Packaged goods are usually considered as close to recession proof as any sector can be. But in the current downturn, even frequently replenished staples are suffering. And because the purchase cycle for these products is so brief, the effects are immediate. When Sanjay Khosla arrived at Kraft Foods in 2007, growth in the company’s Developing Markets business was anemic, margins were eroding, and the world was on the eve of a global recession. Yet within a few years, he turned the business around with an unorthodox approach to growth. Today, Developing Markets is a $13.6 billion business. Revenues from organic growth have increased nearly 13 percent and operating income grew an average of more than 34 percent per year from 2006 through 2010. Michael J. Silverstein, a BCG Fellow and coauthor of Women Want More, spoke with Mr. Khosla about his experience at Kraft Foods.
As budget-constrained consumers trade down to private-label products, brands are desperately seeking growth by adding more products, categories, and markets. Is this a good strategy?
In a word, no. Our experience suggests that this approach is exactly the opposite of what business leaders should do to drive profitable growth. The growth-through-more approach just adds complexity. Paradoxical as it may seem, we find that “growth through less” is the best prescription, whatever the economic environment. Focus is a powerful engine for growth—doing a few things and doing them well. Seemingly mature businesses can be reenergized by making fewer but larger bets, and by focusing relentlessly on executing a simple but powerful vision. At Kraft Foods Developing Markets, our blueprint for driving profitable growth is a strategy we call Winning Through Focus, which takes us from strategy and vision to execution and measurement.
Before you describe your strategy, can you elaborate on what you find wanting with the orthodox way of pursuing growth?
Growth projects often engender a tremendous amount of activity, but activity alone doesn’t get you the desired outcomes, and quantity doesn’t mean quality. To improve the quality of growth, business leaders need to cut back on marginal products, brands, and markets so that they have a better chance of winning in their areas of strength. By carefully focusing on what really matters, you can grow faster and more profitably. The engines of growth are focus (fewer brands, fewer categories, and fewer markets) and simplicity—a simple vision, simplified execution, and simpler organizations.
But isn’t complexity inevitable in large organizations? Doesn’t growth automatically beget complexity, and haven’t large organizations learned to manage it?
Absolutely not. Complexity is the enemy of growth because it adds cost and makes the organization less agile. Complex organizations expend an enormous amount of energy, but they end up generating more heat than light.
How do you handle long-term planning and leadership?
Many companies make long-term plans, but when it comes to execution, they have a short attention span. CEOs are often seduced by a new idea that appears before the strategy has had time to play out. We take a very different view of planning and leadership. In Developing Markets at Kraft Foods, we plan quickly and then stay the course for a long time. Leaders should resist the temptation to change strategies too often.
Tell us about your strategy for Developing Markets at Kraft.
When I arrived in January 2007, Kraft Foods was planting flags all over the world and trying to be all things to all people. We turned that around with a simple hook we called five-ten-ten. It focused us on five key categories, ten power brands, and ten priority markets. And we put disproportionate resources behind these priorities. Before long, revenues doubled—and the improvements were sustained despite the global recession.
Beyond the numbers, the five-ten-ten strategy created positive energy as the team consistently met all its financial-performance targets. With the improved performance, we were able to invest more in our people, our key brands, and our key markets, resulting in profitable growth despite the economic crisis.
Let me describe how the power of focus worked with two of our power brands: Oreo biscuits and Tang powdered beverages.
Not so long ago, Oreo cookies were not doing well outside the United States. When I visited China shortly after arriving at Kraft Foods, the brand was about to be delisted. So the team decided to renew its focus on Oreo and its consumers. One thing they learned was that the U.S. version of the Oreo cookie, which was what we were selling in China, was too sweet, too big, and too expensive for the Chinese. So we made it less sweet, introduced new sizes and forms (such as wafers), lowered price points, and added local flavors (such as green-tea ice cream). The focus of marketing was very local, but the brand’s positioning—“twist, lick, and dunk”—which was known around the world, remained at the forefront. Today, Oreo is the number-one biscuit in China. And Oreo revenues in developing markets grew over 30 percent per year on average from 2008 through 2010, with above-average margins.
Tang is another great example of focus. In 2008, Tang’s growth was in the low single digits. In 2009, we offered a challenge to a small entrepreneurial team of about eight to ten people across five priority Tang markets. They lived Tang day and night. We told them not to worry about resources and asked them to dream big and leverage our worldwide powdered-beverage expertise. On a global scale, the team did a great job at positioning the product within the broader framework of beverages. On the local level, they introduced more-relevant package formats and flavors, such as lemon pepper in Pakistan, mango in the Philippines, passion fruit in Brazil, and tamarind in Mexico. The results? A brand that took fifty years to get to $500 million was able to double its revenues in just five years. Thanks to the power of focus, it is now a billion-dollar brand.
How do you get buy-in from the larger organization?
To make the vision compelling, it should be kept simple. You’ve got to find a hook for people to hang their hats on—something that can be kept consistent over time and across customer touch points. It can be a color, a number, an acronym, or a symbol. We used five-ten-ten. Then you need to launch the vision with a bang, maybe through an event to inspire the team.
I’m sure you’ve heard it said about organizational change that the soft part is the hard part. How do you get your people—and particularly the leaders—to engage in a visible way? I think it’s important to find the right people and to place disproportionate resources in their hands. At Kraft Foods, two-thirds of the top thirty leaders were new to their roles within two years of launching our Winning Through Focus strategy. Many of the new leaders came from within Kraft Foods. Some were hired externally and some came from successful acquisitions.
