Leadership Does Matter

The Leader Dressed in Executive Clothing is Still a Leader and Starbucks’ CEO Howard Schultz has Proved It

By the end of 2007, Starbucks, that ubiquitous purveyor of the coffee experience was in deep trouble. The performance of the company that had legalized charging $4 or more for a cup of coffee had turned bitter. Starbucks was getting creamed by copy-cat competitors and the entrance of McDonald’s and Dunkin’ Donuts into the specialty coffee field. Starbucks had lost its twinkle and was spilling both customers and profits. Growth had virtually ceased.

Once the darling of Wall Street – the stock value increased by nearly 5,800 percent and split 5 times since its initial public offering in 1992 – Starbucks was virtually written off as a growth company; its very survival was being questioned. Worse, Starbucks’ management seemed at a loss to turn things around.

Schultz established the company in 1986 and his deft leadership in the formative years guided the company to become one of the most successful entrepreneurial stories in the history of American business. Going public in 1992, the company grew at a blazing rate of 25 to 30 percent a year. During the 1990s Starbucks opened almost 4,000 stores serving 15 million customers a week.

Then in 2000, Mr. Schultz, just 47, “retired”.

The new management of Starbucks was, shall we say, “competent”. In an effort to continue growth they instituted the normal processes and procedures needed in a large company; they tried to follow the Schultz’ successful business model.

But something was missing. By the fall of 2006, the stock peaked and the company began an inexorable  slide downward that bottomed at $8 and change by the dawn of 2008. Finally, in January of that year, management played its trump card by turning to the company founder, Howard Schultz. And the lesson to learn here is that this cautionary tale exemplifies the difference between management and leadership.

Many “experts” were skeptical when Schultz returned as CEO of Starbucks. He was viewed as a person more interested in the “soft” things; as one who made decisions based on intuition and personal experience. Schultz was known to disdain process and procedure, complicated business plans, heavy advertising and customer research. All the things the traditional manager worships. (Schultz argued that millions of people walking around with Starbucks coffee cups in their hands and personally visiting 25 stores each week was all the advertising and customer research he needed.)

At that time I fully supported the return of Schultz, and argued in a blog in January 2008 that “bringing back an entrepreneurial leader may be the best way to energize a flagging company” like Starbucks. Later that same year in another blog,  I lamented “Companies Without Soul,” and cited Starbucks, among other uncommonly successful companies, who were managed by leaders who imbued their businesses with an entrepreneurial culture.

OK. So where is Starbucks now?

Last week Starbucks held its 2010 shareholder meeting. In a front page Money Section story in USATODAY, “Starbucks perks up with first dividend,” (Mar. 24, 2010) reporter Bruce Horovitz summed up the turnaround at Starbucks by declaring, “Starbucks has its mojo back . . .”

Horovitz reported, “Just one week after Starbucks stock reached a 52-week high, the coffee kingpin announced at it shareholders meeting … that it would pay its first ever cash dividend.” Describing the Starbucks of today, Horovitz reported, “This is a vastly changed Starbucks from the one that was so clobbered by over-ambitious growth and the economic meltdown two years ago that it shut down hundreds of stores, laid off thousands of employees and saw its stock value shrink to single digits.”

How could Starbucks achieve such a dramatic turnaround is so short a time?

The answer is simple – leadership. When Howard Schultz was first building Starbucks a reporter once asked him what type of company he wanted to build? His answer was elegantly uncomplicated: Schultz said he wanted, “to build a company with soul.” He backed up this philosophy with practices that were unprecedented (and still are) in retail. Schultz’s Starbucks provided comprehensive health care for all employees and their dependents for those employees who worked at least 20 hours a week. He introduced a company-wide employee stock-option plan. He referred to employees and “partners” and treated them that way.

In short, when Schultz returned to lead Starbucks, so too did soul.

In referring to Schultz’s return, Troy Alstead the Starbucks CFO said, “We were all shell-shocked that first week (of his return) but we needed his passion and drive and challenging nature.” (BusinessWeek, Mar. 9, 2010).

Certainly Mr. Schultz has had to adjust his tactics to changed times. He has launched Starbucks’ first national advertising campaign, allowed the company to conduct customer research and even hired a chief information officer. Quoted in BusinessWeek Schultz said, “I had to change my own mentality and thinking. It’s always a fragile balance between creativity and discipline, but it’s much more acute than it was in the past.”

But one thing Mr. Schultz has not changed is his core philosophy as to what he wants Starbucks to be as a company and a culture. More than anything else Schultz wants Starbucks to be a company with soul. A company that is powerful and benevolent, respected and passionate, ubiquitous and imaginative. These are thoughts that are the soul of a leader and the scourge of the manager.

And the Moral of the Story . . .

Despite what the traditionalists of corporate management may argue – leadership does matter.

And the sign of a true leader is one who can be flexible enough to adjust to changing circumstances without losing the focus and passion to achieve the ultimate vision. Howard Schultz certainly qualifies.

There is a difference between managing and leading. There are many excellent managers who are poor leaders. There are excellent leaders who are poor managers. As Mr. Schultz has demonstrated, the leader who learns to manage without losing his passion to inspire others is the most powerful of all.

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