JOHN HAUGH AT MARS

How was this for a challenge? You had joined one of the world’s largest and most successful
family-owned companies with a long, proud history in the food industry. And your first
assignment? Breathe new life into a business named for the founder’s mother. Meet John
Haugh, hired from the outside to head Mars/Masterfoods Retail Group, and charged with
reinvigorating sales at Ethel M Chocolates, the gourmet chocolate business named after the
mother of founder, Forrest Mars.

Born in Minnesota, Haugh began his career at General Mills, spending six years there— three
in sales and three in marketing. He credits the firm with teaching him a lot:

In a blue-chip company like General Mills, you really come to understand how to think from
the customer’s perspective. Working there gave me the opportunity to learn how to launch
and sustain iconic brands and to see businesses that didn’t work, despite all the smart people
and market research that was done ahead of time. At General Mills, when something doesn’t
work, you spend time trying to understand why.

He watched colleagues at General Mills tinker with new products, sometimes launching them
three or four times before finally getting it right: “Sometimes your timing is a bit off, or there’s
some new technology or a new customer insight—so you give it another shot.” He learned an
important lesson: “You want to be as right as you can, but you never know everything—so
you take your best information and you get the thing out in the marketplace.”

He left the firm to go to business school, opting for IMD in Switzerland instead of a U.S. school.
Why? “I’d been working with people from the best U.S. business schools at General Mills,” he
explained, “and I wanted to see something different. When you’re sitting with Brazilians in
your class, and you’re assuming 4% inflation and they’re assuming 2,600%, it gives you a
different perspective on launching a business. My thinking was that this would help me down
the road.”

Post-MBA, Haugh went to work in the hospitality industry at a French luxury vacation
company, Club Med, and then at Carlson, a large private travel agency. From there, he went
to Universal Studios and then on to national shoe retailer Payless Shoes. By the time he
arrived at Mars, he had collected quite a diversity of business experience:

When you try different businesses and do different things, you’ve got to learn a new industry
quickly, so you need to get sharper street smarts. You start to get a feel for how business
works—for how to manage people, how to spot a market opportunity, when to go faster,
when to back off. I’ve personally benefited from being in different industries, different
cultures, and different countries. It has required me to heighten my sense of feel for business.

As it turned out, Haugh needed everything he had learned. Ethel M made some of the finest
chocolates in America that few had ever tasted. The business won culinary awards in the
premium chocolate category year after year, but sales were stagnating. Manufactured in a
small factory in Nevada, the chocolates were available only through direct mail and 15 retail
stores in Las Vegas. Ethel M was an anomaly at Mars—a small business in a company that had
more than $18 billion in revenues; a high-end retail business in a consumer-packaged-goods
manufacturer that sold to grocery and drugstore chains. But despite its problems, nobody at
Mars wanted to see Ethel M go. Attracted by Haugh’s retail sensibility and deep knowledge
of consumers, Mars executives believed that Haugh had the right background to salvage it.
One Mars executive noted: “In the past, we had wholesale people who knew how to sell to
retailers; now we finally had someone who knew how to sell to retail customers.”

What Haugh saw when he began to immerse himself in the gourmet chocolate business was
disturbing. First, his early discussions with consumers made it clear that they already had their
favorite brands, and these weren’t necessarily based on taste. Ethel M won in blind taste
tests, but husbands still bought Godiva for their wives. It was like buying IBM in the old days—
nobody could fault you for it. But then their wives put Ethel M away for a special occasion,
which led to Haugh’s second concern: The business was highly seasonal. “It’s a good business
twice a year—at Valentine’s Day and around the Christmas holidays. In July, you can’t give
gift chocolate away,” he explained. With a business model that incurred costs 365 days a year,
he believed that it was essential to make high-end chocolate a more frequent purchase.

It was obvious to Haugh that Ethel M wasn’t going to win by making a better chocolate.
“Everybody else can do that,” Haugh said. “The only barrier to entry into this business is a
kitchen.” There were 2,500 chocolatiers in the United States and no agreement among
consumers on what superior chocolate tasted like, so trying to beat rivals on taste or brand
would be a dead end.

