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


The Core’s Competence

Capabilities do not have to be inborn or part of a long-standing firmwide tradition. One CPG firm with which we worked set its capability-development priorities by surveying retailers to identify their needs and gather their impressions of the company compared with its competitors. The survey revealed that the firm lagged its competition in three areas: category leadership, innovative marketing, and trade promotion practices. Of the three, innovative marketing mattered most to the retailers. The firm responded by changing its focus from brands to categories, and by developing capabilities to customize and share information, insights, and tools in order to meet the needs of retailers.

Capability plans should be unique, but there are category benchmarks. In the tissue-paper business, a capabilities development plan probably will emphasize manufacturing, because managing huge capital investments must be a core aptitude. In the ice cream business, where supermarket margins are very narrow, a capabilities development plan may concentrate on an integrated set of competencies — research, IT, marketing strategy, marketing tactics, and so forth — having to do with impulse buyers. It may even include a capability in supply chain adaptability; the company may need to be able to move freezers from summer lake resorts to winter ski lodges, to be where the buyers are. The plan might even involve developing competencies in outsourcing; the company might decide to outsource supermarket sales in order to focus on the impulse buyer in nontraditional channels.

Resource Allocation
If the business focus tells you where you want to make a difference in the market, and the capabilities development plan tells you how to do so, resource allocation is the element of a CPG growth strategy that explains how the company will pay for it. Fundamentally, it’s about the hard choices that companies, in the era of a thousand flowers blooming, tried desperately not to make.

Most CPG companies today (best-practice leaders largely exempted) suffer from the curse of the turnaround plan. The scenario is familiar. It starts with a brand whose margins are high but whose growth is low. Maybe it’s in a category where the company can never emerge as a leader, but can garner consistently good returns with minimal investment. Maybe tax implications make a sale unattractive. No problem. All this scenario demands is a marketing manager able to milk the brand efficiently.

But marketing managers don’t make it to the top by milking brands efficiently. They soar by grabbing attention with bold turnarounds. So, year after year, brand manager after brand manager, there’s a new turnaround plan promising that this tired old workhorse of a brand will become a new Smarty Jones. The brand organization pushes for its share of investment, and because the company doesn’t do zero-based budgeting, the brand gets about what it got the year before — with good politicking, maybe a little more. And so the company’s budget spreads resources among all the brands, starving those that can grow and overfeeding those that can’t.

Part of the problem is that, in most CPG companies, brand organizations are too strong and the center is too weak. Allocating resources successfully means putting more money on the best bets — which, logically, would mean taking it away from lower-odds bets. But shifting funding from one brand, market, or R&D project to another often results in backlash. It implies that people working on disadvantaged brands aren’t doing important work.

Solving this problem is a job for the corporate center. In the federalist construct, the core needs to make it clear that brand harvesters can be stars just as much as brand growers. Anyone can manage a brand through a profitable decline by cutting all advertising and promotion and letting it die. But it takes an astute manager to strike the balance that avoids overinvestment, yet invests just enough to keep the brand alive and the cash flowing in. It means doing things on the cheap. Spend a little money on packaging changes. Invest just enough in advertising. That’s good brand management, and it needs to be recognized and rewarded as vigorously as the successful turnaround.

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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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