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SRIBATSA PATTANAYAK ------------------------------------------------------------------------------------------------------
A product portfolio is the range of the products a firm produces. A single product firm is vulnerable to external forces, because all risks are centered on a single product & if that product fails to succeed in the competitive environment, then not only the product vanishes from the market; the company is too subject to die. Therefore there must be a range of products, so that risks are spread over various products & the company can withstand if it faces any tough competition. So those products need to be developed & firms need to have a sensible portfolio of products, which are at varying stages at the product life cycle.
Product portfolio management:
Managing the product portfolio of a firm is very much necessary in order to survive in this highly competitive market. There are various strategies adopted while managing the product portfolio, those are: 1. Filling in the product line: Filling the product line means adding more items within the present product range. Generally line filling is done for under given purposes. Reaching for incremental profits Trying to utilize excess capacity. Trying to offer the full line of the product. 2. Product modernization: It focuses on either upgrading the entire product line or modernizing specific products within the line in order to spark new consumer interest in the product or entire product line. 3. Product featuring: A strategy in which certain items in a product line are given special promotional attention, either to boost interest at the lower end or to boost image at upper end. 4. Product pruning: It means reducing the depth of a product line by deleting or eliminating less profitable offerings in a particular product category.
Product portfolio analysis:
Product portfolio analysis means a systematic evaluation or assessment of a company’s products. There are 2 variables which are frequently used in systematic assessment of a company’s product, those are: MARKET ATTRACTIVENESS: (INCLUDES MARKET GROWTH RATE) & BUSINESS STRENGTH: (INCLUDES RELATIVE MARKET SHARE)
Methods of product portfolio analysis:
Generally there are 4 types of product portfolio analysis: 1. BCG matrix 2. Ansoff matrix 3. SWOT analysis 4. GE matrix 1. BOSTON CONSULTING GROUP ANALYSIS: The BCG MATRIX is a portfolio planning model developed by Bruce Henderson of the BOSTON CONSULTING GROUP in the early 1970s. The BCG MATRIX method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. It provides a graphical representation for n organization to examine different business units in its portfolio, on the basis of their relative market share & industry growth rate. To ensure long term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and lowgrowth products that generate a lot of cash. It has 2 dimensions: market share & market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product’s market grows the better it is for the company.
It is based on the observation that, a company’s business units (SBU’S) can be classified under 4 categories based on the combinations of market share & market growth relative to the largest competitor. Hence it is also called The GROWTH-SHARE MATRIX. Here in the above diagram the market share serves as a proxy for competitive advantage, while the market growth serves as a proxy for industry attractiveness. The growth-share matrix thus maps the business unit positions within these 2 important determinants of profitability. The framework assumes that, an increase in the relative market share will result in an increase in the generation of cash, which will help in the cost advantage of the firm. A second assumption is that, growing market requires investment in assets to increase capacity & therefore results in the consumption of cash. The BCG matrix intend to say that, the cash required by the growing business units could be obtained from the firm’s other business units, that were at a more mature stage & generating sufficient cash. The 4 cell of the BCG matrix have been termed as STARS, CASH-COWS, QUESTION MARKS & DOGS. Let’s elaborate them: STARS (HIGH GROWTH + HIGH MARKET SHARE): STARS are high growth high market share businesses, which may be or may not be self sufficient in terms of cash flow. They generate large amount of cash because of their strong relative market share, but at the same time they require large amounts of cash too, because of their high growth rate. If a STAR can maintain its large market share, it will become a cash-cow as soon as its market growth rate declines. A diversified company should always have STARS in its portfolio that will become the next cash-cow & ensure future cash generation CASH-COWS (LOW GROWTH + HIGH MARKET SHARE): CASH-COWS are businesses which generate large amounts of cash, but their growth rate is slow. In terms of PRODUCT LIFE CYCLE (PLC), these are generally mature businesses which are reaping the benefits.
