Consumer packaged goods companies have traditionally been organizational role models for other industries. The brand or product management system—the heart of many consumer goods organizations—not only led to leading-edge marketing skills but also produced exceptional general managers. Recent events, however, have conspired to topple them off their pedestal. A potent combination of low inflation, competition from cut-price, high-quality private label and generic products, shifts in consumer tastes, the emergence of new retail formats, and runaway growth in promotion and merchandising costs has undermined the profitability of consumer products companies and raised doubts about their once-envied organizational structures.

Formerly well-oiled marketing machines are beginning to suffer stress and schizophrenia at all levels. Marketers are trying to stimulate category growth while at the same time slashing their advertising budgets for the nth year in a row. Operations managers are struggling to reduce distribution costs, yet trying to find ways to respond to customers jumping on the ECR bandwagon.

Each and every function within consumer packaged goods companies is being asked to collaborate more closely with the rest—but is all too often plagued by an inability to break free from a long tradition of independence. Business units that have operated autonomously for years in the interest of entrepreneurialism are wondering if—and how—they could be better leveraging corporate scale. Corporate portfolios are changing at a pace not seen for many years, with every addition of a business unit requiring considerable integration efforts over and above the daily challenges of competing in the marketplace.

Given these pressures, can consumer packaged goods companies regain their status as an organizational paradigm? The answer is yes—but first, they must begin to take the science of management a great deal more seriously. They must recognize that not only is organization important, it is hard to get right, and demands the best thinking from the best people in a company over an extended period. There is no "once and for all" fix.

Second, organizational management must be approached through factual analysis and tangible actions. Companies that have made real progress recognize that regarding organization as a "soft" topic is an anachronism. Third, consumer products manufacturers must understand that how a company is organized is not a mere exercise in moving boxes on a chart or seeing who is where on an overhead, but rather a major driver of shareholder value.

The new mindset is built on a handful of basic ideas about how the consumer products company of the future will differ from that of today. It must shift from a brand- and function-based approach to a strat-egy focused on categories and one or two core processes, such as new product development, supply chain management, or customer management (see boxed insert "Core processes in consumer packaged goods"). Companies must decide which process they will excel at and build a structure to exploit it fully. While no form of organization is right for every business, several structural and nonstructural mechanisms are vital in any attempt to leverage process-based organization to boost shareholder value.

A tale of two organizations

Perhaps the best way to explore the nature of the new consumer products organization is to compare the approaches of two hypothetical food companies. At first glance, each appears equally committed to organizing around core processes and managing horizontally through crossfunc class="ArticleHText"tional teams.

Company A has a category team whose members come from the key functions: manufacturing, sales, R&D, and marketing. Each of these members in turn chairs a crossfunctional team for the major core processes: manufacturing for the supply chain, sales for customer management, R&D for new products, and marketing for consumer equity. These process teams manage projects in their area and make recommendations to the category team. They meet frequently, at least once a month, and spend up to 30 percent of their time on team-related work.

If a crisis—such as a delay in a new product launch—develops, the relevant process team (here the supply chain team) alerts the category team. The latter meets, decides on a series of options and a clear recommendation, and then reviews them with the head of the division, who makes the final decision about what will be done.

Now let’s look at company B. With a category team and crossfunctional core process teams, it has a similar structure, but operates quite differently. In company B, the same crisis, a delay in a new product launch, is initially identified by the supply chain team. It diagnoses a problem with a packaging changeover. Rather than pass the problem over to the category team, the supply chain team takes direct action.

First, its packaging specialist works with both the vendor and the plant to resolve the issue. Second, the supply chain leader warns the customer management team that there will be a product shortage for the next 30 days. The customer team then mobilizes to develop an allocation plan. Which customers will get top priority? What can be offered to customers who don’t receive products as promised? When and how should information be communicated?

Plans are in place within 48 hours to address both the original packaging problem and the resulting customer issues. The entire category team is aware of what is happening and how things are being resolved. It serves as a communications link between the separate process teams and with divisional management. The category team leader updates the head of the division. Meanwhile, the supply chain team, having learned from this experience, recommends a short project to improve packaging change-over procedures.

Why do these two companies differ so dramatically in the way they make decisions? First, they have different mindsets. In company A, teams identify issues, recommend actions, and execute solutions that senior management has approved. In company B, teams are expected to support category strategy not only by exploring new opportunities, but by identifying and fixing problems themselves.

Second, company B’s process team members—or at least its team leaders—spend 100 percent of their time focused on category-related work. It is not something they do in addition to their real job; it is their real job.

Third, regardless of the function they actually report to, process team members at company B are evaluated on how well the category performs, not just on how well their particular function does. Their objectives are all linked to category goals, and evaluations are performed jointly by category team leaders and functional heads, with key team members also making contributions to a 360-degree performance review.

