Why a growing portfolio can negatively impact strategy and how to fix it

The typical growth life cycle of a company is to succeed in one segment or part of the market, then as the capital increases the organisation is able to extend itself into other areas and then start acquiring/merging with other organisations. This can lead to a sprawling portfolio, complex supply chain lines and a diffusion of both strategy as well as the marketing budgets. Even when the economy is growing and the consumption is increasing, either of these points can cause concern for the executive team. There’s no doubt that 2020 has made these challenges particularly pressing, as having efficient and lean portfolios (and, by extension, operations) is no longer impacting just the stock price or market share of the company: it can have significant ramifications for the very survivability of the company.In addition, having brands and SKUs that do not sell will have a negative impact on the retailer relationships, as any product that is sitting on the shelf longer than the average means that the working capital is locked in rather than being used to generate profit. Against the backdrop of tightening supplier credit terms this can lead to loss of visibility or even distribution during the range review times, further pressuring the manufacturer’s portfolio profitability.The Pareto PrincipleFortunately, there are ways this can be addressed through unbiased evaluation of the entire portfolio and making some hard decisions as to what should be done with the brands that do not meet the set criteria. Almost all portfolios follow the Pareto Principle, which means that it is likely there will be a long “tail” of underperforming brands and SKUs. One example outlined by Harvard Business Review highlighted that when Clorox conducted the portfolio rationalisation exercise nearly 20 years ago, it found that 40 per cent of SKUs accounted for only 3 per cent of the revenue. A more recent example was by P&G, who decided in 2014 to reduce its footprint by over 100 brands, focusing on the 70 to 80 brands that made up 90 per cent of sales and 95 per cent of profits for the organisation. As the result of some of the divestments, P&G was able to net in excess of $US20 billion. A couple of major examples from 2020 are Coca-Cola and Danone making announcements pertaining to various forms of portfolio rationalisation across their markets. While all of the companies above are household names holding market capitalisations of many billions of dollars, the benefits they derive from the portfolio rationalisation exercise can be done by much smaller organisations or even by the country/regional units of larger corporations.An excellent example of a local company having successfully implemented portfolio strategy is Treasury Wine Estates and their focus on premium parts of the portfolio. Having the focus allowed the organisation to derive 70 per cent revenue in the premium segment versus 50 per cent only four years ago, thus strengthening both revenue and profitability.It is critical to note that there is no one size fits all for the approach, hence prior to beginning the portfolio project some key questions should be asked such as: What is the goal? Is it to reallocate marketing budget, to increase the bottom line or is it to make manufacturing more efficient? Even if the answer is all of the above and more, the key to success will be prioritisation. A good example to keep in mind is one stated by Treasury Wine Estates: “First and foremost, we start with the consumer and their needs.”Developing a brand opportunity matrixA score card can be developed to include (but not limited to) financials (revenue, profit), brands (strength, strategic fit), logistics (type of materials, days the product is on the shelf). A good starting point for the exercise can be the brand opportunity matrix, which will allow an insight into which brands in your portfolio you should focus on.When looking at the divestment there are multiple ways this can happen. For example, the brand can be sold off, stopped being produced, or even outsourced for contract manufacturing. Each of these outcomes has both strong and weak points. An additional benefit of optimising the product portfolio in terms of the brands/SKUs line-up is it will also provide the possibility to do a deep dive into cost of goods sold and potentially find cost optimisation options there. For example, undertaking this process you might find that three different types of cardboard are used to manufacture packaging for the same brand – and while there may be good reasons for this to happen (ie having a premium and discount line), more often than not this will be as a result of legacy inefficiencies. The cost could then be reduced by either buying in bigger bulk or having less complex production.It is also critical to have involvement and buy-in across the organisation. Executives as well as their teams need to buy into the process and the opportunities of the results. There are in fact benefits across the organisation that would be gained from it – for example, marketing will have more focused strategy and investment, finance will obtain cost savings, logistics will benefit from easier supply chain and sales from a slimmer portfolio, making it easier to negotiate with clients to achieve the successful negotiation outcomes.The right stuffAnother important aspect of ensuring that the product portfolio rationalisation process goes to plan is having the right people and systems in place. This is critical to ensure that the right information is gathered to ensure the right outcomes are achieved as the result of the project. For example, if the data warehouse facility exists in the organisation it will help significantly with the data extraction. For the more advanced outcomes modelling it is possible to utilise the help of data science tools to run a number of scenarios and then select optimal portfolio configurations. In terms of the team it is possible to run the project with both internal and the external resources (and the internal SMEs and their knowledge and understanding of the business will be crucial to the success of the project). Whichever way is selected, it is highly recommended that the project is run by either an executive who is considered neutral or an outside party to ensure the needs of all of the business stakeholders are considered and factored to deliver success.