20 years after “The Innovator’s Dilemma” was published, more corporates than ever get stuck when trying to innovate. TIME FOR A RESET!

There is a fundamental disconnect between the abundant chatter about disruption and the actual ability to achieve it. As a result, many FMCG companies appear to be stuck and are bound to miss the train yet, I claim, unnecessarily so. A brighter future lies ahead for those who take the trouble to embrace and apply the magic code that was deciphered twenty years ago.  

In my earlier post on the Global Consumer Goods Forum I referred to a sentiment of partying at the Titanic. The circumstances for disruption are just too much present today. This concern is shared by many. My meeting with the CEO and Executives of Direct-to-Consumer units of two large consumer goods companies pointed this out again as they all appeared to ponder the same question. Will their niche be disrupted and, if so, when will it happen and what can they do about it?

However, in many a FMCG board room, the lens and language needed to adequately assess the situation are lacking, let alone to debate the right solution.

Should Executives in beauty care be worried about brands such as Beauty Pie that offer luxury skincare and cosmetics at what appear to be factory prices? Or, should the pharmaceutical industry be worried about Amazon getting into medical products? Or, might activist investors such as those targeting Nestlé (Daniel Loeb) and PepsiCo (Nelson Peltz) also target your business? And, what to make of the acquisition of Dollar Shave Club at five times revenue ($1b) and the 25% drop in EBITA in one of P&G’s most profitable businesses?

These issues do not simply stand on their own. They all point at the same pattern, a pattern that emerged from research by Clayton Christensen back in 1997. 

A quick reminder: take Dollar Shave Club, for example. Disruption happens: 1. when a new company enters a category where consumer needs are “overshot” with an offering that wrong-foots the performance of the incumbent’s offering; 2. when a new offering is constantly improved eventually to hollow out the broader customer base of the incumbent; 3. when the incumbent chooses to ignore the entry market, thus allowing the entrant to gain a foothold.

When looking at the broader consumer goods industry, these three serial mishaps will occur more than ever. The pattern is on steroids!

1. There will be more entrants with products and services that wrong-foot the offerings of established players. Barriers to entry protecting FMCG majors have vanished, and consumers increasingly turn their backs on major brands.

FMCGs were traditionally protected by barriers to entry involving, for example, brand, talent, manufacturing capacity, access to consumers and capital. Disruptive offerings that wrong-foot established products now simply flatten these barriers. Remember, this wave is building. In 2015 alone, 270 FoodTech Startups received $5.6 Bn funding (on average $20m) compared with 130 start-ups receiving $2.1 Bn (on average $16m) in 2014. This does not just involve 20 year-olds. The industry veteran, Sue Y Nabi, former President of Lancôme, successfully launched the “Orveda” brand this way. In parallel, consumers increasingly turn their backs on major brands. As we report in A.T. Kearney’s 2017 Global Future Consumer Study, over 50% of consumers in UK, France, Japan, and the US say they do no longer trust large corporations and global brands.

2. Direct consumer access and AI-powered analytics accelerate the entrants' ability to improve performance and hollow out the incumbent’s broader customer base.

The ultimate test that says whether an entrant’s offering has disruptive potential is as follows. Can an entrant consistently and effectively improve the performance of an offering while keeping its sustainable competitive advantage? Not all offerings can. For example, to compete with a luxury hotel, you are bolted on a similar cost-base. However, direct consumer access and AI-powered analytics will help to carve out and grow a niche into market by identifying evermore crucial consumer preferences, so new formulas and tweaks can be tested and launched in no time

3. Pushed by activist shareholders, incumbents tend to be locked on short-term results. The last thing they want is to attack a disruptor head-on and risk immediate margin losses.

Here is the third key to disruption: the incumbent’s “asymmetric motivation”. To paraphrase Clayton Christensen:

CEOs of leading FMCGs are generally aware, yet struggle to change the internal resource-allocation system. Not surprisingly, they are sometimes lured into implementing harsh rules including capping performance bonuses. Some are targeted by activist investors who crank up the pressure on quarterly performance. As one former COO formulated it:

Yet, this is what Leaders really should do! To go by the example of the new Ford CEO, Jim Hackett: Draw three circles representing the near, mid and long term, then balance your attention across.

So what can FMCG leaders do?

1. While the pressure builds, create slack to think and assess what is truly happening.

Assess how the future may unfold in your category. Are you headed toward the proverbial cliff? Evaluate the category. Is it “overshot”? Is consumption constrained? The nature of entrants: address foothold customers with different criteria than yours and, their ability to move upmarket. What is the direction in which resource allocation mechanisms push your company?

2. Tweak the asymmetric motivation as the first step to solve the dilemma.

Steve Jobs called ‘the Innovator’s Dilemma’ “deeply moving” and solved it. He tweaked the motivation towards customer value-creation rather than financial value-creation. He then followed through with a set of specific measures to build the new, by now codified and documented. This is needed to predictably and reliably deliver disruptive initiatives.

If your company is already feeling the pain, change the thinking, as once observed: "We cannot solve our problems with the same thinking we used when we created them" - Albert Einstein

About the author:

Bas Kemme is a management consultant and former emerging markets apparel strategist and entrepreneur. He believes that for societal progress, companies should become constant transformers able to solve more customer problems for more people, and that this is only possible with the right insights. Bas helps companies formulate strategy, build capability to innovate and grow, and accelerate corporate change projects including digital business model innovation. Bas is also frequently approached for advice on how to establish an entrepreneurial and innovation-eager culture. 

For further reading:

• 'The innovator's dilemma', Clayton Christensen. Theory that explains how the mechanism of profit-maximizing resource allocation causes well-run companies to get killed. 

• 'The innovator's solution', Clayton Christensen, Michael Raynor. Set of theories to guide managers to grow new business with predictable success - to become the disruptors rather than the disruptees 

• ‘Steve Jobs Solved the Innovator’s Dilemma’ by James Allworth, HBR 2011