Monday, Nov 30

Millennials drive the evolution of the Consumer-Packaged Goods Industry (CPG)

The consumer-packaged-goods industry, has struggled to grow in the past decade after about 40 years of strong growth. A look back at recent decades of developed-market based CPG companies shows that, they have consistently managed to grow, but not always profitably. Its recent struggles are because of a confluence of large-scale trends, many of which have seen an acceleration during the COVID-19 crisis.

There has been the need for markets across board to evolve to meet the needs of the modern consumer, and Consumer Packaged Goods industry (CPG) is no exception.

With Millennials especially entering the phase of their lives where their spending ability is peaking, they are reshaping the trends that had seen the CPG industry so profitable in the past and in the process, creating an evolution.

Modern Internet technology has had an enormous and ongoing impact on the consumer goods sector. The ways products are manufactured, distributed, marketed, and sold have all evolved dramatically over the past few decades.

Performance in the consumer goods sector depends heavily on consumer behaviour. Developing new flavours, fashions, and styles and marketing them to consumers is a priority.

 

The Consumer-Packaged Goods industry

The CPG industry has relatively low-cost commodities that are consumed and replenished on a frequent basis. CPG products are typically packaged individually or in small quantities and are not designed for long-term use.

These goods can be considered as fast moving consumer goods, which are packaged goods with high sales volume, rapid inventory turnover, and often short shelf lives, such as foods and beverages, cosmetics, tobacco, apparels, cleaning supplies, toiletries amongst others.

The old model alone works no more

The Consumer-packaged goods industry has had an unusually, very stable model for a very long time, which most industry players used. This was as a result of five well documented elements.

First, these players were focused on mass-market, brand building and product innovation. That helped them generate stable growth and also gross margins that were usually about 25 percentage points above their non-branded peers. Many consumer goods sector companies are faced with a range of close competitors, substitute goods, and potential rivals. Competition on price and quality is often fierce, so brand identification and differentiation were critical to consumer goods sector companies' performance.

It was also about partnering closely with retailers and other elements of the mass channels in order to gain broad distribution. These companies also really thrived in developing markets by building brands and distribution as consumers became more-able to pay for consumer goods.

It was also about driving cost out of the operating model. And finally, it was about using Mergers and Acquisitions (M&A) to consolidate markets and generate more organic growth.

 

The Millennial Effect

Millennials are different from older generations in many ways. They prefer authentic, special, difference and sustainability is important to them. They tend to be more conscious eaters and are four times more likely than older consumers to say that, they resist buying from established brands.

GlobalData, a recognized leader in providing business information and analytics, found out in a study that, the older we get, the less likely we are to want to experiment with novel flavours and fragrances whiles millennials are more open to new and innovative concepts, indicative of wider exposure to foreign cultures and products from an early age.

Millennials are also importantly, entering the phase of their lives in which their spending is peaking. Yet, studies indicate, only 7 percent of them would consider themselves loyal to brands. Many of the 1.8 billion millennials worldwide today associate consumption with higher motives: they are more keenly aware of their health, value the local origin of products, and support the sharing economy.

This is emphasized by recent studies that concluded that 64% of consumers are now belief-driven buyers who want brands to deliver on societal issues, as well as products. This means that millennials will switch, choose, avoid or even boycott a brand based entirely on its stance on social issues. Therefore, you need to provide more than a great product to win them over and can lose them with just one small slip up.

Millennials also look out for more than a functional definition of a value proposition of a product. For instance, we all know that we should drink two litres of water every day. A value proposition will be for a water company to indicate something on the cap of a mineral-water bottle that shows the number of bottles needed to complete the drinking of two litters of water in a day. That moves the hand because this is what millennials are looking for and can subsequently lead to brand loyalty.

The concept of products having ‘badge value’ is most applicable to Millennials. This is a generation of consumers that value having differentiated products that they can show off via social media or help them get noticed at a party. Studies also indicate that 63 percent of millennials follow brands on social-media channels. These and other market trends bring fundamental changes that the internal structures of many companies fail to adequately reflect.

