Coherence seems to be particularly important in consumer products companies, where there is always a temptation to react opportunistically to changing markets, with brand extensions, new products, or acquisitions. Why does it make such a difference to resist that temptation? In their book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011), Booz & Company Partner Paul Leinwand and Managing Director Cesare Mainardi offer several reasons. A coherent company — for that matter, a company that is simply more coherent than its competitors — can focus its investments on relatively few capabilities, increasing its mastery of those critical areas. It gains in efficiency; it doesn’t waste time, money, and attention on capabilities in domains where it doesn’t need to outdo its rivals and a modicum of competency is sufficient. A coherent company also makes more prudent portfolio decisions, applying the lens of capabilities as it decides which products or services to acquire and which to divest. This can give it an advantage over CPG companies that base those decisions primarily on financial performance and that may therefore be more apt to stay in a product segment that doesn’t fit, siphoning off funds that are needed elsewhere. Finally, a coherent company provides more opportunities for its people and gives them a clearer understanding of where the company is going and how their work fits in.
Why Size Doesn’t Matter
In assessing the relationship between scale and performance, one might argue that it’s not fair to compare the growth rates of large and small companies. Large companies like P&G, Unilever, and Johnson & Johnson already have so much of the market, there’s no way they can grow as fast as a company that’s a fraction of their size. There is some truth to this — a smaller company, especially one with a hit product, always has a better chance of showing dramatic growth because of its small revenue base.
Even so, if the advantages of size, international penetration, scale, and retailer satisfaction were really so great, one would expect bigger companies to do better than the vast majority of their smaller peers. Instead, they are on par with most smaller companies and far behind a few in the important area of total shareholder returns. (See Exhibit 1.)
The history of the industry suggests that size was indeed a vital element in the past. But its impact has been eroded. One important factor in this was the rise of digital media. A generation ago, when network television was the most effective way to get a branding message out to consumers, players with scale could get the best deals for airtime. Now, with a cable audience divided among hundreds of channels, prime-time network television isn’t necessarily the smartest or most efficient buy. Newer outlets, including infomercials, custom-designed Internet sites, and social media such as Facebook offer better options. Creativity and promotional skill are supplanting sheer size as the determinant of marketing success. Many CPG companies are delivering their own branded experiences through websites or mobile phones — an approach known as private-label media.
Outsourcing and alliances have also helped erode the value of scale. It is harder for a CPG company to maintain advantage through functions such as manufacturing facilities, specialized R&D, or customer service. These capabilities can be offloaded to outside partners that can do the job as well as the largest rivals in a market, often at a lower cost. For example, in the past some large CPG companies deployed quantitative experts to run price elasticity models that other companies couldn’t match. Nowadays, a smaller CPG company that needs that information can outsource the function to a specialist firm.