From Crystal Pepsi to Cool Ranch Doritos: Lessons from David Novak

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1:31The launch of Crystal Pepsi. It was a clear cola, no color. And clear drinks were very on trend at the time. But one problem. Some of the bottles coming off the line were neither crystal nor clear. In fact, they were cloudy. So Saturday Night Live did a spoof on Crystal Pepsi and basically made it crystal gravy. So it was like they showed that we had Van Halen was our music and we showed the Pepsi being poured or they showed the Pepsi being poured and out comes gravy on the smashed potatoes. You know, it was just it was pretty embarrassing. We're hungry for something different. Crystal gravy. You've never seen a gravy like this.

2:21and you know what really made me sad about this was that the idea was huge because everybody did want to try it and it wouldn't have been so different i think that product would have been a huge hit and it would still be on the marketplace but it didn't last very long i learned from that lesson the importance of really listening David Novak got another chance after the Crystal Pepsi flop. Actually, many more chances. And that's in part because he's a leader who has always learned from his failures. David was CEO of Yum! Brands for almost two decades. You may not know Yum! Brands, but you know the brands inside Yum!

3:03That's the company that oversees popular fast food outlets like KFC and Taco Bell. He grew that restaurant portfolio from a$4 billion market cap to a$32 billion market cap during his time at the company. And now, for his next act, David is focused on helping the next generation of leaders learn.

3:38Sorry, we made a mistake. But you have to time it right. Oops. Working at a three-bedroom apartment. Stuff that just seems absolutely nut balls. Ten years later, we're like, well, that's just how you do it. We haven't made it just how you do it.

3:54This is Masters of Scale.

4:02I'm your host, Jeff Berman. After a career leading companies to impressive scale, David Novak has turned his focus to sharing the lessons he's gathered. He's founded a nonprofit consulting and media organization. His latest book and podcast are called How Leaders Learn. David, welcome to Masters of Scale. Thank you, Jeff. I've been looking forward to this. Well, I have two for longer than you know, because when your book, The Education of an Accidental CEO, came out, I had just moved to the business side from the policy side of my space. and I wrote you a note thanking you for writing this book because I didn't have an MBA.

4:41I had very little idea what I was doing and your book was an incredible guide for me as I was entering a business role. And you very generously not only responded, but you invited me to come visit you in Louisville. And the wheels kind of came off the bus at MySpace before I had the chance to come see you. But this conversation is about 17 years in the making as a consequence. So I'm especially excited to get to see you today. That's fantastic. I love stories like that. And I do remember that, you know, and I thought MySpace, man, that'll be, I'd like to learn about that company. You know, I was in the restaurant business at the time and, you know, I always like to learn from other companies and I knew I'd learn from you as well.

5:19Well, that's a terrific segue because your new book is How Leaders Learn. And you've got this framework, which is learn from, learn to, and learn by. Can you unpack that framework for us, please? Well, you know, when I was thinking about the leaders that I know who are the most successful in the world, they are active in their learning process. They are constantly trying to get an edge by learning from others, and it's something they've just made a part of their life. When I broke it down, I thought that the learnings kind of broke down into three different areas. One is to learn from anybody and any experience that you have.

5:58That would be like learn from your upbringing, learn from winning, you know, learn from failing, but, you know, learn from the experiences that happen. Then I said, the other thing that you can learn from is you need to learn to maintain a curious, open mind. And, you know, I think that really is when you learn how to be a really great listener, that's really powerful. When you learn how to check your own judgment. So I really broke down the things that you have to learn to do to really become an effective leader. And then the third thing that I broke it down to was a framework in the framework was learn by doing and learn by doing all the things that will make the biggest possible difference in your life or your business.

6:41In the learn from category, there's so much that we could talk about. I'm curious to hear the story of learning from Crystal Pepsi. Could you tell us a little bit about that experience? When I went to Pepsi, it was a very challenging environment. The carbonated soft drink business was really starting to slow down. And we were in big need of a big catalyst that could really grow the business. And the first thing I did is I looked at what was going on in the marketplace. And I saw all the things that were growing were basically clear. Water was taking off. Clearly, Canadian was a hot new beverage.

