The Hershey Company: Aligning inside to win on the outside

Changes in the marketplace, if not monitored, can cause serious losses in profit, market share, and in stakeholders’ confidence. Such was the case with one of the most celebrated American companies, Hershey’s. When the company failed to keep its ear to the ground and eye on the ball it lost touch with consumers and retailers. A shift in the company’s focus and a re-alignment of its divisions rescued the company and restored its luster, market share and profit. As this author describes, its example is an important one for managers.

Thanks to an unlikely – and historically unprecedented — combination of improved productivity and flat-to-declining global demand, businesses now find themselves operating in a world in which supply chain re-engineering has made them more efficient than ever before. Yet finding demand to absorb the supply being generated is a growing challenge.

This stunning turnabout has affected companies both large and small, new and old, and marginal enterprises and corporate icons with a long history of success. Almost no one has been spared, even Hershey’s, the iconic and storied chocolate company.

Hershey’s history

Founded in 1909 by Milton Hershey and his wife, Catherine, the now $5-billion company virtually invented modern candy – and in the United States, at least, is all-but synonymous with the word “chocolate.” Hershey bars and kisses, KitKat bars, Reese’s, Twizzlers and Ice breakers have been household names for decades.

Moreover, Hershey’s enjoyed consistently strong growth for many years, holding or increasing market share in all of its businesses, and buoyed by people’s love of chocolate that has held steady in both good times and bad. And the company had become so efficient at supply chain management, production and distribution that for more than a decade it had consistently added new variations in products, pricing and packaging that captured ever greater real estate on store shelves.

In other words, by almost any traditional measure, Hershey’s should have been enjoying some of the best years in its long history.

But despite all of these positive indicators, Hershey’s senior management had a growing sense that something wasn’t right with the company. For example, many of Hershey’s recent strategic initiatives, especially the company’s shift to focus on pack types rather than on brands and product proliferation, had not produced the desired results. Worse, by creating a significant number of new SKUs based on pack types and flavor extensions, Hershey’s approach was beginning to run counter to the stated desire of many retail customers to simplify the shelf by reducing product complexity.

External challenges

Recalled J.P. Bilbrey, president of Hershey’s North America “After years of growth and success, we had hit a difficult period. Senior management was not aligned in how we were going to compete — and our results weren’t as good as we would have liked them to be. While we had great brands, we had largely operated in a push mode.” It was becoming apparent to the men and women who ran Hershey’s that in a changed marketplace, the old and proven rules for success were no longer working.

The Hershey’s team decided to investigate what was going wrong — and just as important, to identify and assess the key forces and factors impacting the confection category in the new marketplace. The team would then determine what the implications were for Hershey’s and how the company could drive profitable growth in a changing marketplace.

The team found three major external issues that were limiting Hershey’s success:

1.      Hershey’s most important retailers and competitors had entered a phase of significant consolidation that was changing influence within the category. The era of small, independent stores was over- the power now lay with retail chains.

2.     Consumers were not embracing the increased flavor varieties from Hershey’s Brands.

3.     Hershey’s emphasis on pack type was being trumped by competitors’ emphasis on brands.

These external challenges could not be ignored. But they could be identified, understood, and then managed as part of Hershey’s overall strategic re-orientation.

What could be addressed most directly and immediately, were certain areas inside the company whose practices no longer fit the changed competitive reality. And the most important of these – as underscored by Bilbrey’s comment, was alignment. Both research and employee surveys quickly revealed that Hershey’s senior management was not aligned in their beliefs about how the company should compete in the future, and those often- contradictory views had begun to become evident across Hershey’s operations.

This confusion had led, almost directly, to the rapid expansion of Hershey’s SKUs. Marketing had not responded to retailers’ growing need for lower inventories, better use of shelf space, and less product and packaging complexity. In fact marketing was still driving Hershey to add new pack types and flavor proliferations for its classic brands.

The company’s own history of success was making the problem worse. Hershey’s supply-driven approach had worked so well over the previous two decades that it had been years since Hershey had felt the need to assess consumer demand for its products. Demand was just there, waiting to purchase almost anything Hershey could put in its distribution channel.

But now the rules had changed – and Hershey needed to change as well.

Hershey was still a strong, multi-billion dollar company. Moreover, it had faced far more challenging periods of competitive and economic pressure in its century-long history and had survived them all, in large part because of Hershey’s vaunted reservoirs of employee morale and pride. Best of all, the company and its new leadership were confident that once consumer Demand was understood, Hershey’s iconic great Brands would once again continuously increase their share of profitable Demand.

At last: consumer demand gets a second look

Given the changing marketplace and its prowess in managing the supply chain, Hershey began to systematically investigate every aspect of its “Demand Chain”, all while keeping its current and highly developed Supply Chain Management system in place. Hershey management chose this strategy based on its belief that any improved understanding it gained about demand would be used to modify and optimize the company’s supply operations, not replace them.

This demand-side investigation uncovered a number of surprises. For example, when the company looked at itself through the eyes of consumers and retailers, it saw not the exciting array of products and packaging it imagined for its offers, but a bewildering sea of choices on the store shelf. Hershey’s offerings had morphed into a confusing tangle: a single brand, such as Hershey Kisses, had potentially dozens of SKUs featuring different types of chocolate (milk chocolate, dark chocolate, white chocolate or combinations), different fillings (caramel, peanut butter, truffle, plain), different flavors (orange, mint, cherry), and with or without nuts. Adding to the complexity, each of these Kiss types could come in a wide array of pack types, including different foil wrappers, different packages (bags, boxes) and different sizes (10 ounces, half pound, one pound).

