Slide 5.1 Chapter 5 Product portfolios - Krishna Unadkat, MEFGI Slide 5.2 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 Slide 5.3 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. Slide 5.4 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 Slide 5.5 The growth-share matrix Market share High High Low 2 1 3 4 Market growth Low Slide 5.6 Relative competitive position High High Low Star Question mark Cash cow Dog Annual market growth rate Low THE BOSTON BOX Slide 5.7 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 strategy of 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. Slide 5.8 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: 1. It reinforces the inevitability of change implicit in the product life cycle (PLC) concept. 2. It underlines the importance of having a portfolio of products at different stages of their life cycles. 3. It requires formal consideration of the competition and their relative standing. 4. It is intuitively appealing and simple to implement conceptually. Slide 5.9 Shell’s Directional Policy Matrix (DPM) The DPM is one of several models developed to aid strategic 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. Slide 5.10 The directional policy matrix PROSPECTS FOR SECTOR PROFITABILITY Company’s competitive capabilities Unattractive Weak Average Strong Average Attractive Slide 5.11 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 Slide 5.12 Company’s competitive capabilities These are derived from the analysis of strengths and weaknesses and include such factors as: • Current market share • Patent or trademark ownership • ‘Know how’ – implicit knowledge • Reputation Slide 5.13 Strategic Indications Prospects for sector profitability Company’s competitive capabilities Unattractive Weak Average Strong Average Attractive Disinvest 9 Phased withdrawal 6 Custodial Double or quit 3 Phased withdrawal 8 Custodial 5 growth Try harder 2 Cash generation 7 Growth 4 leader Leader 1 Slide 5.14 GSM and DPM combined Strong Weak Star Question mark Leader Double or quit Cash cow Dog Cash generation Disinvest Attractive Unattractive