How Mehmood Khan is Remaking R&D at PepsiCo, with an Emphasis on Sustainability

By Scott Cohen, Co-Founder, Innovation Leader

When you hear that Mehmood Khan oversees global research and development at PepsiCo, it’s hard not to think of the fizzy, caramel-colored beverage that was invented in 1893. (It was originally known — no joke – as “Brad’s Drink.”) But the $63 billion food and beverage giant also owns brands like Quaker Oats, Tropicana, Naked Juice, Sabra Hummus, Fritos, Mountain Dew, and SoBe Lifewater.

Khan, who reports to PepisCo chief executive Indra Nooyi, is an endocrinologist by training. He joined the company in 2007 from the pharma industry, and in the decade since then, the company has been generating more of its revenue from new product innovation — from oatmeal bars to nut-based milks to lower-calorie versions of Mountain Dew and Tropicana orange juice. It has also been dialing up its investment in R&D — by about 45 percent since 2011.

We spoke with Khan about the links between sustainability and innovation; why diversity isn’t only about hiring people who look different; bringing in new skill sets into R&D, like computer modeling; the challenge of measuring progress; and how he’s trying to change thinking in the company’s 30 R&D locations.

“In the past,” Khan told us, “discovery was about something that you discovered in your own lab. In today’s world, discovery is about discovering ideas, no matter where they are.”

You can meet Khan this October, when he will be one of our featured speakers at this year’s Teach-In gathering on the campus of MIT.

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Innovation Leader: Tell us a little bit about your role in general, because your title is Chief Scientific Officer, right?

Mehmood Khan:  Yes. I’m also the Vice Chairman of PepsiCo. As you’d expect, the company has two vice chairs, myself and [Chief Financial Officer] Hugh Johnston. I run all of Global R&D in all of our divisions and different geographies. Ultimately, from a management point of view, we have probably 30 R&D centers around the world, of varying size. They all report into my office, across all categories: foods, nutrition, beverages, and snacks.

As you know, we operate in every country and territory on the planet except two. Weaved into that has been our sustainability agenda. I don’t separate sustainability from innovation. We don’t look at sustainability as a corporate social responsibility activity. We look at sustainability as core to our sustained operations, given the industry and the business we’re in.

…Under the sustainability side, I’m talking about our agricultural practices, our water practices, our energy and carbon footprint, our product, and our labor practices.

I’ve got a number of my colleagues from different functions of corporate that are part of the sustainability team that I chair…

Making sustainability central to product design

Innovation Leader:  Talk more about this connection between product development and sustainability. Where does the rubber meet the road there?

Khan:  This journey for me and our company started just before I joined the company. When Indra Nooyi became CEO, one of the things that she set into motion was this notion of “Performance with Purpose.”

If you think about that, it has two facets. We are about making money. It’s about performance. We’re a business. At the same time, what’s very important in this is how we make money, and that’s where the purpose side came in.

A decade ago, when we first launched it, we used to call it Human Sustainability, Talent Sustainability, and Environmental Sustainability. We were one of the first major corporations to really bring all of that together.

At that time, sustainability did sit outside my mandate — except for the product sustainability. I had direct responsibility for thinking about the composition of our products from a human health impact point of view. Of course, being an endocrinologist, it’s been a journey that was a passion of mine, in terms of sugar, salt, saturated fat, etc.

As we moved from 2007 to 2015, and made a lot of progress, I had the chance to chair all of it and weave that into not only R&D and product development, but also knit it across the operations point of view by working with my operations colleagues.

That’s where it has become even more exciting and unique, because now we integrate product, planet, and people. Even the goals are integrated and interdependent. We basically took how the United Nations was developing the SDG [Sustainable Development Goals] and mapped out a lot of sustainability to that.

Coming back to operationalizing it, rather than looking at it as reputational, we’ve made it core to the design of our products. I’ll give you an example.

