For a long time, the consumer goods sector was regarded as absolutely crisis-proof. For 40 years, consistent growth figures of over 15% were typical for the company giants in this sector. But times have changed, growth has been slowing down, consumer loyalty is decreasing and entry barriers are crumbling. The reaction has been Mergers and Acquisitions. Nevertheless, the figures for these large companies are stagnating.
Now the question arises – why?
To understand “the why” one first must have a basic understanding of the industry and the market.
FMCG market snapshot
– Brand and product development are optimized for the mass market.
– Partnerships with large retail chains are very close to gain preferential access to consumers.
– Early expansion into emerging markets.
– Global synergies through strong centralization, cost control and functional excellence.
– Mergers & Acquisitions to achieve the former.
Additionally, one must recognize that times have changed, and various new trends are affecting the industry. To name a few major trends, see the following list:
New Generations show different consumer behavior
Like the generations before, the new generation has deeply impacted the consumer behavior. They value other things such as an emotional bond to the preferred brand and whether, for example, the product has not been tested on animals.
Changes in marketing
New channels for marketing (e.g. Twitter, Snapchat) are taking over and supercede classic channels like TV and radio. Not to mention the 1.5 million cosmetic videos uploaded monthly to YouTube alone show a fundamental change in marketing channels. Especially since most of the videos are uploaded independently by the content creators and serve a constantly growing number of users.
The success of smaller companies
High margins attract many new competitors into the saturated market. Small companies have identified newly emerging niches as their markets, using the trends described above and their fast decision making to their advantage. Additionally, they have already achieved a market share of 10% in the beauty cosmetics market.
The E-commerce powerhouses have become strong competitors
Amazon and Alibaba are dominating the E-commerce market on a global scale. Their influence on prices is increasing by the day, and if their interests are not matched, they can easily create their own private labels as competition.
The list of trends could be endless — therefore it is important for us not to recognize every single trend but to recognize that the trends emerge from very different roots. However, they have one thing in common: they all describe a new environment established organizations find themselves in.
To give a current example, put yourself in the shoes of an employee at L’Oréal, Coty, Inc or Estée Lauder: It is the year 2016 and you are sitting at your desk at one of the biggest cosmetics companies in the world and get a notice that a new competitor has entered the market. The name? Kylie Cosmetics. Launched by Kylie Jenner, she is offering a matching set of lipstick and a lip liner — the “lip kit” for $29.
Sounds nice? Maybe this is what you were thinking back then: “Just another one of these small competitors entering the market, only to disappear again in the same breath. No threat to us at all.”
Two years later
You sit at the same desk and stare again and again at the Forbes magazine from August 2018. The cover shows Kylie Jenner aka the “Cosmetics Queen”. And you keep asking yourself one crucial question: “How the hell could this happen?” There was a detailed plan, you had a budget and everything seemed like business as usual two years back.
A brief insight into how this became reality
Within two years, Kylie Jenner transformed Kylie Cosmetics into “One of the Hottest Makeup Companies Ever”. As of now, the company has sold more than $630 million worth of makeup and Forbes values it at nearly $800 million. And she built up the company with employing only 7 people.
How did she do it? Through outsourcing.
Manufacturing and packaging is done by Seed Beauty ( a private-label producer in California); Sales & Fulfillment is done by the online outlet Shopify; Finance and PR is managed by her mother. What Kylie brings to the table is the sheer insane number of people following her on social media. Instagram? Over 110 million followers! Nuff said.
The moral of the story: anybody can become your competitor; a 7-employee business can become the competitor of a 82.000-employee billion-dollar organization.
Here’s a story for you…
Complexity that companies face due to changing environments and markets has become immense. The word “complex”(Important! Not to be confused with “complicated”) describes a state of the differently interconnected relationships within a system. It refuses simplification and always remains multi-layered. Depending on the depth of layers, decisions taking processes are difficult to structure and therefore require a new approach. From history we know, a simplified approach to a problem has a high probability to generate even worse problems. Therefore, the system to find the solution must be at least as complex as the system that generated the question in the first place.
To make it less theoretical, here’s an example for better illustration:
When the British Empire was ruling half of the world, they were facing a cobra plague in British India. To solve the problem, the local governor took a simple approach — he decided to pay a bounty per dead cobra, without evaluating the underlying incentives that were created. The result was the creation of a new industry, as local entrepreneurs started to breed cobras just for the sake of killing them and collecting the bounty afterwards.
Once the British noticed what was happening, they simply reversed their decision, which led to the death of the new industry because the cobras became kind of worthless. Instead of now killing the cobras, the breeders released them. The result was a larger cobra population than ever before.
A simple solution to a complex question happened. The British did not understand the complexity of the system. They came up with a simple solution that eventually destroyed the system.
The way companies have been structured over the past decades has been ideal for a competitive environment characterized by predictability and continuous optimization. However, the tensions between these two and an increasingly noticeable unpredictability have reached a breaking point.
The big question we ask ourselves at 1789 is: “How can companies respond to the ever faster pace of change and acquire the flexibility necessary for a completely new competitive environment?” A little further up in the article, the answer is already mentioned: complexity on the market side can only be tackled with adequate organizational complexity.
But how can a company do that?
We at 1789 believe that companies must take the next revolutionary step, because classic linear organizations are not designed to reflect complexity.
What is needed are adaptive and fast-reacting structures, what we call “Responsive Organizations” — Organizations that are geared towards enabling a rapid flow of information, promoting holistic learning, adapting decision-making processes to social reality and thus defining daily work in organizations as a collaborative network.
Examples? Here you go.
Due to an ever faster flow of information, the general conditions on the markets can change within minutes. The sheer amount of information available has made it impossible to predict which information will be useful and which will not. In an increasingly interconnected world, the open exchange of information is indispensable for joint entrepreneurial success. This goes hand in hand with a high degree of trust among the members of the organization in which information is relevant for corresponding actions.
The best insights and knowledge are not centralized at the top of the hierarchy but are with the people closest to the customer. Instead of putting them in the chains of processes and hierarchies, cut them loose and empower/ inspire them to work at their own discretion strategically, structurally and tactically. Introduce agile methods, encourage experimentation and continuous learning to achieve better results.
If a conflict exists in a company, it is usually resolved by means of the usual escalation along the organizational hierarchy. However, the question now arises as to whether this is still appropriate at all. Instead of hierarchy- and ego-driven conflict solutions, moderated dialogue formats are required that ideally take place on an internal team level.
Making decisions is risky, and it is impossible to make the right decision every time, just as impossible as trying to isolate yourself from all the risks in advance. Instead of desperately trying to prevent things from going wrong beforehand, it is necessary to give people the time and space to think about their decisions. This implies, in particular, the possibility of self-correction.
Technology and connectivity have enabled us to largely organize and facilitate our collaboration ourselves. Working in a network enables us to react quickly and adaptively to external influences. Therefore, it is time to enable employees to build a community and individual networks in which connections can be made based on the respective information needs, instead of wanting to ensure this via hierarchies.
At a time when employees are expected to be increasingly agile and innovative and at the same time identify more strongly with their work, companies must recognize that their own organizational framework must be changed for this to happen. Finally, here’s your inspirational quote of the day, capturing the essence of the article:
“If we keep doing what we’re doing, we’re going to keep getting what we’re getting. One definition of insanity is to keep doing the same thing and expect different results” [Stephen R. Covey]
I am Peter, Partner at 1789 — Beyond Revolution , a strategic consultancy with a focus on helping organizations create new structures and empowering teams. Do you agree or disagree with my thoughts? Do you want to share your story? Please leave a comment below!