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SPEAKER 1: This a production of Cornell University.
JOE THOMAS: Ladies and gentlemen, could I have your attention, please? I'm Joe Thomas, dean of the Johnson Graduate School of Management. I'm pleased to be here. I'm pleased that all of you are here for the 21st annual Durland Lecture.
They gave me reading material. So I'm going to read it. But it won't take very long, because we don't want to take time away from our speaker, Irene Rosenfeld.
First, the Durland Memorial Lecture Series is named for Lew Durland. Roy Park, the late chairman of Park Communications and past member of the Johnson School Advisory Council, was instrumental in creating the Lew Durland Memorial Lecture Series. Park and a group of supporters endowed the Memorial Fund in 1983 in honor of Lew, the former treasurer of Cornell University.
Before Durland's retirement in 1973, he spent 25 years directing Cornell's financial life. While he was treasurer, Cornell's investment portfolio group from 45 to $322 million. The numbers sound small now. They certainly were not small at the time. The Durland Lecture Series is the Johnson School's most prestigious business speaking event. Each year, the dean invites a distinguished business leader to the campus to meet with students and faculty and to deliver a major address.
We have kept Irene moving from place to place at, I'm told, an incredible pace all of today. And she's interacted with lots of undergraduate and graduate students. The fund to support this was raised by Roy Park and his colleagues. And it is used to conduct the lecture series and the reception that will occur afterward.
Now, Irene, the 21st annual Durland speaker-- she was appointed chief executive officer of Kraft Foods in June of 2006. She assumed the additional post of chairman in March 2007, following Altria Group's spin-off of Kraft. She earned three degrees from Cornell University-- a Bachelor of Arts in psychology, a Master of Science in business, and a PhD in marketing and statistics. On a personal note, I was the head of the PhD program while Irene was here. I think we made a good admission decision.
She currently serves on the University Board of Trustees. She is a 25-year veteran of the food and beverage industry, has a long history of bringing consumer focus and innovation to building businesses. She began her career at Dancer Fitzgerald in New York, and later joined General Foods in consumer research. She led the restructuring and turnaround of key businesses in the United States, Canada, and Mexico, and the highly-successful integration of the Nabisco acquisition. She also served on the senior team that led Kraft's initial public offering in 2001.
In 2004, Irene was appointed chairman and chief executive officer of Frito-Lay, a division of PepsiCo, where she led her organization to accelerated growth in better-for-you products and developed a pipeline of health and wellness offerings. She's an active member of other industry and community organizations, including the Economic Club of Chicago. And she also serves on the board of directors for the Grocery Manufacturers Association.
Irene's topic today is Anatomy of a Turnaround-- Returning Kraft to Reliable Growth. Please help me welcome the 21st annual memorial Durland lecturer, Irene Rosenfeld.
[APPLAUSE]
IRENE ROSENFELD: Thank you, Joe, for that ringing endorsement of my admission. I'm feeling good about that. I thank all of you for coming this afternoon. It must be a couple of hours before happy hour. And so this is a good thing to do between now and then.
But I also-- I had the opportunity to talk with a number of you who had seen the interview that I did, the PBS interview I did with Jeff Immelt at Dartmouth. And I just did want to tell you, I need to apologize. I agreed to do the interview at Dartmouth only after they told me that I could not do it at Cornell. But I did wear a bright red jacket, which Jim Wright, the president of the college, noticed immediately. And so it became a Big Green vs. Big Red conversation.
[LAUGHTER]
But it turned out to be a very productive one, I think.
Cornell has played such a significant role in my life and my success. And I am just delighted to have the opportunity to come back here today. I've thoroughly enjoyed my experiences as an alumna of the university, first through the President's Council of Cornell Women, through my opportunities to give lectures at the Johnson School, and most recently, the opportunity to serve as a trustee of the university.
I'm also the proud parent of a member of the class of 2008, who has graciously agreed to stop studying for her wine-tasting mid-term to attend this lecture.
[LAUGHTER]
Thank you, Allison.
Most importantly, I've had the opportunity to attend this lecture series for many years. And I am so honored to have been selected to be this year's speaker. The theme of my remarks today, as Joe said, is anatomy of a turnaround. And during our time together I'd like to talk about what we and the Kraft group are doing to restore Kraft to reliable growth. Please understand, though, this is truly a work in process. The story is continuing to unfold as I'm telling it to you. And in fact, we will write another chapter in two weeks, when we announce our third-quarter earnings.
I'd like to tell you our story within the context of six rules of the road that are guiding our actions and providing the foundation for our growth plan. They are very simple rules, but they're quite powerful.
The first is to get the right people on the bus. The second is to engage their hearts and minds. Third, give them a roadmap. Fourth, model the behavior you expect. Fifth, communicate frequently, consistently, and honestly. And sixth, celebrate success publicly and often.
