Slide 5.

Chapter 5

Product portfolios

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.2

The Concept of the Product

Portfolio
• Technological innovation
• New product and process development
• Acceleration in the substitution of new products
for old
• Shortening of PLC
• First priority is to maintain and grow one’s
customer franchise
• Develop a range of portfolio of products

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.3

In order to survive firms need to practice three strategies

simultaneously – market penetration, market
development, and product development.

While the single product firm may enjoy a long life cycle,
ultimately it will go out of business if it doesn’t innovate.

Ideally, the firm should have a portfolio of products each at

a different stage of its life cycle.

Factors influencing the product portfolio

- Objective : sales, profitability or market share
- Subjective : competitive strength, perceived risk or
stage in the PLC

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.4

The BCG Growth-Share Matrix

• Developed by Bruce Henderson : the founder
of Boston Consulting Group (BCG)
• Also known as Boston Box
• Increased experience led to lower
manufacturing costs
• Increase competitiveness and market share
• Relationship between cost and volume

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.5

• Cost exceed prices when a product is first

introduced
• Increase in experience : costs fall below
prices
• In growth phase
– Stable markets : cost efficiencies are
paralleled by price reductions
– Unstable markets : demand outstrips supply
and sellers are able to command higher
margins
• Shake-out will occur as suppliers cut prices to
hold on to their share of the market

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.6

• Survival of the fittest : removal of excess

capacity
• Sales volume = market share
• Evolution of BCG growth-share matrix

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.7

The growth-share matrix

Market share
High Low

High 2 1

Market
growth

Low 3 4

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.8

• Quadrant 1 : product being introduced has low

market share, hence its success is a question
mark
• Quadrant 2 : successful product with high
market share in a rapidly growing market is a
star
• Quadrant 3 : established player in a mature
market, survived the shake-out and is benefiting
from experience, so it has become cash cow
• Quadrant 4 : decline phase, no market growth
and low share, lacks cost advantages, it is a dog

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.9

Relative competitive position

High Low

High Star Question

mark
Annual
market
growth
rate
Cash Dog
Low cow

The Boston box

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.10

• Cash flow position

– New products : negative cash flow
– Rapid growth phase : marginally negative or neutral
– Maturity : positive
– Decline : in balance or negative
• Cash-dog : to manage products in the decline
phase so that they may also be cash positive
• Surpluses from cash cows to be reinvested in
question marks and stars to ensure their future
success
• Balanced portfolio and appropriate strategies

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.11

Criticisms of the Boston Box

The major weakness of the Boston Box is the implicit assumption
that firms compete at the product category or industry level, e.g.
cars, detergents, in pursuit of a cost leadership strategy. But,
only one or a small number of firms can use size (market share)
as a competitive advantage.

Accordingly, the majority of firms compete through a strategy

of product differentiation so as to create a monopoly over that
segment of the market represented by their loyal customers, i.e.
they compete at the individual product level. Under these
conditions the concept of ‘market’ share is irrelevant.

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.12

The Box as an analytical device

While it is difficult to use the Boston Box as a tactical
planning tool, it is an important device at the strategic level:

1. It reinforces the inevitability of change implicit in the product

life cycle (PLC) concept.
2. It underlines the importance of having a portfolio of products
at different stages of their life cycles.
3. It requires formal consideration of the competition and their
relative standing.
4. It is intuitively appealing and simple to implement conceptually.

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.13

Shell’s Directional Policy Matrix (DPM)

The DPM is one of several models developed to aid
strategic analysis of markets.

It is based on two key parameters:

* The Company’s Competitive Capabilities
* The Prospects for Sector Profitability

These parameters are usually established by four

main criteria
1.Market growth rate
2.Market quality
3.Industry feedback situation
4.Environmental aspects

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.14

The directional policy matrix

Prospects for sector profitability
Unattractive Average Attractive
Company’s competitive capabilities

Weak

Average

Strong

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.15

Business sector prospects

These are evaluated using the criteria most appropriate
to the markets involved. Among the more important are:

• Nature and degree of competition

• Threat of new entrants

• Threat of new substitutes

• Bargaining power of suppliers

• Bargaining power of customers

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.16

Company’s competitive capabilities

• Market position

• Production capability

• Product research and development

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.17

Strategic Indications
Prospects for sector profitability
Unattractive Average Attractive
Company’s competitive capabilities

Phased
Disinvest Double or
withdrawal
Weak quit
9 6
Custodial 3

Phased Custodial Try harder

Average
withdrawal 5 2
8 growth

Cash Growth
generation Leader
Strong 4
1
7 leader

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.18

• Leader where major resources are focused on the SBU.

• Try harder might be vulnerable over longer periods of
time, but OK now.
• Double or quit gamble on potential SBUs for the future.
• Growth grow the market by focusing some resources
here.
• Custodial like a cash cow, milk it and do not commit
more resources.
• Cash generation milk for expansion elsewhere.
• Phased withdrawal move cash to SBUs with greater
potential.
• Divest liquidate or move these assets on as fast as
possible.

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.19

Criticism of Shell’s DPM

• Regularity implied in the rectangular format of a
matrix rarely exists in real life
• Boundaries between one position and another
are likely to be ‘fuzzy’
• Recommended strategy may be infeasible or
inappropriate
• Cannot be used as a planning device

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.20

GSM and DPM combined

Strong Weak

Star Question mark

Attractive

Leader Double or quit

Cash cow Dog

Unattractive

Cash generation Disinvest

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.21

QUESTIONS ??

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007
Slide 5.22

THANK YOU

Michael Baker and Susan Hart, Product Strategy and Management, 2nd Edition, © Pearson Education Limited 2007