In the past decade, the consumer-goods industry has gone through a massive disruption that has affected its ability to generate profitable growth. This disruption is poised to continue, caused by a number of ongoing trends, such as the ubiquity of digital technologies, the growing power of e-commerce giants combined with price pressure, the shift in consumer preferences (particularly among younger generations), and the so-called explosion of small brands that has captured most of the growth in the recent years.
Prolonged lockdowns because of COVID-19 outbreaks have acted as an accelerant for a number of trends, such as the dramatic shift to e-commerce and evolving consumer behaviors and preferences. Another big visible trend is the increased scrutiny from multiple stakeholders on sustainability issues that affect product strategy, sourcing and supply chain, and access to capital.
In the face of these challenges, the classic transformation playbook won’t suffice. Consumer-goods companies must embrace a new breed of transformation to build a sustainable competitive advantage in the postpandemic world. Cost-cutting can no longer be the main compass for change. Instead, transformations must take a truly holistic perspective (across functions, geographies, and levers) to unlock new opportunities that companies have failed to harness at scale in the past, while enabling companies to adapt at a much higher speed.
To be successful in this holistic transformation, consumer-goods companies also need to rethink their overall model, where to play, and how to win while developing new sets of capabilities for the future (such as data-driven marketing, digital route to market, and next-generation productivity).
This approach implies not just a broader scope for the transformation but also a radical change in execution: consumer-goods companies must seed and foster their capabilities and empower and mobilize the whole organization to maintain a focus on unlocking a transformation’s full potential.
A mixed track record for transformations
Over the past decade, many consumer-goods companies embarked on transformations of various contours and scale. These initiatives typically shared three features: first, they were primarily “thematic” and focused on a specific function or functional area or geography. Often, companies prioritized cost dimensions and short-term, tactical performance improvements. Out of ten global consumer-goods companies that have launched large-scale transformations since 2015, only 30 percent hit both growth and cost-efficiency targets.
Second, when these transformations involved multiple themes (such as a broader functional or geographic scope), they were often sequential and at times isolated from one another.
Third, in most cases, transformations were set up without a strong connection to the company’s overall purpose and sustainability agenda. Overall, most transformations did not trigger significant investments in new capabilities or a redesign of the operating model.
These companies achieved different degrees of success, often with immediate and measurable positive impact. However, even in such cases, these transformations often left organizations unfit to sustain long-term performance improvements and value creation.
Four fundamental components for a next-generation transformation in consumer goods
To emerge strongly in the post-COVID-19 world, consumer-goods companies must undertake a next-generation transformation built on four distinctive pillars and supported by three enablers (exhibit):
1. Purpose (why) and portfolio (where)
The starting point of the transformation journey is a clear articulation of the company’s purpose (why) and portfolio (where the company wants to play). Unlike in the past, purpose and sustainability are necessary additions to the traditional strategic framework and act as a compass for such journeys to allow for the right trade-offs and decisions along the way. In the post-COVID-19 world, the company’s ability to push its strategy and management decisions beyond pure financial performance will increasingly challenge internal and external stakeholders. These stakeholders will affect many aspects of the transformation—for example, the broader organization’s adherence to the transformation, the response of investors and capital markets to these ambitious plans, and talent attraction.
In addition, the choices of where the company wants to play in terms of category, portfolio, and brand strategies are critical components at the start of the transformation journey. Executives should be prepared to reexamine category priorities, markets and channels, competitive advantages, the promise and positioning of the company’s brands, and new segments and business models.
2. Value-creation levers (what)
From day one, companies should embrace a truly holistic perspective, with a customer-centric approach that moves the focus from short-term wins to reigniting growth as a fundamental condition for sustainable, long-term value creation. In this scenario, transformation levers can expand into portfolio moves through both organic resource reallocation and M&A. Companies can also launch broad performance-improvement initiatives encompassing traditional cost discipline and, more important, a new set of growth-focused domains that are typically treated in isolation:
- Innovation and digital brand building. This involves combining granular consumer and market insights, innovation, and design thinking to support occasion- and purpose-led portfolio innovation and design, digital-native brand building, and portfolio rationalization and complexity reduction.
- Digital consumer engagement. This involves targeting granular consumer audience via data-driven marketing, content personalization at scale, and dynamic placement and measurement, as well as loyalty and ecosystem strategy.
- Digital route-to-market. This involves including omnichannel strategy (for example, e-commerce and direct-to-consumer e-marketplace management), digital-store and distribution management, advanced analytics, and digital technologies applied to the sales force.
- Programmatic mergers, acquisitions, and divestitures (M&A&D). This involves acquiring small brands and capabilities and the divestiture of low-growth brands.
The ability to deploy a harmonized canvas of growth levers, even with some phasing and prioritization, can allow consumer-goods companies to maximize value extraction and fuel profitable growth in the long term. For example, portfolio rationalization and platforming and late-stage differentiation can be key competitive factors for omnichannel strategies and at-scale customization. Companies can combine these levers with next-generation data-driven marketing that allows for the targeting of micropockets of growth across channels.
Within traditional cost domains, new strategies can be explored: for example, next-generation support functions are moving away from simple centralization or the outsourcing of transactional activities into advanced automation and process digitization. Other models include the creation of centers of excellence for value-added services to the deployment of future-proof but scarce capabilities (such as advanced analytics and e-commerce) across the organization.
3. Operating model (how)
Companies should realign the operating model to perfectly match their transformation ambition and long-term sustainability requirements. Successful transformations require companies to reallocate resources to build new capabilities and adjust their operating models toward a fitter, flatter, and faster configuration. Part of this process involves rethinking ways of working by adopting more agile and cross-functional approaches, with fewer touch points, stronger empowerment of managers, and much faster decision making.
