Archive for the ‘Consumer Goods Industry’ Category
Sync your supply chain and business strategy
Filed under: Consumer Goods Industry, Performance Improvement, Supply Chain & Operations |
Leave a Comment It is self evident that a company’s supply chain should be aligned with its core business strategy and value proposition. For example, a retailer following an everyday, low-cost positioning should have a supply chain built to minimize cost and maximize inventory turns, potentially at the expense of other capabilities such as innovation or sustainability. Yet, our research suggests many organizations retain supply chains that are out of sync with their core business goals, leading to lower financial and market share results. Fixing this problem is part analytics, part strategic planning and part organizational redesign.
Syncing your strategy and supply chain is a ticket to superior performance. There are many examples of market-leading firms with strategic congruency including Dell,Walmart, Nordstrom, Cisco and McDonald’s. These firms diligently manage their supply chains to support their core positioning and deliver superior value — not to mention creating industry barriers to entry. For example, Walmart has achieved outstanding operational performance by developing sophisticated inventory management, logistics and procurement systems. These capabilities have played a key role in Walmart delivering on its everyday-low price brand promise while achieving industry-leading margins and profitability. In another case, Dell vaulted to the leadership of the PC industry in the 1990s by offering low-cost and customized products through a build-to-order manufacturing model backed up by extensive procurement and inventory-management competencies.
Most companies, however, are not strategically coherent. This can occur for a variety of reasons. For example, firms competing in multiple product categories face a myriad of competing demands from different product teams and functional departments, leading to a convoluted supply chain design and bloated product portfolio. In other cases, weak centralized management control combined with an outsourced and global supply chain will often result in misalignment. Finally, some firms do not posses a consistent strategic position in their marketplaces. Instead, supply chain decisions ebb and flow depending on short-term market conditions rather than long-term considerations like sustaining a differentiated market position.
One of our consulting projects illustrates the causes and dangers of supply chain incongruence. We were engaged by a customer-driven industrial goods company to help fix its customer satisfaction problem. The company was losing revenue, facing higher cost-to-serve expenses and experiencing historically low customer satisfaction scores. Its distributors were getting short shipped of high-velocity items and incurring extra costs through persistent errors in filling orders. After a thorough analysis, we discovered the problem was not localized to the logistics group (as assumed by management) but had to do with the design of the supply chain. Over time, major parts of its operations had drifted away from the firm’s core positioning around maximizing customer satisfaction. Specifically, production planning was being under-resourced and the product management and procurement teams had quietly (and independently) shifted their focus towards launching multiple products and aggressive cost reduction respectively. Our solution got their supply chain back on track by enhancing their product life cycle management policies, improving order fulfillment capabilities and moving production to a more flexible manufacturing model.
Senior leaders need to develop the right supply chain and capabilities for their business strategy and keep it there. To do this, we recommend a simple three-step approach:
Clarify
Although many companies pursue a hodge-podge of strategies, they tend to focus on a couple of parameters (singly or in combination) like cost leadership, premium positioning, or service excellence. However, many managers may not know what levers drive their success and what to leave for their competitors. By undertaking a thorough strategic planning process, leaders will understand their ‘winning’ positioning, where they merely need to meet competition and what they can ignore because of poor strategic fit.
Prioritize
Misalignments often occur when short-term management decisions undercut the optimal supply chain model. This is understandable given the dynamic nature of some markets and quarterly financial imperatives. One example could be the launch of a cost savings initiative for a premium car brand. The purchasing department may choose the lowest cost, but least reliable and innovative, parts suppliers. Managers need guiding policies and discipline to ensure their supply chain decisions and capability investments efficiently reinforce their core business strategy and value proposition.
Measure
As the saying goes, you can’t manage what you don’t measure. I will add the truism that you need to measure the right things, too. Unfortunately, numerous organizations rely on incomplete metrics, which do not measure the link between corporate strategy and supply chain design. Leaders must focus on or identify key performance indicators (KPI) that reinforce strategic coherence. For example, one KPI — ‘shipments on-time, and complete’ – is a good proxy in customer-drive product companies for supply chain performance areas including production, customer service and logistics performance.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Bad publicity can drive sales
Filed under: Consumer Goods Industry, Customer Insights, Marketing & Branding | Tags: Bad Publicity, Public Relations, Publishing, risk, Sales
Leave a Comment Receiving bad publicity has always been a double-edged sword for companies. The old maxim, that there is no such thing as bad publicity, is tempered by a variety of academic studies that demonstrate that getting damaging news hampers sales. New research published in the Harvard Business Review takes a more nuanced position on this age-old question and suggests that for some products in certain industries, negative news can trigger a sales lift.
