Chapter 5: Understanding Product Portfolios

Concept of the Product Portfolio:

Product Portfolio = range of different products that a company has to offer
Comprises of different categories of products, product lines, and finally the
individual product itself
Relative to the PLC, ultimately, all products and technologies will change
o New product and process development have become the basis for
competitive activity in all kinds of markets
o This has led to an acceleration in the substitution of new products for old
and a shortening of the PLC
Ansoffs Growth Vector Matrix
o Key lesson: In order to survive, firms need to be constantly looking for
new products and new customers
In recent years, emphasis in marketing has moved away from the transaction to
the relationship
Many of the best ideas for new products come from customer feedback on
improving or changing the existing product
Developing the Product Portfolio:
Depends on the overall objectives of the organization and its attitude towards the
basic trade-off between risk and return
Once this has been established, it becomes possible to determine the kinds of
products needed to achieve the desired balance
Peter Druckers Categorization of Products
based on the contribution of the product to overall profitability
o Yesterdays Breadwinners products that have been successful in the
past
o Todays Breadwinners Innovations of yesterday
o Tomorrows Breadwinners New products or Todays Breadwinners
modified or improved
o Also-rans - High hopes of yesterday that did not work out well, but at
the same time did not become failures
o Failures - Tend to liquidate themselves
o In-betweens - capable of becoming successful given appropriate
action
Drucker: Support todays and tomorrows breadwinners, milk yesterdays
breadwinners, make up your mind on the in-betweens, and drop the also-rans
and failures
In balancing the portfolio to achieve overall objective(s), consider:
1. What dimensions should be used in constructing a product portfolio?
2. What are the different approaches to portfolio management, and how do
they differ from each other?
3. How can the portfolio management approach be used to develop
guidelines for product making decisions?
Before seeking to answer these questions, first decide:
o Desired level of business analysis Individual product lines constitute
the basic unit of analysis, will depend on the extend of the firms
existing portfolio

o
o

Level of the market Disaggregate the market into profitable

segments and then analyze the characteristics of the customers who
comprise the distinct segments
Time Dimension of Analysis Take into account future trends and
predict in which direction a product is moving (up, stable, down)

Factors Influencing the Product Portfolio:

Purpose: Allocate firms resources to optimize long-term growth and profitability
To do this effectively, one must select measures for assessing the actual or
potential contribution of individual products to the portfolio
Measures may be
o OBJECTIVE (sales, profitability, market share) or
o SUBJECTIVE (competitive strength, perceived risk, stage in the PLC)
BCG Growth-Share Matrix
Also known as Boston Consulting Group
Developed by Bruce Henderson (1960)
Criticisms:
o Fragmentation of markets w/ increased international competition
o Acceleration of technological change
o The impact of information technology
Henderson's Perspectives on Experience

source: http://mamikikeyu.wordpress.com/2011/05/04/the-experience-curve/
http://dinarstandard.com/leadership/strategy-concepts-the-experience-curve/

Income will depend on the prices it can obtain in the marketplace.

Price and Cost vary depending on the overall competitive situation.

In terms of market conditions:

o

Stable Market: increase in cost efficiencies are paralleled by price

reductions

Unstable Market: demand outstrips supply where sellers command higher

margins.

Result:

Cost will fall more quickly than price

Demand will cease to grow upon saturation

Shake-out: suppliers cut prices to hold on to the market

Basic BCG Matrix

How to use BCG Matrix for Research

1. Plot the position of all the products of your intended industry
2. Identify the strategic options available
Notes:
Firm has 30% of the market share (HIGH) = star or cash cow
Firm has 25% market share (LOW) = Question mark or Dog
Importance of the BCG Matrix
1. Reinforces the inevitability of change implicit in the PLC Concept
2. It underlines the importance of having a portfolio of products at different stages of
development.
3. It requires formal consideration of the competition and their relative standing
4. It is intuitively appealing and simple to implement conceptually, despite the
difficulty of operationalizing it in practice.
Remember:
Market Share Approach: Only one firm or a small, evenly match batch of
competitors can prosper
Experience Curve: Firm with the largest share will always enjoy a cost advantage
over smaller firms
o Result to Differentiation

Source of Cost Savings

o

Innovation

Managerial Efficiency

Implementation

** (text in parenthesis) - recommended strategies for each position

Business Sector Prospects Criteria
- Market Growth Rate
- Market Quality *
- Industry Feedback Situation
- Environmental Aspects
* Questions to ask for MARKET QUALITY:
1. Has the record of high, stable profitability?
2. Can margins be maintained when manufacturing capacity exceeds demand?
3. Is the product resistant to commodity pricing behavior?
4. Is the technology of production freely available or is it restricted to those who
develop it?
5. Is the market supplied by relatively few producers?
6. Is the market free from domination by a small group of powerful customer?
7. Has the product high added-value when converted by the customer?
8. In the case of a new product, is the market destined to remain small enough not
to attract too
many producers?
9. Is the product free from the risk of substitution by an alternative synthetic or
natural product?

Competitive Capabilities Criteria

- Market Position
- Production Capability
- Product Research and Development
Sources:
http://www.marketing91.com/product-portfolio/