The desirability of a portfolio or range of different products is implicit in the concept of the offer (or product) life cycle which emphasises that, ultimately, all products will change.
As a result of technological and or social innovation even the most successful of products will become effectively redundant
Given that the generic strategies of cost leadership and differentiation depend on innovation, new product and process development have become the basis for competitive activity in all kinds of markets.
In order to survive, let alone grow, many firms need to pursue simultaneously the strategies of market penetration (selling more of the existing product to existing users), market development (finding new customers in new geographic regions with similar needs to one’s existing customers) and product development (improving and changing the product both to keep up with the changing wants of one’s existing customers and to attract new customers whose needs were not satisfied by the original product). (Refer to Ansoff’s Growth Vector Matrix)
There is a rule of thumb in marketing which states that it costs five to six times as much money to create a customer as it does to keep one. It is for this reason that in recent years the emphasis in marketing has moved away from the transaction to the relationship. The tendency for customers – individual and organisational -to prefer to repeat purchase from a known and proven source of supply may amount to satisficing behaviour but that is the way most of us behave. In the absence of any compelling evidence to the contrary, why would one want to change one’s behaviour provided it yields satisfactory results? 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.
It seems reasonable to assert that the first priority is to maintain and grow one’s customer franchise. From this it follows that one must accept that, ultimately, a customers’ first loyalty is to themselves, their families and organisations so that if someone else can offer them better value for their investment (greater satisfaction) then they will switch to the new source of supply. To avoid this one must anticipate the customers’ needs and to do so requires that the organisation develop a range or portfolio of products designed to match changing needs and situations.
The idea of the product portfolio is 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 construction of a product portfolio will depend very much upon the overall objectives of a firm 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.
One of the earlier contributions to the idea of developing a portfolio of products was 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 the following categories:
‘breadwinners’ – today’s, tomorrow’s and yesterday’s
- 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,
- drop the also-rans and failures.
Given that one is able to measure the required criterion value (could be profitability and/or growth, and/or market share, etc), this classification is relatively simple. The difficult decision is balancing the portfolio to achieve the overall objective(s). Wind (1982,) suggests that the following questions need to be answered to make this decision:
What dimensions should be used in constructing a product portfolio?
- What are the current approaches to portfolio management and how do they differ from each other?
- 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 one must first decide the desired level of business analysis, the level of the market and the time dimension of analysis.
Level of business analysis
The level of business analysis will depend very much upon the extent of the firm’s existing portfolio.
For many small organisations there will be only a single line, though there may be variants within it at different stages of their life cycle conforming with Drucker’s classification.
Larger firms may have two or more distinct lines while the largest strategic business units will have multiple product lines. Irrespective of the number of product lines, the individual product line constitutes the basic unit of analysis and a clear understanding of each is fundamental to any higher-order level of comparative strategic analysis.