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Keywords:
Product portfolio management
Game theory
Competitive market
a b s t r a c t
In todays competitive markets, effective product portfolio is critical for manufacturers that offer several products. From manufacturers perspective, the diversity must be maintained in a level in which
the engineering costs do not exceed the acquired advantages of increased market share. On the other
hand, product portfolio diversity is prominent for customers. In addition, manufacturers should
always be careful about competitors activity. Therefore, we consider the problem of product portfolio
management (PPM) in a competitive environment. This paper constructs a game theory-based mathematical model to deal with this new PPM problem. In this presented mathematical model, the PPM
problem is formulated as a 2-person non-cooperative game with complete information. Each player
has a set of strategies which correspond to the feasible product portfolios. Every payoff is determined
by the procedure that considers the customerengineering interaction in product portfolio planning,
which aims to optimize product portfolio for a target market segment, and proposed a maximizing
surplus share model for it. Therefore, obtaining the optimal product portfolio is determined by the
Nash equilibrium point of this game. Finally, a numerical example is presented to demonstrate the
feasibility of the approach.
2010 Elsevier Ltd. All rights reserved.
1. Introduction
Consumers, industrial managers, and sales and marketing people, all demand products that improve their lifestyles or to gain an
edge over the competition. So, the products that presented by
manufacturers in their product portfolios (or sets) are interesting
for many people. But unlimited product variety is not a way to
be successful; there has to be an optimum (Forza & Salvador,
2008; Kumar, Chen, & Simpson, 2009). It is true for most companies that the Pareto rule applies: 80% of the sales and/or prots
come from 20% of the products (Gorchels, 2000). It is evident that
a single product cannot fulll the manufacturer needs and on the
other hand, for diversity there exists limitation (Song & Kusiak,
2009).
In todays highly competitive environment, determining an
optimal product portfolio is very important for the survival of a
rm. Optimal product portfolio has received considerable attention, because the rates of failure of new product portfolio and their
associated losses are very high (Business Week, 1993). The whole
product portfolio decision is very crucial for the progress of a rm,
because it is very costly and difcult to change (Kotler, 1997;
Lilien, Kotler, & Moorthy, 1992; Urban & Hauser, 1993). The key
Corresponding author.
E-mail address: m_zandieh@sbu.ac.ir (M. Zandieh).
0957-4174/$ - see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.eswa.2010.11.054
questions are, what the best product portfolio is, and how manufacturer can nd it.
This type of decisions adheres to the general wisdom as suggested in the Boston Consulting Groups notion of product portfolio
strategy (Henderson, 1970). The concept of product portfolio provides a useful synthesis of the analyses and judgments during
the preliminary steps of the planning process, and is a provocative
source of strategy alternatives (Day & George, 1977).
Product portfolio management (PPM) is a general business
concept that analyze the production ability and market potential,
simultaneously, and then determine the best set of products to
offer, with the aim of manufacturer prot maximization (Dacko,
2008; McNally, Durmusoglu, Calantone, & Harmancioglu, 2009).
PPM is developed to direct a product and its diversity including
not only attributes, levels, and prices, but also analysis results,
environmental component information, engineering requirements,
manufacturing procedures, product performance information, and
etc. (Cooper, Edgett, & Kleinschmidt, 1999). Therefore PPM has
been classied as a combinatorial optimization problem. Each
company strives for the optimality of its product offerings through
various combinations of products (Kaul & Rao, 1995).
The PPM problem may develop from two perspectives: (I) For
attract the opinion of customers in target markets. (II) For reduce
the manufacture engineering costs. First is the problem of marketing managers, and second is the problem of producer. When both
7920
2. Literature review
A PPM is dened as a decision making that optimizes some criteria, such as maximizing share-of-choices, or, in other words,
market share. The main contribution of the most researches in
PPM is summarized in following issues:
(1) Generating design alternatives via multi-objective
optimization.
(2) Accounting for uncertainty and competition when estimating the achievement of business goals.
(3) Applying meta-heuristic algorithms to solve a combinatorial
problem during the product line design.
Kohli and Krishnamurti (1987) developed a dynamic-programming-like heuristic to nd a solution to the problem of identifying
a new, multi-attribute product prole associated with the highest
share of choices in a competitive market. This heuristic was then
extended to cover product line design (Kohli & Sukumar, 1990).
