(FORTUNE Magazine) – A HOT, STEAMING CUP OF CUSTOMER AWARENESS

HOWARD SCHULTZ, 51

Starbucks, FOUNDED 1971

Schultz, who bought Starbucks in 1987 when it was a tiny Seattle roastery, loves nothing more than talking about the importance of a finely tuned "customer experience." Managing that experience is no small matter: Starbucks has 8,500 stores and 90,000 employees, and has made macchiatos ubiquitous from Ketchikan, Alaska, to Bangkok. Schultz's latest foray into the zeitgeist: burning stations to mix and burn custom-music CDs while you sip.

On not annoying the guests -- Because we serve more than 30 million customers a week in our stores and have so much trust and frequency, things we might do that are innovative and entrepreneurial have to be respectful and tasteful in terms of their linkage to our company's heritage. A high-profile cable executive once came into my office and said, "Here's a blank check. What would it take to put monitors in every Starbucks store where you could play just one cable channel for a few hours a day?" Although it was a seductive opportunity because of the profit potential, we recognized early on that our customers want to get away from that kind of noise. Our stores are not only an extension of their home and office but also a respite.

On screwing up -- I took Starbucks into the magazine business with Joe--my idea. [Joe was produced for Starbucks by Time Inc. Custom Publishing, which shares a corporate parent with FORTUNE.] Nobody read it. Since Joe failed I've kept a rack of issues in my office so everyone can see the magazine and realize we shouldn't hide behind our mistakes and we should have the courage to keep pushing by not embracing the status quo. I keep that there as a memento. It was an embarrassing defeat, and we lost a fair amount of money, but sometimes you have to have the courage to fail.

On one divine concoction -- Frappuccino was created by a store manager in West L.A. This person was fooling around one day in our store, blending beverages with a blender she bought on her own. We started sampling that, and the people in our Southern California region were very intrigued. We tested it, named it, and Frappuccino today is a multi-hundred-million-dollar business in our stores. A ready-to-drink joint venture with Pepsi-Cola is a $500 million business unto itself. The employee who came up with it? She is now god. She still works with Starbucks. There are so many unique ideas coming to the company from both inside and out, it would be an injustice to link this only to me. We just announced the introduction of a new beverage coming in January: Chantico. This is like drinking chocolate. It's very thick, rich, indulgent, and our food group developed it completely on their own.

On innovation and morale -- Starbucks was the first company in America to give comprehensive health benefits and stock options to every single employee, including the over 65% that were part-time at the time. Starbucks has the lowest level of attrition of any national retailer. These are things that are below the surface, but threaded into the external innovation that we're talking about. The relationships that we have with our people are the driving force of innovation at Starbucks. -- Abrahm Lustgarten

"The employee in West L.A. who came up with the Frappuccino? She is now god."

WARM, FUZZY, AND HIGHLY PROFITABLE

YVON CHOUINARD, 66

Patagonia, FOUNDED 1973

Maine-born Chouinard has kept Patagonia private for a reason: so he can run the company the way he wants. It's fair to summarize his mission as earth first, profits second. A portion of the company's $250 million in revenues goes to conservation causes, and Chouinard constantly looks for eco-friendly ways to make sportswear--pesticide-free cotton, for instance, and jackets made from recycled bottles. It's not altruism. He believes his approach is the reason for Patagonia's success.

On the clothes of tomorrow -- We did an analysis of all the different fibers that we use in making clothes and found that the most damaging was just plain old industrial cotton--dripping with pesticides. I gave the company 18 months to get out of making any product out of industrial-grown cotton--25% of our business. We had to reinvent the way we made clothing to accomplish it, but what the switchover to organically grown cotton did was mobilize the company in a direction, and it's been more profitable because it puts us in a unique position. The Gap is coming here this week to learn how they can get more into organic cotton; we've influenced Nike, Levi's, and a bunch of companies to begin switching because we worked to make the stuff available. Now we're in the forefront of a new way of making clothes. There won't be sewing machines in the future. We're using a lot of seamless technology, coming out with a jacket that has no stitching at all--everything is glued and fused together for a lighter, stronger, more waterproof product.

