External factors and developments also impact companies on their path to digital transformation, even as individual companies have little or no ability to influence them. These trends and challenges, which are critical for leaders to anticipate impacting their plans, include:
Pressure is mounting for transparency about sustainability across the product lifecycle.
Price increases and volatility challenge companies’ ability to delight customers and can hamper profitability.
As behaviors and expectations change, companies must continually update their understanding of consumers.
Increasing complexity of regulations – especially around compliance – makes compliance increasingly challenging.
A perfect storm of intersecting factors meant massive supply chain disruptions.
There is more pressure than ever for companies to implement and expand sustainability measures like reducing emissions, waste, pollution, and toxicity, while concurrently decreasing impacts on land, water, biodiversity, and the atmosphere. Pressure from consumers, investors, and communities is mounting while regulations are requiring increased disclosure. Companies across industries are feeling this pressure, but it is most intense for consumer goods companies and their suppliers. In a global survey conducted by Deloitte across industries, 75% of executives feel a large or moderate amount pressure from consumers/client to act on climate change and 77% feel pressure from regulators/government.18
Companies are reacting by announcing new voluntary initiatives and complying with disclosure requirements. But this is a huge challenge for many organizations. Transparency around sustainability claims requires businesses to have insight not only into every corner of their own organization, but their entire product lifecycle including other members of their supply chains. Stakeholders expect transparency and they will hold companies accountable. Companies that cannot provide evidence of their sustainability achievements risk loss of sales and investments.19
Consumers... increasingly want to purchase products they view as sustainable across the entire value chain... They also want to believe that their consumption habits won’t negatively affect the environment.”
The gap between consumer intent and action is closing rapidly... 49% of global consumers consider sustainability when choosing food and beverages.”
Most of the chemical companies already have a target of being zero emission, carbon net neutral, by certain timeframes. Now throw in COVID... all that kind of goes out of the window...This is the most difficult area to drive or get results, trying to match up with profitability.”
United States inflation is the highest it’s been since the early 1980s. Inflation puts pressure on profitability and a company’s ability to ensure its products delight customers.
In a comparison of the current “inflationary episode” to six other periods of high inflation since the 1940, the White House Council of Economic Advisors find the current pandemic-induced inflation spiral most comparable to the one after World War II, due to similar dynamics of limited supply in a time of pent-up demand. The comparison “suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off.”22
Nevertheless, uncertainty remains. Inflation’s future trajectory will depend on how long supply chains are disrupted, wage negotiations, the evolution of consumer spending, and monetary policy. Geopolitical uncertainty adds volatility to prices.
Customers today are more empowered than ever before and keeping up with their expectations requires a new level of customer obsession. The pandemic introduced new trends and accelerated other shifts. While some changes in COVID-induced consumer behavior and expectations are likely temporary, others are expected to permanently change the landscape.
Providing an experience, not just goods and services, is paramount to attracting new customers and maintaining current ones. Companies must create “new experiences that excite and delight the customer and also that don’t lean heavily on resources that may be scarce, expensive, or non-existent.” They “should involve consumers in creating solutions and uncovering aspects of the relationship that build upon emotions likely to drive loyalty.”26 This is no small feat, especially in a post-pandemic world where offline and online experiences once again need to be coordinated.
There are a lot of avenues to connect with the customer, but the biggest, biggest CPG trend is, I want to know my customer and I want to reengage with them.”
Contending with these trends is putting increased importance on developing a deep understanding of your customer. Companies are under pressure to maintain a 360-degree view of the consumer, including understanding sentiment. McKinsey warns that “meeting [consumers’] lofty expectations requires real-time analytical horsepower to process massive amounts of granular consumer data. Only then will you gain the 360-degree view of customers needed to serve their unmet needs and deliver the wow factor with an astonishingly personalized experience.”27
Increased consumer pressure has led regulatory authorities to put out more stringent rules and guidance across industries. The increasing complexity of regulations, as well as “tougher disclosure and reporting rules” makes regulatory compliance increasingly challenging.28 Depending on the particular industry and regulation, companies now face issues of increased disclosures, ingredients they’ve used for decades newly outlawed, higher costs due to “levies such as the ‘plastics tax’”29 or any number of impacts to their businesses.
