Strategic Marketing

Product portfolio management

A product portfolio comprises of all products that an organization maintains. To be successful, an organization should maintain a portfolio of products in different market shares and with different growth rates. It comprises different categories of products, product categories, and different product lines. Management is required on all three levels of the product portfolio. Managers can manage individual products, product lines, and top level management to manage the complete portfolio. The portfolio composition is a function of the balance between cash flows. High growth products need cash inputs to grow. On the other hand, low growth products should produce excess cash. Both types of products are required simultaneously. Product portfolio management focuses on customer success over product success. Since most of your products target the same customers, product management can adopt a common view of the customer organization from the top down.

Product portfolio management is critical to an organization because it helps in the achievement of critical goals. First, it helps maximize the value of products. Different products contribute to the company’s bottom line differently. Management of product portfolio would maximize the level of contribution of each product. Secondly, it helps identify the optimal product mix (Ioana et al., 2009). A portfolio that spans multiple product categories, market segments and technologies helps shield the business from marketplace changes. Investing the returns from a category of products into another category of products helps stabilize the organization’s returns over time.  Thirdly, it ensures internal strategic alignment. The organization’s success is in jeopardy if the product portfolio fails to support the broader business objectives, priorities, and strategies both today and in the immediate future. Product management also helps in the proper allocation of resources. Organizations have limited financial and human resources. Investing in the right products has a direct and considerable impact on profitability.   This paper explores the concept of product portfolio management, using appropriate marketing models and industry examples.

Models

Effective product portfolio management involves the use of various analytical models. The models specifically position an organization’s products within two dimensions: one representing the attractiveness of a product while the other the competitive strength of a product. The purpose is to product differences in terms of cash flow potential, growth potential, and relative market share. The differences indicate the best investment opportunity, which can generate investment funds and those that should be continue.

There are various types of analytical models that are used by marketing managers. While most were developed to help conglomerates manage several business units, but the same principles apply to product portfolio management.

The most common models include

•    BCG Growth-Share Matrix

•    A. D. Little Business Profile Matrix

•    McKinsey Market Attractiveness (Martinsuo, 2013)

BCG Growth Matrix has widespread acceptance due to its proven value and relative simplicity. The BCG matrix presents three elements of information for each product. The first element is the product sales volume that is represented by the diameter of the product circle. The higher the volume of products, the bigger the circle. The second element is the market growth rate. The market growth rate is represented by the product circle’s position on the vertical axis. Market growth rate represents the attractive nature of the market segment in which the product is competing. The growth rate is arrived at by subtracting market segment sales of the previous year from market segment sales for the current year and the amount divided by market segment sales for the previous year.

 BCG matrix (Martinsuo, 2013)

The BCG matrix is characterized by four quadrants labeled as Cash Cow, Star, Dog and Question Mark.  Each of the quadrants is classified according to cash flow, sales growth opportunities and market share(Martinsuo, 2013).

Stars

Stars are considered to be high growth products with high market share. Stars are significantly attractive because the product holds a strong position and the industry is robust.  They require heavy investment to maintain and grow. This means that the cash flow is often modest.  

Cash cows

Cash cows are high share slow growth products. Products in this quadrant are a key source of cash and are usually core to the overall organization.  Cash cows are in a mature market but maintain a strong competitive position.  Mature markets are neither growing nor declining.  Cash cows generate funds for other products since they generate more cash than they require (Stark, 2015).

Question Marks

Question marks quadrant contains low-share high-growth products. Low market share often gives weak cash flows and low profits given that it grows faster than the product. New products are often fall under this category and may need considerable investments to increase market share. Those products considered question marks yet they have been in the market for some time, are likely to be disinvested(Martinsuo, 2013).

Dogs

The quadrant contains products that are low share and low growth. Dogs do not generate substantial amounts of cash. Additionally, they do not require considerable amounts of cash in investments. Their low profitability is associated with low market share. Only a modest cash investment is required in maintaining market share. Older products in older markets typically fall into this quadrant and are often candidates for disinvestment. New products in a new market may be an exception. They may move from dogs, to stars or question marks.  Hence, each quadrant has its unique characteristics (Martinsuo, 2013).

Quadrant	Profits	Required investment	Net cash flow
Star	High	High	Modest
Cash Cow	High	Low	High
Question Mark	None or Negative	Very high or  disinvest	Very negative or barely positive
Dog	Low or Negative	Disinvest	Positive

 BCG matrix (Martinsuo, 2013)

Once each product is incorporated into the matrix, the current and future product portfolio strategies may be assessed. BCG recommends different strategies based on the quadrant that the product falls.

