A Starbucks cup lies on a magazine rack
Companies beware: activist investors and management consultants are causing trouble.
The business and economic climate is favorable for these outsiders telling executives how to run their companies. And they really do need help. In the wake of the pandemic, many large companies are struggling to either restart growth interrupted by lockdowns or maintain the boost in sales they got from strong consumer demand. Adding to these difficulties is the fact that consumers have become more selective about their spending, as inflation and high interest rates make it more difficult to do so.
Starbucks, for example, was hit hard by the pandemic and has struggled to get back on its feet since then. When sales and stock price collapsed this year, activist investors pounced on the company and played a key role in helping the company replace its short-lived CEO, Laxman Narasimhan.
One of these activists, Elliott Investment Management, has bought up almost 11 percent of Southwest Airlines’ shares and is pushing for major changes at the low-cost airline. Where activist investors sense trouble, consulting firms with their PowerPoint presentations and synergy recipes are not far away.
“Strategy through benchmarking” is not the answer
Certainly, Starbucks, Southwest and several other major companies desperately need change. Starbucks is losing the special bond with its customers that made it a popular “third place” alongside home and work. Southwest, the innovative airline that transformed flying with its low-cost fares and focus on the customer experience, is hit by rising costs, falling profit margins and the fallout from the tech collapse in 2022. Nike stock, for its part, plunged this summer to its lowest level since the start of the pandemic, hurt by increasing competition and strategic missteps.
But it’s highly unlikely that Elliott or McKinsey have the answer. In the short term, it might provide some stability by calming investors’ nerves, but in the long term it guarantees a company that it’s swimming in a sea of parity with its competitors. That’s because both activists and consultants rely too heavily on benchmarking.
The strategy by benchmarking approach boils down to copying everyone else – a recipe for mediocrity. Great companies do the opposite – they leverage their unique strengths and create unique experiences that no one else can offer.
Take, for example, the plan Elliott laid out for Southwest. Large portions of the “Stronger Southwest” presentation focus on comparing Southwest’s recent unfavorable performance to the big three airlines – United, American and Delta. If Southwest could just emulate those guys, everything would be OK, the message seems to be.
The problem is that when it comes to the flight experience, United, American and Delta are virtually identical copies, offering little in the way of differentiation, while Southwest has outperformed its competitors for decades by offering a truly unique experience that customers loved. And that differentiation has paid off. Between 2000 and 2019, Southwest outperformed the average annual share price performance of United and American by about 8%.
The fact that Southwest has underperformed the big three recently has more to do with high fuel costs squeezing margins than anything fundamentally wrong with its values and business model. Yes, Southwest needs to change. But that change should mean getting back to what makes the airline great, not becoming just another big airline.
Swimming against the current
One of the reasons Narasimhan’s attempt to revive Starbucks failed was that he followed a cookie-cutter approach rather than refocusing the company on its unique value. His plan to “ambush” customers with coupons and discounts made Starbucks seem like any other fast-food chain. This approach seemed like a cheap trick for a company whose bond between employees and customers was so strong that a barista once donated her kidney to a sick customer.
The urge to be like everyone else isn’t limited to Starbucks and Southwest. HBO’s descent from the leading platform for quality programming to a follower is a warning against copying others. After acquiring the company, AT&T pressured HBO to become more like Netflix. Key executives moved on. Quality declined. And by the time HBO’s streaming service was rebranded under the bland name Max last year, over 2 million subscribers had already left. Meanwhile, the few streaming platforms that look healthy are those that offer something unique. AppleTV+ is gaining subscriber share with a smaller, higher-quality programming lineup than its competitors. It’s succeeding by swimming against the tide of sameness.
The need to think differently
Of course, some companies are simply structurally broken and could benefit from the kind of emergency surgery that activists and management consultants are conducting. But that’s not the case with fundamentally great companies like Starbucks and Southwest.
So how do you deal with it? Leaders of companies facing external pressures need to be able to present a bigger vision to Wall Street, explaining why it makes sense to reject the usual advice and how a different approach will create more value. That approach should be based on a deep understanding of the value they offer their key stakeholders, not on top-down prescriptions crafted by hired executives. Traditional management consultants are good at in-depth analysis, but they lack the one quality essential to turning around a company: creativity. They are experts at comparing existing options rather than creating new ones.
When Steve Jobs returned to the helm of the struggling Apple in 1997, many smart “business people” urged him to follow other technology companies like Dell and HP and separate the hardware and software divisions. He ignored them and did the opposite, because he understood that Apple had to be a unified company. Only then could it do what it was so good at – creating great customer experiences. He launched the “Think Different” campaign to redefine its identity and reduced the company’s offerings to just four products.
In fact, Apple and other Big Tech companies have continued to thrive by thinking differently. Alphabet, Meta, Amazon, Microsoft and Apple are all wildly successful. And they all differ significantly in their culture, business models and strengths. This is in part because many of them are still controlled by their founders and therefore do not have to deal with tyrannical invaders.
To be fair, not everything outsiders say is bad. Starbucks, for example, now has a chance to renew itself under new CEO Brian Niccol, the former head of Chipotle. He is a promising choice, with a proven track record of driving innovation and creating a great customer experience at the Mexican food chain. Starbucks shares rose over 20% following the news, erasing all losses from 2024.
But Niccol won’t succeed by repeating the Chipotle playbook. With any luck, he’ll spend a little time digging deeper and finding out what makes Starbucks great and unique. Maybe he’ll discover there’s a lot of great stuff left on the counter.
Dev Patnaik is the CEO of Jump Associates.
