© 2005 Booz & Company Inc. All rights reserved.

The Core’s Competence

For further information:Steffen Lauster, Cleveland: steffen.lauster@booz.comJ. Neely, Cleveland: j.neely@booz.comBooz & Company

04/15/2005

The Gillette Company came to market in 2004 with a new razor, the M3 Power, that actually blows whiskersaway from the skin for a closer shave. Battery-poweredyet bladed, the product blew away the competition justas effectively. Weeks after its May 2004 introduction,the M3 Power was the top-selling razor in the UnitedStates, and helped Gillette, one of the consumer prod-ucts industry’s consistently great innovators, to a whop-ping 26 percent rise in second-quarter profits. Gillettetold investors in late July that sales of razor blades, oralcare products, and batteries were up, too. It seemed likegood times were rolling.

But the stock market responded by shavingGillette’s stock price by more than 5 percent. Why?Although effective cost cutting has contributed toGillette’s profits, the company’s annual rate of sales

growth shrank from a 10-year average of 6 percent (from 1993 through 2003) to 1 percent over the threeyears from 2000 to 2003. Over the long term, it takesconsistent revenue growth to deliver outstanding share-holder returns.

If Gillette is taking it on the chin despite a long-term initiative aimed at turning innovation into growth,so are many of its consumer packaged goods (CPG)peers. Unilever and Colgate are among the other giantspunished by shareholders for revenue and earningsgrowth deemed disappointing. Top-line growth in theindustry often is an optical illusion, barely keeping pacewith the “natural” growth rate — population growthplus the rate of inflation. Most CPG companies say theyanticipate top-line growth of only 3 to 5 percent annu-ally, and profit growth of 8 to 12 percent, generally

The Core’sCompetence by Steffen M. Lauster and J. Neely

The Case for Recentralization inConsumer Products Companies

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premised on new rounds of cost cutting. Most consumerproducts companies that have grown more have accom-plished the feat by acquisition.

But the real surprise isn’t that most CPG companiesbarely have managed to run with a very slow pack. It’sthat some have flourished. Indeed, the differencebetween growth leaders and laggards can be stunning.Wrigley, for example, has delivered annualized revenuegrowth of 8 percent for the past 10 years, and grownoperating income by 9 percent a year — impressive inalmost any industry and nearly double the CPG sector’saverage growth rate of 4.7 percent.

What are the CPG winners doing right? In virtuallyevery case, they have found ways to surmount the “cus-tomization conundrum.” Consumers, retail customers,and institutional customers increasingly demand specif-ic products and services tailored to their particularneeds. Successful CPG companies outflank competitionand powerful channel partners by identifying a distinc-tive, brand-linked value proposition. They build strate-gically differentiated businesses around this competitiveadvantage. They customize service offerings to suit the shopping occasion, the channel, and the customer.They understand the profitability potential of differentchannels and consumer segments. They budget sales and marketing expenditures to support such “smart customization.”

But in order to finesse and sustain such complexity,smart customizers have also done something utterlycountercultural in an industry that for decades has beencharacterized by broadening portfolios and higherdegrees of decentralization: They have strengthened thecorporate core.

At the best consumer products companies, the cor-

porate centers are not passive holding companies. Undertheir new business model, the core actively drives prof-itable growth across the organization, by deploying anadvantaged business model across numerous categories,geographies, and channels. Instead of letting a thousandflowers bloom, today’s CPG stars:

• Define the differentiated business focus and alignportfolio and investment decisions with it by assigningdifferent roles to different parts of the business.

• Develop innovation, marketing, and channelmanagement capabilities that are systematically sharedacross the portfolio.

• Structure the organization for growth andimprove competitive agility while realizing scale advan-tages in shared services.

• Manage growth by balancing the pursuit of short-term wins and longer-term “breakthrough bets.”

This kind of “recentralization” doesn’t come easilyor painlessly. It presents real organizational challenges —and in many cases requires organizations to changeingrained behavior. Investing for growth requires har-vesting cash from businesses with lower potential inorder to fund opportunities in a disciplined way. Thatimplies overcoming political resistance in companieswhere the low-growth businesses have been an impor-tant part of the organization’s history or culture — theway Pepsi divested restaurants, or Procter & Gambleabandoned food — in order to focus on growth.

