5 minutos de lectura 1 jun. 2016
People plot out strategy on a whiteboard.

How to take a more strategic approach to portfolio optimization

Por Ryan Burke

EY Global Growth Markets Leader

Líder que ayuda a las empresas a crecer y obtener beneficios en esta era de transformación. Apasionado por la erradicación del analfabetismo infantil y la concienciación sobre la neurodiversidad.

5 minutos de lectura 1 jun. 2016

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  • Can your portfolio of brands provide the answers you need? (pdf)

Five questions consumer products companies should consider to optimize their portfolios

Changing consumer needs, stagnant mature markets, volatile costs and disruptive new competitors demand a portfolio strategy that can deliver sustained, profitable growth. Most large consumer products companies have highly complex portfolios that may comprise dozens or even hundreds of brands, spanning multiple categories.

Some of these brands will be performing well and have strong momentum behind them. Others will be struggling, dragging down overall corporate performance and shareholder returns.

Even companies with relatively few brands struggle to deliver sustained growth across their entire portfolio.

Allocating scarce resources away from nonperforming brands toward the growth engines of tomorrow is therefore a vital exercise. And yet, many companies struggle with portfolio optimization.

We have observed these recurring failures in many companies’ portfolio management processes:

  • Failure to deploy a periodic, consistent and objective review process
  • Failure to develop actionable portfolio scenarios that link to both category strategy and value creation metrics
  • Failure to identify appropriate standards and to develop a process that overcomes internal biases

The complexity of their businesses makes many leaders believe that the return from the portfolio review process is unlikely to outweigh the time and distraction involved. But given the revenue growth pressures that consumer products companies are currently facing, we believe that a strategic approach to portfolio optimization is especially vital now.

To improve their approach to portfolio optimization, companies should consider the following five questions.

Five questions for management

1.  Are you treating portfolio management as a strategic imperative?

Most portfolio reviews are policy driven, retrospective and mechanical. Often done annually, they might identify whether an individual brand needs to be sold or if there is a gap in the portfolio.

Instead, consider a more strategic approach. Assess categories and brands in a holistic manner and communicate proactively with investors about the reasoning behind portfolio management decisions.

Look at the consumer opportunity and the competitive landscape across the entire portfolio. Balance short-term and long-term objectives. Develop a clear rationale for capital allocation across brands. Think how broader macro trends, such as emerging consumer needs, might affect long-term performance.

2.  Is your portfolio analysis truly objective?

Are you carrying legacy brands that feel like a core part of the portfolio but are no longer performing? Could you strip them out and focus instead on the ones with higher growth potential?

A strong emotional attachment can stop management from selling brands that are losing their relevance. Companies can be reluctant to lose household names or to walk away from products that still generate some revenue and cash flow, even if they are low margin or noncore.

A top-down, data-driven approach can help management see each brand in a more rational light.

3.  Are your data and analytics good enough to challenge your portfolio and explore different scenarios?

Effective portfolio optimization demands good data. Many companies do not have it at the level needed to make strategic decisions.

Companies need to move beyond purely historical data. And they need the tools and technologies to consider future scenarios for individual brands and the portfolio as a whole. A scenario-based approach can identify potential opportunities, so management can start planning for them today.

A robust conversation around the full range of decisions will help companies challenge internal assumptions and explore fundamental questions about the portfolio.

4.  Does your portfolio-management process identify where you should invest organically, sell and buy?

A good portfolio-optimization process looks at every brand and selects one of four actions for each one:

  • Grow
    Brand has momentum on a category basis and potential to gain share and increase profits.
    Action: Allocate greater resources to maximize potential.
  • Sustain
    Brand is considered a long-term asset to retain, consistent and nonvolatile, contributing to free cash flow and profits.
    Action: Maintain vigilant attention on appropriate level of resources.
  • Fix
    Brand is material to the business, but not hitting the target.
    Action: Identify and recalibrate resources and apply clear metrics for progress.
  • Exit
    Brand cannot be fixed or does not meet performance metrics over a set timetable.
    Action: Sell it outright or fold into another business.
5.  Are you moving fast enough from analysis to action?

Many companies spend a lot of effort analyzing the portfolio. But few move decisively to convert this analysis into action. There are many reasons for this, including:

  • They lack the resources needed to execute their plans.
  • They spend so much time on analysis that they lose confidence in their decisions.
  • They lack confidence in their execution capabilities.

Strong leadership is essential to make sure that analysis is turned into concrete action.

Identify gaps to be filled with acquisitions

The portfolio review process should also determine whether there are gaps that need to be filled by acquisition. When considering acquisitions, companies need to be proactive, determining in which adjacent categories or subcategories it wants to compete, for which its current brands are not well suited.

It is not realistic to assume a company can acquire its most attractive targets on a certain date at a certain price. You need to take a long-term approach to deal-making to have a successful acquisition program.
Doug Power
Global Head of M&A, General Mills

Once these categories have been identified, the company should pursue specific targets and either have plans to approach them, or be well prepared when the opportunity comes along. But basing M&A decisions purely on what is available on the market is doomed to failure. A strategic approach is required that allows a broad range of possibilities to be considered.

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Consumer products companies must take a more disciplined and proactive approach to portfolio management.

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Por Ryan Burke

EY Global Growth Markets Leader

Líder que ayuda a las empresas a crecer y obtener beneficios en esta era de transformación. Apasionado por la erradicación del analfabetismo infantil y la concienciación sobre la neurodiversidad.