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(originally published by Booz & Company)


Consumer Packaged Goods: Escaping the Consolidation Mentality

Strategies for CPG Companies

No consumer packaged goods company can afford incoherence. But incoherence is built into the industry. If you are a leader in a CPG company, then you are already used to having a multitude of products in your category, with businesses that operate across many regions and a variety of consumer tastes and habits that respond fleetingly to new line extensions and product introductions. Undoubtedly, your company has distinctive capabilities — but they probably apply to only part of your portfolio. Fortunately, the rest of the industry is as incoherent as you are; you can often gain an advantage simply by being less incoherent than your rivals.

Exactly how you move toward greater coherence will depend on your international footprint and product portfolio, and on your sense of how the sectors in which you compete will evolve over time. You will also need a clear understanding of the benefits that coherence can bring you, and the ways in which your three primary strategic elements — your strategic “way to play” in the market, the system of capabilities distinguishing your company, and your lineup of products and services — function together. You don’t have to aspire to full alignment among all your products; becoming more coherent within even one business unit or product segment will make you more competitive than you were before.

Start by assessing the dynamics of your chosen market and your potential for gaining advantage there. (In The Essential Advantage, Leinwand and Mainardi call this your “right to win” in your chosen market, and they lay out a full process for assessing this potential, including a series of diagnostic exercises.) In the CPG industry, this exercise would include a close look at the likely future of your chosen product and service categories: Will they consolidate around a few brands or will they fragment, with new brands coming in? Can you change the dynamic? Very different capabilities tend to be important in these two types of categories. (See Exhibit 3.)

Also ask yourself: What is your own position in this category? Are you a market share leader or laggard? Most importantly, what is your way to play in the market — your differentiated approach to creating value in this category? For example, are you leaders in innovation, in experience, or in providing value? Your answers will help determine the appropriate strategy. For example:

• If you already have significant market share, take advantage of your size by developing a more differentiated capabilities system, and using it to increase your influence over the entire category. This might mean introducing a set of packaging innovations, building or modernizing plants, buying up international distributors, making private-label versions of your product for retailers, or investing in a direct store delivery capability.

Big manufacturers that already have a strong position can sometimes push a category toward consolidation this way, with themselves as the largest beneficiary. This is what Frito-Lay did in the late 1980s, when it used its world-class distribution system (the company has ways of getting its snacks everywhere — supermarkets, gas stations, vending machines, corner bodegas) to apply pressure to the competition. By 1996, two of Frito-Lay’s biggest competitors, Borden and the Eagle Snacks division of Anheuser-Busch, had exited the market for salty snacks, and Frito-Lay’s share of the category in the U.S. had jumped to 55 percent from 38 percent.

• If you are a small company in a fragmenting category, focus not on expansion into other categories, but on distinguishing your existing products in ways that customers value. Build or develop capabilities related to the features that your customers value most. There is probably no need to distinguish yourself in distribution, at least in mature regions like North America and Europe; the retail infrastructure in these markets has leveled the playing field. But you probably need some very distinctive marketing and consumer insight capabilities.

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