From Linear to Exponential: Co-creating the Exponential Transformation or How FMCGs can adapt their competitive advantages in the disruption age

The below article is an excerpt of a keynote speech delivered on Nov 11th for the Swiss FMCG trade association (Promarca) - for the full transcript - see the video below.

The concept of the Exponential Organization has been popularized first by the Singularity University and appeared first in the excellent eponym book (see source section (1)): Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (and What to Do about It) - Salim Ismael, Michael S. Malone, Yuri Van Geest

The challenge for us, FMCG leaders, is not about predicting the future of the industry but it is how we transform structurally our businesses to deal with an ever uncertain future with exponential dynamics.

Exponential dynamics are taking by storm the world of FMCG and beyond:

- Online sales continue to outpace all other channels (Alibaba sold on the single day this year - 11/11/16 - for $18bn sales - this is more than what Tesco sells globally through all his stores in a whole quarter)

- The increase in the number of objects connected to Internet is expected to grow exponentially - the famous Internet of Things - (today 8bn, by 2025 up to a trillion) will change the way we shop (think about the Amazon Dash Button)

- Driverless vehicules/robots are reducing at an exponential pace the cost of last-mile-delivery cost (LMDC) (The Starship robot - currently under test in London, Bern, Dusseldorf - for example is expected to reduce by up to 90% LMDC) making profitable the disruption of an ever rising number of categories through direct-to-consumer business models... think about the wide array of strategic move it opens for established players (Unilever acquisition of Dollar Shave Club to leap-frog in the blades & razors category)

- 3D printing cost is currently halving every 12 months and foster the emergence of a brand new value chain where decentralized production and decentralized supply-demand matching will become the norm. Inventory, manufacturing and logistics costs will be dramatically reduced. The dramatic reduction in cost-to-serve will enable remote geographies/population to be served in a cost-effective manner... think about the revenue increase it could unlock in emerging markets...

- Blockchain - the technology behind Bitcoin - is changing the way supply chain and transactions are secured and has far-reaching implications on traceability and quality management (think about a product with QR code summarizing accurately the origin of all ingredients at an unseen granular level of details: milk that comes from this farm and this cow that was milked that day in that village...)

- Artificial Intelligence starts being used by companies to engage online at scale with an ever increasing number of consumers at the same time (Sephora has been using chatbots through the Kik application since March 2016)

- Quantum computing is opening new possibilities in solving problems than we would have never dreamed of only few years back

Most of those dynamics follow the Moore Law (doubling every 12 months). At such they call both for humility and a sense of urgency. Humility because it is almost impossible to predict precisely exponential dynamics. By definition, if an estimate is off by one period, it ends up being off by 50%. A sense of emergency because it takes as much time to an exponential dynamics to go from 0% to 1% penetration than from 1% to 100%

The risk for CEOs is to miss the emergence of those dynamics and to fail to connect the dots between them. In fact it is very easy to dismiss something that has initially less than 1% penetration but that is growing exponentially (think how Polaroid, Kodak and Nokia got disrupted)

From Linear to Exponential:

Out of those exponential dynamics, a brand new world of risks and opportunities is emerging. In the meantime, most FMCG companies are still busy applying the 'linear playbook': they are still dedicating most of their resources in:

- launching incremental innovation/SKUs,

- squeezing more and more the specifications of their products, implementing ruthless zero based budget, optimizing marginally their revenue management with tactical sizing/pring and trade spend ROI tweaks - all with the objective to extract few bps of margin improvement to offset market deflation and ever increasing retailers requests for increased trade investment

- cutting organization layers out of complex matrix structure in the hope to increase speed-to-market/agility and entrepreneurial spirit

There is nothing wrong with the 'linear playbook'. If applied right while keeping in mind the end consumer, it can deliver substantial sustainable linear revenue/margin improvement (in the scale of 100s of bps). The problem is that this 'linear playbook' is not enough anymore in the digital disruption age: as the Gillette vs. Dollar Shave Club case study showed - what is the point on improving by few 100s of bps revenue and profit if a whole category is going to be entirely disrupted by a new entrant and a radically different business model? 'The linear playbook' should not be scrapped or forgotten, it is just not enough anymore.

There is nothing wrong with the linear playbook (ZBB, revenue management, organization de-layering, product specification optimization...) as long as value is delivered to the end consumer [...] But it is NOT ENOUGH ANYMORE in the digital disruption age [...] What is the point on improving by few 100s of bps revenue and profit if a whole category is going to be entirely disrupted/extincted by a new entrant and a radically different business model? 

Exponential risks and opportunities call for a new playbook - the exponential playbook:

- Launching linearly new SKUs is not enough anymore, the future lies in business model innovation (direct-to-consumer, brand new value chain to be invented with decentralized supply/demand, and a balanced mix of hardware/software/platforms, partnerships that go beyond the traditional core business)

Unilever for example launched in September 2016 The Hatch House with the objective to nurture & grow direct-to-consumer businesses and innovate with business models

- Having large R&D resources in-house is not enough anymore, the future lies in opened innovation and in the ability to leverage the creativity of the world

Nestle for example launched the HENRi platform in October 2016 with the objective to crowd-source innovations at scale

- Doing marketing mix modelling on agencies purchased media is not enough anymore to drive media ROI, the future lies in the ability to purchase directly media and acquire consumer data to improve exponentially GRP (Gross Reaching Point) quality/relevance, hence marketing ROI. While marketing mix modelling can deliver 5-10% media savings, programmatic buying can deliver up to 20-30% media savings on digital marketing without counting the increase in GRP quality.

