Unit J.07 – Product Portfolio Management

What you’ll learn to do: explain product portfolio management and how it relates to the organization’s marketing strategy and tactics

Our last example showed the importance of marketing a diverse set of products and using new products to gain strategic advantage. Defining and managing this collection of products is called product portfolio management.

Think of an artist’s portfolio. The artist will use her portfolio to display a range of work. She will try to select works that showcase her strengths in different areas so that someone reviewing her portfolio can see the range of different things she can do well.

Similarly, a product portfolio requires diversity in order to be effective. In this module we will talk about what the product portfolio is and how a marketer can use the power of a product portfolio to achieve marketing objectives.

The specific things you’ll learn in this section include:

• Define the product portfolio and explain its use in marketing
• Identify marketing strategies and tactics used to achieve portfolio objectives
• Explain why new products are crucial to an organization’s success

The Product Portfolio

Throughout this course we have discussed a number of ways that organizations market products successfully. How does an organization decide which products to offer? When should a company add new products, and when should it discontinue existing ones? Product portfolio management answers these questions.

Organizing for Effective Product Marketing

Before we dive into the product portfolio it is important to understand how products are organized in most businesses.

Typically, organizations group like products into product lines, and then group lines of business targeting a common set of customers into something called strategic business units (SBUs).

A product line is a group of products marketed by an organization to one general market. The products have some characteristics, customers, and uses in common, and may also share technologies, distribution channels, prices, services, etc. There are often product lines within product lines.^[1]

Before we take a look at an example, let’s review some definitions within product organizations:

• A product is a bundle of attributes (features, functions, benefits, and uses) that a person receives in an exchange. In essence, the term “product” refers to anything offered by a firm to provide customer satisfaction—tangible or intangible. Thus, a product may be an idea (recycling) , a physical good (a pair of jeans), a service (banking), or any combination of the three.
  • An example of a product is Tylenol pain reliever.
• A product line is a group of products marketed by an organization to one general market. The products have some characteristics, customers, and/or uses in common, and may also share technologies, distribution channels, prices, services, etc. There are often product lines within product lines.
  • An example of a product line is the full range of Tylenol products, or over-the-counter medicines.
• A strategic business unit or SBU is a self-contained planning unit for which discrete business strategies can be developed.
  • An example of a strategic business unit is consumer health care products.

Managing the Product Portfolio

The goal of product portfolio management is to ensure that the company’s investment in products meets objectives. In order to do this, portfolio management must understand the needs and contributions of the products and allocate resources across product lines and SBUs to optimize their market performance.

Analyzing SBU Performance

Should Johnson & Johnson invest equally in all of its SBUs and product lines? The table below shows Johnson & Johnson’s 2014 financial results.^[2]

SBU	2014 revenue	Revenue growth from 2013	% profit	Research and Development spending
Consumer health care	$14.5 billion	1%	13.4%	$629 million
Medical devices	$27.5 billion	1.6%	28.9%	$1.7 billion
Prescription products	$32.3 billion	16.5%	36.2%	$6.2 billion

You can see that Johnson & Johnson is spending ten times more on research and development (R&D) for prescription products than for consumer health care products. Given the higher growth rates and profit margins for prescription products, this looks like a good decision.

Within the SBUs, managers also make important decisions about where to invest. For example, in 2013, the lowest-growth product line in medical devices was diagnostics, which decreased by 8.9 percent from 2012 to 2013. In 2014, Johnson & Johnson sold a major diagnostic product from that product line to another company for $4 billion. This eliminated a product that was not contributing to the portfolio objectives, and it generated new capital that could be invested in higher-growth product lines.

The examples here demonstrate a simple review of SBU performance, but companies can also perform a deep analysis of an SBU and product performance in order to understand past performance and identify future growth opportunities.

Analyzing Market Opportunities

Beyond the internal performance data, portfolio analysis considers broader market factors. In the marketing planning module, we discussed the Boston Consulting Group’s growth-share matrix, which is a tool to used analyze the product portfolio. You’ll recall that this model considers the attractiveness of the market by studying the growth potential in the market, and it includes company performance by showing the product’s current market share. These are both important factors to consider in determining the future growth opportunities.