Professors Jonah Berger (Wharton), Alan Sorenson and Scott Rasmusson (both from Stanford Graduate School of Business) analyzed the sales patterns of 250 fictional books reviewed in the New York Times between 2001 and 2003. The researchers compared sales patterns before and after receiving a review from a critic.
As expected, good feedback increased all books sales from 32 to 52%. Books by established authors that received negatives reviews all saw their sales, not surprisingly, fall 15% on average. Interestingly, unknown authors who received bad reviews saw their sales spike 45% on average. The sales increases occurred even when the review was cutting. In one case, a book with an adverse critique like, “the characters do not have personalities so much as particular niches in the stratosphere” saw its sales increase by over 400%. The elapsed time following a bad review was shown to have an important impact. Bad reviews initially hurt all books, but the negative sales effect diminished quicker for unknown authors.
These findings have many real-world counterparts. According to the authors, a $60-a-bottle Tuscan wine experienced a 5% sales lift after a popular on-line reviewer likened its smell to “stinky socks.” Shake Weight, a vibrating dumbbell widely panned in the media (“The most ludicrous fitness gadget of all time?” said one newspaper) racked up $50M in sales. Why did these poor reviews lead to a sales boost?
With a relatively unknown product, the value of increased awareness due to bad publicity significantly outweighs the ill effects of the evaluation. Moreover, the impact of the negative review will quickly taper off leaving higher product awareness and little memory of the bad assessment.
Our learnings from working with crisis PR teams suggest that marketers regularly over-estimate the negative impact of bad publicity on their target audience. Given the frantic life of the typical individual and the level of media “noise” in today’s society, most people do not have the attention span or inclination to pay close attention to the details or context of most negative publicity. All they tend to remember is the product name – which the authors have shown has a positive business effect.
These findings have important implications for personal brands (say for an entertainer or athlete) and companies, especially those that are content or experiential-based like books, movies, video games, theme parks, music and theatre.
- Don’t be so quick to squash negative publicity for a new, obscure or undifferentiated product;
- When faced with bad publicity, pursue damage control for well-established brands such as consumer electronics, cars, video games, software or apparel that depend heavily on pre-launch marketing programs and expert reviews;
- Consider undertaking controversial public relations tactics to increase the awareness of new products or brands that are slated to be re-launched.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Next generation manufacturing, today
Filed under: Consumer Goods Industry, Innovation, Performance Improvement, Supply Chain & Operations | Tags: 3D Printing, Additive Technologies, Digital Fabrication, GE, Manufacturing, Open Source Manufacturing, supply chain
Leave a Comment Recent advances in digital fabrication technologies have the potential to revolutionize how companies build products and target consumers. Manufacturers can now produce many customized products and prototypes ‘when needed, as needed’ with the same economics as high volume production. DF technologies will transform many industries including apparel, consumer & industrial products and healthcare – as well as local economies, which may experience a manufacturing revitalization. Savvy manufacturers are exploring how they can leverage these new technologies to compete better.
The rapidly evolving field of DF is doing for manufacturing what the Internet did for information-based goods and services. DF turns traditional, volume-based manufacturing economics upside down. In the conventional “subtractive” production model, the existence of scale economies means that it costs much more money to produce one unit than it does to produce say 100,000 units. When DF technologies and approaches are employed, it now becomes cost effective to manufacture much smaller batches of customized products on demand, while shortening the cycle time between design and production.
Not surprisingly, DF has disruptive characteristics. “3D printing can provide the garage entrepreneur with the same productive capabilities as the large corporation,” says Abe Reichental, CEO of industry leader 3D Systems.
Additive technologies
At the heart of DF has been the development of additive-based technologies like 3D printers. These machines allow firms to take digital designs and rapidly print (i.e. build) products or parts from a variety of materials using bonding or fusing techniques. The 3D printer’s advantages in programmability, quick set up times and rapid change-overs enable firms to produce small batches and prototypes for the same cost per unit as long production runs. Furthermore, companies can rapidly adjust production to meet customer demand and changes in taste.
3D printing is best suited for products or parts that are expensive to inventory, need high levels of customization and require quick production runs. In the healthcare sector, the 3D printing future is already here. Over 10 million 3D-printed hearing aids are currently in circulation worldwide. 3D printing is being adopted by industry leaders such as GE, Medtronic, Boeing and Mattel as well as a host of smaller enterprises to make a myriad of items such as aerospace parts, iPhone accessories, orthopaedic implants, jewelry and toys.
