Brewing A Fresh Pot At Starbucks

As Howard Schultz comes back to drive the day-to-day activities at Starbucks (nasdaq: SBUX - news - people ), the question is, "Will he become one of only a very small handful of returning CEOs who successfully can repeat the magic he brought to the market at the inception of his business?"

A look back at similar situations at companies including Apple (nasdaq: AAPL - news - people ), Dell (nasdaq: DELL - news - people ), Gateway (nyse: GTW - news - people ), Yahoo! (nasdaq: YHOO - news - people ), Charles Schwab Corporation (nasdaq: SCHW - news - people ) and HCA, reveals a number of noteworthy patterns that could shed light on whether the coffee giant's fortunes could soon perk up or continue to falter drip by drip.

In each of the recent leadership transitions, the company began to suffer after an often myopic focus on operational effectiveness led by new, post-founder management began to negatively impact the customer experience. Innovation, which had propelled the company's initial rise, began to wane, often encumbered by layers of bureaucracy or stymied in favor of other priorities. And in each case, it was clear that in order to boost profitability and achieve future growth, the company needed to reclaim the innovation mantle. The challenge was striking a balance.

In Pictures: Best Jobs For Retirees

With Apple, Schwab and Dell--the most successful cases--innovation and profitable growth, supported by a rejuvenated customer experience, became clearly defined, strategic priorities. Innovations with the most impact were along different dimensions than the original innovations that brought the company to prominence. Apple, for example, focused on product and service innovation that addressed music enjoyment rather than computing. Schwab made headway with an expansion of its customer touch/customer service from its "discount" roots. Similarly, Dell used innovation to expand its delivery channels and resuscitate customer service levels.

Special Offer: Turnaround Letter editor George Putnam told subscribers to buy Apple at $7.82 in 2003, turning $10,000 into more than $250,000 in less than 5 years. Click here for all current recommendations in the Turnaround Letter.

In each scenario, innovation to drive growth was balanced with a continued focus on operational effectiveness. However, that operational effectiveness was achieved through consideration of improving process and program service delivery at a reasonable cost, rather than simply achieving lower cost operations.

In the other cases, innovation appears to have been either introduced without sufficient regard for cost implications or alignment of operations to the new market strategy, or it was limited to a repeat of past innovative accomplishments and was insufficiently reflective of the new market conditions resulting from the original disruptive innovations.

Consider the experience of Gateway, which has had five chief executives in six years and struggled to achieve against its business strategies. After the company shifted focus and embarked on failed attempts to expand through retail stores and move into consumer electronics, it has gone back to basics with PCs.

Special Offer: Plenty of banks and brokerages are offering what look like great yields. But as Citi has shown, dividends are not safe. You could get badly burned. Click here for a 30-day free trial of Investment Quality Trends for blue chip dividend payers with generous and safe yields above 5% identified as undervalued.

Lesson learned: It is essential to manage the introduction of innovations for an established organization differently than you would for a start-up. A synthesis across various studies on the subject of innovation into a mature company suggests five key factors for success:

--Building innovations on a deep and current understanding of target customers, both what they know they want, and what they don't yet know they want;

--Providing strong leadership, marked by frequent and open communications and internal dialogue;

--Establishing a culture and working environment that respects the operational gains and internal capabilities built thus far, as well as emphasizing the new;

--Willingness to take quick action on organizational structure, process and investment, and other steps to emphasize the new way forward; and

--Use of tools and rigorous processes to manage innovation risk and make informed decisions.

In addition, successful transformation often means letting go of what you know and embracing the characteristics of the new world. This can require sweeping changes in organizational design, processes and performance metrics, such as new technology, business partners and products/services, along with their associated delivery mechanisms, are introduced.

The specific cases we have examined, and many others, demonstrate that an overzealous focus on cost control can erode company profitability if it affects the customer. There are elements of a cost-control culture, however, that can and should be leveraged as a company, like Starbucks, tries to grow more profitably.

The fact-based analytic approaches normally adopted during a cost control campaign can help a company effectively manage the risks of introducing new product/service innovations, and to establish unexpected partnerships with members of its business ecosystem.

Recession dead ahead? Market veteran Jim Stack assesses the current shape of the economy and shows how you can hedge against further weakness. Click here for the free special report from InvesTech Research.

As Starbucks seeks to revive its customer experience, we hope Schultz will not retreat from kiosks and drive-throughs and limit coffee to cafés. Both internationally and in the U.S., the established customer experience that is valued now goes beyond the four walls of a coffee house. Consider, for example, the strong emergence of McDonald's (nyse: MCD - news - people ) and Dunkin' Donuts in this premium product market. Starbucks will need to continue the evolution of the customer experience if it is to revive profitable growth, and to leverage gains in operational excellence through standard procedures, strategic sourcing of its base product components, intensive employee training and a store-based profit-and-loss focus.

Another key to success will be the extent to which Schultz will, once again, apply his personal leadership capabilities, especially at this initial and critical juncture in the company's transformation. This is the first time in Starbucks' history that it has experienced change driven by poor performance and the need to correct its path. The entire organization now needs to be aligned with the changes Schultz will direct, and that will only happen if he can gain their trust once again. There are now mature executives and store-level personnel in-house who believe in their own deep understanding of the customer, and they will likely embrace only those innovations and operational changes that build on the company's market and operational extensions, as those have been clearly accepted and adopted by its core consumers.

Dr. Kathy Iversen is a managing director and national practice leader for the retail practice of Alvarez & Marsal Business Consulting where she works with companies to solve complex business problems.