Chapter 5 which a product may have. On the basis of this
They
Understanding Product Porfolios
Members
Dalusong, Alexis
Concept of the Product Portfolio
The desirability of a portfolio or range
of different products is implicit in the concept of
the product life cycle which emphasizes that,
ultimately, all products and the technologies
which underlie them will change.
And so it is with the most other products
and technologies. Indeed, as we have seen in
earlier chapters, given that both generic
strategies of cost leadership and differentiation
depend on innovation, new product and process
and development have become the basis for
competitiveness activity in all kinds of markets.
A product portfolio is comprised of all
the products which an organization has. A
product portfolio may comprise of different
categories of products, different product lines
and finally the individual product itself.
Management is needed on all the three levels of
a product portfolio. You need managers for
managing individual products, managing
product lines and finally the top level
management which manages the complete
portfolio.
How do we classify the products in a product
portfolio?
Product classification is done on the
basis of the BCG matrix. The BCG matrix
classifies products on the basis of the market
share of the product as well as the growth rate
of cash needed to maintain the business.
classification, a product manager can decide
what level of investments a particular product
might need and what would be the returns from
such a product. As the other goal of product
portfolio management is cash flow management,
the BCG matrix propagates balancing the cash
flow between all products equally. In harsh
words – no extra revenue should be given to
products which cant give the revenue back to the
organization.
Factors Influencing the Product Portfolio
As noted, the purpose behind
developing a product portfolio is to allocate the
firm’s resources so as to optimize its long-term
growth and profitability. It follows that to do
this effectively one must select measures
assessing the actual or potential contribution of
individual products to the portfolio.
The BCG Growth-Share Matrix
The Boston Consulting Group (BCG)
growth-share matrix was developed by Bruce
Henderson, founder of BCG, in the late 1960s
and dominated thinking about strategy for over a
decade. The matrix was developed from
Henderson’s earlier work with experience curve
effects which he applied as a purchasing agent
as Westinghouse to help explain the link
between increased experience and lower
manufacturing costs.
To use the chart, analysts plot a scatter
graph to rank the business units (or products) on
the basis of their relative market shares and
growth rates.
Cash cows is where a company has high market
share in a slow-growing industry. These units
typically generate cash in excess of the amount
are regarded as staid and boring, in a "mature"
market, yet corporations value owning them due
to their cash generating qualities. They are to be
"milked" continuously with as little investment
as possible, since such investment would be
wasted in an industry with low growth.
Dogs, more charitably called pets, are units with
low market share in a mature, slow-growing
industry. These units typically "break even",
generating barely enough cash to maintain the
business's market share.
Question marks (also known as problem
children) are businesses operating with a low
market share in a high growth market. They are
a starting point for most businesses. Question
marks have a potential to gain market share and
become stars, and eventually cash cows when
market growth slows.
Stars are units with a high market share in a
fast-growing industry. They are graduated
question marks with a market or niche leading
trajectoryetc. The hope is that stars become next
cash cows.
By contrast, the idea of experience embraces
a number of other dimension these are;
 The learning curve
 Specialization of labor
 Process innovations
 New materials
 Product standardization
 Product redesign
Schnaars cites 13 sources of criticism which
have been levelled against the growth-share
matrix. That said, we believe the growth-share
matrix is both valuable and important because;
1. It reinforce the inevitability of change
implicit in the PCL concept.
2. It underlines the importance of having a
portfolio of a product t 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, despites the
difficulty of operationalizing it in
practice.
Shell’s Directional Policy Matrix
The Shell Directional Policy Matrix is
another refinement upon the Boston Matrix.
Along the horizontal axis are prospects for
sector profitability, and along the vertical
axis is a company’s competitive capability.
As with the GE Business Screen the location
of a Strategic Business Unit (SBU) in any
cell of the matrix implies different strategic
decisions.
Double or quit – gamble on potential major
SBU’s for the future.
Growth – grow the market by focusing just
enough resources here.
Custodial – just like a cash cow, milk it and
do not commit any more resources.
Cash Generator – Even more like a cash
cow, milk here for expansion elsewhere.
Phased withdrawal – move cash to SBU’s
with greater potential.
Divest – liquidate or move these assets on a
fast as you can.
We do not consider the directional
Policy matrix (DPM), developed by
corporate planners at Shell, strictly as a
portfolio planning model. Shell’s DPM is
based upon two key parameters- the
Company’s Competitive Capabilities and the
Prospects for Sector Profitability. Four main
criteria are suggested:
- Market growth rate
- Market quality
- Industry feedback situation
- Environmental aspects
With regards to a company’s competitive
capabilities three basic criteria are
identified;
1. Market position
2. Production capability
3. Market research and development
Summary
“Boxes” are a useful aid to analysis to
be operationalized they need to be associated
with a rigorous financial analysis, but, in doing
so, one must not lose sight of the competitive
assumptions on which this is based and of future
changes in these assumptions. In the cases of all
the portfolios reviewed in this chapter, the
important application relies on scrutiny of
assumptions and specific adjustment.