What is a Product Portfolio?
The term“product portfolio” refers to the collection of all the products that a company deals in. A product portfolio may be broken down into different product categories, different product lines, or simply individual products. If an organization offers a wide range of products to various target markets, then it is very important that it analyzes its product portfolio so that it can achieve the organizational goal of increased sales and profits through higher market share and enhanced brand value.
Product Portfolio Classification
One of the most popularly used classifications of the product portfolio is the BCG growth-market share matrix that was developed by Boston Consulting Group’sthen CEO and Founder Mr. Bruce Doolin Henderson in the 1970s. There BCG matrix consists of two axes –the X-axis that represents the relative market share and the Y-axis that represents the expected market growth rate.
Based on the two axes, the entire matrix is divided into four quadrants, where each quadrant represents a particular stage of the product in its life cycle. The four different quadrants are – Cash cows, Stars, Question marks, and Dogs.
- Cash Cows: This quadrant represents those products that enjoy a high market share in a slowly growing market. The products in this category can generate maximum revenue because of their high market share in a market that is not growing. As such, the Cash cow products require the least amount of investment while it has the potential to give higher returns, which helps in enhancing the overall profitability of the company.
- Stars: This quadrant represents those products that have a low market share in a high growth rate market. As such, an organization faces steep competition for the products in this segment and thus it can’t afford to be complacent even when it is among one of the top few. However, if the organization can plan properly, then the Star products can potentially become the Cash cows in the longer term.
- Question Marks: This quadrant represents those products that may have a high market share in a market that is growing fast. However, it is not sure whether the market for the product will go up or down in the future. In case the product loses customer attention, it won’t be able to gain market share and the growth rate will fall and the product will eventually become a Dog. On the other hand, if the product is able to grab more customer interest to gain a higher market share, then it can potentially become a Cash cow. This uncertainty results in the dilemma of whether to invest more money into it or not as an organization is not sure if the investment will give adequate returns or end up becoming a complete waste of money.
- Dogs: This quadrant represents products that have a low market share in a slowly growing market. Hence, these products neither require higher investments nor generate high returns. Consequently, these products have an adverse impact on the overall profitability and thus it is advisable not to invest any more in products from this segment. However, sometimes companies decide to revamp these products to make them saleable again and in this way, they also increase their market share.
Product Portfolio Analysis
The process of product portfolio analysis help organizations to focus on products that operate in a fast moving market faster, while at the same time reduce investments in failing products. An organization analyzes the entire product offering to have a broad idea of how each product is performing in the markets. Based on the analysis, a clearly defined matrix can be constructed that provides useful insight into the current market position, which is then used to build future strategies.
For instance, for Apple Inc., the iPhone is the most profitable segment and it mostly drives the top-line of the company. Hence, the iPhone segment can be categorized as the Star product of the company. On the other hand, the MacBook and the iPad can be categorized as Cash cows.
How to Manage a Product Portfolio?
Product portfolio management is a very important part of any business strategy as it helps in achieving the overall objectives of the organization by planning future tactics for different product lines. Some of the strategies for the above-mentioned product categories are discussed below:
- Cash Cows: For this segment, companies just intend to retain their market share as the market isn’t growing much. They introduce customer loyalty programs and other similar promotions to ensure high customer retention.
- Stars: For this segment, companies undertake various sales promotion and advertising strategies in order to beat the high competition and increase market share. Basically, the investments are primarily focused on marketing activities.
- Question Marks: For this segment, the best strategy is to acquire new customers so that the question marks can be converted to the stars or the cash cows. Also, it is important to monitor the market to understand consumer psychology, which can be used for enhancing the market share for the products in this category.
- Dogs: For this segment, the companies may need to take the hard decision of divestment. Otherwise, they can also revamp the products in this category through rebranding, innovation, etc. Nevertheless, it is very difficult to convert the Dogs into the Stars or the Cash cows.
Key Takeaways
- The product portfolio is the ensemble of all product offerings of a company, which can be broken down into different product categories, different product lines, or simply individual products.
- Based on the relative market share and the expected market growth rate, the product offerings of a company can be divided into four categories – Cash cows, Stars, Question marks, and Dogs.
- Product portfolio analysis, as well as management, helps a company achieve its objectives of increased sales and profits.
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