GlobalData sums this up perfectly, “Millennials are digital natives with a curiosity easily piqued by unusual things seen online and in social media. They are less loyal and more easily swayed by influences such as the media or recommendations by friends.”

From a convenience perspective, Millennials tend to live a very ‘on-the-fly’ lifestyle. Products that fit into their lifestyles can be considered winners with them, whether it’s a recloseable drink package or a travel size product that fits into a purse, wallet or bag.

This is a generation that is much more willing to try new things as compared to their predecessors. The wine segment gives a prime example of the difference between the two generations. A decade ago, wine in a non-glass package would have never worked, consumers just weren’t willing to accept the change. Now, you can look at the store shelves to see the success of wine in a box, wine in cans, and now wine in aluminium bottles. These success stories have been driven by the willingness of Millennials to experiment with new products and new formats.

Millennials cover a wide age range, and with many going into family formation, this can generally and substantially change what consumers want and demand as well as the core of the Consumer-Packaged Goods Industry.

Rise of e-market places

The growth of e-marketplaces also factors into the evolution of the Consumer-Packaged Goods industry with companies like Amazon, Alibaba, JD.com and Pinduoduo making up to 65 percent of revenue growth over the past five years. This growth has been accelerated by the COVID-19 pandemic as there was a notable growth in online demand as customers stayed at home during the pandemic, resulting in a trend of shopping for food on the internet rather than in stores.

During the crisis, Amazon surged by 65 percent in grocery categories in the United States and 80 percent in major European markets. Tesco, Britain's largest supermarket chain, also announced that before the pandemic, around 9% of its sales were online, a figure that has grown to more than 16%. The retailer now serves nearly 1.5 million customers online each week, up from around 600,000 at the start of the pandemic.

It was surveyed that, approximately 15 percent of US consumers tried grocery delivery for the first time during the COVID-19 crisis. Among those first timers, more than 80 percent say they were satisfied with the ease and safety of the experience; 70 percent even found it enjoyable and 40 percent intend to continue getting their groceries delivered after the crisis, suggesting that they have abandoned any previously held beliefs about grocery delivery being unreliable or inconvenient, instead, being surprised and delighted by the benefits of delivery.

Consumer-goods industry players therefore need to be abreast with the rising importance of e-marketplaces in many markets around the world to strategize accordingly.

 

Packaging

Brands that are successful with Millennials today, truly understand that the package should be considered an important part in the production of Consumer Packaged Goods. Packaging is the first thing the consumer sees when they pick up the product off the shelf.

According to Nielsen, a leading global information and measurement company, approximately 60% of decision making happens at the shelf. No other marketing spend can impact a buyer at the moment of truth in the store and throughout the life of a product.

Nielsen indicates that, “Perceptions of a product begin as soon as consumers lay eyes on it. Packaging helps brands get noticed and, more importantly, can significantly elevate perceptions of a product.

LRCFF Clear Coffee, for example, a coffee product recently launched in Slovakia and the UK, gained traction and stands out from rivals thanks to its eye-catching clear colour and packaging. The brand claims the colour addresses teeth staining concerns associated with traditional coffee drinking, while also offering something surprising and unique.

The CPG industry is evolving and will look very different in a few years. It is fast becoming a much bigger industry, with larger global players and more competition from up and-coming companies in emerging markets especially as millennials do not have a problem with switching to new brands.

Already, these changes are compelling CPG companies to rethink how they do business and pursue growth. Companies that fail to adapt to these changes or that make suboptimal choices will most likely be left behind by more strategic and action-oriented competitors.

