Starbucks is the largest coffee brand in the world, and is famous among all age groups particularly because of its ‘connection’ with the people and experience with which customers remember it forever. Like known to everyone that Starbucks provides the best coffee in town, we have proposed research to look deeper into the transformation process at Starbucks after the financial crisis of 2007-2008. This research will show how Starbucks enabled itself to fight the crisis and what change management approaches it used or could have used to enhance people’s experience. We will also look deeper into the mobile app introduction by Starbucks and how leaders did the consensus to boost the sales of coffee.
Overview of Starbucks:
Starbucks always had its unique characteristics. The romance in coffee and making the coffee was all introduced by Starbucks who making the world, fall in love with what they had to offer. Starbucks started as a small store in Seattle in 1971 into a worldwide phenomenon now. Today, it covers 65 countries with 21,000 stores (Starbucks, 2015). This fast growth can be attributed to various factors. With an annual growth rate of 6% and $3.9 billion in sales, Starbucks is an excellent example for turning love for coffee into a flourishing business investment (Forbes, 2014). Their mission is 'to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time (Starbucks Coffee Company, 2015). In 1994, Starbucks gained the rights to make, sell, and use Frappuccino when they took over George Howell's The Coffee Connection cafe. In 1996, Starbucks had an annual sale of Frappuccino’s over $52 million. All this led to what Starbucks is today.
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Crisis of 2007-2008 at Starbucks:
Understanding the crisis requires understanding the economic crisis and how the works. In order to measure market efficiency, a well-balanced model is required. In February 2007, CEO of Starbucks, Howard Schultz said he saw the crisis coming. He warned about the commoditization of Starbucks in an internal memo to the various senior staff at Starbucks (The Economist, 2008). Selling CDs, DVDs, books, t-shirts, etc. gave Starbucks that edge over others yet pulled down on its reputation of being Coffee-Lovers. The company started replacing Hand-made espresso with Automated Machines. In 2007, Starbucks shares dropped down by 42% making the worst performer on the stock market. The sub-prime mortgage crisis brought in many competitors. During the period of 2005- 2007, many new competitors were arising like Dunkin Donuts, McDonald's etc. because they realized the potential of selling good coffee. Many people were worried about Starbucks's fast growth. Analysts like Howard Penney stated that Starbucks had to slow them growth. They have been growing too fast. The prices for food commodities were increasing, forcing the company to increase its prices also. Customers had already enough worry of Oil prices, Food etc., that this had taken its toll on Starbucks. This encouraged competitors, like Dunkin Donuts, Panera Bread, and McDonald's to sell reasonable taste coffee for cheap making Starbucks look like a brand targeting only Affluent Middle-Class Earners. Starbucks felt the effect of the market earlier by June 2006. But though the worst period for Starbucks was from October 2008 till March 2009, the Schultz team had positive evaluations showing the market recognized his efforts. But the rapid growth of Starbucks, brought in structural problems like store profitability, drop in demand etc. The opening of new stores increased these problems because Starbucks had a frantic growth rate, nearly opening 20000+ stores in various countries in a time period of 20 years.
Change Management
Change is defined as one of the few constants of recorded history. In the 21st century, change has become a critical topic for organizational leaders, therefore we can see change everywhere. Its hustle and convolution are growing. In today’s market, inducing change is a must for organizations for better future and success. Inducing change in any organization is a process of three main steps which identify the willingness for a change to happen, apply the change and maintain the change. Change has the power to affect everyone from top to the bottom level.
However, to some degree, the biggest mistake organizations make when implementing change is that they climb ahead without forming a sense of resolution among fellow managers and employees. Managers, mostly the CEOs of the companies fail to communicate vision and objectives with their employees at the very start of the transformation by overlooking the fact of how hard it is for the workers to come out of their comfort zones and learn the new parameters of the business. Another idea is to prevent the lack of a powerful guiding coalition, major change becomes difficult to implement if the head of the organization is not supportive and active. Vision plays a major role in the process of change. It helps to direct and align the activities of the organizations and people and avoids confusion and dissolves all the unnecessary obstacles that lead the organization to nowhere. Major changes need the involvement of the employees. People are generally reluctant to make sacrifices; they may show short-term interest in the change process but unless and until they think that the process is attractive and holds benefits for them. It is highly important to create a suitable communication channel for and with the employees to seize their hearts and minds. Some organizations have full support and willingness from their employees but still are unprivileged to resolve huge barriers in their path. The barriers could be the structure of the organization itself, where the CEO of an organization might not change his personal behavior and doesn’t recompense his employees or their vision (Kotter, 1996). Change involves practice and time, and setting long-term goals can be a threat to change. Businesses can lose momentum without creating short-term wins. It is recommended by Kotter (1996) for organizations to stay realistic and avoid the bigger leaps that employees stop worrying about the short goals.
