Tech Trends Overview: High Expectations, Middling Progress
Consumer goods industry analysts pull no punches when it comes to explaining the critical importance of digital transformation to the future.
International Data Corp., in fact, forecasts that 90% of all industry growth in the next decade will be captured by companies that successfully engage directly with consumers. That’s why roughly half of CG companies expect to be disrupted by digital technology in the next 12 months, according to Forrester.
Companies have been steadily — if not quite rapidly — waking up to this reality. Consumer packaged goods companies have been slower than some other CG sectors to begin shifting their traditional strategies, despite their full realization that e-commerce, mobile connectivity and the emergence of social media as a communication tool have dramatically changed the way they must go to market.
Consumer goods business models have long been built on retail distribution and arms-length relationships with consumers. But those staples are breaking down rapidly, and that is challenging product manufacturers to radically transition their businesses to address the need for deeper understanding and direct contact with consumers who expect to get what they want when they want it — wherever and however those moments of decisions occur.
CGT surveyed a broad range of CG companies to better understand the strategies they’re undertaking, the obstacles they’re facing and the technologies they’re implementing as part of the transformation into digitally driven, consumer-centric organizations.
What follows is an overview of key results from the survey.
Inevitable Budget Issues
Digital transformation is, by definition, an IT-heavy exercise. But IT budgets to date have not exhibited the kind of dramatic change that would be expected (or needed) for a project of this scale. Nearly half of all respondents (49%) saw no change in their overall IT budgets for 2017, despite the increased activity they described elsewhere in the survey (see Figure 1).
Indeed, the majority (51%) of respondents acknowledge that their companies have only conservatively increased IT spending to address digital transformation; a substantial 41%, in fact, say the trend has had no impact on overall spending levels (see Figure 2).
Instead, more companies seem to be funding digital transformation — or “DX” — out of their existing coffers. The median percentage of IT budgets being allocated to DX initiatives is 10%, although 33% of respondents fell below that level (see Figure 5).
Still, 39% of respondents reported an increase in spending for 2017, with 15% fortunate enough to see growth greater than 10%. And a small group of companies (8%) say they’ve substantially increased spending: roughly one-third of respondents are devoting 20% to as much as 70% of their IT budgets on DX initiatives (see Figure 5).
One such “aggressive transformer” is Enjoy Life Foods (a unit of Mondelez International), which increased IT spending 20% in 2017 and will boost it another 10% or so in 2018 based on a technology roadmap that’s linked to the company’s strategic plan, according to chief sales & marketing officer Joel Warady.
More CG companies plan to follow suit: For 2018, 37% of respondents expect IT budgets to rise 1% to 10%, and another 5% project increases of greater than 10% (see Figure 3). This lags cross-industry DX spending, though — IDC forecasts worldwide spending on DX technologies to be more than $1.2 trillion in 2017, an increase of 17.8% over 2016. Retail, healthcare, insurance and banking are driving the fastest growth.
Who Handles Spending?
Rapid changes in both consumer behavior and the retail landscape are driving the need for faster innovation at consumer goods companies. And that could be testing the traditional IT-controlled approach to new investments. While 43% of respondents say central IT continues to manage most of the spending, 40% said that activity is migrating to the business — with some level of IT input, of course (see Figure 4).
Another 15% of companies are already there, with business units managing most of the spending. The rise of cloud- and software-as-a- service-based solutions has made it easier than ever for BUs to acquire new solutions without IT expertise; the greater need for speed when it comes to implementation and execution makes user-level decision-making more critical.
Unilever, for one, tackled this issue by creating a shared platform across the marketing organization that would let individual brands take advantage of common tools but transform at their own pace, according to ComputerWeekly. A broader goal was to establish a new corporate culture in which IT is an integral part of the business, not a back-end function.
“[The] CIO is now expected to be a courageous visionary who can create a compelling vision of what it means to transform the business through technology and tools. They’re expected to lead through influence rather than through ownership,” concluded a recent report from The Economist Intelligence Unit and SAP.
All Talk, No Action?
“We are creating a digital-first culture. This bold ambition will shape the next 150 years of the company’s progress.” That proclamation came from Nestle chief executive officer Paul Bulcke and chairman Peter Brabeck-Letmathe in the company’s 2016 letter to shareholders.
“You can’t afford to wait until you figure everything out. You have to pick some things and just do it. This transformation is so much bigger that it needs to be much quicker,” Jon Harding, global chief information officer at Conair Corp., told CGT.
Comments like these from industry leaders underscore how critical the need for digital transformation is. But the pace of internal change does not match the urgency often expressed, according to the survey.
Nearly half (49%) of companies say they’re “taking some steps” toward transformation and 57% have “some general guidelines in place” to direct the process (see Figure 1 in the Introduction). But almost one-third (30%) admit that they are “still winging it” (see Figure 6).
