On the other day – I had lunch with one of our business network contacts and the conversation slowly turned towards our last week’s blog on sensitivity analysis framework (http://strategywithapurpose.blogspot.com/2010/11/sensitivity-analysis-framework-for.html). More specifically, his hypothesis was that- the granular value drivers covered within our sensitivity analysis framework (e.g. pricing, volume, COGS etc) is useful only to develop “bottom line focused operation excellence strategies” and not the top line focused innovation strategies. While I agreed with him in principle, I immediately pointed out the other variable within the ROIC called “VELOCITY” (or, the capital intensity as some folks call it when we reverse denominator and numerator) is what helps us to develop the top line focused innovation strategies. What do we mean by that? Let us go back to our ROIC formula –
ROIC = NOPAT/Sales x Sales/Capital => Operating Margin x Velocity
While most organizations focus on improving the operating margin within this ROIC equation- few in addition, also simultaneously focus on increasing the velocity to improve the ROIC from both top and bottom line standpoint. They usually do that- either by increasing their top line revenue (using innovative product lines and/or new business models) or by reducing the capital intensity by smart integration strategies (vertical, tapered and/or forward/backward integrations) and/or efficient sourcing strategies.
I ended up convincing him with few real world examples – where one of our client had specifically asked us to help them to increase their velocity – given the fact that consumers in the recent months have started to be very value focused (partly because of the down economy) when it comes to shopping household and personal-care products. One of the biggest conundrums facing this client is - the emerging shift in value perception is no longer a short term phenomena anymore– rather, as most experts predict, it is going to continue to stay even after the economy starts coming back again- which means it is imperative that consumer focused companies to have a value strategy if they already do not have one. For example, Store brand market shares, while stalling in the last spring after a big run up, resumed their growth this summer. While packaged food and beverages did perform reasonably well as people ate out less, store brand shares have grown in F&B categories as well.
When we analyze these store brand growth numbers holistically within its context, there is an interesting dynamics emerging– although consumers have cut back on commodity type packaged goods, they are still spending money on electronic gadgets (Smart phones, HDTV’s and iPads etc) – despite the fact many of them have high monthly subscription fees on top of their already high price tags. What does this tell us? Consumers, of late, have redefined their value equation – i.e. being value minded is not necessarily buying cheaper goods anymore– rather, it is being smart in purchasing products that solve their unmet needs with a longer lasting “higher award status” or experience.
In other words, consumers in their mind have started categorizing the products and services based on their consumption experience patterns as – “value-add vs. non value-add” - not just based on the price tags anymore, but also, based on the perceived long lasting award status those products (and services) leave behind them. Within the context of this renewed insight - the biggest innovation strategy question facing most consumer focused firms regardless of the industry vertical is- how to innovate with an end goal of increasing consumers’ award status, yet increasing the velocity from financial algorithm standpoint?
Before answering that question- first things first – let us recollect the value definition we had laid out in one of the earlier blogs - Value from consumers standpoint is “… the proposition of experiencing the “good enough” product/service consumption attributes (it varies depending upon the product/service) within an acceptable price point that is accessible and relevant to their life situations and experiences.”. In other words, the term value to consumer is the summation of all the experience attributes divided by the price they are willing to pay.
Consumer Value Equation = Top Experience attributes/Price
Within the context of this foundational definition – we sharpened our consumer insight analysis to answer our innovation strategy question using the Award Status Portfolio (ASP) Framework as outlined in the top of the page. Our research suggests that more than 50% of the consumers are looking for better “award status” based value deals when it comes to consumer products/services - followed by another 30% who are willing to exchange their high price commodity products for high price “value-add” products. This is definitely an alarming trend for commodity players and so we did some “deeper dive analysis” on the spending patterns of consumers across various product/service categories.
The insights we garnered was all the more intriguing - that consumers have altered their spending patterns not just based on usage needs, but also based on the way they map their preferred products/services to their personal award status experience. With this new insight and findings – we grouped the products/services under five award status categories and plotted them in the award status framework – with “degree of spending” on X axis and “degree of award status” in Y axis as outlined below and on the top of the page.
- Commodity – addressing the basic commodity experience -where consumers are cutting down on paying higher prices for national brands as 80% consumers now believe that store brands are made by the same manufacturers that make the national brands - especially when it comes to packaged goods and household items.
- Standard – addressing the standardized or mechanized product and/or service experience - where consumers, although are less likely to reduce their spending, yet are not willing to increase their spending e.g. some mechanized packaged/ household services and subscription based utility/content/TV services.
- Transformational – addressing the “inner” soul enhancing experience – where consumers are likely to increase their spending to increase their inner award status e.g. H&W focused nutritional supplements, Workout services, books, CD, music, SPA etc.
- Value-Add – addressing the “outer” prestige enhancing experience – where consumers are likely to increase their spending to increase their outer award status e.g. electronic gadgets, HDTV, value-add content services like context TV, iPads etc.
- Blended value – addressing some combination of the above four categories – where consumers are more likely to balance them on a daily basis to reach their personalized optimum category - and this is where our “purpose model based purpose bundles” (http://strategywithapurpose.blogspot.com/2010/10/transforming-so-what-opposites-in-to-so.html) come in the picture.
As we recognize from these “award status” based category maps – consumers are likely to increase their spending on higher award status experience providing “value-add” categories than other categories– and above all – consumers are also trying to balance their consumption experience portfolio on a daily basis to arrive at their personalized “Blended value” category. This is where our concept of “inter industry vertical” based purpose bundle strategy - of bundling commodity and standard products with transformational and value-add categories-come in to the picture. As it turns out, it is also a win: win strategy (as outlined in one of our earlier blogs), for both consumers and providers alike – as consumers see the synergistic value of the “cross industry” purpose bundles - i.e. sum of the total bundle award status is higher than the individual part’s award status.
What does this tell us? There is a new reality or an “award status based value equation” seems to be evolving when it comes to consumer spending - and so, it is time to accept this new reality and devise an appropriate “purpose model based purpose bundle strategy” to answer this emerging award status perceptions of 21st century consumers. However, by no means – we are suggesting that commodity products and services have lost their relevance – rather, it is time for commodity players to come up with more of value-add/innovative products and services with a higher award status – where, historically, CPG/Retail firms have been lagging behind the electronic gadget firms. I guess the right answer is “doing both” (i.e. innovating commodity product categories and formulating purpose bundles) is the way to go in the words of Inder Sidhu and Roger Martin and as summarized below.
To whom shall we ask… and whom shall we send (to find)
Those who are seeking for this “award status”?
Pay attention pals, sit tall, and don't look so content!
For it is an honor coveted by us all, the normal consumers…
It’s been dreamed of and prayed for so long …
Reflecting the true inner self esteem of the highest scale
No bribes, no pleas, no threats will prevail – and so,
It is time that we fulfill that dream, by
Balancing "value with spending" to achieve that aim,
Reducing the “commodity” quadrant as there exist few choices to claim,
Keeping the “standard” quadrant as basic necessities remain the same,
Sustaining the “transform” quadrant to enhance the inner exclaim,
Increasing the “value-add” quadrant to enrich the outer fame, (yet with a goal of)
Reclaiming the “blended value” quadrant as it is the ultimate acclaim, (so…)
The name of the game tomorrow is for "purpose bundles" to proclaim!