5 minute read 1 Feb 2017
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Five steps to get the most from your consumer products portfolio

By

Ken Dickman

EY Global Advisory Commercial Transformation Leader

Consumer Products & Retail strategist. Helping clients with profitable organic growth for over two decades. University of Chicago Booth School of Business MBA alumnus.

5 minute read 1 Feb 2017

A more rigorous portfolio process can help companies feed the brands that have the greatest potential while pruning the weakest ones.

Growth-hungry consumer products (CP) companies must excel at strategic portfolio optimization, and most executives feel they do a good job here. Yet there is significant room for improvement — and as a consequence, companies are struggling to achieve their targets for both top-line growth and total shareholder returns.

A more rigorous process would help companies to feed the brands and businesses that have the greatest potential, while pruning the weakest ones. But the central problem, according to an EY survey of leading CP companies in the US and Western Europe, is that too many executives lack the tools and resources needed to take their portfolio optimization process to a higher level.

So what drives portfolio optimization success — and how can your company achieve it?

BENEFITS

76%

of respondents point to improved growth as one of the main benefits of their portfolio optimization process. Others include better cash flow and financial management.

Start classifying

For portfolio optimization to succeed, companies need to classify their brands or businesses as one of the following. These categories set the stage for active portfolio management, with all decisions driven by an accurate and complete picture:

  1. Grow: These brands and businesses are accretive to earnings and enjoy competitive advantage and/or a leading position in a category with strong growth prospects.
  2. Sustain: These consistently contribute to free cash flow and profits but without significant growth prospects.
  3. Fix: These do not hit their targets but are material to the business or sit in attractive categories. Competitive disadvantages — for example, an uncompetitive cost structure or weakening brand equity — must be addressed.
  4. Exit: These have not responded to “fix” plans and/or are not meeting performance metrics, and should be divested. This category also applies to businesses that are no longer suited to the company’s strategic direction.

Why is this important? Our survey shows that a third of companies are only “moderately effective” at deciding which brands they should grow, sustain or fix. But those that say they are “very effective” at making these choices delivered 2.2% higher shareholder returns on average over a five-year period than those that consider themselves moderately or not particularly effective. (1)

Also, companies find it particularly hard to work out which brands or businesses they would exit. Just 46% said they were “very effective” here, which means too many are supporting brands that are harming their efforts to grow.

Driving portfolio optimization success

Data provides a foundation for decision-making, and CP companies have access to a mountain of it — but almost half the executives we surveyed don’t trust their data. Most companies (58%) want a stronger fact base; 38% said this is the most important way to improve their optimization process.

Sophisticated data and analytics tools can structure data in ways that allow executives to glean valuable insight. But businesses must first collect better, more accurate data. Without it, they won’t have the right market-sensing capabilities in place.

DATA

46%

of respondents do not trust information presented or supplied by others.

Dedicating the right people to the process, with the right level of support, is also critical. Cross-functional participation is the leading practice, yet finance or strategy people often prepare most of the portfolio review. Without consensus, it can be difficult to trust any information or data coming out of the various business units or brand teams.

That lack of trust leads to uncertainty and inaction, and hesitation is expensive: when a brand becomes non-core, its value can fall fast.

With the right data and the right people available, companies should look across their brands, classified as either Grow, Sustain, Fix or Exit, and understand the right levels of investments to make. The results of data-driven portfolio optimization reviews should be used to best determine where to focus scarce resources, including capital, marketing spend and talent.

Consider long-term scenarios and focus on attractive markets where you have advantage. But don’t simply abandon weaker brands. Even those you plan to exit may need tactical investment to maintain their value to a potential buyer.

Our survey shows 84% of companies do not think the potential selling price of an underperforming brand is key to their divestment decision. But if an exit strategy doesn’t include sale value, there’s less incentive to make it attractive for buyers — and that could harm growth across the portfolio.

And most companies (80%) say changing market dynamics — that is, factors beyond their control — were a major factor in their decision to exit a brand after attempts at a fix failed. But market dynamics don’t suddenly become an issue. They evolve over time. And new capabilities can offer more of a window into forecasting and planning for contingencies.

OPERATIONS

57%

of respondents said a lack of resources kept their optimization process from being more effective, the top reason cited.

Upgrade your process with these five actions

  1. Get the right facts. To make optimal portfolio decisions, you need to analyze consumer, market and competitive data from multiple sources. Few CP companies trust their data sources or can turn data into useful insights, our survey shows. Too often they struggle with overwhelming and often unrefined data, and processes that do not delve deep enough.
  2. Dedicate the best people. Get your best and brightest talent to lead and manage your optimization strategy, and give them the authority to implement changes. Empower them with the tools and technology they need to drive an evidence-based portfolio review and to challenge all assumptions. Otherwise, your efforts will be undermined from the start.
  3. Act decisively on resource allocation. Once you’ve got clarity over which brands and business are growth engines, and which are failing, act accordingly. A portfolio optimization process only succeeds when executives are ruthless in prioritizing resources — in terms of marketing investment, capital and talent.
  4. Be bold when deciding whether to fix or exit. The decision to divest a brand or business can be hard emotionally. But delay the inevitable and you will erode portfolio value and make an exit more difficult. Leading CP companies let the facts lead them and move quickly.
  5. Stay ahead with predictive modeling and long-term scenario planning. Too many CP companies cite unexpected market changes as the key factor driving their decision to exit a business. Forward-looking analyses with sophisticated data and analytic tools, coupled with insights produced by employees in the business, allow for unbiased planning.
  • In 2016, FT Remark surveyed 50 senior-level executives at global consumer companies with revenues of at least US$3b. All the executives surveyed had responsibility for portfolio management decisions. The survey included a combination of qualitative and quantitative questions, and all interviews were conducted over the telephone by appointment. The results were analyzed and collated by FT Remark and EY, and in this report all responses are anonymized and presented in aggregate.

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Summary

The right people empowered with the right data and resources, and able to act decisively, are crucial for optimizing a company’s portfolio. 

About this article

By

Ken Dickman

EY Global Advisory Commercial Transformation Leader

Consumer Products & Retail strategist. Helping clients with profitable organic growth for over two decades. University of Chicago Booth School of Business MBA alumnus.