5

PRODUCT PORTFOLIO

Learning Outcomes
 To understand Product Portfolio and its need
 To understand who is responsible for product portfolio decisions
 To understand the tools used in evaluating products

Learning Content

1. What is Product Portfolio

2. Responsibility for Product Portfolio Management
3. Tools for analysis
3.1. BCG Matrix
3.2. SWOT Analysis
3.3. Ansoff‘s Matrix
 4. Process for Product Portfolio Selection
5. Summary
6. Your learning
7. Key Words
8. Exercises
9. Further Reading

What is Product Portfolio

As we have seen a product is born lives for some time and then dies. The
next product that is born is not assured of success and so if a company has
only one product then it becomes a very risky proposition for the company.
In addition a company has a range of customers. All customers do not have
the same requirement and taste, thus it is not possible for the company to
satisfy all of them with one product only. Hence the range of products that a
company has in the market in order to conduct its business profitably is
known as its Product Portfolio. It also referred to as Product Mix. Each
product in the portfolio has an impact on the other as each competes for the
company‘s resources and time. In addition every
additional product forces the customer to choose a product at the expense of
the company‘s other products thus affecting the sales of that product
negatively. Let us see what all effects a new product would have on an
existing product:
i. A new product will need to be advertised more than an existing
product in order to make the customer aware about it.
ii. In the distribution channel the distributor will have to allocate some
resources in terms of storage space, finance, selling and delivery
effort to this new product.
iii. The new product will also occupy shelf space and may displace an
existing product.
iv. The production facility will have to allocate resources for
manufacturing the product storing raw material and finished
goods.
v. The profitability of each product is not the same and so if sales of
a new product which is not as profitable affects another much
more profitable product it is not for the overall benefit of the company.
Hence the company always analyses and tries to ensure that any new
product that is launched must not have a negative effect on its
existing product range and that the overall profit of the company
increases with this introduction.
Responsibility for Product Portfolio
Management
Product Portfolio Management is the responsibility of the senior management
team of an organization or business unit. This team, which is undertakes this
process, is normally called the Product Committee. This committee meets at
regular intervals to manage the product pipeline and makes decisions about
the product portfolio.
The process of Portfolio Management starts at the time of
i. This starts at the planning stage where the basic product objectives
are defined. In this stage the amounts needed to develop the
product, its expected sales and profits are laid down.
ii. Product Strategy needed to meet this is outlined by defining
customers, markets, competitor analysis, the competitive need for the
product etc.
iii. The next step is to understand the resources/ budget available
given the fact that several products (existing and new) may need to
be supported in the market.
iv. The product must now be evaluated for the investment needed, the
profit it is likely to generate and the risks associated with the
product.

v. The competitor’s products available in the market and likely

response from competition.

3. Some tools that are used in the analysis

In order to make decisions on the Product portfolio there are several
tools that we may use. These tools are used to understand the various
factors that are interplaying with the product and the market so as to take
decisions that will help in maximisation of profit for the company.

3.1. The BCG Matrix

The BCG Matrix or the Boston Consulting Group Matrix is a well known
method of evaluating products. This system was developed by the Boston
Consulting Group in the 1970‘s and provided for a clear and simple method
for companies to decide which part of their business to allocate resources. It
provides a useful way of screening the opportunities available, and helps
think about where we can best allocate resources to maximize profit in the
future.
 This is a good tool not only for product portfolio but also to helps
decide where to apply other finite resources: people, time and equipment.
To understand the Boston Matrix we need to understand how market share
and market growth are interrelated.
Market share is the percentage of the total market that is being serviced by
the company, measured either in revenue terms or unit volume terms. The
higher the market share, the higher the percentage of market controlled by
the company.
The Boston Matrix assumes that if the company has a high market
share it will be making profit. This assumption is based on the fact that a
higher market share will be achieved over a larger period of time and by that
time the company would have achieved its economies of scale and would
have learnt about how to make money from the product. So we have to
decide do we spend money on products that are already making money or
not or spend money on newer products that are not yet tested in the
market. In order to decide this we need to understand the second factor that
is Growth. Market Growth is used as a measure of the market’s
attractiveness. For a market
to be attractive or having high growth it must be expanding and so it will be
easier for the company to make a more profits even if their market share
remains the same. Whereas in markets where there is no or low growth the
company has to fight its competition hard in order to get sales. Sales may
be
achieved only after giving discounts thus reducing the profitability of the
company. Hence a high growth market is much more attractive than a low
growth market.