By the end of his first 90 days, Haugh had decided that the current business model at Ethel M
was simply not sustainable, much less capable of driving the significant revenue growth he
was mandated to deliver. The industry itself was growing by only about 3% per year. He and
his team would have to fundamentally change the game to truly grow the business.
Fortunately, Haugh had been told by Mars executives that he could change anything about
the business but the name.

Clearly, Haugh and his team needed to figure out how to give their target customers—
women—“permission” to eat gourmet chocolate more often and to convince them that it
should be Ethel M’s. To begin, he believed that he needed to figure out how to intersect with
the daily lives of the women who were likely to be his key customers. So he and his team
studied what their days looked like, their habits, and their preferences.

They also looked at other companies, such as Starbucks and Panera, which had succeeded in
turning a premium-priced product into a daily purchase. This was when they had their “Aha!”
moment: They would create a chocolate lounge—a Starbucks for chocolate—a place where
consumers could enjoy the comforts of a chocolate experience. To encourage women to treat
Ethel’s premium chocolates as an accessible, everyday treat, these lounges would sell
chocolates by the piece for in-store consumption as well as for takeout. The stores would also
offer a wide selection of drinks and chocolate-related items such as fondues. They would have
couches and large, comfy chairs, knowledgeable staff, and information on the walls and
elsewhere to educate consumers about good chocolate. Finally, the shopping experience
would offer women the chance to enjoy their chocolate and drinks in a relaxed setting with
their friends.

Haugh took this innovative idea and quickly ran with it:

When you go out with a product, oftentimes speed is as important as knowledge, so you find
the balance and get the thing out in the marketplace. Then you start to understand what
works and doesn’t work. And if it doesn’t work, it’s okay. You take another shot at it. You cut
your losses. You call the baby ugly.

He elected to launch four different kinds of lounges: “We’re not going to go out and have one
perfected prototype,” he explained, “because we don’t even know what that would look like.”
The team checked in with consumers throughout the design process to determine the best
color palettes, types of furniture, and overall ambience for the stores. They also asked
suppliers, partners, and the vendors of their chocolate-making equipment for input. Their
intent was to refine the new business as they went along:

We’d know within three days if a store was working. Are people coming in, are they sitting
where you think they will, are they ordering what you think they will? You know very soon.
And we’d test a slightly different design and layout for the next one to open. We did make
errors—we knew we would. But we were prepared to react quickly and to fix them.

Indeed, Haugh viewed making mistakes as part of the process:

You know what? You’re going to make a bunch of mistakes. What you want to do is to try and
correct them. When you’re younger, you don’t like to make mistakes. You think that’s the
thing that is going to knock you off the track. You get a little bit older and get some gray in
your hair, and then you realize it’s okay to make mistakes. It’s how you learn the most.

Haugh’s customer-oriented and experimental approach had paid off. The first ethel’s
chocolate lounge opened in Chicago just six months after Haugh and his team developed the
concept. By 2009, there were 10 lounges in Chicago and a growing number in Las Vegas. And
since his arrival at Mars in January 2004, Haugh had spurred substantive growth in the Mars
Retail Group: 17% in year 1; 23% in year 2; and roughly 50% in year 3. The number of people
employed by Haugh’s group had nearly tripled, from 350 to more than 1,000.
 JEFF SEMENCHUK AT PFIZER

Jeff Semenchuk, vice president for innovation at Pfizer Consumer Products, arrived there
from Doblin, an innovation-strategy consulting firm. He brought with him years of experience
in change management with Arthur Andersen, and from starting up two marketing
consultancies, but he had limited experience in pharmaceuticals. He also brought a strong
belief that innovation should begin with a deep understanding of customers’ everyday lives
and an ambition to make them better. Semenchuk believed passionately that innovation was
a discipline: “It can be learned as a discipline. And I think the next generation of leaders needs
to be raised to say this is yet another important dimension of what it’s going to take to lead
healthy growing companies.”

Accordingly, Semenchuk laid out a seven-step innovation process at Pfizer Consumer

Products and created training processes aimed at helping business managers to become
innovation “black belts.” He argued that too much emphasis was placed on R&D when looking
for opportunities to produce organic growth: “With R&D-driven innovation, you start
spending way too much time on what you care about versus what matters to the market and
your consumer.”

