How growth champions create new value
To
generate new organic growth for both the short and long term, businesses need
to explore three horizons for action.
How do companies such as LEGO, Chobani, Beats, Diageo, and Dollar
Shave Club significantly outgrow their competition, and what can consumer
companies learn from them?
Today, consumer-facing companies find
themselves in a challenging predicament. They are investing billions of dollars
in marketing and innovation to win the favor of consumers—but to seemingly
little effect on market share. In fact, according to McKinsey & Company
research, only 7 percent of corporate growth is driven by market-share gains,
with the rest being driven by “where to play” choices: M&A and portfolio
momentum. In the race to shift their momentum, many companies never quite catch
up with the market, which remains a step ahead, while headwinds in their core
categories hold them back.
Nevertheless, there are clearly
exceptions, organic “growth champions” that create their own momentum and win
the race. High-growth companies have a clear growth agenda, and they follow
through on it. These companies can unlock hundreds of millions of dollars in
new growth.
Improving organic growth rates begins with
a shift from focusing on costs to focusing on cost and growth. In our
experience, organic growth leaders exhibit at least one (though often a
combination) of three profiles:
·
The Investor has a clear
understanding of where growth is with existing products and services and
doubles down on the winners. This is often the fastest, simplest, and most
effective way to grow. In retail, for example, this could mean investing in
offers that increase profitable foot traffic; in direct-to-consumer businesses,
it could mean increasing advertising in a successful channel.
·
The Creator builds value through
new products or services. Creators work at the frontiers of change to identify
the white spaces—in emerging customer needs, unserved segments, or adjacent
markets. They harness advanced analytics and digital to disrupt markets, not
just improve existing models.
·
The Performer constantly optimizes
core commercial capabilities in sales, marketing, pricing, and customer
experience.
We have found that these archetypes
provide a simple but effective model for business leaders to examine their
commercial growth opportunities. They also provide a simple and useful way to
structure business-unit growth programs.
In practice, changing a company’s
commercial growth trajectory often requires some combination of the three, but
successful companies master at least one. For this article, we will explore how
Creator companies construct a winning portfolio of growth initiatives.
Three
horizons of action for creating new growth
There are three horizons of action that
the Creator archetype can take to capture growth. NOW initiatives find growth
through new niches within categories, segments, and markets. NEW actions focus
on developing new products and services. NEXT initiatives capture organic
growth from new business models.
While the time it will take for these
actions to bear fruit will vary, it’s important to emphasize that business
leaders shouldn’t address these items sequentially. One of the biggest mistakes
we see is companies postponing planning for NEXT as they continue thinking
about NOW, or investing too little time thinking about NOW because they’re
obsessing about the NEW.
In conducting research for this article,
we analyzed hundreds of consumer companies and brands and interviewed dozens of
current and former chief marketing officers (CMOs). The 40 or so “growth
champions” we identified were, on the surface, very different. They ranged from
LEGO (a company that has been making plastic toy bricks for nearly 70 years) to
Chobani and Beats (relatively new entrants in the food and headphones spaces)
to Diageo (which reshaped the whiskey category behind its Johnnie Walker brand)
and Dollar Shave Club (a true “disruptor” in its category).
When you dig deeper, however, you notice a
number of things that unify these companies. Above all, they are companies in
which the marketing organization has stepped up and taken ownership for growth.
“As a CMO, dedicate half of your time to growth. CMOs who are successful focus
on growth ideas, not on marketing communication plans,”1says
Andy Fennell, former CMO of Diageo.
We also found that “growth champions” tend
to exhibit the following characteristics:
·
They take a structured approach to creating and
managing their portfolio of growth initiatives. “You
have to be systematic when going after revenue growth. The creation of a common
framework is extremely useful,” says Alexis Nasard, former CMO and president
for Western Europe of Heineken. Structured growth planning is also a great
opportunity for CMOs to break out of the confines of marketing communication
and bring consumer insights to bear on strategy.
