Is your scale helping you win or holding you back?

Authors

Kristina Rogers

EY Global Consumer Leader

Global leader for consumer industries. Marketing strategist. Worked in 20 countries. Harvard MBA. Photographer. Scuba diver. Canadian fiction reader. Mother of two.

Andrew Cosgrove

EY Global Consumer Knowledge Leader & Lead Analyst

Consumer futurist. Strategist with global FMCG experience. Storyteller. Photographer. Father.

10 minute read 19 Nov 2019

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To sustain competitive advantage and win the future consumer, companies need to change the way they apply scale across everything they do. They need dynamic scale.

In an age when consumer habits and expectations are changing so rapidly, being the biggest player is no longer the aim of the game. To stay in front and win the future consumer, organizations must do more than deploy the right mix of scope, efficiency and scale.

They must anticipate the consumer’s changing needs; build the agility required to constantly reshape business models around those shifting needs; and leverage technologies that enable the organization to morph between models at lightning speed.

The ability to act at scale will remain a critical part of value creation. Nonetheless, it’s time for large organizations to urgently “break and let go” of the way they have applied and owned scale in the past.

What they need is dynamic scale: the ability to apply the right degree of scale, in the right areas, at the right times, with the right speed. But how can you do that? Your response to that question will affect the transformation priorities across your organization. This article focuses on four key areas: what you sell, how you sell it, how you make it, and how you organize your business.

  • Why you need to reshape scale

    The barriers to entry that made it harder for smaller brands to compete for the mass consumer are falling. An agile rival with a great value proposition doesn’t need a big advertising budget to get the consumer’s attention. It doesn’t need presence in hundreds of stores to win their custom, or a monolithic brand to earn the trust. It doesn’t need to own manufacturing plants, or supply chain capabilities. In fact, it doesn’t need to own very much at all. It can access the capabilities it needs, at the scale it needs them, when it needs them.

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Chapter 1

How can your portfolio change as fast as your consumer?

To sustain a relevant market presence, companies need to continually reshape their portfolios and challenge their assumptions about scale.

The most important success driver in consumer products today is relevance. But relevance is harder to sustain when consumer needs, expectations, and behaviors are increasingly volatile. In all the scenarios we modeled across our FutureConsumer.Now program, this challenge only becomes more difficult. To address it, companies need to change the way they manage their portfolios.

The trends shaping a new consumer are going to unfold slowly and then suddenly, following exponential growth pathways. This will make the inflection points along a traditional s-curve more acute. Loved and trusted brands can suddenly flatline; new or refreshed propositions can rapidly take off and dominate.

In that kind of environment, companies must have a more dynamic approach to their portfolios. They need to go all-in and commit to growing a brand when they anticipate an opportunity. But at the same time, they need to be brave enough to take the foot off the gas, scaling down or even ditching a brand when the opportunity is not there.

Many brand owners make this kind of assessment already. But it’s a slow and tactical process. It must become rapid and strategic, and it must take into account all the potential impacts to the business, including tax, legal and people considerations.

Creating a dynamic portfolio

Organizations need to apply dynamic scale to their portfolio. That means reviewing their brands and the portfolio as a whole more often (at least twice a year) and with greater rigor. It means anticipating where the consumer is heading, not just reacting to what’s happening in the market. And it means taking bolder action as a result.

Those that get it right will create competitive advantage by making, adjusting and even reversing their brand investments much faster than their rivals can manage. Success is less about achieving as much scale as possible, and more about applying scale in the right way. Can you allocate the optimum level of resources to every brand in your portfolio, and align them all to a shared corporate purpose? Anything else is deadweight that holds the business back.

  • Actions to take

    Conduct more frequent and forward-looking portfolio reviews. Core to these will be accurate anticipation of changing consumer behavior and its impact on future category potential. Portfolio reviews will help inform your category investment decisions and future opportunities to differentiate.

    Design new business models informed by an objective understanding of where scale will still drive advantage verses where it could become a barrier to flexibility. Your portfolio review will have revealed which product categories are most likely to become vulnerable as more and more products become commodity purchases.

    Divest now in the categories you no longer want to compete in. You’ll need to make some hard choices about the number and type of business models you can truly compete in. But once these decisions have been made, you need to aggressively divest while the brands still have value, while making critical investments in your chosen products and capabilities.

    Align your financial and tax arrangements with portfolio changes. Upfront strategic tax planning is essential as you move to an environment of less inventory and more “just in time” availability, particularly when goods move across borders. Areas to review include depreciation methods, global tax incentives, valuation for tax purposes, intangibles, and duties and tariffs. Be brave and take advantage of AI and blockchain technologies to optimize your tax position and create more agility in your tax compliance.  

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Chapter 2

How can you deliver personalization without destroying your margins?

Companies must use scale to make personalization an experience whilst ensuring they can do it profitably.

From choice of product to marketing proposition to mode of delivery, consumers want an experience that feels personalized to their needs, across any channel. The challenge is, how do you deliver it at scale?