Understanding the MatrixTo understand the Boston Matrix we categorise

products into four groups along two
axes first Market Growth and Market Share. The Market share is plotted on the X-
Axis and the Market Growth on the Y-Axis.

1. Dogs: Low Market Share / Low Market Growth

If a product is in this quadrant the product has a weak market presence. In order to
make the customer notice this product it will take a lot of work and effort by the
company. Making profits will be difficult since it will not get the company
economies of scale. A larger competitor with a larger market share may be making
more profits with the same selling price because of his economies of scale reduce
his input costs and a larger sale giving him more overall profit. All this is further
complicated because the overall market growth is low and getting sales will be
highly competitive – the company will have to cut prices or provide incentives to
the customer to buy his product. In these products we may have to reinvest the
profits in order to sustain the product thus virtually making no profits

2. Cash Cows: High Market Share / Low Market Growth

The product in this quadrant is well established and because of its large sales
would be making profit. The company is in a position to consider investing money
in its growth or new products or in the company‘s star products. However one has
to be careful since the market is not expanding and the competitive scenario would
not be allowing the company to make large profits. Also the company must weigh
the consequences of adding a new product in a low growth market where it already
has a high market share because the market opportunities would be limited.

3. Stars: High Market Share / High Market Growth

In this quadrant the products have a high share of a market and are in the growth
stage of the market. These products need capital to finance their growth which
may sometimes mean spending more than what the immediate returns are but
have potential for high sales and profit. However the product is well established
with a potential to achieve much more and the company should make its best
efforts in order to achieve this.
4. Question Marks (Problem Child): Low Market Share / High Market Growth
Products in this quadrant have a low market share in a high growth market.
These products are opportunities which the company can encash. Since market
share is low the revenue generated is also low but the possibility is high due to high
growth of the market. Hence in order to convert these into Stars the company
needs to inject funds/ effort. This could be in form of an increased sales and
distribution effort, more promotion, etc.
Question Marks might become Stars and eventual Cash Cows, but if not
handled properly they could fall behind and become Dogs. These opportunities
need serious thought as to whether increased investment is needed or not.
The Limitations of the BCG Matrix:
 It assumes that a higher market share will necessarily give a higher
profit. This is not the case always. When Boeing launches a new plane it
may get a high market share but may not make a profit since large
development costs may not have been recovered.
 The BCG Matrix oversimplifies the problem where the problem is a set of
complex decisions. We should use it as a planning tool but must not be
overwhelmed by its decisions. Some market sense must be used with it.

3.2. SWOT Analysis

SWOT analysis was developed by Albert Humphrey from Stanford

University during 1960 and 1970. It is an analytical tool for auditing a
product or organization and its environment. It is the first stage of planning
and helps marketers to focus on key issues. SWOT stands for strengths,
weaknesses, opportunities, and threats. Using this tool involves specifying
the objective of the product and identifying the internal and external factors
that are favorable and unfavorable to achieve that objective.
Strengths and weaknesses are internal factors – those that are within the
control of the organisation. Opportunities and threats are external factors
which the company must take into account but does not have too much
control over.
SWOT analysis starts with the definition of the final objective to
be achieved. It therefore begins at the strategic planning stage. First, the
decision makers have to determine whether the objective is attainable,
given the SWOTs. If the objective is not attainable a different objective
must be selected and the process repeated. Identification of SWOTs are
essential at the initial stage because subsequent steps in the process of
planning for achievement of the selected objective may be derived from
the SWOTs.
 Strengths: Are attributes of the product that are helpful to achieving
the objective(s).
 Weaknesses: Are attributes of the product that are harmful to
achieving the objective(s).
 Opportunities: Are external conditions that are helpful to achieving
the objective(s).
 Threats: Are external conditions which could do damage to the
objective(s).
We can say the a company should
 Build on Strengths.
 Resolve/ remove Weaknesses
 Exploit Opportunities
 Avoid/ Minimise Threats