In its annual report, Johnson & Johnson shared the following information with investors about its largest prescription-drug product line:

Immunology products achieved sales of $10.2 billion in 2014, representing an increase of 10.9 percent as compared to the prior year. The increased sales of STELARA® (ustekinumab) and SIMPONI® /SIMPONI ARIA® (golimumab) were primarily due to market growth and market share gains. REMICADE® (infliximab) growth was primarily due to market growth.

A very simplistic analysis of this information suggests that Stelara and Simponi are stars (high market growth and high market share) while Remicade is a question mark. It is benefiting from market growth but is not achieving gains in market share.

Knowing about the product life cycle is also important to understanding market growth. During the introduction phase, the market growth rate is low, and the longer-term potential is unknown. As the market moves into the growth phase, it moves up the market growth axis and creates opportunities for products that are gaining market share and becoming stars. Those that don’t perform well in gaining market share will become question marks. As the market moves into maturity and decline, the market growth moves back down the axis and products will become either cash cows or dogs.

If we add the data from the iPod product life cycle to the growth-share matrix, as shown above, we can see how Apple’s products might be analyzed. In the growth-share matrix, the size of product sphere is determined by the total sales. Obviously, this diagram is not perfectly sized, but it gives a picture of the way in which product life cycle can be used to inform product portfolio management.

Achieving Portfolio Objectives

In our discussion of the product life cycle, we saw that competition generally increases as more competitors are drawn to high-growth markets. As more brands enter the marketplace and lock into a particular share of the market, it becomes more difficult to win and hold buyers. Apart from these competitive factors, other market factors can shift, too. For example:

• Changes in consumer tastes
• Changes in the size and characteristics of particular market segments
• Changes in availability or cost of raw materials and other production or marketing components

Internally, a company might have a proliferation of small-share brands that were introduced to address market opportunities but never saw significant growth. This can reduce efficiencies in production, marketing, and servicing for existing brands.

In product portfolio management there is an assumption that a company has an existing set of products. The number may be small or large, but each brand, product, and product line has an impact on the external market view of the others and on the internal resources available to the others. For this reason, portfolio management requires marketers to consider each product individually but also understand the way the products fit together collectively.

In order to optimize the product portfolio, marketers may change the marketing mix for a product, change a product line, delete products, or introduce new products.

Marketing Mix Strategies

When a product is introduced, it’s not locked down forever. Marketers continually gather market data about products so they can refine the product and its position in the marketplace.

Product Modification

It is normal for a product to be changed several times during its life. Certainly, a product should be equal or superior to those of principal competitors. If a change can provide superior satisfaction and win more initial buyers and switchers from other brands, then a change is probably warranted.

However, the decision to make a significant product change introduces risk and cannot be approached in a haphazard manner. First, the marketer must answer the question “What specific attributes of the product and competing products are perceived to be most important by the target customer?” Factors such as quality, features, price, services, design, packaging, and warranty may all be determinants. Each change introduces the risk that it may not align with customer needs. For example, a dramatic increase in product quality might drive the price too high for the existing target consumer, or it might cause him to perceive the product differently and unfavorably. Similarly, the removal of a particular product feature might be the one characteristic that’s regarded as most important by a market segment.

The product modification decision can only be made if the marketer has a strong understanding of the target customer. What new information is the marketer learning about the buyer persona? Perhaps additional market research is needed to understand the improvements buyers want, to evaluate the market reception of competitors’ products, and evaluate improvements that have been developed within the company. In determining product improvements, sales teams and distributors can provide valuable information. Sales is likely to hear objections from target customers or learn the reasons why they are choosing not to buy. Distributors often deal with a range of products in a category and provide helpful insights into what is tipping the purchase process toward a competitor’s product.