The future looks promising: additive technologies are evolving on a path similar to Moore’s Law: machine capability is growing while cost is decreasing exponentially. Jeff Immelt, CEO of engineering giant General Electric, is convinced. “I think it’s going to be big, I really do… [particularly for] shortening cycle times between designing products and making them.” This advantage could help North American manufacturers compensate for higher wage costs compared with those in emerging economies such as China.
Of course, DF has its limitations. The technology is not mature enough to handle large or complex products. Furthermore, additive technologies cannot match the low cost and throughput of conventional manufacturing for routine parts.
Open Source Manufacturing
Perhaps the most intriguing facet of the DF revolution has been the emergence of an ‘Open Source’ manufacturing movement. Booze & Co. describes this as the rise of a ‘Maker Culture’ – a self-organizing community and supply chain made up of hundreds of connected manufacturers, consumer groups, on-line shopping sites, and hacker groups.
The Maker Culture encompasses an ecosystem of players. Online fabrication services like i.materialise and Sculpteo provide on-demand 3D printing for personalized small volume production, at rates that are affordable to individuals and small businesses. Customers forward a digital design and receive the corresponding physical item by mail a few days later.
New open design repositories and DF-powered supply chains are sprouting up on the Web. Thingiverse is an online hub where people can freely download each other’s designs and programming code for such ubiquitous products as bottle openers, gears, and coat hooks. Distributed manufacturing networks like Makerfactory and 100kGarages connect digital manufacturers directly with a global market. Potential customers post job requests, which are then bid on by individual fabricators.
Similar to their programming cousins, Makers are forming open source collaboratives and workshops around the world. These spaces are not centrally owned or organized, but they share information collectively and collaborate on each others projects. Makers are expected to publish their plans and specifications, typically under an open source license. This allows others to copy, adapt, and co-develop designs, along with ensuring credit and mutual access to ideas. This cultural shift has the potential to germinate a diverse, dense and innovative network of local vendors centered around large original equipment manufacturers or by industry.
The rise of DF has important implications for every manufacturer. Those that embrace the technological and cultural opportunities will benefit from lower production costs, greater innovation, a faster design-to-build cycle, and the support of a more responsive supply chain.
For more information on our goods and services, please visit the Quanta Consulting Inc. web site.
LEGO: Innovation gone bad
Filed under: Consumer Goods Industry, Innovation, Organizational Transformation & Culture | Tags: Best Practices, Culture, Innovation, Lego, strategy, Turnaround
Leave a Comment Conventional wisdom says that being more innovative is critical for enterprises looking to enhance competitiveness and improve financial performance. However, the reality for many firms is very different. An ill conceived innovation strategy or poor implementation of said strategy carries significant business risk. Case in point is LEGO, the iconic 56 year old Danish manufacturer of educational toys. The company’s innovation-induced brush with bankruptcy carries some poignant lessons for managers who see innovation as the magic bullet.
A recent issue of the Knowledge@Wharton newsletter documents the LEGO saga. During the 1990s, the company faced a number of challenges including slowing market growth, mounting competition from lower cost Chinese manufacturers and changing customer needs – triggered in part by the rapid growth in electronics and themed toys. To respond to these threats, management went on an innovation binge. They added to an already large product portfolio LEGO-branded: interactive video games, jewelry, education centers, an amusement park, plus marketing alliances with the Harry Potter franchise and the Star Wars movies.
Around 2000, innovation became a strategic priority in the company. The firm became a best practice for fostering a culture of innovation. LEGO listened carefully to customer feedback. They proactively searched for unexploited markets where its brand could dominate. And, management actively recruited a diverse and creative staff and actively engaged a variety of external stakeholders. Overall, the goal was to become one the world’s strongest brand families by 2005
However, things did not turn out as expected. Ironically, “LEGO followed all the advice of the experts,” says Wharton Professor David Robertson, “yet it almost went bankrupt.” By 2003, the business was virtually out of cash. It lost $300M that year, and the projected loss for 2004 was up to $400M, with a bankruptcy looming in the not-to-distant future. Robertson would know: he is the author of an upcoming book on the company’s innovation travails (Brick by Brick: How LEGO Reinvented Its Innovation System and Conquered the Toy Industry). Below are some of the company’s missteps, based on Robertson’s research and our firm’s best practices:
Don’t bring a knife to a gun fight
LEGO’s innovation strategy was bound to fail. The company underestimated the severity and permanence of the changes underway in their markets and with their consumers. As a result, the plethora of un-inspiring new products was unable to mitigate fundamental trade, consumer and cost challenges. In many cases, it made the situation worse by bloating the product portfolio and reducing focus on core categories.