Consolidated LossesIn many ways, the consumer products industry has beenvictimized by the mythology that developed during acentury of very real success.

Starting in the late 1800s and continuing for

Steffen M. Lauster(lauster_steffen@bah.com) is a vice president with BoozAllen Hamilton in Cleveland.He concentrates on strategydevelopment and revenuemanagement for manufac-turers of consumer products.

J. Neely(neely_j@bah.com) is a princi-pal with Booz Allen Hamiltonin Cleveland who specializes ingrowth strategy and transfor-mation for consumer andindustrial companies.

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decades, few businesses were more sustainable ormore attractive than packaged goods. CPG companiesand their investors saw an insatiable public appetite forbranded staples. The firms’ wellsprings of innovationstocked supermarket shelves with “new and improved”cleaning supplies, laundry detergents, cereals, andsnacks. And if mature markets tired, executives sawcountless virgin markets all around the world. From theheyday of Listerine’s war against halitosis right upthrough “Coke Is It,” an oasis of infinite growth beck-oned at every horizon.

But that vision has long since faded. The last waveof growth in consumer products started whenEisenhower was president, and it broke with the Nixonadministration. True CPG product innovation — thekind that brought individually wrapped cheese slices,detergents with bleach, and disposable diapers — all butended in the 1960s. During the 1970s and 1980s, theconsumer products industry was more show than go,producing brand extensions instead of new products. Tobe sure, sales kept pace with population growth. Butotherwise, despite some high-profile technological inno-vations (the Swiffer mop, Sensor razor, and Kraft

Lunchables portable convenience foods), sales for CPGcompanies have been like Lost Boys in Neverland —they just don’t grow. (See Exhibit 1.)

As both real innovation and real growth declined,the power of retailers rose. Close to their customers, andaided by new information technology and increasedbuying power, retailers were able to extract lower prices,stocking allowances, and other concessions from manu-facturers. In response, many CPG companies indulged inone of two strategies that have proved costly and largelyfruitless: consolidation and customer “connection.”

Consolidation was the most popular reaction to theindustry’s changing fortunes. It was also the most hol-low. It’s a truism in the M&A business that mergersrarely deliver promised synergies, and the wave of con-solidation that swept over the CPG industry during the1980s and 1990s shows us why. Although the era’smergers — Nabisco with Standard Brands, PhilipMorris with General Foods and Kraft, Kraft withNabisco — brought together sales forces, the businessesgenerally retained autonomous marketing, supply chain,and R&D organizations.

As a consequence, the typical CPG company

Exhibit 1: The History of the Consumer Products Industry

Source: Booz Allen Hamilton

Trends andDevelopments

Example: Kraft

Example: P&G

Example: Gillette

• Emergence of branded consumer products• Individual inventory/ owners

• Move from single product to multiproduct firms• Evolution of marketing strategy and consumer research• International expansion

• New product innovation dominates• Expansion into multiple categories

• Increasing geographic expansion• Beginning of large-scale consolidation• Brand extensions begin to take the place of product innovation

• Consolidation continues• Regional/national business units dominate• Cost-cutting efforts to counter retailer pricing power

• Introduction of crackers• Oscar Mayer opens a meat market

• Expansion into Germany• Maxwell House coffee introduced in the U.K.

• Introduction of Jell-O, sliced processed cheese, Cool Whip, and Tang

• Nabisco merges with Standard Brands• Philip Morris acquires General Foods• Philip Morris acquires Kraft

• Brand extensions focused on reduced-fat versions of existing products• Kraft merges with Nabisco

• 1837: William Procter establishes himself as a candlemaker; James Gamble apprentices himself to a soapmaker

• Introduction of Crisco• Creation of brand management system

• Introduction of Crest toothpaste and Pampers disposable diapers• Established first dedicated upstream R&D facility

• Acquisition of Richardson-Vicks• Introduction of “2-in-1” shampoo and conditioner (Pert)

• Significant restructuring efforts• Move to four-region global organizational structure• Acquisition of Old Spice, Clairol, and Wella

• 1901: King Gillette founds American Safety Razor• Gillette obtains its first patent

• First radio ads • Gillette Sweden incorporated• U.K. manufacturing established• Introduction of brushless shaving cream

• Adjustable safety razor• Introduction of Foamy and Right Guard aerosol• Acquisition of Papermate • Acquisition of Braun • Expansion into Europe/S. America

