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Starbucks: What Went Wrong at The Top?

It ain't supposed to work this way. Howard Shultz launched Starbucks Coffee and eventually brought in Jim Donald, first as head of the company's North American business and then in 2005 as president and chief executive, Donald's elevation to the CEO's job allowed Shultz to retreat from the frontlines to the chairman of the board position. Shultz should have been able to gear Donald up to one day to truly run the company without the founder's presence.

But now we learn that Donald is out, effective immediately, because he is taking the blame for opening too many stores in the United States, reducing the quality of the coffee-lover's in-store experience and allowing too many layers of management to develop. Shultz, at age 54, is back as CEO.

Although this pattern is not terribly unusual, as The Wall Street Journal notes, it does suggest that something went wrong at Starbucks. Here are the key questions we should be asking:

  • As chairman of the board, did Shultz simply fall asleep? As chairman, he should have had a keen understanding of what was happening at the company. He should not have been so isolated that he was suddenly surprised by the fact that the business wasn't doing as well as it might, or that the stock price was declining.
  • Where is the bench strength? If Donald wasn't the right leader, the company should have had three or four other candidates ready to take on the leadership challenge. Why didn't Starbucks do a better job developing its management talent? The absence of bench strength suggests that Shultz may come back in as CEO and rev the business back up, but that could be a short-lived phenomenon if he doesn't gear up a pipeline of talented leaders who could one day take his place.
  • Did Starbucks and Shultz simply fail to spot the emergence of competition from McDonald's and Dunkin' Donuts? If so, it's a classic case of an otherwise successful company that is focused on beating one set of competitors (in this case, smaller premier coffee outlets) but completely misses the arrival of a different set of competitors who happen to be 800-pound gorillas. Did the culture of Starbucks become arrogant? How could a management team fail to spot emerging competition from established players?
Until we know the answers to these questions, it's going to be impossible to understand what went wrong at Starbucks, and whether Shultz can fix it. What's your view?
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