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strategy and business
 / Spring 2005 / Issue 38(originally published by Booz & Company)


The Core’s Competence

But the risk to CPG companies is implicit in those words: The retailers are coming to control not only the channel, but the loyalty of the end consumer. Recent research by Point of Purchase Advertising International, a marketing trade association, indicates that as much as 70 percent of all CPG purchase and brand decisions are made at the retail store. Companies that fail to manage their diminishing ability to connect with consumers at retail risk losing their ability to command a premium price for their products.

Pleasing the customer but not the consumer is fraught with risk. Consider the example of Vlasic, the now-bankrupt pickle company. It used to own a premium brand. Hungry for growth, Vlasic agreed to Wal-Mart’s demand for gallon jars of pickles priced at $2.97 to the consumer. The jars were a “statement item” for Wal-Mart. Stacked on pallets at the front of the store, they signaled to consumers that Wal-Mart was the place to go for value. Indeed, a consumer could buy a whole gallon of plump Vlasic pickles at Wal-Mart for less than the price of a quart of sliced Vlasic dills at a grocery store.

Perhaps Vlasic should have foreseen the cost to its reputation as a high-quality, high-priced brand. Perhaps it should have anticipated the cannibalization, as consumers with a year’s supply of pickles in a gallon jar from Wal-Mart opted not to buy a quart of sliced pickles at the supermarket. But the company did not. Vlasic filed for bankruptcy in 2001. The gallon jar fiasco wasn’t the only reason, but it certainly didn’t slow the company’s downward slide.

Vlasic’s case is exceptional only in degree. Few CPG players are able to identify an area of strategic differentiation or a business rationale beyond cost reduction through scale. Too often their research and development efforts focus on quick wins through brand extensions to meet this year’s sales targets, instead of breakthrough, business-building innovations. The result: a stream of flavor, color, size, and packaging extensions that help hold share (often only barely, as competitors quickly imitate), but do not lead to appreciable top-line expansion.

It doesn’t have to be this way. CPG winners prove that it’s possible to regain and defend strong consumer relations, create must-have brands, develop shopper insights that help the retailer make money, and organize for efficiency. The only mechanism with which to accomplish these goals, though, is an organization able to identify key capabilities and leverage them across the entire, tightly focused, portfolio.

Organizing for Growth
With globalizing retailers threatening the basic value proposition of consumer products companies, sustainable growth can be achieved only by a more engaged corporate core and a “federalist approach” to managing growth initiatives and investment decisions.

The federalist concept of core-unit relationships, as our colleagues Paul Kocourek and Paul Hyde have written, “is based on the philosophy that value is created in two places: at the operating companies closest to the customers and at the corporation, in the linkages between the operating companies.” Far from limiting the operating independence of the business units, the federalist approach actually increases their autonomy, but it does so within boundaries established and monitored by the core, whose role is to set corporate strategy and policy, to identify ways to create value above and beyond the operating companies’ value (e.g., sharing best practices or creating businesses), and to create and enforce a disciplined performance management model.

Such companies as General Electric and Lucent Technologies have benefited greatly from this federalist model, which Messrs. Kocourek and Hyde have labeled the “Model 2” organization. For consumer products manufacturers, applying it and spurring growth with it means inculcating, systematically advancing, and integrating four vital elements: business focus, capabilities development and planning, resource allocation, and a growth imperative.

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  1. Paul F. Kocourek and Paul Hyde, “The Model 2 Organization: Making Your Company Safe for Zealots,” s+b, First Quarter 2001; Click here. 
  2. Charles Fishman, “The Wal-Mart You Don’t Know,” Fast Company, No. 77 (Dec. 2003); Click here. 
  3. Jim Collins, Good to Great: Why Some Companies Make the Leap … and Others Don’t (HarperBusiness, 2001)
  4. Gregory Melich, “Wal-Mart: Yes They Can, If Allowed,” Morgan Stanley Equity Research Report, February 12, 2004
  5. Procter & Gamble 2003 Annual Report: Click here.
  6. Procter & Gamble: Click here. 
  7. Gillette: Click here. 
  8. Kraft: Click here.
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