Only the Innovative Survive

The streets of Seattle were still dark as Howard crunched his way through the morning frost. Bleary-eyed merchants were beginning to fill the alleyways as the bluish glow of dawn seeped across the horizon. When a storefront framed with rustic green wood was within sight, Howard pulled out the key he kept with him at all times and unlocked the door with a familiar click. 

The rich aroma of fresh coffee beans washed over him, followed by a rush of nostalgia. He contemplated the magnitude of the coming day's events as he ran his hand along the oak counter. Later that day, Howard Schultz would be announcing his controversial return as CEO of Starbucks. 

Schultz would be joining a long lineage of “boomerang” executives, including Steve Jobs and Michael Bloomberg. It’s a tradition that remains strong today—witness Bob Iger’s recent return to Disney. But for all the drama of these stories, a 2019 study of over 6,000 CEO tenures found that returning executives perform significantly worse compared to their first-time counterparts. 

So the odds would’ve been stacked against Schultz even under normal circumstances, let alone during a year like 2008. Only a handful of people were aware at the time, but Starbucks was on the brink of collapse. By his calculations, they were mere months away from insolvency. The timing couldn’t be worse: just as Starbucks was beginning to fall apart, one of the most cataclysmic financial disasters in history was gearing up to shatter the world’s economy. 

Schultz was knowingly taking the wheel of a sinking ship and sailing headfirst into a hurricane. He had no idea whether it was possible to steer Starbucks away from ruin, never mind how to do it. But it was there, standing in the darkness of the original Pike Place Market store, surrounded by rows of porcelain mugs and four decades of history, that he made two commitments to himself.

First, he would not blame anyone or point fingers for the mistakes that had created this situation. It would be essential to instill everyone with a sense of confidence about the future. 

Second, and perhaps most important of all, he promised to innovate. 

All of the above and forthcoming details about Starbucks’s turnaround are sourced from Schultz’s book Onward: How Starbucks Fought for Its Life Without Losing Its Soul. It offers one of the most detailed accounts of recession leadership on record. 

The innovators’ paradox 

The idea that a crisis is a good time to innovate may seem counterintuitive. Surely it’s better to play it safe and steady during precarious times. 

Indeed, most companies aren’t willing to run the risk of being innovative during a downturn. There’s a danger of wasting resources and overextending yourself at a time when businesses are the most vulnerable. So when most businesses find themselves in a crisis, whether it’s self-inflicted or the result of an economic recession or a global event, innovation becomes the least of their priorities. 

Numerous studies have found that many businesses halted innovation during the 2008 recession. Research and development budgets were often the first costs to be targeted. Overall investments in innovation retracted. Ongoing projects were canceled. Technology spending plans were revised. 

This pattern also held true for the Covid-19 pandemic. A McKinsey research report found that the number of executives who listed innovation as their first or second priority fell from 55% pre-crisis to 23% during the pandemic. 

Yet there’s little evidence to suggest that this approach is effective. In fact, researchers consistently find that innovation during a crisis yields a “survival advantage.” Businesses that innovate are not only the most likely to survive a downturn, but emerge thriving afterward. 

Obviously, everyone knows that innovative companies are superior to non-innovative ones. But a flurry of studies over the past few years has found that those who remain innovative even during bad times are more likely to survive and become market leaders post-crisis. 

Recent analyses of tens of thousands of businesses in Italy, Spain, and the Netherlands found that crisis-innovators were all significantly more likely to come out on top after the recession. Meanwhile, a study of 2,894 U.S. businesses found that those with an innovative culture were more likely to survive the pandemic, while a study of 15,451 companies across 27 countries observed how those that innovated the fastest in response to the pandemic were less likely to shut down. 

But wait. Couldn’t you make the argument that innovation is a perk for businesses that are already the strongest, or the least affected by a crisis, and that their success is not a result of innovation per se? 

It turns out that the biggest predictor of whether a company will innovate during a downturn is the already established presence of an R&D department—suggesting that it’s the ability and commitment to innovate that gives these businesses an edge above and beyond other factors, including size and industry. 

In fact, companies with the fewest resources of all—startups—have the most staying power. As per a 2009 study, businesses founded in a recession or bear market disproportionately made up more than half of the Fortune 500, including Microsoft, Google, Salesforce, FedEx, and Trader Joe’s. 

One benefit of launching a business during a tough time is that you’re forced to be more resourceful and innovative to survive from the get-go. The skills you learn during this time are embedded into your organizational DNA, which then serves as a competitive advantage long after the crisis is over.

Entrepreneurs are also a lot less likely to chase nonsensical ideas during choppy economic conditions, when the ability to spot a genuine opportunity tends to sharpen. Studies have found that only founders who are “pulled” into the market by recognizing a true opening for innovation are likely to succeed. Founders who are “pushed” into entrepreneurship due to economic pressure have a substantial decrease in survival probability. 

All of the evidence points to innovation as the dominant strategy of recession victors. This was certainly true for Starbucks. 

To say that Schultz’s commitment to innovate was successful would be an understatement. The plan he and his leadership team devised during the first few months of his return would take Starbucks from the brink of failure to posting its most profitable quarter in its history by 2010—all while navigating through two of the worst years of economic activity that the world had ever seen. 

How is such a turnaround possible? What did this process of transformation look like? If the evidence shows that innovation is the best strategy, how do you come up with the kind of innovative ideas that can revolutionize an organization? 

Fortunately, Schultz’s methodology during that period has been outlined in meticulous detail. And his approach is identical to the one observed in studies of the process behind the generation of successful innovations. 

Whether it’s a new startup idea, a product or feature, or personal habits and routines, we all tend to go through the same process when we achieve our greatest breakthroughs. Shining a spotlight on the mechanics will allow you to move through your own cycles of creativity faster. 

Innovation begins, as all good stories do, with tension. 

Phase One: Dissonance 

It was December 2007, just a few weeks before Schultz’s return, and he couldn’t believe what he was seeing. 

Every morning for the past 20 years, Howard checked his screen for Starbucks’s daily same store sales data—the year-over-year differences in revenue generated by a retailer’s existing stores. For the first time, the company was reporting negative figures in the double digits, validating the feelings of frustration that had been building over the past year. 

He had watched in a state of growing angst as Starbucks departed from its original values of elevating the human spirit and prioritizing the customer experience. Instead, the company had become obsessed with delivering results for Wall Street. All anyone seemed to care about was delivering profits every quarter at any cost, long-term thinking be damned.

On the surface, it seemed to work. The numbers had climbed quarter after quarter. But Schultz could sense the underlying health of the business deteriorating—and, indeed, growth was beginning to slow. They’d opened stores at a breakneck pace, and while this strategy had kept investors happy, new stores were now cannibalizing customers from old ones.

He’d also noticed a number of issues within stores that were undermining the customer experience: wait times were too long, there was no connection between customers and baristas, beverage quality was poor, and stores had become sterile and cookie-cutter in an effort to promote scalability. 

Things were no better outside of Starbucks’s walls. Competitors were circling, including McDonald’s, which debuted a cheaper McCafe espresso offering, and consumers seemed to be under increasing price sensitivity as the economy teetered.