Let me start by giving you a little bit of background. About 16 months ago, I came home to a company that I knew very well and I truly love. As many of you know, Kraft is the second-largest food company in the world. We've got over $35 billion in sales. And our market cap is over $50 billion.
We're very well known, especially in the US, where almost 99% of households have some Kraft product in their pantry. And while many of you may associate the Kraft name with cheese, we have many other iconic brands.
[LAUGHTER]
Nancy, I apologize for that. But Kraft is cheese.
[LAUGHTER]
We have seven brands, with sales of more than a million dollars-- brands like DiGiorno, Jello, Maxwell House, Oscar Mayer, Philadelphia, Oreo, Ritz, Toblerone. Many, many household names. And we have a terrific team of 90,000 employees who make, market, and sell our products in over 150 countries around the world.
But quite honestly, the company that I came back to in June of 2006 had not been performing up to its potential. Our financial results were in the bottom of our peer group. And our stock was stagnant. Our growth had slowed and wasn't close to the projections that we had laid out at the time of our IPO. Our innovation pipeline had slowed to a trickle of line extensions and products that, although they were new to Kraft, were not new to the world. In the name of cost savings, we had taken quality out of many of our products. And we were about to be spun off from the tobacco company that had been our parent for 19 years.
I came back as an insider with an outsider's perspective, with 22 years of experience at Kraft and two years at Frito-Lay. This gave me some very unique insights about what it would take to get Kraft growing again. But my own insights could only take us so far.
Although I knew the company quite well, I spent my first 100 days as CEO traveling around the world. I visited employees and hosted many town hall sessions to hear what was on people's minds. I asked the entire organization to share their ideas on an internet site. We called it Ideas for Irene. And it gave our people the chance to speak up about what was going well and what wasn't.
Over the course of the first few weeks, I received literally hundreds of emails. I also spoke to our board members, to our investors, and I reached out to customers and suppliers as well. The insights that I gained by listening to both the good and the bad have informed just about everything I've done since I returned to Kraft.
One of the first steps I took was to reshape our leadership team. And that brings me to the first rule of the road, courtesy of Jim Collins-- get the right people on the bus. Within the first two months, I replaced half of the executive team. Some were new to Kraft. Others were new to their positions. And in the course of the first year, I changed over half of the top two levels of management.
Making sure you have the right people leads naturally to rule number two-- engage their hearts and minds. When I returned to Kraft, I found an organization that had lost its heart and soul. Frankly, the tremendous focus on cost-cutting, restructuring, and headcount reductions had left the organization tired, raw, and somewhat disillusioned.
From the first day, I attempted to reignite their passion by shifting people's focus to something more uplifting-- growth. That's not to say that minimizing cost is not important. But it is very hard to get up every morning when cost-cutting is your end, rather than a means. I've used the phrase "Let's get growing" since the moment I arrived. And it has become something of a mantra within Kraft.
Our spin-off from Altria at the end of March gave us the perfect opportunity to get people re-energized about the business. To that end, I've encouraged our team to think about our company as a $35 billion startup, and to begin-- with a blank sheet of paper-- to address so many of the processes like planning and forecasting.
An excited, energized team is great. But you also need to harness and focus the energy in the right direction. And that brings me to rule number three-- give them a roadmap. In February, I laid out four strategies that are providing our people with a framework and the confidence that we can turn this company around.
Our first strategy is-- rewire the organization for growth. This is not a warm and fuzzy people strategy, with all due respects to the organizational behaviorists in the room. It is first and foremost about accelerating our growth through changes in leadership, reward systems, structure, and behavior. All are designed to instill a growth mindset throughout our company.
Let me give you a sense of what this looks like. Earlier, I talked about getting the right people on the bus. Another way we're rewiring the organization is to change our reward system. We've taken steps to link each executive's compensation and annual bonus much more explicitly to the results of their business. And our long-term incentive plan is now focused on the key drivers of value creation-- revenue, operating income, and cash flow.
As I mentioned earlier, we've also taken actions to streamline our corporate structure and make our business units more accountable. Kraft has a very complex matrix structure. Some would argue that our structure has been one of the biggest impediments to our success. Our people spend more time coordinating with one another than they do in beating the competition. Our top 120 leaders are now helping us to implement a new structure and processes to bring us closer to consumers, speed up decision-making, and make our managers more accountable for their results.
Going forward, our business units will be essentially self-contained and focused on product categories or geographies. The leaders of these units will have full P&L responsibility, multi-functional resources, and full control over the results of their business. We're streamlining our functions to focus on shared services that will support these business units. Our functional leaders will continue to be responsible for functional expertise, for training, and career management. But they will no longer own agendas that are different from the business.
And we're streamlining our corporate staff to focus on strategy, asset allocation, and public company requirements, rather than on day-to-day operations of the business. While effectiveness is our primary objective, we expect to see efficiencies as well as we roll out this new structure and the related processes by early 2008.
