Today, Kraft Foods China is a success story: The team doubled their innovation rate, transformed Oreo into the number one selling biscuit in China, and posted net revenues of more than $800 million in 2011. Today the business’s advertising spend exceeds the business’s revenues in 2006. Most importantly, Kraft Foods China has a sustainable business model that is delivering a virtuous cycle of growth and is among the fastest-growing CPG companies in China today.
Dealing with Failures
Blank checks produce spectacular results when they work. However, as with all innovation efforts, a certain percentage of them will be unsuccessful. Business leaders need to be prepared for some of these initiatives to fail. There are two important lessons in dealing with failures — learn from the failures and overcome the fear of failure.
Kraft’s Royal affordable nutrition program in Latin America is an example of how to deal with a blank check initiative that doesn’t work out. Kraft believed that there was a large opportunity to drive growth at the “bottom of the pyramid” by developing nutritious yet affordable products for low-income Latin American consumers. A Latin American team took on a blank check challenge and came up with a new affordable nutrition product under the Royal brand — a line of gelatin and pudding desserts featuring fortification with vitamins and 45 percent less sugar. The products tasted good and the price points were affordable. The team also managed to build awareness and secure good distribution for the brand. However, the products failed to sell well, and the gross margins were lower than expected. Kraft decided to pull the plug on this initiative.
The team learned many important lessons from this failure. The product involved changing consumers’ attitudes and behavior — a difficult and lengthy process. The positioning of the product as a “treat” did not resonate with target consumers. And the business model was not sustainable: Costs were too high, and the company could not meet the affordability target it had set while still earning an acceptable gross margin. Importantly, the team leading the initiative was not penalized; the team leader was promoted to head the snacks business in Brazil despite the failure, because he took a risk and then learned from his mistakes.
Tips for Managing Blank Checks
Through our experience with several blank check initiatives in different product categories and markets, we have identified some important principles for improving the odds of success.
Focus on what matters. Blank checks must always focus on what matters to the business. In the case of Kraft Foods, blank checks are linked to the company’s “winning through focus” strategy, which allocates resources in line with its 5-10-10 strategy.
Create a virtuous cycle of growth. Blank checks can produce phenomenal revenue growth, but this growth should be both profitable and sustainable over time. Business leaders should be careful that teams don’t undertake initiatives that can boost revenues in the short term but that will hurt the business in the longer term. To ensure sustainable profitable growth that drives a virtuous cycle, blank check initiatives need to be gross-margin accretive. Margin expansion can come from increased revenues, from cost reduction, or from productivity improvement.
Innovate broadly. To harness the full potential of their business, teams need to take a broad view of innovation that goes well beyond creating new products. They need to innovate with packaging, promotions, advertising, distribution, and partnerships.
Simplify everything. Companies are often hamstrung by the complexity of their organizations and their operations. Complexity adds cost and slows down decision making. Blank check initiatives should strive for simplification. Simplification can be achieved in the product (for example, by reducing performance or features to “just enough” levels desired by consumers), in the process (manufacturing, distribution, sales), in the organization (removing layers and moving decision making closer to local markets), and in administration (faster decision making and fewer meetings).