Orchestrating Platform Innovation in Consumer Products and Retail
ELECTRONICALLY REPRINTED FROM DECEMBER 14, 2012Orchestrating Effective PlatformInnovation in CPG and RetailSkilled orchestrators in this consumer-driven segment must be willing to divergefrom old models and paradigms to make way for converged, innovative platformsBy Sean Monahan, Mark Van Weegen and Michael HuT raditional Consumer Packaged Goods (CPG) com- panies and retailers are rethinking their critical seg- ments. With escalating pressures to continuallyprovide innovative market offerings while simultaneouslydemonstrating sustainable, profitable growth, it’s no sur-prise that these CPG and retail companies are thinkingmore like their consumers. They are challenging the tradi-tional topics as basic as how to define a channel and thenature and value of a product. As a result, these CPG andretail value chains lead progressive companies to devel-op new convergent products and channels which combinecross-disciplinary technologies and capabilities to createcompelling value propositions. Figure 2Real-time convergence scenarios nounced this past October that it would open over 100 Powerful things begin to happen when commercial of- “virtual grocery stores” in commuter rail stations in Bos-ferings imitate consumer lives. After limited trials earlier ton, Connecticut, New York, New Jersey, Philadelphia,in the year in Philadelphia and Chicago, Peapod LLC— Washington, D.C. and Chicago.in partnership with Barilla, Coca-Cola, Kimberly-Clark, The idea is simple. Commuters armed with iPhones, iP-Procter & Gamble (P&G) and Reckitt Benckiser—an- ads or Android phones just scan bar codes of the products in the virtual grocery aisles within billboards displayed on train platforms for home delivery. Peapod’s East Coast vir- tual stores’ ads feature household products, food & bever- age (F&B) items and beauty care products. The company expects half its orders to come through mobile devices by 2014—good news since the typical iPad shopper’s ticket is higher than the typical Peapod ticket of $150. The program mirrors Tesco’s Home Plus’ “subway store” offering in South Korea. Launched in June 2011, the sub- way program increased Tesco’s sales by 130 percent in just three months. Whether in Seoul or SoHo, the concept of “taking shelves to where the customers are” requires retailers to success- fully orchestrate a complex set of capabilities—from soft- ware support of mobility-enabled shopping to “last mile”Figure 1 warehousing and fulfillment issues in metro markets.
Coca-Cola’s Freestyle beverage dispensing systemis another example of a successful convergent platform.Freestyle machines allow customers to mix and matchover 100 individual Coca-Cola flavors through a wirelessenabled touch-screen interface. The Freestyle platformoffers a direct-to-customer channel for testing new prod-ucts and interacting with customers. As in the Peapod andTesco examples, Freestyle requires Coca-Cola to orches-trate non-traditional capabilities including micro-dosingtechnology from the medical device industry and precisionautomotive metal chassis building. Both examples demon-strate the opportunity and game-changing nature of con- Figure 3vergent platforms. Convergent platform innovations offersignificant opportunities and present unique challenges, Incubators also require dedicated resources and budgetsmost notably the need to effectively orchestrate a number to leverage personnel and expertise from multiple function-of outsourced, industry-spanning, cross-disciplinary ca- al units with shared metrics and incentives. An incubatorpabilities such as complex high-tech product engineering, approach opens the door to organizational and governancerapid lifecycle technology design and managing a complex alignment for rapid experimentation, appropriate risk tak-global partner base. Unlike traditional outsourcing, where ing and outside the box thinking.the activities are often non-strategic, orchestrating conver- For example, a consumer healthcare client seeks growthgent platform innovation is significantly more complex as through diversifying into home-use health and beauty de-depicted in Figure 2. But it’s not impossible. vices. But the company ends up squashing its R&D team’s Our experiences working directly with global CPG and most innovative ideas at the concept stage and missed de-retail companies and across industries engaged in complex velopment timelines for those ideas that made it to proto-innovation outsourcing such as consumer electronics and typing. As a result, poor organizational alignment created adefense taught us that leading orchestrators consistently failure cycle.outperform their peers. On average, they achieve develop- Without senior executive commitment, even the mostment and launch milestones 25 to 50 percent faster; and promising ideas failed to receive adequate funding or hit in-enjoy 20 to 40 percent cost advantages; and have a high- ternal rate of return targets. The few prototypes managinger likelihood of sustained differentiation.Thus, outsourcing to make it to production—such as a promising light-basedconvergent platform innovation requires the presence of home-use wrinkle remover—were delivered by managersthree success drivers. lacking shared incentives and trapped in traditional met- rics. R&D engineers were focused on safety and functionalSuccess Driver 1: Creating the Right Orchestra- features without involving contract developers early on totion Organization ensure cost-effective production. That led contract devel- Companies which embark on ambitious innovation ini- opers—focused on speed-to-market instead of balancedtiatives often find that demands for short-term results lead performance—to deliver a differentiated, but far too cost-to downstream complications including the loss of central- ly, product that failed to meet conservative payback goalsized decision making; misalignment of necessary skills; and versus risk profiles and quite naturally, died off.conflicting agendas. Establishing the right orchestration Leading orchestrators complement the right organiza-organization and management structure upfront becomes tional structure by ensuring they install the right manage-even more critical in environments where the development ment team to mitigate risks and delays. The majority ofprocess requires coordination across multiple external en- project delays and risks to distributed innovation initiativestities and organizational boundaries. occur at coordination “boundaries” where critical deci- Convergent platform innovation is similar to small-cap, sions are made and critical activities handed off from oneearly-stage start-up efforts, often ill-suited to the manage- group to another. These boundaries come in two forms:ment and cultural style of larger and more hierarchical or- decision-making boundaries where sub-optimal trade-offsganizations. Large cap leaders in industries characterized are made between competing options; and activity-coordi-by complex outsourcing—like consumer electronics and nation “boundaries” when work is passed from one firm inaerospace—adopt an “incubator” structure as a proven or- the value chain to another. Establishing an effective man-ganizational strategy. An incubator organization structure agement team with necessary boundary-spanning compe-can foster and enable the right mix of rapid decision mak- tencies significantly improves decision making and goes aing; championing of an entrepreneurial mentality; and the long way toward ensuring success.development of a risk taking culture required for success. Effective orchestration managers are often generalistsAs shown in Figure 3, establishing stand-alone objectives with diverse functional expertise as well as relevant techni-and mandates, backed by strong executive leadership, is cal experience of the underlying key platform technologies.key to making an incubator model work. Autonomous deci- In addition to establishing the right organizational structuresion-making is needed across departments from identifying and installing the right team, best-in-class orchestratorscustomer requirements; to feature definition and design; to broker and maintain effective partnerships across the inno-supply chain and manufacturing partnership management. vation lifecycle and along the value chain.
