SuperTutor
$15/per page/Negotiable
MGMT 3400 – Organizational Behavior
THE SUCCESS OF STARBUCKS
The first time Howard Schultz walked into a Starbucks Coffee Company store, he fell in love. In
1981, Schultz was in the Seattle store to sell drip coffeemakers. Starbucks was a local threestore chain that sold coffee beans and accessories, but the owners put great care into choosing
and roasting the beans and they taught their customers that same appreciation.
Schultz said to himself, “What a great company, what a great city. I’d love to be part of that.”
He spent a year convincing the owners to hire him as director of marketing... “I was this East
Coast person and I had so much drive and energy, I think I might have scared them at first,”
Schultz admits. He acknowledges that perseverance is one of the most important traits of a
successful entrepreneur, adding, “I have a history of people closing doors on me saying, “No, it’s
still open.”
One year later, Schultz was struck by another lightning bolt. After a visit to Italy, he realized
that coffee bars there provided a location for socializing and relaxing. Schultz believed that the
social aspect would appeal to Americans, fulfilling a need that restaurants and shopping malls
failed to address. Back home, Starbucks’s owners refused to enter the highly competitive
restaurant business. Schultz quit. He founded a successful coffee bar business and eighteen
months later, used the profits to buy Starbucks for $3.8 million.
From that uncertain beginning, Starbucks grew into a retailing powerhouse, with more than
8,000 locations, 97,000 employees, and annual sales of $5.3 billion. Starbucks appears on the
Fortune 500 list and dominates the specialty eateries industry. Dunkin’ Donuts, its closest
competitor, is part of the gigantic conglomerate Pernod Ricard, but has less than one-tenth the
sales of Starbucks. Other popular specialty food shops, such as Cold Stone Creamery and Jamba
Juice, are much smaller, boasting annual sales from $150 to $300 million.
Starbucks has grown rapidly without franchising, although it offers licenses in a few locations.
Schultz avoids franchising because he believes that quality and image control are vital to
success. Starbucks funds growth with current earnings and has locations in thirty-four countries.
Sales revenues increase by double digits in many years. Constant innovation is another indicator
of the company’s effectiveness.
Starbucks has satisfied many stakeholders, including investor, customers, and employees. Stock
price has risen from around $25 in mid-2003 to over $50 in mid-2005, signaling that investors
are confident. The total market capitalization was $200 million in 1992, when then firm had its
initial public offering. Today it’s worth $19 billion. The company never advertises nationally.
Starbucks’s phenomenal sales growth springs from word-of-mouth from satisfied customers.
And there are lots of customers – about 30 million weekly. In 2004, Starbucks was named, for
the sixth time, to the Fortune Best Companies to Work for list. The company was ranked 34th,
up from 47th in 2003. What created this success? One of the most important factors is the management skill and ability
of Howard Schultz and the subsequent CEOs, Orin Smith and Jim Donald. Schultz was raised in
a Brooklyn housing project, the son of a working-class family. Schultz says about that time, “I
saw the fracturing of the American dream…My parents didn’t have much – and they didn’t have
much hope.” After attending college on a scholarship, Schultz held positions in sales and
operations for various firms, ending up as a manager of U.S. operations for Hammarplast. By
1985, he owned Starbucks, which went public in 1992. In 2000, Schultz stepped down from the
CEO position, although he remains a member of the board of directors. Although he no longer
has daily management responsibility, it is his vision that guides Starbucks today.
Orin C. Smith headed the firm from 2000 to 2005, after joining Starbucks in 1990. Smith’s
background was quite different from Schultz’s. Smith has an MBA from Harvard, worked for
years at management consulting firm Deloitte & Touche, and served as a top manager in several
large firms before joining Starbucks. Smith was an effective manager who turned Schultz’s
visions into reality. He oversaw a time of rapid growth, innovation, and operational
improvements.
In 2005, Starbucks gained its third CEO, Jim Donald. Donald worked as a bag boy in a
supermarket during high school; by nineteen he was an assistant manager, making more money
than his schoolteacher father. Donald is down-to-earth and folksy, knows everyone’s name, and
is willing to lend a hand. When Donald was giving a store tour, a customer spilled coffee.
Donald grabbed a mop and cleaned the floor himself. “Being a grocery guy means you always
know where the clean supplies are,” he says. Before Starbucks, Donald helped Wal-Mart
introduce groceries into their stores in the early 1990s, then aided Pathmark, an ailing grocery
chain, in its recovery from bankruptcy.