Figure 2: Typical elements in SWOT

When we undertake the analysis of the internal and external situation it can
produce a large amount of information. A lot of this may not be very
relevant to the product portfolio decision. The SWOT analysis serves as a
tool that helps interpret and filter to the large amount of information such
that it becomes manageable with focus on key issues. Strengths can serve
as a foundation to build a competitive advantage, and weaknesses may not
allow us to do so. By understanding these four aspects of its product, a
company can better leverage its strengths, correct its weaknesses, capitalize
on golden opportunities, and deter potentially devastating threats.

Internal Analysis:

The internal analysis is a comprehensive evaluation of the internal

environment's potential strengths and weaknesses. Factors should be
evaluated across the organization in areas such as:
 Company culture
 Company image
 Organizational structure
 Key staff
 Access to natural resources
 Position on the experience curve
 Operational efficiency
 Operational capacity
 Brand awareness
 Market share
 Financial resources
 Exclusive contracts
 Patents and trade secrets

The SWOT analysis summarizes the internal factors of the firm as a list of
strengths (positive) and weaknesses (Negative).

External Analysis:
An opportunity is the chance to introduce a new product or service that can
generate superior returns. Opportunities can arise when changes occur in
the external environment. Many of these changes can be perceived as
threats to the market position of existing products and may necessitate a
change in product specifications or the development of new products in
order for the firm to remain competitive. Changes in the external
environment may be related
to:
 Customers
 Competitors
 Market trends
 Suppliers
 Partners
 Social changes
 New technology
 Economic environment
 Political and regulatory environment

The last four items in the above list are macro-environmental variables, and
are addressed in a PEST analysis.
The SWOT analysis summarizes the external environmental factors as a list
of opportunities and threats.

In undertaking a Product analysis, the Product Committee make detailed

profiles of each competitive product focusing on their strengths and
weaknesses using the SWOT analysis. They will examine competitions
resources, competencies, positioning of the product and its
differentiation over other products in the market, they will also look at
competitions cost structure and sources of profit. This is done by analysing
documents available in public domain and the various announcements made
by competition in press or to government and factoring in the company‘s
own understanding. The Product Committee also considers how competitors
have responded in the past to industry developments. This gives them key
indications as to the possible reaction when the company introduces a new
product.

Many times the company may have to undertake a market research in order
to validate some information or assumptions being made for the product
portfolio decisions.
Some common techniques to conduct market research are:

 Qualitative market research, such as focus group

discussions
 Quantitative market research, such as statistical surveys,
customer surveys, market size analysis
 Experimental techniques such as test marketing to
understand customer tastes and preferences and the price points
at which the customer will buy
 Observational techniques such as ethnographic (on-site)
observation – this is the science that studies people, ethnic groups
and other ethnic formations, composition, resettlement, social
welfare characteristics, as well as their material and spiritual
culture.
 Product managers may also design and oversee various
environmental scanning and competitive intelligence
processes to help identify trends and inform the company's
marketing analysis.
Like any tool that is used in a complex market the SWOT analysis cannot
give a definitive answer. Its use must be tempered with the Product
Managers own wisdom. This is because at the time of making the SWOT
analysis a degree of subjectivity is introduced in the analysis. This will vary
from person to person.

