited many of them in the early 1990s from fast food companies like Kentucky Fried Chicken, Wendy's, McDonald's, Burger King, Pepsi, and Taco Bell, and they brought professional management to the pre-existing coffee idealism. By the end of 1991, there were just over 100 stores with $57 million in sales (Pendergrast, 2002).
Modeled after coffee houses in Italy, the Starbucks coffee bar was carefully designed to appeal to a coffee lover's five senses. The store's rich coffee aroma, married with flavorful coffee (at a premium price), browser-friendly product displays, beautiful music, and relaxing tables and chairs, were an instant hit with consumers who soon made a visit to Starbucks part of their daily routine. Today, the average Starbucks customer visits eighteen times a month and spends an average of $3.50 a visit. With close to three thousand stores and still growing, the company experienced 50 percent sales and profit growth through much of the 1990s. Starbucks is proof positive that real value, not price promotion, wins customer loyalty (Griffin & Herres, 2002).
Under the leadership of Howard Schultz, Starbucks looked closely at what was missing for coffee enthusiasts and created a unique way to address those wants. The company stopped thinking about coffee as simply a product that was bagged and sent home with the groceries and instead started selling coffee by the cup through Starbucks coffee bars (Griffin & Herres, 2002). In this way, Schultz redefined the coffee industry in America, which, for more than the past 40 years, had been led by a few large companies competing on price and delivering a low-quality commodity that was meant to be made and consumed at home. By importing into his company the knowledge he gained from his (external) sources in Italy, Schultz developed a new framework for entrepreneurial action that was composed of several strategic assets gained through cognitive learning.
Howard Schultz once predicted: "Starbucks is going to be a global brand, in the same genre as Coke and Disney." He apparently meant it. In 2000, Schultz booted himself upstairs from the CEO position, which he gave to Orin Smith, and Schultz is now the chairman and "chief global strategist" for the coffee giant.
Entrepreneurship at Starbucks
When a new entrepreneurial venture is started it is often with minimal organizational structure based on flexible ideas and situated in a turbulent market. The structure is built as the business grows and the idea evolves. Given the organizational and environmental uncertainty, decisions tend to be made according to the “organized anarchy” (Cohen, et al, 1972) model in which there are no clear preferences, processes are not well understood by its members and participation in decision-making is fluid. The entrepreneurial spirit remains alive in the highly successful Starbucks, sustained by close relationships among employees and with customers. Amply rewarded employees are also a source of pride for the coffee chain, which grew from a four-store retailer to a 1,500-outlet chain (Smith, 1998).
There are two plans that an entrepreneur might develop. The first is the business plan, which identifies the new idea, overall goal(s) and market position of the company. The second is the operational plan which details how the organizational goal(s) will be achieved. A business plan is recommended by many prescriptive entrepreneurial theorists as an important step in securing funding and building a business (Perrin Moore, 2000).
However, according to Bhide’s (2000) survey 41 percent of the entrepreneurs had no business plan and 26 percent had only a rudimentary plan. Even venture capitalists recognize the limits of the business plan. According to Rock (1999), cofounder of Arthur Rock & Co. venture capital firm, who helped finance the founding of Intel and Apple Computer, good ideas and good products are a dime a dozen. “I generally pay more attention to the people who prepare a business plan than to the proposal itself”. Good execution, management and good people are rare. Strategy is easy to implement, but tactics – the day-to-day and month-to-month decisions – required to manage a business are hard. These ideas further support the concept of the emergent or free flowing new business idea. Entrepreneurs have to be creative and perceptive enough to recognize the need to alter an idea as the environment requires.
One of the most important strategic assets at Starbucks involves Schultz’s rethinking of the human resource side of the consumer-driven stores. Whereas servers are traditionally the lowest-paid employees in the restaurant industry, Schultz had learned that a "high-touch" personalized experience was the biggest motivator for customers, and this was only possible if all the front-end employees were able to lean the names and preferences of their frequent customers. Thus, Schultz reconceived Human Resources as a core component of his overall strategy, leading to a set of HR benefits that were previously unheard of in the industry.
Not only are Starbucks’ front-end employees the highest paid in the restaurant industry, Starbucks was the first to institute a benefits package for part-time employees, provide stock options for most of their workers, and offer a full week of paid training for every new member (Lumpkin, 2005). According to Schultz, Starbuck’s mission statement about treating people with respect and dignity is not just words but a creed we live by every day. You can't expect your employees to exceed the expectations of your customers if you don't exceed the employees' expectations of management (Smith, 1998).
Starbucks also gives their employees – whom they call partners - 24 hours of training, which includes not just the nuts and bolts of what the company does but also how the company treats their people. Starbucks was thus one of the first U.S. companies to offer employee-ownership to full and part-time employees through annual stock options. The company also offers comprehensive health-care benefits to all employees. Starbucks is the first company in the country to give its part-time employees (65% of its workforce) full health care benefits and stock options. This is a good example of a purpose imbued with values translated into positive principles for operating a business.