Success is fleeting
Initially, many of LEGO’s innovations generated positive market results and customer feedback. Problems arose when the myriad of products failed to hit their volume targets in the medium term, particularly the blockbuster-centric Harry Potter and Star Wars toys. This unexpected ‘boom-bust’ performance led to inventory problems, an inflated cost base and added organizational complexity.
Know where you are going
In 2003, LEGO was enjoying early market success – but was flying blind and making decisions haphazardly. The management had not addressed key questions needed to sustain profitable growth, such as: What are our innovation goals and how will we get there? Little attention was paid to how the large and expensive innovation effort fit into key corporate goals. According to Robertson, “If you are going to accelerate innovation, you need to know which way you are going,” Robertson said.
Getting back on track
The strategic pivot came in late 2003. Importantly, LEGO did not jettison its innovative culture. Instead, it learned from its failures. The most valuable lesson was that a disciplined organization and management system was critical to guiding and supporting an innovative culture. Going forward, the company created a more rigorous decision making process for evaluating and implementing its creative ideas. For example, it developed a vetting process that required each new innovation to be financially sound and aligned with LEGO’s goal of being recognized as the best company for family products.
Furthermore, the firm abandoned its search for category-creating (but high risk) ‘blue ocean’ products. Instead, LEGO reframed its innovation strategy. They refocused their attention back to its core, large and well-understood markets. Recognizing the futility of competing on price and fighting with its retailers, the company attacked its competitors across multiple fronts by opening retail stores, creating LEGO-themed board games and straight-to-DVD films.
The turnaround worked. By better managing its innovative tendencies, LEGO has grown to become world’s third largest manufacturer of play materials. Since 2009, sales have gone up an average of 24% annually and profits have grown 41%.
LEGO may no longer make the list of the most innovative companies, but it is moving forward at a time when many of its competitors are suffering. The LEGO story underscores the moral that leaders should be wary of blindly following innovation dogma. Robertson concludes, “Controlled innovation has clearly worked. That is the lesson learned at LEGO — just in time.”
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Samsung: supply chain-driven leadership
Filed under: Consumer Goods Industry, Growth Strategy, Supply Chain & Operations | Tags: Best Practices, CPFR, Samsung, Six Sigma, Smartphones, supply chain
Leave a Comment Founded in 1938, South Korean conglomerate Samsung has seen its revenue explode in recent years, with profits hitting record levels of more than $4 billion in the first quarter of 2012 on the strength of the company’s smartphone products.
The electronics giant spent most of 2011 in a neck-and-neck race with Apple for the top prize in smartphone sales before ending the year on top.
Now Samsung is shifting its focus from consumer electronics to solar panels, light-emitting-diode (LED) lighting, biotech drugs and medical devices. The company has announced plans to supply medical equipment and drugs to poor countries, while moving industrialized nations toward power created without carbon emissions.
Firms worldwide will be gauging Samsung’s shift and likely will keep a close eye on the company’s supply chain component, widely reported to be one of its biggest competitive advantages.
Samsung’s Supply Chain Philosophy
Samsung initiated a collaborative plan to foster growth and stability among its key suppliers. According to Samsung’s corporate sustainability report, the company is shifting its “Mutual Growth” program to smaller firms lower on its green supply chain. The CEO is directly responsible for implementing seven key collaborative programs:
- Win-win fund for partner companies
- Timely reflection of raw material price changes in parts purchasing prices
- Temporary registration scheme to promote e-transactions
- Support for indirect suppliers
- Joint technology development center
- Fostering “global best companies”
- Support for recruiting activities of small and medium enterprises
In addition, Samsung offers support to its partner companies in human resources, innovation, communication and corporate social responsibility. This approach to supply chain management has resulted in a strong and loyal network of partners. Samsung also has implemented a number of other methods to ensure sustainability in its supply chain
Successful Supply Chain Management
For Samsung, successful supply chain management (SCM) means tapping into the power of its global footprint. The company’s SCM utilizes suppliers in the developing world and highly industrialized areas. This diversity helps buffer Samsung from economic, natural or political disruptions in the supply chain and also creates a wider customer base.
Another idea Samsung has leveraged is that of being a “fast follower.” The company watches the market for new business ventures, purchasing small, leading-edge companies. Samsung becomes familiar with new technologies through these acquisitions, which deliver expertise, talent and customers. Once it finds an area primed for growth, it pours in cash, ramps up production and becomes a key customer for its suppliers, fostering positive relationships that give it a competitive advantage.
CPFR Method: How Samsung Implemented It
Collaborative Planning, Forecasting and Replenishment (CPFR) focuses on improving supply chain management by combining the intelligence of a variety of partners in satisfying customer demand. CPFR uses a set of template-based standards for supply chain management and partner collaboration. Among the corporations to have used CPFR are Wal-Mart, Procter & Gamble and Samsung.