Nair, Thakur, and Wen (1995) developed an improved heuristic
using beam-search methods to solve this problem efciently. Balakrishnan and Jacob (1996) used genetic algorithms, which are
based on population genetics, with conjoint data to generate product designs that are near-optimal. Heuristic approaches are justied because the product design problem has been shown to be
too difcult (NP-hard) to optimally being solved in a reasonable
period of time (Kohli & Krishnamurti, 1989). Li and Azarm (2002)
presented the paper that extends the previous work in product line
positioning by including all of the considering issues, i.e., large
variety of customers preferences, market competitions, multiple
business goals, uncertainties in several factors that are used for
evaluating the design alternatives, and commonality among the
alternatives in a product line. Because of the combinatorial nature
of this problem, they developed a genetic algorithm to solve it.
Thereafter, Jiao and Zhang (2005) examined the benets of
integrating customer concerns over product offerings with more
engineering implications. To leverage both the customer and engineering concerns, a maximizing shared-surplus model that considers customer preferences, choice probabilities and platform based
product costing, is proposed to address the product portfolio planning problem. Also, a genetic algorithm procedure is applied to
solve the mixed-integer combinatorial optimization problem involved in product portfolio planning (Jiao, Zhang, & Wang, 2007).
Recently, Aiyoshi and Maki (2009) proposed a game problem
under the constraints of allocation of product and market share
simultaneously. Their research is considered several manufacturers in oligopoly market. This proposed model, on the one hand
had the competitive circumstance, but on the other hand, did not
has details discussed above, such as large variety of customers
preferences, customerengineering concerns, etc. Next, we describe our method in integrate these details and competitive
circumstance.
3. Description of the PPM problem
Considering the rm capabilities to produce several products, a
set of product portfolios have been identied. Each product has certain desirability between customers. We propound the product portfolio planning problem with the goal of maximizing an expected
surplus from both the customer and engineering perspectives. More
specically, we consider a scenario in which a set of products, have
been identied, given that the manufacturer (m) has the capabilities
(both design and production) to produce all these products,
m
m
m
Pm fpm
1 ; . . . ; pn ; . . . ; pNm g. A product portfolio, zj , is a set consisting
of some selected product. Combined with the products, a set of prodm
m
uct portfolios are created, Z m fzm
1 ; . . . ; zj ; . . . ; zJm g. For example, if
m
m
manufacturer m can produce 3 product, P m fpm
1 ; p2 ; p3 g, 7 product
portfolio are available:
m
Z m fzm
1 ; . . . ; z7 g
m
m
m
m
m
m
m
m
m
m
m
ffpm
1 g; fp2 g; fp3 g; fp1 ; p2 g; fp1 ; p3 g; fp2 ; p3 g; fp1 ; p2 ; p3 gg:
Every product, pm
n , is associated with certain engineering costs,
denoted as C m
There are multiple market segments,
n.
S = {s1, . . . , sg , . . . , sG}, each containing homogeneous customers,
with a denite size, Qg. The customerengineering interaction is
embodied in the decisions associated with customers choices of
different products. Various customer preferences on diverse products are represented by respective utilities, U m
gn (utility of the gth
segment for the nth product of mth manufacturer). Product demands or market shares, Dm
gn (market share of the gth segment
for the nth product of mth manufacturer), are described by the
probabilities of customers choosing products. Customers choose
a product based on the surplus buyer rule (Kaul & Rao, 1995). They
have the option of not buying any products (if none of them produces a positive surplus) or buying competitors products.
We assume that competitors respond to the manufacturers
moves, meaning that, the competition react by introducing new
products. Competitive reactions appear implicitly in the customer
utilities, which are inuenced by the attributes of competing products (Yano & Dobson, 1998). This causes the problem based on
game theory to model.
4. Problem formulation
The present paper considers a market with G segments,
S = {s1, . . . , sg , . . . , sG}, and 2 manufacturers that each of them can
m
m
offer Nm products, P m fpm
1 ; . . . ; pn ; . . . ; pNm g, and Jm product portm
m
folios, Z m fzm
;
.
.
.
;
z
;
.
.
.
;
z
g.
This
gives
the bimatrix-game
1
Jm
j
problem with 2 players and Jm strategy for each, (m = 1 or 2).
7921
The payoff for each player will of course depend on the combined actions of both players. A payoff matrix shows what payoff
each player will receive at the outcome of the game. For player
m (m = 1 or 2), the payoff matrix, Fm, is as follows:
that player 1 (2) chooses his z1a th row (z2b th column). The (expected) payoff for player 1 is x1 F 1 x2 and the expected payoff to
player 2 is x1F2x2.