• Gel shaving cream• Solid antiperspirant• Erasermate• Disposable razors• Disposable lighters• Acquisition of Oral-B

• Introduction of Sensor razor • Acquisition of Duracell • Functional Excellence program

Through the 1920s 1930s–1940s 1950s–1960s 1970s–1980s 1990s–2000s

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became a portfolio of unrelated businesses, each usuallysaddled with utterly different competitors, consumerbases, customer needs, infrastructures, and success fac-tors. After a recent culling, for example, Unilever stillhas 400 “core” brands. When a product portfolio isbroad and unwieldy, the gain in consolidation efficien-cies usually is not sufficient to offset the loss in focus.Instead of innovating, consolidated CPG companies fallinto the trap of “incrementalism” — each brand gets itsextensions every year, and proliferating extensions clut-ter retailers’ shelves. That makes it harder for any onebrand to capture the fancy of the consumer, and rendersit difficult for that brand’s managers to learn about thecharacteristics their customers might have in commonwith those of another brand — or to find supply chainsynergies, build effective joint sales forces, or innovateconsistently and effectively.

For these reasons among others, consolidation hasproved more of a drag than a draw on revenue growth,particularly for the largest consumer products compa-nies. More focused players — such as Wrigley, which hasspecialized in chewing gum for 103 years — have con-sistently outperformed consolidated companies. In fact,Wrigley is the only major consumer products companyto grow sustainably above the rate of inflation and pop-ulation from 1993 to 2003 without taking on majoracquisitions. Over the same period, Gillette acquiredDuracell; Clorox acquired First Brands; Kimberly Clarkacquired Scott; and Nestlé acquired Ralston Purina,Dreyer’s, Ice Cream Partners, and Chef America. (SeeExhibit 2.)

Customer MythologyPerhaps it’s more correct to say that proliferating exten-sions would clutter the shelves — if the CPG companieshad the power to get their products on shelves. But thatpower isn’t theirs anymore.

Until the 1990s, retailers were a weak and frag-mented lot. Indeed, in some senses CPG consolidationwas an attempt to exploit that weakness; it promisedmanufacturers economies of scale in sales and advertis-ing, and gave big manufacturers an advantage for nego-tiating stocking and trade promotions with relativelysmall retailers.

But while consumer products companies were busyconsolidating, such visionary retailers as Sam Waltonand Sol Price were building a new industry. They usedradical new supply chain efficiencies, pricing programs,and even store organization to create, respectively, Wal-

Mart — now the biggest company in the world by revenue — and Price Club, the first warehouse club,eventually acquired by Costco.

Today, Wal-Mart accounts for approximately 28percent of Dial’s sales, about 25 percent of Hershey’s,and roughly 18 percent of Procter & Gamble’s — fairlytypical proportions for consumer product manufactur-ers’ sales through the retailing behemoth. Not even thebiggest CPG company constitutes more than 5 percentof Wal-Mart’s sales. Wal-Mart and the other value-focused discount and club channels are powerfulenough to demand continual concessions — notablydramatic new supply chain efficiencies — in order topass the savings on to consumers in the form of ever-lower prices.

Consumer goods companies responded with theirsecond grand strategy of the 1990s: “Win with winningcustomers.” This scheme concentrated a company’shuman, financial, and intellectual resources on thehandful of retailers that appeared best able to gain itadditional share.

Unfortunately, CPG companies have not won withtheir “winning customers” strategy.

The essential problem with the approach is that itbrought little to the CPG companies beyond the imme-diate contribution to revenue growth. As the club, dis-count, and dollar store channel grew, such outlets indeedtook more product, boosting consumer goods compa-nies’ sales figures even as their pricing power declined.But the CPG marketers rapidly became passive respon-ders to the retailers’ demands, and lost much more thantheir control over pricing: They squandered their link-ages to, and ultimately the allegiance of, consumers.

Wal-Mart, for example, encourages its vendors tolimit spending on advertising and promotion so that itcan maintain lower prices — a tactic that threatens toconsign brand loyalty (and brand premiums) to thedumpster of history. Innovation has also suffered; clubsare notorious for their narrow product selection and typ-ically carry just one brand in a category, limiting a man-ufacturer’s incentive to develop breakthrough productsand major new revenue sources.

