Why Collaboration Is Needed
For New Business Environment
By Camille P. Schuster
Technology, the global marketplace, sustainability, and changing consumer demands create new challenges in the marketplace. Here is a closer look:
With new technological capabilities, companies face the process of absorbing and analyzing an overload of data about consumers, purchases, profitability, and location. With more countries having companies in the top 100 largest corporations each year, competitors are no longer just domestic companies. With consumer and government interest in sustainability, companies have increasing packaging, carbon footprint, and recycling issues to address. With consumers demanding personalization and using different media for information, creating products and messages is more demanding.
In this new business environment, do companies need to compete or collaborate? The reality is that both are part of the current business landscape.
Over the past ten years, there has been an increased call for collaboration between retailers and suppliers to address the challenge of creating an efficient supply and creating value for consumers. Presentations at conferences and articles in publications emphasize the use of collaboration to compete successfully. Sharing data allows both partners to better understand consumers, recognize the business processes and constraints of their partner, and use resources to create synergy and efficiency in their supply chain. In general, the guidelines are as follows:
- Understand the mission, objectives, and processes of one’s own company
- Identify the mission and objectives of the potential partner
- Develop insight and understanding of one’s own company’s consumers
- Identify joint consumers and develop and in-depth understanding their needs
- Identify a joint project and appropriate metrics for evaluating success
- Meet regularly to monitor progress and make necessary changes.
This working relationship assumes that retailers and suppliers work together on specific joint projects. However, they are not partners in the “joint venture” sense of partnership. They have no legal, financial, or long-term business commitments. Retailers work with more than one supplier; suppliers work with more than one retailer; retailers carry branded products and private label products.
Retailers and suppliers cannot freely share all information. While developing interdependent processes to create efficiencies, in-depth understanding of consumers, more effective joint projects, and increased sales, companies also compete with one another.
Collaboration does not happen all at once, quickly, or without difficulty. The initial Efficient Consumer Response (ECR) report on collaboration stated that it takes about 18 months for companies just to begin to trust one another. Collaboration tends to occur with specific companies on specific projects for a specific time period with no legal ties. This is a more tenuous process carrying with it some risk as well as the potential for great reward.
Companies need to be clear about their commitment to collaboration; namely, for what purpose, under what circumstances, with which partners, for what time frame? In this competitive/collaborative environment, companies need to create guidelines for collaborative working relationships as follows:
- Begin with a specific, well-defined project with an end date
- Determine what information will be shared
- Identify the metrics that will determine success
- Meet regularly to determine that specific activities have been accomplished.
When the joint project accomplishes the goals, companies have usually identified other opportunities for joint projects and are ready to move forward. However, this process grinds to a halt if both partners do not see success. Determining goals and metrics is critical at the beginning; monitoring progress is essential for successful completion. Successful completion determines whether trust is being built and companies are ready to continue their collaboration.
This is new work requiring new skills. Experience from those companies involved in collaboration is that someone in the group needs to be familiar with and understand the process of this new work to help the group get through the difficulties and challenges that will and do arise. Some have used consultants to assist them through the process. Some have sought advice at industry meetings.
However, there are many companies not involved in collaborative activities or not having much success with collaborative activities because they are not sure where to start, how to start, or doubt whether they have the rights skills, structures, and processes in place to begin. There are trade organizations addressing these needs with educational programs designed to give industry executives skills that enable professional collaboration with trading partners. This is certainly an appropriate, relevant, and important way for partners to learn how to collaborate.
These skills are essential for success well into the future. GS1’s report entitled “Succeeding in a Volatile Market: 2018 The Future Value Chain” predicts that in response to consumer and government demands to decrease their carbon footprint and create a sustainable environment, patterns of distribution will have to change. The description of the future is that collaborative warehouses will move product to regional and city hubs from which products will be transported to local retail outlets. In this scenario, collaboration will involve more than just retailers and suppliers working on a joint project. Collaboration will involve third parties, suppliers in a variety of industries, and different types of retailers working together to create efficient global supply chains as environmental requirements demand that companies develop interdependent forms
of distribution.
Competition will continue, but companies will exist in a marketplace that requires collaboration and competition. A company’s ability to create structures, processes, and people skills to compete and collaborate is essential for success between trading partners today. The ability
to manage the structures, processes, and skills across third parties will be required in the
near future.
