Identify and describe the four building blocks of competitive advantage. Provide an example of each using the Starbuck’s case below.

The growth of Starbucks is the stuff of business legend. In the 1980s, when the company had only a handful of stores, the company’s director of marketing, Howard Schultz, returned from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later pur- chased the company and became CEO, persuaded the owners to experiment with the coffeehouse format, and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, and other products, in a tastefully designed coffeehouse setting. The idea was to transform the act of buying and drink- ing coffee into a social experience. The stores were to be “third places,” where people could meet and talk or relax and read. The company focused on providing su- perior customer service. Reasoning that motivated em- ployees provide the best customer service, Starbucks’ executives devoted much attention to employee hiring and training programs, and progressive compensation policies that gave full-time and part-time employees stock-option grants and medical benefits. This formula was the bedrock of Starbucks’ compet- itive advantage. Starbucks went from obscurity to one of the best-known brands in the United States within a decade. Between 1995 and 2005, Starbucks added U.S. stores at an annual rate of 27%, reaching almost 12,000 total locations. It also expanded aggressively inter- nationally. Schultz himself stepped down from the CEO role in 2000, although he remained chairman. By 2008, however, the company was hitting seri- ous headwinds. Competitors from small boutique cof- fee houses to chains like Tully’s and Pete’s Coffee, and even McDonald’s, were beginning to erode Starbucks’ competitive advantage. Although the company was still adding stores at a break-neck pace, same-store sales started to fall. Profitability, measured by return on invested capital (ROIC), slumped from around 21% to just 8.6% in 2008. The stock price tumbled. At this point, Howard Schultz fired the CEO and again reclaimed the position. His strategy was to re- turn Starbucks to its roots. He wanted the company to reemphasize the creation of value through great customer experiences, and he wanted the company to do that as efficiently as possible. He first closed all Starbucks’ stores for a day, and retrained baristas in the art of making coffee. A number of other changes followed. The company redesigned many of its stores to give them a contemporary feel. It stopped selling breakfast sandwiches because Schultz thought that the smell detracted from the premium coffeehouse experi- ence. Instead of grinding enough coffee for an entire day, he told employees to grind more coffee each time a new pot was brewed to create the aroma of freshly brewed coffee. He gave store managers more freedom to decide on specific aspects of their stores, such as the type of artwork displayed. Starbucks also dramati- cally expanded its fair-trade policy, purchasing its cof- fee beans from growers adhering to environmentally friendly policies, and it promoted this to customers. To reduce costs, Schultz announced the closure of 600 underperforming U.S. stores. Starbucks used the threat of possible closure to renegotiate many store leases at lower rates. It cut back on the number of suppliers of pastries and negotiated volume discounts. A lean thinking team was created, and it was tasked with the job of improving employee productivity; baristas needed to become more efficient. The team found that by making simple changes, such as placing commonly ordered syrup flavors closer to where drinks are made, they could shave several seconds off the time it took to make a drink, and give employees more time to interact with customers. Faster customer service meant higher customer satisfaction. The results have been impressive. What was once nearly dismissed as a stale brand has been reinvigo- rated. Between 2008 and 2012, Starbucks’ revenues expanded from $10.4 billion to $13.3 billion against the background of a weak economy, and ROIC surged from 8.6% to an impressive 26.13%.The growth of Starbucks is the stuff of business legend. In the 1980s, when the company had only a handful of stores, the company’s director of marketing, Howard Schultz, returned from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later pur- chased the company and became CEO, persuaded the owners to experiment with the coffeehouse format, and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, and other products, in a tastefully designed coffeehouse setting. The idea was to transform the act of buying and drink- ing coffee into a social experience. The stores were to be “third places,” where people could meet and talk or relax and read. The company focused on providing su- perior customer service. Reasoning that motivated em- ployees provide the best customer service, Starbucks’ executives devoted much attention to employee hiring and training programs, and progressive compensation policies that gave full-time and part-time employees stock-option grants and medical benefits. This formula was the bedrock of Starbucks’ compet- itive advantage. Starbucks went from obscurity to one of the best-known brands in the United States within a decade. Between 1995 and 2005, Starbucks added U.S. stores at an annual rate of 27%, reaching almost 12,000 total locations. It also expanded aggressively inter- nationally. Schultz himself stepped down from the CEO role in 2000, although he remained chairman. By 2008, however, the company was hitting seri- ous headwinds. Competitors from small boutique cof- fee houses to chains like Tully’s and Pete’s Coffee, and even McDonald’s, were beginning to erode Starbucks’ competitive advantage. Although the company was still adding stores at a break-neck pace, same-store sales started to fall. Profitability, measured by return on invested capital (ROIC), slumped from around 21% to just 8.6% in 2008. The stock price tumbled. At this point, Howard Schultz fired the CEO and again reclaimed the position. His