UK: Smart Moves: Building A Winning Strategy To Achieve Growth

Consumer products companies need to maintain their relentless efficiency drive. That agenda is being forced by retailer power, over-capacity, and consumers who expect prices to keep on falling.

But now – with expanding global markets and a realisation that enormous scale is required to achieve cost efficiency – manufacturers need to be just as relentless in driving growth.

Despite revenue growth being key to corporate valuations and a major driver of scale efficiencies, many organisations still heavily weight their spend on projects and initiatives towards cost reduction, more efficient SGA and manufacturing spend. These clearly need to remain important, as they represent big opportunities to release funds for investment in growth. But are many companies missing the big value-creating plays?

We believe that developments across a broad range of fronts – including technology, processes and corporate finance – offer significant opportunities to take much stronger central control of growth investments, as well as to use savings on current spend to fund better focussed and more efficient investments in developing brands, new products, even whole new businesses.

In today’s industry climate we believe there are big opportunities for better focus of resources –. with significant quick wins as well as longer-term benefits to be achieved – in six key areas:

• Commercial execution.
• Brand development.
• Market development.
• Talent management.
• Mergers, acquisitions and divestments.
• Innovation.

We are developing a series of papers, looking at these key elements of the growth agenda in more detail, which we hope you will find interesting and thought-provoking. This booklet provides some initial food for thought…

The real value of a consumer products business is in its brands. And developing the value of the brand portfolio should rightly be the key business focus. But it takes bestin- class commercial execution capabilities to turn powerful brands into increased share of distribution and bottom-line value.

Over the past decade many consumer products businesses improved the efficiency and effectiveness of their sales organisation by deploying field-force automation technologies, improving channel strategies and category management, and adopting best-practice ways of working. This has sharpened up the competitive situation across the market. As a result companies are now turning their focus on two key drivers of competitive advantage and bottom-line return – promotions management and pricing.

Consumer products companies commit over half of their total marketing spend on trade promotions, accounting for up to a quarter of gross revenues. But understanding and managing the value from this spend is getting harder: with increasingly complex mechanics, an ever greater need for provable controls, and real pressure to manage consistently across borders.

Yet a surprising number of organisations remain wedded to piecemeal processes, fragmented ’stovepipe‘ views and a plethora of spreadsheets. Admittedly, few processes in consumer products cross so many functions within the organisation: marketing, sales, finance, production, distribution…
We believe this range of stakeholders has been a major obstacle to really streamlining trade promotions decisions and evaluations, and ensuring that they are properly visible.

At every step of the trade promotions process there is the opportunity to create value… or destroy it. And the fact that on average, promoted products can go out-of stock in around a fifth of major stores¹ suggests that there is still a long way to go. The only solution is to take an end-to-end, strategic view of the entire process: people, technology and regulatory issues, your customers’ objectives, your financial goals…
It takes a comprehensive approach to really deliver benefit.

The best consumer products companies who have taken this approach are realising a win:win from process and technology improvements. By radically redesigning the way they do business and deploying much more integrated processes, technology and measurement structures, they are able to give real empowerment to their commercial teams, ensure every deal delivers brand objectives and improved ROI, and also deliver much more effective control without imposing administrative burdens. Those companies who are slow to adopt new ways of working will struggle to maintain distribution without increasing promotional spend – either losing market share, or damaging the ability to invest in brand development.

And this win:win extends to retailers. Better targeting and planning means better returns all round, combined with smoother execution and fewer out-of-stocks.

No-one would argue that getting the price right is critical to success. A 1% improvement in price can have an 11% impact on the bottom-line².

• Increased promotional effectiveness.

• Better delivery of brand strategy.

• A more effective sales team .

• Smoother, more efficient supply chain.

• Improved working with retailers – better returns, better planning and reduced disputes on deductions – helping to grow distribution.

• Significant increases in operating income and margins.

• Typical payback on investment in around nine months.

• Redesigned processes and pricing models, delivering greater profit per segment, SKU, customer…

• Better understanding of pricing opportunities and how to manage them.

• Reduced exposure to market consolidation from more consistent pricing.

But even the best pricing strategy has to be properly executed to achieve both the right market impact and the right bottom-line return. Executing accurately is not straightforward. The sheer volume of transactions, promotional overlays, complex market structures and a myriad of systems and deals can make the ’real‘ or ’net net’ price very hard to identify.

Our experience shows that there are significant margin benefits to be obtained by analysing in detail what is really happening to your prices in the daily transactions in the marketplace. Key areas for focus include:

• SKU velocity analysis – to confirm which SKUs make up the majority of total revenue (typically just 10-20%), and highlighting where improvements in pricing realisation/execution should have the greatest impact.

• Product and customer contribution – plotting SKUs and customers to show which are creating profit and which are actually eroding it.

• Price band analysis for chose segments – to identify and address both the highly profitable and highly unprofitable transactions.

• Segment performance – reviewing the average net price in chosen segments to assess whether the customers in those segments are achieving the volumes that deserve the reduced price.

