Opportunities for Action in Consumer Markets. Seeds of Destruction

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1 Opportunities for Action in Consumer Markets Seeds of Destruction

2 Seeds of Destruction Like most civilizations, companies typically progress from rapid growth to maturity and then begin a long and often painful decline. But is the decline inevitable? Can successful companies overcome complacency, competitive threats, and shifting markets? Consumer companies are particularly vulnerable to rapid change. Ten of the 25 retailers that were the world s largest in 1960 have disappeared. Eight of the 25 retailers at the top in 1997 either didn t exist in 1960 or had nominal sales. Seven of the 25 consumer goods manufacturers with the highest revenues in 1960 no longer survive as independent entities. (See the tables at the end of this article.) The reality of consumer marketing is innovate or die. Change can overwhelm even the most capable management teams. Usually, change is forced on a company by consumers or competitors. It can occur when demand shifts (through new buying or usage patterns, or new consumer needs) or when a competitor approaches the market from a different vantage point, bringing new resources or a better response to a consumer problem. Many of the companies that succumbed in the last 40 years failed to respond to intruders. Others lost contact with consumers shifting tastes. Focusing narrowly on their core businesses, they were blind to threats and opportunities beyond their limited vision. Eventually, they lost the ambition and creativity that had fueled their initial success. Failing from Within The forces that drive change may come from the outside, but a company s inability to respond to them is

3 an internal disease that metastasizes quickly. Resources human and otherwise begin to flow out of the company as profits are dissipated, new investments earn below the hurdle rate, and advantage is squandered. Many companies sow the seeds of their own destruction in their initial success. The breakthrough innovation that originally opened new markets can also establish a model for success that shuts out fresh perspectives. Instead of inventing a new model, the company continues to follow the old one. Rigor mortis sets in. Large companies are constantly in danger of becoming dinosaurs. Although their size gives them many advantages, it can also lead to some potentially devastating disadvantages, including increasing complexity costs, resulting in inflexibility and slow decision-making a tendency toward internal conflict and stratification a leadership that emphasizes capital investments as a solution to all problems centralized control with limited coordination among divisions and a weakened sense of market trends and dissatisfactions It s easy for a consumer company to become a lumbering colossus, incapable of competing against leaner, faster, and more spirited businesses. But retailers face the greatest challenge. Many owe their success and their customers continued allegiance to their founder s vision and their large investment in stores and systems. But when customers age, relocate, or demand new products, no one is able to convince the organization that it has to adapt or it will die.

4 The seeds of destruction are often visible to a discerning leader. The head of a multibillion-dollar consumer company recently lamented, We ve gained five share points in the last five years and achieved record earnings in But something happened this year. Volume is flat or declining. Competitors we had put out to pasture have come back with a vengeance. My old tricks merchandising, cost control, rallying the troops don t work anymore. The CEO s company has grown dramatically, but so have its problems: Overhead is increasing at an alarming rate. Investments in IT have failed to deliver better decisions or an integrated information system. Key-account programs require six levels of approval and eight weeks of consideration before final sign-off. And the routine battles between marketing and sales are growing more heated. Efforts to break into new markets have failed, and the research department (renamed Consumer Insight) can t account for the shifts in demand. Yet because the business continues to show significant profits, it s all but impossible to get anyone to face up to the coming crisis and the company s need to reinvent itself. The company has lost touch with consumers largely because it has allowed retailers to do the work of interpreting consumers needs. Meanwhile, managers expend so much energy navigating the company s organizational structure that no one notices when a competitor runs away with an emerging market segment. The company needs to refocus on the world outside its walls. It needs to turn mounds of raw data on competitors into information it can act on; it needs to get much closer to consumers; and it needs to inspire its people to turn their swords on competitors instead of on each other. Companies that always reinvent themselves challenge their assumptions about market definition, sustainable cost position,

5 changes in consumption, and the potential for competitive ambush. Focusing Outward Overcoming these destructive tendencies takes effort, vision, and commitment. For a company to succeed, it must adapt to new realities without discarding the wisdom it has acquired through experience. It must respond to intruders while seeding the organization with the intellectual diversity and vitality necessary for its continuing evolution. But the real key to this work is in the millions of details that begin to form a picture of consumers and competitors movements. If you suspect your company could find itself in the same spot as the one described above, consider these questions: Have you shopped along with consumers lately? Can you describe their experience from purchase to repurchase? What are their biggest dissatisfactions? Do you know when and why they defect? Have you tried to understand your competitors consumers with the same intensity as you have your own? Do you have data on how often they buy your products and on their intentions to repurchase? Do you know your competitors bestsellers? Do you track competitors test markets and adapt or improve on profitable ideas at the earliest sign of success? Do you measure the efficiency of your marketing efforts? Can you distinguish between what it costs to acquire new users through advertising and promotions and what it costs to retain them by main-

6 taining a data warehouse of purchases, frequency of use, and complaints? Can you predict the next three waves of market growth and the source of your own growth? When benchmarking competitors, do you look outside your current product categories? Do you know your share of your customers overall spending on food, for instance, or leisure activities? Are you actively searching for the next round of invention? The keys to survival and prosperity are outside your window. Talk to consumers about their experiences. Ask the right questions to understand their dissatisfactions. Consumers are usually eager to supply even the most minute details if they think the information will help you make their lives easier and more exciting. Discovering the best solutions to consumers problems requires time, energy, and skilled interactions. There is an alternative to extinction. A company s vitality depends on fresh insights about consumers and competitors. It requires a sharp pencil and a clean sheet of paper to test what ifs. It calls for courage and commitment. The next 40 years will deliver a new leading retailer and a new leading manufacturer. One of them could be you. Michael Silverstein Emmanuel Huet Michael Silverstein is a senior vice president in the Chicago office of The Boston Consulting Group and head of the firm s global Consumer and Retail practice. Emmanuel Huet is a Consumer and Retail practice specialist based in Paris.

