Hay Group – The Leadership Professor

The most recent Hay Group newsletter continues its series on the World’s Most Admired Companies. This edition focuses on PepsiCo and its drive for innovation and a healthier portfolio of products. Take a read.

The Leadership Professor calls your attention to two key issues:

1. PepsiCo’s belief in the importance of personal development: “You can’t have business growth without personal growth.” Amen!

2. Innovation and creative thinking – not simple “lift and shift” of the same old products to new markets – will drive Pepsico’s future. The company is hiring different kinds of folks to encourage new thinking and what Clayton Christensen calls “disruptive innovation.”

Interesting for us all to think how much of what we do to grow our programs and organizations is “lift and shift.” What can you do to drive real innovation and creativity in your organization?

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PepsiCo: Driving hard into emerging markets

With nineteen billion-dollar brands, PepsiCo is home to some of the world’s powerhouse food and drink brands. In recent years the company has expanded internationally and is looking to emerging markets for growth. At the same time it’s moving to a more nutritionally responsible portfolio of products. SVP of talent management David Henderson outlines PepsiCo’s growth strategy and how it’s using innovation and people to reach its goals.

The 2011 World’s Most Admired Companies survey revealed a focus on growth, especially in emerging markets and for high-growth business units. How does that resonate with PepsiCo?

First, in developed markets we’re aiming to do more with less, unlocking operating synergies and freeing up investment capital for our emerging markets and nutrition businesses. Growing share in key emerging markets is our next priority: for example we just bought a very large market-leading dairy company in Russia which makes us the largest food and beverage company in that key market for us. Overall, we anticipate that emerging markets will grow from 30 to 45 per cent of our next revenue mix over the next five years. Our third priority is developing our nutrition portfolio, offering a more balanced portfolio of enjoyable and wholesome foods and beverages.

Has recession affected your growth strategy?

Yes, in that commodity prices have gone up very significantly, consumers are spending less and retailers are consumed with the concept of value. So we’ve had to look internally and probably harder than ever before for operating efficiency, because it would be irresponsible to pass the cost of this on to the consumer. And also we’ve shifted the portfolio mix over that period.

"We’ve been really surgical and forensic around which markets offer the best growth prospects"

Another theme this year was innovation. What does PepsiCo do to drive and foster it?

A few years ago we started a process called ‘Innovation and Growth Planning’, where we moved from a three to a five-year horizon to help drive breakthrough innovation. Then to support this we brought in people from outside to disrupt our dominant logic, for example hiring a chief scientific officer from a pharmaceutical background. We changed our operating model from ‘lift and shift’ – where we transfer successful products to different markets – to a faster-moving mode where a globally matrixed organization has R&D ‘hardwired’ in and a multidisciplinary global nutrition group drives new innovations.

What challenges have you had spreading this culture of innovation and keeping it alive?

We’ve a few of examples and failures where innovations cannibalize other products, taking share away from more profitable products. But if you accept that more of your growth is going to come longer-term from innovation and more of that is going to be breakthrough (farther out) innovation, inevitably your failure rate is going to go up. So we have to build a culture that’s more risk tolerant. You’ve got to almost encourage people to forget what has made them successful in the past.

"You need ‘keepers of the flame’ and a few mavericks in there who are really going to shake things up"

Employee involvement was another characteristic of Most Admired Companies this year. What does PepsiCo do in this area?

This comes right back to the heart of our performance management systems. We have a model of performance management in PepsiCo which is geared fifty per cent on business results and fifty per cent on people results. And that’s true for every manager from the CEO of the company right through to first level supervisors in the organization. For example our ‘Manager quality performance index’ uses a set of twelve very simple questions that are consistent right across the organization. They’re heavily geared towards how effectively the manager is in engaging with the employees on his or her team. We baseline the manager’s performance and then we’ll track that over the twelve month period.

Building on this point, enabling employees to succeed is something Most Admired Companies have focused on. How does PepsiCo approach this?

"Our philosophy is that you can’t have business growth without personal growth"

In fact, they’re inseparable. When the business is growing and you’ve got employees that are themselves growing professionally it’s a very powerful combination and one can really drive the other. For us the most effective formula has been one of continuous learning and development through the organization. We also segment our talent, for example based on who’s prepared to be mobile and who wants to stay where they are. It helps us better manage both personal life and professional life considerations.

