Thursday, December 23, 2010

Super Fast Moving Consumer Goods Industry: The Cradle of New Management

Established management thought and practice owe much to two major industries: the automobile industry and the fast moving consumer industry. These two industries, more than any other industry, demonstrated how firms could achieve stability and efficiency in design, manufacturing and marketing of products. Management principle rooted in these two industrial sectors epitomized effective ways of conducting businesses. In today’s knowledge economy driven by new modes of technological convergence, a new industrial sector of Super Fast Moving Consumer Goods is fast taking shape rewriting principles of management.

Automobile and FMCG industries

Automobile industry was the cradle of management ever since the design, manufacturing and marketing of automobiles became the leading component of the industrial revolution. The automobile industry contributed several path breaking concepts in functional management and geographic management, with a special focus on operations management, supply chain management and technology management. Specific national and company systems such as 5 S, Toyota Production System and Just-in-Time System became industry standards and management role models globally. The automobile industry was also the leader in globally networked design and manufacture, heralding in the 1970s an era of globalization. In the 1990s, the automobile industry took new strides in integrating electronics and digital technologies.

The automobile industry was, and continues to be, driven by technology to achieve better fuel economy, safety and user satisfaction for the singular, unchanged objective of road transportation. That said, automobile technology has been characterized by incremental improvements, and yearly model changes. The industry became a prototype of a standardized template of management that withstood vicissitudes of time as well as cyclicality of demand, often linked to economic factors. In one sense, the automobile industry by the 2000s could contribute all that it could to the development of management theory and practice. The author’s pioneering work in the application of Porter’s theory of Competitive Strategy to the Indian automobile industry characterized the last of breakthroughs in management theory and practice in the automobile industry.

In parallel, however, a new industry was developing globally and contributing to new managerial paradigms. Organized retail, combined with what are euphemistically called Fast Moving Consumer Goods (FMCG), set the stage for new paradigms for global supply chain management, cost and profit management, production outsourcing, market segmentation and shaping consumer behavior. If the automobile industry shaped its management paradigms out of research laboratories and manufacturing complexes, the FMCG industry shaped its management paradigms out of turning around product manufacture and consumption at a rapid pace. The fact that the FMCG goods represent daily necessities lent a new dimension to management of cost economics and consumer perceptions. Technology was less relevant compared to management of hundreds, if not thousands of, store keeping units (SKUs), related distribution logistics and advertising to perk up demand. As with the automobile industry, the FMCG industry came to be typecast in terms of management ethos of outsourcing economics and perception management, with freshness management becoming the key driver of managerial success.

Super FMCG

The late 2000s, however, saw the emergence of a totally new breed of consumer products which are driven by rapid strides in technology on one hand, and challenges of global supply chain management on the other. These consumer products, such as cellular phones, portable audio and video devices, gaming devices and other consumer electronic products combine leading edge design and manufacturing technologies with rapid-fire management of supply chain. These products, which may be called Super FMCG products, have clearly raised the bar on technology and management. To illustrate, unlike an automobile or a tooth paste, a cellular phone is designed and launched with the objective of making itself obsolete in 3 to 6 months of launch. Unlike an automobile which is segmented on clearly defined user needs (be it carrying capacity, fuel economy, or driving sophistication) or an FMCG item which is segmented on vaguely defined user perceptions (be it savings, esteem or functionality), the Super FMCG creates new markets based on new technologies at an amazing speed. Super FMCG is as tangible as an automobile is in technology and as intangible as an FMCG product is in freshness.

The SFCG product typically has multiple technological dimensions, which is best illustrated by the example of a cellular phone. A cellular phone can typically be based on one of the three operating systems (Symbion, Android or Windows, each of which is updated at least twice a year), RAMs and processor speeds (from 128 MB and 1 GHz to successive higher levels), internal and external memory (up to 64 GB), input technology (hard Querty, touch Querty, handwriting recognition, regular cell input), imaging technology (from 1.3 to 12 MP cameras, with or without flash, and with or without video conferencing and camcorder capabilities), communication technologies (2G, 3G or 4G), panel technologies (LCD, Super LCD, retina display, AMLOED or Super AMLOED), screen size (from 2 to 5 inches), documentation technologies (office document editing), application technologies and a plethora of other options (like radio, music player, organizer and so on). Every manufacturer tends to have scores of models of combing these variations, with challenges of forced technological obsolescence almost every three months.