7 The Top 25 Worldwide Retailers in Revenues Revenues 1997 (in 1997 (in 1997 Real $millions) $millions) CAGR 1 Great Atlantic & Pacific Tea 27,426 10,262 3% Sears, Roebuck 21,604 41,296 2% Safeway 12,902 22,484 1% Kroger 9,773 26,567 3% J.C. Penney 7,676 30,546 4% Montgomery Ward 6,527 5, % F.W. Woolworth 5,410 6,624 1% Edeka 5,344 32,654 5% American Stores 5,286 19,139 3% National Tea 4,472 acquired NA Federated Department Stores 4,105 15,668 4% Food Fair Stores 4,030 acquired NA Winn-Dixie Stores 3,770 13,218 3% May Department Stores 3,579 12,685 3% Allied Stores 3,556 acquired NA Grand Union 3,158 2,266 1% First National Stores 2,803 acquired NA Jewel Tea 2,680 acquired NA W.T. Grant 2,679 bankrupt NA R.H. Macy 2,658 acquired NA Colonial Stores 2,328 acquired NA S.S. Kresge (Kmart) 2,185 32,183 7% Gimbel Brothers 2,127 bankrupt NA Karstadt 1,663 15,306 6% Kaufhof 1,579 acquired NA SOURCES: Fortune, Hoover s company profiles, annual reports, BCG estimates. 1 Compound annual growth rate. 2 Currently under Chapter 11 bankruptcy protection.

8 The Top 25 Worldwide Retailers in Revenues Revenues 1997 (in 1997 (in 1997 Real $millions) $millions) CAGR Wal-Mart did not exist 119,299 NA Sears, Roebuck 21,604 41,296 2% Metro did not exist 37,212 NA Rewe 1,308 35,355 9% Edeka 5,344 32,654 5% Intermarché-Spar AG did not exist 32,394 NA Kmart 2,185 32,183 7% J.C. Penney 7,676 30,546 4% Tengelmann 29,234 NA Carrefour 7 29,000 25% Dayton Hudson ,757 11% Kroger 9,773 26,567 3% Leclerc 5 26,200 24% Daiei ,138 15% Ahold ,923 15% Ito-Yokado ,949 14% Home Depot did not exist 24,156 NA Tesco ,766 10% Safeway 12,902 22,484 1% J. Sainsbury 1,434 21,959 7% Costco did not exist 21,874 NA Auchan did not exist 20,567 NA American Stores 5,286 19,139 3% Promodès ,966 11% Aldi ,606 13%

9 The Top 25 Worldwide Consumer-Goods Companies in Revenues Revenues 1997 (in 1997 (in 1997 Real $millions) $millions) CAGR Unilever 20,112 56,114 3% Nestlé 11,721 48,274 4% Japan Tobacco 11,532 29,867 3% National Dairy Products 8,712 acquired NA Procter & Gamble 7,533 35,764 4% Distillers 5,693 acquired NA General Foods 5,681 acquired NA British-American Tobacco 5,136 24,005 4% Borden 4,996 3,482 1% Kodak 4,937 14,713 3% R.J. Reynolds Tobacco 4,159 17,057 4% American Tobacco 3,784 3,551 0% Seagram 3,557 12,560 3% Canada Packers 3,120 acquired NA Colgate-Palmolive 3,012 9,057 3% General Mills 2,810 5,609 2% Kirin Brewery 2,750 12,438 4% Campbell Soup 2,675 7,964 3% Ralston Purina 2,666 4,487 1% Coca-Cola 2,623 18,868 5% National Biscuit 2,361 acquired NA American Home Products 2,333 5,850 2% Beatrice Foods 2,315 acquired NA Standard Brands 2,315 acquired NA Continental Foods 2,220 19,734 6%

10 The Top 25 Worldwide Consumer-Goods Companies in Revenues Revenues 1997 (in 1997 (in 1997 Real $millions) $millions) CAGR Philip Morris 1,727 56,114 10% Unilever 20,112 51,611 3% Nestlé 11,721 48,274 4% Procter & Gamble 7,533 35,764 4% Japan Tobacco 11,532 29,867 3% Pepsico ,292 10% BAT Industries 5,136 24,005 4% ConAgra ,002 13% Johnson & Johnson 1,578 22,629 7% Diageo 20,305 NA Sara Lee 2,220 19,734 6% Coca-Cola 2,623 18,868 5% RJR Nabisco 4,159 17,057 4% Danone Group ,164 8% Mars 1,306 15,000 7% Kodak 4,937 14,713 3% Archer Daniels Midland 1,254 13,853 7% IBP ,259 12% Seagram 3,557 12,560 3% Kimberly-Clark 2,110 12,547 5% Kirin Brewery 2,750 12,438 4% L Oréal ,847 11% Coca-Cola Enterprises did not exist 11,278 NA Anheuser-Busch 1,613 11,066 5% Fuji Photo Film ,346 8% The Boston Consulting Group, Inc. 1998

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