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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


Design for Frugal Growth

With the right kind of organization, you can expand while cutting costs.

Illustration by Dave Plunkert

The control of costs had been its greatest strength. But it was now the greatest weakness. The company had spent so many years trying to reduce expenses that this imperative was hardwired into its practices, processes, and organizational design. When executives tried to shift gears, to expand into new markets and introduce new products, those old ways of doing business also had to change.

That was the story of the Amberville Corporation, a major U.S. brand-name consumer packaged goods (CPG) manufacturer. (This company is fictional, a composite of three companies; although all three have been disguised, the details are based on in-depth observation and are typical of many companies in the industry.) Like many other consumer products companies, Amberville had once been an avid innovator, responsible for many new household-name products. But its priorities had swung, like a pendulum, from growth in the 1980s to cost cutting in the 1990s. Now, in 2006, the pendulum was swinging back to growth.

But the company was ill-equipped for the transition. To keep costs down and control its large and far-flung product line, Amberville had built up a vast central operation at headquarters. New product launches had to be approved at four different levels: brand, division, region, and headquarters. Senior ex­ecutives in functional areas were expected to weigh in at least twice during the development cycle on such issues as capital costs and feasibility. Managing the computer systems and functions to support dozens of brand-based and regional operations groups was an immense task involving hundreds of people and a major focus on HR systems, reporting relationships, and recruiting programs.

Meanwhile, consumers were growing increasingly sophisticated. They wanted more information about Amberville’s products. So did institutional customers, such as schools and restaurant chains. Some Amberville marketers saw the opportunity to build Web sites and use other online channels to connect directly with consumers. But these efforts faltered amid the sheer complexity of multiple product categories. And their failure led many people in the company to conclude that even the business units that were closest to Amberville customers had lost their market focus and speed.

There was other evidence that all was not well. For example, when the company expanded its branded line of ice cream, the unit was consistently slower than competitors in launching new flavors. Business unit leaders spent much of their time looking inward, negotiating with the executives at headquarters who made the final decisions about personnel, product launch timelines, and many other operational issues.

Amberville’s dilemma is typical of many consumer packaged goods companies in North America and Europe today. Their most familiar home markets are stagnant; for the past 20 years, consumption of consumer goods in most product categories has grown only at the rate of population growth plus inflation. And consumer behavior is fragmenting; supermarket shoppers are increasingly likely to switch stores and brands. At the same time, mergers and acquisitions among manufacturers have consolidated the industry, creating larger competitors with global reach. But new consumers in emerging nations — those in Asia, Latin America, eastern Europe, and the Middle East — are eager for products. Simultaneously, around the world, global retail chains like Tesco and Wal-Mart are applying their expertise at squeezing manufacturers’ margins.

As consumer packaged goods companies have struggled to create and execute growth strategies, investor expectations for the sector have remained high, and raiders continue to stalk the producers of popular brands. It’s no wonder that the industry has devoted its attention, for at least a generation, to reducing cost, streamlining operations and creating economies of scale by consolidating research, manufacturing, and distribution. This approach has paid off in the past; most CPG companies have survived. But now, having turned themselves, in effect, into supercharged cost-cutting machines, how can these companies suddenly invest in the risky arenas of emerging markets and fundamental innovation? And if they can’t, how will they compete when frugality alone is no longer sufficient?

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  1. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: Study of R&D spending data shows that alignment with strategy and customer insight boosts the impact of innovation on performance.
  2. Andrew Martin, “In Live Bacteria, Food Makers See a Bonanza,” New York Times, January 22, 2007: Story behind the Danone launch of Activia yogurt.
  3. Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008: Complements the suggestions in this article by showing why effective organizational redesigns start with decision rights and information flow.
  4. Sankaran Venkataraman, “PepsiCo: The Challenge of Growth through Innovation,” University of Virginia Working Paper No. UVA-S-0133, 2006: Compelling case study of Pepsi’s innovations and growth strategy, demonstrating many of the precepts in this article.
  5. For more thought leadership on innovation, sign up for s+b’s RSS feed.
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