·
They use advanced analytics and agile insights
techniques to spot opportunities. They don’t expect to
come up with market-beating ideas by looking at the same data in the same way
as their competitors do. They unleash the power of advanced analytics on highly
granular consumer data to develop distinctive insights, and they mobilize their
organizations to act on them quickly. As Unilever CMO Keith Weed, put it:
“Sustainable growth is consumer-demand-led growth.”2
·
They mobilize for quick results, beating
competitors to the market. A common complaint is that many marketing
organizations are too slow, taking up to two years to bring a simple consumer
product to market or a year to launch a new campaign. In today’s marketplace,
the emphasis is on speed-to-market and on rapid test, learn, and optimize. Many
of our growth champions have adapted tech-company techniques, e.g., hackathons
and rapid prototyping, to learn fast and drive results quickly.
The three horizons differ in the nature of
their growth opportunities, the insights that underpin them, and the
capabilities required to deliver. A balanced portfolio, however, will contain
initiatives across each of the NOW-NEW-NEXT horizons, and all initiatives
should be informed by strong insights and a bias for action.
NOW—Growth
from new niches
NOW initiatives focus on new ways to
generate growth quickly. This could mean selling an existing product in a new
channel or market, launching a product variant, rejuvenating a core product by
infusing it with new meaning, or opening up micromarkets. NOW initiatives have
a high likelihood of impact, often require relatively little effort, and take a
rather short time to implement. They represent a company’s “bread-and-butter
business,” as one CMO described it.
However, NOW initiatives shouldn’t be taken
for granted. Many companies still have a lot of potential to grow by exploiting
overlooked segments, channels, or categories. The insights that power NOW
initiatives often come from existing market research, product data, or
straightforward surveys. In NOW, it is especially important to increase the
metabolic rate of the organization and optimize for speed.
Sometimes, even the most successful
companies underestimate the growth potential of their core business and tend to
lose focus. Take LEGO, the Danish toymaker. In 2003, sales fell off a cliff.
The company had ventured into many—perhaps too many—new categories in parallel:
children’s clothes, accessories, and lifestyle products. As CEO Jørgen Vig
Knudstorp put it, “We went into three new categories per year, when we should
have gone into one every three years.” LEGO subsequently refocused its business
on being a “small giant” in the subcategory of toy-construction kits. “What we
realized is that the more we’re true to ourselves, the better we are,”3Knudstorp
said in summing up the brand’s growth philosophy. With success, LEGO grew from
revenue of €0.9 billion in 2004 to €4.8 billion in 2015.
We have observed two distinct growth plays
that are particularly powerful in helping companies realize the full potential
of NOW opportunities: granularity and category ownership.
Take a granular
perspective
Moving beyond averages and taking a more
fine-grained view of the opportunity—by geography, consumer segment, or product
category—can allow companies to find growth that others have missed.
Looking at things through a geographic
lens, McKinsey research indicates that 600 global cities will drive more than
60 percent of GDP growth by 2025, and in many categories, growth is much more
concentrated in these cities than in the broader country or region.
Understanding which cities will matter most to future performance and investing
in them will likely drive better results than focusing on whole countries or
regions. Diageo used a local lens to identify ten cities in Brazil that were
promising markets. A successful small-scale marketing program in these cities
encouraged the business to roll out an ambitious £100 million plan more
broadly. In 2009–13, global sales increased by more than 30 percent, making
Johnnie Walker the leading international spirits brand by retail sales value.
Similar thinking can be applied to
consumer segments. Microsegments trump mass demographic and attitudinal
segments—at global scale, even niche markets become attractive. Consider the
case of Lululemon, a Canadian company that built up a billion-dollar business
in a few years by focusing on an underserved microsegment—yoga gear for
affluent, educated women—that the big sportswear companies had overlooked.
