Product portfolio management
The product portfolio is represented by the product variety that a company offers on the market. The portfolio analysis proceeds from the assumption that different product categories bring the company different levels of sales and profits, that might sustain the results of other products.
It is a well known fact that most of the companies follow the 20/80 rule that says that 80% of the profits are generated by 20% of the products. Analyzing the product portfolio is crucial in taking the best strategic decisions, depending on the future perspectives each product category offers. For this analysis there are several models, the most used are those from Boston Consulting Group company.
BCG model
The BCG model has been created by the Boston Consulting Group and it has two variants(BCG1 and BCG2).
The first model, BCG1 was designed in 1970, according to the American economy conditions at that time, defined by dynamism and high stability of production techniques. The model is best suited for big companies, that can become market leaders for some products, but can also be applied to smaller companies that focus on becoming leaders of a market segment.
BCG1 is a matrix with 4 cells, analyzing 3 variables:
- Relative market share
- Market growth
- Cash cows – the company is market leader on the product's market segment. The market is at the maturity stage, with low increases. The sales are extensive, they generate profits that support other product categories from company's portfolio.
- Stars – Products that are in the growing stage and the company holds the market leader position. The products are still sustained by the company, so the profits are not very high. They are reinvested in technologies, promotion, staff. The products can become cash cows as the market starts the maturity stage.
- Question marks – the company is not the market leader but the market is growing. These products absorb financial resources because they need to be sustained for sales increases, the products being in initiation stage or beginning of growth stage. These products pose question marks for the decision makers: whether or not to keep offering them on the market, analyzing if the products can outface the competition.
- Dogs - products that are in the maturity or decline stage, on whose market the company holds a small market share. They can still generate profits, in this case, will be kept for a short period or can not generate profit anymore and the company adopts a abandonment strategy.
The second variant - BCG2 appeared in 1980 as an answer to the new economic environment defined by increasing competition. This new model allows a more flexible approach because it's not focused anymore on strict bordering of the products in the four matrix cells.
It is also designed as a 4 cell matrix built around two variables:
- Competitive advantage
- Competitive differentiation
Besides bordering the products in four categories, the BCG2 matrix offers strategies for the company to adopt:
- Volume strategy – suitable for a company with strong competitive advantage but low competitive differentiation opportunities. Such a company can increase the offer volume, obtaining high profits with low costs, as o consequence of economies of scale.
- Differentiation strategy – when company's competitive advantage is high an the differentiation opportunities are also available. In this case, the company must approach different market segments with different products and adopt volume strategies on each segment.
- Niche strategy – is suitable for companies that don't hold a strong competitive advantage, but their products can be differentiated from the competitors'. The company must focus on a certain customer segment, preferably not covered by the competitors, and offer them specific products. This segment can be enlarged as the company gains competitive advantages.
- Dilemma – when the competitive advantages and differentiation opportunities are both low. The company can adopt a maintaining strategy for a short period of time if the products generate reasonable profits or a abandonment strategy if the products don't offer any more development perspectives.