THE SNOWBALLING IMPACT OF COVID-19 PANDEMIC ON BUSINESSES GLOBALLY

THE SNOWBALLING IMPACT OF COVID-19 PANDEMIC ON BUSINESSES GLOBALLY

Reality unusually seem more relatable to business owners than prospects for the future. Businesses are founded on the pillars of the future with the bricklaying of ideas, innovation, risks, test runs and skill upgrade, as an edifice of dominance, is constructed based on the successful prediction of these ideas and visions. They are what one may humorously call “economic fortunetellers” who ply their commodities on charts, graphs, pitches, researches and simulated test runs on their products and services which invariably become the future. In all their sixth sense and foresightedness, not a single business was prepared for the economic and financial shock lurking in the corner, and all it took was a sling of a carrier and a stone from a virus.

For what resembled a common cold which will blow over with some home remedy of ‘contain and treat’, it seems a boardroom of the best minds, suited up in well-meaning ideas couldn’t draft a convincing proposal to convince the COVID-19 investor to sign off the shares it has in the economy. The virus broke ranks and went for the juicer part of what controls and makes the world’s economy move on its stability axis- business. Invariably, businesses are the heart and lifeblood of any economy and if there are frictions within the space of transaction where there’s supposed to be exchange of goods and services, it will likely result in wears and tears in the long term.

Interconnected economies

It is an accepted fact that we have a pandemic situation on our hand, and likewise have we heard and seen the overwhelming decimation of human lives and heart wrenching occurrences in hospitals globally. With millions of people around the world in a virtual lockdown, there is an inevitable ripple effect of its impact in global economies and has brought a stark visibility of how operations, interactions, trade, commerce, transactions and international relations amongst countries globally, overlap in value and purpose. Revenues, profits, capital and liquidities all bear resemblance to a country’s viability, growth and supremacy by their interplay and interdependence on each other’s resources. Economic interdependence oils the machinery of nations and currently, countries are reviewing their trade policies whiles in the case of the United States, they are on the verge of decoupling with China on international trade. Manufacturing companies have had to either close down permanently or reduce workforce, businesses which are heavily reliant on daily transactions with consumers such as restaurants have been left high and dry, shops have had to cut back on losses and other companies are either encouraging staff to work from home or risk shutdown.

According to Investopedia,

“specific industries bear the brunt of the damage, shops and restaurants start to empty out, if not close their doors altogether. Non-essential travel slows down, curtailing revenue for not just airlines and business cruise-ship operators, but smaller businesses that rely on tourism revenue. However, those employed in seemingly unrelated industries can also feel the secondary effects of social distancing. For example, … banks may have to absorb more loan defaults as a portion of its customer base loses work. And oil companies see prices plummet as investors sense weaker demand”.

Measuring the effects of the pandemic

Container operation in port of durban South AfricaContainer operation in port of durban, South Africa

World Trade Organization (WTO) reports that Trade was already slowing in 2019 before the virus struck, weighed down by trade tensions and slowing economic growth. World merchandise trade registered a slight decline for the year by ‑0.1% in volume terms after rising by 2.9% in the previous year. Meanwhile, the dollar value of world merchandise exports in 2019 fell by 3% to US$ 18.89 trillion. In contrast, world commercial services trade increased in 2019, with exports in dollar terms rising by 2% to US$ 6.03 trillion. The pace of expansion was slower than in 2018, when services trade increased by 9%.

Currently, no one can comprehensively give precise definitions and statistics on the impact of the virus on businesses because the pandemic is an ongoing process, a “snowballing voyager” which doesn’t have a clearly defined destination or timeline, for now. Investopedia reports that, In the U.S for example, retail sales dropped by 8.7% in April, the greatest monthly drop since the government begun collecting data and the Federal Reserve confirms it by indicating it’s the worst dip in manufacturing output since the 1940’s.

The Organization for Economic and Cooperation Development last year, projected GDP growth in 2020 and beyond, but today, the picture is starkly different. It intimated that, “the path to economic recovery is highly uncertain and is vulnerable to another wave of infections. Two scenarios are likely: first, a second wave of Covid-19 hits, with renewed lock-downs, and world GDP plummets 7.6 % in 2020; the other, a second wave is avoided and global GDP falls 6% this year. In both scenarios, the recovery will be slow and the crisis will leave long-lasting scars.”

