FRESH BREW:
Starbucks CEO Howard Schultz Shares Business Advice at CEIBS     Read PDF

By Laurie Underwood

 

On November 2, 2007 CEIBS made history as the first business school worldwide to host the inaugural filming of a new show produced by CNN called The Boardroom Master Class. The idea behind the show was to bring a world class CEO - in this case, Starbucks CEO Howard Schultz - to the campus of one of the world’s leading business schools - i.e. CEIBS - for a new twist on CNN’s popular interview program The Boardroom.

The nearly 300 students, professors and guests who packed the CEIBS auditorium that morning witnessed a bit of television magic. Working around the clock for the four days leading up to the show, CNN crews had transformed the school stage into the dramatic backdrop for the Boardroom Master Class series, erecting a massive window depicting a fantasy skyline that incorporated buildings from the three cities featured in the series: Shanghai, London and New York. After CEIBS, the program will be filmed at London Business School, then Columbia.

As the lights went down, CNN host Andrew Stevens warmed up the audience with a slick video montage introducing the star of the show. The MTV-style video showed clips of Schultz during his nearly 30-year history with Starbucks, beginning with a wholesale stall at Seattle’s Pike Place Market and ending with 14,000 retail cofee bar locations worldwide. The clip ended with Schultz arriving at Pudong International Airport, driving through Shanghai, ordering a coffee at Xintiandi, crossing the river and pulling into the distinctive CEIBS gate.

During the 90-minute interview that began as Schultz strode onstage, the chairman of one of the world’s best known and most successful brands shared with CEIBS frank insights into his business plan, management philosophy, past frustrations and concerns for the future. He candidly discussed projects that failed, told why he closed the Starbucks shop in the Forbidden City, and discussed the famous leaking of an internal memo in February 2007  in which he expressed fears that Starbucks was becoming “sterile” and lacking in soul.

The program aired on CNN International worldwide on November 10, 11 and 12, in a 12-minute show. On November 12, a longer version of the program was uploaded onto CNN.com and to the CEIBS website (www.ceibs.edu/media/archive/22899.shtml.) Read on for highlights of the Howard Schultz interview, conducted by CNN at CEIBS.

CNN Host Andrew Stevens (AS): Shanghai, China! I don’t know about you but every time I come here I’m amazed by how much this place changes, the economic development… every time you come back, it’s almost like you’re visiting a different place, don’t you think?
Howard Schultz: I’ve been here four or five times over the past 12 months and every time I come back it seems as if it’s been transformed all over again. China, and specifically this part of the world, will be the number one growth region for Starbucks.

AS: Let’s talk about that Howard… Just how big are your plans for China?
HS: We’re approaching 600 stores in greater China, 300 in the Mainland. I think at the end of the day, there’ll be thousands of Starbucks stores in China. But I think it’s important to note that despite the success that we have enjoyed in other parts of the world, success is not an entitlement anywhere - especially in China. We have to earn the respect of the Chinese customers and do it in a way that is very respectful and very sensitive to how people live here.

AS: When you look at a market do you radically alter the Starbucks model or is it much more of a case of ‘one size fits all’, with a few minor modifications?
HS: When you look at Starbucks as a business case, what we have done and the way we do business is quite different than a classic consumer brand. Let me be specific: Most consumer brands that have emerged in the last 10, 20 years have been built through traditional marketing and traditional advertising. Starbucks is not an advertiser. People think we’re a great marketing company but in fact we spend very little money on marketing. We spend more money on training our people than advertising.

AS: Was that always the plan?
HS: Well, when we started, we had no money. We had no choice: we had to figure out a different way. But the point I want to make is that we built the brand by the experience; and when you look back on the history of Starbucks, we are the quintessential experiential brand built by what’s happened inside our stores. And the mantra has been this: if you want to exceed the expectations of your customer, you can’t do that unless you exceed the expectations of your people first. Which means you have to treat people with respect, and dignity. People want to be part of something larger than themselves; and at the end of the race, there has to be something in it for them. 