Technology makes it easier and cheaper
than ever before to manufacture and distribute niche products. For example, Nike
and Adidas plan to put 3-D printers in stores that will allow customers to
design one-off shoes that will be ready in 15 minutes. Diageo uses containers
to build mobile factories in emerging markets that cost just $2.5 million,
compared to $15 to 20 million for a conventional factory. We urge those who
think niche segments are not attractive to think again.
Own
category development
Successful brands take responsibility for
changing growth trajectories in their core categories, often by tapping a new
niche. They don’t simply fight for share or assume that category trajectories
are predestined, as did many brewers that focused their efforts on new markets,
assuming that growth prospects for beer in mature markets would, at best, stay
flat. It was left to craft and microbrewers to rejuvenate the category,
attracting new consumers at a much higher price point. Category development
requires taking a new look at the category you’re in and approaching it as a
challenger. It’s no surprise that many of the companies that have succeeded
have been new entrants.
One example is Chobani, which took just
seven years to develop Greek yogurt from a niche product into a billion-dollar
business and become the category leader. When Chobani launched in the US, Greek
yogurt was a tiny category found mainly in gourmet shops and organic sections
of high-end food stores. Founder and CEO Hamdi Ulukaya sought to attract a much
wider audience and position Greek yogurt as an everyday snack.4This
included displaying the product in the main dairy section, not with specialty
foods. The company continued to develop the category both through geographic
expansion (yogurt was mainly consumed in the northeastern US) and by targeting
new consumer segments (such as infants and Hispanics) and specific consumption
occasions (such as evening indulgence) with new varieties and marketing
activities.
Today, first-person action cameras are
heavily associated with the brand GoPro. But actually, these products have
existed since the 1960s, mainly targeting professional athletes and Hollywood
studios. In 2004, GoPro launched its first camera, an analog waterproof photo
camera that cost about $3 to produce, and targeted surfers. The business grew
steadily but remained very small in subsequent years. It wasn’t until 2010 that
GoPro started really developing the category from a niche into a mass market.
The main success factor was not the technology, but rather GoPro’s focus on new
consumer segments, using clever, content-based marketing to target one
microsegment after another. While the company only sells six different cameras,
its content and marketing activities address 27 different segments based on
activities and interests—from snowboarding and rock climbing to pets and
family. The company’s revenue has increased 20-fold in just four years, from
$64 million in 2010 to $1.4 billion in 2014. Today, GoPro dominates the US
market for portable cameras, not just action cameras.
NEW—Growth
from new products and services
NEW initiatives take something that works
and use it as the basis for innovation, i.e. launch a new product, expand a
brand into a new category, or address new segments. Because NEW initiatives
venture beyond existing business, analyzing the market as it is won’t be
enough. Identifying unmet needs and spotting NEW opportunities require being
close to consumers and customers. Examples of effective techniques include
social listening, sentiment analysis, digital ethnography, and online consumer
cocreation. For example, discussions in an online beauty forum inspired Nivea
to develop a no-stain deodorant, the company’s most successful product launch
in ten years. Unilever engaged in consumer cocreation for its TRESSemmé dry
shampoo line, also one of this company’s most successful launches.
In our work with clients, we observe two
particularly impactful growth plays companies employ to become NEW champions:
expanding category definitions and acting on emerging trends.
Expand
category definitions
To broaden their understanding of where to
play, leading marketers explore all the competing options that consumers can
choose from when they decide what to buy. There exists a real risk that
companies will tend to define their market in a way that flatters their own
brand (in terms of market share and equity) and not look at the broader
competitive set or at opportunities outside their frame of reference.
When Procter & Gamble launched Olay
Total Effects, it effectively created a new category: “mass premium” skin care.