Fourth, there are vital differences in work practices. While both companies have standing team meetings, company B depends on informal ongoing communication to drive decision making and execution. Despite long distances, frequent e-mails and voicemails link team members to one another and to other teams. A simple electronic bulletin board that captures important issues and solicits input from members keeps teams up to date.

Of these two organizations, only company B is truly managing horizontally along core processes.

Fixing structure

New-style organizations like company B’s share three structural elements: a focus on categories rather than brands; highly effective integration across processes as well as functions; and an ability to share functional resources cost-effectively.

Categories, not brands

Companies can no longer afford to fund every opportunity, nor allow competition between their own brands

The case for a category-based organization is compelling. In a world of limited real growth and fragmenting consumer and trade markets, consumer products companies can no longer afford to fund every opportunity, nor allow competition between their own brands. From an economic perspective, any company with several brands in the same category will be forced to adopt a portfolio perspective to capture greater shares of industry value.

For larger manufacturers with many brands in a category, the shift from a brand to a category focus will also prove essential to making core processes work. Many leading companies—including P&G, Kraft, and General Mills—have already made this shift, partly to improve their management of processes that cut across brands. Managing the customer interface effectively, for example, calls for an understanding of how changes in pricing or promotion programming affect not just an individual brand, but an entire category.

Effective integration

Integration must be performed across functions and across processes, to run the business as a whole

While a category focus will generally apply to larger companies, the second key structural element, integration, applies to all. It must be performed at two levels: across functions, to deliver on core processes; and across processes, to run the business as a whole, day to day. The distinction between the two is important. Consumer products companies will need to master both to be successful.

Crossfunctional teams are a vital part of the new consumer packaged goods organization. The merits of a team that incorporates manufac-

turing, engineering, quality, procurement, and logistics are self-evident. Tremendous progress has already been made by leading companies in leveraging crossfunctional teams to manage the supply chain, customers, new product development, and, to a lesser extent, consumer equity processes.

However, the value of integrating across processes is less obvious, which may explain why so few companies have managed to achieve it. Let’s look at an example. Suppose a cereal manufacturer "gets religion" and creates crossfunctional teams focused on the supply chain, customer management, new product development, and consumer equity. Each team clearly defines its process and injects the right crossfunctional expertise. Functional and brand silos are eliminated.

Problems start to arise when, in the absence of a mechanism to integrate across these processes, new silos—now defined by processes—develop. Consider what happens when responding to customer needs for a high-quality private label offering becomes a priority for the customer management team. The supply chain team, focused on optimizing the manufacturing configuration, is happy to comply. Believing that the private label strategy will cannibalize more profitable branded volume, however, the consumer equity team objects. But the walls between processes have grown so high that the ensuing debate is painful and protracted.

Shared resources

The final key structural characteristic for the new consumer packaged goods organization is an ability to leverage economies of skill or scale, but without sacrificing the needs of individual categories in the name of cost synergies. Developing a shared distribution system capable of cross-docking and delivering full truckloads of all a company’s products to major customers, for example, is becoming increasingly important to the customer management process. Determining which functions will need to be leveraged to support core processes in this way—or simply to reduce costs—is an important exercise.

In general, there are three types of functional resource in consumer products companies: those that are generic, or common across categories; those that are highly technical, but applicable to more than one category; and those that are category-specific. This article focuses on the first two types which can offer real opportunities to leverage scale or skills.

A generic function’s objective should be to deliver agreed levels of service at ever-decreasing cost

A generic function such as accounts receivable or benefits processing should be organized for efficiency at the most cost-effective location. Its objective should be to deliver agreed levels of service at ever-decreasing cost.

Often, technical resources can also be shared across categories to provide value-added expertise that no single category would be able to afford on its own. Examples might include a molecular biologist serving product development teams; a raw materials procurement expert or commodities trader assisting supply chain teams; and an interactive promotion specialist advising consumer equity teams.

Many consumer packaged goods companies have begun using such an approach to provide greater functional support at the category level for the same or a lower cost. Even traditionally decentralized companies such as Johnson & Johnson and Heinz have started to share pieces of their business system, including customer service and distribution, to increase trade leverage and reduce costs. This strategy offers large companies an important means of creating economic and skills-related advantages over their smaller competitors.

Soft stuff matters

In addition to these structural features, the new-style organization will focus on two nonstructural areas: skills development and evaluation and compensation. Both have traditionally been regarded as "soft" topics—afterthoughts on the senior management agenda. Yet each must be approached with the same rigor and factual understanding as marketing or manufacturing. Why? Because both are central to boosting the effectiveness of core processes and thereby creating economic value—and because human resource deployment and compensation in a process-based environment is becoming as complex as any challenge faced by the operating and marketing sides of a business.

