In an unprecedented business environment of accelerating pace of change and spiraling complexity, almost three quarters of consumer products companies say they need to make ``significant changes’’ to their business in order to sustain historic margins, according to a recent study by Ernst & Young.
``Disrupt or be disrupted,’’ a report released last month, identifies that today’s consumer products companies are facing a ``brand new order,’’ where the traditional ways of creating value are no longer valid and execution is critical.
Over two thirds of consumer products leaders, in particular, said they are feeling under pressure to reappraise their operating model according to the survey, which canvassed the opinion of 285 senior global executives including the CEOs and CFOs of leading companies and industry investment analysts.
``We believe consumer products companies are facing a dramatic pace of change in which tried-and-tested ways of creating value are no longer fit for purpose,’’ Ernst & Young’s Global Consumer Products Leader Howard Martin says.
``This highly disruptive environment that we call the brand new order presents companies with not only huge opportunity but also heightened risks.’’
The level of complexity and pace of change feels unlike anything that consumer products companies have ever experienced. Without understanding the brand new order, companies can hardly identify the opportunities and risks. So Ernst & Young presents the five characteristics of this brand new order of consumer products industry.
1. Uncompromising stakeholders present companies with dilemmas
Business leaders must manage a more diverse, complex stakeholder universe and satisfy multiple sets of demands. Investors expect clarity around margin improvement, yet companies are facing pressure on margins and finding it more difficult to provide clarity given the pace of change.
In addition to meeting the needs of investors, companies must also address the expectations of regulators, governments, employees, customers, suppliers and communities. Investors want stability and consistency and will not forgive management for lapses in performance.
Governments and regulators are placing companies under tighter regulatory control, while consumers expect them to act responsibly in their stewardship of resources and communities.
Although the demands of different stakeholders may sometimes converge, on other occasions they will, on the surface, appear irreconcilable. For example, investors may want short-term returns, which could be achieved by shrinking the workforce or increasing prices of products. Yet, both of these approaches would conflict with the needs of other stakeholders, such as employees or customers.
Satisfying the demands of different stakeholders under conditions of extreme uncertainty is now a major management challenge, and it demands a strong management team, clarity of purpose and consistency in approach. Transparency is no longer an option in terms of reporting and communicating ― it is an essential part of business life.
2. Consumers take hold of the conversation and demand greater value
Consumer products companies no longer “own” their brands. When consumers are seeking recommendations or advice on what to buy, they will turn not to the producers of those goods but to third-party advisers, such as their peers, social leaders or experts found on digital channels such as Facebook or Twitter. Brands are now becoming a cloud of interactions that are shaped by consumer comments not just companies or partner organizations.
Without control over the conversation, business leaders must determine how to participate and engage with these third parties so that they can build and maintain trust among a fast-changing and demanding consumer base.
Channels such as Facebook and Twitter are evolving at an incredibly rapid rate and will probably be joined or even overshadowed by new technologies in the next few years. Companies must also understand the equivalent channels in other markets, such as Renren in China and VK in Russia.
This means that companies must learn incredibly quickly how to use a large variety of channels and perform multiple experiments at any one time to determine which approaches work and which should be discarded.
3. The new age of the consumer demands a revitalized approach to brand management
In a consumer-centric world, the brand is king. With consumers now controlling the conversation around brands, the traditional approach to category management is not fit for purpose. In order to compete effectively, consumer products companies must adopt a highly shopper-centric approach.
Consumers have more influence than ever, and retailers will respond to their needs, stocking the brands that consumers say they want, not those that companies want to sell.
This renewed focus on brands requires consumer products companies to relearn the capabilities of managing brands and swing the pendulum away from centralization and back toward local execution.
Rather than aggregated brand management at the global headquarters, companies need to give profit and loss accountability for brands to local managers so that they can make marketing decisions based on their knowledge and understanding of the local market.
This will require a major shift in power and accountability for some companies, but local execution will be critical to create differentiation in a highly competitive market.
4. Unprecedented complexity demands greater flexibility of supply
Companies have long sought ever-greater economies of scale by integrating supply chains at a global level. They have tried to reduce the number of stocking-keeping units (SKUs), harmonize manufacturing and standardize their product offerings as much as possible.
If companies offer consumers ``any color... so long as it is black’’ _ as Henry Ford did with the Model T car in the early 20th century _ they are merely superimposing simplicity on a world that is becoming more complex by the day.
Companies need to embrace good complexity that creates value and reject the bad complexity that creates unnecessary cost.
Consumers want choice and companies need to find a way of delivering it using techniques that create uniformity where possible but enable customization where it is needed.
Stripping out nonperforming SKUs and figuring out how to offer choice without creating unmanageable complexity have become key capabilities for leading consumer product companies.
5. The fast-changing environment requires a new style of leadership
The speed of change and scale of complexity have rendered traditional methods of management obsolete. Command-and-control approaches cannot keep pace with a dynamic business environment. Instead, leaders need to give greater autonomy to local managers, but provide a clear framework so that decisions take place within certain parameters and are aligned with the overall long-term vision of the company.
Business leaders must embed a more facilitating, enabling style of management with clear accountability for outcomes. It will also require a new generation of entrepreneurial local managers who are comfortable with making decisions independently of headquarters. These managers must adopt the skills of the ``herd.’’
This means that they must be award of a common purpose, have the ability to sense both risk and opportunity and respond accordingly. This new generation of managers will know instinctively how to do what is right for the organization within the context of the local environment.
It is imperative that consumer products companies address each of the above-mentioned five disruptive characteristics that define the brand new order. But coming to grips with the brand new order requires companies to constantly challenge their thinking and disrupt their own ways of working.