Celebrating the implementation of the change process is not suggested until the change go down to the root of the organization, a company can take two to three years to grasp the new approach, it is highly advisable to wait before the change is implemented. Once the change is implemented, it must be adapted as a ‘way’ to work and process things. This stage involves decisions and brainstorming of the directors so that they can enable future directors to follow the same strategy. New managers must be able to understand the transformation in detail.
Change Management at Starbucks
Why Starbucks considered to change its strategy and how did they come back? Or the Turnaround of Starbucks. In 2010, Starbucks reported annual sales revenues $2.6 billion (Starbucks Annual Report, 2011), which was huge turnover from the past 3years during the crisis. U.S sales increased by 8%, driven by 5% increase in traffic. But the question is how, did this happen? The first step taken by CEO Howard Schultz as he said in an interview with Harvard Business, was to accept full responsibility of the own mistakes of the leadership team. Schultz believed in 'owning reality was critical to expediting change' (Harvard Business Review, 2010). He says that once leaders identify the problem and take responsibility for it, they save time in making up excuses to cover up goof-ups and can take an immediate course of action in turning things around for their business. Another point, to be considered that helped Starbucks was, that leaders of the company should be involved at every level to ensure success. Building a relationship with your employees in the company helps the business prosper, says Bruce and Pepitone (1999). This is exactly what Starbucks did. They spent $ 30 million during the financial hardships and took each and every one of their 10,000 store managers to New Orleans for a conference of the company. Moreover, before the conference, each store in charge was asked to do 5 hours of community service to show their commitment to customer service by doing it themselves (Starbucks Newsroom, 2015). Starbucks had to rebuild their customer relationships and the trust the customers had in them before the economic crisis. Starbucks now had to ensure and show the world; that consistency and quality would be cared for.
Starbucks introduced many ideas like MyStarbucksIdea, which would ensure a direct relationship with the customer. Starbucks also cut costs, which were approximately $581 million, by improving efficiency, reducing waste etc. which all led to very high levels of satisfaction from customers (Prabhakar et al., 2013). But more importantly, Starbuck's main success for their comeback was their need to care for customers and their satisfaction. Introducing various ideas, like the Free Wi-Fi, carrying out corporate social responsibility and advertising helped them 'redo the look' of Starbucks. Earning its customers back, became a necessity and Starbucks wasn't compromising on it. To apply the change strategy smoothly and resist the traditional mistakes made by most of organizations, John P. Kotter (1996) at Harvard Business School introduced an eight-stage process while making change, we will apply Kotter’s model on Starbucks' strategy and look how much it has influence Starbucks as a company.
The Kotter’s Eight-Stage Process of Creating a Major Change
- Establishing a sense of urgency
- Creating the Guiding Coalition
- Developing the guiding coalition
- Communicating the Change Vision
- Empowering Broad-Based Actions
- Generating short-term wins
- Consolidating gains and producing more change
- Anchoring new approaches in the culture
1. Establishing a sense of urgency:
After the crisis of 2007-2008, Starbucks enabled itself through a clear message by the CEO of the company Howard Schultz himself who send a letter to all the employees which said that “the company must go back to its core business and become customer-centric again instead of focusing on bureaucracy”. He made this objective very vibrant that the employees must connect through emotional attachment with customers (Businesstoday.in today.in, 2014).
2. Creating the guiding Coalition:
In January 2008, the Chairman of Starbucks returned and took over the worse situation as the CEO, the decisions he had to make were very difficult, according to Schultz it was like making a confession in front of 180000 employees and their families and feeling responsible. But Schultz took over he came forward with a technology-oriented strategy and guided the employees to think freely and contribute their strategies. The idea was to create a community to achieve the required goals.
3. Developing the guiding coalition:
Everyone needs a break from home and from work, and Starbucks saw this and did just this. They created a zone for comfort and relaxation, mesmerizing the customer with the experience of a comfy experience. From the furniture to the paint, Starbucks takes care of every little detail in this third place or comfort zone that many are looking for in the hustle and bustle, involving innovation helped Starbucks to review their customers and add technology as a core business tool to reinvent the chain. Wi-Fi was introduced as part of the shared vision of the employees.