Quadrant	Strategy
Star	Hold or invest
Cash Cow	Hold
Question Mark	Invest or disinvest
Dog	Hold or disinvest

 BCG matrix (Martinsuo, 2013)

 When applying the product portfolio matrix to a company’s, managers require maintaining a balanced portfolio with enough stars and question marks.  The healthily balanced portfolio with enough stars and question marks has the potential to become a cash cow.  The manager also requires sufficient cash cows that generate the expected business profit at a reasonably low cost and are therefore able to help finance the development of new products, stars and question marks. Additionally, business managers would like to minimize the number of pets which incur a cost but deliver only little benefits. The quadrants of the portfolio matrix form an interesting relationship (Chao & Kavadias, 2008). They start out as a question mark and may develop into stars and then develop into cash cows. Both development steps require time, effort and money.  The organization may have to enhance or change the user experience, features, and architecture of the product and possibly adjust the business model for different sales and marketing strategies. Some products need a pivot. For example the case of Flickr, which began as an online game before it turned into a photo-sharing website and Youtube which began as a dating website.

Once a product becomes a cash cow, it can offer the desired business benefits at relatively low cost when existing features are mainly incrementally improved. A cash cow is most profitable because it is a revenue generating product. Eventually, cash cows become pets as they lose their ability to provide business benefits. These products generate a few benefits and consume funds to maintain them (Chao & Kavadias, 2008).  Since every successful product eventually becomes a pet and dies, it is critical that the business is able to replace stars with question marks and aging cash cows with stars. In the same way, money must be invested enough in new product development projects to create new question marks specifically when the business grows organically.  Therefore, portfolio management should be a common activity as the product portfolio requires regular adjustments.  As a rule of thumb, product portfolio should be reviewed once per quarter, and necessary changes initiated (Martinsuo, 2013).

Industry examples General Motors and Google Inc

General Motors

General Motors has been facing a problem in the management of its product portfolio. The firm’s portfolio is made up of portfolios of divisions, different brands within divisions, different models within brands and diverse variations within models. The company serves different market segments. The corporate portfolio is characterized by a considerable loss of market focus that has been happening at each level of the portfolio. As a result, the General Motors has experienced continuous cash losses over several years (Tang, 2009). The organization has a product portfolio of over one hundred automobiles. To underscore the significance of the company’s market focus problem, the company often launches new models of vehicles.

The company has too many brands as well as many variations amongst brands that create a perilous situation. Building an offering for every segment in the market has been a problem that many companies have faced in the recent past.  While there is a need for more cash flow by companies, an offering for every market segment may not make sense in the long-run. Organizations have established the benefit of market focus and as global corporate managers realize the importance of market planning and critical strategies in making or breaking a company (Olson & Mathias 2010). General Motors is a better example of the importance of market focus which has been distressed due to a complete loss of market focus in its product portfolio.  General Motor’s failures have had a cascading impact on a range of stakeholders. The ten years have been financially devastating for General Motors.  Highly market-focused competitors like Honda and Toyota have had solid net cash flows while General Motors has lost its market focus across different portfolio levels in the firm. The company’s financial metrics have focused on market share and revenue as compared to creating positive net cash flow. The existing corporate, multi-level, cross-portfolio market focuses has a negative impact on the capacity of the business to produce positive net cash flow.

The solution to General Motor’s problems lies in market focus. Market focus is the capacity of concerned parties to focus constantly with expertise, the portfolio market opportunities, critical cash and other resources of the organization that can generate and increase long-term, positive net cash flow. The decision is often to make tough choices of the portfolio that have the best market returns. It also means exiting market segments where it is difficult to create positive net cash flow. There are numerous examples of firms whose strategic planning and market processes are highly market-focused. Such include Wal-Mart, Toyota, General Electric, Sony, Honda, and Microsoft. All of these firms are known to drive market focus toward opportunities where there are higher cash flows and wide buyer choice.

These firms also share the ability to quickly exit markets that do not create high, long-run net cash flow. A critical characteristic of market focus for firms is their ability to deal with market and economic downturns such as that recently experienced.  A market focus would allow a General Motors to focus its critical resources to support high cash-flow opportunities. The company can withdraw resources in declining markets and move away from operating businesses that do not generate positive cash flow (Boe et al., 2009).  For example, Toyota historically high degree of market focus has left the firm with high cash reserves despite declining car sales. On the other hand, General Motors had a little cash to deal with the downturn due to a legacy of annual cash losses in high-growth. Similar to other management concepts, market focus and its implications cash flow and corporate portfolio is a simple concept. However, it is also considered extremely difficult to attain and sustain. It is important that the management culture of a firm does embrace, understand and practice continuously. General Motors represents such a firm.

A market-focused strategy is aimed at creating and sustaining high and growing cash flow in the long term. Over the last few years, the firm has recorded negative cash flow. As a consequence, the firm’s cash requirements have grown to the point where it has required external support to survive. While it is true that other companies in the auto industry have also experienced cash-flow difficulties, their high levels of market focus have paid off by reducing their cash losses and producing reasonable cash flow (Buss et al., 2014).  Similar to other large corporations, General Motors has complex and enormous interconnected, multi-level product portfolio.  A BCG matrix would help in formulating critical strategies to guide the company’s successful turnaround that would lead to positive cash flow car and increased market segment shares.