There’s a divide emerging between products, services and experiences that feel personalized to the needs of the individual consumer, and generic commodities delivered at massive scale. This is a trend we see accelerating across all of the future consumer scenarios we’ve modeled.

Looking for competitive advantage on the generic side of that line is a losing game. Consumers won’t actively shop for those propositions. At most, they will pick one from a few options curated by their technology platform of choice. At worst, they will fully delegate the purchase to their AI assistant, which won’t care about intangible brand promises. That is a terrifying prospect for brands that are struggling for differentiation and relevance.

To survive the cull of curation, companies must find smarter ways of connecting their brands to consumers. The relationship with them will be the only “channel” that matters.

Making it all feel personal

The need for product personalization is animating the C-suite, but personalization isn’t just about what you make or offer. It’s also about how you market it to the consumer. Winning propositions are those that feel tailored for them, at the right time for them, in their right place: in the micromoment. It’s also about how you deliver that proposition. That includes every part of the experience, from packaging to channel.

The important nuance is that this is about the feeling of personalization. Large consumer products organizations must make the consumer believe “this is all just for me”. But they need to achieve that in ways that are profitable for a mass market: customization, but not at any cost. How do you better understand the sort of personalization that each consumer actually wants and values?

This is a balance leading companies have been actively experimenting with for a while. Nike has been offering consumers the ability to personalize sneakers for almost 20 years. In 2019, it scaled up the offer considerably. What was originally just a feature on its website became Nike By You, a platform for consumers to co-create merchandise with the business.

Organizations behind the curve on this need to test new propositions now. How could you offer consumers a greater degree of personalization? What innovations could become profitable if you applied scale in a more dynamic way? Have you modeled the impacts on your supply chain and operating model of different levels of personalization across financial, legal and tax perspectives? Smarter use of technology and data will certainly be part of the answer.

  • Actions to take

    Pool data to understand each consumer in every micromoment. Large companies need to make a step change in their ability to respond to patterns of behavior. If they combine insights from a range of sources, they can get closer to the consumer when they decide to purchase. Then they can get ahead of the market and actively shape consumer needs.

    There may be tax impacts around the ownership and location of your “data pool”. On the plus side, certain costs incurred that are associated with qualifying research activity may be eligible for R&D tax relief under applicable regimes.

    Go direct to consumers and work only with the few retailers that enhance your proposition. Consumer goods companies can transform their understanding of the changing consumer by creating direct-to-consumer brands and platforms. Yet many are afraid to go down this route because they don't want to risk falling out with their large retail customers. They need to be bolder. Now that routes to market have fragmented, the battleground has shifted.

    Start creating new ecosystems. With the vast amounts of data at their disposal, the online retail platforms can spot, create and shape trends. They can try out new propositions super-fast, and build up those that land well. Consumer products companies are one step removed from the data to apply their scale in that way.

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Chapter 3

How can you make what consumers want without breaking your supply chain?

To add complexity to what they offer, without increasing cost, companies need to make manufacturing more dynamic.

Consumers increasingly want products that feel more authentic, and they want them to be made and delivered in ways that are more sustainable and traceable. According to a Research and Markets report, the market for clean label ingredients is expected to reach US$47b by 2023, a compound aggregate growth rate of 6.8%. This is putting traditional manufacturing under acute pressure, and it's a trend that will only accelerate.

The scenarios we’ve modeled in our FutureConsumer.Now program anticipate the way consumers will push the demand for instant, factual, trusted information about every aspect of what they buy beyond the limits of what’s possible today.

A lot of consumer products companies are dependent on factories and manufacturing systems that were designed for a different age. They achieve economies of scale by churning out one product all day.

Making the factory future-fit

Future-fit manufacturing is about smaller runs, quicker turnover, and the ability to meet the demand for much greater variety. To achieve that, factories must be able to scale production up and down quickly. They need to be more automated and more efficient.

In the fashion world it can take six to nine months from designing a garment to getting it into stores. A disruptive newcomer such as Boohoo can cut that cycle to two weeks. It sells over 27,000 different styles of own-brand clothing, and releases 100 new products every day, but purchases stock in batches of less than 500 items at a time.

There’s a cost to adding complexity to production. A more dynamic application of scale can help you give consumers the variety they want, at a price point they find attractive. Levi’s, for example, has transformed its supply chain to enable efficient speed to market and personalization. Investment in robotics has automated denim production and reduced the number of steps required to finish a pair of jeans from up to 24 to just 3. One of its robots can perform up to 12 minutes of manual work in just 90 seconds.

  • Actions to take

    Invest in better systems before new factories. By applying the right principles, you can make manufacturing scale more dynamic. In a grocery factory, for example, it can take 6-9 months to get production to a target level of efficiency; we've worked with clients to achieve the same performance in 30 days.

    Lower the point where you achieve scale economies. By making better use of factory instruments, optimizing the layout, synchronizing the flow in blending operations, etc., you can find efficiencies that lower the production level needed to achieve economies of scale.

    Explore the tax implications of adjusting your plant for more dynamic scale. In some locations, additional costs used for factory remodeling could receive favorable tax treatment under fixed asset capitalization regimes.