On the benefits of stress -- If you want a company to be around for a while, you have to constantly embrace change and even create an artificial sense of stress or crisis. So you want an entrepreneur at the top and lots of other people running behind picking up the pieces or saying, "No, this isn't going to work." But somebody has to be responsible for shaking things up. There's a certain formula in business where you grow the thing and go public. I don't think it has to be that way. Being a closely held company means being able to take risks and try new things--the creative part of business. If I were owned by a bunch of retired teachers, I wouldn't be able to do what I do; I'd have to be solely concerned with the bottom line. For us to go public would be suicide. -- A.L.

"You want an entrepreneur at the top and lots of people running behind, picking up the pieces."

I'D RATHER BE INVENTING

AMAR BOSE, 74

Bose, FOUNDED 1964

By snuffing out office politics and keeping a lid on executive pay, Bose has created a kind of engineers' paradise. In fact, Bose reinvests 100% of his $1.7 billion company's earnings into R&D. The latest invention: An ultra-smooth automobile suspension system.

The exciting thing for us is to bring to the market products that just perform better. We've worked on this car-suspension system and tested it for 24 years now and are finally ready to show it to the auto companies. It will probably take several years before they adopt it; they'll want to do some of their own testing, but we've designed it so that they won't have to do expensive retooling to make this technology work. The potential size of the market? We really have no idea. We just know that we have a technology that's so different and so much better that many people will want it. To bring new technology that can cause that excitement--that motivates a lot of people in the company. I try to keep the spirit of innovation alive in other ways too. I hire a lot of bright, ambitious engineers from MIT, but I also want to make sure they focus on the technology--not office politics. One thing we do is let outside consultants set my salary and that of other top managers to make sure we're not making more than what's standard for our industry. If you have a CEO who's making obscene amounts of money, then the employees began to realize that they're working to make somebody else very rich. And then you get office politics. People spend most of the time that they're alive at work. If it isn't exciting, if it isn't pleasant, if it's riddled with politics, their whole life gets warped. But when you see the salaries aren't being determined by the people at the top, that creates a different spirit. -- Brian Dumaine

YOU CAN'T SAY, "THE CUSTOMER DOESN'T GET IT"

KATE AND ANDY SPADE, 41 AND 42

Kate Spade, FOUNDED 1993

The Spades turned a tiny handbag shop in a Manhattan apartment into a $125 million designer of shoes, fragrances, china, and other accessories. Their secret, besides quirky style? Choosing battles very carefully.

KATE: When we started to have a lot of success with the bags, people said we should expand into this or that category. We knew we had a window of opportunity, but the point was to get into a category that had a growth prospect, and not for growth to simply be the byproduct. So instead, our first extension of the line was stationery. It was a category retailers hadn't seen as something they could make money on. After that, we went into shoes.

ANDY: If we go into a new category we always ask, "Do we understand it? Can we design it well?" Look at belts. Everyone does belts. I don't wear a belt. I don't know how to design it. If we do something interesting that doesn't sell, we don't perceive that as a success. We don't go back and tell people that the customers "just didn't get it." -- Julie Creswell

THE BEST IDEAS COME FROM THE FRONT LINE

SCOTT COOK, 52

Intuit, FOUNDED 1983

When the house of Quicken hit a dry spell a while back, it had to do some soul searching to get its innovative mojo back.

In my book, entrepreneuring new successes is a systematic thing. It's not random. It's not a sloppy, loose, "let's get lucky" kind of thing. It's intentional, rigorous work. You've got to teach it.

The place where inventions that matter come from is actually the operating business units. One event that's a great example of this is the launch of QuickBooks in March of 1992, which came from our software division and which allowed small businesses to manage their money like never before. QuickBooks became the bestselling accounting software by the end of its first full month on the market. And the only reason that happened is because of the fundamental invention inside QuickBooks. And it didn't come out of any big fancy R&D lab. It came out of us being closer to understanding the customer and the prospect than anyone else. -- Christopher Tkaczyk

ABSOLUTELY, POSITIVELY, SLOW THE HELL DOWN

FRED SMITH, 60

FedEx, FOUNDED 1971

It's kind of odd to hear the guy who founded FedEx telling people to take it easy. But during the years since this ex-Marine first came up with his audacious plan to take on the U.S. Postal Service, Smith has learned that he'll take realism over enthusiasm any day.