This is certainly not the first pandemic we have had to confront, but it is certainly the one which has had the most severe toll on global economies. “While the mortality rate of the corona virus is almost certainly less than that of the Spanish flu, its economic toll is already severe. Those economic shortwaves are being felt from Beijing to Madrid, creating a drag on the world economy that hasn’t been seen for decades. The IMF recently announced its forecast for a 3% drop in global output in 2020 which would be the worse slide in recent memory. The organization envisions a muted recovery next year, with GDP growth of 5.8% worldwide”.

The origin and epicenter of the virus, China, from early evidence of the impact of the COVID-19 conducted by emarketer found the severity of the short-term effects on SMEs. “In February 2020, 30 per cent reported that, due to a cash shortage, they would be able to sustain their business for no more than three months; 30 percent reported that they would be able to sustain their business for six to twelve months. Furthermore, 30 per cent of firms have seen their income fall by more than 50 per cent, with almost a third reporting a 20 to 50 per cent reduction. Three months after the COVID-19 outbreak in China, many small businesses are not working at full capacity. Many employees continue to work from home, and business owners attempt to fix broken supply chains and look for new domestic and overseas contracts. Estimates suggest that each ten-day period of lost work in the Chinese economy reduces quarterly GDP growth by 0.39 to 0.46 percent”.

WTO is of the view that, value chain disruption was already an issue when COVID‑19 was mostly confined to China. It remains a salient factor now that the disease has become more widespread. The waves of the pandemic travelled to the shores of Africa and did equal damage and the effects transcends subliminal impact to tangible manifestation on businesses. A survey conducted by the African Trade Policy Centre along with other agencies on the coronavirus disease (COVID-19) pandemic and its impact on Africa with strong inclinations on the impact of COVID-19 on businesses and trade, identified the challenges faced and responses made by these businesses.

Interestingly, a universal attribution from global accounts which has had damning repercussions and has resulted in the current economic challenges particularly for most businesses has been the imposition of restrictions. Despite its innocent motive of mitigating the spread of the virus, it has equally grounded most businesses, rendered their activities almost inoperable and African businesses are functioning with considerably less employees than under normal circumstances. ATPC said, “The rate of capacity utilization ranges from 30-40% (for small-sized enterprises) to 50-60% (for large-sized enterprises). It also tends to vary depending on the sector in which the business operates, with the average of respondents indicating rates of capacity utilization of around 30-40% for goods, and 40-50% for services. Within these broad sectors, there are quite large differences. In general, manufacturing operations, travel/hospitality and transportation services appear to be operating at their lowest capacities”.

Implications from the shutdown of economies on a global scale directly translated to the freezing of capital as human movements were restrained, as a result, closure of businesses, dearth of operational cash flows, drop in demand and reduction of opportunities to meet new customers are the main challenges faced by African businesses.

The World Trade Organization’s Director-General Roberto Azevêdo addressed the impact of the pandemic by saying, “the unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself. The immediate goal is to bring the pandemic under control and mitigate the economic damage to people, companies and countries. But policymakers must start planning for the aftermath of the pandemic”.  Trade is likely to fall more steeply in sectors characterized by complex value chain linkages, particularly in electronics and automotive products and according to the OECD Trade in Value Added (TiVa) database, the share of foreign value added in electronics exports was around 10% for the United States, 25% for China, more than 30% for Korea, greater than 40% for Singapore and more than 50% for Mexico, Malaysia and Vietnam.

Morale may be low, spirits may be crushed but between the cracks of ailing economies, socio-economic despondencies and businesses being irreparably split into halves is that ray of defiant conviction that things will look up. But the implications of the burgeoning rate of COVID-related cases and its mutating tendencies cannot override a system ready to build a firewall of resistance and fortitude. Businesses must also realize that they can’t make plans only to survive the bad times imposed by the pandemic.