Some simple rules to a successful SWOT analysis

i. Be as realistic as possible about the strengths and weaknesses
ii. Avoid grey areas as they tend to introduce subjectivity.
iii. Use SWOT to compare competitive products better or worse than our
own product.
iv. Do not over analyse or over complicate the SWOT.
v. Remember SWOT is subjective

Example of SWOT analysis for Pepsi

Strengths
 Strong core brand
 Strong market position
 Solid brand portfolio
 Strong revenue growth 84
 Economies of scale
 Cooperative and Progressive Corporate Cuture
Filtered Water instead of Spring Water makes the production, logistics, and
profit margins a lot greater on their bottled water
Weaknesses
 Concentrated in North America (US, Canada, Mexico), where almost 70%
of revenues come from
 Health Craze will hurt soft drink sales.
Opportunities
 Acquisitions & alliances
 Bottled water growth
 Hispanic growth in the US and Pepsi's ability to meet their tastes with
current product lines (i.e., Sabritas chips)
 Growth in emerging markets
 Growing consumer health consciousness - i.e., consumer focus on non
carbonated beverages like Gatorade, Aquafina, Litpon, Quaker Oats, etc
Threats
 Declining economy/recession
 Sluggish growth of carbonated drinks
 Coca-Cola & other smaller, more nimble operators
 Commodity price increases, fluctuating oil prices effect production and
distribution (gas, plastic)

3.3. Ansoffs Matrix

The Ansoff Product-Market Growth Matrix is a marketing tool developed

by Igor Ansoff in 1957. This matrix allows Product Committees to consider
ways to expand their business using current and/or new products, in
existing and/or new markets. This matrix uses a combination of Product
and Market to help define strategy. This matrix gives us four possible
combinations which help companies decide what action to take based on
what they are doing at present.

Each of these combinations gives possible strategies:

 Market penetration (existing markets, existing products): when

companies sell more of its product in the same market it means that
they are penetrating the market. A penetration strategy will lead to an
increase in the market share of the product. This is because
additional sale in an existing market is likely to come by taking the
competitors share, or making the company‘s existing customers buy
more of the product by way of promotion or advertising. Market
penetration strategy has four main objectives:
o Maintain or increase the market share of current products – this
can be achieved by a combination of competitive pricing strategies,
advertising, sales promotion
o Ensure that the company remains the main player in markets that
are growing
o In markets that have become mature and are not growing anymore
we reposition the company‘s product so that the competitor is not
able to sell and the company‘s takes over its market share. This is
not easy as it requires an aggressive marketing strategy to make the
market unattractive for competitors
o Increase usage by existing customers – for example by introducing
promotional and loyalty schemes. Amul cheese had a campaign on
using cheese spread on bread, on paratha, or just plain this gives
ideas to customers who may use it in new ways.
A market penetration marketing strategy is easier to execute since the
business is focusing on markets and products it knows well. It is likely to
have large amount of information on competitors and on customer
needs. Hence the company may not need to spend too much on new
market research.
 Product development (existing markets, new products): When a
company with a existing product launches a new product in its
existing market. These products can be similar to existing products –
eg if Colgate-Palmolive were to launch a new flavour of toothpaste. They
are already in the same business and adding new toothpaste could help
them get new customers or entice their existing customers to try the
new flavour.

The Product Development strategy may require the development of

new competencies and also requires the business to develop
modified products which can appeal to existing markets. Hence, new
product development can be a crucial business development strategy for
firms to stay competitive.
 Market development (new markets, existing products): When a
company wants to sell its existing products in new markets.
This strategy can be undertaken in several ways:
o The existing product can be sold in a completely new
geographical markets – in another state; country; territory;
channel; etc.