A strategy pair
x1 ;
x2 2 DJ1 DJ2 is an equilibrium for the game
(F1, F2) if
Table 1
List of cost and utility for products.
Players (m)
Products (pm
n )
Cost (C m
n )
s2
s3
Manufacture 1
p11
22
0.02
0.14
0.09
p12
31
0.37
0.33
0.27
p13
40
0.64
0.86
0.69
p14
59
0.18
0.51
0.08
p21
28
0.94
0.23
0.37
p22
32
0.33
0.05
0.14
p23
47
0.58
0.18
0.37
p24
56
0.71
0.56
0.98
Manufacture 2
z 12
z 22
z 32
z 42
z 52
z 62
The set of all equilibria for the game (F1, F2) is denoted by
E(F1, F2). By a theorem of Nash this set is non-empty for all bimatrix
games (Nash, 1950).
Some methods for calculating payoff matrix arrays, fm z1a ; z2b ,
are there (see Section 2). We used the function that proposed by
Jiao and Zhang (2005). This function is based on customer-engineering interaction model in PPM. This is as follows:
0
Nm
G X
X
Um
gn
g1 n1
Cm
n
Dm
gn Q g ;
elUgn
Dm
gn PN com lU ;
gc
c1 e
z72
z 82
z 92
2
z 10
z 112
z 122
2
z 13
z 142
z 11
0.19, 0.95 0.21, 0.25 0.19, 0.43 0.15, 0.92 0.13, 0.80 0.12, 0.88 0.11, 1.19 0.13, 0.44 0.11, 0.81 0.11, 0.88 0.10, 0.79 0.08, 1.04 0.09, 0.80 0.07, 0.99
1
2
0.47, 0.87 0.53, 0.23 0.49, 0.39 0.41, 0.87 0.33, 0.76 0.31, 0.84 0.28, 1.13 0.34, 0.42 0.30, 0.77 0.28, 0.84 0.25, 0.76 0.22, 1.00 0.23, 0.77 0.18, 0.96
1
3
1.03, 0.76 1.13, 0.19 1.06, 0.33 0.90, 0.75 0.76, 0.68 0.73, 0.76 0.65, 1.03 0.78, 0.37 0.69, 0.69 0.66, 0.76 0.59, 0.70 0.53, 0.93 0.54, 0.71 0.44, 0.90
1
4
0.20, 0.91 0.22, 0.24 0.20, 0.41 0.17, 0.89 0.14, 0.78 0.13, 0.86 0.12, 1.16 0.14, 0.43 0.13, 0.79 0.12, 0.86 0.11, 0.78 0.10, 1.02 0.10, 0.78 0.08, 0.97
1
5
0.46, 0.64 0.50, 0.16 0.47, 0.28 0.41, 0.65 0.35, 0.60 0.34, 0.67 0.32, 0.93 0.36, 0.33 0.33, 0.62 0.32, 0.68 0.28, 0.64 0.26, 0.85 0.26, 0.65 0.21, 0.84
1
6
0.88, 0.58 0.94, 0.14 0.89, 0.25 0.79, 0.58 0.70, 0.55 0.67, 0.62 0.61, 0.86 0.71, 0.30 0.64, 0.57 0.62, 0.63 0.56, 0.60 0.52, 0.80 0.52, 0.61 0.44, 0.79
1
7
0.26, 0.66 0.28, 0.17 0.27, 0.29 0.23, 0.67 0.20, 0.61 0.20, 0.69 0.18, 0.95 0.21, 0.33 0.19, 0.63 0.18, 0.67 0.16, 0.65 0.15, 0.87 0.15, 0.66 0.13, 0.85
1
8
1.02, 0.55 1.09, 0.13 1.04, 0.24 0.92, 0.56 0.81, 0.53 0.79, 0.60 0.74, 0.83 0.84, 0.28 0.78, 0.55 0.75, 0.60 0.66, 0.58 0.61, 0.78 0.62, 0.59 0.52, 0.77
1
9
0.45, 0.63 0.49, 0.15 0.47, 0.27 0.41, 0.64 0.35, 0.59 0.34, 0.66 0.31, 0.91 0.36, 0.31 0.33, 0.61 0.32, 0.65 0.28, 0.63 0.26, 0.84 0.27, 0.64 0.22, 0.83
1
10
0.86, 0.57 0.92, 0.14 0.88, 0.25 0.78, 0.57 0.69, 0.54 0.66, 0.61 0.61, 0.84 0.70, 0.29 0.64, 0.56 0.62, 0.60 0.56, 0.59 0.52, 0.79 0.52, 0.60 0.44, 0.78
1
11
0.90, 0.45 0.95, 0.11 0.92, 0.19 0.83, 0.46 0.75, 0.45 0.73, 0.51 0.67, 0.71 0.76, 0.24 0.70, 0.47 0.68, 0.52 0.63, 0.50 0.59, 0.68 0.59, 0.52 0.51, 0.69