DIGITIZATION – Redefining the Rhythm of Competition in Businesses

DIGITIZATION – Redefining the Rhythm of Competition in Businesses

Most executives have a powerful, intuitive feel for the rhythm of their businesses. They know how hard and fast

Developing Tailored Made Solutions to Increase Sales

Developing Tailored Made Solutions to Increase Sales

|To grow a business, there’s a need to improve the commercial capabilities.

Solutions selling is fast becoming the norm for many B2B players, driven by commoditizing product markets, shrinking margins, and increasingly complex customer demands. Companies in industries from chemicals to medtech are developing individually tailored combinations of products and services to meet customers’ needs more completely and grow sales. Yet for many of them, solutions selling has not yet delivered on its promise. Why not?

A series of analyses and benchmarks have been developed and has made it clear that the answer to this question lies in the fact that most solution-selling companies have less developed commercial capabilities than their more transactional peers.

That is a significant shortcoming, since analysis has also clearly shown that commercial capabilities are closely correlated with solution-selling performance. One company analyzed, for example, was a commercial real-estate company with above-average commercial capabilities as well as a compound annual revenue growth rate of more than 15 percent over five years—four times the average for its market. That kind of connection between commercial capabilities and performance came through again and again in the analysis.

 

FILLING THE CAPABILITY GAPS

Analysis of solutions providers delivered a clear message: if you want to grow your business, improve your commercial capabilities. Success hinges on three main factors.

 

Build the Right Institutional Capabilities

“Good products sell themselves,” says an old adage. While there’s obviously an element of truth to that, there was a need to learn more about what capabilities are most important in solutions selling today. Thus, 101 B2B companies across eight capabilities, from strategic marketing to commercial support, plus four enablers, from organization design to information systems were benchmarked and the following leapt out.

  • An average B2B solutions provider does not outperform its product- or service-focused counterpart in commercial capabilities,  but lags behind. The gap between the top and the average solutions provider is even wider. In other words, solution-selling companies have great potential to unlock value by boosting their commercial capabilities.
  • The gap between average and top performers is far greater among solutions providers than transactional sellers in innovation and product management. This confirms that, for solution-selling companies, customer-backed innovation and constant renewal of products to meet customer needs are key differentiators, in which insights from sales provide the competitive edge.
  • Solution-selling companies seem to have marketing programs that struggle to support sales effectively. Value propositions that sales reps can take to their customers are often difficult to tailor or quantify, nor are they modular.
  • The biggest gap to close between top and average performers lies in managing channel partners. In solutions selling, channel partners may struggle to understand their role in contributing to the value proposition and solutions. If training channel partners to sell your portfolio of products is important, it is even more so for solutions.

Improving commercial capabilities isn’t just relevant to customer-facing sales teams but also to entire end-to-end sales processes. One professional-services firm struggled to manage global sales across its broad portfolio of solutions and decided to address its organizational effectiveness. It discovered that salespeople with queries often had to wait two or three days for a reply from their lean technical-support team, even for high-priority bids and customers. To reduce these delays, the firm set up a cross-functional team of service experts, marketing specialists, and salespeople, led by a newly appointed presales project manager who acted as customers’ main point of contact. This dedicated role meant that when a customer had a question, there was someone responsible for quickly getting them an answer, which cut response times way down. Under the new setup, queries were resolved within a day, helping the firm cement its reputation as easy to do business with and an expert in its field.

Cultivate the Right Individual Skill Sets

If a wide gap in institutional capabilities separates top solution-selling companies from average performers, does the same gap exist for individual reps’ selling skills as well? To find out, a survey was conducted and the following were revealed.

