9 minute read 31 May 2019
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How consumer products giants can regain lost ground by learning from newcomers

By

Ken Dickman

EY Global Advisory Commercial Transformation Leader

Consumer Products & Retail strategist. Helping clients with profitable organic growth for over two decades. University of Chicago Booth School of Business MBA alumnus.

9 minute read 31 May 2019

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Established consumer products giants wanting to thrive amid disruption must be willing to challenge everything and reinvent strategies.

Seemingly overnight, the ground under the consumer products (CP) industry has shifted dramatically. Incumbent companies whose hold over the industry once appeared unbreakable find themselves besieged on all sides from new entrants. These newcomers have leveraged their mastery of all things digital to gain the competitive advantage in innovation, revenue growth and meeting consumer needs and preferences. (In fact, some of these new entrants aren’t all that new, having been on the scene for 10 to 15 years. But in the context of a century-old industry, they’re relative newcomers, so for the purposes of this point of view, we’ll refer to them as new entrants.)

Smaller, speedier and nimbler than their older rivals, these new entrants have outsourced most of their manufacturing operations and supply chains, reducing the competitive advantage that larger players realize from their large and highly efficient fixed-asset bases. In many cases, the new entrants have found ways to both work with traditional large retail channels and team with companies outside the industry to find growth in other channels, especially e-commerce.

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Chapter 1

Incumbents on the defensive — and losing

A recent EY study identified the large, established companies least prepared for digital disruption.

Established, household-name consumer products companies have responded to this unprecedented assault on their primacy by playing defense, for the most part. Rather than build their digital capabilities to develop truly innovative products, processes and business models, they’re trying to wring the most out of their existing business model and assets. A recent EY study identified the large, established companies least prepared for digital disruption. CEOs of 60% of those companies named “optimizing current business model revenues” as their top corporate priority. And that’s just what those companies are doing — leveraging their fixed assets and current brands to produce line extensions and match incremental innovations developed by competitors large and small rather than look for breakthroughs that could disrupt business as usual. And even as small and medium-size food and beverage players account for more than half of the revenue growth in the category and the bulk of successful new-product launches, established players have only recently turned their focus from slashing costs to a renewed emphasis on growth. Some incumbents also try to capture growth by acquiring a new entrant with an established track record, but all too often they spend too much and act too late, buying in after the target’s growth rate has peaked. Despite the disappointing returns such acquisitions yield, incumbents are reluctant to acquire the newest and most disruptive players, considering them too risky.

Those moves aren’t nearly enough. The key to reigniting growth in a time of disruption is not to resist or ignore the new entrants but to learn from them. The new entrants have seized the high ground in CP by focusing on consumers in real time, identifying their needs, working backward to fulfill them and crafting personalized marketing stories that resonate with consumers. And they have pressed their advantage by treating their speed, flexibility and ability to sense change as core competencies. Rather than focus on efficiency as the be-all and end-all, the new entrants have capitalized on their advanced analytics capabilities, agile innovation processes and flexible manufacturing operations and supply chains to anticipate shifts in consumer needs and preferences and to bring new offerings to market well ahead of their slower-moving competitors. EY research shows that their larger rivals’ volumes and margins are typically higher but that the new entrants are reaching consumers who won’t give the incumbents a second look, and they are staking their claim to leadership in categories that will contribute an increasing share of growth in the future.

General Mills, with its acquisition of Annie’s Homegrown, is a rare example of a CP incumbent that has leveraged the disruptive capabilities of a new entrant to fuel its growth. Under General Mills, the maker of natural and organic convenience foods has steadily introduced new products and line extensions that have found favor with a new breed of consumers seeking fresh, natural ingredients prepared in a transparent manner. Capitalizing on its close relationship with these consumers, Annie’s Homegrown has become a go-to brand for busy young families that want convenience without sacrificing healthy eating.

It’s not just the new entrants that have lessons to teach the incumbents. Established CP companies can also learn from the responses of other industries challenged by sweeping disruption. Like incumbents in those other industries, CP companies can turn the disruption in their industry from a threat to an opportunity, often by creating open ecosystems or innovation platforms that promote the co-creation and sharing of disruptive products, services and business models. But to do so, they will have to embrace change, especially a change in mindset. They must learn to think and act like disruptors. That entails identifying unmet consumer needs and moving quickly to develop innovations to meet them, sometimes by looking outside the four walls of the corporation for new ideas. They must learn to challenge everything in their organizations and renovate their business models.

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Chapter 2

What has to change—starting now

Challenging everything means developing new and different ways to of working, beginning with organization, processes and capabilities.

  • Organization: Established CP companies are for the most part built for stability not speed. Organized by function, with strict hierarchies in place, they tend to work in siloes, with one function performing its share of a larger task, then throwing its work over the wall to the next function down the line. Such organizations are simply incapable of rapid response and innovation. That’s why more forward-looking companies are moving toward matrixed organizational structures that promote cross-functional teaming, accelerate experimentation and learning, and enable rapid decision-making.