As CPG companies lose their historic connection totheir audiences, retailers have stepped in to fill the vacu-um. Retailers have clear strategies for attracting con-sumer traffic; increasingly, they are tailoring valuepropositions for their shopper segment, and forcingmakers of consumer goods to follow. “Suppliers canbenefit from working with Wal-Mart through increased

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efficiency, reducing promotional and distribution costs,”a Morgan Stanley analysis concluded.

But the risk to CPG companies is implicit in thosewords: The retailers are coming to control not only thechannel, but the loyalty of the end consumer. Recentresearch by Point of Purchase Advertising International,a marketing trade association, indicates that as much as70 percent of all CPG purchase and brand decisions aremade at the retail store. Companies that fail to managetheir diminishing ability to connect with consumers atretail risk losing their ability to command a premiumprice for their products.

Pleasing the customer but not the consumer isfraught with risk. Consider the example of Vlasic, thenow-bankrupt pickle company. It used to own a pre-mium brand. Hungry for growth, Vlasic agreed to Wal-Mart’s demand for gallon jars of pickles priced at $2.97to the consumer. The jars were a “statement item” forWal-Mart. Stacked on pallets at the front of the store,they signaled to consumers that Wal-Mart was the placeto go for value. Indeed, a consumer could buy a wholegallon of plump Vlasic pickles at Wal-Mart for less thanthe price of a quart of sliced Vlasic dills at a grocery store.

Perhaps Vlasic should have foreseen the cost to its

reputation as a high-quality, high-priced brand. Perhapsit should have anticipated the cannibalization, as con-sumers with a year’s supply of pickles in a gallon jar fromWal-Mart opted not to buy a quart of sliced pickles atthe supermarket. But the company did not. Vlasic filedfor bankruptcy in 2001. The gallon jar fiasco wasn’t theonly reason, but it certainly didn’t slow the company’sdownward slide.

Vlasic’s case is exceptional only in degree. Few CPGplayers are able to identify an area of strategic differenti-ation or a business rationale beyond cost reductionthrough scale. Too often their research and developmentefforts focus on quick wins through brand extensions tomeet this year’s sales targets, instead of breakthrough,business-building innovations. The result: a stream of fla-vor, color, size, and packaging extensions that help holdshare (often only barely, as competitors quickly imitate),but do not lead to appreciable top-line expansion.

It doesn’t have to be this way. CPG winners provethat it’s possible to regain and defend strong consumerrelations, create must-have brands, develop shopperinsights that help the retailer make money, and organizefor efficiency. The only mechanism with which toaccomplish these goals, though, is an organization able

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11%

Notes: General Mills acquired Pillsbury; Gillette acquired Duracell; Smucker’s acquired Jif and Crisco; Kimberly Clark acquired Scott; Clorox acquired First Brands;

Nestlé acquired Ralston Purina, Dreyer’s, Ice Cream Partners, and Chef America; Alberto-Culver acquired West Coast Beauty Supply

Source: 10K Data, Annual Reports, Booz Allen Hamilton

Exhibit 2: Revenue and Operating Income Growth Trends for Major CPG Companies (1993–2003)

Ope

rati

ng In

com

e G

row

th (%

CAG

R)

Revenue Growth (% CAGR)

20%

15%

10%

5%

Campbell’s

Unilever

Sara Lee

Kellogg

Colgate-PalmoliveP&G

Coca-Cola

Nestlé

Kimberly Clark

General Mills

Alberto-Culver

Smucker’s

Clorox

Wrigley (organic growth)

CPG growth above population and inflation ratedriven largely by acquisitions

Heinz

ConAgra

Pepsi

Hershey

Hormel

Gillette

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With retailers threatening the value proposition of CPG firms, growth can be achieved

only by a more engaged corporate core.

to identify key capabilities and leverage them across theentire, tightly focused, portfolio.

Organizing for GrowthWith globalizing retailers threatening the basic valueproposition of consumer products companies, sustain-able growth can be achieved only by a more engagedcorporate core and a “federalist approach” to managinggrowth initiatives and investment decisions.

