In January 2008, after 20 straight years of 5 percent or higher annual revenue growth, Starbucks (SBUX) announced that it had posted a paltry 1 percent growth rate. Newly reinstated Chief Executive Officer Howard Schulz sensed that something was rotten in the state of Starbucks—namely, breakfast sandwiches.
In his book Onward!, Schultz writes that Starbucks did a lot of things well, but first and foremost it was “the coffee authority.” The company built an empire by obsessing about coffee beans, roasting techniques, and the coffee education of every in-store “partner.” Once upon a time, it even obsessed about aromas. During Starbucks’s prime, every person who walked into one of their stores was greeted by the scent of fresh coffee, instead of the odor of burnt cheddar melting off a breakfast sandwich.
So why was Starbucks serving breakfast sandwiches?
The answer is simple. Breakfast sandwiches were accounting for 3 percent of the company’s total revenue and management believed it had to come up with some creative way to continue the meteoric rise. Discontinuing the sandwiches would have been like lopping off a big toe in the middle of a marathon.
Revitalizing by Reducing Revenue
Yet that’s exactly what Schultz did. He felt that Starbucks had to get back to its “coffee roots” by reducing or completely eliminating the CDs, movies, and breakfast sandwiches that had cluttered stores, diluted the brand, and eroded its coffee authority—even though they added respectable revenue streams. By summer 2009, despite a steadily declining national economy, Starbucks’s sales and stock price had again begun to climb.
The Starbucks story illustrates three vital decisions all corporate leaders must make.
1. Decide what your equivalent is to being “the coffee authority.” Around the same time the Starbucks drama was unfolding, Panera Bread (PNRA) found itself in trouble, too. The café-bakery’s response was basically the same as that of Starbucks, with a twist. Instead of eliminating breakfast sandwiches, it introduced steak sandwiches. Rather than getting sucked into lose-lose price wars with fast food chains or taking on Starbucks and the new McCafés in a coffee war, Panera shored up its comfortable middle-class customer base by providing them with even better, yet convenient food at full price.
2. Decide what you should start doing more of to reassert your authority. A back-to-basics approach does not mean forgoing innovation or shunning change. At Starbucks, it meant ramping up innovation with regard to coffee. The coffee seller spent months perfecting its new “Pike Place” roast. Notwithstanding a cost of $6 million in lost sales, it also shut down all its stores in North America for one afternoon to retrain every barista on the proper technique for pouring espresso. Similarly, in a speech at the Wharton School last spring, Scott Davis, CEO of UPS (UPS), said that during the downturn, the package deliverer has continued investing heavily in its information technology capabilities, as well as expanding into new lines of business. In both companies’ cases, the objective was to complement and strengthen core delivery capabilities.
3. Decide what you should stop doing in order to reassert your authority. Due to the innate psychological phenomenon of “loss aversion,” this third decision is always the most difficult. It’s easy for anyone (leaders included) to grow attached to exciting new initiatives and programs. It’s even easier to grow attached to initiatives that were your idea to begin with. Yet you have to take an honest look at the choice you made. Ask yourself: “Is X moving us in that direction or is it merely putting a band-aid on a fatal wound?” If it’s the latter, it might be time to amputate.
When times get tough, the natural tendency is to move toward the middle. After all, who wants to be the isolated gazelle on the edge of the herd when lions are hunting nearby? That’s sound reasoning, except when the herd is sick: You don’t want to end up catching what ails the other gazelles. In the present Age of Uncertainty, the herd is extremely vulnerable to a toxic virus of fear, mediocrity, and hopeless conformity.
Greener pastures are out there. To find them you have to reassert your authority and then make it clear to employees everywhere—from the storefronts to the C-suites—that each tiny decision they make is just one more opportunity to passionately and obsessively move the company in the right direction, not the common direction.