4. Communicating the Vision:
Howard Schultz made it very clear to his employees that they won’t be doing only coffee business, Starbucks vision was to create a space between work and home and give people an experience to cherish and come back again as much as possible. The vision of Starbucks was revised, and more compelling conversations happened at the time of the transformation.
5. Generating short-term wins:
According to Starbucks Chief Financial Officer Michael Casey, the company was set to have short-term goals in order to achieve long-term goals. This was planned by issuing monthly revenue basis to encourage volatility in the company’s stocks, Casey believes that the company will continue to follow this pattern and will continue to shoot results on a periodical basis.
6. Consolidating gains and producing change:
Starbucks' approach was not just to come out of crisis but also to become the hub of community service and employee training programs to enable more learning related to customers. These programs mainly encouraged opportunities among young people and to enable them to positive learning, get a job and teach several leadership programs (Starbucks Coffee Company, 2015).
7. Anchoring new approaches in the culture:
According to Howard Schultz, the company has grown over the years, but still it is busy anchoring its root to different cultures around the world. The intent to grow and be remembered forever is still there and the development to do that is underway.
Lewin’s Change Model
According to the Starbuck's position in the market and especially after the crisis, it could be that assumed that the company could have used this model to relate to change:
If an organization is failing, it becomes important to accept that a change is desperately needed, and its tie to do brainstorming among employees to keep up the operations of the company, everything must be exposed or unfreeze so that the root problem could be tackled (Mindtools.com, 2015). After knowing all the mistakes and shortcomings within the company, it is important to start to resolve issues lookout for new ways and alternatives to do business. This step is the most difficult part of the model as change is always hard to implement and many people resist to move in a new direction. The next and last step of this model is to freeze everything again and form new principles to set new goals for the business to prosper.
1. Unfreezing at Starbucks:
After Jim Donald was hired as the CEO by Schultz, the quality of the leadership and coffee started fainting out. Schultz was highly criticized for his ‘unawareness’ regarding the too many openings of stores around US which ultimately resulted in the low quality of the coffee. Schultz after brainstorming with the directors at Starbucks concluded that a lack of a ‘backup plan’ regarding the leadership was the reason behind the crisis faced by Starbucks.
2. Change at Starbucks:
The strategy used by Starbucks is worth learning from and remembering considering the crisis that impacted them and their less-than-year turnaround from the slump. Majorly, driven by CEO's Howard Schultz perseverance, the company is now making a lot of progress. The history of Starbucks is worth remembering considering their setbacks and their beautiful recovery. But how did they achieve this? Well, some of their brilliant strategies were:
- Creating the perfect coffee: Their huge emphasis on creating the perfect cup of coffee can be seen in their mission statement. 'One Person, One Cup, One Neighborhood at a time (Starbucks Coffee Company, 2015). Throughout the years, their focus has solely been on creating a romance between the coffee and the customer.
- Customer Satisfaction: Starbucks has always put their customers first, and thus creating a community of happy customers. After its major setback, in 2007, Starbucks left no stone unturned to start gaining relationships with its customers again.
- Innovation: Starbucks has been known to be innovative. From its coffee to their food and service offerings, Starbucks has always done something new.
- Brand Marketing: Their secondary driving factor for success, first being customer satisfaction, is how they market their Company. Starbucks spends limited money on advertising their brand. Their major reason for success is that they let their service, their offerings, their company name speak for themselves. This quality makes it self-inviting and creates interest in potential customers.
3. Refreezing at Starbucks:
After the leadership crisis at Starbucks, to revive its global sales, Starbucks plans to become an international brand and spread its roots globally in giant countries like China and Russia to get more revenues, this new part is relatable to the geographical strategy of Starbucks. The more the brand will look less ‘US centric’ the more it will look ‘customer-centric’ and also to go back to its core competency of serving not only good coffee but also following strict business standards to receive customers, especially at places like Airports which will represent Starbucks everywhere.