Our second strategy is to reframe our categories. The underlying assumption here is that we are in attractive product categories. And I believe we are. Around the world, people are eating cheese, they're eating chocolate, they're eating cookies, they're drinking coffee. And these categories are growing at very healthy rates. We need to stop apologizing for our categories and start reinventing them.
Our issue is simply that we need to make our offerings in these categories more relevant to today's consumers by aligning them with the food trends that are driving consumer behavior-- snacking, quick meals, health and wellness, premium quality in developed markets, and affordable quality in developing markets. We've taken some exciting steps to reframe our largest categories. For example, we reframed our pizza category and saw an opportunity to compete with pizzeria pizza. And we introduced DiGiorno Ultimate Pizza. It was launched nationally in June. And it already accounts for a third of all new product sales in the frozen pizza category, making it the largest new item launched in the category.
We've taken our beloved Oreo brand into an entirely new category-- snack cakes-- with the introduction of Oreo Cakesters. And I know Allison and her friends have sampled many of these.
[LAUGHTER]
These soft snack cakes with cream filling are competing in the billion dollar snack cake category. We're expanding our cheese business with the introduction of LiveActive snacking cheeses. These products contain pre and probiotic ingredients for digestive health that enable us to compete in a $500 million business that's growing at a phenomenal 50% rate.
In Europe, we've reframed our Milka chocolate brand beyond mainstream to compete in the rapidly-growing premium chocolate segment with the introduction of [INAUDIBLE], a line of filled chocolate tablets. This new line has contributed to growth of 10% in Milka after years of decline. And we've just introduced a new line of premium coffee in Germany, [INAUDIBLE], our first significant innovation in this category in over a decade. These are just a few of the examples of how our teams are stepping up to the reframing challenge, and discovering new growth opportunities by looking at their categories through the eyes of our consumers.
And while we're clearly investing to grow our current businesses, we will continue to look strategically at acquisitions and divestitures. In July, we announced our intention to acquire the Danone biscuit business. This will add an important third growth category to our European portfolio, in addition to coffee and chocolate. The business has great brands, good margins, and an excellent organization and capabilities. In addition, Danone's presence in developing markets will provide us with some scale to help accelerate our growth there. We're on track to complete this acquisition by year-end.
Our third strategy is to exploit our sales capabilities. For too long, we viewed sales as an overhead cost to be minimized, rather than as an asset to gain competitive advantage. Kraft has an outstanding sales force. And we are making it even more effective in the United States. Wall-to-Wall, one of our major initiatives, enables one sales rep to cover the entire store, wall to wall.
With this initiative, we increased the frequency of our retail visits and build much stronger relationships with store management. This helps us reduce our out-of-stock, gets our new products to market more quickly, and enables us to significantly increase the display support that leads to impulse purchasing. We're already seeing a very positive impact to our business. And our results are improving over time as we learn more about how to train our reps to take on these larger responsibilities.
At the same time we're building our build business outside the United States, by expanding our reach to the traditional trade-- to kiosks, to corner stores, and wet markets, where the majority of consumers in developing markets shop. So in select countries like Brazil, Ukraine, Russia, and Mexico, we're investing to expand our reach to the traditional trade.
But reaching additional stores is just part of the equation to grow the business. At the same time, we're adding more products that are relevant to those local consumers, especially more affordable packaging and package sizes. I feel very good about these efforts. And I am confident that they, together with a number of our other initiatives, will help us to continue to fuel the 8% to 10% growth rate that is so important to our future success.
And the last strategy-- but certainly no less important-- is to drive down costs without compromising quality. Productivity has been and always will be one of Kraft's hallmarks. We've taken significant costs out of our business over the last couple of years. Over the past 3 and 1/2 years, we've announced the closure of 29 plants and eliminated over 11,000 positions. As necessary as these actions are, they're always difficult because they impact people's lives. And we do everything we can to minimize that impact.
This year, our savings are coming faster and at lower cost than we had anticipated. And we're on track to deliver $1 billion in savings by the end of 2008. These savings are helping us to offset inflationary cost increases, as well as provide the funding for growth. I also believe that the new organization structure that I described a few minutes ago will be a key enabler to improve our efficiency by facilitating better ideas, better execution, and further reducing our overhead costs.
But while we're saving money, our first priority is to make our products truly delicious. As part of this strategy, we're increasing the percent of our portfolio that consumers believe is superior to competition. We're doing it in a very focused way. We're focused on what we call our marker products. Those are the 250 products in our portfolio that have the greatest impact on our performance. And we're making very good progress. The number of Kraft products that today test superior to the competition has doubled in the past 18 months. And we're targeting for 2/3 of them to be superior by 2010.