In 2004, Samsung signed a CPFR agreement with electronics retailer Best Buy for the North American market. The initiative improved efficiency by cutting costs for merchandising, inventory, logistics and transportation. In 2009, the two firms expanded the agreement to the Chinese market, agreeing to enhance each other’s supply chains by supporting and assisting in joint practices, including:
- Monitoring market demands
- Sharing customer feedback
- Working together to reduce operating costs
Six Sigma at Samsung
With a global supply chain as complex as Samsung’s, advanced approaches to planning, scheduling and operations are necessary for stability and success. Since 2004, an innovative program combining supply chain management and Six Sigma has been a key driver of both.
Samsung first researched how Six Sigma was being used at companies like General Electric, Honeywell and DuPont. Methods of matching customer requirements to products and services, while applying lean methodologies to manufacturing, were seen as particularly valuable.
In the end, Samsung determined about 75% of its Six Sigma projects would involve redesigning processes and 25% would focus on process improvement. It then tailored Six Sigma’s methodology to better support Samsung’s supply chain management projects.
In addition, Samsung’s team also created design principles to guide the SCM Six Sigma projects throughout each stage:
- Global Optimum – speaks to a global, rather than local alignment of improvement ideas
- Process KPI Mapping – defines objectives and monitors the process towards management improvement plan goals
- Systemization – a critical component of SCM Six Sigma at Samsung
- Five Design Parameters – used to characterize the changes that need to be managed.
Samsung’s Success Based on Sound SCM
By beginning with a collaborative philosophy and adopting smart supply chain management processes, such as “fast follower,” CPFR and specialized Six Sigma, Samsung has maintained its position as a world leader in consumer electronics.
As the company moves into a diversified business model, it is expected to continue utilizing those methods to remain competitive and profitable, while fostering similar benefits for its suppliers, retailers and other supply chain partners.
This guest post was provided by Dean Vella who writes about supply chain managementand sustainability for University Alliance and submitted on behalf of University of San Francisco.
Making Open Innovation work: the case of 3M
Filed under: Consumer Goods Industry, Executing Strategy, Innovation, Organizational Transformation & Culture | Tags: 3M, Adobe, Best Practices, Cisco, Collaboration, GE, Implementing Innovation, Innovation, Open Innovation, P&G, Problem Solving, Product Development, R&D, Technology
Comments (9) Open Innovation is a proven paradigm for generating higher levels of innovation in products, processes and capabilities. As opposed to the “closed” nature of many company’s R&D efforts, OI looks to open up a firm’s innovation process to outside ideas, collaboration and partners. Because technical knowledge is widely distributed and dynamic, organizations will not be as innovative when they rely entirely on their own research. Instead, managers should actively search out and buy or license technology, patents or inventions from other companies, individuals or research institutes. At the same time, technology not being used in a firm’s business can be offered outside the company. OI is not only about big science projects. One of the most common applications is problem solving for challenging technical issues.
Many market leaders like GE, Cisco, Adobe and P&G have successfully used OI to improve their products, reduce R&D costs, solve difficult technical problems and accelerate time to market. One of the best exploiters of OI is the manufacturer, 3M.
In 2010, 3M was voted the World’s third most innovative company in a survey by consultant Booz & Co. How does 3M use a paradigm like OI to regularly create successful new products and capabilities? Fred Palensky, 3M’s Chief Technology Officer, shared some insights in a recent edition of strategy+business magazine:
- 3M stresses internal sharing of new innovations. New technologies and capabilities that are developed in one R&D centre must be shared – cross pollinated – across product lines, markets and technology platforms;
- Cross pollination is enabled by a cultural trait known as “dual citizenship.” Employees are responsible both to their market and department as well as the global 3M technical community. Key people are often moved around to different sectors, roles and geographies enabling them to share ideas and skills while bringing them a holistic view of the business.
- 3M encourages regular collaboration with outsiders. For example, 3M’s R&D labs are presently collaborating with universities and business partners in over 300 projects. To better address user needs, 3M has developed 30 customer technical centers that bring users directly into the product development process.
Palensky attributes 3M’s innovation success to culture, not structure or process. OI has been practiced for years and is part of the firm’s DNA. According to Palensky, OI works because “everyone has skin in the game.” In particular, employees must spend 15% of their time outside of their area of responsibility, collaborating, visiting customers or brainstorming.
In our experience helping firm’s germinate innovation, strategizing on OI is a lot easier than making it work. The following are some of our best practices:
Cultural considerations are paramount
Within closed R&D organizations, the “not invented here” phenomena is very strong. Overcoming this requires managers to regularly reinforce a culture of external collaboration, information sharing and trust and back it up with reward schemes.