However, no matter how skilled the managers, a company’s success also relies on a number of
factors from the business environment. Starbucks appeals to a demographic market segment
who needs have been ignored by the food-service industry. The typical Starbucks customer is
affluent, well-educated, and thirty to fifty years old. Traditional fast-food outlets do not appeal to
this segment. Above all else, these customers want customization-products that are personalized
to their tastes and needs. Anne Saunders, senior vice president of marketing, worked in a
Starbucks store when she was first hired, as does every executive. “I waited on hundreds of
customers while working the cash registers and was struck by how every single one of them
ordered something different,” Saunders says. “Every single person coming in here has a
different experience, designed to the way they want it.”
The preference for the personalization is so well known that the popular movie You’ve Got Mail
gently makes fun of the phenomenon. In the film, Joe (played by Tom Hanks) writes in an
email, “The whole purpose of places like Starbucks is for people with no decision-making ability
whatsoever to make six decisions just to buy one cup of coffee. People can get…an absolutely
defining sense of self.”
Another opportunity presented by Starbucks’s environment is the potential for global expansion.
Starbucks has entered thirty-three European, Asian, and Middle Eastern countries, but there are
still markets the company could enter. In addition, the number of outlets in each country could be expanded. Starbucks plans to build 15,000 more overseas locations over five years, about half
of the expected new stores.
Expansion plans are not stopped by the fear that selling American-style coffee and fast service to
European customers, who are used to a more relaxed environment, might be tough. Plans
continue in spite of anti-American sentiment that has been fueled by the war in Iraq. Some
brands that are highly identified with the United States (Barbie dolls and AOL, for example)
have seen their foreign sales fall in recent months.
Starbucks’s operations become profitable only when there are a sufficient number of locations in
a region or a country to gain economies of scale. It takes time for customers to become familiar
with the company’s products. Also, expenses are higher in Europe. Minimum wage in France,
for instance, is $9.92 hourly, almost double the U.S. rate of $5.15. For these reasons,
international operations produced adequate revenues but did not become profitable for Starbucks
until 2004. Schultz explains the slow start, saying, “We’re simply maturing. Not that we’re
getting close to maturity, because we’re just scratching the surface internationally, but the
markets are getting larger now.
The environment also presents some threats to Starbucks. Rising costs are a problem. The cost
for employee healthcare benefits in the United States is sharply increasing. Schultz remains
absolutely committed to providing health insurance for every employee who works twenty hours
or more. This is a rarity in the restaurant industry, but Schultz believes that it’s vital for his
company to provide a living wage. Although hourly wages for overseas employees are higher,
national health insurance in many countries allows Starbucks to save money on benefits.
Starbucks has been targeted by some advocate groups that are critical of the company’s policies.
While some of the coffee Starbucks sells is organic and shade grown, environmentalists want
them to sell more. They also want Starbucks to sell more Fair Trade certified coffee, which
guarantees a living wage and safe working conditions for coffee farm workers. Consumer food
safety advocates want Starbucks to stop selling mile that contains hormones and other
ingredients that are genetically modified. The company claims that it is environmentally friendly
as is possible. For example, the company buys 200 million pounds of coffee each year, far more
than the current worldwide supply of Fair Trade or organic coffee. Starbucks has developed
Coffee and Farmer Equity (CAFÉ), a set of guidelines that includes some of the Fair Trade
coffee requirements. The CAFÉ standards have been adopted by other firms and Starbucks has
won awards for its environmentally friendly supplier guidelines.
Even Starbuck’s very apparent success opens the company up to criticism. Writer Ruth
Rosselson suggests “consumers choose non-chain shops that offer fair-trade coffee.
Starbucks…puts local companies out of business and with this policy can never be 100 percent
ethical.” Many agree. On the other hand, studies have shown that when Starbucks enters a city
for the first time, coffee consumption increases and local coffee houses experience increased
sales. Some local coffee bar chains take advantage of this trend by opening a new store on the
same block whenever Starbucks opens one. For now, Starbucks’s continued success seems assured, although skeptics claim there is a limit to
the number of $4 cups of coffee people will buy. Among them is venture capitalist and author
Geoffrey Moore. “Of course, no chief executive wants to say, “Yes, our market is saturated.”
The notion that 7%market share means he still has a big filed to go after is silly,” Moore asserts.
“His market is people who buy into an upscale 21st-century café society experience, which is
much smaller.”
Yet Moore and other doubters have consistently been proven wrong. Analyst Sandy Sanders
believes that customers will continue to indulge. “It’s a simple way of rewarding yourself
without spending a ton of money,” Sanders claims. Schultz is optimistic about the future of
Starbucks. “We are in the infant stages of the growth of the business in America,” he says.
“And now seeing what we’ve done internationally…we are going to shock people in terms of
what Starbucks is going to be.”
STARBUCKS AND ITS EMPLOYEES
Starbucks sells food and drinks, but the most important component of a customer’s purchase is
the service. Customers demand high-quality service that is personal, friendly, fast, and accurate.
