Product Portfolio Planning

Product Portfolio Planning

• The logical first step in marketing strategy is selection of markets in which to compete.

• This requires- Appraisal of company’s ability to meet a

potential market’s requirements

Market Selection and Direction

• Market selection can’t be separated from broad corporate strategy issue of what business the company should be in.

Ex: “Automotive supply business” and “shock absorber original equipment market”

Choice of “Market direction”- Should a company build, hold or shrink its position in a given market

4

Marketing Management Build

Increase market share Works well for question

marks

Hold Preserve market share Good for cash cow

Harvest Increases short-term

cash flow Good for weak cash

cows, question marks and dogs

Divest Sell or liquidate Good for dogs and

question marks

Analyzing the Current Business Portfolio

Portfolio planning

• Designed to help a company make a decision on market selection and direction in an integrated manner for all its business. ( What about a business?)

• Decision on resource allocation

Product

Market

Present

New

Present

Market Penetration

Market Development

New

Product Development

Diversification

Ansoff’s Matrix

Portfolio planning for multiproduct companies

• Particularly complex problem• Some divide the organization into profit

centers, independent planning unit• BCG describes this suboptimizing ???

Words of wisdom

“A multidivision company without an overall strategy is not even as good as the sum of its parts. It is merely a portfolio of nonliquid, nontradeable investments which has added overhead and constraints. Such closed-end investments properly sell at a discount from the sum of the parts.” ( Henderson, BCG)

Portfolio planning approach

• A multi divisional, multi product company can channelise resources to most productive units, an option not available to undiversified companies.

• An integrated planning at corporate level• Slow growth of paperboard division and invest more in

minicomputers ( example)

• May impair the performance of a particular division

BCG approach

• Differs in its method of assigning roles to products, divisions and integrating these roles into a portfolio strategy

• Roles based on cash flow potential and growth relative to competition

General Assumptions

• Key characteristics on which products and markets can be meaningfully compared- for example, a 15 % share of one market can be weighed against a 10 % share of another market

• The key characteristics are systematically related to performance measures such as profitability and cash flow. Thus there are certain “laws of market place”.

Assumptions ( Contd..)• It is necessary to invest in a product to

achieve these desirable characteristics• Companies are limited in the amount they

can invest, because both financial and managerial resources are finite

• The portfolio can be internally subsidized• Portfolio planning leads to better overall

performance than if investment decisions on each product were made independently.

Specific assumptions for BCG matrix

• If the company is market leader, it can fix the prices and other competitors follow it

• If the company has higher cumulative production, the cost of production goes down

• Technological superiority or advantage may reduce the cost of production

Two Dimensions for BCG Matrix

• Market (Industry) Growth ( higher/less than 10 %)

• Relative Market Share (higher/less than 1)

10%

20%

Fig: A Typical Product Portfolio Chart of a Comparatively Strong and Diversified Company

Product Market Growth Rate

Relative Market Share

4.0 2.0 1.0 0.5 0.25

Competitor Market Share Relative Share

A 50% 2.0

B 25 0.5

C 10 0.2

Relative Market Share (RMS)

Fig : Categories in the Product Portfolio Chart

High

Low

High Low

Modest Positive or Negative Cash Flow

Large Negative

Cash Flow

Large Positive

Cash Flow

Modest Positive or Negative Cash Flow

?

$ DOG

Cash Generation

(Market Share)

Cash Use

(Growth Rate)

PDT MKT SHARE

MKT SHARE OF LARGEST

COMPETITOR

IND. GROWTH

RMS.

A 20% 10% 20% 2B 10% 20% 15% .5C 30% 10% 6% 3D 5% 20% 4% .25

Investment

Possible Movements

A Hypothetical Case

STAR(HI, HP)

A

QUESTION MARKS(HI, LP)

B

(LI, HP)C

CASH COW

(LP, LI)D

DOG

> 10%

< 10%

> 1 < 1RMS

BCG (GROWTH – SHARE ) MATRIX

IND GROWTH

Product Dynamics in the Portfolio Chart

STAR(HI, HP) AAmul Butter

QUESTION MARKS(HI, LP)

B

Amul Butter(LI, HP)

CCASH COW

(LP, LI)D

DOG

> 10%

< 10%

> 1 < 1RMS

BCG (GROWTH – SHARE ) MATRIX

IND GROWTH

STAR(HI, HP)

A

QUESTION MARKS(HI, LP)

B Amul Frozen Pizza

(LI, HP)C

CASH COW

(LP, LI)D

DOG Frozen Pizza

> 10%

< 10%

> 1 < 1RMS

BCG (GROWTH – SHARE ) MATRIX

IND GROWTH

STAR(HI, HP)

A

QUESTION MARKS(HI, LP)

B

(LI, HP)C

CASH COW

(LP, LI)Dettol

DOG

> 10%

< 10%

> 1 < 1RMS

BCG (GROWTH – SHARE ) MATRIX

IND GROWTH

General principles (BCG)

1. Margins and cash generated depend on the market share. Experience curve effects link high margins with high market share."

2. Product sales growth requires cash input to finance added capacity, working capital, and other needs. Thus, participation in a growing market requires cash input if market share is to be maintained.

General principles (BCG)

3. An increase in market share requires cash input to finance increased advertising expenditures, additional plant, and cost-reducing equipment.

4. Growth in each market will ultimately slow as the product approaches maturity. Cash generated as growth slows must be reinvested in other, still-growing products.

Limitations of BCG Matrix

• Static or Dynamic Framework ?• Cash Flow/generation as a criteria! Any

better criteria available? • Reliance on two single factors !

???

Growth-Gain Matrix

Any better!

Two Dimensions for Growth-Gain Matrix

• Industry Growth• Company Growth

What do you say?

IND GROWTH COMPANY GROWTH5%5%5%

5% ( ON DIAGONAL)6% (BELOW DIAGONAL)4% (ABOVE DIAGONAL)

Hypothetical Case for Growth Gain Matrix

6

5

4

4 5 6 10

(5,5)

10

IND GROWTH

CASH COW DOG CASH COW

DOG

STAR

STAR

GROWTH OF COMPANY(PDT / BRAND)

GROWTH GAIN MATRIX

Competitive Analysis of the Product Portfolio

1. Internal balance2. Trends. 3. Competitive evaluation. 4. Industry position. 5. Financial balance

INDUSTRY ATTRACTIVENESS

NU

SIN

ES

S S

TRE

NG

THS

Invest/grow

Selectivity / earning

Harvest/divest

High Medium Low

Hig

hM

ediu

mLo

w

• Size

•Growth

• Share

•Position

•Profitability

•Margins

•Technology position

•Strength/weaknesses

•Image

•Pollution

•People

• Size

• Market growth, pricing

• Market diversity

• Competitive structure

• Industry profitability

• Technical role

• Social

• Environment

• Legal

• Human

GE / McKinsey Business Assessment Array

This is more flexible and comprehensive Problems in application:

1. For each business, the various factors that contribute to industry attractiveness and business strength must be identified.

2. The direction and form of each of these relationshipshas to be determined

3. Some scheme, whether explicit or implicit, has to be used to weight the contributing factors in each composite dimension. One issue is whether the same weights are used for different businesses (or products) within the same company.

Portfolio Strategy and Maximum Sustainable Growth

Some Application Considerations