Getting their fix of innovation.

How Starbucks Keeps Innovating

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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A recent visit to a hectic Starbucks store near Times Square in New York reminded me of one of the great achievements of real entrepreneurship and inspired innovation: taking an existing technology and turning it into something much more transformational in meeting -- and often forming -- the demands and needs of customers.

Many pathbreakers in business, such as Amazon, Apple, Google and Microsoft, succeed by creating something completely new. Their impressive deployment of one disruptive technology after another has comprehensively redefined existing industries and created new segments. They have empowered people and enhanced living standards around the world.

Less obvious -- and sometimes counterintuitive -- are the companies that take an existing activity and turn it into something much more consequential. Think of how Cirque du Soleil has revolutionized the circus experience. And how Starbucks, with more than 21,000 stores in 65 countries, has redefined coffee drinking, not only in the U.S. but also around the world, including Europe where skepticism was most intense. On recent trips to Europe, I couldn't help but notice the brisk business the company's increasing number of outlets conduct there (although, admittedly, I tended to stick to the more traditional cafes for my own daily consumption).

Now the challenge for Starbucks is to keep innovating as a dominant player in the industry. From the perspective of an outsider like me, it is succeeding through approaches that intelligently target different client segments. Three stand out.

First, Starbucks is doing more than just expanding and adapting its product line to enhance the experience of the coffee drinkers who constitute its core client base. It is also looking to improve their purchase experience in other ways. Last week, it announced that it would introduce new formats that would reduce client wait times.

Second, it is experimenting with more products to tempt those who use its stores as an ad hoc office during the day. Only last week I discovered that the place where I occasionally work while waiting for my daughter to finish an after-school activity now serves popcorn. It is not easy to resist the combination of reliable free Wi-Fi, a customized drink and popcorn munchies. You can even get beer and wine later in the day at some locations.

Third, it is employing user-driven customization to expand its reach among groups such as teenagers and tweens -- something that I discovered a few months ago when my daughter introduced me to the "Starbucks secret menu" (which, by the way, contains lots of drinks with no caffeine).

Not everyone admires Starbucks. Those who dislike the company and its influence can become quite entrenched in their opposition. One of our local coffee houses actually developed an identity almost synonymous with being anti-Starbucks.

Yet regardless of how you feel about the company, it is hard to ignore how it is constantly innovating on the foundation of an old "technology." Its approach is instructive for many other industries. Just imagine how many are waiting to be beneficially disrupted by this type of entrepreneurship.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net