With much higher price tags ($20, compared to a $6 average charged for other
Olay products) and aggressive efficacy claims (“Fight the seven signs of
aging”), Total Effects went head-to-head with department-store brands
(previously excluded from P&G’s market-share calculations). Gina Drosos,
who led the effort at the time (she’s currently president of Assurex Health),
said, “The thing that made us feel comfortable was getting close to the
consumer and understanding what she wanted.” The company conducted thousands of
interviews with skin-care users and discovered that women around the world
expressed the desire for a product that wouldn’t fight just one or two signs of
aging, but all of them. In price-elasticity tests, researchers were surprised
to find that Total Effects was forecast to achieve higher volumes at higher
prices because of the prestige and the self-rewarding effect that comes with a
high price ticket. Retailers and competitors were skeptical, but it worked. By
2003, Olay had become a billion-dollar brand.
Act on
emerging needs
“A good hockey player plays where the puck
is—a great hockey player plays where the puck is going to be,” Canadian hockey
hero Wayne Gretzky once said. To build better products and create competitive
differentiation, companies need to know consumer needs before they are even
articulated. They also need the courage to act when they detect an emerging
need. As Diageo CMO Syl Saller put it, “An obsession with consumers better
equips companies for change. Consumer insight must inform how, when, and where
a brand embraces new ideas in the pursuit of growth.”
Take headphones, for example. Until
recently, headphones was a dormant market dominated by a handful of
long-established brands. Most consumers simply used the loose, in-ear headphones
that came with their MP3 player or phone, most of them white or black. Seven
years ago, along came an attacker to change all that. Beats Electronics now
holds an astonishing 64 percent share of the US market for headphones priced at
$100 and above. Beats took a granular perspective, targeting a small but
influential segment of young, urban, style-conscious consumers. Targeting these
trendsetters, Beats designed a product that addressed two of their needs:
superior sound quality and self-expression. Beats positioned its product,
produced by musician Dr. Dre, with the promise to “hear the music the way the
artist wanted you to hear it” and offered the 11 different available colors as
statements of personality and self-expression. Today, its products are visible
in almost every gym, street, and workplace.
NEXT—Growth
from new business models
NEXT initiatives try out new business
models, explore disruptive ideas, and create things from scratch. Often they
take a lot of time and energy and have highly uncertain outcomes. But if they
work, they can have huge impact. Disruptors, such as Uber, AirBnB, and Netflix,
are leading the way in this respect. The lesson for incumbent consumer-goods
players? Disrupt your own industry before others do it for you, even if that
means you see some initiatives fail. In fact, more and more consumer-products
giants are experimenting with new additive or disruptive business models, such
as subscription-based direct-to-consumer approaches or mass customized products
using technologies such as 3-D printing.
Some companies are setting up dedicated
teams to explore NEXT initiatives. LEGO has tasked its Future Lab with
inventing the “future of play.” Staffed with 50 of LEGO’s top employees, the
lab works with lead consumers and upcoming start-ups to identify new target
groups, new markets, new technologies, and new business models. It works like a
start-up, developing a minimum of viable products that it launches in small
quantities, iterates, and scales when they prove successful. Since Future Lab
is an entity run separately from the parent organization and even has its own
small manufacturing facility, it can experiment with radical ideas without the
limitations of working within the day-to-day business environment. Similarly,
Diageo has set up a Futures Team that is charged with identifying and creating
disruptive growth.
Companies don’t need to have a large team
or an impressive innovation hub in Silicon Valley to start with NEXT
initiatives. Even two junior employees with open minds can make a big
difference. If their ideas seem promising, the company should go ahead and
increase funds and resources. While NEXT initiatives tend to take a little
longer to get to market, the aim should not (only) be to secure growth in the
years ahead. The aim can be on a smaller scale at first—to go to market in 6 to
12 months, even if only in three cities and with improvised operations. The
idea should be to start small, iterate, and scale quickly.
To grow in NEXT, companies have two plays
available: developing additional income streams through additive business
models and disrupting the existing business
Explore
new revenue streams
New business models can add to the
existing business by, for instance, offering new services with a current
product or tapping into new sales channels to reach different customers. These
new business models don’t always have to be radically innovative in order to
deliver high returns.
