Thinking Beyond Science

In 1983, Howard Schultz noticed an anomaly and from that insight a fascinating new business was eventually born. At that time, Schultz was the marketing and retail operations manager for a tiny chain of Seattle stores selling dark-roasted coffee beans. On a visit to Italy, Schultz discovered the Italian espresso experience.

With a retailer’s eye, Schultz also noticed the rapid customer turnover at the espresso bars and the relatively high prices being paid for coffee.

For Schultz, the experience in Milan was an anomaly. In Seattle, the market for dark-roasted arabica beans was a niche, populated by a small but growing group of especially discerning buyers. But the vast majority of people in Seattle, and in America-even the well-to-do drank cheap, bland coffee, In Milan, expensive high-quality coffee was not a niche product but the mass-market product. And there was a further anomaly: in the United States, fast food meant cheap food and plastic surroundings.

In Milan he saw “fast coffee” that was expensive and served in a lively social atmosphere, so different from that of an American Main Street diner or coffee shop. Americans, especially those in the Northwest, were at least as wealthy as Italians. Why should they drink “bad” coffee and not enjoy the pleasures of an espresso latte in a social setting?

Schultz formed a strategic hypothesis— the Italian espresso experience could be re-created in America and the public would embrace it. He returned to Seattle and explained his idea to the two owners of the company he worked for the Starbucks Coffee Company. They listened and gave him a small space to try to brew up espresso drinks, but they did not share his belief in the project. They thought that Starbucks’ strengths and purpose were in buying, roasting, and retailing fine arabica coffees, not in running an espresso bar. In addition, they thought that espresso coffee restaurants were nothing new, being a niche business frequented by bohemians, beatniks, hippies, and Gen X nocturnals, depending on the era.

When Howard Schultz pitched his proposal to the owners of Starbucks, the coffee shop was hardly a new idea. A deep problem Schultz faced was that his vision required a radical change in consumer tastes and habits. What he observed in Milan was not just a different business model but the result of several hundred years of divergent social history. In the United States, coffee had emerged as a bland tea substitute to be drunk both at meals and at breaks throughout the day. In southern Europe, coffee was an alcohol substitute, taken in small strong doses at lively “bars.” Whether he knew it or not, Schultz wanted to do more than just open a coffee shop; he wanted to change American tastes and habits.

Schultz’s second problem was that there seemed nothing new about coffee, espresso, coffee bars, or espresso shops. Millions of other Americans had traveled to Italy and experienced Italian espresso bars. Knowledge about these businesses was hardly privileged. To expect to make money from a new business, the entrepreneur should know something that others do not, or have control of a scarce and valuable resource.

The delicacy in the situation was that Schultz’s proprietary information was only a glimmer in his mind, a mood, a feeling. Others, exposed to exactly the same information and experiences, did not have this insight or feeling. The privacy of his insight was both blessing and curse. Were it easily shared with others, Schultz himself would have been irrelevant.

But because it could not be fully shared, it was difficult to convince others to back the project. Luckily for Schultz, his hypothesis could be tested without a vast investment. Opening a single espresso bar would cost several hundred thousand dollars, but not the hundreds of millions or billions that some ventures require.

After some time, Schultz left Starbucks to start his own shop (Il Giornale). The new shop was a direct copy of an Italian espresso bar. In it, he “didn’t want anything to dilute the integrity of the espresso and the Italian coffee experience.” The seven-hundred-square-foot space had Italian decor and no chairs— it was a stand-up bar just like the bars in Milan. Shots of espresso were served in small porcelain cups. Opera music played in the background, the waiters wore formal shirts and bow ties, and the menu was peppered with Italian.

Had Schultz stuck to this initial concept, Il Giornale would have remained a single small espresso bar. But, like a good scientist who carefully studies the results of experiments, Schultz and his team were alert to customer response. Il Giornale, once started, became a living experiment.

One of the most important resources a business can have is valuable privileged information-that is, knowing something that others do not.

There is nothing arcane or illicit about such information-it is generated every day in every operating business. All alert businesspeople can know more about their own customers, their own products, and their own production technology than anyone else in the world. Thus, once Schultz initiated business operations, he began to accumulate privileged information.

As knowledge accumulated, he altered policies. He took the Italian off the menu, then eliminated the opera music. He knew the baristas were central, but he did away with their vests and bow ties. He departed from the Milanese model and put in chairs for the sit-down trade. Over more time, Schultz discovered that Americans wanted takeout coffee so he introduced paper cups. Americans wanted nonfat milk in their lattes, so, after a great deal of soul searching, he allowed nonfat milk. In the technical jargon of international business, he gradually “localized” the Italian espresso bar to American tastes.

In 1987, his company bought out Starbucks’ retail operations and adopted the Starbucks name. The new firm combined the old Starbucks business of selling dark-roasted arabica coffee beans with the new one of operating espresso bars. By 1990, the company was profitable. In 1992, it went public with 125 stores and two thousand employees.

By 2001, Starbucks had become an American icon, with 4,700 worldwide outlets and $2.6 billion in revenue. The bulk of its revenues came from selling coffee drinks— the company called them handcrafted beverages. The rest came from the sale of coffee beans, some other food items in its coffee bars, and licensing agreements with food-service firms. Only a few years before, “coffee” had been seventy-five cents and came in a plastic foam cup. Now the urban landscape is peppered with Starbucks outlets, and the sight of young professionals sipping pint-sized three-dollar takeout lattes has become commonplace.

Howard Schultz, envisioned an Italian espresso bar in Seattle. He tested this hypothesis and found it wanting. But the test produced additional information, so he modified his hypothesis and retested. After hundreds of iterations, the original hypothesis has long since vanished, replaced by a myriad of new hypotheses, each covering some aspect of the growing, evolving business. This process of learning-hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientifiaduction and is a critical element of every successful business.

Europeans see Starbucks as “American coffee.” Americans think Starbucks is an Italian espresso bar. But at an Italian espresso bar everyone drinks standing up at the bar; almost everyone takes a small cup of pure espresso in a tiny porcelain cup, Calé-latte is for breakfast only, or for children. There is no takeout; there are no tables. The coffee is not a restaurant brand but is suppled by one of the major coffee companies, like Segafredo, Finally Italian espresso bars are small family businesses, not parts of a giant chain.

Source – Good Strategy Bad Strategy: The Difference and Why It Matters by Richard P. Rumelt

Goodreads – https://www.goodreads.com/book/show/11721966-good-strategy-bad-strategy