The federalist concept of core-unit relationships, asour colleagues Paul Kocourek and Paul Hyde have writ-ten, “is based on the philosophy that value is created intwo places: at the operating companies closest to thecustomers and at the corporation, in the linkagesbetween the operating companies.” Far from limitingthe operating independence of the business units, thefederalist approach actually increases their autonomy,but it does so within boundaries established and moni-tored by the core, whose role is to set corporate strategyand policy, to identify ways to create value above andbeyond the operating companies’ value (e.g., sharingbest practices or creating businesses), and to create andenforce a disciplined performance management model.

Such companies as General Electric and LucentTechnologies have benefited greatly from this federalistmodel, which Messrs. Kocourek and Hyde have labeledthe “Model 2” organization. For consumer productsmanufacturers, applying it and spurring growth with itmeans inculcating, systematically advancing, and inte-grating four vital elements: business focus, capabilitiesdevelopment and planning, resource allocation, and agrowth imperative.

Business focus is the basis for all investments and thecriterion for all plans and budgets. The focus determines

what capabilities a company will develop and where andhow it will grow. The focus must be clear, because it tellseveryone what the company will do — and what it willnot do.

Business focus cannot be decreed; rather, it must bepremised on the firm’s existing — and ideally its histor-ical — strengths. This is because the company must beable to establish, for its own people as well as its presentand future customers, a clear “right” to win. Research(by Jim Collins, among many others) has shown repeat-edly that those who stick to a consistent strategy out-perform their peers over the long term.

Focus need not have anything specific to do withthe product portfolio. Clorox focuses on bringing big-company capabilities to niche categories. It can win inbleach and in specialized laundry products, such as stainremovers — but not in laundry detergent, so it doesn’tgo there. This explicit business focus tells Clorox man-agers which initiatives fit and which are inconsistentwith the strategy. Acquisitions that would bring Cloroxinto big categories do not fit. But acquisitions that allowClorox to transfer its large-firm capabilities to small cat-egories do, hence its successful acquisitions of KingsfordCharcoal and Glad bags. In small ponds, Clorox can bethe big fish.

Focus adds coherence to a product portfolio — andcoherence is a clearly developing best practice amongCPG leaders. Heinz sharpened its focus on condimentswith its 2002 sale to Del Monte of seafood, pet food,private-label soup, and infant food brands. Procter &Gamble has a clear focus on technology and a portfolioaligned with categories in which technology makes a dif-ference. When its experience with the Olestra fat substi-tute made it clear that technological innovation had a

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limited future in the food business, P&G disposed of itsbeverage and snack businesses. The company even soldoff Crisco, a big-name shortening and food oil brand ithad introduced in 1911 and advertised ever since.

Business focus naturally implies a consistentapproach to capabilities development and planning.Although any executive would want his or her firm to be world-class in R&D, supply chain management,marketing, IT, customer management, and trade pro-motion, the brutal fact is that few companies can simul-taneously develop all these capabilities, let alone themyriad other capabilities a large company needs in dosessmall and large. For any company, some subset of func-tional capabilities is more important than others totransform its strategy into sustained growth.

A capabilities plan identifies the tools and know-how that can bring the business focus to life. It can pointto necessary new capabilities, or guide the further devel-opment of capabilities in which the company is alreadya leader. Procter & Gamble has built an unparalleledR&D capability, invested generously in innovation, anddeveloped processes and methodologies for leveragingtechnology innovations across businesses. One result:Crest Whitestrips, a blockbuster innovation that com-bined bleaching, dental care, and adhesive technology.

Campbell Soup Company has a capability set thatcenters on convenience — unsurprisingly, consideringits business focus is convenience food. That focus is real-ized through capabilities in research, customer relation-ship management, and sales force management, amongother capabilities.

For example, to make it easy for supermarket shop-pers to buy Campbell soups, the company has createdan in-store display system that shelves each variety ofsoup in rows on a sloped rack. When a shopper takesone unit, another slides handily to the front. Whileseemingly simple, the system actually was the result of aseries of insights into both consumer and retailer needs.Campbell consumer researchers discovered that a shop-per who wants to buy low-salt cream of mushroom soupand doesn’t see it on the shelf will hunt behind the creamof broccoli and the chicken noodle, shuffle the adjacentrows, and leave frustrated if the desired product can’t befound. The disarray creates difficulty — and cost — forthe retailer, who must restore order to the shelves.Campbell’s solution solved the problem for both theretailer and the consumer. People see what they’re look-ing for immediately or they immediately see that it’s outof stock. Because there’s no more rooting around at the

back of deep shelves, the retailer keeps a tidy display andhas a reliable indicator of stock level. Getting this con-cept to work also required additional training of theretail force and a dedicated effort to get retailers’ “buy-in” on the new shelves.