    Fast-fashion players such as H&M and Zara — and even speedier entrants such as boohoo and Missguided — are examples of such organizations. Established CP companies can’t expect to match their speed, but they can still learn from the organizational structures that enable rapid innovation.

  • Processes: Today’s large CP companies still cling to processes ill-suited to today’s fast-moving markets. For example, as recently as 10 years ago, retailers typically would reset their shelves twice a year, giving their suppliers a year or more to plan for the changes. But in today’s environment, where retailers are more likely to reset every four weeks, annual planning processes will lead to missed opportunities. It may not be possible to immediately cut planning cycle times to six months, but nine months should be within reach, with six months as the ultimate goal.

    Successful brick-and-mortar retailers such as Costco, Trader Joe’s and TJX Companies can serve as guides to incumbents looking to overhaul their processes. These retailers have built up loyal customer bases by leveraging fast-moving, cross-functional processes to turn the shopping experience into a treasure hunt. Knowing that today’s great find might not be on the shelves next week, shoppers are quick to pounce — and eager to return next week to see what new and surprising discoveries await them.

  • Capabilities: The new digital environment calls for new capabilities in areas such as e-commerce, agile development, digital marketing and social media. And it demands cross-functional collaboration. That means that talent acquisition strategies and incentive structures are due for a rethink. Companies will have to broaden their search fields and seek out talent suited to an era of disruption. They will have to seek diversity, not just racial and gender diversity but diversity of capabilities. They will need to seek out people with an innovation mindset — eager to experiment, unafraid to learn from failure, with a keen eye for the opportunities hidden within turmoil. And they must reward people not simply for their functional excellence but for their ability to work across functions toward a common goal.
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Chapter 3

The rewards of reinvention

Disruption offers a wealth of opportunities to those prepared to seize them.

By asking why not, rather than why, by challenging everything about the organization, from decision-making processes to supply chains, from innovation activities to brand strategies, even the largest CP companies can learn to act like new entrants. To do so, they may have to jettison the very things that once were their source of strength but now hold them back from acting at consumer speed. Many will need to develop new stories to tell their investors, manage expectations of continually rising earnings, and reallocate their outlays toward growth rather than dividends and share buybacks. That might not be as tough a sell as it sounds. EY survey results show that 67% of large institutional investors want companies to undertake potentially disruptive innovation projects even if they’re risky and may not deliver short-term returns. And 73% of investors say that corporate disruption readiness will weigh more heavily in their investment decision-making over the next five years.

Nothing about this undertaking will be easy or risk-free. Leaders will be challenged to embrace disruption and press ahead with business transformation in the face of internal and external skepticism and resistance. But the startling success of the CP industry’s new entrants demonstrates conclusively that business as usual is no longer the road to success — indeed it’s more likely to lead to irrelevance and obsolescence. The future belongs to the disruptors. The challenge for CP incumbents is to join their ranks.

1.    Learning from other industries: automotive OEMs

Confronted by trends and technologies that have rendered old ways of operating all but obsolete, original equipment manufacturers (OEMs) in the automotive industry have reinvented their businesses from the ground up. They have redefined their core competencies to emphasize their strengths in design and marketing, and they have shed many of their fixed assets, turning to third parties to produce their componentry and assemble their vehicles. That has freed them up to integrate new technologies across their entire value chain and focus on the evolving relationship between consumers and technology. That focus, in turn, has helped them develop product and service offerings that meet consumers’ desires for connected cars; greener vehicles; and simple, friction-free mobility options, such as ride-hailing and car-sharing.

Not only have the OEMs embraced disruption, they are well on their way to becoming disruptors themselves.

2.    Learning from other industries: financial services

Disruptive entrants to the financial services industries have a lot going for them. Born digital, they take agile development for granted and work with breathtaking speed to develop a minimum viable product and move it into the market. The rapid uptake of services such as online mortgage applications and approvals demonstrates that there is a ready market for such offerings. But not all the advantages rest with the new entrants. They lack the large capital bases, regulatory compliance infrastructures and funding sources that large incumbents enjoy.

That’s why forward-thinking incumbents in financial services aren’t just fighting back against the new entrants or developing me-too applications of their own. Instead, several established global banks have acquired or invested in upstarts with an eye toward pooling their strengths to capture the competitive high ground, reach new prospects, and improve their chances of developing the next game-changing innovation. It’s an example of how incumbents can find opportunity in disruption and learn to become disruptors themselves.

Summary

Big, established consumer products companies have much to learn from smaller, more agile newcomers. They need to accept the disruption in the industry and find out different ways of working, beginning with organization, processes and capabilities.

About this article

By

Ken Dickman

EY Global Advisory Commercial Transformation Leader

Consumer Products & Retail strategist. Helping clients with profitable organic growth for over two decades. University of Chicago Booth School of Business MBA alumnus.