Recently, the Harvard Business Review ran a special series of articles and posts on Making Collaboration Work. Some of these articles were quite insightful and a good read for any Supply Management professional looking to improve the efficiency and effectiveness of her supply chain. In this two part series, we are going to address the insights from three recent HBR posts that capture some key insights.
In collaborate to grow the pie, not just split it, the authors tell us that far too many retailers and manufacturers opt for pie-splitting instead of collaborating to come up with pie-growing strategies and, as a result, the majority of money spent each year on trade promotion just shifts share from one retailer to another or one manufacturer to another. This results in short-term, unsustainable results where companies are merely “renting share” and destroying long-term industry profitability for everyone involved.
As support for their argument, they reference a recent Neilsen Company macro study analyzing trade promotion across 30 grocery categories which found that only 13% of trade dollars actually result in category growth while 15% result in brand switching, 17% result in store switching, and a whopping 55% just results in subsidized volume (where no new consumers or incremental units are purchased). In this last case, customers who would have purchased anyway get a discount while corporate profits are gutted. And while a manufacturer or retailer might think that consumers only want lower prices, a recent analysis across dozens of categories by the Cambridge Group found that only 10% to 30% of households are truly price sensitive and the rest (who make up the majority) want new benefits and innovation and are willing to pay for them.
Thus, manufacturers and retailers need to collaborate, upfront, on innovation strategies with the consumer in mind and grow the pie. If they do, they can actually increase market share, either by creating a new market (because the product is the first to sail a blue ocean) or by robbing share from a different market. Jimmy Dean is an example of the latter. By expanding its frame of reference beyond just breakfast sausage into convenient breakfast meals centered around sausages, it grew the overall category 25%, drove 2/3rds of the growth, and tripled its frozen breakfast sales. Manufacturers and retailers both won by stealing sales that would have likely gone to fast food establishments instead.
In Part II, we will discuss two more HBR posts that address the inherent value of collaboration.