Capabilities do not have to be inborn or part of along-standing firmwide tradition. One CPG firm withwhich we worked set its capability-development priori-ties by surveying retailers to identify their needs andgather their impressions of the company compared withits competitors. The survey revealed that the firm laggedits competition in three areas: category leadership, inno-vative marketing, and trade promotion practices. Of thethree, innovative marketing mattered most to the retail-ers. The firm responded by changing its focus frombrands to categories, and by developing capabilities tocustomize and share information, insights, and tools inorder to meet the needs of retailers.

Capability plans should be unique, but there arecategory benchmarks. In the tissue-paper business, acapabilities development plan probably will emphasizemanufacturing, because managing huge capital invest-ments must be a core aptitude. In the ice cream busi-ness, where supermarket margins are very narrow, acapabilities development plan may concentrate on anintegrated set of competencies — research, IT, market-ing strategy, marketing tactics, and so forth — having todo with impulse buyers. It may even include a capabil-ity in supply chain adaptability; the company may needto be able to move freezers from summer lake resorts towinter ski lodges, to be where the buyers are. The planmight even involve developing competencies in out-sourcing; the company might decide to outsourcesupermarket sales in order to focus on the impulse buyerin nontraditional channels.

Resource AllocationIf the business focus tells you where you want to make adifference in the market, and the capabilities develop-ment plan tells you how to do so, resource allocation isthe element of a CPG growth strategy that explains howthe company will pay for it. Fundamentally, it’s aboutthe hard choices that companies, in the era of a thou-sand flowers blooming, tried desperately not to make.

Most CPG companies today (best-practice leaderslargely exempted) suffer from the curse of the turn-around plan. The scenario is familiar. It starts with abrand whose margins are high but whose growth is low.Maybe it’s in a category where the company can never

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emerge as a leader, but can garner consistently goodreturns with minimal investment. Maybe tax implica-tions make a sale unattractive. No problem. All this sce-nario demands is a marketing manager able to milk thebrand efficiently.

But marketing managers don’t make it to the top bymilking brands efficiently. They soar by grabbing atten-tion with bold turnarounds. So, year after year, brandmanager after brand manager, there’s a new turnaroundplan promising that this tired old workhorse of a brandwill become a new Smarty Jones. The brand organiza-tion pushes for its share of investment, and because thecompany doesn’t do zero-based budgeting, the brandgets about what it got the year before — with good pol-iticking, maybe a little more. And so the company’sbudget spreads resources among all the brands, starvingthose that can grow and overfeeding those that can’t.

Part of the problem is that, in most CPG compa-nies, brand organizations are too strong and the centeris too weak. Allocating resources successfully means put-ting more money on the best bets — which, logically,would mean taking it away from lower-odds bets. Butshifting funding from one brand, market, or R&D proj-ect to another often results in backlash. It implies thatpeople working on disadvantaged brands aren’t doingimportant work.

Solving this problem is a job for the corporate cen-ter. In the federalist construct, the core needs to make itclear that brand harvesters can be stars just as much asbrand growers. Anyone can manage a brand through a

profitable decline by cutting all advertising and promo-tion and letting it die. But it takes an astute manager tostrike the balance that avoids overinvestment, yet investsjust enough to keep the brand alive and the cash flowingin. It means doing things on the cheap. Spend a littlemoney on packaging changes. Invest just enough inadvertising. That’s good brand management, and itneeds to be recognized and rewarded as vigorously as thesuccessful turnaround.

Private equity firms, interestingly, have been leadersin the art and science of brand resource allocation. Theyhave perfected the practice of building, making moneyfrom, and selling “tail brands.” A celebrated recentexample is that of Pabst Blue Ribbon beer. Purchased byan investor who planned to cut costs and let the brandgenerate profits as it died, Pabst Blue Ribbon hasbecome a favorite of alternative-lifestyle types, thanks toan innovative and low-budget marketing campaign.Pabst outsourced its brewing and invested modestly inmarketing by sponsoring bicycle polo tournaments,screenings of skateboarding movies, indie rock concerts,and the like.