AS: Let’s talk about the closing of Starbucks in the Forbidden City.
HS: We were invited to open up a store there and we did very well, and then all of a sudden it was reported by a local blogger that perhaps we were being disrespectful of the history and culture of China. And I think for us, as soon as that occurred, we took a step back and said we don’t want to do anything that would dilute the integrity of the heritage and culture of the Chinese people; and if they want us to leave, we will leave. And I think we did that very respectfully and walked away and I think many other companies probably would have fought it. But we didn’t. We don’t want to do anything that would be inconsistent with how people would view an outsider.

CEIBS MBA student Robert Zhang:
Starbucks products are expensive, but it also means a fashionable experience. Can you tell me why people see [Starbucks products] as premium items and are willing to spend so much money on them?
HS: I wouldn’t say Starbucks coffee is expensive; I would say it’s a premium product at a premium price, based on what it is we deliver to the consumer. And the price of coffee that we buy is significantly higher than most people in the coffee business. In terms of what we deliver, people really do feel that there is good value for the experience [they have] in a Starbucks store.

CEIBS MBA student Aleksandra Krainski: We know that China is a nation of tea drinkers. How do you make it a nation of coffee drinkers and have you ever thought of adding a tea chain to your business: Starbucks tea?
HS: Another good question. I was talking about coming to China and being respectful of the heritage here. Starbucks is not coming to China to displace the love that people have for tea, we’re coming to China to create a complementary beveraging experience. We have been in the tea business for over 30 years, but it’s less than 1 percent of our sales. I don’t think that there is an economic model that I can see for a traditional tea store in our future.

CEIBS MBA student Sher Le Chua: We’ve heard of the frappuccino and other different products you have introduced. I’m wondering what products have not made it - ideas that did not work.
HS: Well I’ll give you one idea that was a big failure, and it was my personal idea. A few years back, I had the brilliant idea that we should publish our own magazine. On paper, it looked like a great opportunity: all the people coming into our store, we see them reading. We saw lots of newspapers in our stores, [so I thought] why don’t we just create our own magazine? There are a thousand magazines out there that are fantastic, [but] not good enough for us - we’ll do our own. We got a great partner, Time Inc, and we invested millions of dollars. It was a fantastic-looking magazine, a great editor - and no one bought it.   We lost our shirt. I have a rack of those magazines sitting permanently in my own office to try and remind myself, and others, of a very important business lesson. That is: it’s one thing to learn from your mistakes but sometimes you have to celebrate them. The one thing that I do not want to do at Starbucks is have the kind of failure where we start discouraging creativity and entrepreneurship. I’m very fond of encouraging our people to recognize that our success is not an entitlement, it has to be earned. And we have no right to enduring success unless we continue to be relevant and close to the consumer. But there is a real balance here: the world is changing so quickly and the consumer has so many choices that the important thing is not only staying relevant but preserving and enhancing your core business so that it’s not diluted by other things you do. This is an art, not a science.  

AS: Let’s go back to 1983. You had just joined Starbucks, been there for a few months and you went to Milan, Italy, and it’s been said that was a defining moment in your career.
HS: When I joined Starbucks, we were getting ready to open up store number four in 1982 and I was the head of marketing. Within a year of being with the company, I was sent to Italy to a coffee trade show. I went to Milan and I found myself walking from the hotel to the convention center and everywhere I walked I saw... these wonderful, romantic coffee bars. I walked in there and I must say I was just swept away with the sense of community, the romance of espresso. But the idea was, I saw something that Starbucks was not doing; and it’s almost unbelievable to think of the fact that from ’71 to ’82 Starbucks did not sell one cup of coffee. We only sold coffee by the pound for home consumption. So I raced home to Seattle and I was so excited and probably a little overheated about what I had seen and what I thought we had missed. And the founders of Starbucks - and I must be very respectful because they had started the business - but they did not really want to move Starbucks into this area of the business. But after two-and-a-half years of me kind of knocking on the door, they allowed me to open up the first coffee bar for Starbucks.

AS: Let’s just stop there for a moment…The founders, the people you look up to, have said, ‘not interested’. How did that make you feel?
HS: I was terribly frustrated but I was patient. I was very respectful of the fact that it was their business and when we got to the first coffee bar it was a store that was about 1,500 square feet and I only had a couple hundred dollars to open up the bar. Within a few weeks, we had about 1,000 customers a day and we introduced the drink and the word ‘café latte’ to Seattle, and America.

