Chapter 5 Product portfolios - Krishna Unadkat , MEFGI

1. Chapter 5 Product portfolios - Krishna Unadkat, MEFGI

2. Agenda • The concept of product portfolios • Assessing the contribution of individual products • Boston Consulting Groups (BCG’s)growth-share matrix • Criticisms of portfolio analysis • Shell’s directional policy matrix

3. Product Portfolios In order to survive firms need to practice three strategies simultaneously – market penetration, market development, and product development. While the single product firm may enjoy a long life cycle, ultimately it will go out of business if it doesn’t innovate. Ideally, the firm should have a portfolio of products each at a different stage of its life cycle.

4. The BCG growth-share matrix • The BCG matrix, or Boston Box, was developed by • Bruce Henderson from his observation that increased • experience led to lower manufacturing costs. • Factors: • The learning curve • Specialization of labour • Process Innovations • New Materials • Product Standardization • Product Re-design

5. The growth-share matrix Market share High Low 2 1 High Market growth 3 4 Low

6. The Boston box Relative competitive position High Low Star Questionmark High Annual market growth rate Cashcow Dog Low

7. Criticisms of the Boston Box The major weakness of the Boston Box is the implicit assumption that firms compete at the product category or industry level, e.g. cars, detergents, in pursuit of a cost leadership strategy. But, only one or a small number of firms can use size (market share) as a competitive advantage. Accordingly, the majority of firms compete through a strategyof product differentiation so as to create a monopoly over that segment of the market represented by their loyal customers, i.e. they compete at the individual product level. Under these conditions the concept of ‘market’ share is irrelevant.

8. The Box as an analytical device • While it is difficult to use the Boston Box as a tactical planning tool, it is an important device at the strategic level: • It reinforces the inevitability of change implicit in the product life cycle (PLC) concept. • It underlines the importance of having a portfolio of products at different stages of their life cycles. • It requires formal consideration of the competition and their relative standing. • It is intuitively appealing and simple to implement conceptually.

9. Shell’s Directional Policy Matrix (DPM) The DPM is one of several models developed to aidstrategic analysis of markets. It is based on two key parameters: * The Company’s Competitive Capabilities * The Prospects for Sector Profitability These parameters are usually established by means of a conventional SWOT analysis and marketing audit. Each parameter is divided into three categories.

10. Prospects for sector profitability The directional policy matrix Average Attractive Unattractive Weak Company’s competitive capabilities Average Strong

11. Business sector prospects • These are evaluated using the criteria most appropriate • to the markets involved. Among the more important are: • Growth potential • Profit potential • Nature and degree of competition • Threat of new entrants • Threat of new substitutes

12. Company’s competitive capabilities • These are derived from the analysis of strengthsand weaknesses and include such factors as: • Current market share • Patent or trademark ownership • ‘Know how’ – implicit knowledge • Reputation

13. Strategic Indications Prospects for sector profitability Average Attractive Unattractive Disinvest 9 Phased withdrawal6Custodial Double orquit 3 Weak Try harder 2 Phasedwithdrawal8 Custodial5growth Company’s competitive capabilities Average Cashgeneration 7 Leader1 Growth4leader Strong

14. GSM andDPMcombined Weak Strong Star Leader Question mark Double or quit Attractive Cash cow Cash generation Dog Disinvest Unattractive