How Starbucks got its groove back

March 24, 2011, 4:41 PM UTC

In his candid new book, CEO Howard Schultz tells what went on behind the scenes in Seattle, and what he learned from the company’s mistakes.

By Anne Fisher, contributor

FORTUNE — Sometimes, it’s the little things that drive you crazy.

In the summer of 2007, Starbucks (SBUX) was in the middle of its worst year ever.

Starbucks CEO Howard Schultz

Having stepped aside as CEO 7 years earlier to become a Bill-Gates-like, hands-off chairman instead, founder Howard Schultz often peered wistfully through the windows of closed-door conference rooms, “feeling like an outsider looking in,” he writes in his new book (with co-author Joanne Gordon), Onward.

That would probably have been tolerable if the decisions cooked up in those conference rooms weren’t so disastrous. But they were. Starbucks’ day-to-day store traffic was “in free fall,” Schultz recalls, tumbling to levels not seen in the company’s 40-year history. The coffee leviathan had spread itself too thin, opening too many stores too fast,  expanding willy-nilly into alien territory like the music business, and neglecting to build an online presence that could have given the company a way to explain some of its actions to its many critics.

Starting in February 2007 — when Schultz wrote an infamous memo complaining about the “commoditization of Starbucks,” which promptly got spattered all over the Internet — the company’s once-stellar stock began to slide, losing 42% of its value by the end of the year.

The last straw, however, was a small, irritating detail: The smell of burnt cheese.

“People who have known me for years will tell you that few things had ever piqued my ire as much as that smell,” Schultz writes. “I could not stand it.”

Having opposed the idea of selling breakfast sandwiches from the get-go, he hated the way “singed Monterey Jack, mozzarella, and, most offensively, cheddar” from the sandwiches overwhelmed the aroma of coffee.

“Where was the magic in burnt cheese?,” he writes, adding, “The breakfast sandwich became my quintessential example of how we were losing our way.”

Yet when Schultz issued a direct order to Starbucks’ head of global products — “Get the sandwiches out!” — then-CEO Jim Donald countermanded it an hour later. The debacle, more than any other single problem Starbucks faced, made Schultz decide to step back into the role of active CEO. In January of 2008, he did.

Most of Onward, which is subtitled How Starbucks Fought for Its Life without Losing Its Soul, is a play-by-play account of what happened next. There may be more detail here than most readers really want, as when Schultz describes the weather outside his kitchen window while he wrote the “commoditization” memo (rainy), or what he wore to an important meeting with employees (“blue jeans and a dark gray sweater”).

But for anyone looking for insights on how to turn around a troubled giant brought low by overconfidence in its own success, Onward is essential reading — and not only because Schultz’s recipe is clearly working. (The company reported record earnings for fiscal 2010, with earnings per share up 138% on a 15% gain in revenues, and then broke its own record in the first quarter of fiscal 2011.)

Schultz comes across in these pages as a genuinely, even disarmingly, nice guy, so that, while he’s recalling his angst and recounting his struggles, you find yourself cheering him on. But the real value here is in his willingness to put his own shortcomings under a microscope, shoulder much of the blame for his company’s missteps, and draw conclusions that reach far beyond Starbucks.

“If not checked, success has a way of covering up small failures,” he muses. “This is why, I think, so many companies fail. Not because of challenges in the marketplace, but because of challenges on the inside.”

A crucial lesson he learned while tackling those challenges is one that’s all too easy to lose sight of: “Growth, we now know all too well, is not a strategy. It is a tactic.”

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