Over the last 26 years I had the good fortune to work in Europe, the US and the Middle East for two companies that are leaders in the field of consumer marketing – PepsiCo and the Procter and Gamble Company. During this time, the environment under which global companies were operating was impacted by a number of megatrends that have shaped, not only business, but our daily lives as well. As a result of these dramatic changes in the environment, the challenges faced by the leaders of business have grown many fold, and have challenged the status-quo. Hopefully, the thoughts that follow will be of interest to those who wish to understand the forces that are driving global business strategy, and can shed some light on what it takes to be successful in international business going forward.
I was recently invited to give a speech at one of the leading European business schools where I grouped these mega trends under 5 theme categories.
1. Modern Trade Concentration and Private Label Pressure. The astonishing growth of organized modern trade outlets at the expense of traditional stores is happening everywhere, from Moscow to Madrid, and the increasing power of organized trade is putting intense pressures on the profit margins of most manufacturers. Additionally, the concurrent development of Private Label is putting further pressure on branded products who now need to justify their price- premium through more than just superior branding. Companies are now forced to innovate at a faster pace and ensure their brands are offering both tangible and emotional benefits ahead of competition, including private label.
As a result of this trend, we are seeing the emergence of two distinct categories of brands. First, those brands which offer good product benefits and sell at a significant price discount to the average market price (a great example is Zara, now the world’s largest clothing company). The second category is that of premium priced products, which have developed superior product performance characteristics coupled with leading-edge design and a distinct brand DNA. Probably the best example in this category is the family of Apple devices ( ipad, iphone, Mac).
Today’s consumers are extremely sophisticated, shopping for price or for performance/prestige. Brands that try to offer both, but do not truly distinguish themselves in either, are failing like never before. Being in the middle, is not a good place to be.
2. Emerging Country growth. Until about 10 years ago, the majority of global growth in consumer spending was driven by the developed economies of the West. Not any more! The arrival on the world scene of the BRICs ( Brazil, Russia, India, China) and other high growth emerging economies, has changed the global algorithm. It is estimated that over 70% of global spending growth over the next 5 years will be contributed by these economies. Companies that have a strong footprint in these economies will grow significantly faster than the rest and will gain significant competitive advantages through scale and improved profit margins.
3. Commodity price volatility. In recent years we have experienced a very volatile environment in the commodity markets – wheat, corn, sugar, aluminum, plastic etc- driven in large part by the huge demand for these materials by the emerging economies of the BRIC countries. In parallel, businesses have found it very difficult to pass these commodity- based cost increases to consumers, partly due to increased competition from Private Label, and partly due to the fact that disposable incomes are no longer growing like they used to. As a result, profit margins of international companies have come under pressure, and most companies are now forced to take drastic cost reduction and productivity initiatives to offset this phenomenon.
4. The Internet Revolution. The speed of information dissemination has grown exponentially over the past 10 years and the ways to communicate with consumers have changed dramatically. Traditional media have taken a back seat to new, internet- based social media, and experts indicate that in 5 years or so, more than 80% of all purchases will either be done or influenced by the internet. Companies that understand well how they can leverage technology for their particular business model will no doubt outperform the rest.
5. Last, but not least, we have the concept of Corporate Social Responsibility hitting the radar screen and changing the way corporate priorities are evolving. Business today needs to balance the need for superior shareholder returns with actions that lead to sustainable societies – whether this means initiatives to preserve water, reduce waste, eliminate unhealthy gas emissions, promote healthy eating or develop human talent just to mention a few. Business leaders are realizing that unless their practices lead to sustainable economies, the long -term future of their business, the global economy and capitalism the way we know it, will be questioned. This development is not without its problems, as most often than not, the objective of short -term profit maximization clashes with the objective of corporate social responsibility leading to tensions between different stakeholders.
In conclusion, the biggest constant as we look at the evolution of business over the past decade is CHANGE. Change is happening at a much faster pace than any other period in the past as a result of macro- economic, demographic and technological developments. Business leaders need to play tomorrow’ s game, not yesterday’s, if they want to survive in today’s dynamic environment.
