CEO of the Year David Novak: The Recognition Leader

To follow are excerpts from a conversation with Novak.

Your penetration of emerging markets, notably in China, has been the company’s signature success, but how long can you count on continued growth there?

We’re still in the early innings of our growth in China. In the U.S., for example, we have 58 restaurants per 1 million people. In China, that number is just three. As its population continues to grow, the consuming population continues to grow—today, it’s 300 million. Outside experts say it’s going to go to 600 million within the next eight years. We’re going to be able to grow along with the consuming class. We’ve barely scratched the surface in terms of what we can really achieve in China.

Our strategy in China has always been to have the leading brands in every significant category. KFC is the leader in the quick-service restaurant industry, with 3,800 restaurants. In casual dining, Pizza Hut now leads with 662 restaurants. We’re moving into the home-service market, with about 150 restaurants. We’re even developing our own Chinese fast-food concept called East Dawning because the Chinese obviously love Chinese food and there is no major national chain there. So we plan to do with Chinese food what Ray Kroc did with the hamburger, what Glen Bell did with the taco and Colonel Sanders did with chicken.

And then, we look at emerging new categories in China, such as the hot-pot concept. We just acquired a company called Little Sheep, which has about 600 restaurants offering this popular casual dining concept where the customer cooks their own food at the table. There’s a pot that has two types of broths, one that’s spicy and one that’s more moderate. You cook your Mongolian lamb and vegetables at the table. It’s very popular in China.

So when you take all of this into consideration, we think that we’re just getting started in China.

In this year’s presidential campaign, there is much talk about whether the U.S. should somehow force China to stop manipulating its currency. Some say the U.S. should demand more market access. Yum obviously has market access. How will these forces play out and how will your business be affected?

First, the business world that we live in today is global. Every major country is dependent on one another, so I don’t think anybody’s going to be mandating anything to anybody. To me, the biggest single thing you have to do to be successful in China is the same formula for success we have implemented around the world, which is to make sure you have the right people who understand the local culture. That’s really been our key to success in China. We have a phenomenal management team, all of whom have been in China together, the top leaders, for over 20 years. They know how to build brands in China because they know the customer, they know the culture and they know how you get things done. We’ve made the right investments at the right time based on their guidance.

To what extent did you inherit that team when you were spun off from PepsiCo, and how did you build it up since?

We had a very small team at the beginning; and when we were spun off from PepsiCo, we knew that we wanted to be a growth company. We were fortunate in having inherited an international infrastructure, but it was poorly run. Our returns were terrible. We were spread over a lot of different countries, we were fragmented and we didn’t have the right kind of focus. But the fact of the matter is we’re an international business. We were handed that opportunity. We needed to fix it, focus it and really drive it to become the growth company that we are today.

When we were spun off, China had just 117 restaurants and made about $20 million. When we looked to the future, strategically we said this is one place where we need to make a big bet. So the first thing we did was build even more people capabilities to drive the business. So we’ve gone from a little over 100 restaurants now to the number that we have today, which is really substantial.

You compete in no small measure through your culture—what you call a “recognition culture.” Where once you handed out floppy chickens, now it’s chattering teeth. It seems curious in this cynical age that such things influence and motivate people. How do you do it?

When I was at PepsiCo, I used to run operations and would conduct roundtables with people when I visited the warehouses and the bottling plants. One morning, I was with a group of route salesmen in St. Louis and asked them about merchandising. They all started talking about this guy named Bob, who was sitting at the end of the table. They were raving about the guy. He taught them more about merchandising than anybody else. He was the best they’d ever worked with. And I looked down at the end of the table and see that he’s crying. I said, “Why are you crying?” He said, “Well, I’m crying because I’ve been in this company for 47 years and I never knew people felt this way about me.”

Here was a guy who was obviously the best at what he did—people looked up to him. I thought, “What a waste!” He didn’t know that people appreciated him. Imagine what he could have done for the company if he were properly recognized. So I promised myself that if I ever had a chance to run a company, I was going to make recognition the number one value.

As I moved up the ranks, I had my own recognition awards that I would give my teams and made certain to take the time to celebrate the times when we really achieved great things together. Every time I did it, whether it was saying thank you to an individual or recognizing people in a group, it was always appreciated and it always motivated people.

When I became president of KFC at PepsiCo, I started giving away floppy chickens—rubber chickens and $100 because you can’t eat a floppy chicken—and people started crying when I gave it to them and people were motivated by it. It ignited performance because people respond to recognition. When you recognize people, it says that you’re watching. It says that what you do matters. Intuitively I knew this and formalized it with my own awards. It took off like wildfire. Now, every leader in our company has their own, individual recognition award, so it’s not just me giving out the recognition now, it’s all of us. One of the things a leader has to do is cast the right shadow, and one of the things I’m most proud of is that our culture is one that really does have fun celebrating the achievements of others.

We constantly invest in our culture. When we started the company, we launched what we called our how-we-work-together principles. After 10 years, we trained everybody around the world on how to achieve breakthrough results—our ABR program. Now [we] have six behaviors that we drive all around the world. We kept our foundational behaviors of recognition, customer-mania and believing in all people, and added more edge and more competitiveness into our company by doing these three things: Going for breakthrough, building know-how and leveraging the fact that we have 120 different countries where we do business and where we can share the know-how that we gain. We train people and give exercises on how to make these things happen. Regardless of what country you are in, it’s been very empowering to people.