strategy was to re- turn Starbucks to its roots. He wanted the company to reemphasize the creation of value through great customer experiences, and he wanted the company to do that as efficiently as possible. He first closed all Starbucks’ stores for a day, and retrained baristas in the art of making coffee. A number of other changes followed. The company redesigned many of its stores to give them a contemporary feel. It stopped selling breakfast sandwiches because Schultz thought that the smell detracted from the premium coffeehouse experi- ence. Instead of grinding enough coffee for an entire day, he told employees to grind more coffee each time a new pot was brewed to create the aroma of freshly brewed coffee. He gave store managers more freedom to decide on specific aspects of their stores, such as the type of artwork displayed. Starbucks also dramati- cally expanded its fair-trade policy, purchasing its cof- fee beans from growers adhering to environmentally friendly policies, and it promoted this to customers. To reduce costs, Schultz announced the closure of 600 underperforming U.S. stores. Starbucks used the threat of possible closure to renegotiate many store leases at lower rates. It cut back on the number of suppliers of pastries and negotiated volume discounts. A lean thinking team was created, and it was tasked with the job of improving employee productivity; baristas needed to become more efficient. The team found that by making simple changes, such as placing commonly ordered syrup flavors closer to where drinks are made, they could shave several seconds off the time it took to make a drink, and give employees more time to interact with customers. Faster customer service meant higher customer satisfaction. The results have been impressive. What was once nearly dismissed as a stale brand has been reinvigo- rated. Between 2008 and 2012, Starbucks’ revenues expanded from $10.4 billion to $13.3 billion against the background of a weak economy, and ROIC surged from 8.6% to an impressive 26.13%.The growth of Starbucks is the stuff of business legend. In the 1980s, when the company had only a handful of stores, the company’s director of marketing, Howard Schultz, returned from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later pur- chased the company and became CEO, persuaded the owners to experiment with the coffeehouse format, and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, and other products, in a tastefully designed coffeehouse setting. The idea was to transform the act of buying and drink- ing coffee into a social experience. The stores were to be “third places,” where people could meet and talk or relax and read. The company focused on providing su- perior customer service. Reasoning that motivated em- ployees provide the best customer service, Starbucks’ executives devoted much attention to employee hiring and training programs, and progressive compensation policies that gave full-time and part-time employees stock-option grants and medical benefits. This formula was the bedrock of Starbucks’ compet- itive advantage. Starbucks went from obscurity to one of the best-known brands in the United States within a decade. Between 1995 and 2005, Starbucks added U.S. stores at an annual rate of 27%, reaching almost 12,000 total locations. It also expanded aggressively inter- nationally. Schultz himself stepped down from the CEO role in 2000, although he remained chairman. By 2008, however, the company was hitting seri- ous headwinds. Competitors from small boutique cof- fee houses to chains like Tully’s and Pete’s Coffee, and even McDonald’s, were beginning to erode Starbucks’ competitive advantage. Although the company was still adding stores at a break-neck pace, same-store sales started to fall. Profitability, measured by return on invested capital (ROIC), slumped from around 21% to just 8.6% in 2008. The stock price tumbled. At this point, Howard Schultz fired the CEO and again reclaimed the position. His strategy was to re- turn Starbucks to its roots. He wanted the company to reemphasize the creation of value through great customer experiences, and he wanted the company to do that as efficiently as possible. He first closed all Starbucks’ stores for a day, and retrained baristas in the art of making coffee. A number of other changes followed. The company redesigned many of its stores to give them a contemporary feel. It stopped selling breakfast sandwiches because Schultz thought that the smell detracted from the premium coffeehouse experi- ence. Instead of grinding enough coffee for an entire day, he told employees to grind more coffee each time a new pot was brewed to create the aroma of freshly brewed coffee. He gave store managers more freedom to decide on specific aspects of their stores, such as the type of artwork displayed. Starbucks also dramati- cally expanded its fair-trade policy, purchasing its cof- fee beans from growers adhering to environmentally friendly policies, and it promoted this to customers. To reduce costs, Schultz announced the closure of 600 underperforming U.S. stores. Starbucks used the threat of possible closure to renegotiate many store leases at lower rates. It cut back on the number of suppliers of pastries and negotiated volume discounts. A lean thinking team was created, and it was tasked with the job of improving employee productivity; baristas needed to become more efficient. The team found that by making simple changes, such as placing commonly ordered syrup flavors closer to where drinks are made, they could shave several seconds off the time it took to make a drink, and give employees more time to interact with customers. Faster customer service meant higher customer satisfaction. The results have been impressive. What was once nearly dismissed as a stale brand has been reinvigo- rated. Between 2008 and 2012, Starbucks’ revenues expanded from $10.4 billion to $13.3 billion against the background of a weak economy, and ROIC surged from 8.6% to an impressive 26.13%.

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