As one can imagine, many of these products were not aligned with consumer demand. At the same time retailers were unhappy about carrying ever-more inventory. Then, inevitably, Hershey resorted to special promotions and deep discounts. But this merely substituted short-term gain for long-term solutions. Hershey had added significant cost and complexity to its Supply Chain in order to create tailored products that had ultimately failed to produce their expected price premiums. It was not the category knowledge and leadership retailers had come to expect from Hershey This was obviously not the direction in which the company wanted to go.

Recalled Bilbrey, “In retrospect, all of these issues converged at the perfect time for Hershey’s, because it gave us the courage to act. We needed to go from a supply-driven approach to a demand-driven, consumer-focused one. Our existing model was simply not sustainable. We needed to move from push to pull. Of course, that’s easy to say, but much harder to do.”

Once the magnitude and nature of the problem had been identified, the next step was to develop a deep understanding of Hershey’s (and, in fact, all confectionary) consumers in all of their variations in desires, needs and tastes. This meant the construction of a Demand Landscape that not only encompassed all of these consumer groups, but also identified the pockets of high profit demand — “Demand Profit Pools.”

This new Demand Landscape gave the entire Hershey team for the first time a shared understanding of the total potential opportunity for the company — and where to focus its resources and attention.

Most exciting of all, the Demand Landscape made clear that Hershey could access billions of dollars opportunities across the confectionary landscape in the U.S. The opportunity was clear. Now that management knew which consumers carried the high profit Demand, it had a clear vision for how to manage its supply of iconic Brands and great products to capture that Demand.

Where was this opportunity? The Demand Landscape identified a single Demand Profit Pool, Engaged Exploring Munchers, which would prove to be a critical discovery for Hershey. Understanding more than competitors about the demand of Engaged Exploring Munchers, — a group of consumers who love candy and are willing to pay more for their favorite treats — would give Hershey’s the competitive edge it needed to win with them.

Ultimately, constructing a Demand Landscape and then identifying its most attractive Demand Profit Pools is a futile exercise if the company doesn’t use that new knowledge to rethink its own competitive strategy. That is, Hershey’s needed to devise a brand new Thesis for Winning. This Thesis would show how and why Hershey would beat the competition — and the role each part of the organization would play in achieving that success.

Hershey’s new Thesis for Winning would focus on the transition from their traditional supply-driven approach to the market to a new demand-driven model for success. Hershey would understand more about the unique demands of the most attractive Demand Profit Pools for candy, especially the Engaged Exploring Munchers, and would re-align the entire business to serve that demand profitably. To implement its new Thesis for Winning, Hershey now had to develop a single internal Mental Model across the organization to show everyone in the company how the organization works and their role within it. A Mental Model is the way great companies teach their executives, managers and employees to internalize the Thesis for Winning – so that on a day-to-day basis they can independently make important business decisions congruent with that Thesis.

Said Bilbrey, “An important part of making the Mental Model work was that every member of the Hershey Executive team, our leadership group, was involved in all phases of the work. Once we made the commitment to a Demand Business Model, we were “all in.” By creating a sense of participation across our entire leadership team, we were also creating missionaries who would go back to their own respective functional organizations and talk about the changes that were taking place on how we would run Hershey as a company.

“Because of the Mental Model approach, we have achieved a level of collaboration that we’ve never seen before.”

And so the process began. Not surprisingly, with the spadework done, the process went smoothly. For example, it was now clear to everyone that Hershey could no longer win by pushing more variations of supply into the market and by focusing on pack types. Instead, the path forward would be to focus on those Engaged Exploring Munchers, fulfill their desires — and to leverage and build upon Hershey’s powerful and iconic brands.

Said Bilbrey, “Building a single Mental Model across our organization showed everyone in the organization how it works and how they fit in. The business case for our Mental Model was very clear and compelling. The first managers to apply the new approach to their businesses saw the results and became zealots who helped others internally adopt it. We were very decisive in creating one way forward.”

Meanwhile, Hershey also began sharing this new demand model — what it entitled “Insight Driven Performance” — with its strategic partners, its customers. “They got it immediately,” recalled Bilbrey, “It’s so intuitive that a collaborative approach is better for all parties. The idea of collaboration is important, but where everybody gets enthusiastic is when they understand that we’re converting both the retailer’s data and Hershey’s into a single operating system. That’s when the lights really go on. We used to talk about one activity or promotion at a time — now that we’ve got an operating system, each of our activities is just another app. It’s easy to understand and it’s easy to see the advantages.”

The results of Hershey’s transition to a demand-driven business model have been beyond expectations. At the February 2010 meeting of the Consumer Analysts Group of New York (CAGNY), Hershey CEO Dave West announced that the company had generated record cash flows in 2009 of $1.066 billion. That was more than double its 2008 cash flow and 35 percent higher than the company’s previous record cash flow of $788 million in 2004.

West told the assembled analysts that the transformation Hershey had just gone through constituted a “fundamental re-grounding in the consumer.” Hershey, West said, now knows:

  •  Who its consumers are — their demands, motivations and demographics;
  •  Why they buy — their demand by profit pool and the need states they experience;
  •  What they buy  — a detailed understanding of the brands, tastes and textures and pack types consumers most prefer;
  •  Where and how they buy — shopper missions and channel preferences; and
  •  When they consume: The key usage occasions for confectionary.

“The implications of all of this have been really profound,” says 
Bilbrey. “Our new approach has strengthened our Brands, lowered inventories, reduced

 SKUs, reduced complexity, created tremendous efficiencies and generated greater cash flow. I’ve never seen a jump in performance like this before.”

A framed copy of the report now adorns the wall of his office. At the heart of Hershey’s success is the internal alignment created by its Mental Model. Today, everyone within Hershey is committed to the idea that you must align internally in order to win externally.

About the Author

Rick Kash is the Founder and CEO of The Cambridge Group, a growth-strategy consulting firm based in Chicago. He is the author of How Companies Win.