Deloitte study: Size doesn’t matter, but coherence does
A new Deloitte study reveals that exceptional business performance within the consumer goods industry is not achieved solely by business size, but rather correlates to an organization’s alignment with one of three dominant business model types.
Deloitte analyzed 97 global consumer goods companies and identified 25 “Exceptional Winners” that have consistently outperformed their peers over a period of 10 years in the study, “Business model innovation in consumer goods: How consumer goods companies are configuring their business to deliver exceptional performance.”
“We find that the top companies in the consumer goods space almost universally embrace the notion that they innovate – though not only at the level of products and services, but at the business model level,” says Jacob Bruun-Jensen, principal, Deloitte Consulting LLP and co-author of the study. “Rethinking the fundamentals of how a business creates, delivers and captures value wasn’t a priority in an era of slow change and stable markets, but in a time of disruption, it must be.”
Characteristics of exceptional performance in the consumer goods market
Exceptional Winners varied in business model, size and industry segment, but all consistently outperformed their peers over a 10-year period. The winners realized average return on assets (ROA) of 12.1% and annual revenue growth of 13.3% during the same period, compared with an ROA average of 7.3 percent and 8.2% annual revenue growth for all companies studied.
Winners were also rewarded with an average annual shareholder value return of 27.1% , as opposed to 16.8% for all 97 companies analyzed. In addition to their strong performance, these companies shared three common qualities:
• They drive value from one of three dominant business model types – Operational Excellence; Brand/Product Leadership; or Customer Solutions;
• They develop a set of critical and distinctive capabilities that work together as part of a self-reinforcing business model; and
• They drive greater maturity into the distinctive capabilities than their peers.
Winning Companies also shared the common trait of strong “Business Model Coherence,” which was measured as a function of how closely aligned the company was to a certain business model type. Deloitte’s research found that Business Model Coherence is positively correlated with greater financial performance, and is a dominant factor in explaining why some companies perform better than others.
“Just as no single factor is responsible for success in the market, no one business model is the sure path to exceptional performance,” says Kim Porter, Deloitte Consulting’s U.S. sector leader for consumer products and co-author of the study. “The Exceptional Winners focus intensely on what they do better than others and build truly distinctive capabilities. They also configure their business and operating models as mutually-reinforcing capabilities, which can make their advantage more powerful.”
Creating coherent business models
A coherent business model makes the most efficient use of a company’s resources, attention and time. By allocating capital and expenses more deliberately and effectively, companies focus more on the capabilities that can create differentiation and enable them to win in the market. To unlock the potential benefits of business model coherence, companies should consider taking four deliberate steps:
• Design a clear and self-reinforcing business model: Make strategic choices to support this configuration;
• Prioritize strategic capabilities: Identify capabilities that work together and help reinforce the business model;
• Begin the transformation by rapidly prototyping capabilities: Launch minimum viable transformations to move towards a world-class offering;
• Scale and expand business and operating model: The new business model is ready to scale once a company has created distinctive, well-realized capabilities that are backed by deep organizational commitment.