[Howard
Schultz strongly believed that Starbucks’ success was heavily dependent on
customers having a very positive experience in its stores. This meant having
store employees who were knowledgeable about the company’s products, who paid
attention to detail, who eagerly communicated the company’s passion for coffee,
and who had the skills and personality to deliver consistently pleasing
customer service. Many of the baristas were in their 20s and worked part-time,
going to college or pursuing other career activities on the side. The challenge
to Starbucks, in Schultz’s view, was how to attract, motivate, and reward store
employees in a manner that would make Starbucks a company that people would
want to work for and that would result in higher levels of performance.
Moreover, Schultz wanted to cement the trust that had been building between
management and the company’s workforce.
One of
the requests that employees had made to the prior owners of Starbucks was to
extend health care benefits to part-time workers. Their request had been turned
down, but Schultz believed that expanding health care coverage to include
part-timers was the right thing to do. His father had recently died of cancer,
and he knew from having grown up in a family that struggled to make ends meet
how difficult it was to cope with rising medical costs. In 1988 Schultz went to
the board of directors with his plan to expand the company’s health care
coverage to include part-timers who worked at least 20 hours per week. He saw
the proposal not as a generous gesture but as a core strategy to win employee
loyalty and commitment to the company’s mission. Board members resisted because
the company was unprofitable and the added costs of the extended coverage would
only worsen the company’s bottom line. But Schultz argued passionately,
pointing out that if the new benefit reduced turnover, which he believed was
likely, then it would reduce the costs of hiring and training—which equaled
about $3,000 per new hire. He further pointed out that it cost $1,500 a year to
provide an employee with full benefits. Part-timers, he argued, were vital to
Starbucks, constituting two-thirds of the company’s workforce. Many were
baristas who knew the favorite drinks of regular customers; if the barista
left, that connection with the customer was broken. Moreover, many part-time
employees were called upon to open the stores early, sometimes at 5:30 or 6 am;
others had to work until closing—9 pm or later. Providing these employees with
health care benefits, he argued, would signal that the company honored their
value and contribution.
The
board came round and approved Schultz’s plan. Starting in late 1988,
part-timers working 20 or more hours were offered the same health coverage as
full-time employees. Starbucks paid 75 percent of an employee’s health
insurance premium and, over the years, extended its coverage to include
preventive care, crisis counseling, dental care, eye care, mental health care,
and treatment for chemical dependency. Coverage was also offered for unmarried
partners in a committed relationship. Since most Starbucks employees are young
and comparatively healthy, the company has been able to provide broader
coverage while keeping monthly payments relatively low.
The
value of Starbucks’ health care program struck home when one of the company’s
store managers and a former barista walked into Schultz’s office and told him
he had AIDS. Schultz said later:
"I had
known [Jim] was gay but had no idea he was sick. His disease had entered a new
phase, he explained, and he wouldn’t be able to work any longer. We sat
together and cried, for I could not find meaningful words to console him. I
couldn’t compose myself. I hugged him."
At that
point, Starbucks had no provision for employees with AIDS. We had a policy
decision. Because of Jim, we decided to offer health-care coverage to all
employees who have terminal illnesses, paying medical costs in full from the
time they are not able to work until they are covered by government programs,
usually twenty-nine months.
After
his visit to me, I spoke with Jim often and visited him at the hospice. Within
a year he was gone. I received a letter from his family afterward, telling me
how much they appreciated our benefit plan.11
In 1994
Howard Schultz was invited to the White House for a one-on-one meeting with
President Clinton to brief him on the Starbucks health care program.
