STUDY: CRACKS IN CONSUMER PRODUCTS INDUSTRY

NEW YORK -- On the eve of the 21st Century, consumer products companies are in the midst of deep industry turbulence caused by the fragmentation of markets, a deep-seated struggle to pinpoint buyer value propositions, and a race to adopt state-of-the-art technologies, finds the latest Vision in Manufacturing Study, conducted by Deloitte & Touche here in collaboration with researchers at the Kenan-Flagler

NEW YORK -- On the eve of the 21st Century, consumer products companies are in the midst of deep industry turbulence caused by the fragmentation of markets, a deep-seated struggle to pinpoint buyer value propositions, and a race to adopt state-of-the-art technologies, finds the latest Vision in Manufacturing Study, conducted by Deloitte & Touche here in collaboration with researchers at the Kenan-Flagler Business School of the University of North Carolina.

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Now in its 10th year, the study indicates the end of traditional consumer-product growth strategies which relied largely on natural growth and price factors. It also is the first to define a new "Era of the Virtual Customer," where customers will surface anytime, anyplace, and can dissipate just as quickly. This era is characterized by new customer expectations, approaches to product innovation, worldwide supply and distribution chains and organizational realignment.

"Traditional growth strategies are dead, as superior product quality and product-line breadth and time-to-market are no longer making the difference between success and failure," said Wally Buran, leader of Deloitte Consulting's Consumer Products Practice. "Companies must learn to compete beyond time. Technology innovation has created a generation of consumers who want to dictate when, where and how they interact with manufacturers."

"Technology is the force behind changing not only the way consumers buy products but also the way companies develop, produce and market the products globally. It is a Herculean task for many consumer products companies to anticipate, not just respond to, consumer desires," he added.

The findings also pinpoint several key trends that industry winners will need to consider as the industry moves into the next century:

New product offerings continue to be the top strategic direction for more than 75% of executives, with revenues from these products anticipated to increase by roughly 50% by the year 2000.

New product-introduction failure rates, however, have risen from 66% to 75% in the last two decades. Leading-edge companies are changing their product development strategy from mass innovation to focused innovation, with heavy product line "pruning" and rationalization, the report said. Regionally, 63% and 46% of executives responding from Japan and Europe, respectively, see new product development as the main thrust of re-engineering efforts, while only 36% of North American executives are focusing on new product development. This could be a dangerous complacency by North American companies since their product development processes are not viewed as particularly strong or state-of-the-art.

While company leaders are beginning to realize that future competitive advantage will stem from tightly integrated and synchronized activities with suppliers, retailers and consumers, executives overall rank themselves as "average" in the degree of integration with their business partners. Over one-third indicate that their primary vendors and customers have little or no understanding of their goals, strategies and overall business objectives.

Only 30% of executives in industrialized countries indicate a high degree of integration with consumers, compared with 50% of their counterparts in emerging markets.

This gap is due to the complex distribution channels and market power enjoyed by retailers in North America and Western Europe which often make it difficult for manufacturers to closely interact with the consumer. The thrust in supply-chain restructuring is nevertheless pervasive across all regions, the study said.

Industry leaders are integrating information technology throughout every aspect of consumer business to anticipate, rather than respond to, changes in consumer demand. Executives in North America, in particular, are investing resources into Internet commerce and enterprise-resource planning systems.

Overall, executives are heavily investing in IT for product- development processes: over 60% plan a significant increase in process technology over the next three years, and almost 50% plan to increase resources for computer-assisted design and manufacturing processes. Less than 25% of executives consider themselves to be world-class or near world-class in most aspects of customer-support services.

Retailers are solidifying their position as industry superpowers. Through consolidation, megaretailers have attained an unprecedented base of power, forcing manufacturers to conform to their operating standards, the report found.

"The new era is forcing executives to rethink traditional approaches to doing business," said Leo Kessel, leader of Deloitte & Touche's Consumer Practice.