How Change Management could have been handled more accurately by Starbucks:
Our group thinks that a company like Starbucks shouldn’t have gone to the point of the financial crisis it faced, but still if the company has faced problems that not only resulted in the loss of jobs but also the closing down of 600 stores as mentioned earlier in the crisis section. We think that Starbucks is still focusing its sales in US and is not strongly inclined towards becoming an international brand. If Starbucks has added a change model and guidelines to become an international brand in their corporate culture, then it must become the brand of people all over the world and also launch an online awareness program among employees or other stakeholders to spread its international performance among a common man. Just like an organization like Wikipedia has made its value and performance known to the common man, in times of crisis Starbucks should have enabled programs like those to get support and backup from the people when facing a crisis if it claims to be a people’s brand. Furthermore, the employees which were fired during times of crisis must have been given a chance to come back and work for the organization. Too much strictness for a warm drink might cause stakeholders to hold grudges for a brand. For example, the comments like these from ex-employees and customers could have been avoided:
'The coffee is not always fresh. Often, employees start a new urn on top of the remains of the cold coffee, so the new stuff mixes with the old. There may not be a freshly done urn all day.' - Kelly, a New York resident who worked at Starbucks for a few years and would like her name not to be disclosed.
'Some of my coworkers were more demanding than others. Most were nice and welcoming. And there were office politics. On more than one occasion I walked into the break room to see someone crying or talking about other coworkers. I mostly avoided this, until what would be my last week on the job.' Aimee Groth, ex-employee of Starbucks.
Consensus Management:
Along with the process of change comes consensus management also known as the decision-making process. Making decisions together is an important part of a family or organization so that they can connect and come to common conclusions to achieve their goals. The ability to handle unusual situations rests upon the organization’s managers to make decisions well. The main aim of conducting consensus is to reach an agreement which is favorable for everyone.
Aims of a Consensus:
- Reaching to an agreement: It is difficult to decide when there are a lot of interests involved among people looking for the same thing, hence it becomes important to do voting or a deal to minimize disagreement as much as possible.
- Bringing all the members together: Consensus is also a chance to analyze what everyone thinks about a certain idea and what is their perspective regarding the future. This phase concerns the thinking of the members.
- Participation: The more participation by the members, the better the needs will be brainstormed are:
- Broad-View: Not all the company executives but all the rest of the stakeholders must take part in the consensus process.
Starbucks Mobile App:
In 2012, Starbucks launched its mobile app in 16 stores, the app success led it go viral in US and then later it allowed customers to pay for their coffee wherever there was a bar scan point available. The genius behind letting coffee sales happen through an app was Benjamin Vigier. The idea was to innovate the coffee experience and boost sales among customers which were not able to reach the stores by themselves, so they could order it for someone or themselves and can drink it later in any Starbucks outlet. The app also offers loyalty schemes for the customers which helps them gain and redeem points to buy coffee and other goods by Starbucks (Warman, 2012).
How Mobile App was launched (Consensus Management Approach):
The leadership at Starbucks believed that it is important for the company to improve the customer experience by making it convenient for the customers to purchase coffee. To apply the core coffee business and add value to the current trends happening globally, Starbucks decided to tighten its bond by introducing a smartphone app to sell coffee. This customization of was done to match the needs of the customers not just within the store but also outside the store. The company took a survey on social media and saw a tremendous change in the world of technology, the rapid switching of people to mobile phones helped them revise their customer-centric approach by aligning technology. To encourage relationships through technology, Starbucks made itself more productive and applied the CRM strategy to its app. This decision helped Starbucks to take a competitive advantage from other brands like Mcdonald's and Dunkin Donuts (Anon, 2015). It is possible due to this decision that the app has currently 12 million users who use the phone to pay for their coffee. Out of 1.6 billion dollars spent by Americans through their smartphone, 90 percent goes to Starbucks, which is a tremendous boost (Shah, 2015).
How Consensus Management could have been handled more accurately by Starbucks:
Starbucks should launch its app worldwide and declare as a global brand, for example in Europe Starbucks start a trend of its mobile app because people in Europe still lack the technology advantage, so Starbucks should start an innovative idea from a place where the technology is unpopular so that they can not only cover a country but also the whole continent.
Starbucks Change Strategy: https://youtu.be/8H_D6w3z-CQ
Conclusion:
Doing the research regarding Starbucks was tough as it’s an international brand with a lot of public value to it. But doing research didn’t only enable us to look into the company itself but also allowed us to do learning about how big companies fail and rise again. Most of the report focuses on the assumptions which could have been made by Starbucks in the process of change, we made sure that the model used are relevant to the nature of the transformation of the company. We gave different suggestions based on our knowledge and experience to make Starbucks a better company. At last, we think that Starbucks still has its challenges and a lot of grey areas are left to refine its brand. Still, Starbucks is applying the Change and Consensus management approach in their day today business which is adding more value to them and is helping them to solve riddles to understand customers in a better way.
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