Dr Susanna Takkunen from Aalto University Executive Education, and Principal Director at Accenture
When I started my career in the late 90s as Assistant Brand Manager at United Biscuits in London, the consumer-packaged goods (CPG) industry was strongly guided by brand building practices leveraging mass media advertising and in-store execution as key business drivers. Harnessing strong relationships with the retailers was imperative for success.
But in 2015, as Chief Marketing Officer of a personal care and beauty company, disruption of the so called Aakerian brand management model had slowly begun. New niche brands, such as Glossier, and Million Dollar Shave Club, leveraging the benefits of digitalization, were paving the way, and posing a threat towards the market position of incumbents. These disruptors were owned by private investors and venture capitalists, who did not rely on metrics such as market share, shelf space and brand awareness for evaluating success.
New customer acquisition rates, customer lifetime value, and speed of growth ousted key performance indicators such as brand health and profitability. Consumers were diverted from offline shops to online channels, and mass media communication was replaced by personalized consumer experiences and digital touchpoints.
It was clear that traditional operating models were changing. But what was less obvious was how a company should respond. The deeply embedded brand management doctrines and organizational routines linked to retail sales cycles were preventing change.
According to a recent study by Accenture, in the next five years the top 20 CPG companies will grow five times slower than their smaller category competitors. This is a result of reliance on a single ‘tried and tested’ organizational business model, siloed organizational structures, and self-sustained market opportunities, in which partnerships are merely there for transactional purposes. In addition, long innovation cycles and a lack of organizational capabilities to collect and leverage data is weakening the ability of incumbents to thrive.
So why is change so difficult?
McKinsey claims that 80% of CEOs in the CPG industry feel that their existing business model is at risk, but they do not know how to change it. Prior research also indicates that a possible explanation to why some companies succeed in driving a digital transformation while others attempt to favor strategic choices, they are familiar with, or ultimately, to push back, is typically an outcome of the cognitive path dependencies held by organizations. What this means is that senior leaders often fail to change existing business logics due to a so called ‘identity trap’, in which an organization’s heritage, habits, values, emotions, routines, and politics become a barrier to change. It is this identity trap that also prevents organizations from understanding how to change.
In the last two decades, understanding digitalization as a contemporary phenomenon impacting the value creation-value capture models, and organizational structures and strategies has drawn significant attention amongst both practitioners and scholars. However, a profound limitation of research to date is its focus on exploring the phenomenon pre-dominantly from a digital technology, or a digital industry perspective. As such, the underpinnings for how digital transformation of an incumbent organization is triggered, and what impedes and promotes changes within a company attempting to transform the operations of its legacy business model, seems to be absent.
During the last three years I have attempted to dig into this dilemma and understand why incumbents in the CPG industry are slow at adapting to digital transformation, and what prevents them from changing. In my doctoral dissertation comprising of a case study of eight CPG companies, I explored how different organizations made sense of digitalization and what impeded and promoted business model change.
My research findings depicted three different orientations towards digitalization: transformative, compartmentalized, and ambivalent. The defining difference between these organizations was which stakeholder they defined as their primary customer.
For those organizations who continued to focus on the retailers as their primary customer, comprehending how to change the existing operating and business model was laborious. As a contrast, organizations who had identified that digitalization enabled the creation of direct relationships with consumers, were able to disrupt the conventional industry practices and innovate new operating models.
The findings further indicated that the ability of an organization’s CEO to dispose of the organization’s existing retailer-centric identity and replace it with consumer-centricity were able to lead a business model transformation.
What this means is that the ability of an incumbent in the CPG industry to drive a business model change and to accelerate business growth depends on an organization’s ability to understand and re-define its key stakeholder-relationship from retailers towards consumers.
To survive in the long run, a company in the CPG industry cannot shy away from the fact that the traditional operating model in which the retailer has an imperatively strong role, and in which most business decisions are guided by the retailer’s sales cycles and category strategies, must simply be replaced by new business logics. Consumers today are no longer restricted by time or place – or even by the existing reality.
To succeed, consumer-centricity must be deeply embedded into a company’s identity. As a contrast, retailer-centricity can and will act as a barrier to change, slowing down growth, and, at worse, trigger firm failure.