Skill building

The typical key account manager must also make dramatic leaps as he moves from being a relationship-based salesperson to a fact-based customer manager

Long considered to be at the forefront of skill building, particularly in marketing and market research and perhaps also in distribution and information management, consumer products companies are finding more and more often that they lack the skills they need to be successful. Some of these skills are specialist in nature. Nowhere is the need for functional expertise more acute than in marketing, where for decades managers have prided themselves on their ability to develop into strong generalists. Today, however, consumer equity managers must learn a repertoire of new skills, from how to manipulate highly complex behavioral data to how to reach consumers effectively through emerging online media. The typical key account manager must also make dramatic leaps as he moves from being a relationship-based salesperson to a fact-based customer manager skilled in the associated disciplines of shelving, pricing, product mix, and new product introduction.

Consumer products companies are finding more and more often that they lack the skills they need to be successful

While marketers and salespeople need to develop deeper functional skills, the challenge for other key areas—including R&D and operations—is different. Here, deep functional skills are the norm, and it is integration skills that must be acquired. Companies must identify and nurture managers with the potential to move to supply chain management roles early in their career, instead of keeping them for a decade in manufacturing and a decade in distribution before deeming them worthy of an operations position. Many managers will need training in economics, problem-solving techniques, crossfunctional team leadership, and communications. A lack of these skills can create performance differences between teams that will ultimately affect a company’s overall economic results.

In one case, two supply chain teams were asked to identify cost reduction opportunities in raw materials. Their findings differed by 25 percent, much of which was attributable to the project management skills of the team leaders. Developing managers capable of integrating not just across functions, but across processes will be even more of a challenge.

Compensation and evaluation

This area will need reform at both the individual and the collective level. If core processes are to be managed effectively, the teams doing the managing must share common goals. Moreover, team members will need to contribute to the evaluation of their fellow team-mates, even if a single manager continues to coordinate the overall evaluation. Many consumer products executives have been nodding their heads to these sentiments for years, yet few have made as much progress as they would like.

The secret of successfully realigning compensation and evaluation systems is to involve both human resource and business managers in a rigorous, fact-based process. Companies frequently fall into the trap of delegating personnel decisions—especially those that affect low- to mid-level managers participating in teams—to HR functionalists. Though equipped with a clear knowledge of HR policies and tools, these individuals seldom possess a deep understanding of how the teams are supposed to work and what key behaviors need to be changed, making it hard for them to develop effective new metrics.

When it comes to collective measurement, part of the answer is easy: category directors should have clear responsibility for the P&L of their category, including gross profit net of the merchandising, marketing, R&D, and G&A expenses that they control. Process teams and their leaders are in turn accountable to the category director for their financial results.

More challenging, however, is ensuring that shared functions such as finance, information systems, and human resources strike the right balance between capturing cost synergies and securing category needs. Category directors and functional leaders must negotiate clear performance targets incorporating both cost and service levels and hold functional groups accountable for achieving them. Functional leaders must also be held responsible for making tough calls on allocations across businesses when shared resources are scarce and for creating a forum to debate those decisions. Examples might be the relative priority a salesforce gives to new products in different categories or the way in which specific engineering, R&D or other shared functional expertise is allocated.

Four organizational questions

This argument for a new-style consumer packaged goods organization based on core processes ends where the challenges for individual companies begin. The first of these challenges is to figure out where to start in making this profound transformation. The second is to have the sheer guts to stick with it, because the change process can be long and painful.

How and when should a company embark on this shift? The following four questions help put key organizational issues in their proper context. Debating them in sequence should help you clarify your organizational priorities.

1. Do we have a clear strategic perspective about our core processes? In which of these processes are we developing distinctive capabilities, and in which need we only be proficient? Which processes create the most value in our categories? Do we have skill gaps in the processes that matter most?

2. Is our organization designed to support these processes? Do we manage day by day through well-structured, clearly chartered teams that are genuinely responsible for identifying opportunities, evaluating options, and making decisions? Do our teams have full-time leaders? Are teams’ objectives and measures aligned with the drivers of value, and are they consistent for all team members? If we have crossfunctional teams in place, do they work together, or have we merely replaced functional silos with process-based ones?

3. Do we have the right skills to support these processes? Do we have the necessary functional expertise—particularly in marketing and sales—to deal effectively with increasingly demanding customers and consumers? Do we possess the integration capabilities required to squeeze all available cost savings out of the supply chain, while still maintaining high levels of customer service? If we don’t, how will we develop these skills or where can we obtain them quickly?

4. Are we as a senior management team collectively committed to manage around these processes? Do our decisions truly optimize total performance, or do brand-specific, business unit, or functional priorities still determine how we do business?

Ironically, the solutions are actually quite simple, but making them work is extraordinarily challenging

Evolving from the once-effective but increasingly frustrating brand management model to an increasingly horizontal, team-based organization is a challenge for virtually every consumer packaged goods company. Ironically, the solutions are actually quite simple, but making them work is extraordinarily challenging. It is clear, however, that the ability to develop more effective organizational structures will make all the difference between excellent and average consumer products performers.