And that brings me to the next rule of the road-- model the behavior you expect. As part of our rewiring strategy, we're asking our people to come to work with a very different mindset. We're asking for less conformity and more candor, less caution and more courage, less consensus and far more action.
If we had followed these principles, I am convinced that we wouldn't have made many of the mistakes we made on our Tassimo hot beverage system. I don't know how many of you are familiar with Tassimo. It's an on-demand coffee system. It's just coming, actually, just coming to the United States now. We've been selling it in Europe for a couple of years.
And if you think about-- what were some of the mistakes that we made as we introduced that system, the first big one that we learned was that our original assumptions were far too aggressive. But the people that were closest to the business were afraid to speak up. So we didn't course correct. We built many, many plants. We funded far too many production lines. And we didn't make the necessary adjustments to our plan. This forced us to take money from our base coffee business, which helped to drive that one down, and created two problems instead of one. As a result, we took a $250 million write-off last December to write down the assets.
In the end, though, we learned some very important lessons from this experience. And our company is much better for it. We took a step back. And we looked at a new business model. This machine does not belong in Walmart. It belongs in Bed Bath & Beyond. It doesn't belong in Kroger. It belongs in more upscale department stores. And by focusing on the coffee aficionados who are most excited about this kind of an offering, our business is up 70% this year and promises to be an exciting addition to our portfolio going forward.
I've showcased this turn-around wherever possible, because it is extremely important that the message and the lessons learned from the Tassimo experience be the notion of candor, courage, and action; testing and learning; and not-- let's not try new things; you will get shot. And so I've spent a lot of time telling the Tassimo story and making sure that the organization understands the power of what we have learned in the course of that experience.
Closely related to modeling the expected behaviors is the next rule of the road-- communicate, communicate, communicate, frequently, consistently, and honestly. There's enormous uncertainty during times of change. And so the more communication the better, especially on organizational changes. I mentioned that the new structure will be implemented early next year.
As we've worked on the design over the past couple of months, I had committed to the organization that I would let them know as we made decisions. And we've been doing that. We've used a variety of channels. I've hosted town halls, supported by webcasts for employees around the world. I've hosted conference calls with our senior leaders, posted messages on our intranet, recorded podcast audio programs, and I have an easily-accessible mailbox. So employees can write directly to me if they have something they'd like to say.
In fact, I'd like to share with you two employee responses to my most recent message, on the status of our rewiring initiative. This first one is from a sales director. And this individual says, "I just wanted to say bravo for your commitment to your own mantra-- courage, candor, and action, all of which are very evident in this communication that you sent out. You've once again re-energized my belief that you are really going to make this turnaround happen, a truly amazing feat for a company of this size steeped in its own tradition. I am so very proud of what I am seeing. You go, girl!"
[LAUGHTER]
They're not as reverent as they used to be. Here's a second one from one of our engineers. And he said, "Irene, I'm not sure how often you receive praise for your announcements. But I wanted to say thank you for your openness regarding the recent organizational changes. I understand the teams are working hard to figure out the best way to organize our company for growth. I'm especially glad to receive these periodic updates on the subject, given that the changes are still a work in progress. It is refreshing for me, and others probably share my opinion, to learn more about the significant organizational changes along the way, instead of having a sweeping announcement once everything is set. I think it helps to both minimize disruption and boost morale. I wish you and your teams the best in this time of change for growth."
And this is from an individual whose job is likely to be eliminated as a consequence of our restructuring. And he knows that. So I can't emphasize enough the power of communication in not only settling people down, but giving them greater confidence that the changes that are about to be implemented will have a positive benefit.
I also expect our senior leaders to share in the task of communication. It can't just be me. We need all of our leaders engaged and talking with their teams. And so we provide them with talking points, with tools, and training to help them do that.
And finally, people want to know that what they're doing is making a difference and is appreciated. And this can mean a lot of things, from a simple thank you to more formal company recognition programs. And that brings me to my final rule of the road-- celebrates success, publicly and often.
I want to talk specifically about the value of sharing stories. As you share the stories of an organization, you're able to bring to life concepts and strategies in a way that's real and understandable, and makes people proud. And when you tell these stories in a large setting, like a town hall meeting, they go a long way toward building a sense of community and shaping the culture you're trying to create.
It can be about a new product launch, a new marketing campaign, a packaging innovation, a process innovation. In fact, we just had a town hall last week to share and celebrate three of our most exciting reframing stories. And it's going a long way toward giving people greater confidence about what the idea means and the kind of impact that it can have in the marketplace.
When we were spun off from Altria, we rang the bell at the New York Stock Exchange. It was a very exciting day. I invited 10 of our front line managers from around the world to join me on the bell podium on that day. It was a terrific event. And they were able to take back the story of that day back to their locations, which generated excitement about Kraft's independence in a way that could not possibly have come just from a little note from me out to the organization. We also shared the event with all of our employees around the world by posting some of the clips-- the film clips-- on our intranet. And it generated tremendous pride and enthusiasm and excitement about our future.
