Corporate mavericks like Steve Jobs who push boundaries and view the world differently are at the backbone of innovation.
In Part I, we outlined a four-stage theory of corporate evolution: the innovators; the rapid scaling-up, geographic expansion; re-engineering of the value stream; and the financial “dance moves.”
What are the implications? At each stage, the evaluation of managers and leaders is based on the behaviours appropriate for the present stage. Bluntly, this means talent with competencies belonging to the previous stage are discouraged, rejected and ultimately removed from the system.
Thereby a company at stage 3 or 4 has by now systematically driven its creators and innovators out. Mavericks are actively discouraged. Corporate culture is re-engineered by encouraging development of “model employees” who exhibit the desired behaviours appropriate for the stage. Through codes, written and unwritten, it becomes a world of bureaucracy, CYA behaviour, and internal politics.
What triggers a change of stage? When the business model of the current stage ceases to provide EPS growth, the pressure from analysts and investors forces an evolution in business practices to the next stage. And, the environment may change dramatically, rendering the key success factors of business as usual obsolete. No strategy sustains forever.
Three trends stand out that result in pushing these companies into late stage 4:
An outdated business model
Go back 30 years and P&G, as one example, had a wider proliferation of brands. Driven by a strong belief in focused messaging, the company forged unique brand propositions that would result in a different brand for a different consumer benefit. So, in toothpaste, they would have Crest stand for “Cavity-free teeth” and Gleem stand for “Whiteness.” It wasn’t uncommon for P&G to have two or more different brands in a given category. And it worked. Stick to one message per brand and drive it home. If you need more messages (consumer benefits), bring in a new brand!
As the balance of power shifted to large retailers like Wal-Mart, getting smaller niche brands on shelf became harder. It became a battle for limited shelves and stores called the shots. Marketing costs skyrocketed; it became more difficult to support smaller brands. And suddenly a new model emerged: the mega-brands. And P&G led the way in brilliant fashion. Consolidate small brands into big ones. Create mega-brands. Get beautiful block shelving in stores. Create scale and with this, drive costs down while increasing share and profits.
Suddenly Gleem disappeared and became “Crest Whitening.” White Cloud bath tissue disappeared and became “Charmin Ultra.” It was a brilliant model for a traditional bricks-and-mortar store environment where the retail customers had the power. P&G became all about measuring and tracking “billion-dollar brands.” Drive the big-ticket items. And it worked! P&G had some beautiful runs in the 1990s and early 2000s.
This era was hostile to niche brands. They didn’t have the scale to get on shelf. They didn’t have the scale to afford a traditional marketing model of national TV advertising. Effectively, the scale of mega-brands locked out niche products. This didn’t mean the true need for these niche brands didn’t exist among segments of consumers; it just meant it was hard to get these products broadly available. And the mega-brands of course had no interest in chasing “small” niche ideas. The name of the game was scale!
Then the world changed. Gradually, then suddenly. And it’s all about the digital revolution.
The second driver is the dawn of ecommerce
The historical barriers to entry, resulting from scale required to launch into retail stores and into TV advertising, are gone. And let’s remember the consumer needs that niche brands address have always existed—the environment was just hostile to niche brands. If we really think about it, whole ranges of consumers have been dissatisfied for years because they couldn’t get what they wanted. The mega-brands forced them into buying sub-optimal products for their needs! The consumer wanted a niche brand yet was forced into buying a mega-brand!
But in today’s world, a niche brand can come quickly with a product idea, launch via Amazon, and go national for a fraction of the historical investment. They can achieve scale at relatively much lower volumes than 20 or 30 years ago.
Niche brands are tapping into unmet needs consumers have had for years. For local beers (think micro-brewery). For boutique flavors of soft drinks. For all kinds of niches the major FMCG companies are ill-suited to counter. They are set up to run mega-brands. They don’t even have the organizational design or knowhow to run niche brands. Just look at P&G for example: it was just a year ago they sold-off all their niche beauty brands to Coty, desperately clinging to their mega-brand model.
And perhaps the scariest of all is what we can call “The Amazon Effect.” In Western Europe, when the discounter phenomena entered (Lidl, Aldi and others) and dramatically impacted the market, a review of the history showed that once a new retail segment hit about 15 percent of the retail industry, they hit scale and had a geometric impact on the marketplace. Under 15 percent and they could fly below the radar of most people.
Let’s remember this 15 percent threshold.
Amazon is projected to reach over five percent of total US retail sales in 2018. And in terms of ecommerce, Amazon represents 44 percent of total ecommerce volume. This would translate to ecommerce being between 11-12 percent of total retail in the US. And this means ecommerce is going to hit the 15 percent threshold sometime in late 2018 or early 2019.