It is easy to realize therefore that SFCG products pose managerial challenges like no other product. The basic principles of management such as economies of scale and scope, product life cycle, learning curve, globalization, cross-industry integration are challenged by the technological factors that drive innovation in SFMCG. As SFMCG firms break new ground in managing the aforesaid complexities they not only stay ahead of the efficiency curve in their own industries but also offer new managerial insights for the other less complex industries just as the Japanese automobile industry revolutionized the management thought and practice for the industry as a whole.

SFMCG management

There are a few special features of SFMCG management (called from now on, SFMCGM for simplicity) that are clearly contrarian to the established management thought. Fundamentally, SFMCGM continuously accelerates innovation in multiple yet inter-linked facets as a combined trigger for market expansion. Secondly, SFMCGM embraces technological discontinuities to create new markets, accepting product obsolescence as a welcome need. Thirdly, it relies on unconventional marketing to maximize sales and achieve quickest possible paybacks. Fourthly, it relies on globally networked design, manufacturing and supply chain processes with a high mix of outsourcing to optimize investments and push down breakeven points. Fifthly, it creates a sustainable brand loyalty based on customized functionalities and harmonized user experiences. These features can be set out as five essential principles of SFMCG Management.

Principle of seamless innovation

Innovation is not new to industrial development. Where SFMCGM differs from the past experience as well as from other contemporary sectors is the continuous and comprehensive nature of innovation, often backed by creation of intellectual property by SFMCGM firms. As a result, multiple product generations are under parallel processing in an SFMCG firm. SFMCG firms have an ability to innovate on multiple platforms, oftentimes combining multiple products under a single umbrella design platform. This is driven by a clear conceptual clarity on how successive generations of products will be conceptualized within the firm and delivered for the marketplace. SFMCG firms typically do not see innovation in the typical risk-reward lens. On the other hand, they utilize innovation as a survival tool. They believe that if they do not innovate, some other firms would, to the detriment of the incumbents.

SFMCG firms oftentimes adopt a scaled approach in the functionality of individual components to develop several permutations and combinations of end-products. In this endeavor, SFMCG firms generate enormous flexibility for components to work in a range of performance parameters. To revert to the basic example of cellular phone, it would be possible to fit a low-end or a high-end chip in a common configuration. One cannot, however, imagine a light axle to be fitted on a large truck. In other words, SFMCG firms design internal components in a manner that they can function independent of external form factors. From a lowest common multiple (LCM) basic approach to a highest common multiple (HCM) premium approach, SFMCG firms revel in innovating to varied functionalities and user experiences, thus providing another facet of seamless innovation.

Innovation in SFMCG firms typically tries to expand market base through user experience. By making product usage multi-functional yet highly intuitive SFMCG innovation brings knowledge to the consumer. SFMCG products, in one sense, are highly educative products which stimulate intellectual curiosity in the users and expands market base. The success of telecommunication and gaming products in relatively less literate or less affluent sections of emerging markets is attributable to innovative simplicity. This simplicity automatically provides the leverage to raise the bar for high end products. A product such as Kinect which provides for the simplest of movements thus leading to as universal appeal as possible also retains a sophisticated gaming capability to cater to the well-initiated. SFMCG firms thus typically break the ceiling as well as crash the floor to create a seamless expanse of user base.