• Price/profitability waterfall – showing the key ‘buckets’ that reduce list price down to net net price, and a parallel ‘cost to serve’ analysis. Each bucket represents an opportunity to improve margin at the transaction level.

Our clients have achieved major benefits by quickly identifying divergence from, or unintended consequences of, strategic decisions when they are executed in the field. In the first instance, this can highlight significant short-term opportunities for tactical pricing (resulting in substantial returns to the bottom-line within a matter of months), as well as identifying possible longer-term improvements in processes, systems, controls, training and metrics.

Even when you can evaluate the most effective promotions for your brand and you are confident that you are achieving the desired price, you are still left with some big questions around where best to invest the funds across brands and geographies.

In the past, ROI has typically been squeezed because:

• Funds are allocated according to past market history with year-on-year changes.

• Differing brand objectives lead to difficulties comparing performance.

• Different markets and different brands use different KPIs.

• High turnover of staff leads to lack of learning.

• The focus may inevitably have been on sales generated…but sales may not be achieved until long after the money has been spent.

A structured brand performance framework can tackle many of these issues. This framework needs to align the different brand building blocks – brand equity, consumer equity, communication, distribution and overall corporate culture and leadership – because so many factors have an effect on the relative strength and differentiation of each element.

The challenges companies face in developing a structured brand performance framework are to:

• Understand the value drivers for each brand.

• Align behaviours across business units and geographies.

• Improve availability, timeliness and standardisation of brand performance data.
• Develop consistent brand definitions.

• Create effective consolidation mechanisms.

The most forward-thinking companies are aligning behaviours around brand value frameworks in order to target their investment where it will have the greatest return: enabling them to create successful global brand positions and develop the category killers that are the real creators of value. Others will be left with also-ran brands. But this is a journey where everyone still has a long way to go…

• Brand-focused organisation culture.

• Clearer definition of brand equity and values.

• More consistent execution of brand values throughout the marketing mix.

• Consistent ‘brand performance’ scorecards, delivering meaningful data.

• Greater ROI on brand-related spend.

by developing geographic markets Very few truly global brands exist. But as the world increasingly becomes a global village, so the opportunities for geographical expansion become increasingly real for consumer products companies.

The attractions of geographical expansion are clear in terms of economies of scale, proven propositions and so on. Yet although regulations and consumer tastes are converging, there are still hurdles to overcome if companies are to successfully enter new territories or grow brand coverage across markets.

Do consumer business companies have the capability to execute centrally-set strategies across regions? Do they have sufficient global mobility in their management teams to take full advantage of the opportunities that exist? And do they have the full set of capabilities to really be able to execute in new geographies? The slow pace of brand coverage would suggest not.

We believe these capabilities have suffered from a lack of focus over the years, because they do not easily fit most organisational models in the industry, and promise medium-term rather than short-term payback. Yet in terms of overall long-term value creation, the capability to take existing successful brands into new markets has the potential to transform the value growth of an organisation from mediocre to stellar performance levels.

Developing the organisation and processes to drive market expansion needs strategic drive from the very top of the organisation. All functions have to contribute if it is to be fully effective: sales and marketing alone will not generate a sustainable expansion model beyond the franchising stage. This involves rethinking the central infrastructure – to ensure that it is value-creating in its own right – as well as the usual challenges of setting policy, managing investment and providing corporate governance. However, this can bring unexpected additional benefits. As well as enabling the centre to ’unlock‘ value in subsidiaries, the increased career opportunities and mobility can radically increase the dynamism of the whole organisation.

• Creation of global economies of scale for brands.

• More diverse career development opportunities for management, helping to attract and retain talent.

• Maximum value from existing brand assets.

• Opportunities to get in at the growth phase of emerging markets.

• Counterbalances to the threat from overseas entrants into ’domestic‘ markets.

For a long time, the major consumer products manufacturers have developed some of the brightest, most capable managers in industry. Strong cultures – built around strong brand identity and a real sense of pride, loyalty and belonging – are the envy of many.

These characteristics give consumer products businesses some unique challenges. How to retain their brightest people; how to manage individual careers to create space for challenge and growth, encourage creativity and innovative thinking across all business teams; how to harness the talent of individuals working for their strategic partners; and how to overcome the challenge of effectively integrating valuable external recruits into organisations with such a strong culture.

Another major challenge faces marketing organisations, where frequent moves are seen as part of a ’normal‘ career path. Managing continuity in brand strategy and investment (which is by its nature a longerterm process) can be a real headache. This intensifies further if businesses fail to create alignment between their ’employer brand’ and the actual experience of employees who work in the organisation.

Enthusiasm and motivation quickly turns to disillusionment and disengagement if the internal culture appears very different to market image.

As the global economy enters another growth cycle, those businesses who are able to attract, retain and realise the full potential of the best personnel within an increasingly competitive marketplace will be able to actually make their strategies and teams work. Without an effective approach to talent management and continuous development of their people, some businesses will struggle as they lose those key individuals and so hamper the organisation’s ability to grow in the future.