Starbucks is constantly adding new revenue
streams to its retail business, for example, by selling ready-to-drink and
packaged coffee in grocery stores and delivering packaged coffee to the home
for a monthly fee. However, the masterpiece must be the prepaid cards that
Starbucks launched a few years ago. Of course, these cards provide customers
with a convenient payment method, lead to more store visits among card owners,
and allow the brand to tap into the gift-giving market. But also interesting is
the fact that payment fees to credit companies are (relatively speaking) more
than 50 percent lower for a $25 prepaid card than for a $3 coffee. Plus,
although there are no expiration dates on the cards, Starbucks communicated in
its 2015 annual report that it had made a profit of $110 million in the
preceding three years from unredeemed cards. Moreover, with total card-value
liability of about $1 billion, the cards could lead to nice interest capture
when rates increase again. While the upside of this example seems very
compelling, a recent McKinsey survey found that just 27 percent of companies
are systematically scanning for new opportunities outside of their core
business.
Embrace
disruption
Whereas the previous growth play is about
adding new revenue streams to the existing business, disruption is about
attacking and cannibalizing it. For example, Coca-Cola has teamed up with
coffee specialist Keurig Green Mountain to launch a machine that allows people
to make their own cola at home. Heineken has done much the same with Sub, a
draught-lager machine for domestic use that it is selling directly to
consumers.
Companies that think their category is
disruption-proof should consider what’s happened in other seemingly stable
fields. For decades, consumer-goods companies all over the world admired Gillette’s
business model. But it didn’t protect Gillette from attackers. Only three years
old, razor-blade home-delivery service Dollar Shave Club is already enjoying
sales equivalent to 10 percent of Gillette’s US market share. The start-up hit
revenue of about $140 million in 2015, more than twice its previous year’s
sales. As Unilever CMO Keith Weed put it: “Disrupt or be disrupted. That may
sound strange coming from a global company operating across 190 markets. But
embracing disruption is critical to creating change. As marketers, we need to
become better at experimenting, taking risks, accepting the occasional failure,
and learning quickly along the way.”
While prognostications on the future and
market research will lead to imperfect visions of the future, leading companies
still consider how major consumer, economic, or technological trends could
affect a given category. They think about how an attacker with new models could
disrupt their industry, and they team up with entrepreneurs, start-ups, and innovators
from other industries to challenge established ways of doing business.
Five
sets of questions companies can ask themselves to get started
Companies should not take NOW NEW NEXT as
an invitation to spend the next half year looking for growth opportunities. The
aim should be action. Accordingly, marketers can start right away on Monday
morning by answering these five sets of key questions:
1. How
balanced is our portfolio? If we take our portfolio of growth and
innovation initiatives and plot them against NOW NEW NEXT, how balanced does
the distribution look? Do we have a perspective on which of the six “growth
plays” would be successful in our business?
2. Who is
thinking about disruption? Are we as systematic in NEXT as we are in
NOW? Is anyone tasked with disrupting our core business—or are we leaving it up
to competitors? What are we doing to explore additive business models?
3. Are we
limiting our horizons? In exploring NEW opportunities, do we
impose limiting mind-sets on how we define consumers, our category, or the
addressable channels?
4. Do we use
advantaged insights? Do we rely on the same data and insights as our
competitors—or do we have a source of distinctiveness?
5. Are we
agile enough? Have we been able to accelerate our time-to-consumer and
time-to-market? Or are we still stuck with cumbersome and slow innovation
processes?
Organic growth is a top priority for
business executives today. Armed with a clear organic-growth agenda and
sufficient resources for those initiatives, businesses can generate growth for
both the short and long term.
By Jonathan Gordon, Nils Liedtke, and Björn Timelin
http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/now-new-next-how-growth-champions-create-new-value?cid=other-eml-alt-mip-mck-oth-1609
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