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Starbucks and the Perversity of Growth

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Oren Harari believes that growth should be a consequence, not a cause, of sustained competitive success. He demonstrates his point using Starbucks as both a good example and a bad example.

Let me tell you something about growth. Growth is necessary, particularly if you’re a publicly traded company. If you’re not growing, you’re stagnating. Further, having clear growth goals is useful. You have to track progress and hold people accountable for results.

But growth per se is not a strategy; it’s the consequence of a strategy. Strategy reflects key questions like these:

  • How will we grow? (What’s our special path, direction, value-add, and underlying philosophy?)
  • Why did we choose that particular path, direction, value-add, and philosophy?

This distinction between growth and strategy has huge implications.

Why Is Your Company Growing?

When a company grows because it’s providing the marketplace with something that excites and intrigues customers (groundbreaking business model, unique value proposition, cool product line), growth is a wonderful thing. It generates the kinds of financials that bring big smiles to investors’ faces. But when growth is the company’s strategy—that is, when leaders see bigger size as financial salvation, or when their strategic intent is to get bigger in the belief that bigger is better and more likely to steamroll over competitors, growth becomes a predictor of organizational malaise, if not decline.

Exhibit A on both accounts: Starbucks.

First, a brief history. As numerous business and management books have noted ad nauseum, the remarkable success of Starbucks in the 1980s and ’90s was its capacity to pump compelling value into what was traditionally an uninspired commodity "coffee" industry. That value, of course, revolved around the unique experience that Starbucks offered the customer: a diverse, constantly changing menu of high-end global coffees within a casual, romantic European ambience. For its increasingly loyal customer base, Starbucks offered a predictably warm, friendly environment that the company defined as a "third place" (between home and work) refuge from the woes of the external world.

Unsurprisingly, with that sort of groundbreaking business model, unique value proposition, and cool product line, Starbucks’ growth (in store locations, same-store sales, customer loyalty, margins, and stock value) exploded—even when, as the satirical jokes went, multiple Starbucks cafés sprang up across the street from each other.

Now fast-forward to 2008. The $10 billion corporation, boasting more than 15,000 stores worldwide, has seen a 1% overall drop in traffic (3% decline in the U.S.) in stores open at least 13 months—the first time that’s ever happened. Starbucks has also seen a drop in profits and a lowering of earnings expectations, a significant hit to its public image and "cool" brand, and a precipitous decline in share value (40% down in 2007, 50% down since late 2006).

What happened? Well, my wife could tell you. She was one of those 20 million plus U.S. customers who used to frequent her particular Starbucks café several times a week. She would drag me along periodically, and I confess I went pretty willingly. That’s because it used to be a warm, inviting place. It was a place that beckoned us with easy familiarity, a place we could hang out in comfort.

No longer. The stuffed chairs and sofa have been removed. A few small tables and wooden chairs remain, pushed to the edges of the room. The baristas no longer seem to know the customers, or care. The whole vibe of the place reeks "fast food": Get people in, pump them for multiple sales, take their order, get 'em out.

This is not an idiosyncratic situation. It’s a predictable consequence of Starbucks’ strategic obsession over the past decade—which has been all about unbridled growth. Launch more stores in more places, full speed ahead! Four new stores per day in 2007, as it turned out, with an immediate goal of 40,000 stores worldwide.

And why? I ask. As I indicated earlier, leaders are wise to view growth as a strategic priority. But when growth becomes the strategic obsession, there’s a real danger that a company will lose its distinction and its soul. That’s what happened to Starbucks.

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