  • Solutions providers are less confident in their commercial skills than their counterparts at more transactional organizations. The focus on the technical and operational side of the business may, in practice, prevent solutions players from developing best-practice commercial acumen among its sellers. This is especially true early in the deal cycle—account planning, prospecting, resource management, and pipeline management—where solution sellers lag their transactional peers. Even when both solutions and product sellers are well prepared, the complexities of selling solutions require greater selling skills.
  • Top-performing solutions sellers excel at understanding customer needs, delivering on the value proposition, and negotiating and closing deals compared to their more transactional peers. When moving to solutions selling, these are the skills that need to go above and beyond the best practices of transactional sellers and require active training of the sales force. All these items center around clarity of value created for the customer and how to price that over the lifetime of the product.

One digital-solutions provider was able to grow its business by a double-digit percentage every quarter simply by hiring more sales staff. But when sales growth started to slow down, the company decided to analyze its selling skills and discovered big variations between reps. Closer examination revealed that they were given little support after onboarding and that the company had weaknesses in its performance measurement, training, and coaching. By comparing reps’ sales proficiency with sales outcomes, the company found it focused too heavily on prospecting and could achieve better results by refreshing reps’ product knowledge, equipping them with proven tactics for negotiating prices, and improving their ability to handle customers’ concerns. After upgrading sellers’ skills, the company saw revenues rise by more than 4 percent.

Dedicate more Time to Customer Interactions

Despite the attention it has received in recent years, improving the way sales reps allocate their time is often overlooked in sales-effectiveness efforts. Yet even the best reps need enough time in front of customers to deliver distinctive results.

To uncover the obstacles that prevent reps from dedicating enough time to selling, their most value-creating activity, an analysis was conducted on how they spend an average working week. And the following was found:

  • A typical rep spends less than a third of the working week on sales interactions with clients, with transactional sales reps having the edge over solutions reps, with scores of 29 percent and 22 percent, respectively. This highlights how much still needs to be done to relieve sales reps of non-sales activities through, for example, industrialized, streamlined, and effective sales operations as well as motivating them to take greater advantage of support.
  • Not surprisingly, reps at solutions providers spend far more time on sales preparation than transactional sellers do: 28 percent of an average week compared with 21 percent, respectively. Cutting that time requires adopting easy-to-use tools, such as value-proposition modules, customer-value calculators, and solution configurators.
  • Some reps were able to spend twice as much face-to-face time with clients as the average for their peers—up to 45 percent for top-performing solutions sellers. Make time management more transparent so that the sales force is aware of how their time is spent and can better see how to strike the right balance in activities.

One chemicals company was concerned when it discovered that its reps spent less than 13 percent of a typical week interacting with clients. That meant just five hours dedicated to direct selling activities and 35 hours spent on non- or less-value-adding tasks. The company found the biggest drain on reps’ time was aftersales activities: booking new orders into the system, chasing missing or incorrect invoices, and resolving issues. The answer was simple but effective: setting up a specialist team to handle postsales requests and free up reps’ time for selling.

WHAT SHOULD SALES LEADERS DO?

In companies that excel at solutions selling, sales leaders typically do three things.

Get much closer to the customer to innovate

As B2B companies shift their focus from products to industry expertise, and as companies work with their customers to drive innovation, listening and inquiry skills become critical. For instance, one upstream chemicals company set up a new marketing organization to engage with its customers’ customers—the end users— to understand how its products affected the performance of the paints, inks, and other products they used. Armed with insights from this team, reps then spearheaded innovation by committing to project sales targets and cocreating solutions with each customer to meet their individual needs, enabling the company to double its success rate for new projects.

Maximize sales time for salespeople

The complexity of solutions selling can trap salespeople into spending the bulk of their time answering customer requests, orchestrating internal activities, and reinventing the wheel for every new pitch. Smart companies avoid this trap by transforming their sales operations, customer support, and marketing as they switch to solutions selling. They work hard to focus sellers’ time on the actual selling interactions with the customer. When one high-tech company moved its customer support from local sales offices to a central organization, it improved efficiency, response time, and quality. By locating customer support next to its training center and introducing clear career tracks for staff, it deepened its expertise in helping customers and left reps to do what they do best: sell. 