7:19And so I would just sit in my office one day and I said, oh, gee, what if we came up with a clear Pepsi? And I thought, wow, that would be such a big idea. I mean, that would just break through the clutter. So, you know, I went and talked to customers and we did focus groups and everybody thought it was really a great idea. So then I went into what I call the heat-seeking missile mode. We developed this clear Pepsi. We thought it tasted great. We took it to consumers. Consumers told us it tasted great. We rushed it into test market. When it came off the lines in the Pepsi-Cola plant, Dan Rather, who was the anchor for CBS News at the time, said Pepsi-Cola launched a clear cola, Crystal Pepsi, and this became a phenom.

8:02Pepsi-Cola takes today, unveiling in test markets the newest weapon in the cola wars, Crystal Pepsi. Supposedly a new category of soft drink. No caffeine, low sodium, no preservatives, and oddly for a cola, no color. That's weird. You don't expect something that white to taste like cocoa. I mean, at that point, when that happened that day, I thought I was a genius. I mean, I thought this was the biggest idea ever, you know. Well, and for especially our younger listeners and viewers, like, I mean, Dan Rather, Evening News, you're talking about millions and millions of Americans, right, who are tuning in and seeing a marketing story, a product story in the middle of the evening news.

8:43This is a big deal. So then I had this meeting with the Pepsi-Cola bottlers. Pepsi Cola bottlers said, David, this is really a good idea. There's only one problem with it. And I said, what's that? And they go, it doesn't taste enough like Pepsi. And I said, well, we're calling it Crystal Pepsi. We're giving it cola flavor notes. And they said, yeah, David, but you're calling it Pepsi. You got to make it taste more like Pepsi. And I said, no, we're trying to get incremental users. And they said, yeah, but it doesn't taste like Pepsi. And I said, yeah, I didn't care what they said. I was going to get this into the market, and this is just the way I was going to be.

9:20Well, let me tell you something, Jeff. It was the only product in the history of Pepsi-Cola Company at that point in time that was a carbonated soft drink that was launched at a premium price. Now, the reason for that is the bottlers set the pricing. They said, don't worry about the trial. Everybody's going to try Crystal Pepsi. The problem is, David, they're not going to come back. And guess what? they didn't come back. And guess what the reason was, Jeff? Didn't taste enough like Pepsi. Well, and also execution needs strategy for lunch, right? I mean, incredible idea, but boy, if the execution is just a little bit off, there you go.

9:57You're swinging from Dan Rather, leading the evening news to not so great selling log piece. And once you miss on execution on a new product, it's really hard to get it back because those first three months are everything. So David, we talk a lot about learning from failure and sharing those learnings, But in institutions, especially as you get into larger companies, we talk about it, but it's really hard to institutionalize learning from failure. So when you think about Crystal Pepsi or other efforts that have gone awry that you've been a part of, how do you think about building organizationally that muscle of really being able to own failure, share the learnings and grow from it together?

10:37Well, I think, first of all, when people are working on things that are really important to the company and they're taking that risk and it doesn't work out, you scream from the rooftops that that's the kind of breakthrough thinking that we need. So it's OK around here to swing and miss. Just don't swing and miss every single time. OK, but we want people really going for it. And a lot of times big things are not going to happen unless you take some sort of risk. One of the challenges I've seen in the bigger organizations I've been in especially is leadership tells you they want candid feedback, but maybe they do, maybe they don't.

11:13Whether they do or not, there really aren't systems set up to make people feel comfortable coming to the CEO or to the business unit leader and saying, hey, I really think we have this wrong. I think there's a better way to do it. So when you think about the sort of extension of learning from failure, how have you set up systems or what do you think the best practices are to make sure that your team members feel comfortable speaking truth to the power at the top of the org chart? Well, I think first of all, that whoever's leading the company has to cast the right shadow. I think leaders cast a shadow.

11:46And you got to recognize that people do what the leader does. and so what I did was I always like to really recognize very publicly the people that saved me from myself, the people who told me what I should be doing and really helped me take the company or myself into a better position and so I would always talk about those people in my speeches or you know whenever I did my communications to the entire organization I would talk about how someone really helped me do the right thing or do something better for you. Let me give you a good example of this story on this is that my CFO was Rick Carucci and we were getting ready for a analyst meeting in New York and we're working on the analyst presentation.

12:35I'm deep into this. I do not want to be interrupted. And all of a sudden I hear this band marching outside. you know, it was our roving recognition band. We always had a lot of fun recognizing people and having fun doing it. And we had literally, I didn't have anything to do with it, but people in the company developed what they called the roving recognition band. And they would go around every month and recognize people inside the company for doing something great to satisfy our customers or whatever that reinforced our cultural values. So I'm hearing this band and Rick says to me, David, we got to go out there and be a part of this celebration.

