AQA BUSS4 Section B Practice Question - Starbucks

Question 1: A Change of Leadership

Howard Schultz rejoined multinational coffee chain Starbucks as Chairman and CEO in 2008 after 8 years away from the business he had turned into a global brand. His aim in 2008 was to achieve a turnaround in the financial performance of Starbucks which many observers believed had grown too big and lost its innovative edge. Do you think that a change of leadership can be relied upon to guarantee a significant improvement in performance? Justify your answer with reference to Starbucks and/or other organisations you know. (40 marks).

Background Reading:
Video & radio interview with Howard Schultz - January 2010
Schultz plan for change - interview transcript from CNN
Video interview - Brewing a New Strategy (2009)

Outline Answer:

Possible Paragraph Points:

Football clubs change the “Manager” when they are threatened with relegation or they fail to reach the Champions League. So why shouldn’t shareholders and Boards change the CEO when they want to achieve better returns? The answer is linked - there is a perception that a change of leadership should bring about better performance; that the quality of leadership influences results. What is the evidence to support that?

The question invites a challenge on “measurement”. What do we mean by a “significant improvement in performance”? Are we measuring this in terms of financial returns (e.g. market capitalisation, revenues, pre-tax profits? Are we measuring over the short or long-term? Is performance measured in terms of market metrics (e.g. market share) or perhaps by non-financial measures (brand recognition; quality; customer satisfaction)? On whose behalf are we measuring performance - shareholders, customers or other stakeholders.

Let’s assume we are looking at financial performance for now. Why might the Board or shareholders believe that performance is unsatisfactory? For a quoted firm like Starbucks, a key issue will be sustaining the rate of revenue and profit growth. Under Schultz’s earlier leadership the business grew rapidly and shareholders benefited from strong growth in the Starbucks share price. Relatively few businesses are able to grow at the rate achieved by Starbucks, or able to achieve such successful international expansion. Perhaps Starbucks shareholder expectations were set too high, and they were too easily disappointed as the business faced market saturation in the core US coffee market and increasingly intense competition from major rivals such as McDonalds, Burger King & Subway? Maybe it was unrealistic for Starbucks to believe that they could return to the stellar growth rates of the 1990s once the business had reached a more mature stage in its development.

A change of leadership isn’t unusual as a firm develops - regardless of whether performance deteriorates. As a business grows and matures, the requirements for leadership usually change. Typically a business moves from needed a more entreprenerial leadership style and culture (essential in the early, high growth years) to a more managerial style as the business structure becomes more complex. This has big implications - decision-making; strategic direction; budgetary responsibility. Schultz left Starbucks as he believed that his pivotal role in business growth was over - he handed control over. But might a more managerial rather than entrepreneurial culture have been detrimental for a business like Starbucks?

The loss of Schultz coincided with a declining performance by Starbucks - but which factors were to blame. Changed leadership - or something else? A case can be made - that increasingly intense competition + global economic downturn would inevitably lead to performance issues in the business. Had Starbucks lost its competitive advantage - distinctive branding and a unique approach to customers in what is otherwise a commoditised market?

However, if you accept that a business performance inevitably declines due to a loss of competitive advantage, the surely a fruther change in leadership is an essential part of the recovery process? What Starbucks needed was to return to the entrepreneurial, customer-focused approach which lay behind its original success. Effective leadership plays a critical role in setting the business on a different strategy and implenting change.

Could improvement be guaranteed? With the benefit of hindsight, Schultz proved to be the right man for the job - Starbucks has enjoyed significant revenue & profit growth since he returned. But Schultz was special - he founded the business; he understood exactly what was required and had the skills required to make effect change. Might a different, but similarly entreprenerial leader have had the same effect?