Companies that have made significant progress are a definite minority: 28% of respondents say they’re “well on their way” and just 14% have a strict roadmap and timeline in place.
The aforementioned Economist study found that companies that have made significant progress started by embracing a digital mindset culturally; that led to increased investment in digital skills and technologies that could fuel transformation. Meanwhile, companies that haven’t made significant progress have been more focused on speed to market.
At Enjoy Life, “It starts at the top with the leadership team and how we make decisions, and [then how we] communicate the decisions to our team members. And it runs throughout all departments,” explained Warady.
This organizational buy-in is vital, according to analysts. “Don’t develop a digital strategy. Digitize your business strategy,” advised Forrester. About half of digital transformation leaders have created purposeful groups such as Centers of Excellence to orchestrate and coordinate strategic change across functions, compared to just 14% of the laggards, according to the Economist.
Wanted: Solid Strategies. And Money
When it comes to progress, digital transformation is running into some age-old obstacles. Respondents to CGT’s survey cited insufficient budgets (22%) and the lack of a strategic plan for spending it (19%) as the biggest hindrances in their path (see Figure 7).
Those two issues are followed closely by problems posed by the legacy infrastructure and systems that must be adapted — if not outright replaced — to enable digital capabilities. This snag was addressed in CGT’s 2017 Consumer Goods Sales and Marketing Report, where IDC predicted that as many as two-thirds of respondents will be held back in their transformation by inflexible/ outdated business models, processes or functional structures.
Conair’s Harding has found that one path to overcoming these obstacles is ensuring that the right elements are in place before a digital project begins. “You need to align the appropriate organization and people resources, because in many cases there are additional incremental initiatives on top of the way the business processes are already operating,” he said.
Making Digitization Digestible
Ultimately, digital transformation is an enterprise-wide endeavor that has the entire organization pivoting to put these new systems at the front and center of strategy and decision-making. The end goal is a modernized infrastructure that facilitates a new way of doing business.
Whirlpool Corp., for instance, no longer considers itself an appliance manufacturer but an “experience company” that helps improve the lives of its consumers. (For more, see the NPDI section.) Similarly, computer maker Acer is investing in customer experience technologies to personalize advice and product recommendations as it transitions from a product to a service company, according to Forrester.
But such sweeping cultural change is hard to implement in one fell swoop. As Harding suggests, identifying projects aimed at specific departments and/or processes can make things a lot simpler.
“Many companies start small, focusing on reshaping one business unit or product line, which in turn helps with innovation and digital agility. Managing scope and continually experimenting to find the right answers are vital techniques,” according to Forrester.
That strategy, however, demands that all decision-making for those projects keeps the long-term, enterprise-wide perspective in mind. Some companies make the mistake of delegating transformation to specific departments in one-off ways that, in the long run, won’t support the larger corporate vision.
Starting from the Outside In
Because changes in consumer purchase behavior have driven much of the need for digital transformation, it’s not surprising that many companies have given the marketing function the most attention thus far. In fact, 66% of respondents have already initiated DX projects in this area (see Figure 8).
The supply chain, sales, and manufacturing functions have also seen significant early investment. Conair has undertaken one project that hits all targets: constructing a new drop-ship distribution facility in Phoenix, Ariz., to support the expanding fulfillment requirements of its retailer partners — while also increasing its ability to grow direct-to-consumer sales.
Similarly, from a process perspective, consumer marketing and engagement (63%) and sales and operations (57%) are the two areas of the enterprise considered to be priorities for transformation at most companies. Business intelligence/data analytics, supply chain and customer management/collaboration are also important targets (see Figure 9).
Enjoy Life recently formed a cross-functional team aligning IT, production, procurement, sales, marketing, customer service, logistics and the leadership team to bring digital transformation to demand planning. The goal is to improve forecasting and production efficiency, reduce waste and the level of finished goods ageing out, and ultimately to improve margins. “Our ultimate goal is to be able to feed in the various data points and [have] the ‘system’ provide us with an optimized plan,” Warady explained. “It is extremely cross-functional in nature, but will allow for an improved case fill rate and improved efficiency in our overall production planning.”
In Cloud We Trust
Legacy systems were never designed for the demands of today’s digital business. That’s challenging companies to establish new, enabling technologies while simultaneously modernizing their infrastructures.
Cloud-based computing architecture has emerged as the go-to platform, with 61% of respondents implementing it as part of their transformation strategies (see Figure 10). What’s more, the vast majority(83%) cited the cloud as critical to their strategy (see Figure 11). Nestle Waters North America, for example, uses marketing cloud technology to create personalized consumer journeys.
“I see the cloud as a key enabler for us, particularly as it relates to Software-as-a-Service solutions,” said Harding. “With traditional on-premise hardware and software development, we wouldn’t be where we are today in terms of this journey.”