Success Driver 2: Building and Evolving EffectivePartnerships Outsourced partnerships are defined by their underlyingintegration activities—a holistic set of interrelated roles, pro-cesses and management of upstream supply chain activities.During ideation, these activities include defining consum-er-centric platform features and design. During development,they include activities like sub-system prototyping and test-ing manufacturability. One defining capability of leading or-chestrators is their ability to both establish the right partner-ship structure and then evolve it through changing objectivesand market dynamics when outsourcing critical integrationactivities across the value chain and innovation lifecycle. Building the right partnership—Leading orchestratorsestablish effective outsourcing partnership by definingcorrect spans of control in coordinating and managing up-stream value chain activities with key partners and injectingthe appropriate level of competition. Maintaining excessive Figure 4span of control forces orchestrators to operate in areas be-yond their core competency and leads to unfocused exe- production. Cisco also employs different strategies to se-cution. Giving up too much control to suppliers can threat- cure critical IP rights—such as paying an upfront premiumen intellectual property (IP) and promotes development of to secure all IP ownership; or splitting IP ownership by mar-undifferentiated solutions. ket application and software versus hardware with its key Defining the appropriate level of control requires system- partners to protect core commercial IP.atic assessment of the underlying risk versus opportunity Evolving the right partnership—Savvy orchestratorsconsiderations as depicted in Figure 4. The orchestrator evolve partnership structures to ensure sustained out-must objectively decide if it has the necessary in-house ex- sourcing performance since changes in the organizationpertise to actively manage upstream sub-contractors and strategy and external industry dynamics necessitate rede-integration activities or if it should delegate to its key part- fining span of control and level of competition.ner. Also, the degree of contractual and incentive mecha- Let’s say an orchestrator makes a strategic shift to de-nisms protecting against IP risks is also a consideration on velop deeper in-house bench expertise on up-stream val-the degree of retained control vs. delegating to partners of ue chain capabilities. Over time, this leads to an increasedupstream value chain activities. span of control in upstream value-chain coordination and To illustrate, Apple consistently employs a tight span of management to reduce external dependencies. In an effortcontrol of its outsourcing activities even in “non-core” pro- to cut cost in the 1990’s, automotive OEMs over-indexedduction logistics activities. Rather than relying on external on outsourcing key component prototyping and manufac-manufacturing partners to turn-key coordinate new product turing to Tier One suppliers in a turnkey model, leading toactivities, Apple manages key upstream supply chain activi- loss of development control and increasing costs. In recentty points such as factory-to-port logistics to guarantee end- years, many OEMs have invested in the in-house expertiseto-end IP security and zero product leakage. As illustrated required to regain control of upstream component of out-on the vertical axis on Figure 4, Apple’s need for IP security sourcing management and coordination activities.and launch secrecy demanded a tight span of control across Other orchestrators, like Redbox, delegate increasingmost of its outsourced activities for the iPhone platform. Es- scope of activities to external partners as market place al-tablishing the right level of competition is the second skill in ternatives offer better efficiencies, scale and flexibility com-defining right partnerships. Best-in-class orchestrators sys- pared to internal capabilities. The DVD kiosk innovator de-tematically manage their key development and integration signed and prototyped its first generation platform in-houseefforts to enable increased competition across the lifecycle. but quickly realized that it could accelerate redesign leadAs depicted along the horizontal axis in Figure 4, orches- time and production ramp-up efficiencies by leveraging thetrators enable competition through ensuring modular design know-how and scale of Get-A-Movie, their design partnerand minimizing asset specificity, or dependency on external and contract OEM Flextronics. Similar to evolving its span ofpartner for specific capital and/or technology know-how. upstream value chain control, orchestrators can also change Increased competition not only ensures optimal costing the degree of partnership competition by moving from a sin-but also increases capacity flexibility and risk redundancy. gle turnkey partner to multiple partners, especially as inte-Cisco is an example of a leading orchestrator who system- gration activities and underlying technologies become moreatically guides platform development trajectory to enable commoditized across the development lifecycle. Severalcompetition. While early stage prototyping may rely on a years ago, a leading consumer healthcare company movedkey technology partner with specific know-how or capital to a dual-contract design and manufacturing model for itsassets, Cisco aggressively pursues rapid iterations of re- innovative diabetes-monitoring platform once it had erecteddesign enabling a more modular design as well as increase strong patent protection and realized that several underly-sub-component substitutes in moving from prototyping to ing proprietary technologies are becoming commoditized,