Managing a product portfolio can mean constant tension between efficiency and customer value, but the key to success is to take a customer-first approach, a McKinsey report says.
Using a consumer perspective to reduce complexity, however, goes beyond simply reviewing the performance of products and culling those that perform poorly. This can be a powerful way of optimizing portfolios, according to the authors of Mastering Complexity with the consumer-first product portfolio, but on its own is not sufficient to capture the full potential of simplification.
At its core, they argue, dealing with portfolio complexity should focus on the most “cost-efficient way of meeting consumers’ expectations in generating the greatest possible value”. Which is easier said than done. Many brands spend years trying to achieve it.
Some take an approach that is too disparate and active, resulting in “constant innovation and multiplying initiatives”. Others do too little with their portfolios, unsure of the right steps, “ending up with a growing tail of low- (or even negative-) margin products”.
Both approaches tend to result in too much complexity in a product range for too little in return.
Optimizing portfolios has been a priority for many brands for some time, as the retail landscape changed, along with consumers’ preferences. The pandemic has thrown this into sharper focus, and “portfolios that are aligned with (and optimized for) consumer value drivers can help companies get a head start in the recovery period and remain competitive”, the authors write.
They advocate a six-step approach to cutting costs and complexity.
Define cost targets for each brand or cluster of products; understand market trends and consumer drivers; understand what are driving costs and map those costs and their impact on the supply chain; develop product platforms and “smart differentiation” based on consumers’ needs; optimize the current portfolio based on a cost-benefit analysis; refresh design briefs.
Successful companies, the authors write, embrace a clear set of features. They have leaders who make it clear portfolio performance is a top priority; the organization sets “bold targets for ambition, scope and timeline”; they have actively engaged teams from R&D, marketing and procurement; and leaders’ decisions are based on good data about consumer needs that can help identify and eliminate lower-value features.
Portfolio optimization means striking the right balance between efficiency and consumer value drivers, the authors write. “Both practical and tangible, a consumer-backed approach to portfolio performance is more relevant than ever and can be done relatively quickly with cross-functional resources,” they add.
Sourced from McKinsey; additional content by WARC staff