SaaS contracts also make it easier to test and innovate. “SaaS is a great tool to have in our armory,” he added. “It allows us to be quicker to try things — but also to relatively quickly be able to kill something.”
Other high-use steps in the digital journey include modernizing legacy systems (55%), along with adopting new technologies and integrating third-party apps and services (both 52%).
Mobile technology is also high on the list for impending implementation, with 45% of companies having it on the agenda; 62% of respondents identify mobile apps as critical to their efforts (see Figure 11).
Mobile tools are vital because they provide a method of two-way communication — not only letting CGs communicate with consumers, but also to “hear back” from them in the form of behavior data that can inform future strategy.
Shining examples include Under Armour, which developed health and fitness apps that work in conjunction with “smart” products to deliver personalized user experiences and deliver fitness and health trends back to the company.
Coming up a distant third (41%) is artificial intelligence and machine learning, a surprise considering the plethora of CGs (including numerous apparel makers) using the technology to tailor product recommendations and content for consumers. McCormick & Co., for one, uses algorithmic technology to determine a user’s taste preferences and recommend relevant recipes.
Open for (New) Business
Of course, digital transformation isn’t just modernizing existing business practices. It’s also providing the chance to explore new opportunities that may become business imperatives in the very near future.
As seen elsewhere, direct, personalized consumer engagement is getting the most attention among CG respondents (see Figure 12). Enjoy Life is using an Amazon Dash button to insinuate itself right into the consumer’s home; parent Mondelez employs smart-shelf technology in store checkout lanes that identifies basic shopper demographics to present targeted videos.
Digitally driven changes to the supply chain (61%) are also opening up new opportunities, a la Conair’s DTC drop-shopping. “Logistics will take a huge step forward through better connectivity, advanced analytics, additive manufacturing and advanced automation, upending traditional warehousing and inventory-management strategies,” according to McKinsey.
Among other opportunities is micro-segmentation, the use of big data to achieve mass customization by separating the supply chain into hundreds of individual segments that can respond to customized needs. L’Oreal has adopted an “Industry 4.0” program to improve responsiveness by digitizing the supply chain; Kellogg Co.’s Bear Naked lets shoppers on its website customize their own granola.
Direct-to-consumer sales (48%) and automation (35%) are also seeing a fair amount of activity (see Figure 12). Many CG companies, including Conair, are implementing drop-ship capabilities to support retailer needs, but this also sets them up to support their own direct-to-consumer sales.
Transforming the Bottom Line
With such a massive undertaking in the pipeline, most CG companies have high expectations for a big payoff. First and foremost among their measures for success is, naturally, sales growth: It’s the top benefit (55%) expected by respondents and the top metric (68%) by which they’ll measure success for their digital endeavors (see Figures 13 and 14).
Productivity improvements are also a top benefit (42%) and metric (48%), as are expense reductions (30% and 45%, respectively). Supply chain efficiencies (33%), better inventory planning/forecasting and stronger consumer engagement (both 30%) are also on the radar. The Economist study concurs with the last measure, noting that 70% of CG leaders believe that DX efforts are already delivering increased consumer satisfaction.
Conair’s Harding recommended not forgetting about improved customer engagement, which usually has the added pass-through benefit of boosting consumer engagement as well. “The number one benefit is that the brand will not only survive, but will prosper,” said Enjoy Life’s Warady, harking back to the dire warnings discussed earlier.
For the most part, consumer goods executives have heeded the call and are making moves toward digital transformation. Inadequate budgets and undefined strategies are still presenting challenges, leaving some companies struggling with how to change the corporate culture, break down departmental silos and ensure a consistent IT approach.
Technologies like the cloud are helping them sidestep some obstacles and become more nimble and innovative, testing and learning from new initiatives. That flexibility and innovation will be critical in driving internal efficiency and improving the bottom line.
“The reality is this: Companies must remove the word ‘digital’ from the phrase ‘digital transformation’ and simply understand that all transformation must contain a digital component if they are going to be truly successful,” concluded Warady. “We’re in the first inning of a very long game when it comes to understanding how digital will change our businesses down the road.”
It’s comforting to know, then, that most consumer goods companies have at least stepped up to the plate.
TABLE OF CONTENTS
- Tech Trends Report 2017: Transforming to the Digital Enterprise
Introduction & methodology
- Tech Trends Overview: High Expectations, Middling Progress
Everyone knows what must be done. Now, they just have to do it.
- A New Dawn for Analytics
New data sets require new skills and new processes.
- Redefining Trade Promotion
Is cognitive computing the key to the future?
- Moving to Outside-in Supply Chain Processes
Digital tools can transform every step in the system.
- Marketing: Getting Personal with Consumers
Digital tools make the promise of personalized engagement real — and required.
- NPDI: Enhancing Products, Improving Process
Transforming traditional methods of new product development.