The trick to being 60 years old and an entrepreneur is that you have to encourage and reward innovation that may not come from you. As you get older, what you get is simply a greater appreciation for what the war expert Karl von Clausewitz called "friction." Stuff happens. You think you're on one timeline, but you have to recognize that decisions will take longer and the roads will be more difficult. That's why entrepreneurs are usually younger--they don't know that. A fundamental problem with most entrepreneurs is they are unrealistic about the market demands or unrealistic about the costs of meeting those demands. It sounds simple, but it's not. It's hard once you're in battle not to be lured by emotion and optimism. You can be the greatest innovator, but if you are not steely-eyed about that you have a problem. Being entrepreneurial doesn't mean jump off a ledge and figure out how to make a parachute on the way down. -- Matthew Boyle

"Being an entrepreneur doesn't mean jump off a ledge and make a parachute on the way down."

FROM ART HOUSE TO MOUSE HOUSE TO ...?

HARVEY WEINSTEIN, 52 (right) BOB WEINSTEIN, 50

Miramax, FOUNDED 1973

Harvey's the frontman with a taste for art films; Bob's the pragmatist who loves "popcorn" movies. They love to talk about each other and their legendary partnership. Regarding Disney, which bought Miramax in 1993, they're a bit coy. After recent rifts over films like Fahrenheit 9/11, rumors are swirling that they'll walk. The brothers won't say what's next, but they aren't shy about dropping hints.

On accounting for taste

BOB: I used to wonder how Harvey viewed a movie; what was the quality he was looking for in making a decision to buy? He gave me an answer I've never forgotten. He said, "I actually watch a movie for the movie's sake, just as if I'd paid my seven bucks to see it. Whether it was costing me $2 million or $7 million to acquire it, that wasn't in my mind. It was just, literally, did I enjoy the movie for its own sake?" You follow your instincts and enjoyment rather than a formula in your head; you buy it on your gut.

Ten years ago I started Dimension Films, which is devoted to the kinds of movies that we never had the money to do--the popcorn movies. You can make Scream for $14 million and gross $100 million and the same thing with Scary Movie. You didn't necessarily need to spend a lot of money to get an audience. The passion for those kinds of movies was always there. But everyone always said, "Well, Miramax can do those small art house movies, they can even make a lot of money, but they can't make a mainstream movie." Tell us no--that's all we've got to hear. Tell us we can't do something.

HARVEY: I saw The Crow and thought, This won't work. And that was the last time they invited me into a screening [at Dimension]. It grossed $60 million. I don't know that genre of movies, but I'm the happiest brother in the world, because Dimension's financial success is the best of any movie company in the world. Yes, Bob makes commercial movies, but he has never lost his sense of quality. It's something I'm incredibly proud of.

BOB: Chicago. I saw the play, and I said to Harvey, "You think this is going to be a movie?" And he goes, "Yeah." For ten years we were going over that. It was like, what does he see in this that I do not?

On Disney and the future

HARVEY: I look at my years of Disney fondly. Bob and I built a $2 billion asset for their shareholders. Michael Eisner has said the best investment he ever made was buying Miramax, and believe me, buying a company for $70 million and then turning it into $2 billion is the best investment he ever made. I don't think anybody over the same ten years has had the track record that we have. Bob and I are asset-builders. We have had a great time being entrepreneurs, and even if we're not with Miramax and Disney, we can do this again, and we'll do it bigger, better, and smarter, and that's all I've got to say.

BOB: [If we were to leave Miramax] I don't think we're back to where we started from, based upon our track record and the amount of money that we know is available to us from people who can't wait to get into business with us should we come available. We have no fear of the future. I'm trying to give context for how we view it: supreme confidence in what we're doing. -- A.L.

"Even if we're not with Disney, we can do this again, and do it bigger, better, and smarter."

