Multimedia Marketing/Marketing.iso/market/chapter5.4p

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SECTION 5.4  Product Portfolio Analysis

INSTRUCTIONS Think about how a company might decide what products should make
up the product mix. Can you envision any useful guidelines for management?

EXAMPLE

A producer of metal castings for the machine tool industry has
managed to develop its product mix in a way that optimizes the
company's profit and cash flow performance. The compay has one
line that is mainly popular with large customers and has a
high growth rate in sales and a high market share. But this
line needs considerable cash to grow. This need is fulfilled
by another line, mainly popular with moderate sized customers,
that has a high market share but is not growing in sales. The
second line provides the cash that is needed for the first.
As a result, the product mix of the company is in equilibrium--
producing  adequate sales, profits, and cash.

DETAILS

Many companies who offer a variety of goods and/or services have
used a technique called "product portfolio analysis" to integrate
strategies for an entire product mix.  This procedure is based upon
the principle that if management considers all product strategies
in conjunction with one another, the company is more likely to benefit
than if individual product decisions are made independently.

This approach is analogous to the investment portfolio strategies used
by various individual investors and companies. They attempt to
maintain some balance in their investments in order to reach
diversified goals such as income and capital growth.

Investors realize that it can be a mistake to overdo any one
category. If they invest heavily in bonds they will be placing
their funds in a relatively safe place but may have little opportunity
for growth and high incomes. If they focus only on common stock they
could make great gains but they also could lose large amounts--the
risk is great. Even with mutual funds--which invest in a variety of
stocks--the risk can be substantial. Thus, intelligent investors
develop their objectives and then attempt to construct a portfolio
of targets for their money. They may end up with some combination
of stocks, bonds, certificates of deposit, real estate, and other
investments.

Marketers can use the same principles as do investors in producing
a desirable portfolio. In so doing, they can set up a product mix
that allows them to best reach their objectives.

PROBLEM 1
A book publisher is considering the use of product portfolio analysis.
This analysis is based upon the principle that:

A. All products will go through a definitive life cycle.
B. The strategies for all products should be considered together.
C. Product decisions should be based upon the behavior of rivals.
D. Product decisions should be based upon economic theory.

WORKED

A book publisher is considering the use of product portfolio analysis.
This analysis is based upon the principle that the strategies for
all products should be considered together. The idea is that weaknesses
in one kind of product may be offset by strengths of others. If the
decisions for each product are made independently, there is not
an opportunity for synergy, where the entire product mix complements
other components of the mix. This analysis, then, is aimed at
optomizing the objectives of the entire company, rather than the
objectives of each individual product.

ANSWER  B
INSTRUCTIONS Think about how a company might decide what products should make
up the product mix. Can you envision any useful guidelines for management?

EXAMPLE

A producer of metal castings for the machine tool industry has
managed to develop its product mix in a way that optimizes the
company's profit and cash flow performance. The compay has one
line that is mainly popular with large customers and has a
high growth rate in sales and a high market share. But this
line needs considerable cash to grow. This need is fulfilled
by another line, mainly popular with moderate sized customers,
that has a high market share but is not growing in sales. The
second line provides the cash that is needed for the first.
As a result, the product mix of the company is in equilibrium--
producing  adequate sales, profits, and cash.

DETAILS

A widely adopted form of portfolio analysis involves categorizing
products along two dimensions: current or expected market growth
rate and market share. Often market growth rate is stated relative
to the change in gross domestic product, providing an index that is
relative to all products and services. Another modification is to
state market share as a percentage of the firm's largest competitor,
a logical transformation because the strategies which are appropriate
for a given market share could differ, depending upon the market share
of the largest competitor.

Users of the product portfolio concept often arrange company operations
into "strategic business units (SBU's). These are divisions that offer
one or more products to a particular market and that resemble separate
firms. The truck division of a large automobile producer, for example,
is a strategic business unit.

With product portfolio analysis, the entire firm is viewed as a
portfolio of SBU's or individual products. This requires that each
SBU has a clear cut strategy and seves a well-defined segment of
the market. In turn, management should develop the strategies of the
SBU's in a manner that promotes overall company goals, resulting in
balanced growth in various products' sales and earnings and in the
overall asset mix.

Market share and market growth are, of course, interrelated. During
times of substantial market growth, consumers and intermediaries
are not locked into rigid purchase patterns and a firm can acquire
additional market share at reasonable expense. Conversely, when the
growth rate is low (as it is during later points in the product life
cycle) the firm finds it more difficult to increase market share.
Consumers and intermediaries have developed entrenched purchase
patterns and competitors can be expected to react intensely when
their market share is threatened.

PROBLEM 2

A diversified manufacturer is contemplating the breakdown of its
product mix into SBU's. Which of the following is not a guideline
for SBU's:

A. Each SBU should have a clear cut strategy.
B. Each SBU should serve a well-defined segment of the market.
C. The objective of each SBU should be to maximize its own profit.
D. SBU's should be developed so that they resemble individual firms.

WORKED

If a diversified manufacturer is contemplating the breakdown of its
product mix into SBU's, an attempt should be made to develop balance
between these entities. Instead of having each SBU try to maximize
its profits, all should work together to promote achievement of
overall company goals. This means that the SBU's should function,
in a coordinated fashion. One may supply cash for another or one may
bring in more profits,t hereby promoting the achievement of overall
company goals.

