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In Depth August 6, 2009, 5:00PM EST

Starbucks: Howard Schultz vs. Howard Schultz

Starbucks' iconoclastic founder has gone through a reeducation in the rigors of running a more typical company. That doesn't mean he has to like it

By Susan Berfield

You can get a sense of what's important to someone by the stories he tells. At Starbucks (SBUX), a company diminished in ways both tangible and ineffable, Howard Schultz is telling a story about milk. Starbucks uses a lot of the stuff. As part of Schultz's efforts to improve the quality of the millions of lattes and cappuccinos Starbucks serves, he forbade what had become the common practice of resteaming milk. That meant the baristas were pouring millions of dollars of leftover milk down the drain. As store managers for the first time began thinking about how to operate more efficiently, an idea emerged. It was simple, obvious, and made everyone wonder why no one had thought of it before: They could put etched lines in the steaming pitchers so that the baristas would know exactly how much milk to use for each size drink. Before, they just guessed. "The celebration of that line in the halls of Starbucks has become a metaphor," says Schultz. "How many other lines can we find? We've found a lot because no one was ever looking. The people who have found those lines have become part of the folklore."

Can you think of many other executives who would turn something so prosaic into folklore? Or who would have left something so basic to chance? But we're talking about Howard Schultz, and about Starbucks, which for most of its existence was fast-growing and free-flowing, a place where the experience was everything. A place where the boss led by instinct, where authenticity was what counted. Schultz liked to say that Starbucks had taken the road less traveled.

That vision, perhaps inevitably, has collided with the exigencies of the real world. The $4 latte has become an unaffordable luxury, and Starbucks is competing with McDonald's (MCD) and Dunkin' Donuts, two chains more interested in selling lots of coffee than in being a part of people's lives. Even so, Schultz, for a time, seemed strangely unconcerned that the ground was shifting. When he reclaimed the responsibilities of chief executive in January 2008, he announced that Starbucks had lost its way: It had become the kind of soulless corporation he detested. He promised to take the company back to its roots, to make Starbucks loved again.

The Great Recession has since forced Schultz to do something even more drastic. He has had to acknowledge, however grudgingly, that the company needed to change almost everything about how it operates. Starbucks had to become more ordinary. The first orders of business: Cut costs by at least $500 million, shutter 800 stores in the U.S., lay off more than 4,000 employees. And also: Conduct more customer research, offer discounts, advertise. All very common, unremarkable ways of doing business. All new and uncomfortable to Schultz. "He was always so tantalized by out-of-the-box thinking," says John Moore, a former Starbucks marketing executive. "But sometimes it's the box that needs to be fixed."

Spend enough time with Schultz, and one thing becomes clear. Despite the recent reversals and reckonings, he still wants it all. Starbucks must be powerful and benevolent, respected and passionate, ubiquitous and imaginative. There is no point telling him that no big corporation, certainly not one with some 16,000 stores in 50 countries, has ever found such a balance. He simply doesn't buy it. Yet he concedes the strain of trying to stay true to his shareholders and his original vision. "I've had to change my own mentality and thinking," he says. "It's always a fragile balance between creativity and discipline, but it's much more acute than it was in the past." As he leads Starbucks into its next era, Schultz's biggest struggle may be with himself.

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