The same product can be repackaged or remodelled

o It can be made available in Different/ New distribution channels
o Different pricing policies to attract different customers or create
new market segments
 Diversification (new markets, new products): In this strategy the
company enters a new market with a new product. This strategy is
the riskiest of all. In order to undertake this strategy the company
must be very clear about what its objectives are and must study and
assess all opportunities and risks. Before undertaking this strategy it
must also have its risk mitigation strategy in place at the same time
of introduction of new products.
Virgin Cola, Virgin Megastores, Virgin Airlines, Virgin Telecommunications
are examples of new products created by the Virgin Group of UK, to
leverage the Virgin brand. This resulted in the company entering new
markets where it had no presence before.

The matrix shows us that risk increases the further the strategy moves
away from known quantities - the existing product and the existing
market.
Thus, product development and market extension usually involve a
greater risk than penetration and diversification generally carries the
greatest risk of all.
While penetration are usually need the same technical, financial, and
merchandising resources which are used for the original product line,
diversification usually requires new skills, new techniques, and new facilities.
As a result it almost invariably leads to physical and organizational changes
in the structure of the business which represent a distinct break with past
business experience.
For this reason, most marketing activity revolves around penetration.

4. Process for Product Portfolio Selection

Product Managers have the primary responsibility of deciding whether to
build, maintain, harvest or divest products. To do this it requires a clear
understanding of the products capabilities in the market vis-a-vis its
competitors, its ability to generate profits, sales in the short and long run.

The strategic objective of the product portfolio is to enhance value

creation for the company. In order to have the right portfolio the company
must continuously:
 Identify new market opportunities
 Must have a clear understanding of the markets and competitors in which
the products will be launched and the factors in the market that can have
an impact on the success and failure of the product.
 The company must also make and evaluation of how much sale and
profit will the product make for it and how the product fits into its
business objectives.
 If the company‘s business objectives are not fully met by the product it
must evaluate and answer how these will be made up.
 The company has therefore to work towards setting for itself priorities in
the products it needs to develop to meet its product portfolio objectives.

Thus in order to manage the product portfolio the company has to start at
the first stage that is:
1. Strategic Planning – At this stage it must evaluate how its new
products will affect its competitive position. This means will the company
stay ahead of completion or will it begin go lag or wil this new product
add a new market which the company is already strong or will it take it
to new unchartered markets.
2. Balance the Product Portfolio – At any time the company will be
evaluating and developing new products and each product has a different
need of time and money for development. However in order to generate
the right portfolio the company must ensure that it has the right balance
of investment across:
a. Products, technologies and markets (new and existing)
b. Customer segments and regions
c. Innovation Level, Project Stage, Timing and Risk
d. Business Unit
3. Focus on Research and Development – The company must
ensure that the necessary Research and Development activities needed for
development of their products has clear objectives so that the necessary
developments are ready on time for product development.
4. Continuous evaluation of New Product Development – Every
new product being developed must be evaluated at each stage of
development for them consumed, costs incurred, and ability to meet
business and financial goals. Products that do not neet the necessary
requirements must be rejected even though the company may have
spent some resources on it. This will ensure that only the best products
are finally completed and it also ensures that the company does not keep
spending money on projects that will not meet the requirements in the
end.
5. Sharing of information across the company – In order to speed
up product development we must ensure that mistakes are not repeated
and good practices are duplicated across the company. Hence knowledge
of product development must be shared across the company.

Summary
A company has a variety of customers each of whose need is a little different
from the other customer. It is therefore not possible for the company to
satisfy all customers with one product. This is possible only by a set of
products called the product portfolio. The product portfolio is also important
since every product has a life cycle and before an existing product goes into
decline or is forced into decline by a competitor the company must be able
to bring in another product to take its place and allow the company t fulfill
its business and strategic objectives.

There are several tools like the SWOT analysis, BCG matrix or the Ansoff‘s
matrix that help the product manager evaluate his product with the market,
its strength and the competitor to make a decision. However these tools can
only provide a general guidance and cannot give exact solutions since the
actual market is a highly complex one and all its variables cannot be
quantified. The marketer has ultimately has to use his knowledge and
experience to arrive at a conclusion or decision.
The marketer must be careful while using the tools since many times they
get so carried away by their own convictions that they do not evaluate
rationally the conclusions or indications of the tools.