And there are no signs of regulations loosening any time soon. In 2022, proliferation of new rules and regulations is expected to be particularly intense around sustainability.30 The increased calls for transparency have been especially notable among sustainability issues. Concerns about greenwashing and other sustainability claims will only cause regulations to further tighten. Additionally, “the European Union’s Green Deal provides for all packaging in the EU area to be reused or recycled by 2030. The Circular Economy Action Plan also provides for products to have long life cycles and be repairable (‘right to repair’).”31
In the past, it was mainly technology companies that were assessed on cyber security resilience, but these days, businesses across a range of sectors are subject to such scrutiny.”
The COVID pandemic has caused disruptions to supply chains across industries. Caused by labor shortages, shifting product demand, lack of components and raw materials, cargo capacity issues, and bottlenecks at ports, these disruptions are forecast to continue for some time.32, 33 These factors, along with inflation and added safety measures, mean higher costs for businesses and consumers. This has caused shifts to customer behaviors and loyalty. McKinsey notes:
Over 60% of US consumers have experienced out-of- stock items in the last three months of 2021, and when this happened, only 13% waited for the item to come back in stock versus the 39% who switched brand or products and the 32% who switched retailers. Additionally, we see both increased trading down across income groups with trading up increasing as well among higher income groups.”34
As Vinod Galani notes, the rules, regulations, and nuances related to supply chains have “changed dramatically.” Mandates and employer policies around staffing are volatile and COVID has led to scenarios that no supply chain system could anticipate, no matter how integrated and sophisticated. People are reverting to manual decision making “because the system cannot handle those variables” causing a breakdown of automation.
At the same time that COVID was disrupting supply chains, many brands ramped up their relationships with co-manufacturers.
To gain flexibility, speed, and access to new or different technologies, many organizations are opting to outsource the entire manufacturing and go-to- market process for select products or product lines to co-manufacturing partners. But while this practice can benefit businesses, it also further complicates the supply chain and ultimately increases risk to the brand. Those businesses that choose this route will need to focus digitization efforts on data transparency in order to ensure limited third-party risk and regulatory compliance.
Chains Supply chain cyber-attacks are on the rise. When a single supplier is attacked it is enough to bring down a whole network of providers. Attackers have found that a company’s vulnerability lies with its suppliers, who may not be transparent about security breaches. Therefore, companies must conduct third- party risk assessments to ensure suppliers’ cyber security is up to par.35
COVID-19 has exacerbated weaknesses along the supply chain and the third-party risks that companies are susceptible to, including environmental risks. It is vital that companies vet their partners across the value chain to ensure they have a shared approach to environmental considerations.36
The struggle of worker-retention has plagued the supply chain, causing mass delays, supply shortages, increased wages, and increased cost of consumer goods. Organizations that utilize third party logistic services are being hit with a 30% increase on shipping rates.37
As the pandemic evolved, consumers purchased different kinds of product. This had major impacts on supply chains that were not sufficiently resilient. The rapid acceleration of e-commerce also meant a need to shift transportation and delivery of goods further straining an already stressed system.
Increased regulations are among top supply chain risks.38 Manufacturers need assurance they will have access to critical supplies to innovate, compete globally, and support their customers. Regulatory uncertainty can “incentivize [offshore] product sourcing... for critical industry sectors.”
Companies are up against a myriad of interacting internal challenges and external forces. The current state is not tenable.
Internally, digitalization and cloud adoption are difficult because they entail culture change and must not compromise cyber security. Workforce resignations and reshuffling mean increased pressure to ensure employees are efficient and engaged.
Externally, suppliers, regulators, and consumers are pressing on companies from all directions. Suppliers cannot always meet demand, have increased their prices, and have mixed ability to meet companies’ needs for sustainable supplies and transparency. Regulators and consumers are demanding increased sustainability practices and transparency. Consumers balk at increased prices, while expecting products and experiences tailored to their changing behaviors.
These trends and tensions are driving the shift to a new business imperative.