1
12
0.45, 0.50 0.48, 0.12 0.46, 0.21 0.41, 0.51 0.37, 0.49 0.36, 0.55 0.33, 0.77 0.37, 0.27 0.34, 0.51 0.33, 0.57 0.30, 0.54 0.28, 0.73 0.29, 0.56 0.24, 0.73
1
13
0.89, 0.44 0.94, 0.10 0.90, 0.19 0.82, 0.46 0.74, 0.45 0.72, 0.50 0.67, 0.70 0.75, 0.24 0.70, 0.46 0.68, 0.51 0.62, 0.50 0.58, 0.67 0.59, 0.51 0.51, 0.68
1
z 14
0.81, 0.37 0.85, 0.09 0.83, 0.16 0.76, 0.39 0.70, 0.39 0.68, 0.44 0.64, 0.62 0.71, 0.21 0.66, 0.40 0.65, 0.45 0.60, 0.44 0.57, 0.60 0.57, 0.46 0.50, 0.62
Fig. 1. The payoff matrix for player 1 and 2.
7922
Table 2
Parameter description.
Index
Description
m
M
Nm
N0 m
Ncom
Pm
pm
n
Zm
m
zj
Manufacturer referral
Number of manufacturers in market
Maximum number of products that feasible for mth manufacturer
Number of products that are offered by mth manufacturer
Number of products in market
Set of products as for mth manufacturer
nth product of mth manufacturer
Set of portfolios (strategies) as for mth manufacturer
jth portfolio (strategy) as for mth manufacturer
Jm
S
G
sg
Qg
Cm
n
Um
gn
Dm
gn
E
Fm
f
xm
zm
Market share of the gth segment for the nth product of mth
manufacturer
Scaling parameter of conditional multinomial logit choice rule
Expected value of shared surplus
Payoff matrix as for mth manufacturer
Payoff function
The probability that player m chooses his jth strategy
DJm
Appendix A
fm z1a ; z2b
G X
N0
X
Um
gn
g1 n1
Cm
n
elUgn
PNcom
c1
elUgc
Qg;
z11 fp11 g
z12 fp12 g
z21 fp21 g
z22 fp22 g
z13 fp13 g
z23 fp23 g
z14 fp14 g
z15 fp11 ; p12 g
z16 fp11 ; p13 g
z17 fp11 ; p14 g
z18 fp12 ; p13 g
z19 fp12 ; p14 g
z110 fp13 ; p14 g
z111 fp11 ; p12 ; p13 g
z112 fp11 ; p12 ; p14 g
z113 fp12 ; p13 ; p14 g
z114 fp11 ; p12 ; p13 ; p14 g
z24 fp24 g
z25 fp21 ; p22 g
z26 fp21 ; p23 g
z27 fp21 ; p24 g
z28 fp22 ; p23 g
z29 fp22 ; p24 g
z210 fp23 ; p24 g
z211 fp21 ; p22 ; p23 g
z212 fp21 ; p22 ; p24 g
z213 fp22 ; p23 ; p24 g
z214 fp21 ; p22 ; p23 ; p24 g
Three segments are identied, i.e., s1, s2, and s3. Q1, Q2, and Q3
are assumed 0.2, 0.3 and 0.5, respectively. Table 1 shows the
utilities of three segments to every product (U m
gn ) and cost of each
(C m
).
Also,
scaling
parameter
(
l
)
is
supposed
0.8. Therefore, 2
n
payoff matrixes F1 and F2 formed for manufacturer 1 and 2, separately. This game and obtained data from expected shared surplus
values (Eq. (5)) are summarized in Fig. 1.
7923
Urban, G., & Hauser, J. (1993). Design and marketing of new products (2nd ed.).
Englewood Cliffs, NJ: Prentice-Hall.
Yano, C., & Dobson, G. (1998). Prot optimizing product line design, selection and
pricing with manufacturing cost considerations. In Product variety management:
Research advances. Boston: Kluwer Academic Publishers.