15 minute read 12 Mar 2020
Start Up Culture for Innovation

Incumbents to disruptors: adopting the start-up culture for innovation

By Pinakiranjan Mishra

EY India Consumer Leader; EY EMEIA Consumer Market Segment Leader

Photographer. Traveler.

15 minute read 12 Mar 2020

Today, start-ups are giving tough competition to the large consumer product companies. Thus, it becomes important for the incumbents to set an agenda for identifying evolving customer needs with speed and provide products and solutions to meet them.

Indian consumer products market offers robust long-term growth prospects. By 2025, the market is slated to become the fifth largest market in the world by reaching US$262 billion, growing at around 7.5% annually. The growth will be driven by robust economic drivers and favorable demographic factors.

India to become fifth largest market by 2025
Sector outlook remains promising but factors shaping the growth are changing

The long-term sector outlook remains promising driven by stable fundamentals. But composition of growth is likely to change for companies within the sector, especially the large, existing companies. There are primarily two factors that are reshaping the sector dynamics: fast changing consumer preferences and emergence of start-ups. 

Consumer preferences are changing rapidly

Indian consumers are evolving rapidly, similar to their global counterparts. Increasingly, they are getting closely connected, sharing more information and are becoming more demanding. The change is mainly being driven by more than 400 million millennials who are redesigning what Indian consumers want, how they shop, how they interact with brands and their relationship with products.

Increasingly, Indian consumers are seeking products that resonate with their individual values like health consciousness or sustainability. They are looking for more personalized products that can address their individual needs. They are increasingly shopping online, especially using mobile devices. They are getting in sync with global trends much faster than before with the growing proliferation of social media. They are choosing to become more asset-light by sharing ownership of products and subscribing to services.

There is fundamentally nothing new with changing consumer preferences; by nature, they are fluid. What is new is the pace of change. Consumer preferences are evolving much faster than ever before and we believe that the pace of change will only accelerate going ahead, given the shortening shelf life of technology.

EY’s consumer survey across cities, age-groups and income brackets along with in-depth interviews with start-ups and large consumer products companies aimed to get their perspective on what Indian consumers want and how they make purchase decisions.

60%

consumers across age groups said that social media was an important influencing factor to try a new brand.

75%

consumers chose to try a new brand because they thought it was ‘better-for-them’ (i.e. free from harmful ingredients, more effective or healthier).

80%

consumers are willing to pay up to 25% higher prices if they receive the desired value. consumers are willing to pay up to 25% higher prices if they receive the desired value.

  • Value-for-money continued to be a critical factor while making purchase decisions. It was the second most important reason for trying a newer brand.

Start-ups are gaining prominence

Democratized access to technology has lowered entry barriers, while supportive policy environment and improved access to funding have given a level-playing field to upcoming businesses. This has created a conducive environment for start-ups to flourish.

These start-ups rely on innovation to differentiate themselves from competitors and fuel growth. They are highly adept at spotting the unhappy consumer and leveraging the latest technology to address unexpressed desires.

Individually these start-ups may not pose a significant threat to the behemoth incumbents but together, they are forming a formidable challenge. Increasingly, incumbent companies are finding it difficult to capture growth. During the period 2012 to 2017, eight of India’s top 12 brands ceded market share in the range of 40-200 basis points to newer entrants in home care, packaged foods and beverages categories.

Competition from start-ups in India is intensifying, but it is still not as severe as some of the larger, global markets, where start-ups are unsettling the top order.

In the US, during 2012 to 2017, upcoming, local consumer companies (<US$1 billion in sales) captured US$17 billion in market share from large, existing companies. During the same period, nearly 50% of the growth in the US consumer food and beverage categories came from 20,000 companies below the top 100 largest companies.

This phenomenon is not limited only to the US, but is seen across other large consumer products markets as well. These start-ups are competing with large companies and are chipping away market share across categories. In some cases, start-ups have displaced the legacy brand to capture market leadership owing their formidable value proposition.

To remain competitive and maintain leadership, incumbents must make fundamental changes in their operating models and inculcate the agile start-up culture

What sets start-ups apart is their ability to innovate rapidly by keeping consumers at the heart of every decision. It is not that incumbents are not aware of how start-ups innovate. But, they struggle to rapidly innovate at an organization-wide level given their legacy systems and operating model. There are some fundamental differences between ways of working for incumbents and start-ups that essentially influence the culture of innovation.

Difference between incumbents and startups
How can incumbents inculcate the start-up culture to drive agile innovation?

Keep consumers at the heart of every decision

  • Increase direct-consumer interaction for the c-suite

    In most incumbent organizations, senior management tends to get caught up in internal issues whereas founders of start-ups are mostly in the market interacting with consumers. C-suite should aim to spend at least one day per month to listen to consumers. One quick way of reaching changing consumers is by being present on the most popular social media platforms.

  • Precisely define area of play using analytics

    Incumbent companies need to keep consumers at the heart of every decision. For focused strategy, leverage analytics to precisely outline areas of play by working backwards from the segments and markets they want to operate in, rather than existing brand’s philosophy or categories.

