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(originally published by Booz & Company)


Consumer Packaged Goods: Escaping the Consolidation Mentality

Companies that develop in this fashion naturally tend to organize themselves around their brands, typically their most visible managerial distinction. All brand managers strive for growth, because that’s how they expect to build a career; to make a name for themselves like the P&G marketers who turned Old Spice into a young, hip product. Unfortunately, for every visible success story like Old Spice, perhaps 10 other products don’t fulfill their potential, because the company doesn’t have the capabilities to develop and market them properly. Without stepping back and looking at the portfolio in light of capabilities, a CPG company will struggle to be coherent. Each product line in its wide-ranging portfolio inevitably requires its own capabilities to thrive, and few of these capabilities overlap with those needed by other products.

Consider, by contrast, the high level of coherence that Alberto-Culver has achieved. This relatively small company has outperformed the market since 2007 and commands a high valuation multiple. Its strategy works because Alberto-Culver has a tightly defined product mix — 80 percent of its revenues come from beauty products for hair and skin care — and a system of interconnected capabilities, giving it an advantage in its categories. (See “Focus vs. Hocus-Pocus at Alberto-Culver,” by James Marino.)

The company’s first critical capability is a deep understanding of consumer preferences regarding hair care, especially styling. Unlike their counterparts at broadly diversified CPG companies, the brand managers overseeing hair care products at Alberto-Culver generally haven’t been rotated into their positions from some other business unit or product area; they’ve typically spent years or even decades marketing shampoos and conditioners. The same is true of the product development staff; they know hair care deeply.

A second differentiating capability relates to brand building. Alberto-Culver’s deftness with aspirational marketing allows it to give its value products a premium aura, even with a comparatively small marketing budget. For example, it was the first company to convert products used in salons into mass-market packaged goods. This capability applies to both hair and skin care products and thus meets one of the requirements of any key capability — relevance to all or most components of a company’s portfolio.

Like any other CPG company with limited resources, Alberto-Culver also manages some capabilities that are not differentiating. For example, hair care isn’t a segment in which there are huge differences in product quality, so although Alberto-Culver’s products are usually on par with those of its rivals, and may be better in some cases, the company has a relatively small R&D budget and doesn’t over-invest in product development.

Coherent companies typically have a culture and an organizational structure that allow them to focus on the few activities they regard as critically important. This is true of Alberto-Culver, where members of the management team all work in close proximity at the company’s headquarters in Melrose Park, Ill. The result is an entrepreneurial culture that responds effectively to competitive threats, and that can mobilize rapidly to capitalize on opportunities. Indeed, in this company’s case, entrepreneurialism has become a capability in itself, adding a sort of velocity to the company’s other capabilities. Entrepreneurialism enabled Alberto-Culver to get the Nexxus hair care line into broad distribution after it bought Nexxus in 2005.

Alberto-Culver’s coherence is also reflected in the disciplined way it thinks about its product portfolio. Companies in the beauty industry have many opportunities to expand into adjacent product segments. Leaders at Alberto-Culver always ask whether potential opportunities are consistent with their capabilities system. One new area the company was considering required a capability in celebrity marketing; a second required the ability to anticipate fashion trends. Creating superior capabilities in those areas would have been too costly for Alberto-Culver, given the expected returns. So it dismissed these opportunities. Every focused company must occasionally do the same.

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