So those are my six rules of the road, that are guiding our actions and providing the foundation for our growth plan. Get the right people on the bus. Engage their hearts and minds. Give them a roadmap. Model the behavior you expect. Communicate, communicate, communicate. And celebrate success publicly and often. I believe they have served us well so far. We're now nine months into our three-year plan. And we're making good progress against all four of our strategies.
And that progress is translating into improved financial performance. We're seeing faster revenue growth in all geographies. We're stepping up our growth in North America, our most important market. We're changing our growth trajectory in the EU after years of decline. And we're maintaining good momentum in our developing markets. We have bigger, better ideas coming to market. And you will start to see most of them as we get into early 2008. And despite some significant challenges with input costs, we've increased our earnings guidance for this year.
We still have many challenges. There will always be challenges. But our team is increasingly confident that we can meet these challenges while remaining on the path to reliable growth. So that's our story. I thank you for the opportunity to share it with you today. And I'd now be happy to take any of your questions. Thank you.
[APPLAUSE]
SPEAKER 2: Do we have time for questions? OK, who has the second question?
[LAUGHTER]
AUDIENCE: Irene, I applaud you. But I have a question. How, in your strategic look at where you're taking the firm, do you factor in packaging and trying to stay green with the convenience? I think that's probably a dilemma that you face.
IRENE ROSENFELD: You know, Jeff Immelt has a great saying-- green is gold. And I couldn't agree more. The reality is that sustainability and environmental efforts are not only the right thing to do for society. But they actually happen to be good business as well.
One of the interesting things, as I came back to the company, is we had a variety of initiatives going on on that subject across the company. And they were all very tactical. Some of them-- you know, Walmart said this. So we put a team in place. And they were all very altruistic, which I don't mind. But they didn't really have any business objective behind them.
So we actually have created a vice president of sustainability, whose task is to focus on the opportunity for us to do well by doing good. And he's made terrific progress. He's brought together all these disparate people across the company. And we're focused on four areas. And we're making terrific progress in each of them.
The first is really just to reduce our energy use, reduce our water use, and reduce our greenhouse gas emissions, which has both environmental benefits and clear cost benefits. We're looking at reducing our manufacturing waste, reducing our packaging waste, and improving the sustainability of a number of our key commodities, like coffee and cocoa. We've got clear metrics on each of those targets. And I am feeling very good about where we are.
And so I think the moral of the story is, you can do well by doing good. The key is to make sure you have a business purpose that is in line with the societal opportunity, and that you have some clear metrics and milestones along the way. But I'm quite encouraged about the results that I'm seeing so far. Jeff?
AUDIENCE: Irene, you spent a couple of years outside of Kraft. What did you learn in your two years down in Dallas that you've been able to bring back to Chicago?
IRENE ROSENFELD: First, with all due respect to the Texans here, I learned that I like Chicago better.
[LAUGHTER]
[APPLAUSE]
New York is better yet. But certainly on a relative scale, I do love being back in Chicago. You know, it was interesting. Part of what lay behind the restructuring efforts that we've announced is my own experience and the experience of so many of my colleagues in companies that were much more decentralized than what Kraft had become. And so as I talked to folks around the company about what was getting in their way-- and I talked to our suppliers. I talked to our customers. They all talked about this giant bureaucracy.
And a lot of that came from the fact that we were so very heavily matrixed. And although I don't think there's really a right or a wrong organizational structure, just the experience of having lived through a much more decentralized structure at General Foods and then going back to that at Frito-Lay reminded me of the power of having individuals that come to work every day focused on a business, and not distracted by functional objectives or other issues that they have to be working on. So in large measure, the experience that I had at Frito gave me as much confidence as some of the feedback that the direction that we're taking as we unmatrix a lot of our activities, and we have a lot of the key functions-- like manufacturing and R&D, for example-- reporting directly into the business will be a powerful enabler of our ability to grow.
AUDIENCE: Hi, Irene. I wanted to ask you about your courage and candor plank. Most organizations tend to be hierarchical, where you report to someone who's the boss. How do you encourage and practically motivate people to offer dissenting opinions, particularly if they're in contradiction to an immediate supervisor, knowing that you've done a lot of downsizing?
IRENE ROSENFELD: Yeah.
[LAUGHTER]
It starts with putting a woman in charge who was not in the military.
[LAUGHTER]
It's a real challenge. And in fact, it's only through storytelling and personal experience that we're going to be able to make progress on that subject. I still find cases where we have a meeting, we say-- just tell the truth. And it is just so difficult, because there's just a lot of politics. And that's just a reality of large companies.
