Disruptive Innovation: Welcome to a New Game
I recently ordered an automatic fish feeder for the twenty five fish that are part of my aquaponics system that’s sustainably producing salad and tomatoes for my small family of three. I hopped on Amazon.com and instantly filtered out all the automatic feeders that had less than 4 stars, then filtered to only those that can deliver to France (where I currently live). I then started diving into some of the products that looked good, and explored the product attributes - I had never bought an automatic feeder before, and so I was simultaneously educating myself on what was important and what the different brands stood for. This lead me to me filtering out a variety of brands that I had no interest in (the low cost ones), and then finally making a decision.
Just two days later, it showed up at my door.
The reason I lead with this example is because I’m sure we can all agree that when we reflect upon it, we find that it is truly amazing the speed at which things are changing. As I write this I’m listening to an automatically generated list of music, designed to help me focus, chosen from over 35 million accessible songs on Google Play. Leading up to writing this post, I read all my research on my phone, which I was automatically pulling in from the internet via a research aggregating app. At 6 pm this afternoon, when my son is allowed to get his daily dose of talking pictures he’ll jump straight onto a computer and pull in some content from either YouTube, Netflix or Amazon. At that time my wife will sit down with her Kindle and nurse her latest version of Fifty Shades of Grey.
There’s nothing particularly special about this picture. And that’s what’s so absolutely incredible. This is a standard story these days, a story that represents huge change and disruption across a variety of industries. If you’re a leader in the CPG space this story could potentially be horrifying, resulting in losing sleep over questions such as “how might I be completely blindsided by the next unicorn startup in my industry?”
New Rules for Consumer Engagement
In this one short example I referenced the massive disruption of 4 distinct industries: music, books, news media, and television. Almost all of the disruption of these markets took place over the last decade, two decades at most. This is not new, and if anything is almost overplayed. We all understand that digital transformation is disrupting the CPG industry, and we all probably feel that it's going to continue to get more disruptive quickly and this is, understandably, a concern. But there is a silver lining.
While disruption is everywhere, no industry has been disrupted completely. We still see newspapers being read on trains, CDs for sale in brick and mortar stores, and yellow cabs are still seen on city streets. A recent article in Computerweek dedicated to this topic stated that, “The Financial Times recently sold for an impressive $1.3bn, and printed books are now holding their own against e-book competition.”. It is apparent that although digital disruption significantly changes the makeup of an industry, changing the rules of the game, and cleaning out those that don’t keep up, there will be incumbents that survive and even thrive on the other side. So, how can you increase your chances of being one of the survivors and position for new growth?
Surviving Disruption in Your Industry
First, it’s important to heed Clay Christensen’s warning in the “Innovator’s Dilemma” where he talks about the three phases that disruptive changes typically go through. At first, disruptive startups are perceived as “toys” and dismissed as novel but hardly serious. As they continue to innovate and gain traction they take the form of a “threat” that needs to be countered, possibly crushed, often completely missing the unique value that they offer. Finally the disruptive startup becomes the “obvious” solution and starts taking a leadership position and market share. When looking for disruption within any industry it’s critical to check your hubris at the door, to be conscious of your own incumbent biases, and to monitor all changes in the industry.
Second, and possibly even more important, it is critical to identify competitive advantages that will remain true in a future after disruption and to focus on positioning your organization to be at least competent in those areas. When considering how digital transformation has disrupted other industries one pattern jumps out as being common across them all. Disruptive companies in all industries are focused around innovations in how consumers gain access to any particular good or service. When a critical mass of the consumer is captured and behavior is changed, and more importantly new expectations are set, then the incumbents adjust to stay relevant in this new world order.
Consumer Engagement = Transparency
In the CPG industry innovation around consumer engagement will not only lead to a considerable change in the way that consumers buy products, but it will have massive impacts on how consumers make decisions about products, how they find and search for products, and also in what they value in products and brands. Underpinning, many of these changes is the macro trend towards transparency. Although not the only trend impacting the CPG industry, it is one of the the most easily identifiable as something that will be important in a disrupted CPG industry. So much so, that transparency will evolve into an entry level requirement, that will only get more fragmented and challenging in the future as consumers demand for more information and their opinions on what is important to them evolves.
To underline this point, in our 2016 study entitled “Transparency ROI”, Label Insight found that nearly all consumers (94%) are likely to be loyal to a brand that offers complete transparency. While almost three in four consumers (73%) said they would be willing to pay more for a product that offers complete transparency in all attributes. And, it’s not only about more data it’s also about Personalized data - more than half of people surveyed said they use their own personal definition to determine which foods are "healthy."
Driving Evolution of Consumer Expectations
While you’re avoiding hubris, monitoring the market for change, and working to grow a new competency that will sustain you post disruption, there will also be the need for you to tactically react to remain relevant and to keep up with constantly shifting consumer expectations.
Making this increasingly more difficult will be the disruptors who, beyond competing in your markets, will also be actively painting a picture of a future that is unattainable for incumbents. This strategy will form and shift consumer expectations to demand goods and services that are more aligned with the new digital disruption. The disruptors will be constantly driving the demand they want to see in their favor.
Amazon is the king of resetting consumer expectations. Marketing initiatives and tests like drones and new format person-less stores are all examples, not of amazon launching and scaling a new offer, but in testing the market receptiveness to a new bar, while at the same time resetting expectations and making incumbents appear to be further and further away from that expectation.
The key will be to remain focused and to not get swayed to compete in areas where you simply will not succeed. Those companies that can adapt to the oncoming uncertainty by remaining focused on a core competency in Transparency will be positioned to drive towards a wide host of opportunities in the future and will be de-risked.
How the Industry is Reacting
We are already seeing the industry shift and move to address the new challenges associated with Transparency. Unilever, has been a leader in the SmartLabel movement, not only pushing e-labels for over 3000 of their products onto their website in record time, but also leading the market in information disclosure. To further build on that point they recently announced a new initiative to lead the industry in the voluntary disclosure of fragrance ingredients.
Danone, among others, has put a lot of effort and resources behind reformulation of their products to align with the Partnership for Healthy America. “From our beginning, we aspire to create economic, environmental and social value in our everyday decisions about how we operate DanoneWave. We’ll do this in the interest of our shareholders, employees, consumers, customers and suppliers, and improve the impact of our activities on the environment,” said Lorna Davis, CEO. Obviously, this positioning works for Danone because of their range of products, but their continued push to support transparency and health will have the effect of driving change of consumer expectations and in and of itself could lead to disruption in this category.
Another great example of incumbent disruption is Kroger’s recent home run with the Simple Truth own brand product range. In a very short time, Kroger launched the Simple Truth brand with the aim of providing products that were curated towards a more transparent and health and ethically conscious shopper. In four to five years this own brand offering has hit over 1.6 billion dollars in sales disrupting the own brand and the transparency market.
These a just a few examples of the many taking place across the industry. The key with all of these is that they require a core competency in dealing with, working with, and even leveraging the benefits of being transparent. It’s a meaningful challenge for the whole industry and those that are sitting back and claiming that the demand for their product will not be impacted by transparency are simply kidding themselves.