They want a relaxing and social store atmosphere. Customer satisfaction is crucial to generating
profitable repeat buyers, as the most loyal customers visit Starbucks eighteen times a month or
more. “When…the person behind the counter says hello and maybe greets you by name, you
feel a connection you don’t find with most retailers anymore. It makes you feel welcome and it
makes you want to come back,” says Dave Pace, executive vice president. To offer that level of
service and atmosphere, Starbucks depends on its 97,000 worldwide employees.
Success starts with choosing workers, called “baristas” (from the Italian word for barkeeper), for
front-line positions. A good person-job fit is created by selecting individuals with the right skills
and personality. Baristas must be knowledgeable about the various items that Starbucks sells.
They are constantly on their feet, must lift heavy items frequently, use dangerously hot
machinery, and communicate and cooperate with their coworkers. Most importantly, they must
provide a satisfying, personal inter action to hundreds of customer each day. “Our baristas are
the foundation of our business,” claims the company. “Baristas deliver legendary customer
service to all customers by acting with a “customer comes first” attitude and connecting with the
customer. They discover and respond to customer needs,” To meet high customer expectations,
Starbucks “looks for people who are adaptable, self-motivated, passionate, creative team
players.”
It’s not hard to find individuals with the minimal skills needed for entry-level jobs. However,
it’s more difficult to identify who can contribute the most and who is most likely to stay.
Applicants undergo interviews with two managers, to assess complex abilities such as social and
communication skills. Each applicant completes a behavior assessment designed to measure
cooperativeness, extroversion, honest, and conscientiousness.
“It’s not hard to recruit at this company”, claims vice president Sheri Southern. “People want to
work here. We’re very fortunate that way.” The company has a reputation for being a great employer. A 2004 survey found that 82 percent of employees were satisfied or very satisfied. In
January 2005, Starbucks was named #2 on Fortune magazine’s list of best large employers. One
tangible measure of the good person-job fit at Starbucks is the low annual turnover rate among
baristas – 80 percent – compared to 200 percent for the quick-serve food industry. Starbucks
CEO Jim Donald is intensely interested in generating enough applicants to keep up with growth
while maintaining the quality of personnel. The company must hire 200 new workers each day,
for vacancies at existing stores and for new locations. “My biggest fear isn’t the competition,
although I respect it,” Donald says. “It’s having a robust pipeline of people to open and manage
the stores who will also be able to take their next steps with the company.”
Although Starbucks baristas are generally satisfied, their jobs can be stressful. There are the
physical demands of constant standing and walking. At the same time, baristas must properly
prepare orders and work in a constrained physical space with others. Interpersonal stress can
also be high. It is difficult to establish a personal and positive relationship with a stranger in just
a few seconds, and baristas must do this over and over again for hours. As in any job with heavy
customer contact, there is the potential for unpleasant interactions and encounters with difficult
customers. For example, some of Starbucks’s customers are irritated by the language the
company uses. Although customers may order Starbucks’s products by using the words “small,
medium, large,” the baristas are required by the company to respond with the official terms of
“tall, grande, venti.” “Customer will mock the drink sizes and get snippy with the barista over
how they think it’s stupid to note just use small, medium and large. And that’s when I find
myself tempted to be rude. To simply say, “Oh, thank you, mister! I’m so glad you’re taking on
the corporate dominance of Starbucks by irritating an hourly employee!” says one barista.
Another factor in creating success through the efforts of individuals is to properly design the
work. The job of barista combines physical production, personal interaction, and planning and
time management. Therefore, workers use a variety of skills and switch tasks frequently,
reducing boredom and fatigue. The barista participates in the entire process, from the time the
customer enters the store through payment. Baristas receive constant feedback from customers
about their performance. Based on Hackman and Oldham’s job characteristics theory, these
qualities of the barista job should result in higher satisfaction and motivation. On the other hand,
baristas do not have a lot of autonomy. The products must be prepared consistently, reducing
creative opportunities. Also, although providing good customer service is a priority, baristas
may feel that their job does not have a significant impact on others. These factors would tend to
reduce satisfaction and motivation.
Another important aspect of job design at Starbucks is work scheduling. About two-thirds of
Starbucks’s 76,000 U.S. workers have part-time work schedules. Of those, about one-half work
twenty hours or more each week. Operating hours for each Starbucks location is determined by
local demand; however, many stores open as early as 6:00 A.M. and remain open until11:00
P.M. The busiest hours at most stores are between 8:00 A.M. and 10:00 A.M. Clearly then,
work scheduling is a complex task. Stores use a flexible scheduling approach. Many baristas
appreciate the part-time and flexible nature of their work hours, so they may attend school or
meet other needs. Some workers, however, would prefer a more predictable schedule. In
addition, the total number of hours worked per week has a significant impact on income and
benefits eligibility, so some workers are displeased when their hours vary. From 2000 to 2005, then CEO Orin Smith concentrated on improving operational effectiveness.