What I'm finding, increasingly, is that the leader sets the tone. And that doesn't mean me. It means all the leaders that are in charge of large groups around the organization. And so I've worked pretty hard to find those leaders that are well-aligned with that philosophy. But I actually think in today's rapidly-moving world, that if you don't have the ability to accelerate the chain of communication, you've lost competitive advantage. So I really think this notion of telling the truth, encouraging people to tell the truth, and to just move quickly is going to be one of the most powerful things we can do.
AUDIENCE: How do you think corporate culture has changed as a result-- or sort of distancing yourself from tobacco, have you been able to get maybe a different type of employees? Have you noticed any difference?
IRENE ROSENFELD: It's a good question. A lot of people ask that question. Truthfully, I don't think that's had a big impact. It's more, we're finding just fundamentally, the separation has given us enormous financial flexibility that we didn't have before. So we're able to use our stock as a currency, for example, as we think about acquisitions. And we have the opportunity to really make much more aggressive use of our balance sheet, which we couldn't do as a subsidiary. So that's really been the main benefit. And I think we'll continue to see that play out over time.
From an employee standpoint, I think the bigger impact has been on our ability to step back and look at our processes and our practices, as I mentioned, and just say, why should we be doing a strategic plan in February? There was no logic on our business of doing a strategic plan in February. But that happened to be when the Altria strategic plan happened. Now we have the opportunity to let the year unfold and do our strategic plan, for example, in June.
And so it's been a lot of-- some of the changes that we made to our compensation system were as a result of our ability to say, this is what is going to serve our business well. We don't want to be on the Altria system anymore. So it's had more of an impact on employees in that respect, I think, than in terms of them choosing to come to work for us would have.
AUDIENCE: Irene, you'd mentioned some of the work that Kraft is doing in parts of the developing world-- Latin America and Russia. What's going on with Kraft in China and in India?
IRENE ROSENFELD: I was talking with the students Jan Katz's class this afternoon. Our biggest opportunities in developing markets are in Eastern Europe and Latin America. And it's simply because our portfolio there is broader. And the consumption patterns of those consumers work well with chocolate, coffee, and Tang, which is what we sell-- and biscuits, which we sell a lot of in that part of the world.
Asia-- it's going to be a while till we've got a lot of Asians eating cheese. And so--
[LAUGHTER]
One of the first things I looked at as I came back last year was really to understand-- recognizing that we needed to get faster growth from Asia-- what would be the best strategy to do that. And I came to two conclusions. One is that-- three conclusions, actually. First is, it's not going to impact us in the short term. It's going to be a bit of a long-term investment. And we need to be prepared to make that investment while we are making progress on the other fronts.
The real question, though, is-- and it will have to come through acquisition. We have a fairly subscale-- we've got a $100 million business in China today. It's a nice business. But you can't really build an infrastructure with that business.
So one of the benefits of the Danone acquisition, actually, one of the reasons for it is, as I mentioned, it has good presence in developing markets. It'll double our business in China. It doubles our business in Malaysia and Indonesia. So it starts to give us much more scale. And I've come to the conclusion that biscuit is our linchpin in that part of the world. So some day, cheese. But today, biscuit.
And one of the things that Danone actually brings to that task is that they have a very low-cost operating system, unlike what we had been doing there. And so I think we can learn a lot as we integrate that business.
SPEAKER 2: Excuse me one second-- after these two questions, we can bring the microphones to you if you raise your hands.
AUDIENCE: Irene, as the world's largest food and beverage manufacturer, arguably you're incredibly influential when it comes to nutrition and wellness. And I'm interested to hear what Kraft is doing and prepared to do strategically to help address the obesity epidemic in this country.
IRENE ROSENFELD: That's a very important question. And we're doing a lot of things, because it is incumbent upon us as a leader in the industry to be able to make some progress in this very significant issue. It starts-- we actually took a very strong leadership position a number of years ago, with respect to advertising and marketing to kids.
And so we started by taking our products out of schools-- many of our products out of schools, out of vending machines. And we stopped advertising products that did not qualify for our sensible solution criteria, which are basically criteria that are established by the FDA. And that was a pretty bold move-- interestingly, nobody followed us-- at the time. So we had some bold share declines as well.
[LAUGHTER]
But clearly, it is the right thing to do. The good news is, the industry has now come to its senses. And most of our peers have joined us. So I think we are continuing to work to make sure that the products we are marketing to children meet the highest nutritional standards. We are very actively engaged in portion control. We invented the 100 calorie pack, in fact. It's become a bit of a household concept. But the idea of helping with foods that are more indulged in by making them in smaller portion sizes, we think, can be an opportunity to allow consumers to be able to indulge and address their weight management issues as well.
And lastly, we were very active in continuing to fund programming related to physical fitness, both physical education in schools as well as aligning ourselves with other organizations that build parks and encourage consumers to be active. So on a variety of fronts, we're trying to approach the calories-in aspect in terms of what we are marketing and what we are selling.