Once the new leaders are appointed, they need to be given the freedom to operate so that their potential can be unleashed. Leaders should be challenged to act as entrepreneurs even if their large companies have traditionally been perceived as process driven, top down, or bureaucratic. In our experience, the biggest enemies of creativity and imagination in large companies are inadequate budgets and resources. To liberate people from these constraints, we give them huge targets and empower them with virtually unlimited resources—a blank check—so that they are constrained only by their imagination and, of course, the company’s strategic framework and values. The targets should be a quantum leap beyond historical results. You might think that unlimited resources would encourage profligate spending, but in fact the leaders become even more commercially responsible because they have to deliver profits and margins, not just revenue increases. When leaders are asked to act like owners, they often arrive at sensible tradeoffs among risks, rewards, and resources. It’s important that they not be penalized for failure unless they consistently fail to learn from experience.
Our China business is a great example of giving people freedom within a strategic framework. China has been on an amazing journey. In 2007, Kraft Foods China was an unprofitable, $100 million business that was not growing. We decided to give the team unlimited resources to put the right people in place. Interestingly, the team scaled back to get the business model right and focused on winning in biscuits. Once they had a focused model that worked, they scaled it up. Today, Kraft Foods China is among the fastest-growing consumer-products companies in the country. And today, our marketing spend exceeds the business’s sales from four years ago.
This same approach worked well in India. When Kraft Foods acquired Cadbury in February 2010, we gained a phenomenal business in India that soon became a priority market for us. We challenged the team to take a $400 million business in 2009 and make it a $500 million business in 2010. We gave the team unlimited resources to do it—all within our strategic framework. The team focused and invested big in advertising, sales, and distribution behind its strongest power brand, Cadbury Dairy Milk. The result? The highest growth in living memory in India: over 25 percent growth in organic revenues in 2010 and nearly 40 percent growth between January and September of 2011.
Is this approach to growth replicable at other companies or is it unique to the Kraft Foods environment?
Growth through focus is equally applicable across industries and geographies. Many companies have succeeded with a focused approach. There are, however, a few things you can do to avoid sand traps.
For instance, it’s really important to figure out what works early on. All large companies have pockets of excellent growth performance. The key is having senior management take a back seat, to avoid hierarchy from impeding the flow of ideas and insights. It’s important to focus on what is working rather than dwelling on what isn’t, because it’s easier to build on what is right than to fix what is wrong.
How do you ensure quality growth?
A key element of the Winning Through Focus strategy is to drive a virtuous cycle of growth. This involves focusing on power brands or innovation platforms, which have a higher-than-average gross margin. It also means simplifying the organization and reducing overhead. Cutting unnecessary costs helps improve margins as well as fund increased investment in advertising and sales infrastructure, which continues to fuel the virtuous cycle.
What is the most challenging part of Winning through Focus?
Talking about focus is one thing, doing it is another. That’s why the implementation of focus is so important. It is where execution comes in. Everyone needs to be clear about who will do what, and decision making should be moved closer to customers and consumers so that the people responsible for results have the operating freedom they need—all within the company’s strategic framework and values. To accelerate execution, we emphasize action. In our experience, meetings and documents foster “analysis paralysis,” promote an internal rather than external focus, and emphasize the past over the future. We even try for a no-PowerPoint policy in presentations. Numbers may help tell the story, but too often, we find that numbers become the story and the big picture gets lost.
As the execution process gets under way, it is important to keep score, but scorecards should be objective and should be kept simple. Simplicity begets focus, as everyone knows what numbers the executives are looking at. For example, at Kraft Foods, I manage our Developing Markets business on two sheets of paper—our five-ten-ten and our scorecard.
Storytelling is a powerful tool for propagating the culture of winning in the organization. We make a conscious effort to disseminate success stories from around the world. Success stories become part of the culture and successful people become heroes in the eyes of their peers and managers.
What can go wrong and how do you avoid it?
I can think of three things to keep an eye on.
First, make sure your model works before you scale up, and don’t get seduced by the size of the opportunity—big opportunities usually take big resources.
Second, watch your tail—the products, brands, categories, and markets that do not make it to the priority list. Simply cutting off the tail can be disastrous, because the tail could decline faster than the core grows. What’s more, the noncore businesses often have fixed costs that are linked to the core businesses. Finally, if not done well, cutting and divesting can have a huge demoralizing effect on morale. We find it helpful to cluster the noncore businesses into two buckets—milk or divest and local jewels, each of which needs a different management approach.
Third, invest in people and brands. Often when companies rationalize and focus, two areas that take the brunt of cost cutting are people-related expenses (recruitment, training, travel) and brand advertising. It sounds counterintuitive, but I recommend increasing investments in hiring and developing talent, even ahead of the company’s needs. We also recommend increasing investments in building focus brands. Our approach yields significant cost savings by reducing unproductive management layers and marginal businesses and reducing overhead. Focus frees up resources that can be used to invest in the future.
Do you have an overriding philosophy that keeps you going through the process?
Yes: keep the faith and stay positive. Large companies tend to search for new strategies every few years, particularly when there is a change in leadership. Our approach requires patience and perseverance. The whole philosophy is that you build on what’s working—what I like to call “looking for gold”—and then put resources behind it to scale it up. The positive energy that comes from winning is infectious. It inspires people to achieve goals that they have never considered possible.
The sun generates a tremendous amount of energy, but it only gives us a warm glow. By contrast, a laser beam that uses a few kilowatts of energy can cut through metal. Such is the power of focus.