Consumer Products and the Power of Fitness
by Deniz Caglar, Jaya Pandrangi, and Thomas Ripsam
To test the relationship between index scores and shareholder return, we looked closely at the consumer packaged goods industry. This industry is a good proving ground for several reasons: It’s a big industry with companies of all sizes that operate in markets around the world. Our sample comprised 23 companies in the food, beverage, household products, and related segments. Most are multinationals with a broad global presence.
These segments don’t exhibit identical results, but they do share certain broad characteristics relevant to our analysis of the factors that affect long-term performance. Their common foundational elements—such as a similar distribution channel structure—support basic comparability across companies. Perhaps most important, relatively low barriers to entry make consumer products a wide-open competitive battleground, where companies live or die by smart strategies and sharp execution. To win, consumer products companies must offer something customers really want but can’t get elsewhere. This requires a strategy that capitalizes on distinctive capabilities to create truly differentiated products. Companies can’t execute such a strategy unless they optimize costs and tailor their organization to deliver on the value proposition that sets them apart from competitors.
How, then, do index scores line up with shareholder return in the consumer products industry? We found a remarkably clear correlation (see Exhibit A).
The survey data also revealed which components of the index had the greatest impact on shareholder return. Gaps between high- and low-performing companies were greatest in factors related to strategic clarity and resource alignment. Differences between high- and medium-performing companies were most pronounced in the supportive organization category.
For deeper insight, we examined two particularly strong performers that embody the key principles of the Fit for Growth approach. Global beverage giant Diageo and Church & Dwight Company, a midsized company best known for its Arm & Hammer brand, stand out for the coherence of their strategies, the power of their differentiating capabilities, and their focused use of resources and organizational structures to create a right to win in the marketplace.
Diageo is a global alcoholic beverages company with brands that include Johnnie Walker, Smirnoff, and Guinness. Diageo sells in more than 180 countries and derives 40 percent of its sales from emerging markets. These figures reflect the company’s overarching growth strategy of expanding leading brands into new markets, using a tailored approach for each.
Diageo relies on a small set of differentiating capabilities: marketing, supply chain and distribution channel efficiencies, innovation, and joint business planning with customers (known as the “Diageo Way of Selling”). Capabilities are adapted to meet the needs of local markets. For example, Diageo cultivates a premium image in North America, and emphasizes product innovation to middle-class consumers in emerging markets.
Diageo manages costs and investments to strengthen these key capabilities, in part by seeking efficiencies in other areas. It reduces costs through careful strategic sourcing of ingredients and other direct materials, operational optimization, alignment between its supply footprint and growth opportunities, and the use of value-enhancing distribution channels in emerging markets—to name a few of its tactics.
Diageo has built a fit-for-purpose, efficient, and effective organization. The company’s geographic organization maximizes brand value by combining a focus on individual growth markets with a global marketing support system. Employee satisfaction scores are high; many employees praise Diageo’s meritocratic culture, strong leadership, focus on results over “face time,” social responsibility, diversity, and work–life balance.
Church & Dwight
Church & Dwight has assembled a strong portfolio of home-care and personal-care brands in both the premium and value categories. Its strategy emphasizes identifying and acquiring niche brands with untapped residual equity, such as Nair and Pepsodent. Church & Dwight mines this value by giving the brands wide distribution and prominent shelf space, then cross-pollinates and extends the brands into adjacent categories.
This strategy requires superior capabilities in areas such as brand extension, innovation in categories in which a brand is the market leader, and being a “fast follower” in niches in which it is a value player. Church & Dwight develops these capabilities through resource alignment.
Investments focus on brand development and marketing for a small set of “power brands” that drive growth at the company. Innovation investments focus on breakthroughs in areas of market leadership, such as condoms (Trojan), and closely follow market leaders in value niches such as baking soda (Arm & Hammer). More broadly, Church & Dwight fosters a financial culture that is highly focused on performance, supported by aggressive cost management.
The approach has paid off for shareholders. Church & Dwight’s TSR has ranked among the highest returns of the consumer products industry for most of the past decade.
- Deniz Caglar is a partner with Booz & Company based in Chicago. He focuses on organizational design and cost fitness in the consumer packaged goods and retail industries.
- Jaya Pandrangi is a partner with Booz & Company in Cleveland. Her work focuses on growth and cost fitness strategy for consumer products and retail companies.
- Thomas Ripsam is a partner with Booz & Company based in Munich. He specializes in strategy-based improvement of top-line and bottom-line performance.