    Change your manufacturing metrics. Too often factories and their managers are incentivized to produce as much as possible. They are not penalized when they go over plan. This drives cost elsewhere in the business and makes variety more difficult. It also causes levels of waste and stock destruction that are increasingly hard to justify to consumers and to the media.

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Chapter 4

How can you profit from applying scale without the cost of owning it?

To pivot their operations at the speed required, companies need more dynamic ways of accessing capabilities.

Many large consumer products companies are pulling services back in-house because they feel they have to own their related processes more closely, as that's the only way to become more responsive to the changing consumer.

But the challenge isn’t about owning scale, it's about putting the consumer at the center of your strategy and creating an operating model that enables the organization to apply scale dynamically. For example, Airbnb doesn’t own properties; it connects the consumer to an ecosystem of providers.

Across the future consumer scenarios we’ve modeled, it takes a complex ecosystem of organizations working together to win the consumer. These ecosystems are always led by one dominant player – the ecosystem orchestrator. It’s their role to coordinate a fragmented network of partners and suppliers, accessing and deploying scale in a dynamic way, as and when it gives them a competitive advantage. Could you play that role in your categories?

Buy, build or partner?

Three key factors can help you decide whether to build, buy or partner to get the scale you need: Does the capability differentiate? How fast do you need to move? Are there existing skills you can build on? Long-term answers must also be informed by your purpose. When purpose is closely aligned, partnership is an option. If not, a transactional relationship is likely to be more effective.

Closer partnership is not always the right option. Even so, you can still make sure that integrated, outsourced or shared services are not standard, generic services. With the right technology, you can build greater flexibility into most processes. Dynamic scale can let you focus on the business outcome you want, without having to control how it is achieved. So, have you got the balance right?

The chart above is a quick and simple way to sense-check your choices and identify the need for action.

  • Actions to take

    Reassess how you access scale. There are different ways to leverage the capabilities you need, from ownership to outsourcing to wider ecosystems of partners. The need to apply scale in a more dynamic way will challenge some of the arrangements you have in place today. 

    Look at wider performance indicators. Two key questions need to be answered, regardless of who is executing: what process have we defined to provide the service we need? Is that process designed for dynamic scale, or is it rigidly aimed at getting the lowest possible cost? If cost-to-serve is just one of your metrics, you can still use scale to cut costs, but not at the expense of wider service needs.

    Optimize for the whole, not for the parts. Process owners across the organization need to work together in a more systemic way. If they think more holistically about how their end-to-end processes meet the needs of changing consumers, they can start to identify where it pays to apply scale and where it doesn't. What's more common today is a break or fix mindset, where people only collaborate when a specific process is discovered to be failing in some way. That needs to change.

    Re-integrate your tax department into the overall fabric of the business. With deeper connectivity across the organization’s shifting supply chains and global footprint, it will be easier to spot and respond to new tax initiatives and accelerating regulatory and legal changes.

    Take a business-led approach to process governance. Then you can make sure that everyone is working in line with the needs of the consumer, and the business model that is meant to be delivering those needs. If you don't come to the table with that perspective, individual teams and functions will create or change processes in ways that help them meet their own performance metrics, but undermine the organization's efforts to achieve dynamic scale.

A rigid business can’t serve a fluid consumer

Success in the next wave of change is about prioritizing the need to give consumers what they want, then delivering that proposition in a way that seeks to optimize – but not necessarily maximize – scale. That means being agile and intimate where that's what the consumer values, and using scale efficiently where personalization isn’t necessary or profitable.

We’ve suggested some key implications in this article, and some actions to address them, but they are just part of the challenge. Greater change is to come, and it will hit different organizations, categories and brands at different speeds. The right response is not a one-off transformation. The aim is to become an organization that constantly learns, adapts, and scales up and down in a dynamic way, so it generates and captures maximum value as it moves forward and grows.

The key to that sustained transformation is to take a future-back approach. Understand what the future consumer will need and value, and identify the areas of your current cost and scale model that will be critical or irrelevant. Then ask two questions. What capabilities do you have today that you must protect and strengthen? Where do you need to let go?

Summary

In an age of rapidly changing consumer needs, businesses need to be able to constantly adapt and transform their operations to offer the right proposition, in the right place at the right micromoment. That means leveraging efficiencies of production and supply chain scale when delivering a commoditized offer, but reducing the baggage of scale when seeking to offer a more reactive and personalized choice for the consumer. Applying such extreme dynamism to the scale of your operation demands a new approach that is driven by regular portfolio review, smart factories and new forms of alliances or ecosystems.

About this article

Authors

Kristina Rogers

EY Global Consumer Leader

Global leader for consumer industries. Marketing strategist. Worked in 20 countries. Harvard MBA. Photographer. Scuba diver. Canadian fiction reader. Mother of two.

Andrew Cosgrove

EY Global Consumer Knowledge Leader & Lead Analyst

Consumer futurist. Strategist with global FMCG experience. Storyteller. Photographer. Father.