If companies do not have the structures, processes, and people skills for collaboration today, the time to make this change is now. If not made soon, those companies will not be prepared for the future.
Camille P. Schuster, Ph.D., is Professor of Marketing at California State University
San Marcos, and President of Global Collaborations. She can be reached at schuster@csusm.edu.
MARCH 2009
Fine-Tuning Promotional Learning
In a Challenging Economy
By Paul Thompson
We are in an economic environment where price and promotion are playing a critically more important role in consumers’ purchase behavior and product choices. In that context, the key question today is: How do manufacturers develop category and brand spending plans that grow volume and earnings while supporting both brand equity and a competitive price position?
The trick is to achieve the whole package; that is, grow profits while supporting brand equity and establishing a competitive price position.
Doing this requires a clear understanding of what causes consumers to switch brands and the importance of deal and price relative to those switching decisions. Otherwise, all of the available dollars will be sucked out of marketing and targeted toward competing with retailers’ private label price points or other low-priced national brands.
Understanding where the consumer fits in the equation focuses the outcome toward achieving the right competitive price points and creates promotional bundling strategies to improve the return per trade dollar spent. This means that brand equity can be supported because advertising dollars do not have to be reallocated to trade spending. Net, the business is able to achieve the whole package – grow profits while supporting brand equity and establishing a competitive price position.
Many manufacturers are managing a portfolio of brands across a category based on historically promoted price points and product groupings. Consequently, more information is needed to make insightful promotional decisions. In many cases, the manufacturers feel like they have a good handle on the promotional lifts generated when that product group is promoted. That usually gives them a warm feeling about return on investment per trade dollar expended. What they don’t usually have is insight into the impact promoted group promotions have to the rest of their portfolio. In effect, they do not know the impact of the promotion net of cannibalization to the rest of their portfolio.
To understand this Net Brand Effect (NBE), manufacturers need to understand the consumer switching behavior that takes place when that particular promoted group is merchandised. Say chicken noodle soup in a can is promoted at two for a dollar. How much of the promoted volume is sourced from microwaveable soup and other varieties in the total portfolio? What is the net brand impact of running this promotion? Once you start to drill down into those questions, manufacturers can then begin to explore the Return on Investment (ROI) of different bundles of promoted products. This enables them to determine which groups collectively provide the highest amount of retained incremental volume or best ROI when promoting.
To be able to do a NBE analysis across the portfolio, a couple of things are needed. First, a detailed market structure that defines the key consumer segments and deciphers the consumer switching that occurs at each distinct level of the structure. Second, modeled promotional response data to understand the impact of promotional and base price changes.
At HRCP, we began providing this promotion portfolio learning on a consulting basis along with a comprehensive trade strategy. Today we have developed the structure switching into a set of tools that can be used to define optimal promoted bundles to maximize the return on trade investment for both manufacturers and retailers. These tools will also define optimal price points and frequency as many tools do, but what sets it apart is the ability to understand the true return on investment net of cannibalization.
What we have found for many of our clients is that the size that may have the greatest promotional lift may in fact be very cannibalistic of a more profitable promoted group within the portfolio. The net effect of that promotion could be significantly diminished when combined with the impact to that more profitable group. Also, by bundling products in promotions that touch different consumer segments of the market structure, the promotions tend to be more highly incremental than stand-alone promotions. An example of this would be that promoting a microwaveable soup and can soup in the same ad would appeal to a broader set of consumer needs and create higher promotional incrementality.
We have used this tool across many OTC drug and food categories and have found many areas where promotional synergies can be achieved by better, more efficient bundling at more moderate price points. We have helped our clients have defined ways to reduce overall trade spending while retaining the necessary incremental volume to maintain or grow share of market. For the retailer, it is also important to understand the category effects these new promoted bundles provide so they can evaluate not only the profitability, but the net category effect of what is being recommended. The tool we developed also uses the same consumer switching to aggregate up to total category impact of different promotional events.
The bottom line: In difficult times, it is more important than ever to focus on consumer understanding and shopping behavior to maximize pricing and promotional decisions for volume and profit growth.
Paul Thompson is a managing partner at Henry Rak Consulting Partners (HRCP),
a consultancy based in Chicago (www.hrcpinsights.com).