4. Road map (when)
To ensure companies can make progress, they must craft the phasing of the different functional building blocks and map major interdependencies across functions and geographies. Given the recent shock from the pandemic and the continuous evolution of consumer preferences and behaviors, a lot of value resides at the intersection between functions and their ability to move in a synchronized way to adapt to emerging trends. Moreover, accurate phasing allows companies to efficiently fuel growth while optimizing capital requirements without slowing down the journey. Last, business continuity should be considered when sequencing the implementation: the road map needs to adapt to local market dynamics, including top-line trajectory, ongoing transformation efforts (such as IT initiatives), and any other major business issue.
Enablers for at-scale holistic transformations
Throughout our work in serving companies embarking on transformations, we have identified three core enablers that contribute to successful outcomes.
First, companies must avoid incrementalism and instead assess and target the actual full potential across the short term, the midterm, and the long term. Before the pandemic, companies that went “all in” were more likely to succeed in their transformations. Today’s uncertainty requires executives to confidently challenge the status quo even more by exploring big moves, which may be a better fit for the next normal.
Furthermore, the whole organization should be mobilized around the transformation process, with a renewed focus on empowering markets to drive the journey rather than the organization being driven by centrally led legacy transformation blueprints, which could only hinder the deployment of initiatives. Markets should own the tailoring and steering of the transformation so that organizational scope ensures long-term success (except for highly functional vertical components within the transformation). The early involvement and empowerment of the organization can ensure the highest level of buy-in and a realistic assessment of the full potential of specific markets. This step is particularly relevant in the transition from transformation design to implementation, where initiatives should be fully owned by markets, optimized based on specific conditions on the ground, and quickly piloted before bringing them to scale.
Last, companies should seek to establish and build a strong execution muscle fueled by a transformation team, which acts as a key node to connect programs running in parallel across regions, countries, and domains (such as costs, growth, and organization). Such transformation teams should include leaders with strong business credibility and acumen as well as a deep knowledge of the organization, on top of dedicated functional resources (such as HR and finance). In this setup, success hinges on the level of coordination and value extraction from interdependencies, elevating the role of the transformation team as a key enabler by prioritizing resource allocation and cross-fertilization while ensuring smooth and flawless execution. This transformation team goes hand in hand with a comprehensive change-management strategy, including a common language that is established from the start. This strategy should encompass the full scope of the effort and the organization’s emerging needs (for example, resiliency and adaptability combined with the potential to establish a continuous capability-improvement model).
Embarking on holistic transformations
While truly holistic transformations are still not the norm in the consumer-goods sector, some companies are pushing the envelope in the breadth and depth of the journey, including more new elements such as purpose, sustainability, and operating-model strategies.
A global consumer-goods company that entered the pandemic in the middle of a comprehensive cost transformation decided to double down by broadening the scope of the effort to include growth levers. The company considered how to not only pull classic cost levers (such as procurement cleansheeting and zero-based budgeting) but also remove complexity in its portfolio to fuel growth and refocus product strategy. A massive shift to e-commerce and direct-to-consumer, combined with an upgrade of digital-marketing capabilities, was necessary to cope with the disruption in the core legacy channels and capture the long-term omnichannel momentum. Leadership’s ability and courage to pursue bold top-line and bottom-line ambitions beyond the conventional playbooks was a core element of the transformation. A lean transformation infrastructure, designed to minimize organizational stress during such a challenging period, ensured the introduction of a common language and a single source of truth to measure impact and be able to steer the transformation across functions and regions in the most efficient way.
Leadership’s ability and courage to pursue bold top-line and bottom-line ambitions beyond the conventional playbooks was a core element of the transformation.
Similarly, a large consumer-goods company embarked on a transformation to become more agile and reduce complexity in the next normal, with an explicit focus on growth and cost efficiency and a truly holistic perspective across functions, geographies, and levers. It redesigned its operating model to create a leaner, faster organization by reducing the number of touch points. The mobilization of the entire organization was accomplished by empowering local markets to drive the transformation journey: markets have been involved from the start in the identification of growth initiatives and efficiency levers, and they played a key role in steering the effort and tailoring the transformation to local conditions. The empowerment of local business units was designed to increase their autonomy and decision-making power. Central functions acted as global expertise teams, with shared resources and capabilities enabled by automation and digitalization.
Last, a leading international beverage company embarked on a ten-year, growth-focused transformation in the midst of the pandemic. Its effort combined category and portfolio strategy, purpose and sustainability lenses to respond to the seismic market shifts in the next decade, and attraction and retention of customers and talents. Growth initiatives were not only aligned with the purpose and sustainability guidelines but also shaped to generate the maximum value for internal and external stakeholders in the long term. The company also took the opportunity to rethink its operating model (for example, innovation process and brand and category management) to ensure that the organization could sustain its growth trajectory. Markets have been involved from the early stages in the identification of the strategic imperatives and associated growth initiatives. Markets and key functional leaders played a central role in shaping the company’s purpose, creating a virtuous cycle and cross-pollination with the core growth-strategy design. A transformation office reporting to the CEO was established on day one, with the dual role of not only ensuring smooth execution but also acting as a custodian of the capability-building strategy.
A next-generation transformation is an ambitious effort—but one that’s well worth it. The postpandemic landscape will require consumer goods to have a different set of capabilities to thrive. The winners will be those that simultaneously pursue moves to capture growth and cost savings.