Quantify each sale in terms of customer value and lifetime profitability

To close deals, reps must be able to translate each solution into value for the customer and profitability for the company throughout the solution’s lifetime. One power-equipment company moved from selling products and services to offering digital systems for operating the grid. Rather than focusing on profitability at the point of sale, sales reps sought to maximize the system’s lifetime profitability using a tool to calculate annual capital-expenditure and operating-expenditure savings for each customer. The company won a big deal by helping the client understand which of its costs mattered most: the price of the land needed to house its equipment and the travel expenses incurred by its maintenance engineers. With the company’s help, the customer achieved substantial savings by reducing their buildings’ footprints and installing remote monitoring for maintenance optimization.

Developing a growth catalyst that funds itself

Developing a growth catalyst that funds itself

To drive growth, one has to first find the fuel—and for many companies, that’s not so straightforward.

How Businesses can thrive in a world of continual turbulence

How Businesses can thrive in a world of continual turbulence

In the face of rising uncertainty, businesses should get ready for the unexpected; To build resilience, accelerate productivity improvement and operational flexibility.

Economic and business uncertainty is rising across the world. After more than a decade of strong growth, expansion in many major economies has slowed significantly in recent months. Businesses are feeling the repercussions of political and economic tensions, from disputes over trade to questions over the growth trajectories of economies from China and India to the European Union and the United States.

At the market level, meanwhile, further forces are at work. From the rise of e-commerce in retail to the impact of alternative power trains, new mobility solutions, and autonomous driving in the automotive sector, few industries have been spared the impact of technological disruption. New digital technologies are also reshaping the way operations are done, with sophisticated automation powered by the Internet of Things (IoT), for example, or the use of advanced analytics and artificial intelligence technologies to support or augment human decision making.

These changes bring significant opportunities as well as risks. In response, companies in multiple sectors are already transforming their products, processes, and business models. Now they need to go even further, accelerating internal initiatives and pursuing new forms of collaboration with customers, suppliers, and partners. With so many variables in play, however, the challenge for many organizations will be to learn how to thrive in a world of continual turbulence.

The past provides a clue. Some companies have made structural, strategic, and operating decisions that dramatically improved their ability to perform in the face of volatility and uncertainty. Businesses need to draw on proprietary research that shows how resilient organizations succeeded. It is important to understand that future challenges may require an even bolder approach, and that companies should strive to build greater flexibility into their end-to-end value chains.

Learning from the Past

The most significant period of volatility in recent history was the global recession triggered by the financial crisis of 2007. Over the ensuing 18 months, global GDP fell by 1.9 percent, its steepest and most widespread contraction in the modern era. Industrial output, trade, and investment plummeted in most developed countries. The US unemployment rate doubled.

Some companies rode out the turbulence far more successfully than the majority of their peers, however. In a research by McKinsey, an analysis was conducted on the performance of around 1,000 large, publicly traded companies from multiple industry sectors through the crisis. That research identified a subgroup of resilient organizations that delivered a growth in total return to shareholders (TRS) that was structurally higher than the median in their sector. The performance of these companies dipped less overall during the recession, and improved faster during the ensuing economic recovery. By 2017, the cumulative TRS lead of the typical resilient had grown to more than 150 percent over their non-resilient counterparts.

That difference wasn’t down to luck. Resilient companies were not insulated from the impact of the downturn: their revenues fell in line with their peers during its early stages. By 2009, however, the earnings of resilient companies had risen by 10 percent, while industry peers had lost nearly 15 percent.