13:14I said, no, we can't. We got to get this done. He said, no, we got to go out there. And he says, you know, you talk about the importance of recognition all the time. If you stay in here and you don't go out there, that's not what you're all about. That's not what our company's all about. And so we got out and I went out there and we did our clapping. We are here to recognize you. And I put my heart into it as best I could. Wanting to get back, wanting to get back at that investor presentation we were working on. But Rick really told me, laid it out for me, and he was so right. And I told that story to everybody, everybody I could possibly tell it to, because he saved me from myself.

13:57I know what I should do, but sometimes you don't do it. And you got to really recognize the truth tellers that are in your company. And we always tried to make sure that our leaders would recognize the people who really address their issues head on. And we really kind of built it into our recognition process. And we talked about the importance of recognizing people who challenge you and help the organization get to a better idea or a better solution because of it. It built into our culture. I love that. I want to go back to learning from, and I'd like to go to perhaps an inverse of the Crystal Pepsi experience.

14:35Could you share a little bit of the story of the success behind Cool Ranch Doritos? Well, Cool Ranch Doritos is an example of what I write about, which is learned by pattern thinking. And when I was working with Frito-Lay, and this was when I was on the advertising agency side, we really needed to have some product innovation for Doritos. The brand had started to slow down a little bit. And so I said to my team, we've got to come up with a new line extension for Doritos. And the most popular flavor at the time was nacho cheese Doritos. So I said, OK, let's go to the supermarket and let's just walk up and down the aisle and see what we can learn, see what we can observe and see if there's anything that can lead us to a new idea.

15:16So this is a corporate field trip to Kroger's. Yeah. We went right into the grocery store. We started marching up and down the aisle and we got to the salad dressing aisle. And what we noticed was the most popular new salad dressing on the market was ranch. And, you know, they had more facings. And I talked to the store manager. I said, how's this, these ranch dressings doing? Oh, fantastic. It's really taking off. And so I went back with the team. I said, this ranch dressing seems to be very powerful. What if we made a Doritos? And we all agreed that could be a good idea. So this time I called up the head of R &D at Frito-Lay.

15:59And I said, Dennis, got this great idea. I think we could do a ranch-flavored Doritos. Do you think we could do one? It makes sense. It seems to be a very popular flavor. And we go over in the R &D labs, and he gets it out, and we taste it. It's delicious. I mean, it's delicious. And then we said, how soon can we get in the market? He said, we can do it very quickly. We got it in the marketplace. And so we came up with the idea to call them Cool Ranch Doritos. And the rest is history. It's one of the most profitable, largest snacks in the grocery aisle. But what's really interesting is that we didn't go to the snack chip aisle to find that idea.

16:35We went to the salad dressing aisle. And I think when you can look at two seemingly different things and then say, hey, how could it possibly unite in whatever I'm working on? I think that's when you can really come up with big ideas. It's that pattern thinking that I think really allows you to innovate in really successful ways. And you don't have to always start from scratch. One of the interesting things in these stories of success and failure is clearly a culture in which the big swings are allowed for, if not actually encouraged. And so how do you think about balancing the desire, the need to take big swings, but also the fear that it's going to be so bad that it's going to either hurt the company meaningfully or end someone's own career?

17:23right? I mean, I think there's a lot of fear in big companies about pushing the boundaries because, hey, if I just do my job, if I take care of my own three yards, you know, like I'm going to, I'm going to get my cost of living adjustment. Maybe I'll get my promotion in two years. But that's not what creates innovation, particularly in bigger companies. The way I always look at that is you want to have a culture which really seeks both. You need incremental improvements. And then most of your growth is going to come from those incremental improvements. At the same time, you do want people feeling free to go for the home run.

18:04And then the important thing is to have some sort of process that allows you to determine whether it is a home run or not. And before, it really hurts the company. So like, let's go back to Crystal Pepsi, for example. We really didn't put that into enough testing. We didn't give it time. We had our blinders on. We were so in love with the idea. And under your leadership, Yum! Brand's market cap went from$4 billion to$32 billion. That doesn't happen with purely an incrementalist's mindset. And so as you led Yum on an 8x scaling journey off of a$4 billion market cap base, how did you talk to your team and what values did you try to instill in the company to balance the need for incremental growth with the need to take those big swings?