Principle of disruptive technologies

Unlike traditional industries such as the automobile industry or watch industry which were unwilling to proactively embrace substitute or even complementary technologies until it became inevitable SFMCG firms tend to readily integrate disruptive technologies to create new products and achieve product obsolescence. Apple proactively leveraged touch screen technology to virtually reinvent cellular phone. Samsung stole a march over Sony by pioneering a new generation of televisions based on flat panels. Nintendo pioneered Wii by integrating motion recognition technology in its gaming devices. Amazon simplified digital technology to enable avid readers access books any time, any where. Google saw cloud as a new way of disrupting the established model of physical infrastructure based computing. And the examples would only abound in future.

From incremental innovation in products and processes to disruptive leapfrogging in technological development, SFMCG firms could use either or both the approaches. An SFCG firm which bases itself on the foundation of disruptive technology and seeks incremental innovation is, however, likely to be more successful than firms which are based on a foundation of continuous innovation with only an occasional disruptive development. The benefit (sales turnover) to cost (R&D expenditure) ratio of product development at Apple is several times over that of Samsung or Sony Ericsson, for example. A continuously innovative Samsung, however, fared far better than other giants less inclined towards seamless innovation. Clearly firms are advantageously placed when they pursue original as well as incremental innovation.

To be successful in disruptive technological model firms must be prepared to take bets on such sunrise technologies with “perfection at first attempt” objective. Firms which dabble in disruptive technologies without aiming for maturity are likely to fail rather than succeed. The first generation of tablet computers introduced in 2000 failed because of the imperfect nature of hand-writing recognition technology. Disruptive technologies need to carefully cultivated and imbibed based on observation of technological maturity of internal as well as external technology sources. Many times, an industry as a whole needs to bet on disruptive technologies to be pioneering. For the automobiles global positioning systems (GPS) was one such disruptive technology of the recent past while automated (driverless) driving could be a disruptive technology of the future.

Principle of unconventional marketing

Firms in several industries rely on keeping their products under wraps until they are in a position to launch their products. Automobile industry is a classic example with several other FMCG and white goods firms following a similar philosophy of secrecy until product launch followed, or at best closely preceded, by open advertisement. Possibly, this reflects a philosophy of avoiding signals to competition. On the other hand, SMFCG firms follow an entirely different and largely unconventional marketing model. SFMCG firms follow a model based on three approaches of (i) expectation marketing, (ii) technology marketing, and (iii) saturation marketing, which together present a wholly new and challenging marketing model.

SFMCG firms typically indicate the profiles of their futuristic products almost at the same time as that of new product launches. Consumer expectations are built up as the products go through their development phases, are offered in their beta versions and are finally showcased in industry conferences and exhibitions. In a sense, expectation marketing of SFMCG firms is akin to the marketing of a celluloid movie, expectations on which are built up right from the launch date of the movie through several phases of casting, information release on shoots, music launch and finally screening of trailers. SFMCG firms believe that current products will continue to be purchased because of compulsive needs even as expectations of future products will lead to future compulsive buying. Experience indicates that expectation marketing helps SFMCG firms retain and broaden their customer base.

Technology marketing is unique to SFMCG firms. While other industries such as white goods industries also seek to market products based on their novel technological platforms (for example, filtration efficiency or cooling efficacy by air conditioners), SFMCG firms take technological marketing to an entirely new level. Additionally, the technological impact of each component of the SFMCG product is felt more tangibly than in the case of a white goods product which makes technological marketing a veritable tool. The flip side to technological marketing is the need for the design to live up to the value propositions. Whether it is signal response or screen clarity technology has to speak with performance. The positive side to technological marketing is the build-up of virtuous opinion base on technological performance.

The third component of SFMCG marketing is based on saturation marketing. The SFMCG marketing model does not follow the conventional product life cycle marketing model which prescribes almost equal phases of introduction, growth, plateau and decline. On the other hand, SFMCG marketing considers an urgent and rapid growth phase, immediately upon launch with little concern for plateau or decline phases both of which are treated as bonuses, if at all. This helps SFMCG firms recover their investments with saturation sales before the new expected products reduce the impact. This model requires SFMCG firms to adopt an aggressive multi-chain and multi-store format with maximal exploitation of all trade channels, including online options. Online marketing including access to critical review portals helps in saturation marketing in a big way.