ANSWER  C

INSTRUCTIONS Think about how a company might decide what products should make
up the product mix. Can you envision any useful guidelines for management?

EXAMPLE

A producer of metal castings for the machine tool industry has
managed to develop its product mix in a way that optimizes the
company's profit and cash flow performance. The compay has one
line that is mainly popular with large customers and has a
high growth rate in sales and a high market share. But this
line needs considerable cash to grow. This need is fulfilled
by another line, mainly popular with moderate sized customers,
that has a high market share but is not growing in sales. The
second line provides the cash that is needed for the first.
As a result, the product mix of the company is in equilibrium--
producing  adequate sales, profits, and cash.

DETAILS

Breaking down SBU's (or individual products) into four categories
can provide numerous strategic prescriptions.

Those SBU's or individual products with high growth and high market
share are called "stars". These units require substantial amounts
of cash in order to maintain growth. Management can accomplish this
through invading new markets, research and development, large promotion
expenditures, and low prices. These , of course ,tend to drain cash
resources.

Units with low growth and high market share are called"cash cows".
Products in this category are profitable and tend to generate large
amounts of cash. The firm can retain its market share without
spending substantial resources. Hence, the best strategy is to
take steps to ensure that the company maintains its high market
share without taking extreme measures such as price cutting or
developing many related new products. The firm can use funds
generated from cash cows to support research, promotion, and product
development activities for other SBU's.

High growth low market share products are called "problem children".
As any parent will agree, this situation calls for substantial amounts
of cash in order to maintain the growth pattern. The firm may consider
strategies such as repositioning, product modification, or brand
extension, or might decide that the costs of maintaining problem
children are just too high and get out of the business.

Products with low growth and low market share are called "dogs".
These can pose problems for the company. They often do not generate
much in the way of cash or profits and opportunities for future
growth are limited because the markets are not growing. Given this
background, a milking or pruning strategy is probably appropriate.

PROBLEM 3

A cosmetic marketer has a SBU that has been labeled as a star. This
being the case, which strategy would be most appropriate:

A. Invading new markets.
B. Milking.
C. Pruning.
D. Repositioning

WORKED

A cosmetic manufacturer with a SBU that has been labeled as a star
would benefit from invading new markets. The SBU has been succesful
in the past, as evidenced by its high market share. This indicates
that the company has developed an effective marketing mix. A good
strategy is to search for new markets (such as overseas) where this
effective combination of ingredients will provide the company with
further success. Milking and pruning would not be recommended,
since these are mainly strategies for products that are not doing
well in the marketplace. A repositioning strategy would entail
excess risk and would amount to changing a successful marketing mix
to an untried one.

ANSWER  A
INSTRUCTIONS Think about how a company might decide what products should make
up the product mix. Can you envision any useful guidelines for management?

EXAMPLE

A producer of metal castings for the machine tool industry has
managed to develop its product mix in a way that optimizes the
company's profit and cash flow performance. The compay has one
line that is mainly popular with large customers and has a
high growth rate in sales and a high market share. But this
line needs considerable cash to grow. This need is fulfilled
by another line, mainly popular with moderate sized customers,
that has a high market share but is not growing in sales. The
second line provides the cash that is needed for the first.
As a result, the product mix of the company is in equilibrium--
producing  adequate sales, profits, and cash.

DETAILS

As with any investment portfolio, a company should strive for a
condition of balance among the various categories. If the product
portfolio is characterized primarily by dogs and problem children,
strong remedial action is required. Management should aim for a
situation where there are some products producing profits and
cash and others utilizing cash as a means of providing future
growth. Hence, cash cows and stars are desirable targets.

In some cases there are opportunities for beneficially converting a
product's status from one category to another. For instance, the
firm can use funds from cash cows to develop problem children into
stars so that when the problem childrens' growth rate slows, the
next generation of cash cows will be replaced. Management should be
on the alert for such strategic modifications.

Product portfolio analysis does not provide usable answers to all
strategic product questions. There are several problems with the
approach, including the following:

1. Classifying SBU's into the different categories is imprecise.
Standard procedures that lend themselves to all situations are
unavailable, causing measurement problems.

2. Variables other than market share and market growth are also
important to consider.

3. The focus is on internally generated and used cash. Management
should also consider other sources of cash, including the financial
markets.

4. The focus is on the short run. Long run considerations should
also be evaluated.

While there are weaknesses, the major advantage of the approach is
that it stresses achieving a balance among all of a company's
products. In this sense, product portfolio analysis forces management
to integrate its efforts.

PROBLEM 4

A desirable strategy for a producer of infants' toys is to:

A. Use funds generated from dogs to build other dogs into problem
   children.
B. Convert problem children into dogs through market segmentation
   strategies.
C. Use funds from cash cows to develop problem children into stars.
D. Use funds from stars to convert dogs into cash cows.

WORKED

A desirable strategy for a producer of infant's toys is to use funds
from cash cows to develop problem children into stars. Problem
children have low market share. This can be remedied by increasing
promotion expenditures, reducing prices, product development, and
other means. The best source of these funds is cash cows, because
they tend to be cash generators. If the problem children can be
converted into stars, the firm will have a source of profits for future
periods.

ANSWER  C