The big boys in FMCG are ill-equipped to win in this world. They are far behind savvier ecommerce companies and still cling to the old models as well as old brands. Ask Wal-Mart who the best suppliers are, and P&G will always pop up. Ask Amazon the same question? You will find many of the smaller niche players are considered far more adept at the ecommerce world.
Add to this the looming private labels to come. What will happen when Amazon suddenly becomes a competitor with its own brands and leverages unbeatable data and Alexa to drive their own brands? In traditional retail it was not shocking to see 20 percent declines in branded volumes once a retailer launched a private label. We could argue the Amazon effect is going to be far worse than history. But let’s stick with 20 percent losses for a moment.
This means when the ecommerce world comes with private labels, there will be a fresh impact of -20 percent on the big FMCG players. Let’s say by the time this happens, ecommerce will be 20 percent of total retail sales in the US. A -20 percent hit on 20 percent of volume translates to an overall sales loss of 4 index points on total US business. This is enough of an impact to drive many of these titans into a negative global sales rate. When you are struggling to grow +1 percent worldwide, a loss of 4 points on the largest market will end up driving the whole company into the red.
The time of e-commerce is now. And the era of the nimble, flexible, family-owned businesses that decide and move quickly is upon us. It’s their time. Just like history, business also provides for the rise and fall of empires. And the torch is passing.
The Extinction of the Mavericks
As Richard Cheverton explored in his business bestseller The Maverick Way: Profiting from the power of the corporate misfit, having a well-mixed blend of mavericks—people who just don’t fit the mold of the culture—is critical for driving creativity and innovation. In fact, Cheverton quite persuasively proves that corporate mavericks like Steve Jobs who push boundaries and view the world differently are at the backbone of innovation.
Innovation isn’t a process, or it isn’t appointing a “Chief Innovation Officer.” It’s creating a culture where people have the courage to think differently and drive discontinuous ideas. And this is where mavericks come in. They shake up the status quo. They push boundaries. They make people feel uncomfortable. Sure, too many mavericks can be chaos. But every successful company needs to have some strategically placed throughout the organization.
Mavericks are fun. Inspirational. A bit zany. They drive innovation. And when they sit at senior levels, they play an important role as aspirational role models for young mavericks below them. Being a maverick is scary—everyone keeps saying, “you don’t fit in.” Knowing someone at a higher level was successful being different is a huge enabler. It gives a young maverick hope and courage to be bold and hence drive innovation and risk-taking.
When the authors walked into P&G and Nestlé in the ’80s, there were a well-defined handful of mavericks in each company. As young bucks we loved these guys, even idolized them, and couldn’t wait for them to speak at the annual meetings. They were like those cool and charismatic college professors who actually made you want to come to class!
As time went on, the long line of wise leaders who understood the role of mavericks always ensured there was a blend of mavericks in the company to keep creative tensions going. All outside the traditional mold and good at pushing the boundaries and keeping people on their toes. Providing sparks that led to innovation and breakthrough.
We recall once a discussion about some idiosyncrasies of one of the prominent mavericks. And the question was asked, “Why did the company not fire this person?” The answer was pure brilliance: “This person plays an irreplaceable role in shaking up the company’s rigid culture and keeping us fresh to the external world. As such, sometimes we must be willing to look past a person’s imperfections and look at the sum of their total impact on the organization.”
The “Proctoid” or Nestlé culture is a strong one, like all company cultures. It’s a hammer. And, like all hammers, it loves to hit nails that stick their heads up! Just ask anyone from the Gillette merger who stayed around P&G post-merger, or any Rowntree manager who stayed on post the acquisition by Nestlé. Corporate cultures are insular.
What caused the mavericks to go the route of the white rhino was one simple change: the move to global calibration. Suddenly mavericks were unprotected, which is crucial for mavericks to survive. When the move to global calibration happened, suddenly buzzwords like “collaboration” leapt to the forefront in comparing performance. It’s truly difficult to calibrate performance across the globe so generic performance monikers become crucial. “Collaboration” is another way of saying, “Keep your head down and never make waves.”
Mavericks are known to make waves. To sometimes piss people off. They play a crucial role in companies like Nestlé or P&G, but they never win on the “collaboration” scale. Does anybody think Steve Jobs would win a collaboration contest? It’s nothing short of ironic—so many people in the titan FMCG companies will toss out the Steve Jobs example as an iconic leader. But would they ever interview a Steve Jobs? Would he even pass any interviews if he even got in the door? And better yet, let’s assume Jobs got in by some miracle. Would he survive? The answer is no, no, and no. Jobs would be destroyed in the evaluative system. It’s a system that rewards keeping your “nose clean.” Don’t make waves. And by God don’t ever upset anyone, dream up anything “scary” or push the envelope!
