Demanding consumers, along with profound social and demographic changes, are creating both opportunities and threats for consumer products companies. The top performers have responded by rethinking their business models to emphasize innovation. By John Jackson, Susan S. Mann and John Zealley Outlook Journal, October 2005 Download this article [PDF, 427K]
PDF Help  There was a time when selling soap powder, shaving cream and disposable diapers was a pretty straightforward and predictable business. Not any longer. The pressures on the demand and supply sides of the consumer packaged goods business are relentless. Even getting ahead through innovation is difficult, since new features and products are copied by competitors in a matter of months.
Yet somehow this "traditional" sector has managed to outperform the S&P 500 for the past five years—and the subset of companies we identify as the high performers in the industry have outperformed the S&P 500 on shareholder returns by a whopping 270 percent. How has this happened? Though a number of factors contribute to success, one thing is certain: The leading companies have redesigned their business models so that innovation permeates everything they do. Today's consumers are a demanding bunch. And thanks to the explosion of choice, they have exponentially more products and services to choose from. But they still aren't satisfied. They expect much more from the brands they buy and use every day, and won't think twice about trading down to private label if they perceive a better value. Nowadays, consumers judge products along multiple dimensions, including convenience, prestige, sensory appeal and health as well as the traditional standard: how the product functions. Moreover, profound social and demographic changes are creating both opportunities and threats for consumer products companies. Those that can successfully understand and anticipate these changes and their impact on consumers will thrive and grow new categories and businesses; those that do not will decline as their products and markets continue to mature. For example, aging consumers who want to look and feel like they did 25 years ago are turning to advanced cosmetic, hair- and skin-care products for help. Increasing numbers of working women with less time but more money for themselves and their families are using innovative products to "buy" their way out of traditionally female household chores. The rise of single-person households and a trend toward delaying marriage and childbearing means traditional assumptions about shoppers are no longer valid. However, the rewards for insights into "new" shoppers are large. Similarly, the migration of consumers away from traditional channels such as TV and print signals the declining value of mass marketing. But this shift also means the companies that successfully target consumers using the emerging media mix can gain a distinctive source of competitive advantage that cannot be readily copied. Rising costs—for raw materials and marketing, among other things—are putting pressure on margins. The value-driven retail landscape and the accelerated pace of innovation are leading to large-scale increases in advertising and promotion budgets to drive growth.  Rapid concentration in the retail sector has added to manufacturers' challenges. Retail giant Wal-Mart is one obvious example. The company is famous for driving down vendors' prices, in part by competing against them with its own, value-priced private-label products (see "Consuming Passions," Outlook, June 2005). However, many of the best retailers now realize that collaborating with innovative brand manufacturers with deep consumer insights can help drive bottom-line results. Consequently, there has been significant growth in collaboration between retailers and manufacturers. This is because both sectors confront similar challenges from consumers, although product manufacturers must impress consumers at point of purchase and at point of use to drive brand loyalty.
So how have players in the household products and personal care industries, which are part of the consumer packaged goods sector, responded to these challenges and opportunities? The global spread of an affluent middle class, time poor but cash rich, means that a rising number of people are willing to pay significantly more for convenience items like mops that don't require a bucket of water and liquid soap, or pampering products like multi-bladed shaving systems and anti-aging creams—all of which also happen to have higher margins because they are distinctive. Innovative products not only create larger initial sales, they can also help lock in repeat sales through replacement components, thus enhancing loyalty and profit margins. Crucially, innovation has also helped turn relatively expensive consumer durables (like electric toothbrushes) into grocery items (like Procter & Gamble's Crest SpinBrush). Yet achieving consistent commercial success in innovation is far from easy in this intensely competitive industry, where more than 33,000 products were launched in 2004 in the United States alone. The majority of new products do not succeed. Worse, perhaps, consumers continue to complain that most of the industry's products look more or less the same.  However, a few companies in this sector—four in total—have risen to address the challenges and the opportunities to become high-performance businesses. Indeed, our research suggests that between April 2000 and April 2005, they generated 73 percent greater total return to shareholders than their peers (see "About the Research"). These companies have achieved higher performance by fundamentally rethinking their business models to position innovation as a pervasive capability driving an entire organization, rather than as a discrete strategy or initiative.
Innovation alone, however, is insufficient to ensure high performance in this industry. It has to be the right kind of innovation. And that hinges on five other competencies shared by all our high performers. First among them is strategic positioning, the ability to exploit distinctive and relevant positions in the market. To achieve this, high performers constantly and fundamentally question where to invest for growth, when to "harvest" mature markets or products, and when to acquire or dispose of product and market positions. (For more on market focus and position, see "The Right Place, the Right Time.") The ability to execute these positioning decisions is vital. For example, Avon Products has invested in beauty boutiques for its Chinese sales reps as a way to establish an important foothold in China, which has not allowed door-to-door selling since 1998. Meanwhile, today's Avon reps are also just as likely to be Russian or Brazilian as American or British. Establishing effective strategic positioning relates directly to another of the high performers' most significant core capabilities, customer centricity. High-performance businesses in this sector are exceptionally good at understanding their target consumers: who they are, where they are, how they use the companies' products, and what they really want and need. If necessary, they'll even reconstruct the company around the consumer. UK-based Reckitt Benckiser, for example, put its innovation center for insect sprays in Australia because that's where some of the world's nastiest bugs are found and where demand for the stuff that kills them is exceptionally high. (Read an interview with Reckitt Benckiser CEO Bart Becht.) High performers, indeed, practically live with their consumers. While their marketing functions tend to be globally organized, they establish highly focused, intimate, in-country customer organizations that allow them to keep track of changing consumer tastes within particular market segments. Procter & Gamble involves consumers directly in its product development efforts—witness its recent TV ad campaign, soliciting consumers to pick the next flavor for Crest Whitening Expressions. These industry leaders are also getting a better understanding of the value of their advertising and promotion investments. For example, in December 2004, P&G announced its investment in Arbitron and VNU's Project Apollo, which would create a model measuring the impact of media exposure and consumer consumption in the industry. Traditionally, the absence of such information has held back progress in innovation and marketing; after all, it is hard to be happy with your return on innovation if you don't know what it is. Traditionally, R&D has been more focused on technology, but many of today's breakthroughs are coming from the design side. P&G brand teams include top designers who rethink how consumers actually experience products. The company's Pampers Kandoo baby wipes, for instance, are designed for toddlers to use by themselves, a direct response to the observation that growing children want to be independent. Similarly, Olay Daily Facials give women a spa-like indulgence at home, and Swiffer mops and dusters make household cleaning faster and easier for today's busy men and women. The development and commercial evolution of high performers' product portfolios is driven by insights from multiple sources, including real-time interaction with customers. And those insights have allowed high performers to beat out competitors still reliant on traditional data models that do not provide a real understanding of consumers or of competitors whose portfolios remain too broad. Indeed, by narrowing their brand portfolios to concentrate on specific categories, and then continually reviewing and improving them, high performers create a "virtuous circle" that enables them to boost spending on future product promotion and innovation.  The Clorox Company calls its most significant product innovations gamechangers (see Case Studies 1 and 2)—and changing the game is exactly what it and these other successful innovators do. High performers know that consumers want more than solutions. Finding fresh and valuable variations of familiar products is what they look forward to. And the high performers in this sector excel at delivering "delightful" consumer experiences—often in the most unlikely places. Clorox's ToiletWand has disposable Clorox-embedded heads, which are thrown away—along with the germs—after use. According to the Schneider/Stagnito Most Memorable New Products Survey, the ToiletWand was among the top 10 new products introduced in 2004, in terms of both consumer awareness and purchases.
 What's more, high performers don't confine their innovation to inside their four walls. To deliver the complete consumer experience and reduce the costs of innovation, they will pursue collaboration and partnerships with a diverse network, including retailers, suppliers, scientists, appliance manufacturers and even competitors. The November 2002 alliance between staunch competitors Clorox and P&G, for example, combined the strength of Clorox's Glad brand name with P&G's powerful research capabilities and added Glad ForceFlex garbage bags and Glad Press 'n Seal plastic wrap to an already successful product line. P&G has a significant stake in this joint venture with Clorox, with an option to increase its stake over time.
All our high performers are, of course, paragons of operational excellence, since cost control and superior execution make much more predictable contributions to the bottom line than innovation. And their talent and change management prowess is formidable. These organizations empower their people to act like entrepreneurs and foster a culture that clearly rewards risk taking, performance and teamwork. For example, P&G united scientists from the company's Pur water purification unit and from dishwasher detergent Cascade to help develop Mr. Clean AutoDry, a car-washing sprayer product. These companies' leaders also set the tone by touching the products, walking the stores, and reaching out to consumers and employees, thus inspiring heightened employee engagement in the business. At Reckitt Benckiser, managers rarely wear ties, and they're known for spending time in retailers' household-cleansers aisles. Many of these leaders have helped restructure their organizations, transforming their companies into stock market stars. To be sure, sustaining high performance in such a fast-changing industry won't be easy. Consumer demand for innovation and the pace of product innovation continue to escalate. Maturing markets and categories need continual renewal to drive growth. Partnerships are not easy to maintain. The four companies currently cleaning up will have their work cut out for them in their continuing efforts to come up with new products and features to delight their demanding consumers. About the Authors John Jackson is a senior executive in the Accenture Consumer Goods & Services industry group. For more than 15 years, he has helped formulate global strategies, primarily for consumer products clients. He leads the company's European Operating Model team and focuses on leveraging organizational and operational redesign to help multinational consumer products clients drive higher performance. Mr. Jackson is based in London. Susan S. Mann is a senior manager in the Accenture Retail and Consumer Goods & Services/Strategy groups. For more than seven years, she has helped formulate sales and marketing, operating and M&A strategies for leading consumer products and retail clients. Ms. Mann, who is based in Wellesley, Massachusetts, has spent the past two years as Accenture's global industry program manager for retail and consumer goods; part of her responsibility in this role is to conduct high-performance business research and analysis in these industries. John Zealley is the managing partner of the Accenture Consumer Goods & Services/Strategy group in Europe. Mr. Zealley, who has been working in the consumer packaged goods industry for more than 20 years, has spent most of the past decade focusing on business strategy, serving clients engaged in consumer-led transformations. He is based in London. For more information, please contact us. Next: Consumer Packaged Goods II: Taking Care of Business
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