A big thrust of our innovation pipeline is about health and wellness. It's about taking down fat. It's about reducing calories. And it's about reducing sugar. And we're making some terrific progress. And I do think that's going to be an important source of our growth in the years ahead. So it's a critical issue. There is no one solution to it. I think the more we, as a food industry, can unite in terms of how we approach the task-- if you look around at packages in the supermarket today in the United States, you will see a different symbol from each food manufacturer to designate their better-for-you products. And it's exceptionally confusing to consumers. And it's clearly not having the desired impact. And we are in the process of working together with a number of our peer companies to get to a common symbol and a common standard that can better help consumers make those choices. So a critically important issue, and we are taking some significant steps to do our part.
AUDIENCE: Thank you. I very remarked by a comment you made, that you're a $35 billion startup. And I think one challenge between a startup and a $35 billion company has to do with the fact that your investors, your shareholders are going to be holding your feet to the fire, particularly on the economies in the back office, and make certain that-- as large as you are and as global as you are, there's a certain facet of the company that remains centralized. And there's a certain, perhaps, outward-facing facet that you can customize to the region or geography or product.
So in the culture that you put into the company, how did you instill collaboration, particularly if your incentives were on sales and operating income and cash flow? Was it operating income? Or where was it that you created that element of collaboration, but at the same time providing the autonomy for your product managers to go to market?
IRENE ROSENFELD: Yeah. Actually, those three metrics are not going to instill collaboration. An individual manager is evaluated 70% on his or her business results and 30% on their leadership. And the collaboration comes out in their leadership rating.
The interesting thing was the matrix structure served us exceptionally well in the course of the merger of Kraft and General Foods. It served us exceptionally well as we integrated companies like Nabisco. But it had kind of run its course. And so the real issue is, we were organized for the 10% of collaborative opportunities, and found ourselves in a very bureaucratic, slow structure for most of the work that had to get done on a day-to-day basis.
And so we are still working through what are the mechanisms and the incentives that will encourage that collaboration. But I was telling a number of the students I met with this afternoon, this year's strategic plan for international-- despite the fact that we blew up the central group-- had more collaboration in it than anybody who's seen an international plan could remember. So I am confident that if we put the right incentives in place-- and they did it because we said, we'll shoot you if you don't. So--
[LAUGHTER]
I am confident that if we put the right incentives in place, we can get people to cooperate. And over time, as they start to have the opportunity to see good ideas from one region of the world to the other, I think we can facilitate that. Our solution in the past had been to have a central coordinating group. And I will tell you, it doesn't work. It's overhead. And those individuals have no authority. And they just end up making everybody aggravated. So I've worked very hard to narrow the corporate groups and put the resources back in the individual businesses. Yes?
AUDIENCE: What are you doing about the trend to more fresh or more natural foods? I mean, the growth of Whole Foods shows it's turning into a fad.
IRENE ROSENFELD: Yes.
AUDIENCE: I don't know if Whole Foods even sells any of your products.
IRENE ROSENFELD: They do.
[LAUGHTER]
Not enough. We have a brand called Back to Nature, which many of you will not know is ours. We have a brand called Boca Burgers, which is ours. And we have a number of other products that you wouldn't recognize. And so we are trying-- we have sort of a dual-pronged strategy. We recognize that our base businesses need to be made fresher, less processed to meet the needs of today's consumers. And we're taking a number of steps on products like our Kraft Slices to take out the artificial preservatives, to take out some of the artificial colors, and to meet consumers' needs.
But in many cases, we're finding there are some consumers that really want a considerably different alternative. And we've got a couple of platforms, like Back to Nature and like Boca, that we've been using. California Pizza Kitchen, for example, is ours, California Pizza Kitchen products.
Most products you're eating are ours.
[LAUGHTER]
That's the good news. We make many products that you wouldn't recognize as Kraft immediately. And in some cases, we're finding that there's value in having different offerings, depending upon the different consumer needs. Without a doubt, though, Whole Foods and other natural grocers are growing at a very rapid rate. And we are working to make sure that we can keep pace with that.
AUDIENCE: As you undergo this turn-around-- there's a lot of initiatives that you talked about and a lot of change in the organization. When do you start to get to the point where there's too much change, or it starts to become a detriment?
IRENE ROSENFELD: That's a great question. We ask ourselves constantly, what's the right balance? And that's one of the reasons that our leadership changes have been a balance of insiders and outsiders. And I think, as best as possible, each time we make a change we try to surround the new leader with some of the support that that individual needs to be able to make a transition.
But I do lie awake at night, sometimes, thinking, should we do this change? And then I think, how can we not? And so that's the constant tension that I and our management team go through. But we spend a lot of time talking about that. And in most cases, we try to surround some of the change leaders or some of the changes that we're making with some support systems that I hope can help us.