18:56I think, first of all, the most important thing I did early on was try to learn from winning. and so my team we went out and visited all the companies that at that point in time that we had consistent results year after year and so we went and visited with walmart and southwest airlines and home depot and a lot of great companies general electric was just an incredible company at that point in time we met with them then we came back and we codified what's really driving the success of these companies that allow them to get to great results year after year. I made my number one priority to really create a powerful culture where everyone counts.

19:37That became job number one for me as a CEO, because if I can create that right work environment, people will innovate and people will go further. Still ahead, I get advice from David about how business leaders can navigate some of the thorniest challenges of our time.

20:06Real leaders don't back down when the stakes are high. They innovate, they push forward, and then they take the stage at the Masters of Scale Summit. Join us in San Francisco, October 7th to 9th, to hear from the CEO of the New York Times, scientists using cutting-edge technology to find cures, the leader of crypto powerhouse Coinbase, a retired four-star general, and many, many more. Apply now at mastersofscale.com slash apply25. That's mastersofscale.com slash apply25. If you're ready to take your startup from idea to impact, then AWS is your launchpad. From data storage to machine learning to secure app hosting, AWS gives you the tech trusted by the world's fastest scaling startups.

20:55And here's the best part. Join AWS Activate today and you could score up to$100 ,000 in AWS credits tailored to your stage and network. Go to aws.amazon.com slash activate and start building. Expanding your business in the U.S. can feel like a maze. Every state has its own payroll, benefits, and compliance rules, which can pull your focus away from growth. That's why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert plus Fortune 500 level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one.

21:39So if you're scaling, make it simple with Deal. Go to deel.com slash MOS and get up to three months free. Welcome back to Masters of Scale. You can find this interview and more on the Masters of Scale YouTube channel.

22:23pressure from team members to speak out on things that are happening in our country and in the world. At the same time, we see polling data that says that consumers really don't want to hear from business leaders on political and social issues. Do you have a point of view on when business leaders should speak out publicly on something that's happening in the world? Well, first of all, very rarely. My belief is that leaders should focus on running their business best they can and make that their primary accountability. As it relates to politics, I don't think you should put pressure on people on the political front because when you have power, you don't want to give people any sense that you're exerting your power over them to influence their position.

23:12So I never talked about being a Republican or a Democrat or vote for this person or that person because I didn't really think that that was called for. You know, I think that when major things happen in the country that really shock the world, like let's say the George Floyd situation, you know, I think that's a time you would step up and you would speak out. I think if your industry is attacked or vilified, that's a time you speak on behalf of your company and your industry. For example, I always felt and always talked about the fact And I felt that our jobs were much maligned. People always said we're minimum wage workers.

23:54Well, if you're a minimum wage worker, you're not a minimum wage worker for very long if you do a good job. And we had a lot of minimum wage workers who quickly became restaurant managers. And restaurant managers, believe it or not, make over$60 ,000 a year. And then, you know, if you have five restaurants as an area manager, you can make over$100 ,000 a year. Companies and business leaders are mostly judged based on market cap valuation, revenue, traditional financial and core business metrics. When you think about how business leaders should evaluate themselves, are there success metrics beyond those core financial and business metrics that you think we should be thinking about?

24:35I think leaders should evaluate themselves, obviously, on the financial scorecard. You know, that's what you get paid to do. You get paid to, if you're a CEO, you get paid to grow the share price. I was measured on that every single year. But I didn't hold myself accountable just for that. I held myself accountable for creating something great. I wanted to create the defining global company that feeds the world. That's what I talked to our board about. I didn't want to just be a company. I wanted to, now how would we do that? We wanted to create a work environment where we wanted to be renowned worldwide for recognition.

25:15We wanted people to come best practice us for how do you recognize and value others. You know, no one wakes up every day, Jeff, wanting to be a part of something mediocre. They want to be a part of something great. So I think every board in the United States of America or every board in the world should hold their CEO accountable for making the world a better place. It's a terrific entry point to a specific question on this because there's a lot of AI anxiety out there right now. There's a lot of anxiety about robots out there right now. And there are a lot of companies like Yum that could optimize for profit by driving hard into replacing humans with robots and AI.

25:58How do you think about balancing that sort of critical every team member matters with the drive for profit optimization that robotics and AI in particular may help generate? That's a really tough question. You won't find too many CEOs who spent more time talking about the power of people, people first, recognizing others, building a culture where people feel valued. And I believe that with every fiber in my body. And I also believe it's the CEO's accountability to make sure that their business is vibrant and grows. Because you don't live in a world where everybody's standing still. You live in a very competitive world.