Automated espresso machines were introduced to speed up coffee production, which now takes
about one minute per cup, down from three minutes. The taste of the machine-made drinks is as
good as those made by hand, an important point for quality-conscious Starbucks. Another factor
in the decision to adopt espresso machines was worker safety. Overall, Starbucks is a very safe
employer. Workers sustain injuries at about half the rate of other companies in the industry.
However, burns are the most frequent injuries sustained by baristas and are a concern.
Automated machines reduce baristas’ burn rate by 50 percent. Workers must learn new skills in
order to operate the new machinery.
Finally, success based on individual employees comes from motivating workers to perform at
high levels, coupled with meaningful and appropriate rewards. CEO Donald role-models
motivation skills. Every morning, he calls five store managers for a personal chat. Then he calls
three hourly workers. Donald says, “We’ve got to be able to reach into this organization and say,
“How’s it going?” and “Good job!” If any company doesn’t have the time to talk to people on
the front lines, then you might as well close it up, because it’s not going anywhere.”
Motivation at Starbucks is accomplished through the use of rewards to meet the needs of
employees. An important motivator is base pay, which at Starbucks is about average for the fastfood industry. The average annual pay for full-time hourly employees, including baristas and
shift supervisors, is $35,294. However, Starbucks also offers above-average benefits to most
workers. Bonuses are a rare benefit in the fast-food industry. In 2004, Starbucks paid each
hourly worker a $250 annual cash bonus.
Starbucks also offers a level of healthcare benefits that is unusual, especially for part-time
workers. All employees who work half-0time or more can receive healthcare benefits, including
medical, drug, vision, dental, and even alternative medicine. In its list of the Best Companies to
Work For published in January of 2005, Fortune magazine said about Starbucks: “The coffee
behemoth is justly famous for its generous benefits. One example: Part-timers and their samesex or opposite-sex partners receive comprehensive health coverage. Hypnotherapy? Covered.
Naturopathy? Ditto.” The company pays between 50 percent and 809 percent of the cost of the
care for workers and family members.
A stock purchase plan allows employees to buy shares of Starbucks at a 15 percent discount.
Another program, called “Bean Stock,” grants stock options to almost every employee, allowing
them to purchase stock at even deeper discounts. The stock options are awarded based on an
individual’s pay, length of employment, and even more importantly, Starbucks’s overall
corporate performance. Stock ownership is seen as a way to increase wealth for hourly workers,
while also helping to align their interests with those of the company. “Share success with people
who make it happen,” says vice president Emily Ericsen. “It makes everybody think like an
owner, which helps them build long-term relationships with customers and influences them to do
things in an efficient way.”
Starbucks also offers a variety of miscellaneous benefits, including reimbursement for college
tuition and adoption expenses. All employees get free beverages and on pound of free coffee beans. Time-off benefits include paid vacation for full-0time employees, and personal days and
time-and-a-half pay for holiday work. Extensive training improves employee’s skills and
prepares them for positions of greater responsibility. Finally, the benefits package is flexible.
Under the Starbucks’s program, called “Your Special Blend,” employees can shift benefits
dollars between the various components of the total pay package, customizing their
compensation. Each worker can use their benefit dollars in the way that provides the best value.
With its emphasis on appropriate recruiting, job design, and motivation, Starbucks is fulfilling its
mission statement, which states, “[We will] provide a great work environment and treat each
other with respect and dignity.” Many employees realize that Starbucks, while not perfect, is
clearly one of the best employers. When a barista posted negative comments on the Internet, one
employee replied with: “Starbucks work isn’t much different from that of any other foodservice
job. Yet employees show more loyalty and support for Starbucks than they do for any other
similar employer.” Another also defended the firm, writing, “Starbucks does more for its
employees than any other food service or retail business. Perhaps not as good as a company
where everyone has their Masters degrees, but it’s a lot better than the McDonald’s and WalMart’s of the world.” INTEGRATIVE CASE QUESTIONS:
1. What are the organizational-level outcomes experienced by Starbucks Corporation?
Based on these outcomes, do you think Starbucks is an effective organization? Why or
why not?
2. What forces from the environment are affecting Starbucks? Does the environment
present more opportunities or more threats for Starbucks? Explain.
3. Describe the psychological contract for baristas working at Starbucks. What are the
inducements? What are the contributions? In your opinion, is this a reasonable and fair
exchange? If so, explain why. If not, tell how it could be improved.
4. How do alternative work arrangements contribute to the motivation of baristas at
Starbucks? Are there any potential limitations or drawbacks of the alternative work
arrangements?
5. Consider all of the significant stakeholders of Starbucks: investors, employees,
customers, and local communities. Do the generous rewards offered to baristas help or
hinder each of these groups in reaching their goals? Explain.
Attachments: