The two-speed organization has been saved
The two-speed organization
Consumer product companies organizing for growth
Faced with ever-increasing external threats, consumer product (CP) companies may need to take bold steps to accelerate growth.
For years now, incumbent consumer product companies have often struggled to respond to the start-ups disrupting categories ranging from skin care to ice cream. They've chased strategic initiatives they hope will accelerate sales and profit growth; initiatives including portfolio diversification (often through acquisitions), product and packaging innovation, geographic and segment expansion, and cost management. So how have these initiatives performed?
Deloitte analyzed recent sales and profit performance of over 50 publicly traded CP companies that operate in all major industry channels—food and beverage manufacturers, foodservice distributors, and supermarket chains (see figure 1).
Our data show food and beverage manufacturers clearly face the most significant headwinds, with declines in sales and gross profit of three percent and 0.2 percent, respectively. Sales for multinational companies in North America were off even more sharply (-3 percent vs. +2 percent for international sales), while producer prices rose two percent, suggesting unit volume declines of -5 percent. Operating profit was up only due to a decrease in operating expenses.
The pace of disruption in the market place is exponential
Gordon Moore, co-founder of Intel, famously observed that computing dramatically increased in power and decreased in relative cost over time, and at an exponential pace. What would become known as Moore's Law describes this exponential dynamic: Technical advancement getting progressively faster, sparking accelerating change in related domains.
We see this dynamic playing out in the marketplace: When industries begin to take on digital—i.e., technically-driven—properties such as digital commerce, digital marketing, and digital services, these industries see to reflect Moore's Law, with disruptive changes coming at a faster and faster rate.
We believe today's CP industry is in the early stages of just such systemic disruption. The competitive advantages on which the industry has been built are increasingly less differentiated; technology-savvy start-ups have eroded them by:
- Creating breakthrough innovation by staying close to consumers and trends
- Building digital-first, purpose-led brands
- Capitalizing on the rise of emerging channels such as direct-to-consumer and alternative channels
- Leveraging 'asset-light' manufacturing model and ecosystem partners
- Being hyper-efficient
- Moving fast
The pace of change in the industry is forcing many consumer product companies to compete ambidextrously in two worlds
At the heart of the industry's disruption is a new, consumer-centric paradigm that challenges the traditional value of 'scale' and forces an evolution of the business.
Our experience working with large CP companies suggests that they don't suffer from a lack of ideas; where they often struggle is in innovation—knowing where to make bets, move products to launch quickly, then nurture them to scale. Driving growth through innovation like this means CP companies should evolve the assets and capabilities already in place and adapt while adopting significantly different ways of working. The catch? They have to do this without harming the existing business.
How? By competing in two worlds simultaneously: The world where large, multi-national companies compete on scale and efficiency, and the world where start-ups and niche brands compete on customer intimacy and speed.
We're beginning to see some evidence of CP companies starting to pivot like this. In February 2019, 23 of the most preeminent CP companies gathered for the 48th annual Consumer Analyst Group of New York (CAGNY) event in Florida. Almost half of them outlined a strategy for restructuring and realigning their operations, and for embracing organization agility. And more than 80 percent of the companies presented their plans for further P&L productivity and cost management.
Rethinking the two O’s: Operating model and organization
Still, it's not immediately apparent how companies can straddle these two worlds. Those that compete as large multi-nationals have well-defined roles and responsibilities—with clear job descriptions—while firms competing as start-ups and niche brands have organically developed lateral coordination mechanisms with few formally defined tasks, and less reliance on standardization and specialization.
Studies of organizational adaptation suggest success over time, in the face of environmental and technological change requires change in the organization's structure—but to what? In this case, we're suggesting successful organizations should be both routine-based and agile; efficient and creative. Simultaneously. Organizationally…ambidextrous.
There is a precedent for this concept of organizational ambidexterity, the most accepted definition being a balance between exploration and exploitation; organizations capable of exploiting their existing competencies while simultaneously exploring new opportunities (Nieto-Rodriguez, 2014). When we look at things this way, we can see that most organizations already work with both 'hands'. Adaptation then means strengthening the weaker of the two and getting them to work in concert.
Running-the-business: Call it the right hand—is central to any organization day-to-day. It quite simply keeps the company alive, and includes core processes like operations, sales and marketing, customer service, and finance. Most of the revenue firms generate will come from these activities; the focus is short-term. Objectives are mainly commercial, financial, and performance-driven. Efficiency, productivity, and economies of scale are paramount.
Changing-the-business: Call it the left hand—is the future of the organization. It includes all the strategic and tactical programs, as well as projects and initiatives (organizations often have hundreds, even thousands of initiatives running in parallel). Changing-the-business makes bets on future value for the organization. Objectives are closer to the vision. They're made to transform the business, significantly increasing growth and its profitability. The focus is medium and long-term, with benefits harder to quantify—if they ever materialize—so bets are more risky. If running the business is like writing with your right hand, changing the business is like painting with your left.
The two-speed organization: Transforming the organization to resolve the tension between operating at scale and being agile
In our work with CP companies, we've found that organizational structures rarely come from methodical planning. Rather, they evolve over time, in fits and starts. The haphazard nature of the resulting structures is a perennial source of frustration for executives, with overly-complex structures (like matrixed organizations) often collapsing because of lack of clarity about responsibilities and accountabilities. Intentional organization design can spare leaders these issues.
When designing a two-speed organization, we recommend leaders ask two fundamental, strategic questions: Which markets do we compete in, and how will we win in those markets? These may seem obvious questions, but too often a company's existing operating model and organization end up impeding a new strategy rather than support it. So it's important to clarify strategy and business model from the beginning in order to support key sources of competitive advantage. In a perfect world, each source of competitive advantage is assigned a working group dedicated to preservation and realingnment to the new model.