Since the 1980s, managements and boards in the consumer packaged goods (CPG) industry have been on a quest to get bigger — the conventional wisdom being that the best shareholder returns would accrue to companies with huge brands and the scale to compete in developing markets. But this assumption has turned out to be misleading, certainly over the last decade.
Instead, the best performers from the perspective of total shareholder returns have been small CPG companies with relatively narrow product portfolios supported by three to six differentiated capabilities.
These small companies exhibit “coherence,” a state in which their capabilities, product portfolios, and market strategy (what we call a “way to play”) all fit together. Coherence allows these companies to be efficient in their activities, disciplined about their portfolios, and unmatched at the capabilities that matter most to customers.
The importance of coherence does not mean there is no value at all to scale. In fact, scale is still critical for CPG companies trying to expand into developing markets. There the near-term advantage is to the swift, and the scale of a Procter & Gamble, for example, does represent an advantage. In general, scale matters more in markets that don’t have well-developed retail infrastructures than in markets that do.
No CPG company is perfectly coherent across all of its businesses. Indeed, there is so much incoherence in certain sectors that a company can often gain an advantage simply by being less incoherent than its rivals. At a management level, the practical question is where to pursue coherence full bore and where to tolerate some level of incoherence. The answer will depend on the company’s international profile and product portfolio, and on its sense of how the sectors it competes in will evolve over time.
Click here for the full report