Portfolio brand categories
For portfolio optimization to succeed, companies need to classify their brands or businesses as one of the following:
Brands and businesses that are accretive to earnings and enjoy competitive advantage and/or a leading position in a category with strong growth prospects.
Brands and businesses consistently contributing to free cash flow and profits but without significant growth prospects.
Brands and businesses that 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.
Brands and businesses that have not responded to “fix” plans and/or are not meeting performance metrics, and should be divested. Also applies to businesses that are no longer suited to the company’s strategic direction.
These categories set the stage for active portfolio management, with all decisions driven by an accurate and complete picture.
Growth-hungry consumer products (CP) companies must excel at strategic portfolio optimization, and most executives feel they do a good job here. But we believe there is significant room for improvement.
The central problem, according to an EY survey of leading CP companiesin 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.
One consequence is that companies across the sector are struggling to achieve their targets for both top-line growth and total shareholder returns.
A more rigorous portfolio optimization process would help companies to feed the brands and businesses that have the greatest potential, while pruning the weakest ones.
Our research shows a clear correlation between excellence in this area and superior financial performance.
A third of companies are only “moderately effective” at deciding which brands they should Grow, which they should Sustain and which they should Fix.
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.
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 carrying out brands that are harming their efforts to grow.
What drives portfolio optimization success?
- Evidence you can trust
CP companies have access to a mountain of data from both internal and external sources. They should feel confident using it to drive portfolio optimization. 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.
- The right people produce results
Dedicating the right people to the process, with the right level of support, is critical. Yet finance or strategy people often prepare most of the portfolio review.
Cross-functional participation is the leading practice. It can take more time and planning, but the results are usually more robust and better aligned.
46% of companies were concerned by a lack of internal consensus.
Without consensus, it can be difficult to trust any information or data coming out of the various business units or brand teams.
• Empower people with technology: let it do the heavy-lifting on data gathering and analytics; verify that your people can convert the results into decisive action.
• See that managers can make nimble, fact-based strategic assessments of brands or businesses based on those insights.
• Create an in-depth assessment mindset that challenges existing assumptions.
- Effective resource investment
Successful companies make wise choices about how they deploy their resources across brands they classify as either Grow, Sustain, Fix or Exit.
• Use the results of data-driven portfolio optimization reviews to focus scarce resources, including capital, marketing spend and talent.
• Be smart when investing resources. Consider long-term scenarios and focus on attractive markets where you have advantage.
• Don’t simply abandon weaker brands. Even those you plan to Exit may need tactical investment to maintain their value to a potential buyer.
How much are you investing in your brands/businesses?
- Decisive action
When a portfolio review identifies a brand or business as underperforming – or likely to be so in the future – CP leaders have to act quickly before it affects growth.
Hesitation is expensive: when a brand becomes non-core, its value can fall fast.
• 26% of companies say heritage is an important factor in whether to Fix or Exit a brand. And 18% say it is the most significant.
• 84% 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 an attractive proposition for buyers – that could harm growth across the portfolio.
What influences your decision to fix or exit brand?
- Long-term icebergs
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.
Companies that use reliable data-driven insights and experience to plan ahead are in a better position to spot trouble coming. They identify underperforming brands earlier and Exit them faster.
When you have divested a brand or business that you had previously attempted to fix, what factors drove your decision?
Upgrade your portfolio optimization process with these five actions
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.
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 they need to drive an evidence-based portfolio review and to challenge all assumptions. Otherwise, your efforts will be undermined from the start.
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.
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.
Stay ahead with predictive modeling and long-term scenario planning
Too many CP companies cite unexpected changes in market dynamics as the key factor driving their decision to Exit a business. But such changes can be anticipated. Forward-looking analyses with sophisticated data and analytic tools, coupled with insights produced by employees in the business, will establish a complete picture of the portfolio that allows for unbiased strategic long-term planning.