As we think about a product, we explore not only its composition —nutrients to limit, such as salt, saturated fat, etc. — but the supply chain implications of growing the agricultural piece, manufacturing and processing, packaging, and then distribution. What will the impact of that be on the environment, on the planet?

That includes looking at labor practices, even all the way up to the farm —how the agricultural components are going to be grown —because we look at all of that as either a direct or indirect [impact]…

When you think about product development, everybody immediately thinks about what you’re going to do in the lab. But we’re looking at this, literally, from the farm, all the way to the kitchen shelf. Where will the tradeoffs be? How do you optimize for environmental impact? Or water usage? Or labor practices?

Innovation Leader: How do you get the broader R&D folks to actually operationalize that, day to day?

Khan:  First of all, having absolute clarity starts with “What are we trying to achieve?” And it goes back to those three words: Performance with Purpose.

First, we specifically recruit individuals — scientists, or operators, or engineers, or nutritionists, or marketers— for whom this concept of “Performance with Purpose” is something that excites. This is actually one of our most powerful recruitment approaches, especially with Millennials.

Second, we’re taking our people and asking them to look more broadly at these issues. Some companies will take the approach of, “Hey, we’re going to be really good at sustainable packaging.” But they really haven’t thought about the fact that the world is changing, and maybe we need to sell different products.

Or others might come up with very healthy products or products that are perceived as healthy. But they have a very poor environmental footprint. It might be from water, it might be from the fertilizer that’s used, etc.

Those trade‑offs are a lot easier [when you] actually have the team ask, “How do you design a product that’s going to be acceptable from a human body point of view, but also, doesn’t trade‑off future generations from an environment point of view?”

As we start to think about designing a food product, the teams have to now come together, and we actually bring design teams together. By design, I don’t mean visual design, I mean product design. That includes supply chain engineers, product development, ingredient experts, manufacturing experts, and others.

You say, “Look, if you design this in a way that when you package it, you’re shipping 50 percent more air, because of the way the packaging is designed and the way it stacks, you’re going to have a negative carbon footprint from the distribution system.”

Or if ingredients are being designed in a way that the environment they’re grown in needs a huge amount of water, then you’re going to blow your water footprint.

I’ll give you a very simple example regarding packaging. Somebody recently said to me, “Well, one of the ways you could reduce plastic is simply just use more glass bottles and reuse them.”

I said, “Absolutely, no question. But do you know how much water it takes to wash a glass bottle?” They thought a little bit, and I said, “You know what that would do to the water footprint? By the way, do you think we should be using the planet’s fresh water so we can wash more bottles?”

There was this pause, and this was a very smart person! So the reality is, we’re going to have to work with all these levers and say, what is the combination of all these challenges that gives us the best footprint?

Would you then invest in glass bottles, or would you find a way to convert biowaste into a polymer that you can use? It’s forcing these conversations to happen now because we’re putting these guard rails into the design mandates of products. We’ve got a lot of work to do, but we’re already seeing success.

‘Refresh, Reframe, and Breakthrough’

Innovation Leader:  Let’s talk more about your product strategy. McKinsey has this Horizon 1, Horizon 2, and Horizon 3 construct I’m sure you’ve seen, regarding short‑term versus long‑term product development and vision. Does PepsiCo think in that way, and — if so — where’s the focus for you?

Khan:  We don’t use those terms, but we have a similar way of looking at it. From a product side, as an example, we think about “Refresh, Reframe, and Breakthrough.”

“Refresh” is basically taking an existing product and tweaking flavors, colors, or launching the same product in different markets. That’s important, because it keeps our core [business] current from a brand point of view. It’s not resource-intensive, because you’re not creating a new product; you’re just tweaking something existing.

“Reframe” is taking something that actually already exists in the marketplace…and creating the capability to move it to a different paradigm.