Are there generational issues or any other new issues that you’re keeping an eye out for?

Talent scarcity is an issue. R&D is one of the hardest areas to recruit into because there’s such demand for companies that are looking. There’s just not enough talent coming through into the market at the right skill levels. In emerging markets, the talent is less bonded to the company because there’s greater demand. This scarcity is a constraining factor on our growth. Voluntary attrition has dropped very significantly, so there is an aging demographic in a lot of organizations. Too many leaders will be exiting the organization in the next five to ten years. And it also means we need a delicate balancing act between continuity and potential.

PepsiCo was number 26 on the 2011 FORTUNE World’s Most Admired Companies list.

Every year the Hay Group does a study of the Best Companies for Leadership. I wasn’t expecting to find McDonald’s high on their list (#7).

Mea culpa, I wasn’t associating serious things like leadership best practices with Ronald McDonald. I stand corrected. We can all learn from looking at McDonald’s recipe for assuring the right leadership at all levels of the operation. The company emphasizes:

1. teamwork

2. proactive performance management with clear and consistent expectations and high standards

3. attention to education, training, coaching, and leadership development, and

4. leadership continuity through an impressive retention rate of over 95% of the graduates from the company’s internal accelerated leadership program.

The result is a strong, consistent corporate culture, with reliability in product delivery and innovation to stay ahead of the competition in a globalized, customer-centric, fast-changing, fast-food market.

How are you doing on important dimensions like teamwork, performance management, leadership education and training, and retention in your business? What could you be doing more or better?

To get you thinking, here are excerpts from the Hay report on how McDonald’s talks about the issues.

What are the leadership practices that differentiate McDonald’s?

It starts with having high standards. Performance management is at the core: we employ a 20/70/10 performance distribution model across the organization: 20 per cent at the exceptional level, 70 per cent significant and then 10 per cent needs improvement. We make sure we keep these standards high. Also, around talent, when we talk about people being ‘ready now’ and ‘ready future’, the ‘ready now’ candidate has to be someone who can be better than the incumbent over time. And, if every time you have an opening you put somebody in that’s stronger, you’re going to increase your organizational capability.

How is McDonald’s adapting to all the shifts that are happening in demographics, globalization and technology?

We’re a very team-based environment. So whenever we have a business issue, our natural inclination is to put together a team of people to look at it. It’s typically cross-functional and in some cases cross-geographic as well. This focus on team goes back to the restaurants. All you have to do is walk into a restaurant during the lunch "crush" and see 15 or 20 people working hard together. The whole culture revolves around working as a team. We’re preparing leaders for what they will face in the future, with two accelerated development programs for different levels of leader. There’s a heavy emphasis around technology, globalization and speed of change. The programs include a business simulation component; an action learning component, a lot of coaching, assessment, self insight and awareness.

Can you talk a little about what you’re doing on the goal setting and coaching side?

We have a pretty good process of cascading our major business goals to our business units. If there is one thing important at McDonald’s, it’s having this alignment of business strategies. I think our team-based approach helps immensely in this regard. We actually hire and promote people based, in large part, on their ability to be able to work effectively in teams. People are generally working at McDonald’s over the long haul. It’s not uncommon to find people at McDonald’s that have been with us 35, 40 years starting out at the restaurant level. So, I think the combination of all of these things drives a lot of alignment.

Beyond core financial results, how do you track the success of leadership programs?

We look at retention, which at 95 percent plus, is where we want it to be. And we look at the percentage of people who are promoted that come out of the accelerated development programs. This program has a big impact on retention. It’s actually one of the most visible signals of how much we are investing in you.

What are you working on for the future of leadership at McDonald’s, say 10-15 years from now?

Our CEO and COO have put together five strategy teams that we believe are going to help us continue our performance run. One is on talent management. We have a cross-geographic, cross-functional team that’s looking in particular at strategic workforce planning – anticipating what resources are going to be required to deliver against our business plans. We also plan to work more collaboratively as a senior team on developing top talent proactively. Third, we want to make sure that whenever we fill key jobs that we put a lot of discipline and rigor into the process. This helps us to improve our ability to make the right call on filling critical jobs – there is nothing more important than this. So far, this team’s work is paying off.