By 1991
the company’s profitability had improved to the point where Schultz could
pursue another employee program he believed would have a positive long-term
effect on the success of Starbucks—a stock option plan for all employees.12
Schultz wanted to turn all Starbucks employees into partners, give them a
chance to share in the success of the company, and make clear the connection
between their contributions and the company’s market value. Even though
Starbucks was still a private company, the plan that emerged called for granting
every employee companywide stock options in proportion to base pay. In May
1991, the plan, dubbed Bean Stock, was presented to the board. Though board
members were concerned that increasing the number of shares might unduly dilute
the value of the shares of investors who had put up hard cash, the plan
received unanimous approval. The first grant was made in October 1991, just
after the end of the company’s fiscal year in September; each partner was
granted stock options worth 12 percent of base pay; the value of these first
shares was pegged at $6 per share. Each October since then, Starbucks has
granted employees options equal to 14 percent of base pay, awarded at the stock
price at the start of the fiscal year (October 1). Employees, if they wish, can
cash in one-fifth of the shares granted each succeeding year, paying the
initial year’s price and receiving the current year’s price. It took five years
for the shares to fully vest. Each of the shares granted in 1991 was worth $132
in October 1996; thus, an employee making $20,000 in 1991 could have cashed in
the options granted in 1991 for more than $50,000 in October 1996. In 1991 when
the Bean Stock program was presented to employees, Starbucks dropped the term
employee and began referring to all its people as partners because everyone,
including part-timers working at least 20 hours per week, was eligible for
stock options after six months. At the end of fiscal year 1997, there were 8.7
million shares in outstanding options at an average exercisable price of $19.72
(which compared very favorably to the current stock price of $43.50).
In 1995,
Starbucks implemented an employee stock purchase plan. Eligible employees could
contribute up to 10 percent of their base earnings to quarterly purchases of
the company’s common stock at 85 percent of the going stock price. The total
number of shares that could be issued under the plan was 4 million. After the
plan’s creation, nearly 200,000 shares were issued; just over 2,500 of the
14,600 eligible employees participated.
Starbucks
was able to attract motivated people with above-average skills and good work
habits not only because of its fringe benefit program but also because of its
pay scale. Store employees were paid $6 to $8 per hour, well above the minimum
wage.
Starbucks
believed that its efforts to make the company an attractive, caring place to
work were responsible for its relatively low turnover rates. Whereas most
national retailers and fast-food chains had turnover rates for store employees
ranging from 150 to 400 percent a year, the turnover rates for Starbucks’
baristas ran about 65 percent. Starbucks’ turnover for store managers was about
25 percent compared to about 50 percent for other chain retailers. There was
evidence that Schultz’s approaches, values, and principles were affecting
company performance in the intended manner. One Starbucks store manager
commented, "Morale is very high in my store among the staff. I’ve worked
for a lot of companies, but I’ve never seen this level of respect. It’s a
company that’s very true to its workers, and it shows. Our customers always
comment that we’re happy and having fun. In fact, a lot of people ask if they
can work here."]*
There is
nothing more to add. The case speaks for itself. When the leader of an organization decides to
transform his/her thoughts, his/her personal philosophy into a business
strategy, it impacts directly on the brand experience delivered to customers.
"Greatness"
says Jim Collins, co-author of Built to Last, "is the result of a
conscious choice and discipline." We just need to understand this example
to prove it. The good, better or extraordinary brand experiences are not the
result of chance, are the result of the passion of the leaders of the organization
to get it done right. No shortcuts, no way to cheat. There is no place on the
podium of success for companies that are not congruent with what they preach and
pretend to be what they are not. Companies that try to deliver experiences
based on principles or values that do not practice day in and day out can
cheat employees and customers once, will not be able to have a second chance. As
Martin Lindstrom says: “There are two different ways to brandwash the consumer
– you can choose the open, honest approach, or you can take the more devious
path. The choice is yours. Remember, regardless of what you do, the consumer
will ultimately discover the truth.”
Companies
that support the strategy of brand experience on a philosophy that emerges from
the purest human principles, which are consistent between what they say and do,
are the ones that deliver genuine experiences and communicate without saying a
word with the customer’s genuine human essence and thus earn their loyalty.
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[*] Segment reproduced entirely from the Case Study published by McGrawHill: http://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html
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