Yet within the consumer business industry, the processes for effective talent management are often fragmented and unclear. Even if the HR organisation and management team work together successfully in the commercial and marketing functions, all too often the HR team is restricted to administrative tasks within the supply chain. And management practices and capabilities vary considerably between business units and regions. In recent CIPD research, 86% of HR directors said that ‘more effectively integrating their management development with the business’ was a key priority.

The challenge is clear: to embed talent management as a strategic cornerstone, and to ensure that the management team and HR organisation work together in partnership to achieve consistent quality of practice across the organisation.

We believe that the real value comes when the whole organisation gets involved in HR transformation: with senior management owning and championing the cultural agenda and values, and line management working in partnership with HR to turn that cultural agenda into reality. In that situation, new HR capabilities (and the accompanying skills, processes and technologies) are then developed to meet the real, strategic needs of the organisation, with full buy-in and support from line management.

• Embedded high-performing culture, realising greater potential from all employees.

• Retention of knowledge about previous successes and failures, enabling informed decisions about future investment.

• Reduced costs from replacing individuals in key positions, coupled with reduced risk of low morale and demotivation for other team members.

• Increased ability to attract higher calibre recruits at all levels – executives, professionals and graduates – leading to future success.

• Talented individuals deliver great value. Talented teams deliver even more!

All consumer products companies need to retain a strong focus on dominating their selected categories. But all companies also have existing portfolios of stronger and weaker brands across a number of categories. So we can confidently expect to see continued merger, acquisition and divestment activities; whether on the scale of P&G and Gillette or at the level of individual secondary brands.

Different industry sectors have their own specific dynamics, but some clear trends are emerging:

• Consolidation at all levels of the value chain is driving the bigger players in each sector to acquire, in order to complete their product and geographic portfolios to maintain their competitive positions.

• The same pressures from consolidation are providing a specific challenge to mid-tier companies, who have neither the economy of scale of the major players nor the rapid innovative response of niche players. A few will look to acquire scale through a rapid acquisition strategy. Many more will look to be acquired.

• Private equity investors will continue to provide additional market liquidity: valuing businesses not necessarily by their growth potential or strategic fit, but rather by their ability to generate cash and by their attractiveness as acquisition targets.

One thing is clear: acquisition activity will continue apace in the sector. All companies with growth ambitions will need to be able to integrate new brands and operations into their existing portfolios quickly and cleanly. That competency not only depends on a well-organised ’100-day plan‘, but also on a number of foundation stones that cross the whole growth agenda: not least strong, flexible talent management capability and a clear existing commercial strategy backed up by leading commercial execution capability that can easily absorb new brands and products.

We also believe that further opportunities exist beyond the movement of brands. Ultimately, the real value in consumer products lies in the brands and how they are developed. Few segments allow players to maintain a true competitive advantage from manufacturing efficiency. Indeed seeking manufacturing economies of scale may be a particularly cumbersome M&A strategy. Instead, again due to the interest of private equity, there are opportunities to ’deverticalise‘. Divesting manufacturing assets to a third party – who has more opportunity to consolidate capacity – frees up capital for brand investment and can reduce operating costs without surrendering any brand leverage.

• Better capability to execute on strategic expansion plans.

• Rapid time-to-benefit from acquisitions.

• Integration of the best people and capabilities from acquired entities.

• Greater flexibility to respond to market challenges and opportunities.

• Corporate restructuring to focus on the real value of the brand.

No other strategy for driving sustainable top line growth in consumer products is more important than developing new businesses, brands and products.

Although innovation is a top five priority in over 90% of CPG companies³, executives are dissatisfied with their ROI. What’s more:

• Companies struggle to get the right balance between maximising short-term profit and investing for long-term shareholder value growth.

• Margin requirements and existing infrastructures struggle to compete with disruptive innovation – it can be hard to make an objective case for the necessary ’leap of faith’.

• The business case for disruptive innovation looks completely different to the arguments for sustaining existing business activities.

We believe ROI is limited because typically companies have fragmented processes, and fail to capture all the detailed good ideas that abound within the business in an effective way. There are parallels to the issues faced within trade promotions (see above). Many different areas of the company are affected in different ways, and only a holistic approach to innovation processes can drive the innovation machine more effectively, by:

• Capturing and recording ALL ideas within the organization (and indeed outside).

• Working through a disciplined process, with well understood criteria for progress at regular checkpoints (the ’gate‘ approach).

• Stopping ideas quickly when they are identified as unsuitable, without constant attempts to rework them or find additional supporting evidence.

• But also making sure that all ideas are retained so you avoid ’reinventing the wheel’.

• Ensuring that all stakeholders have visibility of impacts in the supply chain, marketing and sales, and that the desired standard of support from each is available in time to ensure a successful launch.

• And finally ensuring that all new product introductions are monitored closely against well-thought-through launch plans and forecasts, to allow very rapid response to divergence from plan – whether to provide further support, kill turkeys or ship stock to the shelves as the product flies out the door.

• Well-defined innovation and growth strategy.

• ‘Innovation engine’ to drive growth.

• Clear and consistent process and tools for managing innovation and intellectual assets.

• Culture change: open and supportive yet realistic about all types of innovation.

• Optimised R&D spend and organisation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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