Repositioning

In an earlier module we discussed product positioning, which requires finding the right marketing mix for a product in order to distinguish it from competitors and give it a unique position in the market. As competitors’ offerings and customer preferences change, marketing may need to make a significant change to the marketing mix to reposition the product. This involves changing the market’s perceptions of a product or brand so that the product or brand can compete more effectively in its present market or in other market segments.

For example, since its heyday in the late seventies and early eighties, Cadillac sales have dropped by more than 50 percent as the Cadillac customer base aged. In order to restore sales, General Motors is trying to redefine the Cadillac product and brand for a new generation of consumers. This is a dramatic example in which a substantial change is needed. Product repositioning can also involve a very subtle change, such as updating the packaging or tweaking the pricing approach, but it is an important way to shift perceptions as market factors change.

Product-Line Decisions

A product line can contain one product or hundreds of products. The number of products in a product line refer to its depth, while the number of separate product lines owned by a company is the product line width.

There are two overarching strategies that deal with product line coverage. With a full-line strategy the company will attempt to carry every conceivable product needed and wanted by the target customer. Few full-line manufacturers attempt to provide items for every conceivable market niche. Instead, they provide many products for a particular market segment.

Companies that employ a limited-line strategy will carry selected items. Limited-line manufacturers will add an item if the demand is great enough, but they make that decision based on the market opportunity for the product rather than on a desire to meet all customer needs with their product line.

Line-Extension Strategies

A line-extension strategy involves adding new products under an already established and well-known brand name. The objective is to serve different customer needs or market segments while taking advantage of the widespread name recognition of the original brand.^[3]

When Frito-Lay added Dinamita Mojo Criollo Flavored Rolled Tortilla Chips to its Doritos line, that was an example line-extension strategy. Frito-Lay is able to take advantage of a strong brand with existing shelf space and add a new product that has an appeal to shoppers seeking a spicier snack than the traditional nacho cheese flavor. Similarly, Clinique provides high-end skin care products and has extended its line to provide anti-acne products.

Generally, line-extension strategies are lower risk because they introduce a product change but are able to take advantage of other proven elements of the marketing mix. Still, there is a risk of cannibalizing the market for existing products or, if the product is not well received, damaging the brand. Also there a danger in overextending the product line by offering so many products that consumers can’t find unique value, and company resources get stretched across many, low-volume products.

Line-Filling Strategies

Line-filling strategies involve increasing the number of products in an existing product line to take advantage of marketplace gaps and to reduce competition. Many businesses use line filling to round out an already well-established product line and to help increase the market success of new related products.^[4]

Before considering such a strategy several key questions should be answered:

• Can the new product support itself?
• Will it cannibalize existing products?
• Will existing outlets be willing to stock it?
• Will competitors fill the gap if we do not?
• What will happen if we do not act?

Assuming that a company decides to fill out the product line further, there are several ways of going about it. The following three are most common:

1. Product proliferation: the introduction of new varieties of the initial product or products that are similar (e.g., a ketchup manufacturer introduces hickory-flavored and pizza-flavored barbecue sauces and a special hot dog sauce).
2. Brand extension: strong brand preference allows the company to introduce the related product under the brand umbrella (e.g. Jell-O introduces pie filling and diet desserts under the Jell-O brand name).
3. Private branding: producing and distributing a related product under the brand of a distributor or other producers (e.g., Firestone producing a less expensive tire for Costco).

In addition to the demand from consumers or pressure from competitors, there are other legitimate reasons to engage in these tactics. First, the additional products may have a greater appeal and serve a greater customer base than did the original product. Second, the additional product or brand can create excitement both for the manufacturer and distributor. Third, shelf space taken by the new product means it cannot be used by competitors. Finally, the danger of the original product becoming outmoded is hedged. Yet, there is serious risk that must be considered as well: unless there are markets for the proliferations that will expand the brand’s share, the newer forms will cannibalize the original product and depress profits.

