Portfolio Analysis
chapter two
PORTFOLIO ANALYSIS
INTRODUCTION Organizations market a mix of products or services or both. These constitute the offering that is made through the strategic window. Central to the success or failure of a business is the health of its product (or service) mix. A starting point is the product life cycle concept. This is a useful conceptual framework within which to study how firms can vary their marketing strategies—though of course as we shall see in later chapters they do have to take other factors into account. There seems to be little doubt, however, that at different stages in the product life cycle certain marketing strategies seem to be more appropriate than others. The life cycle concept also points to the different earning patterns of products or services at various points in time. It indicates that it is necessary to have a balanced portfolio of products services in terms of cash generating capabilities in order to ensure steady-sales and profits at all times. Since products will generate different cash flows and profits over their lives it means that the firm has to constantly review its product mix, prune its product lines and introduce new products from time to time in order to maintain long-run profits and stay in business. Examining the nature of the product life cycle concept acts as a good introduction to product portfolio models. Several product portfolio models, perhaps the best known of which are the BCG (Boston Consulting Group) matrix, the GE/McKinsey matrix, and the Directional Policy matrix have been adopted by marketers to aid them assess the health of a firm’s product
22
PORTFOLIO ANALYSIS
mix. This chapter examines the use and limitations of such models. Portfolio models are useful diagnostic tools but more formal and detailed planning mechanisms are required to evolve and evaluate detailed strategies. Consideration of the product life cycle and the various portfolio models is essential when examining the
PORTFOLIO ANALYSIS
INTRODUCTION Organizations market a mix of products or services or both. These constitute the offering that is made through the strategic window. Central to the success or failure of a business is the health of its product (or service) mix. A starting point is the product life cycle concept. This is a useful conceptual framework within which to study how firms can vary their marketing strategies—though of course as we shall see in later chapters they do have to take other factors into account. There seems to be little doubt, however, that at different stages in the product life cycle certain marketing strategies seem to be more appropriate than others. The life cycle concept also points to the different earning patterns of products or services at various points in time. It indicates that it is necessary to have a balanced portfolio of products services in terms of cash generating capabilities in order to ensure steady-sales and profits at all times. Since products will generate different cash flows and profits over their lives it means that the firm has to constantly review its product mix, prune its product lines and introduce new products from time to time in order to maintain long-run profits and stay in business. Examining the nature of the product life cycle concept acts as a good introduction to product portfolio models. Several product portfolio models, perhaps the best known of which are the BCG (Boston Consulting Group) matrix, the GE/McKinsey matrix, and the Directional Policy matrix have been adopted by marketers to aid them assess the health of a firm’s product
22
PORTFOLIO ANALYSIS
mix. This chapter examines the use and limitations of such models. Portfolio models are useful diagnostic tools but more formal and detailed planning mechanisms are required to evolve and evaluate detailed strategies. Consideration of the product life cycle and the various portfolio models is essential when examining the