So once this went into effect in the late 2000s, one by one the mavericks in the company were summarily executed. Wiped out. They didn’t fit in. They failed in collaboration. Or they were “too radical.” So they had to go in a world that rewards keeping your nose clean.
So today you have many people, including activist investor Nelson Peltz, pointing out facts such as, “P&G has not had a single new product category innovation since Swiffer in the late 1990s” and it’s fairly true. The company that created laundry detergents and disposable diapers has had about a 20-year run of purely incremental innovations, which means basically no breakthroughs at all.
All the mavericks are gone. It’s like a taco without the hot sauce—a key ingredient is missing. The same is what Daniel Loeb is saying about Nestlé. There’s been no significant breakthrough invention since Nespresso, or the use of probiotics to raise the nutrition profile of milk formula.
P&G’s David Taylor is a world-class, outstanding CEO. So is Marc Schneider at Nestlé. But without the mavericks to add spice to the mix, they simply can’t do it alone. A crucial ingredient is missing.
So where does this bleak picture leave a Nestle or a P&G?
Both companies, alongside many other of the titan FMCG companies, are firmly entrenched in stage 4. Stage 5 is what we term “Death of some sort.” Either the company dies in total, or it is forced into a death in its current form. It is broken up into pieces or reinvented in another form. But the old company as we once knew it, is dead and gone.
No data point illustrates where a company stands than a review of R&D spending. This shows whether a company is investing in innovation, investing in the future, or has trimmed costs back as a part of their stage 3 efforts to reduce costs. The illustration below, comparing the FMCG giants to the new economy leaders, kind of says it all:
There was a time when P&G was a perennial “Most Admired” company on the Fortune list. Consistently top 10. Then it started slipping after 2010 and within a few years it fell to #15. And it has been falling ever since. The most recent ranking? #34. Maybe some companies would revel in a 34 ranking, but not P&G. The company’s DNA is all about being the best. For P&G, being #34 is a dismal performance. It is a level unfathomable just a few years ago. And the way things look today, it would not be shocking to see P&G drop out of the top 100 in the near term.
Sales for most of these companies have consistently languished in the one- to two-percent growth range, below market growth, meaning more categories lose share than gain share; a dangerous place to be. When a company loses share, they are losing consumers to competition. They are losing leverage with everyone from suppliers to retailers to media outlets. Share is the metric that leads to strong sales and strong profits, so when shares are declining, this is a worrying sign.
P&G’s share price has reflected eroding shareholder confidence. A recent closing of $73 per share means if you bought P&G shares a long five years ago, well, the value of your shares has dropped nearly -10 percent. All while the Dow over the same period has risen a whopping +71 percent. We remember times not long ago when P&G always outperformed the Dow. Now it is one of the bottom feeders of the Dow composite.
P&G should watch distractions. They engaged in a costly and public battle with activist shareholder Nelson Peltz (it should be noted that one of the authors was publicly supportive of P&G management in the proxy battle), which ended with Peltz joining the board anyway. Unilever responded with knee-jerk reactions to the 3G threat, much as Nestlé now does with Daniel Loeb.
We postulate that many FMCG giants are firmly into stage 4, and well on the way to stage 5, unless they can do the following:
Rethink strategy. Commit to reinventing culture with firm leadership and re-hire the innovators who can drive this turnaround. Bring mavericks back! It starts with culture!
Create business structures that can support and nurture niche brands and insulate this effort at innovation. Look seriously at restructures that result in smaller, more nimble and independent business units. Explore the idea of “a company within the company” where niche ideas and innovation can flourish freely and independently.
Reinvest cash generation into the new, innovative business models instead of returning it to shareholders via share-buy backs (which do little, beyond artificially boosting the EPS). Buy some smaller, more successful FMCG companies and keep them apart. Learn from them. Experiment. Search and reapply.
Manage stock market analysts and investors’ expectations as the company moves into a reinvention phase. Stop letting analysts drive strategy. Take the long view and do what is right to reinvent the company.
Considering Nestlé’s and P&G’s recent results, it does beg the question of whether either company is approaching its own “Kodak moment.”
As proud alumni of Nestlé & P&G, we sincerely hope all of this is wrong. These are great companies with truly the finest people. But sometimes the best collection of players doesn’t win the game.
These companies need some major shakeups—new, conscious choices, as mentioned above. Accelerate cost control in businesses with no real competitive advantage. And invest in new business models where breakthrough innovation can create a step change. Here both will need to bring in multiple, true mavericks to stir the pot. This will get genuine innovation accelerating again.
If Jessica Alba can do it sitting at her kitchen table, the talent of P&G and Nestlé certainly can do it. We are pulling for you Nestlé and P&G.