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What Makes Starbucks CEO Howard Schultz So Successful?

By Rana Pritanjali - Nov 17, 2014 at 8:29AM

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Five business principles have made a big difference for Schultz and his company.

There was a time when most Americans didn't know the difference between a high-grade coffee bean and a teaspoon of Nescafe instant coffee. So when Howard Schultz dreamed of creating a national chain serving the best coffee in the world and offering a third place (apart from home and office) for Americans to socialize, it may have seemed like a outlandish idea. Today, his company needs no introduction. Good, quality coffee and the name Starbucks (SBUX 3.87%) have become synonymous. I recently read two of his books: Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time and Onward: How Starbucks Fought for Its Life without Losing Its Soul . Both of them together provide great insight into how he and his company became so successful. Below are five of my favorite quotes from the books and five admirable business principles Schultz practices as a CEO: 

Innovation: "Innovation is in our DNA."

Schultz has always encouraged the development of new products. He created an R&D division to fuel innovation -- the Frappuccino was one of the results of that approach. When he came back to Starbucks as CEO in 2008, he realized that its spirit needed to be reinvigorated. One of the early results was an instant coffee, called VIA, which tasted almost as good as traditionally brewed coffee and revolutionized the instant-coffee industry. Historically, U.S. consumers have mostly been skeptical about ready-made brews, associating them with lower quality. But VIA became the fifth-best-selling instant coffee brand by volume in the U.S. with 10.4% market share, within one and half years of its launch.  

Integrity: "Authenticity is what we stand for. It's part of who we are. If we compromise who we are to achieve higher profits, what have we achieved." 

Another principle that distinguishes Schultz from his contemporaries is his integrity. When frost in Brazil caused a coffee crisis in 1994, most of its competitors raised prices immediately. As Starbucks had locked in lower prices for the next few months, it decided not to raise the price of its drinks immediately as it would be unfair to the customers. As the situation worsened in Brazil, the price of coffee jumped more than 330% within three months. Starbucks was left with no option but to raise prices, but it adopted a different strategy than other commodity businesses.

Instead of raising prices based on replacement cost and passing the price rise immediately to consumers, Schultz decided to raise the prices to compensate for the extra money which Starbucks would spend in that fiscal year to buy the raw material (coffee). The customers valued the company's honesty and they continued to buy coffee even at higher prices. 

Schultz writes in Pour Your Heart Into It that when faced with such situations, an easy solution would be to compromise a bit on quality. Customers probably wouldn't even notice. But Schultz and his company never wavered on serving the best coffee in the world.

Flexibility: "I gradually learned the need for compromise. A lost customer is the most powerful argument you can make to a retailer."

In the early years, Starbucks used only whole milk in its drinks. Schultz was dead set against making coffee with nonfat milk, as he thought it didn't taste good. But as he realized that this was what customers wanted, he decided to give them a choice.

Passion: "Passion is everything, and as a leader, you must share that passion at every opportunity. You cannot inspire unless you're inspired yourself."

Shultz has practiced this philosophy throughout his career. It's helped him connect with his employees and instill the same passion and confidence in them. From day one, he's wanted his employees to take pride in their work, and he's done that by offering stock options and generous benefit packages, as well as health benefits for both full-time and part-time workers. Schultz realized that Starbucks couldn't flourish and win customers' hearts without the passionate devotion of its employees. That passion comes from ownership, trust, and loyalty. Schultz has said Starbucks employees' passion and devotion are a big part of the company's competitive advantage.

Boldness: "Whatever you do, don't play it safe. If you do what's expected of you, you'll never accomplish more than others expect."

Here's just one example of Schultz breaking new ground. In 1996, Starbucks entered into an agreement with United Airlines to serve coffee on flights. There was an opportunity to serve 20 million people a year, but with airlines' reputation for serving bad coffee, investors and insiders alike were concerned about the move. Schultz signed the deal, but he ensured there was a comprehensive quality-assurance program in place, along with thorough training for flight attendants on both coffee in general and Starbucks in particular. United Airlines called its decision to partner with Starbucks as one of its best strategic moves.  

Foolish takeaway
Earlier this year, Howard Schultz was named to Fortune's list of the "World's 50 Greatest Leaders." He came in at No. 29 and Fortune noted Starbucks' offering medical insurance to all employees, its support for environmental and social projects, and said "crucially, [Schultz] understood that he was creating an experience, not selling a product."  What makes him great is his ability to strike a perfect balance between people, product and profitability.

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