Google Inc

Google Inc pursues the generic business level strategy of differentiation.  The company offers many unique products and services to many a wide range of customers. The differentiation strategy has enabled Google to attain a competitive advantage.  This strategy also involves operating in a broad market scope. The company’s most popular service, Google web search engine offers users a more reliable way to search. The web search engine has differentiated itself from other search engines by making use of a patented system known as PageRank. The system delivers search inquiries by calculating a recursive score of web pages based on the weighted sum of the ranks of the pages linked. Hence, a user can access relevant web pages based search interest rather than on the frequency of appearance of search terms. This is different from how competing search engines work. The company keeps updating its PageRank algorithm to ensure the optimal search results possible.  Google’s internet-search-driven advertising is another of Google’s products that support its differentiation strategy. Google AdWords is used by advertisers who desire to reach a competent audience as efficiently as possible. What differentiates the product from competitors’ products is easiness in creating ad text and managing online advertising accounts with no huge upfront fee required. In addition, the ads appear across the company’s increasing list of partners. Advertisers can effectively target customers’ located in a particular geographical location (Parnell, 2006).

Google has benefited from its differentiation business strategy a number of ways. Apart from the company’s products being the most preferred by customers, it has developed customer loyalty.  Google’s web search engine accounts for more than 66% of global internet searches. Its simplicity and reliable in producing search results make it the most preferred search engine.

Google’s web indexing system called Caffeine is another of the company’s products that differentiate it from its competitors. The product provides 50% fresher results for web searcher compared to the previous index.  In addition, Google Instant is a product that provides predictions, reduces the time needed for the search and more dynamic results. The option was used by Bing.  However, Google’s product reduces the search time needed much less than Bing. Ultimately, the product impacted the price of AdWords and paid search engine campaign which was previously higher than competitors.

The generic strategy is the most important to the long-term success of the firm. It is a good choice that is directly related to the nature of the business as well as the characteristics of its industry. Google’s generic strategy is an overarching influence on what the firm does. Through its generic strategy, Google has become a major player in the industry influencing the development of industries as well as the competitive landscape. Its strategy also involves developing particular unique capabilities that make the company competitive. The uniqueness of its products sets the company apart from competitors. The uniqueness is achieved since Google is highly innovative in the technology field. The increasing range of its products, including Google Search, Google Glass, and Google Fiber is a manifestation of the innovativeness under the generic strategy.

Application of Product portfolio management

A generic strategy in portfolio management should result in a large market segment, high market segment share, low variable costs, attractive competitive prices, low fixed costs, high unit margins, and low investments negative cash flows. To create market segment share, each level of the product portfolio should support, create and sustain market share and customer choice.  If each level of the portfolio does not effectively support customer choice, turnaround strategy should be taken as a quick action. Resources can also be reallocated to pursue another strategy, sell or exit the situation or shut the initiative down. The strategy means that each product in the portfolio should result in high market share in the segments in which it competes. Businesses should not retain portfolios that sell in small numbers or those that compete in considerably small, specialized market segments. Additionally, every product should create and increase long-run net cash flow as high market shares of specific segments are not adequate to support a market-focused firm.

 BCG matrix

In the case of General Motors, the first step would be to identify stars, question marks, cash cow, and dogs.  Purple Star products in the star category are likely to begin maturing, hence experiencing a slower growth rate. The star products should increase the market share at the expense of the competitors. So the strategy here is to hold with the expectation that it will become a Cash Cow. The cash cow products are not expected to decline or grow in future. The strategy here is to hold and make use of the cash flow to develop or enhance other worthy products. Question Mark products are expected to perform well in a fast expanding market. The strategy to employ is to invest more funds and achieve more market share throughout the growth period. While the strategy may result in negative cash flow, the robust cash cow product will ensure that the portfolio’s cash flow remains negative. The green question mark and dog products should be disinvested.

Conclusion

When a business identifies the combination of product strategies that maximize the value of the entire portfolio, financial and human resources can then more clearly identified and be invested in each product. Matrix analysis has been employed as an invaluable starting point. However, the final product portfolio management decisions and strategy must incorporate other market insights such as best-guess market predictions, competitive strengths and weaknesses and customer trends.  Acquiring the information required to conduct product portfolio management is not often easy, but the process is essentially critical. Managers can make well-informed assumptions to close information gaps. However, the assumptions must be tracked over time and adjusted accordingly.

References

Boe, H., Ketler, D., O’Keefe, N., Rubenstein, A., & Siverio, J. (2009). General Motors and the Auto Industry: A Strategic Analysis. Management, 450, 5.

Buss, R., Croteau, H., Davidson, S., Kerrey, C., Van De Winkle, J., & Gladwin, T. (2014). The Sustainability Business Case for General Motors.

Chao, R. O., & Kavadias, S. (2008). A theoretical framework for managing the new product development portfolio: When and how to use strategic buckets. Management Science, 54(5), 907-921.

Ioana, A., Mirea, V., & Bălescu, C. (2009). Analysis of service quality management in the materials industry using the bcg matrix method. Amfiteatru Economic Review, 11(26), 270-276.

Killen, C. P., Jugdev, K., Drouin, N., & Petit, Y. (2012). Advancing project and portfolio management research: Applying strategic management theories. International Journal of Project Management, 30(5), 525-538.

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in urgent custom research papers. If you need a similar paper you can place your order from nursing school papers services.