The cash generated by the CASH-COWS are re-invested in STARS & QUESTION MARKS. It provides cash to cover the administrative costs of the company, to fund R&D, to service the corporate debt & to pay the dividends to its share holders. QUESTION MARKS (HIGH GROWTH + LOW MARKET SHARE): Businesses with high growth rate but low market share for a company are termed as “QUESTION MARKS” or “PROBLEM CHILDREN”. They require a large amount of cash to maintain or grow market share. QUESTION MARKS are usually new products or services which have a good commercial potential. If the QUESTION MARKS don’t succeed in becoming the market leader, then perhaps after years of cash consumption it will degenerate into a DOG as soon as its market growth starts declining. Again the QUESTION MARKS have the potential to gain market & become a STAR & eventually a CASH-COW, when the market growth becomes slow. The QUESTION MARKS therefore should be & must be analyzed carefully in order to determine whether they are worthy for investment, which is required to gain market share. DOGS (LOW GROWTH + LOW MARKET SHARE): Those businesses which are related to slow growth industries & where the company has a low relative market share are termed as DOGS. They neither generate cash, nor require large amount of cash. In terms of the PLC as shown above, the DOGS are usually products in late maturity or at declining stages. Therefore companies should try to avoid & minimize the number of DOGS in company, beware of expensive “turn around plans” & deliver cash, otherwise they should liquidate. Here investments are just like throwing stones in darkness in a hope that it will hit the target. STRATEGIES FOR DIFFERENT POSITIONS IN THE BCG MATRIX: POSITION STARS: CASH-COWS: QUESTION MARKS: STRATEGY HOLD: TO KEEP THE ORGANISATION IN ITS PRESENT POSITION. HARVEST: REDUCING INVESTMENT & MAXIMIZING CASHFLOWS. INVEST / BUILD SHARE: TO INVEST MORE IN ORDER TO INCREASE MARKET SHARE. DIVEST: TO AVOID ANY FURHER INVESTMENT & IF POSSIBLE TO
2. ANSOFFS MATRIX: In order to find out alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm’s present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible productmarket combinations. The ansoff growth matrix is a tool that helps businesses decides their product & market growth strategy.
Ansoff’s matrix provides four different growth strategies: 1. Market Penetration – the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. 2. Market Development – the firm seeks growth by targeting its existing products to new market segments. 3. Product Development – the firms develops new products targeted to its existing market segments. 4. Diversification – the firm grows by diversifying into new businesses by developing new products for new markets. MARKET PENETRATION:
It has 4 main objectives: To, increase market share. To, secure dominance in growth market. To, restructure a mature market by driving out competitors. To, increase usage by existing consumers. MARKET DEVELOPMENT: It is needed when there are certain conditions as: It’s a new geographical market. It’s a new distribution channel. There are new product dimensions or packaging. There are different pricing policies to attract different customers. PRODUCT DEVELOPMENT: This strategy requires the business to develop modified products in existing market. PRODUCT DIVERSIFICATION: This involves more risk as here is a new market where there is a little or no experience, so to adopt this strategy, the firm must have a clear idea about what it expects to gain from strategy as well as an honest assessment of risks. 3. SWOT ANALYSIS: It is a listing of strengths & weaknesses as well as opportunities & threats of the current & future states of an organization. The SWOT analysis provides information that is helpful in matching firm’s internal environment with external competitive environment in which it operates.
S-O STRATEGIES: It emphasizes on using of strengths of a firm to exploit newer opportunities. W-O STRATEGIES: It emphasizes on overcoming weaknesses of a firm by taking advantage of available newer opportunities. S-T STRATEGIES: It emphasizes on using of strengths of a firm to avoid any kind of threats of competitors or other business environmental forces. W-T STRATEGIES: It emphasizes on minimization of a firms weaknesses & avoiding any kind of business environmental threats. 4. GE MATRIX: It was developed by McKinley & company in 1970s.It is rated in terms of market alternativeness & business strength. It is an enlarged and sophisticated version of The BCG analysis. Here market attractiveness replaces relative market growth & business strength replaces relative market share.
The GE matrix is plotted on a graph, where the vertical axis represents the market/industry attractiveness & the horizontal axis represents business strength as shown in the above picture. Here in the graph there are 3 colored areas, i.e. green, red & white, which mentions that products or SBUs of a firm/company can fall in any part of this colored graph. GREEN: Here market attractiveness & business strength starts from moderate to high. So here it is suggested for the firms to invest in the product or SBUs falling in this area. The strategy applied here is “GO AHEAD” with major investments. RED: It is just the opposite of the green area. Here the market attractiveness & business strength starts from moderate to low. Here the firms are suggested either to harvest by discouraging any further investment or to divest. The strategy applicable here is “STOP” with disinvestment or liquidation. WHITE: It falls in between green & red colored areas; here the market attractiveness as well as the business strength is in moderate areas. Here in this type of situation firms are advised to follow “WAIT & SEE” strategy &whether to invest or divest by selectivity & measuring the opportunities & threats.
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