Management systems must align
Key elements like structure, information rights, roles & responsibilities and measurement systems must be congruent with an external-facing, sharing-based philosophy.
Seek and ye shall find
Serendipity is most likely to occur when a range of technical problems is exposed to a large number of diverse participants. Sufficient resources, time and mandate must be designed into the OI process: innovation discovery & synthesis, partner identification and relationship management.
Governance is critical
OI programs must be carefully designed to protect intellectual property, designate decision rights and reward distribution in advance.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Can new Tide Pods reinvent the laundry business?
Filed under: Consumer Goods Industry, Marketing & Branding | Tags: Cascade Action Pacs, Concentrated Detergents, Laundry Business, Laundry Detergent, P&G, Tablets, Tide, Tide Basic, Tide Pods, U.K. Market, U.S. Market, Walmart
Leave a Comment P&G is betting hundreds of millions of dollars that a new version of Tide will reenergize its flagship but challenged laundry business. Coming this September, Tide Pods is being billed by the Company as the biggest innovation in laundry detergent in over 25 years. Tide Pods are a new line of highly concentrated liquid-filled tablets with two times the concentration (i.e. less water) than the popular Liquid Tide detergent. This format leverages the same technology as the successful Cascade Action Pacs automatic dish detergent. Tide Pods promises better cleaning power, improved convenience and a smaller environmental impact through reduced packaging. According to the Company, Tide Pods has recorded the highest customer satisfaction scores the company has ever seen with a laundry detergent. Importantly, executives claim that there will be no price increase on a usage basis, a common tactic used in previous concentrated detergent launches to take hidden price increases.
P&G has told retailers that the liquid-filled tabs could generate up to $2B in sales which translates into a 30% share of the $6.5B U.S. laundry market. This is not a grandiose forecast. In the U.K., currently the most developed market for this type of detergent, all forms of tablets (including powder) make up more than 30% of the market. Significantly, the Tide Pods introduction will be backed by a large - even by P&G standards – $150M marketing budget with activity kicking off in the summer. The launch is a big risk for an American market that has rejected a variety of laundry tablet products dating back to the 1960s.
Tide Pods can not come soon enough. P&G laundry margins are stuck between a rock – increasing raw material costs – and a hard place – on-shelf price deflation. If you think the former is not a concern for the company, then consider that the phrase “higher commodity costs” occurs eight times in its most recent earnings release. At the same time, P&G is trying to cope with market pricing pressures. While P&G’s products are consumer staples, they are still positioned as premium brands in most of its categories. In an environment where most consumers are looking to economize in their household purchases, this puts significant pressure on premium, leadership brands like Tide who must simultaneously support pricing levels and build market share.
In a previous blog post, I was highly critical of Tide Basic, P&G’s most recent laundry detergent launch. This time, I am more optimistic. Assuming their research is valid, Tide Pods looks like it will deliver compelling consumer value. Furthermore, P&G stands to gain in many other ways including increased product consumption (which increases market size) and reduced packaging & logistics costs though these will be partially offset by higher manufacturing costs. Moreover, the Company will bring some real sizzle to a flagging American laundry market. According to research firm SymphonyIRI as reported in Advertising Age magazine, retail sales of liquid detergent (excluding Walmart) for the 52 weeks ending March 20, 2011, fell 3% to $3B, while sales of powder detergent fell 10% to $506M. Market softness may be even worse at the largest American retailer Walmart, where Deutsche Bank has reported sales down 10% in liquid detergent and 20% in powder in the last quarter.
P&G’s survival does not depend on the fortunes of Tide Pods. Even though P&G has diversified heavily into developing markets, beauty and other household categories, the U.S. laundry business remains vital to the firm’s long term prospects. With more than a 40% market share and high margins, the Tide franchise is crucial to overall company health and long term success. Time and an embattled consumer will tell.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Will P&G clean up with two new businesses?
Filed under: Consumer Goods Industry, Customer Experience & Service, Customer Insights, Growth Strategy, Marketing & Branding | Tags: Car Wash, Consumer Goods, Customer Experience, Dry Cleaning, Mitchell Osak, Mr. Clean, Mr. Clean Car Wash, New Product Development, P&G, Tide, Tide Dry Cleaning
Comments (4) Having worked in P&G brand management on some of their biggest brands (Tide, Cascade, Ivory Snow), I must admit to being an admirer of almost everything the firm does. Well almost everything. I was not a big fan of the Tide Basic introduction. And, lending their reputation and strong brands to some consumer service industries may turn out to be another misstep.