Principle of integrated outsourcing

SFMCG firms share with their FMCG counterparts a reliance on global networking and outsourcing to enhance their manufacturing efficiencies and achieve cost and price competitiveness. The role played by several mainline vendors (such as Acer) in multi-brand computer development or more recently by HTC in supporting many leading mobile phone products and the pivotal role of global workshops like Foxcon to deliver millions of products are reflective of the approach to optimize global manufacturing for maximal supply efficiency.

SFMCG firms, however, differ from FMCG firms in that they consider manufacturing advantage as a source of firm-level competitive advantage which must be preserved internally. This is reflected in the efforts by end product makers to internalize some of the advantage by establishing manufacturing bases in countries providing such efficiencies. The bases established in China by global electronics firms and in India by global auto makers are clear examples. They have helped such global firms to align demand and supply points for least cost factor supply and product distribution solutions. They have, more importantly, enabled global firms overcome the vicissitudes of exchange rate variations and other macroeconomic factors.

SFMCG firms, however, are more unique in their internalization of key technologies (as is practiced by established firms) which is in contrast to the philosophies of FMCG firms which could totally outsource both design and manufacture. The efforts made by SLR camera makers to develop in-house their image processing engines, the note book computer makers to develop o develop solid state devices, the cellular phone makers to develop capacitative or super bright screen technologies are indicative of the need for SFMCG firms to retain core competencies within their in-house industrial systems.

Principle of sustainable loyalty

SFMCG firms need a constant and ever increasing customer base to give effect to, and derive benefit, from the SFMCG business model discussed above. Brand switching as a concept accepted in other industrial sectors acts to the detriment of SFMCG firms. The principles of loyalty in SFMCG sector are more challenging than in other sectors where a generic strategy such as cost position (eg.,Wal-Mart for budget products) or product differentiation (eg., Mercedes for esteem and quality) build long lasting brand loyalty. The user of SFMCG products evaluates at least three facets before developing loyalty. Typically, SFMCG firms build lifelong loyalty around one or more of the following factors: technology markers, usage versatility and esteem value.

A user of automobile is less likely to be impressed with the use of fuel injection system than with the fuel economy or acceleration that it provides. On the other hand, the user of an SFMCG product would tend to be fascinated by specific technology markers such as the operating system, screen technology or application repository. Technology has thus a standalone appeal for users which provides a feel of customized preference. The power of choice that is embedded in a typical SFMCG product is an extremely important lever to play for the SFMCG firms.

Unlike several other products which are mono-functional delivering one usage functionality (a detergent just cleans, an automobile just drives and a microwave oven just cooks, for example), SFMCG products tend to be convergence products delivering multiple functionality, and at least multiple options within a single functionality. As a result, the versatility of functions provides the second most important lever to build loyalty with SFMCG products.

SFMCG products, however, share with other products the lever of esteem as a driver of customer loyalty. A premium automobile user would any day love to drive a car with Mercedes Tristar, BMW logo or Toyota brand. An electronics equipment user would always consider a Sony or a Bose to represent higher senses of listening pleasure. In a similar manner, SFMCG firms have the ability to convert their products into products of esteem. When technology of design, manufacture and usage provides a unique experience and feel, SFMCG products tend to assume a cult phenomenon. Apple has emerged as the most skilful in leveraging esteem as a driver of sustainable customer loyalty.

Others: Quo vadis?

The above discussion has led to an interesting profile of what defines an SFMCG product and the five essential principles that shape the evolution and sustainability of an SFMCG product. Yet, it would be facile to assume that the other sectors and products would, for ever, be molded in conventional laws of development, manufacture and marketing. The rate of technological change would in the coming years be even more intense and comprehensive. The new laws of SFMCG would need to be studied and adapted by all firms which believe in product reinvention and competitive rejuvenation as strategies to dominate future industrial evolution.

Posted by Dr CB Rao on December 24, 2010

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