AUDIENCE: Recently, the food industry has gone through a lot of recalls. I'm thinking of hamburgers, spinach. What do you think the industry's role is in correcting the situation? And what is the role of government?
IRENE ROSENFELD: I will tell you, as with most issues, the industry is the group that will solve the issue. The challenge of asking the government to take charge of some of those activities does not really help to get to a better solution.
Food safety is very much-- next to our ethical integrity, is at the top of our list in terms of values of our company. We take it very seriously. We have a very significant food safety program in place. In fact, in our meat business, our Oscar Mayer meat business, we have been one of the industry leaders in terms of helping to improve the food safety of meats with some proprietary technology that we've made available to the industry.
Having said that, with every occurrence, we all step back and take another look at our systems to make sure that we are doing everything that we can. Some of these recalls, I'll tell you, are not all bad things. In some cases, it's because there are better systems in place to be able to alert the consumer to some of the issues.
But the challenge with the government is that their approach to things like food safety would be a zero-defect concept. And it's just not feasible. And so what will happen is, you're going to end up creating enormous disruption for not a lot of benefit. So I do believe the food industry needs to continue to be held to the task of making sure that food safety is of the highest magnitude.
And I would tell you in particular, China, of course, is on the minds of all of us. We do not source any stuff from China that is exported outside that country. But we continue to make sure that even the production that we're doing internal to the country is of our highest standards. It's a critically-important issue. And I think the industry needs to remain in charge of solving it.
AUDIENCE: To hire right people, you replaced half of the top management. How were you able to engage other half's hearts and minds without creating fear of uncertainty?
IRENE ROSENFELD: It comes back to the idea of establishing the standard, being clear about what performance requirements are, and holding people accountable. When I came back in June, within two months we had our annual succession plan process. For a company that was underperforming, it was staggering to me to discover that 40% of our employees were rated high potential. That simply does not make sense.
And so much of what we've been doing is just raising the performance bar, being very clear about what's necessary. In many cases, we have allowed individuals who we have some concerns about-- allowed them the necessary time to either get with the new standard or not. But at a certain point, you have to be prepared to make those tough decisions. And so in some respects, some of the individuals in that group-- clearly, once the performance standards were clearer, they simply were not performing. And everybody understood that.
It's so interesting. It is incredibly difficult to let people go, as you all know. But I have found so often, when you let under-performers go it is a liberating event to the rest of the organization, because while they are there, people are confused about what you really want. And so I am hopeful that many of these changes-- rather than creating fear-- have created a sense of optimism and hope for those who are good. But time will tell.
SPEAKER 2: We have time for one more question. And we can bring the microphone. Oh, you already have it.
AUDIENCE: Irene, in this time of incredible increases in commodity prices-- namely, milk and coffee and others-- what is your philosophy of management in this kind of an environment?
IRENE ROSENFELD: The first thing is to make sure that we have adequate value in our brands. And so much of the investment that we have made in the course of 2007, and have been making for the last couple of years, is designed-- to some extent-- to undo some of the past behaviors. But it's about reinvesting in product quality, reinvesting in brand equity, and reinvesting in product innovation. And so our first obligation is to make sure that we're adding enough value to our brands so that they have the ability to take price increases in the face of some of these really ungodly, all-time-high commodity costs that we're seeing in so many different areas.
So our focus is really on what we need to do to add enough value to our brands to be able to price the commodities. And certainly in most cases, this is an industry-wide issue. And so it's not a question of anybody staying behind and trying to grab market share. So our focus has been on adding value.
The second piece is to continue to look at the controllable costs. And that's why this overhead piece is so important to us, because in the foreseeable future, input costs are not going down anytime soon. Some of what we're seeing in dairy is cyclical. There is a drought in Australia, created havoc with the dairy powder market. That will go away.
But some of it is secular, as we look at demand in Asia and in other markets. So we are hunkering down and preparing for a continued environment of high input costs. And our goal is to make sure that our products can be differentiated enough-- things like [INAUDIBLE] cheese, for example, have a much higher margin than our base cheese products. And that will allow us, we believe, to weather that storm.
[APPLAUSE]
JOE THOMAS: Good work. You sure you don't want to come back and join the faculty?
IRENE ROSENFELD: [INAUDIBLE]
JOE THOMAS: Dr. Rosenfeld, thank you very much for a wonderful talk, and for excellent answers to questions. There will be a reception immediately following in the atrium of Sage Hall, right across the street. We hope you will join us there. And Irene, thank you very much for being the 21st annual Durland lecturer.
IRENE ROSENFELD: Thank you, Joe.
[APPLAUSE]
Irene Rosenfeld, chairman and CEO of Kraft Foods Inc., presents the 2007 Lewis H. Durland Memorial Lecture in Cornell's Alice Statler Auditorium.