Over the past three years, P&G has been refining plans to enter two new markets – dry cleaning and car washes – by leveraging two of their strongest brands. In effect, P&G is applying the considerable technology and brand equity of Tide and Mr. Clean to launch two new franchised consumer services. In particular, a pilot program of Tide Dry Cleaners is about to be introduced in selected markets across the United States. Secondly, P&G is continuing to roll out Mr. Clean car washes in partnership with franchisers ready to fork over a $5 million initial investment.
I am skeptical as to whether these initiatives will succeed:
One would assume that years of testing and refinement were behind the concept development and delivery model. Was this effort of value? Thorough thinking and ample investment can not make up for a weak consumer proposition or bad timing. During my tenure in the late 1980s, P&G Canada launched a family of Enviro-Paks – cleaning, detergent and dishwashing liquids – packaged in large Tetra Pak containers – based on European learnings. The roll out flopped, not necessarily because of poor execution but because the timing was about 15 years too early (environmental awareness was very low at the time) and there was no compelling consumer benefit in switching to the new format.
My concerns with P&G’s new franchising strategy centers on the following areas:
The attainable market may be too small
The dry cleaning and car wash markets are fragmented, often driven by price and location considerations. On the other hand, P&G has traditionally focused on share leadership in large and defined market segments with premium-performing products. I am not sure the dry cleaning and car wash sectors contain segments large enough to support P&G’s premium business model and generate sufficient financial returns. Furthermore, at $5 million per store, a Mr. Clean franchise will not appeal to any but the deepest pocket franchisers.
Challenges with the customer experience
Financial returns will depend heavily on the quality of the customer experience delivered every day. Service businesses rise and fall on front line staff interactions with customers and delivering consistent quality. Ensuring a fruitful and consistent customer experience is a challenge in consumer services given the heterogeneous nature of employees who are often unskilled and transient. While having a bullet-proof set of policies and procedures will help, P&G will lack the control and immediacy to ensure day-to-day execution excellence on a national scale.
Franchising cheapens P&G brands
Given the above challenges, P&G runs a significant risk that an unsuccessful franchise strategy could hurt Mr. Clean and Tide’s strong brand equity and subsequently damage their market shares. Together, these brands represent over a billion dollars in profit in the US alone.
Without analyzing the business case, its hard to really know whether the above issues are problematic. However, one must wonder why P&G chose to expand to new markets with completely new business models that are well beyond their core consumer and customer franchise. Time will tell.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Catching Up in Sustainability
Filed under: Consumer Goods Industry, Growth Strategy, Sustainability & Corporate Social Responsibility | Tags: Apple, Chiquita, Green Business, Nestle, Starbucks, Sustainability Standards, Sustainability Strategy, The Fishin' Company, Wal-Mart
Comments (2) These days, virtually every company is being impacted by consumer, stakeholder and regulatory demands for green strategies and programs. For a variety of reasons, most firms have adopted a “follower” sustainability strategy as opposed to that of a pacesetter. A poignant article from the Harvard Business Review highlights the challenges of being a sustainability follower and suggests some strategies to catch up.
Enterprises face considerable financial, marketing and operational dangers when competition or external advocacy groups have defined what sustainability means for their products, company and industry. Although green product definitions and standards will vary across industry, companies not engaged in shaping the rules risk being assessed against standards that they can’t easily satisfy. Worse, the firm may be out-flanked by a shrewd competitor that has strategically positioned itself as the sustainability gold standard.
Shaping the sustainability landscape is no mean feat. There are a plethora of advocacy groups, regulations & standards (current and under debate) and consumer needs that need to be understood and evaluated. For example, the coffee industry features more than a dozen standards and hundreds of individual criteria, affecting everything from pesticide use to workers’ housing to bird friendliness. Each of the various standards has a constituency working to define the benchmarks for “sustainable coffee.” Some are backed by nonprofits such as the Audubon Society and TransFair, others by companies such as Starbucks and Nestlé.
Fortunately, firms that lag in sustainability progress can still leapfrog competition by repositioning themselves as influential or even leading players in the green-standards battle. There are 4 possible strategies to do this:
1.Adopt existing standards
Companies should pursue this strategy if their industry or major customers have well-established standards and their sustainability capabilities are modest. Importantly, a determined catch-up effort can still enable firms to best competition and become a credible participant in future sustainability debates. As an example, The Fishin’ Company became the largest sustainable seafood supplier to Wal Mart by outperforming its competition in meeting Wal Mart’s strict product sustainability standards.
