Many consumer-packaged-goods companies are placing too many bets. Greater simplicity and agility increase the odds of higher performance.
Allocating resources wisely is one of the most difficult tasks for executives. As the competition attacks their core markets ever more aggressively and growth becomes elusive, companies often respond by placing bets on a wide range of potential opportunities. This scatter-shot approach may be misguided.
Analysis of data from 53 consumer-packaged-goods (CPG) companies over the period between 2010 and 2014 showed that players typically manage hundreds or even thousands of business “cells”—specific combinations of products and geographies, such as facial moisturizers in South Korea or breakfast cereals in Germany. When we divided companies into quartiles based on revenue growth, the drawbacks of such complexity became apparent (exhibit).
For while top players obtained about 75 percent of their revenue growth from only 13 percent of their business cells, companies in the bottom quartile required 33 percent of their cells to generate the same performance. Companies, it seems, can win big by concentrating their efforts on a small number of promising opportunities rather than dispersing their time and resources among many.
We also found that the highest-growth CPG companies reallocate their resources with greater agility than the rest, rapidly moving investments by both product category and geography as new opportunities emerge.
These high performers achieved average annual revenue growth of 6 percent between 2007 and 2014, compared with 5 percent growth for companies that made only geographic shifts, and 4 percent growth for those that roughly maintained their traditional portfolio positions.
To become more agile, companies should adapt their operational and organizational models. One way to do this is to decentralize decision making, giving individual country leaders the authority to reallocate resources or set growth targets.