CUSTOMER SERVICE. IN NEW YORK. WHO KNEW?

DAVID NEELEMAN, 45

JetBlue, FOUNDED 1999

Service, service, service. Neeleman doesn't seem to talk to his staff about much else. So far, his obsession seems to be paying off: JetBlue is the No. 1 airline on the Brand Keys' Customer Loyalty Index.

On the interpersonal skills of New Yorkers -- When we first started the airline, we said, "This will be the best customer service company in the country, and it's going to be in New York," and everyone just laughed at us. New Yorkers that do customer service? It's just not known for that culture. But we had a lot to choose from. It's a great atmosphere here, and people try really hard. Being in New York, people don't usually get that level of service, so they really appreciate it.

On not getting cocky -- It's been easy so far, and this business is not easy. Especially right now, with fuel prices going up and profit margins down a little. But this company was built with low cost and a high-quality product and good people, so it can withstand all that. It's about getting our people to understand that we're in a real dogfight right now and not to let the success go to our heads. We're always giving updates, so they understand how constantly under siege we are. They get it. It's all about being very close to your people. -- Nadira A. Hira

YOU DO THE DISHES, I'LL MIND THE STORE

HOWARD LESTER, 69

Williams-Sonoma, FOUNDED 1956

Computer guy walks into fancy but struggling kitchenware store. Falls in love. Buys it. Twenty-six years later, the guy's chairman of a publicly traded housewares empire. As Lester is the first to admit, Williams-Sonoma's growth isn't thanks to his own taste in stand mixers and pasta spoons. He credits the success to his knowing what he doesn't know (i.e., leaving the buying to the experts) and preaching a fanatical attention to detail.

On the small stuff -- We talk a lot here about being a shopkeeper, running your business as if you have only one store. You're passionate about every detail in that store. And you pass that attention to detail on to others. We spend a lot of time in the stores with the executive team--we say all the answers are in the stores or in the care centers where we talk to our direct customers.

On knowing what you don't know -- When I first came here I was so anxious to go on a buying trip with [company founder Chuck Williams]. I thought, Wouldn't that be fun? So we were going to go to Europe on a buying trip, and I went to the ladies in the Beverly Hills store and said, "I'm going with Chuck to Europe, so tell me, what are the things you need, and I'll be sure we get them for you." So they gave me a little list, and at the top of the list was a caviar server--you know, one of these little things where you have the vodka cups and you put the caviar in the middle. Chuck's not the most talkative guy in the world. And he wouldn't talk to me much on the trip--nothing about caviar servers. We get to Florence, Italy, and we were staying in this little hotel. We had a drink before dinner, and I probably had a couple, and I said, "Williams, I think you know a lot about cooking. But entertaining? I know as much as you. So you need to let me help you with it." He kind of grunted, and we go on for two or three days. We end up in Paris, and he still hadn't brought up my caviar server. Finally we walk into a room, and there are 100 caviar servers. He said, "Well, which one do you want? Is this what you had in mind?" And I said, "Well, yeah." So we bought 24. And of course they didn't sell. We probably sold one; I bought two. It's a great lesson learned that we talk about a lot around here: It's as important what we don't sell as what we do sell--Chuck really taught me that. -- Kate Bonamici

IT'S NOT JUST BUSINESS, IT'S PERSONAL

ERIC SCHMIDT, 49

Google, FOUNDED 1998

Schmidt, who's intentionally taken a back seat in Googlemania behind founders Sergey Brin and Larry Page, is a shrewd student of innovation. His formula: Unleash the nerds and make sure they take their mission personally.

On the role of passion -- The way you manage innovative companies is you get people excited about the cause. It's part of the reason we serve meals: If you feed people it's a family. And it's easier to get a family united behind a cause than a bunch of employees. Passion is so often forgotten by management. Passion motivates more than money--that should be inscribed on every boardroom.

