PRODUCT

PORTFOLIO
CHAPTER 5
Introduction
A product portfolio is the collection of every product and service that a
business sells. A detailed analysis of this portfolio can provide insights into
the sources of company sales and profits, and growth prospects. The
portfolio may be viewed as a group of product lines, as well as a group of
individual products.

In this chapter we address this issue and suggest that even the smallest
company needs to pay careful attention to the creation of a portfolio of
products to ensure its continued survival.
 The Concept of 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 productsand the technologies
which underlie them will change.
Human progress and economic growth are the consequence of new and improved
ways of doing things being substituted for old methods and approaches. It follows
that as a result of technological innovation even the most successful of products
will become obsolescent and displaced by new and better ways of serving a
particular need.

Given that both generic strategies of cost leadership and differentiation depend on
innovation, new product and process development have become the basis for
competitive activity in all markets.
 ANSOFF'S GROWTH VECTOR
MATRIX

. In order to survive, let alone grow, the firm needs topursue simultaneously
the strategies of the following:

Market Penatration- The concept of increasing sales of existing

products into an existing market
Market development- Focuses on
selling existing products into new
markets
Product Development- Focuses on introducing new products to an existing
market

Diversification – The concept of entering a new market with

altogether new products
 It is also a well-known fact that many of the best ideas
for new products are generated by customers who
identify means of improving or changing existing
products so that they will perform better.
THE IDEA OF THE PRODUCT PORTFOLIO IS, OF COURSE, BORROWED
FROM THAT OF INVESTMENT MANAGEMENT, WHERE THE INVESTOR
SEEKS TO ACQUIRE A SELECTION OF STOCKS AND SHARES WHICH
WILL MEET HIS OR HER NEEDS. USUALLY THESE NEEDS WILL
EMBRACE A DESIRE FOR CURRENT INCOME BALANCED BY A DESIRE
FOR CAPITAL GROWTH.

THE PORTFOLIO MAY COMPRISE ANY KIND OF ASSET AND THE

PURPOSE OF PORTFOLIO ANALYSIS IS TO DETERMINE THE
COMPOSITION OF THE IDEAL OR OPTIMUM PORTFOLIO TAKING INTO
ACCOUNT BASIC PREFERENCES FOR FIX OR VARIABLE YIELDS, SHORT-
OR LONG-TERM RETURNS, ETC. IT FOLLOWS THAT THE CONSTRUCTION
OF A PRODUCT PORTFOLIO WILL DEPEND VERY MUCH UPON THE
OVERALL OBJECTIVES OF AN ORGANIZATION AND ITS ATTITUDE
TOWARDS THE BASIC TRADE-OFF BETWEEN RISK AND RETURN. ONCE
THESE HAVE BEEN ESTABLISHED IT BECOMES POSSIBLE TO DETERMINE
WHAT KINDS OF PRODUCT ARE NEEDED TO ACHIEVE THE DESIRED
BALANCE.
 Investment Management Theory is derived from the broader field
of economics in which the portfolio may comprise any kind of asset,
and the purpose of Portfolio Analysis is to determined the
composition of the ideal or optimim portfolio taking into account
basic preferences for fixed or variable yields, short - or long term.
Peter Drucker’s Harvard Business Review article ‘Managing for business
effectiveness’ (Drucker, 1963) in which he proposed that products could be classified
as falling into one of six categories:
• ‘breadwinners’ – today’s, tomorrow’s and yesterday’s
• also-rans
• failures
• in-betweens (those capable of becoming successful given appropriate action).

Drucker’s classification was based on the contribution of the product to overall

profitability. Once diagnosed, the prescription was simple – support today’s and
tomorrow’s breadwinners, ‘milk’ yesterday’s breadwinners, make up your mind on the
in-betweens, and drop the also-rans and failures.
 Wind (1982, p. 110) suggests that the following questions need to be answered to make this
decision:

1. What dimensions should be used in constructing a product portfolio?

2. What are the current 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
marketing decisions?

However, before seeking to answer these questions, Wind suggests that onemust first decide
the desired level of business analysis, the level of the market,and the time dimension of
analysis.
As to the time factor, Wind observes that most analyses of products relate to their current rather
than their future position. Given the implications of the PLC, it is obvious that one should also take
into account future trends and try to fore-cast the direction in which the product is moving – up,
stable, or down – as this will have a major bearing on one’s strategy and planning
Factors Influencing the Product portfolio

It follows that to do this effectively one must select measures for assessing the
actual or potential contribution of individual products to the portfolio.

Such measures may be objective, such as

sales,
profitability or market share
competitive strength,
perceived risk,
stage in the product life cycle.
 Sales
-Sales are most most obvious and most frequently used in measure,if for no other
reason than that actual or potential sales determine the firm’s revenue, and it is the
timing and volume of revenue related to expenditure which determines whether the
firm will succeed or fail..
-Measures of sales are also involved in computing profitability and/or market share,
either of which may be used as asurrogate for actual sales when constructing a
portfolio matrix
 Conventionally sales are recorded in terms of volume, or units sold, and value.
Ideally both should be measured as this will enable the analyst to form a view about the
shape of the demand curve and price elasticity, both of which are important inputs
when devising a competitive strategy or planning new product developments. When
measuring sales it is necessary to ensure one is comparing like with like and avoid
mixing manufacturers’, wholesalers’ and retailers’ prices, as well as making sure that
data cover the same time period.

Comparative sales data are an essential input to the computation of market share
which is one of the primary dimensions of the Boston Consulting Group’s growth–
share matrix (see below). Market share is widely cited as an important measure of
competitive performance, particularly since the publication of the PIMS (Profit
Implications of Market Strategy) study in which it was found that there was a strong
association between market share and profitability.,
.
As Wind (1982, p. 114) notes, defining a brand’s market share ‘requires the
explication of several concepts: the unit of measurement, the product definition,
the boundaries of the market and competitors; the time horizon involved, and the
nature of the denominator in the share calculation’.
Wind then devotes four pages to a discussion of these factors. It is doubtful if such
an exercise in definition and measurement would be worthwhile for most small
firms, for whom a more subjective, judgemental approach would seem more
appropriate.
In Marketing Strategy and Management (2000) Baker confines his discussion of
portfolio analysis to the BCG growth–share matrix and classifies other similar
analytical frameworks such as Shell’s Directional Policy Matrix (Shell, 1975) as a
‘strategic overview’.
This distinction is made on the basis that obtaining the kind of objective data
necessary for portfolio analysis can be both difficult and costly, in addition to
which there are many other factors top management might wish to consider when
developing a strategy which are subjective and qualitative.
 Thank
you
Prepared by: Charlene Tayros
Charlyn Dogmoc
Hanah Alonzo
Carl Andrian Sabio