The result: turnover at Starbucks is the lowest of any similar organization, and the high-touch experience translates into the strongest form of word-of-mouth publicity, thus obviating the need (and expense!) for local or national advertising. Further, as frontline employees are empowered to constantly suggest and implement new improvements, knowledge-creation has been institutionalized as an active and ongoing process within the company (Lumpkin, 2005).
Of course the route to the top is never perfectly smooth, and Starbucks itself is no stranger to criticism and controversy. There are numerous “anti Starbucks” Web sites, which provide various levels of detail about alleged mistreatment of suppliers and anti-competitive practices. Whether these stories have a basis in fact is open to question. What is not, however, is that this negative publicity is bad news for the Starbucks brand (Strategic Direction, 2004).
But for all the negative publicity and occasional protests by activists, there are also many shining examples of good corporate citizenship. For instance, as already mentioned, Starbucks was among the first companies to offer health benefits and stock options for part-time employees. CEO Orin Smith is quoted as saying: “social responsibility is not an add-on to our business – it’s an essential part of who we are”. Starbucks has also managed to maintain a squeaky-clean image, working with Conservation International to promote shade-grown, ecologically friendly coffee (Pendergrast, 2002). Howard Schultz has also won the respect of many critics through his handling of a robbery at one of his Washington cafés in which three Starbucks employees lost their lives. Schultz was immediately on the scene, helped in every way he could and also declared that all future profits from that café would be donated to charities in the future (Strategic Direction, 2004).
Schultz the Entrepreneur
Howard Schultz could be considered a leader from the Social view. As a key feature, the Social view focuses on a leader's ability to lead with a truly caring and benign view of others. This leadership approach looks for ways to enhance employees' job satisfaction and organizational goals. Howard Schultz is considered a "visionary with values." He demonstrates self-respect for employees and focuses on helping others strive for success, making a difference and contribution to the community, and rewarding workers for courage, integrity, and social vision in business (Fandt & Quirk, 2000). Schultz demonstrated a talent for being able to empathically understand and value the positive nature of individuals.
Schultz believed very early on that people's interaction with the Starbucks experience was going to determine the success of the brand. The culture and values of how Starbucks related to the customers, which is reflected in how the company relates to their employees, would determine the company’s success. Starbucks thought the best way to have those kinds of universal values was to build around company-owned stores and then to provide stock options to every employee, to give them a financial and psychological stake in the company. As a result, Starbucks has the lowest employee turnover of any food and beverage company.
Starbucks has expanded but not through franchising. Schultz always viewed franchising as a way to get access to capital, because you're using other people's money to grow, essentially. Starbucks is dealing with a premium product--something that can be hard to learn, that you have to explain to the customer, that requires an educated staff. According to Schultz, it would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if franchised. All the stores of Starbucks are still company owned.
There are a lot of advantages to the company-owned model. Universal company values can be created. You can read the marketplace and turn on a dime. As a company-owned business, Starbucks can do that. According to Schultz, if you're a franchised company, it's hard to make quick adjustments because there's an extra level of people in the business [the franchisees] that you have to basically pass all the decisions through. And that can make these kinds of transitions harder (Kurlantzick, 2003).
Being company-owned also Starbucks you to find significant new revenue sources without having to worry whether they might compete with your franchisees' businesses. Starbucks has created a major new revenue source recently by selling bags of Starbucks coffee, bottled Starbucks coffee drinks and Starbucks ice cream in supermarkets. If Starbucks were a franchise, it would be difficult to sell products in supermarkets because most franchisees probably would see that as competition and not like it. In a franchise situation, there are a lot of prohibitions on territoriality and exclusivity. Starbucks doesn't have those problems, so according to Schultz they can open up many stores in an area quickly and even sometimes cannibalize their own business (Kurlantzick, 2003).
Though Schultz could have quadrupled his expansion rate by franchising Starbucks, he chose to open only company-owned stores, except in airports or other odd spots that demanded licensure. That way, he could maintain strict control of quality and training. Similarly, he maintained close to vertical integration, sending his coffee buyers in search of the best beans, then roasting, grinding, and brewing them to strict specifications. The chain paid slightly above minimum wage -- better than most fast food companies -- and provided an innovative benefits package that included part-time employees who worked 20 hours a week or more (Pendergrast, 2002).
Conclusion
Starbucks has made clear to a new generation of restaurateurs and entrepreneurs that even in a crowded retail environment there is plenty of room for a concept that demonstrably meets consumer demand. But, equally important, Schultz and Starbucks have shown that rapid growth is built with loyal employees as well as loyal customers. Starbucks' extension of health care benefits and provision of stock options to all employees, both full- and part-time, are models many other foodservice organizations now are following. The visionary with values, Schultz’, has entrepreneurial ideas focused both on the employees and the customers of Starbucks.
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