Starbucks Coffee Company: Transformation and Renewal – Case Solution

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Starbucks Coffee Company: Transformation and Renewal Case Answers

Starbucks Coffee Company

Inspired by European coffee bars and a desire to create a third place where people can relax and reconnect, Starbucks Coffee Company was born in Seattle, United States of America.

With the goal to serve premium quality coffee and to emotionally connect with its consumers at the store level, Starbucks changed America’s coffee culture.

Within 10 years of its initial public offering, Starbucks had created a strong foothold in the US and was revolutionizing coffee culture internationally.

With its annual growth rate compounding at 36%, Starbucks Coffee Company felt the pressure to increase its revenue, expand geographically, and meet the rising expectations of its investors. To increase its profit margins, Starbucks became more focused on its financial metrics and, in a way, lost its mojo of connecting with its customers.

With growing competition and Starbucks’s shifting focus from consumers, the Starbucks Experience was diluted, as evidenced by its declining growth rate.

Recognizing the early signs of the looming financial problems and deteriorating Starbucks culture, founder and CEO Howard Schultz stepped in and made significant changes within the company.

The paper outlines problems faced by Starbucks and how Howard Schultz’s transformational leadership style addressed these issues.

It also examines Starbucks’ organizational restructuring through a combination of the 7s framework lens and concludes with recommendations to keep the momentum going in order to sustain its future growth.

Dilution of Starbucks Experience:

Howard Shultz envisioned creating a coffee chain that emotionally appealed to its consumers and would create a relationship between baristas and customers. Based on this shared value, Starbucks evolved from a small coffee company to a global brand.

Since its IPO in the year 1992, Starbucks has grown exponentially from 677 stores in the year 1995 to 15,000 plus stores globally by 2007 (Exhibit 1). From the financial aspect, Starbucks’ geographical expansion, coupled with increasing revenue that compounded annually at 36%, garnered investors’ support in the form of rising stock prices.

Working toward the single goal of scaling operations to 40,000 stores, Starbucks failed to notice the declining trend of its key metrics like the same-store sales that reduced by 2% between 2004 and 2007 (Exhibit 2), a gross margin which decreased by 2.5% from 2006 – 2007 and its stock prices.

On the operations side, there was a shift toward a product-centric strategy to streamline store processes to increase speed and efficiency. Although well-intended, this compromised the company’s core value of providing a human connection.

The commoditization of its products was one of the reasons for declining comps. Its supply chain inefficiencies meant there was a 35% probability of goods being delivered on time, increasing the runaway rate to $100 million every year.

Analyzing the external environment of Starbucks Coffee Company, inspired by its success, many local and established companies opened coffee outlets. For companies like McDonald’s and Dunkin’s, which already had established outlets catering to cost-conscious customers, offering coffee drinks was synergistic with its existing operation, increasing its product diversification.

Amidst the crumbling economy, declining key performance metrics, and facing competition from a growing coffee chain, it was imperative for Starbucks to rediscover its value proposition and identify its comparative advantage to remain relevant in the market.

Transformational Leadership & Turnaround Management:

Concerned with the declining performance of Starbucks, Howard Schultz returned as CEO in 2018 and quickly assuaged the fears of its employees regarding upcoming changes in the organization.

The CEO re-emphasized the mission of Starbucks – To inspire and nurture the human spirit, and reiterated the principles of connecting with consumers, valuing its partners (employees), and understanding its Corporate Social Responsibility towards the neighborhood.

These shared values of Starbucks Coffee Company served as…