An example could be a fried potato chip going to a baked potato chip, or taking a product that uses “hot fill” —which uses a lot of plastic — and having the technology to be able to use it in a “cold fill” environment. …Without using the heat, you minimize the need for certain packaging material, etc. These are examples of what I would look at as reframing products…

“Breakthrough” products would be products that take much longer, because you’re developing completely new ingredients, new processing or manufacturing techniques, new packaging materials, bio‑compostable materials, etc.

We’re doing a limited commercial pilot this year — one in a developed market, one in a developing market — where the material is using a polymer that is composted in an industrial composter. That’s a breakthrough. It doesn’t happen in 12 months. It takes time, and will take time to develop the supply chain. But it will change the paradigm.

But we don’t call them Horizon 1, 2 or 3, because I really want to look at what it means in the marketplace and what it means to consumers.

Diversity and Bringing in New Skill Sets

Innovation Leader: We’ve heard a lot of companies say they are “rethinking R&D.” Is that a term PepsiCo uses, or a strategy you’re pursuing?

Khan:  Look, if you’re not rethinking technology and R&D as a leader, then you’re not progressing. What does it actually mean, though, is the important question.

At a lot of companies, when they say “rethinking,” what they’re really doing is structuring differently, organizing differently, and changing their processes or decision trees or stage‑gate process.

I look at all of that as operational, but it really doesn’t move the needle a lot; all those are what I call enabling capabilities.

The real rethinking of R&D is when you bring in completely new skills and capabilities into an industry, into an organization that typically wouldn’t be found there.

First of all, how many physicians, let alone endocrinologists, do you know that run R&D in a consumer packaged goods company? So we’re very intentional about recruiting people from other industries into PepsiCo. We’ve now recruited into my organization people from life sciences, biotech, pharma, energy, and more. Obviously, we’ve got food, beverage, and CPG expertise … those folks were already here. But we’ve brought in people from many other industries, like automotive, and even beauty care.

In fact, somebody once asked me, “How and why did you find this person from beauty care?” I looked at him and I said, “Have you ever taken a look at the packaging from beauty-care companies, versus something that food and beverage [industry] designed? Which one would you rather buy?”

We [put together a team] of computational modeling experts — some from the energy industry, some from transportation industry, a couple from pharma — that actually use computers to model systems and design systems, very complex systems. The thinking they’ve brought into PepsiCo about how we design, and develop, and operationalize products and innovation into the marketplace … they’ve completely changed the way we’re thinking.

So “rethinking R&D,” from my perspective, is more about the talent and skills than the organization and process. Yes, we’ve restructured. Yes, we are aligned by what I call innovation platforms. Yes, we are supporting across our different geographies.

But those are just table stakes — they’re enablers. It’s the thinking and the diversity of thought that really has impact.

A lot of people think diversity is about what you see. I think of diversity as how people think. The more diverse the thought process, the better your innovation. Two people can look very differently, but think the same. That doesn’t bring diversity to the table. Two people who look the same but think very differently are going to add a lot more perspective. That’s important.

Innovation Leader:  How does PepsiCo keep tabs on emerging trends and technologies? Is that something that happens in R&D, or are there other groups like strategy, or corporate development what are tracking disruptive startups or opportunities?

Khan:  All of the above. We work very closely with our corporate strategy team. Obviously, developments are happening either at the brand level, the consumer level, and the technology level; we even have an individual whose sole job is technology scouting and partnerships.

We’ve been very effective working with tech centers, and academic centers, and large and small technology companies — we have over 50 partnerships, which opens us up to a very broad ecosystem of ideas.

One of the things I’ve said at PepsiCo is, “In the past, discovery was about something that you discovered in your own lab. In today’s world, discovery is about discovering ideas, no matter where they are, inside or outside.”

It’s a very different way of thinking about discovery, and it requires a new approach. You say to scientists and others, “Listen, you’re going to be recognized and rewarded for identifying ideas and discovering those ideas regardless of where they are. It doesn’t have to be in your own lab.”

Many times, large companies like ours are aggregators of technology as much as discoverers of technology. You can be very successful if you bring lots of disparate ideas together. Ultimately, those inventions become innovations.