We try to tap into that by allowing engineers to spend 20% of their time on their own independent projects. They work in three-person teams, and the teams are supposed to have lifetimes of three to four months, unless, of course the idea has potential for a new product. You can't build chips this way, and it's not how most software companies like Microsoft or Sun, where I worked, develop products either. But for us it increases experimentation, encourages risk-taking, and allows us to change directions quickly. Best of all, the employee base is used to working this way because most of them are young and right out of college or graduate school, and this is how universities work. Think about what you do in a quarter or a semester in a college. It's not very different.

On Google's secret ingredient -- There's tremendous opportunity before us, so we're organized around taking advantage of those technology discontinuities as they occur. And therefore we spend a lot of time trying to make sure that we're busy seeing them. And that's our competitive advantage. You have to be set up to shift your focus quickly so that you spend most of your energies inventing the new business instead of blindly optimizing the old one. -- Fred Vogelstein

"Passion motivates more than money--that should be inscribed on every boardroom."

ONE-MAN BRAND MACHINE

DAMON DASH, 33

Rocawear, FOUNDED 1995

Roc-a-fella Records, which produced rap artist Jay-Z, put Dash up there with P. Diddy and Russell Simmons. Now he's figuring out ways to parlay the hip-hop success into a multipronged brand onslaught--clothing, vodka, a line of watches and jewelry, a movie, and a competitor to the iPod. Busy man.

Sure, I love my artists and would never leave them, but it's so hard for anyone to make money in the music business. Last year Roc-a-fella made $65 million; that's more than similar labels. We're doing well. But it's a tough business. I don't like the politics or the margins in the music business. So I'm using music for my other businesses, to cross-promote. I encourage my artists to have individuality--their music--but also to have something to promote and sell. Now I have all these artists who have their own clothing line and record label. Beanie Siegel has State Property--he has his own line and label under my company. Kanye [West] has his own clothing line. It's so easy to be pigeonholed in hip-hop. Tommy Hilfiger isn't urban, but he sells urban clothes. Why can't I do the opposite? I want a foothold in every kind of music and to sell every kind of clothing. -- C.T. and Julia Boorstin

"Tommy Hilfiger isn't urban, but he sells urban clothes. Why can't I do the opposite?"

PICK INDUSTRY. DIVE IN. REPEAT.

RICHARD BRANSON, 54

Virgin, FOUNDED 1970

Music, cellphones, airlines, railways (railways?)--obviously, this is a man who's never seen an entrenched commodity business he didn't covet. But as Sir Richard will tell you, he's made a career out of mixing go-for-broke exuberance with a dash of self-discipline. His latest: a reality-TV show and consumer space travel.

On following your gut -- When we did Virgin Mobile four years ago, it was a big investment for us--$300 million. I looked at the percentage of people in America with prepaid phones, and it was 8%. Yet in England it was 83%, in France 78%, and so on. And yet we had long debates before making the decision. I decided to push on with it--and it's been one of the best investment decisions we've ever made. So sometimes you just have to go on gut feeling. To start Virgin Mobile, I sold assets that I loved, that I'd had since I was 20 years old, in order to take one opportunity. We couldn't find any venture capitalists, so we had to put every penny in ourselves. Now I'm quite glad that we didn't find any. But it was quite a gamble.

On discipline and the entrepreneurial urge -- I have a board of directors to try to balance me, and I need it. There's always got to be an entrepreneurial streak, but we support half-a-billion people on our planes and on our trains, and our No. 1 issue is safety, so having really good, sort of conservative people running some of these companies is important. We try to surround ourselves with great people. Most people leave companies because they aren't allowed to make a decision, or somebody keeps saying no instead of yes. We give people the freedom to give it a try.

On the final frontier -- We announced we were going to be the first company to send people to space. We moved quickly to secure the right to Burt Rutan and Paul Allen's technology [their SpaceShipOne recently won the X Prize for its record 71-mile-high flight]. The directors of Virgin were not happy. Instead of Dr. No, I've become known as Dr. Yes. My belief is, we'll find the 3,000 or 4,000 people who want to go into space, and it will cover the $50 million, or perhaps $100 million, that we're going to have to spend. I also know that from now on, anytime anybody writes about space tourism, Virgin Galactic Airways will be mentioned. -- A.L.