The analysis suggests that these companies succeeded because they moved further and faster before, during, and after the crisis. In 2007, for example, resilient companies were cleaning up their balance sheets, reducing debt while most companies were accumulating it, and selling off underperforming businesses. They doubled down on operational effectiveness too. By the first quarter of 2008, resilient companies had cut their operating costs by 1 percent, while those of their peers continued to grow. That decisive action meant resilient organizations had access to more cash, and they used it wisely: maintaining their relationships with key customers through the recession and acquiring assets and companies from distressed rivals as the upturn began.

The past is not a Blueprint for the future

The experience of the past can inform companies’ planning for future challenges, but it doesn’t provide a blueprint for action. In part, that’s because history is unlikely to repeat itself in the same way. While there were significant regional differences in the impact of the 2008 crisis, markets and supply chains are even more fragmented today. Then there’s the digital difference. The large-scale adoption of new technologies, such as IoT, advanced analytics, and machine learning, is redefining the size of the opportunities available to companies, and the speed at which they can be captured.

Digitization can be a double-edged sword, however, helping outsiders slice through barriers to entry even as incumbents’ slash performance constraints. The steady annual productivity improvements that have become the norm in many manufacturing plants may not be enough to keep a company ahead in a world where digital tools are delivering improvements ten times faster. Put simply, yesterday’s bold moves may be too timid in the face of tomorrow’s challenges.

Building resilient value chain

Companies can’t avoid volatility and uncertainty, but they can, and should, take specific actions to build greater resilience into their value chains. We define resilience in this context as an organization’s ability to keep generating economic profit through cyclical and structural changes in supply and demand.

In practice, resilience has a productivity component and a flexibility component. High, and continually rising, productivity helps a company protect its margins, allowing it to ride out smaller changes and giving it the financial firepower to respond to larger ones. The flexibility of a value chain, meanwhile, is determined by its ability to continue generating profit under different supply and demand conditions. Can a company bring its costs down as demand falls? Can it ramp up output to take advantage of market peaks? Can it adjust its procurement activities to benefit from fluctuations in input costs?

The need for new metrics

Even companies that recognize the power of superior productivity and operational flexibility can lack effective tools to measure and evaluate them. Today, few organizations can claim to understand how flexible their value chains are compared to those of competitors, for example. Nor do they know where they should make changes in order to gain the flexibility they want.

We believe that the development of effective ways to measure, develop, and manage value-chain flexibility will be critical for companies over the coming months and years. It will also be challenging. Value-chain flexibility is multidimensional and context-specific. Measuring it will require detailed, granular analysis. In logistics, for example, flexibility might be affected by the fraction of material purchased from local suppliers, as well as by the nature of contractual arrangements with logistics-service providers. In R&D, key factors might include the percentage of engineering hours that are outsourced, as well as the size and duration of major ongoing projects.

Companies grappling with this complexity need a better understanding of where to target their efforts to become more resilient. Some automotive players, for example, have committed significant resources to their future electric and autonomous vehicle programs, potentially limiting their ability to cut costs in the event of a major fall in demand for today’s models. Over time, the index provides organizations with a way of tracking their progress and benchmarking themselves even as standards for leadership in flexibility and productivity continue to evolve.

The leaders of most organizations already understand the critical role that operations play in overall business performance. It is believed that the next frontier for many companies will be the development of operating models that embrace resilience: able to withstand shocks and capture emerging opportunities faster and more effectively than those of their competitors. Where should your organization focus its efforts? Providing answers to the three questions below may offer a guide.

  1. Which opportunities have been difficult to pursue due to a lack of resources or responsiveness in your organization?
  2. What are the most inflexible points in your current operations, and what are the underlying reasons for the rigidity?
  3. Where could the use of digital and analytics solutions achieve meaningful changes to the performance indicators that matter most to your organization?
Growing faster than the market: Three questions the C-suite should ask

Growing faster than the market: Three questions the C-suite should ask

Leaders who are most successful at driving growth in their organizations are deliberate, persistent, and disciplined in the way they go about it.

Topher Grace sits down with Bryan Elliott to go Behind the Brand and answer 20 Questions.

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