  • Reduce product turnaround time by at least half

    Invest in advanced technologies like 3D printing that has proven to exponentially cut down on product prototype testing time. This helps in lowering the product turnaround time to market.

Foster innovation-led culture

  • Set up monthly innovation day for leadership

    To set the organization on the journey towards inculcating the start-up culture, senior leadership should make innovative mindset a personal priority. They should spend dedicated time with entrepreneurs and star-ups to familiarize themselves of the emerging trends and seek opportunities to collaborate more with upcoming businesses.

  • Organize a focused internal disruption team

    Setup a small team of innovators with a single objective of generating internal innovation ahead of external disruption. The team should report directly to the CEO. The compensation and rewards mechanism should be designed in a way that it offers safe environment for failure.

  • Diversify leadership and board to include young leaders

    Induct more young leaders and innovators in senior leadership and on the board to bring in fresh perspective on upcoming technologies and changing consumer preferences. Also, the leadership board should be open to taking hard decisions if they are critical for long-term success.

Design lean organization structure

  • Design locally empowered lean teams with shared objectives

    To become more agile and drive faster decisions, incumbents need to make their organization structure leaner, empower local teams, reduce iterative review time. Regional teams should be empowered to facilitate quick responses to fast changing market dynamics.

  • Cut down on review iterations and block common decision-making time

    The hierarchical structure and disjoined ways of working between functions of an existing organization lead to multiple reviews and elongates the decision-making process. To become more agile, existing organizations should cut down on iterative reviews and bring all decision makers together to mull about the topic and take on-the-spot decisions.

  • Break the silo style of working between functions

    The organization structure should address the existing insular ways of working between departments and encourage more collaboration to fuel innovation. This can be done by building cross functional teams and setting up metrics to measure success.

Develop a flotilla-like operating model to support multiple niche brands

  • Develop a portfolio of many smaller brands and effectively track performance of each brand

    Identify top brands that account for at least 80% of revenue for focused strategy and continuously track performance of the brands against defined metrics to aid appropriate distribution of resources required to drive innovation and quick changes. Also, incumbents should critically review their existing brand portfolio and divest brands that have lost relevance to consumers.

  • Redesign channel partner relationship for the new environment

    Negotiate terms with channel partners knowing that the potential of each brand will vary significantly in market size depending upon how clearly the company defines the target segment. Increasingly the company will have few big brands and many small brands, both equally profitable, especially in an emerging world that is getting increasingly fragmented due to customization.

  • Provide a central ecosystem to the flotilla of brands

    Incumbents need to review existing operating model to make it more suitable for the flotilla-like structure. The flotilla-structure empowers brands by offering full creative freedom and entrusting entire responsibility of its success, but, simultaneously offers a central ecosystem to maintain consistency in reporting, transactions and talent needs to maintain common ethos of the company.

Invest with long-term vision

  • Set different performance tracking metrics for a start-up brand compared to an incumbent brand

    Incumbents need to track performance of the start-up against parameters that are different than the ones used to track performance of traditional brands. For example, rather than focusing on profitability right from the beginning, focus should be more number of consumers added in certain timeframe, repeat buyers, new areas reached, and number of new channels partners added.

  • Set up an internal venture capital arm or an accelerator/incubator

    Incumbent companies can consider setting up an accelerator/incubator or an internal venture capital arm to gain early exposure to emerging concepts or actively invest in promising ideas. This will also help them in identifying possible acquisition opportunities early on before the valuations skyrocket and a merchant banker brings in an opportunity.

  • An acquisition is not complete until it is successfully integrated

    In case of an acquisition, it is critical for the incumbent to strike a balance between maintaining the culture of the start-up which has made it successful and integrating with own processes and systems to achieve faster scaling up. Often, failure to achieve this balance adversely impacts both the parties and erodes the benefits of synergy.

Incumbents need to innovate at speed for sustained leadership

Start-ups and incumbents bring two distinct but complementary skillsets to the table. Both understand that creating proofs of concept and scaling proofs of concept are totally different facets of a business. Although incumbents are aware of how start-ups innovate, they struggle to adopt and implement the start-ups’ style of working. They hesitate to shed the weight of their legacy and are often inexperienced in embracing new ways of functioning.

To see visible impact and deliver innovation at speed, incumbents need to bring innovation centerstage, and every organizational decision should pivot around that. This requires inculcating a start-up culture, which is not easy. It requires significant changes in business operations. Such sweeping changes are obviously not possible across the board but organizations need to intelligently explore options to build innovation into their business model.

To succeed in the long-term, incumbents need to wear two hats, one of a start-up to drive agile innovation and the other of a legacy player to scale up at speed. Investing behind the five wheels of agility can provide the necessary traction required to the incumbents to become agile innovators.

Summary

For an incumbent company to succeed at driving agile innovation, it is critical to inculcate the start-up culture. This necessitates some fundamental changes in operating model and mind-set of the incumbent company.

About this article

By Pinakiranjan Mishra

EY India Consumer Leader; EY EMEIA Consumer Market Segment Leader

Photographer. Traveler.