He soon formed a team to explore what people really wanted and needed. Composed mostly
of ethnographers and anthropologists, team members arranged to live with consumers, eat
with them, work with them, and basically be involved in all aspects of their lives. The team
made thousands of observations, and looked for emergent patterns.

In addition to the observation team, Semenchuk gathered a cross-functional management

team from across Pfizer. He recruited from finance, R&D, marketing, sales, and business
development. He looked for members who would bring focus and credibility, people with
established track records within the company. Pulling together these respected employees
eased senior managers’ concerns about the team’s competence, ultimately allowing them
more flexibility. They began their work by synthesizing the insights gleaned from customer
observations and exploring their implications. Their rallying cry was “What are we doing for
the consumer that would really make their lives materially better?”

In the process of doing this, Semenchuk and his team identified what he called “something so
fundamental it makes you want to cry.” They observed that almost every product in use had
been designed with the idea of the home medicine cabinet in mind. This focus forced
consumers to use various stopgap solutions for carrying their health care products with them
on- the-go. “The insight was that we needed to provide a way for people to be able to take
care of themselves and their health away from home—portable health care,” Semenchuk
said. He and his team then set a goal of giving consumers access to the same health care
products they had at home when they traveled in the car, on the bus, plane, or train. The first
“win” was Listerine’s PocketPaks, built around one of Pfizer’s strongest brands of mouthwash.
The team converted a bottle of Listerine into a package of thin strips that consumers could
store in their pockets.

Based on this success, Semenchuk and his team quickly explored In Your Pocket formats for
each of the existing brands (e.g., for each of Pfizer’s over-the-counter remedies for headache,
cough, and allergies), and they studied ways of putting these existing Pfizer products together
in ways that would be more convenient for consumers. They worked hard to create new
packages because these would be the real key to success. Ultimately, they focused on a
portfolio-type package that would combine several offerings as a group, and that consumers
could put together on their own much like a cosmetics kit. Although it was difficult to achieve
the alignment necessary across Pfizer products to get this new product-and-package
combination through development, the team was finally able to work through the territorial
problems and emerged with an array of brand new, multiproduct In Your Pocket offerings
they called mosaics.

Early involvement of retailers was key to the success of the new initiative. Semenchuk felt
that offering theoretical arguments to retailers for the viability of this new category and
attempting a large rollout would be a slow and painful process. He believed in the need for
speed: “I think one of the things that most managers don’t get—and this is the big challenge
in the innovation journey—is this notion of speed. An entrepreneur doesn’t have the luxury
of time or lots of resources. And that’s why I think a lot of entrepreneurs are better at
innovation than corporate executives.” So he elected to partner quickly with just a few
selected retailers to conduct small-scale experiments in a few stores and to monitor the
results.

Walgreens stepped up to the plate, offering Pfizer limited shelf space in just seven stores to
test early forms of the new concept. A critical part of this phase was to observe and interview
consumers as they experienced the product in the stores, and to learn from these insights.
Pfizer continued to have ongoing conversations with Walgreens’ competitors as well. The
early success demonstrated in the Walgreens pilots quickly persuaded competing drugstores,
who put In Your Pocket products into all their stores within two years. Working with retailers
directly early on in the product-development process, Semenchuk believed, not only
cemented their interest in the new product, but it convinced Pfizer senior management as
well, who responded to retailers’ enthusiasm with increasing support for the new initiative.

Portable products generated 5% to 10% incremental revenue for the participating brands
right from the start and were projected to become a $500-million category for Pfizer. “We
have become the fastest-growing consumer health care company in the industry over the last
three years,” Semenchuk said. “We’re doubling the rate of growth of our segment of the
industry. And it’s been almost entirely through organic innovation.”

Reflecting on his success, Semenchuk noted the value of his good relationships with Pfizer’s
senior management and the environment that they supported: “It’s not just the seed, but it’s
about the soil. And I think that’s very true. You know, it’s not just about having the idea or
the project or the initiative, but it’s also about the conditions in the organization that enable
that idea to actually flourish and get to market successfully.” He also believed his research
approach and awareness of what the consumer needed were critical to effective design and
delivery. It all started with the question “How could consumer behavior change if this product
were available?” Though this did not seem a radical new question or a fundamentally
different way of thinking, for Jeff Semenchuk and Pfizer Consumer Products, it produced
dramatic results.