P&G for example sources already more than 70% of its digital marketing through programmatic buying

- Enjoying great manufacturing scale is not enough anymore, the future lies in flexible decentralized value chain that will leverage 3D printing and digital platforms

- The matrix organization as we know it today is not enough anymore to overcome the self-disruption dilemma and foster change at scale. New powerful organization ideas are required (creation of the Chief Entrepreneur Officer role - as Alexander Osterwalder popularized it - see source (2)) to orchestrate self-disruption; business model innovation group at the edge to drive self-disruption and bring the outside in... Much more work still needs to be done in this area to invent the organization of the future for FMCG companies but what is sure is that the winning FMCG companies will be the ones that will succeed to reconcile the start-up vs scale-up dilemma

Much more work still needs to be done in this area to invent the organization of the future but what is sure is winning FMCG companies will be the ones that will succeed to reconcile the start-up vs the scale-up dilemma

Having for strategy to acquire similar companies to gain scale (supply, go-to-market, geography) or to strengthen/enter into a new segment is not enough anymore, winning FMCG companies will need to acquire Exponential Organizations to assemble new value chain

Coca-Cola for example created a Corporate Venture Capital Fund ('The Coca-Cola Founders Initiative) in 2015 with the objective to invest in Exponential Organizations that can deliver broad synergies. Most of acquired companies had in common to have digital platforms and be located in developing countries (from video aggregator website Winnin in Brazil, through mobile virtual netorwk operator Weex in Mexico to order management platform S3 in Vietnam)

If few FMCG companies started to take bold steps, no ones cracked the code of 'the Exponential Playbook'

If few companies have recently started to take bold steps to move to an exponential organization: No companies have cracked the code of 'the exponential playbook'. Far from it, our research revealed that:

Our research identified 3 key insights for FMCG companies and derived a 10 steps process to execute the Exponential Transformation:

1. It starts with education at the top (Executive Committee, Board)

2. There is no point rushing into strategy/execution if the right culture/leadership is not in place

3. It is critical to maintain a balance between present and future (Chief Entrepreneur Officer role along with the traditional CEO role, Business model innovation group at the edge must help current businesses developing profense plans while trying to disrupt them...)

If it is clear that there is not a single 'one-size-fits-all' approach/recipe for success, we identifed some patterns for success and developed a 10 steps process to help FMCG companies executing the Exponential Transformation:

Again humility and a sense of urgency

I believe we have never lived in more exciting times in the FMCG industry. All those exponential dynamics bring unprecedent risks and opportunities. As FMCG leaders, we need both to display great humility and act with a sense of urgency. The future of our industry still needs to be co-created and it is our exciting challenge. 

Frederic

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To discuss more on the above, you can contact Frederic at: [email protected]

Source:

(1) Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (and What to Do about It) - Salim Ismael, Michael S. Malone, Yuri Van Geest

(2) The C-Suite needs a Chief Entrepreneur Officer - article published in the HBR by Alexander Osterwalder

About the author:

Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner of Frederic Fernandez & Associates a bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. His focus areas are mainly in growth and profit turnaround, restructuring, corporate strategy and digital business model design in the FMCG industry. His passion is to help FMCG leaders co-creating the future of the industry and to develop, achieve and exceed the potential of their business. He spends his time advising senior FMCG leaders across Europe, Middle East and Africa (EMEA). Before joining the world of management consulting, he spent more than 10 years working with Fortune 500 companies like Procter & Gamble, Reckitt Benckiser, PriceWaterhouseCoopers and Societe Generale in leadership positions across Europe (France, UK, Nordics, Germany, Switzerland, Austria), Central Africa and India.

Previous articles published include:

FMCG CEOs: 6 Reasons why your company's competitive advantages are becoming increasingly obsolete

7 Reasons Why Unilever Acquired Dollar Shave Club

Why the FMCG industry is becoming 'uberized' and how to move from disrupted to disrupter in 5 moves

Breaking the code of 3G Capital's success (Kraft-Heinz, Ab-Inbev, Burger King) or how a private equity firm is transforming the whole FMCG industry

Unlocking the DNA code of RB success in 5 genes or how RB outperfomed consistently P&G, Unilever, Henkel and many more for 15 years now

FMCG CEOs: Disrupt your business model or disappear - 5 lessons and recommendations drawn from the Dollar Shave Club / Gillette case study

FMCG CEOs: Stop insanity and turn your company into a serial business model disruptor

Why Consumer & Retail companies should listen again to the ABBA hit 'I want it all, I want it now'

What do Bayern Munich football club, McVities biscuit and Sainsbury premium tea have in common?