CEO of the Year David Novak: The Recognition Leader

David Novak sees himself as the chief teaching officer of Yum! Brands and believes that recognition is the foundation for motivation—which is the only way to make big things happen.

In 1996, when David Novak worked for PepsiCo as president of KFC and Pizza Hut, Roger Enrico, then CEO of the company, called him up one day and said, “David, I’d like you to create a leadership program for PepsiCo executives. You’ve got a pretty good reputation for building and aligning teams, and I’d like you to share what you know and what you do with others.” Sixteen years later Novak, the CEO of $12 billion Louisville, Kentucky-based Yum! Brands, continues to do just that.

In 1997, the restaurant group made up of KFC, Pizza Hut and Taco Bell was spun off from PepsiCo because Enrico saw it as a drag on his earnings (he bought Tropicana with the money). Tricon (the Yum name came later) had been a stepchild and was pretty much left out in the barren wilderness like an unwanted newborn in ancient Sparta. The debt with which it was saddled alone did not auger for a promising beginning. There were two forces, however, that changed things: Andy Pearson, the past president of PepsiCo and former professor at Harvard Business School who became its first CEO, and his mentee, David Novak, who would build a new culture, one that ultimately proved Yum’s competitive differentiator. To this day, Novak credits Pearson for smoothing off his rough edges and disciplining his managerial thinking about leadership development and building teams.

Since the spin-off, Novak, 59, has expanded his alignment process, enabling Yum to grow into the largest restaurant group in terms of system units. The company’s restaurant brands are global leaders in the chicken, pizza and Mexican-style food categories. Yum has 37,000 restaurants in 125 countries around the world. McDonald’s still leads in the U.S. market, but Yum is expanding faster in emerging markets with net unit growth of 4,000 restaurants from 2006 to 2011 compared to Mickey D’s 1,800. The share of operating profit derived from international markets has grown from 20 percent in 1997 to 75 percent in 2011—more than 3M and GE but less than Coca-Cola.

From its early days, Novak has shaped Yum’s strategy, which consists of driving international expansion—building strong brands everywhere but particularly China—and improving U.S. brand positions in terms of consistency and returns. Yum has increased its share price six times during this period while maintaining double-digit annual EPS growth. As of Q1 2012, same store sales grew 14 percent in China, 5 percent in Yum’s international units and 5 percent in the U.S.

Like many of Yum’s customers, Novak is a longstanding fan of fast food. His family loved a bucket of Kentucky Fried Chicken. In college, he took dates to Pizza Hut; and when cramming for exams, he could demolish six to seven tacos at Taco Bell. He encourages experimentation with tastes and local offerings. In India, now a separate unit within the firm, customers can order a Masala line of pizzas or Fiery Drumsticks. “They are unbelievably fiery,” he says with eye-widening emphasis. In China, where a breakfast-food launch is underway, customers can have congee, a soup that’s taken in the morning. The French’s taste for desserts is indulged with a cream-ball-style ice cream served in a great bowl. “We sell a ton of them.” Yum launched a 30-restaurant chain of Chinese food restaurants in China called East Dawning and will roll out more when the concept is fully tested. It acquired a controlling interest in Little Sheep, a hot-pot, casual dining concept where customers cook items like Mongolian beef and vegetables.

The core of the company’s secret sauce is the simple premise that if one wants results, one needs the enthusiasm and commitment of people along the way. Simple to say, but not so simple to do without a well-developed process to make it happen. It was one of the defining characteristics that impressed members of the 2012 CEO of the Year selection committee (see sidebar, p. 28) in naming Novak. “Being a strategy person, I didn’t at first fully appreciate David’s emphasis on culture,” says Sam Su, the company’s vice chairman and CEO of Yum! Restaurants China, who was among the original executive team, “but since then it has been clear to everyone here that we couldn’t have done this without it.” In the conversation that follows and in his book, Taking People with You, Novak outlines key elements of how this approach works. JPMorgan Chase CEO Jamie Dimon, on whose board Novak serves, quips correctly that it is “a leadership book you can actually use.”

Given his penchant for exuberance and handing out chattering-teeth awards to those who have achieved company milestones, it is curious that he describes himself as an introvert. The son of a government surveyor, Novak lived in 23 states by the time he was in seventh grade. “We moved every three months,” he recalls, “and my Mom would say, ‘David, I’m checking you into this school. You better make some friends because we’re moving again.’ I think that this helped me learn how to work well with people and size up situations in a hurry. It gave me [insight] about other people because I was forced to go into so many situations, work through the anxiety and learn how to get along.”

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.

Yum’s success internationally tends to eclipse the U.S. market, which seems to be struggling. Is it a question of too many restaurants chasing too few customers?

Our U.S. business is actually very good. For example, Taco Bell, which was struggling under PepsiCo, has been turned into the second most profitable brand in the U.S. Pizza Hut is the leader in the pizza business. KFC has struggled somewhat in the U.S. and we’re working on it. The U.S. business is much more competitive and unforgiving. You’ve got to be right every day. You make a mistake and competitors will take you on. Outside the U.S., it’s basically McDonald’s and us with KFC, Pizza Hut and Domino’s. We don’t have a lot of global, multinational competition. The U.S. is much more crowded and developed.