If venture capitalists can win fame managing not-for-turnaround, why not CPG marketing managers?Paradoxically, the continued decline of mass mediachannels opens new opportunities to squeeze growthand profits from previously neglected tail brands. Withthe cost of major network advertising going up even asaudiences decline, companies are less likely to reflexivelyorder a mass media campaign to support a flagging

Exhibit 3: The Role of the Center for CPG Companies

Source: Booz Allen Hamilton

Corporate RoleGovernance

Portfolio ManagementResource Allocation

Capital Structure/Ownership

Shared Services

InnovationROI Marketing

Channel Management/Smart CustomizationOrganization Effectiveness/Best Practices

BusinessUnits

Regions Functions Categories Brands

Exec

utio

nEx

cell

ence

C

ore

Cap

abili

ties

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brand. Innovation in packaging, below-the-line market-ing, and sales force management is increasingly likely tobe the driver of a brand’s revival.

To make resource allocation work in a diverseorganization, the center must develop with the units acommon understanding about the varied ways the dif-ferent parts of the business have to contribute to grow-ing the enterprise. Creating this growth imperative is,perhaps, the most important and most difficult task ofthe corporate core.

Consider the example of Procter & Gamble.During the late 1990s, margins were suffering on vol-ume that was growing weakly. Franchise brands, evenTide detergent, were struggling as new product initia-tives got a disproportionate share of marketing dollars.By mid-2000, the company was losing share in seven ofits top nine categories, and had lowered earnings expec-tations four times in two quarters.

P&G recently completed a four-year restructuringprogram aimed at refocusing on the core — big brands,big customers, and big countries. Those changes, whichincluded the divestiture of noncore businesses and theshift of resources to higher-growth businesses, happenedonly because the company’s leadership determined todrive them. Organizationally, P&G has reasserted cen-tral control, establishing five global business units anddowngrading the once-almighty country organizationsto sales offices. Each of the global business units has atightly focused portfolio, and both strategy and P&Lresponsibilities for its brands.

The new organizational strategy is not without risk.For example, Procter & Gamble took longer than itmight have to react to the Argentine financial crisisbecause the country organization was weak. The com-pany has also discovered that in emerging markets, atoo-centralized approach limits success. P&G has mod-ified its product range, channel, and pricing strategy insuch situations. But the center still has much morepower than it once did, while the global business unitsremain empowered, but bounded.

The P&G example shows that “recentralization” isless about command-and-control than about coordi-nate-and-communicate. The federalist model keeps atthe core responsibilities for strategy and oversight —identifying the common themes that connect the busi-ness units and ensuring that this strategic agenda is driven across the business. Business units remain closestto the markets and create value through these relation-ships. This Model 2 organization bridges the chasm

between the center that acts merely as a financial hold-ing company, and the center that becomes operational-ly involved in the managing of the business units. (SeeExhibit 3.)

“Win with winning customers” has been the sloganof consumer products companies, but the reality formost players in the industry has been far different.Consolidation and diffusion of power through scores,even hundreds, of brand organizations have made itimpossible for them to win. In order to innovate effec-tively and develop the must-have products that givethem growth, they need to abandon their “states’ rights”organizational model and adopt a recentralized federal-ist approach that shifts oversight to the center, even as itvalues insights at the units more than ever. +

Resources

Paul F. Kocourek and Paul Hyde, “The Model 2 Organization: MakingYour Company Safe for Zealots,” s+b, First Quarter 2001; www.strategy-business.com/press/article/10797

Charles Fishman, “The Wal-Mart You Don’t Know,” Fast Company, No.77 (Dec. 2003); www.fastcompany.com/magazine/77/walmart.html

Jim Collins, Good to Great: Why Some Companies Make the Leap … andOthers Don’t (HarperBusiness, 2001)

Gregory Melich, “Wal-Mart: Yes They Can, If Allowed,” Morgan StanleyEquity Research Report, February 12, 2004

Procter & Gamble 2003 Annual Report: www.pg.com/investors/annualreports.jhtml

Procter & Gamble: www.pg.com

Gillette: www.gillette.com

Kraft: www.kraft.com

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strategy+business magazine is published by Booz & Company Inc.To subscribe, visit www.strategy-business.com or call 1-877-829-9108.

Originally published as “The Core’s Competence” bySteffen M. Lauster and J. Neely.