Starbucks after schultz how to sustain a competitive advantage

Starbucks after Schultz: How to Sustain a Competitive Advantage? By Frank Rothaermel 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 $27 billion in 2017. While core competencies are often built through learning from experience, they can atrophy through forgetting. This is what happened to Starbucks. Between 2004 and 2008, Starbucks expanded operations rapidly by doubling the number of stores from 8,500 to almost 17,000 stores (see Exhibit MC8.1). It also branched out into ice cream, desserts, sandwiches, books, music, and other retail merchandise, straying from its core business. Trying to keep up with its explosive growth in both number of stores and product offerings, Starbucks began to forget what made it unique. It lost the appeal that made it special, and its unique culture got diluted. For example, baristas used to grind beans throughout the day whenever a new pot of coffee had to be brewed (which was at least every eight minutes). The grinding sounds and fresh coffee aroma were trademarks of Starbucks stores. Instead, to accommodate its fast growth, many baristas began to grind all of the day’s coffee beans early in the morning and store them for the rest of the day. New espresso machines, designed for efficiency, were so tall that they physically blocked interaction between baristas and customers. Although these and other operations changes allowed Starbucks to reduce costs and improve efficiency, they undercut Starbucks’ primary reason for success—that going to Starbucks was not simply a stop for caffeine; it was a sensory experience. The negative impact of costreduction measures was underscored when Starbucks lost a blind taste-test to fast food giant McDonald’s. Among six coffees tested, Starbucks came in last. Even run-of-themill supermarket coffees sold in huge cans were rated higher. Some customers don’t like Starbucks coffee and gave the chain the nickname “Charbucks”—because critics say that a lot of the coffee has an overly roasted quality, a dark and bitter taste. EXHIBIT MC8.1 Total Number of Starbucks Stores and Revenues ($ billions), 1971– 2017 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.