Managing the product portfolio is an important aspect from meeting the

company‘s business objectives and so its evaluation starts with the
formation of the business objectives and thus the company has to provide
adequate financial and commitment efforts to ensure that the products
needed by the company to stay ahead of its competition are delivered by the
product development team on time and within the cost estimates helping te
company have a balanced product portfolio.

Learning Assessment I

1. What is the importance of Product Portfolio?

2. What are the steps a company should take to maintain a product
Portfolio?
3. How does using tools help us in evaluating new products for our
portfolio?

Key Words
1. Product pipeline - A product pipeline is a series of products developed
and sold by a company, ideally in different stages of their life cycle.
2. Risks associated – risks linked with a certain set of activities
3. Finite resources – limited resources. Resources that are not infinite
4. Market’s attractiveness – Measure of the profit possibilities that lie
within the structure of a particular industry or market. There are many
different factors that contribute to market attractiveness. These
include: (1) market factors such as growth rate and size of the
market; (2) economic factors such as investment potential and
industry saturation or rates of inflation affecting consumers'
purchasing power; (3) technological factors such as availability of raw
materials; (4) competitive factors including the types of rival business
and the bargaining power of suppliers; and (5) environmental factors
such as the existing regulatory climate and the degree of social
acceptance for a product within a particular market
895. Final objective – The ultimate destination.
6. Overwhelmed - To be confronted with more than one can bear or
handle. So the information received from a tool must not be taken so
literally that we go totally by it and do not use our own judgement at
all.
7. Capitalize – take advantage of any opportunities that may come along
or be noticed
8. Deter – to dissuade or discourage a person or company from
undertaking certain activity or function
9. Competitive intelligence – Information acquired about a competitor
with which it competes by the company. Competitive intelligence might
include pricing, advertising strategies, names of clients, technical
advantages and disadvantages, market strengths and weaknesses,
10. Environmental scanning – Here the environment referred to is the
business environment. Scanning means to continuously monitor this
environment for changes in customer behaviour or requirement,
competitive activities, governmental policies, etc so that the company
is at all times aware of them.
11. Degree of subjectivity – subjectivity is a decision based on a
person‘s feelings and impression and not based on facts. Hence a
degree of subjectivity is a certain amount of subjectivity. The amount
will increase or decrease with the increase or decrease in degree.
12. Definitive answer – An answer about one is sure. This type of
answer is given when one is sure of the outcome of the decision based
on the answer.
13. Risk mitigation strategy – risk mitigation is to reduce the chances
or effects of the risk. Whenever we execute a new project there is
always an element of risk which comes from how the factors that are
unknown or over which we have little or no control will affect the
project by the way they unfold or behave. The risk mitigation strategy
lays down actions to be taken if these factors unfold or behave in a
certain manner. This way the negative effect of these factors is
mitigated or reduced.
14. Continuity – something that keeps on going on. Hence if there is
continuity in a product it goes on and does not decline.

Exercises

1. Why is product portfolio management linked closely to business strategy?

2. What must the company do to ensure that new products in its portfolio
are developed on time?
3. Why is a marketers experience important in taking decisions about the
product portfolio despite having tools that can help him?
4. What is the difference between the BCG and Ansoff‘s matrix? What
factors determine which tool we should use?
5. Why should we consider the internal factors in a SWOT analysis while
developing a product since we already know them?
6. How does knowing the threats in the market help in the development of
the product portfolio?

Further Reading
1. Kotler, Philip, (1999), Marketing Management, New Delhi, India, Prentice
Hall of India, page 68-73
2. Gupta, C B Dr. And Rajan Nair, N Dr. (2009) Marketing Management, New
Delhi, India. Sultan Chand and Sons Page 7.9 – 7.14