Product Deletion

Eventually a product reaches the end of its life. There are several reasons for deleting a mature product. First, when a product is losing money, it is a prime deletion candidate. In regard to this indication, it is important to make sure that the loss is truly attributable to the product. If the product appears not to be profitable when it is actually covering costs of other products, then deleting the product could negatively impact other products in the portfolio.

Second, there are times when a company with a long product line can benefit if the weakest of these products is dropped. This thinning of the line is referred to as product-line simplification. Product overpopulation spreads a company’s productive, financial, and marketing resources very thin. Moreover, an excess of products in the line, some of which serve overlapping markets, not only creates internal competition among the company’s own products but also creates confusion in the minds of consumers. Consequently, a company may apply several criteria to all its products and delete those that are faring worst.

A third reason for deleting a product is that problem products absorb too much management attention. Many of the costs incurred by weak products are indirect: management time, inventory costs, promotion expenses, decline of company reputation, and so forth.

Missed-opportunity costs constitute the final reason for product deletion. Even if a mature product is making a profit contribution and its indirect cost consequences are recognized and considered justifiable, the company might still be better off without the product. Each product requires focus and resources that are not available to grow other products or create new ones.

New Products in the Portfolio

Factors Influencing the Pace of Product Development

New-product introductions are an important component of the product portfolio. This has always been the case, but there have been a number of changes since 2000 that have increased the pace of new-product development and, with it, the importance of new products in the portfolio.

The Internet has fundamentally changed the way that we think about new products. We could devote an entire course to exploring and substantiating this statement, but for our purposes here, we’ll concentrate on the following notable developments:

1. The Internet increases our ability to find new products. In the past, if a local store carried version 3.0 of any product, a buyer could consider the attributes of version 3.0 and make a purchase decision. Today, the buyer may enter the store, but she’s more likely to know the improvements incorporated in version 4.0 and the new features expected in version 5.0.
2. The Internet supports real-time comparisons of competitive products, including their features and users’ experience with the products.
3. The Internet enables new products and services that have changed expectations for service delivery.
4. The Internet enables customers to recommend new products and experiences to others.

In addition to these Internet-related developments, there are many new tools, technologies, and methodologies that are speeding the pace of new product development. For example, software development frameworks make it possible to launch, test, and refine a new Web-based service in a fraction of the time that it required in the past. A new retail offering that, in the past, would have required a team of programmers to bring to market can be launched on Etsy today in less than an hour.

New products have never been faster and easier to launch.

New Products Bring Risk

Still, new products are risky. In the strategic opportunity matrix section we reviewed a number of strategies that include new and existing products. Why is it important to consider whether the product and/or market is new in this strategic context? Current products in current markets are known, and new products and new markets are not known.

In this section we have discussed a couple of examples of new products in the context of company strategies. Apple launched five major iPod models in six years, and then followed them with a total of twenty different versions of those models. Perhaps most interesting, Apple launched three different iPod models—the Classic, the Mini, and the Shuffle—before it saw significant sales growth.

The Johnson & Johnson medical practices unit launched more than fifty new products between 2012 and 2014 but has seen only a 0.5 percent increase in sales during that period. With the 2014 sale of a diagnostics product that was showing declining sales numbers, the SBU is better poised to show growth in its 2015 sales numbers.

Both of these examples show that new products do not guarantee new sales, and they certainly don’t guarantee immediate success.

Role of New Products in the Portfolio

New products bring greater risk to the product portfolio but also greater potential reward. The goal of portfolio management is to balance risk in order to create strong performance today and in the future. Though new products can drain resources in the short run, they are positioned to generate new sales in the long run—and to take off when other products are entering stages of maturity and decline.

The early investment in multiple new iPod models that were not growing quickly created a future base for the growth of the iPod. That, in turn, generated returns and positioned the Apple brand for the development and release of the iPhone. Johnson & Johnson’s medical products division has aggressively invested in new products that can spur growth and divested from products with declining sales. Still, in the first three quarters of 2015, overall growth for the division is down. It is not yet clear whether the new products will generate enough growth to replace the growth of their predecessors.^[5]

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