Having said that, we have plans to take Taco Bell from 5,000 restaurants today to 8,000 restaurants. We think we can have another 2,000 more Pizza Huts in the U.S. KFC will take a while to grow new units, but we believe that the U.S. business is going to be better than what people think.

Many CEOs face the challenge of getting good ideas from one silo in the organization to another, where they may be needed, even if the value isn’t perceived at the time. How do you solve this requirement in a far-flung company such as yours?

We made know-how sharing a major win-together principle in our company. I give discretionary bonuses to people and to teams around the world who share ideas. I give additional bonuses to people who take ideas. We reward the behavior. And then I tell everybody in the world that I did it, so everybody knows.

In addition, we bring teams together from different markets and share what’s working. Shortly, Sam Su will be hosting all the emerging markets in Shanghai, talking about the China success story. We’ve got the UK leading the way in terms of developed markets. For example, I went to Australia and learned about the big-box idea, where we packaged up a meal in Australia consisting of a pizza, breadsticks and wings for a good price. I came back and told the people in the U.S. about it. The U.S. now offers a $20 big box and a $10 box and is doing extremely well with it.

The other thing that we do is use internal technology. We created our own internal social networking site, called [iChing], which is all about sharing know-how. So, if you’re working on breakfast, you click on breakfast and find out what people are doing on breakfast ideas. In addition, when I travel to different markets, I blog about what I see, take a picture of it and talk about what’s going on.

Where will growth come from over the next five years?

First, about 60 percent of our profits today come from emerging markets. China accounts for about 40 percent of our overall profit. The good news is that over the last 10 years, we’ve achieved sufficient critical mass to allow us to grow in other, significant parts of the world. India, now a separate division, will see well over 100 new restaurants. We have 660 restaurants in South Africa and just bought more to give us a base because we’ll be in 20 additional countries in Africa by the end of this year. We’re on the ground floor in a continent with another billion people.

We have about 170 restaurants in Vietnam, which has 80 million people. McDonald’s isn’t even there yet. We have 400 KFCs and 400 Pizza Huts in Indonesia, with well over 400 million people. We’re excited about Russia, where we bought out our franchise partner, Rostik’s, and are in the process of converting them all to KFCs. Now we have about 165 restaurants in Russia.

It took us 10 years to get to 100 restaurants in China, and it’s taken us 10 years to get to scale in these other countries that I just mentioned. Now we’re ready to really take off.

The other thing that’s interesting for us, besides the emerging markets, are the developed markets like France and Germany. McDonald’s makes well over $1 billion in those two countries alone. We make under $100 million today, and France has the highest average unit volume in the world, with Germany not far behind. It’s still early days in Germany and France. Yes, it’s a more developed market, but we’re on the ground floor there, too. It’s no longer just China. Going forward, we’ll have China and a whole lot more.

One of your famous pieces of advice to leaders is to ask oneself, if a hotshot replaces me, what would he do? Then do it first, yourself. So, taking your own advice, what would you do?

There are three things that I’m trying to do right now. One is to make operational excellence our foundation. We historically have been more of a marketing company, marketing and innovation, but we haven’t been as operationally focused as we need to be to be even better. We’re good operators, but we’re not great operators, so we’re really trying to get better at just delivering the basic service every single day and making that a higher value, higher priority in our company.

Two, we need to do a better job of leveraging our assets throughout the day, which is what we talked about earlier with respect to McDonald’s, to leverage our same-store sales growth.

Three, we want to evolve the culture into what we call our second set. We went 10 years doing extremely well. What are we going to do in the next 10? Often, you win the first set, but you lose the second set because you won the first set. We need to put more edge in our company. We need to make our culture even more focused on breakthrough results, urgency and sharing know-how.

Culture Is No Accident

“It’s the CEO’s job to create new memories. At PepsiCo when I paid a visit to a bottling plant that we had bought five years prior, one of the things I noticed when I walked in was a trophy case with plaques for Employee of the Month. The most recent one was from 1988. This was 1993. So I said to them, “Has there really been no one you wanted to honor in the past five years? If that’s the case, you should rip out that trophy case, because it’s really depressing.”

“The more I talked with people there, the more I understood what had happened. PepsiCo had taken ownership of the plant in 1988. Before that, there had been family picnics and holiday parties. People kept saying to me, “I remember when we used to do such and such.” There was so much nostalgia for the old days, it was palpable. And it was a huge problem. These guys had been so much happier working for the previous owners that it affected their performance. And who could blame them? To turn things around, I asked the plant’s management to develop a plan for recognizing people every month and bringing back a family atmosphere, which they did. It’s the leader’s job to make sure those memorable moments happen.”

—Excerpted from David Novak’s Taking People With You

Read: Why the 2012 Selection Committee Choose David Novak?

 

Read: Previous CEO of the Year Recipients

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