2.Influence existing standards
Green advocacy groups often compete to see their own standards widely adopted. To do this, they need to find corporate partners to champion and commercialize their standards. This fact gives companies an important but limited window in which to influence the standards to their commercial benefit without compromising sustainability considerations. For example, Chiquita Banana was successful in helping define new standards that not only satisfied the Rainforest Alliance’s goals but also led to a 27% increase in farm productivity and a 12% reduction in costs.
3. Define new standards
Some industries do not yet have established standards or a green consensus. Ambitious firms may be able to impose their sustainability standards – which happen to be a strong fit with their business model – on the sector in conjunction with external stakeholders. To pull this off, these companies should possess significant industry clout, a credible brand image and strong internal capabilities. Starbucks and Nestlé have successfully pursued this strategy in the coffee business.
4. Break away from existing standards
A few firms may consider going alone to create new sustainability standards when the existing standards do not play to its strengths, are inconsistent with its strategy, or actively undermine its competitiveness. Apple is a case in point. With its revolutionary iPad, Apple out-greened the greens by emphasizing a new and relevant sustainability dimension — power conservation — on which it can excel. The market-beating iPad is considered so energy-efficient that one T. Rowe Price analyst compared its battery life to “black magic.” A strategy like Apple’s will work only if the proposed new standards are measurable, relevant to customers, and demonstrably superior to the existing criteria.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
Luxury Goods: Where is the Runway Headed?
Filed under: Consumer Goods Industry, Growth Strategy, Marketing & Branding, Product Management, Supply Chain & Operations | Tags: Armani, BMW, Burberry, Calvin Klein, Gucci, Hermes, Louis Vuitton, Luxury Goods, Luxury Goods Market, Luxury Goods Strategy, Mercedes, Supply Chain Management
Leave a Comment Few industries face more uncertainty over the next couple of years than the $225B luxury goods business. This recession has pummeled luxury sectors – designer apparel, exotic cars, watches & jewelry etc – with some brands recording 30% revenue declines. Increasingly, consumers have become more fickle and demanding as they have become more globally fragmented. With many pundits forecasting a slow and uneven economic recovery, and in some cases a permanent retreat in consumer demand (at least in North America and Europe), the industry faces some major challenges. Over the next year, how can luxury firms rebuild revenues, profits and brand equity?
Remain true to your brand essence
Luxury franchises must stick to their knitting if they want to survive and prosper. Major global brands such as Louis Vuitton, Hermes and Mercedes have demonstrated that luxury brands can grow during recessions by maintaining an emphasis on core values like quality, exclusivity and image. Firms should be very careful before they reduce investment and focus on design, marketing and merchandising. Companies should also resist the temptation of short-term, volume-driven revenue expansion by rashly shifting core brands laterally or down market. For one thing, strong core brands can provide a powerful halo over secondary or mid-tier brands within the same corporate portfolio. Also, the decline of Pierre Cardin in the 1980s still serves as an example of how to ruin a premium brand by repositioning it downward through excessive licensing and over-distribution.
Tailor offering to key segments
New market realities require a two-pronged strategy tailored to the challenges of each major consumer segment. Firstly, brands need to reengage with aspirational, middle-income buyers who during good times emerged as the major drivers (between 60-70%) of revenue. The recession saw a significant decline in demand from this group with many buyers likely never to return to the sector. Reacquiring aspirationals will be difficult given a newfound caution rooted in employment anxiety and high levels of personal debt. Firms will need to refine their marketing tactics and products mixes to improve perceived value, while avoiding marquee brand cannibalization and dangerous price discounting. Additionally, there are significant opportunities for luxury brands to drive differentiation and value through enhanced Web capabilities, brand communities and integrated on & offline customer experiences. Burberry, BMW and Calvin Klein serve as good models of how to target different segments with multi-brand strategies.
Secondly, companies can not afford to take their core wealthy consumer base for granted. This segment is a major revenue pool and serves as a key influencer for aspirational buyers. Should a product’s brand image wane in terms of cache, quality and exclusivity, wealthy consumers could quickly migrate to a competitive luxury brand, with aspirational consumers not far behind. To increase wealthy consumer loyalty, companies should reinforce their premium brands via strategic pricing management, limited supply and enhanced design & quality.
Optimize the supply chain
The emergence of web-enabled supply chain management combined with global shifts in customer demand have created a unique opportunity for luxury firms to reengineer their product supply chains in order to reduce cost, improve flexibility and minimize design times. For example, luxury companies could consider following other manufacturers and locate some product design, merchandising and marketing operations in high growth markets like China and India. As well, some brand portfolios like Armani and Gucci that compete in many categories (e.g., apparel, sunglasses and fragrances) could benefit from portfolio rationalization of duplicative or low volume products.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