CEIBS student Gulnara Abdullina:
Do you think you have had to sacrifice, partially, your early vision?
HS: I think we’ve been fairly blessed. If I look back on the initial business plan for our company and what we were dreaming about, most of the things that we’ve been able to do are very consistent with that. The original business model was to be able to achieve the fragile balance between profitability and a social conscience, to build trust between our employees and our customers, to create a “third place,” where it really would be an extension of people’s home and work. I think the challenge for us going forward, while maintaining our links with the past, is that we’re a big company today. And the question is: how do you get big and stay small, how do you maintain intimacy with 200,000 people who work for our company, with 50 million customers a week. And so the answer is: the original business plan never imagined that we would have 15,000 stores. And one thing you should know is that when I was raising equity for Starbucks, the original business plan was 100 stores, and I had such a hard time raising money and I couldn’t afford to reprint the business plan, so I actually crossed out [100] in ink and wrote “75.” I never imagined that we would be here today. We are maniacally focused on quality, maniacally focused on providing a great environment for our people, we don’t want to dilute the environment of our company, and will not, for growth’s sake. And so it’s a constant battle and challenge in growing the company and at the same time maintaining its intimacy with those constituents that I have mentioned.

AS: In February this year, a memo, written by you, appeared on the Internet. It wasn’t meant to appear publicly, but it did. And I’ll quote this. It says the Starbucks brand is being watered down because Starbucks is opening too many “sterile, cookie cutter stores that lack character and soul.” Now to me, what you are saying is that Starbucks is losing its way. Is that how you felt?
HS: Let me provide some context for the memo. If you sat in our Monday morning meeting for the last 15 years, you’d go in that meeting, if you’re an outsider and you’d say, ‘this company’s really in trouble.’ We don’t spend a lot of time celebrating. We spend a lot of time focusing on the things that we need to get better and we are very, very, hard on ourselves. And I felt I needed to remind our people that as we are growing and looking forward, we need to link the growth and development to the heritage and the tradition of what has built this company. I wouldn’t apologize for the memo, I was self-critical of some of the things I think we were doing and that is my role and responsibility to make sure that the guardrails of the company are intact.

AS: What are your moral values as they apply to your corporation? Where do they come from?
HS: I was a poor kid from Brooklyn, New York, growing up on the other side of the tracks, and I’ve never lost sight of the fact that I want people in our company - whether they are highly educated, come from a rich or poor family, whatever religion they are, whatever color they are - I want people to be valued and respected. And I think that goes back to the fact that, as a young boy, I watched my father lose his self esteem because, as a blue-collar worker in the 50s and 60s, he was kind of devalued. And I never forgot that. And so what we’ve tried to do as a company is directly linked to my childhood experience.

AS: You will step down from Starbucks one day, the proverbial bus is always out there. What do you want your legacy to be. How do you want to be remembered for what you have done at Starbucks?
HS: It’s hard to answer that question because I’m a long way from that bus. But I would say the success of the company is linked to the fact that the company really did try to have a conscience and a soul in everything it did. And the success of the company was shared with its people. That would be enough for me.

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Howard Schultz’ Golden Business Rules

During the filming of CNN’s The Boardroom Master Class on November 2 at the CEIBS auditorium, Starbucks CEO Howard Schultz shared the following strategic tips with CEIBS students and faculty:

1. You have to be 100 percent authentic and true. I think when you’re either building a business or joining a company, you have to be transparent - you can’t have two sets of information for two sets of people. 

2. A great leader, at times, has to demonstrate a level of vulnerability and share with people how you really feel.

3. In order to achieve success, it takes unbridled enthusiasm and passion. You have to find something that you really, really love.

4. You have to be willing to understand that this is hard to do - to build great and enduring success takes personal sacrifice.

5. You have to find people who share your dream, and not only to make money. Great businesses do not succeed because they’re focused purely on making a profit. Great businesses succeed at a high level of profitability because they are doing fantastic things for their people, for their customers and their communities. Find that fragile balance and you will build a profitable business.

6. Surround yourself with people who are smarter and more experienced than yourself and share the success with them.