Measuring Progress

Innovation Leader: How do you monitor and track success? Are there certain metrics that you think about when you are trying to measure your innovation or R&D efforts?

Khan:  Of course. The external metrics are no different than you’ll find for any other company. Those are financial metrics. We look at setting revenue targets for what’s coming from innovation. We look at how much of it is cannibalizing [existing products]. How much of it is truly driving top‑line growth? How are your margins doing, and how is innovation either driving the top line, improving the bottom line, or a combination of those?

But we also track the innovation that’s enabling the “purpose” side of things. If we’re doing this from a truly long‑term point of view, the innovation allows you to use less water, less energy, emit less greenhouse gases, reduce sugar, reduce salt, etc.

While those are on the purpose side, they’re also enablers of growth, whether it’s from saving your expenses from energy, saving expenses from water use, or being able to maintain a supply chain of agricultural inputs that otherwise we may not be able to do. We look at all of that.

We even look at the longer‑term horizons. How well are we aligned with where the consumers are going? Where can we preempt? How do we understand those challenges? Those are more the internal metrics as we look at.

The challenge is setting metrics in the discovery process. Discovery is not a manageable process in the traditional sense, because discovery requires ideas and breakthroughs. They don’t happen on a consistent, linear basis. Often, discovery solutions might start in one area and end up being very successfully applied to something that you’ve completely not anticipated.

If you look at history, either in academia or in industry, phenomenal discoveries have been made, but their success in the marketplace may actually not be where they were originally thought to be. If you try and manage the organization so tightly, you’ll lose all those opportunities.

I can give you loads of examples. My favorite one is that penicillin was an accidental discovery. It wasn’t planned. It was discovered because somebody misplaced a petri dish, and they found an observation they weren’t supposed to.

So you have to be very careful in how you manage the discovery side and what metrics you use. You want to hire smart, creative people for this discovery process also — people who can bring in skills that you may not have a direct application for.

Our computational modelers came from the energy industry. They took a look at how we cook food in our processing lines and said, “You know, Dr. Khan, there’s actually a more efficient way of doing this.” I said, “How do you know that?” They said, “Well, we modeled it on our computer, and we’ll show you.”

That modeling, which was not their primary mandate, resulted in us finding ways to become more than 10 percent more efficient at processing, using the same capital. At the same time, they figured out ways to drop food into our packaging at a faster rate with less air. All because they could model the whole thing on a computer and saw there were better ways of doing it.

Innovation Leader: It seems like that can be applied more broadly to societal problems, right?

Khan: Absolutely. Think about this: About a million children in the world get tuberculosis. 200,000 of those die a year. Most of them have treatment that is theoretically available, but they die because they can’t take the pills.

If you’re a one-year old with TB in the emerging world, the pills that are used to treat tuberculosis are very bitter. You can’t get the child to swallow them. They throw up.

One of the people who’s working on this problem is a scientist who used to be on my team. He’s now with TB Alliance, which is funded by [the Bill and Melinda Gates Foundation] and a variety of other philanthropies. They called me and said, “Dr. Khan, can you help? You know more about flavor biology than just about anybody on the planet.”

Now, we’ve built a lot of capability around understanding the biology of taste. So we’re identifying mechanisms to be able to block the bitterness of those drugs, to help these children [and] save their lives.

We don’t have a breakthrough yet, but the first set of data I just saw shows that actually there are very sophisticated technical ways of being able to model this and help them develop these drugs so that these children can actually benefit.

That’s a perfect example of taking expertise from a different industry, getting creative, and helping solve a massive societal problem. We actually have committed to giving this IP to this non‑profit drug development team at no cost.

But my point is this: There’s going to be exciting avenues opening up because we’re building bridges in ways industries never have before. Future leaders are going to have to figure out how to bridge their own discoveries across industries and global challenges, because there’s massive opportunity for both profits and non-profits. That to me will be the next exciting phase of innovation.

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