Product Portfolio and Product Life Cycle
The principle of strategic marketing has great underlying importance within organizations and to the entire society. According to Stark (2015), marketing strategies usually result from a peculiar meticulous analysis of the market, which forces entrepreneurs to be familiar with all aspects that it can use to position itself in the market to garner more sales volume. Gmelin and Seuring (2014) defined marketing strategy as the process through which a firm identifies sustainable competitive advantages in the market it is serving then allocating appropriate resources to exploit it to the maximum. This business essay uses the practical market example to explore the concept of the product portfolio and product lifecycle management (Edgett, 2012).
Hollensen (2015) asserted that in the modern business setting, most organizations are offering a wide range of products and services (product portfolio) as part of their strategic marketing plans. He further explained that the advantage of offering more than one type of service and product is that the firm has opportunity to manage the product portfolio so that they are not all in the same phase in their life cycle. When products and services are evenly spread across the life cycle, the firm can manage the efficient use of both human resource and cash (Hollensen, 2015). The essay adopts real world situation to explain the concept of the product portfolio and outline its benefits as well as practical application in the soft drink industry.
In modern business, companies are accustomed to selling different types of products and services designed for different types of clients and markets – this practice of issuing different types of products and service is known as product portfolio. For example in the soft drink industry, the coca cola company is applying the concept of product portfolio where it produce several types of drinks namely coke, Fanta, sprite and others. Also in the automobile industry, the Toyota motors limited is producing a wide range of vehicles to suit different clients in the market. Archibald and Archibald (2015) argued that the essence of product portfolio is that within it each product or service makes different contributions to the firm’s bottom line. For instance, as explained by Archibald and Archibald (2015), some items within the product portfolio are increasing the firm’s market share, while other are losing it at a faster rate, some are costly to produce while others are less costly, and some items bring in greater marketing expenses while others bring more revenues to the firm.
The product portfolio contribute differently to the firm’s bottom line, thus, allowing the company to manage every item in the product portfolio independently so that they are not all in the same phase in their life cycle in order to achieve efficient use of both cash and human capital. According to Hellweg and Canals (2014), managing product portfolio is all about analyzing the overall consumer behaviors in the market with a primary goal of determining mechanism of expanding new products as well as improving profitability to removing the underperforming ones. When a firm offers a broader range of portfolio product, it is able to get more opportunities to capture consumers who have different tastes and needs by offering them more choices (Cooper, 2001). The coca cola company has used this approach successfully and it has helped them increase sale to double figures within the past years.
Unlike a company that maintains a single product, a key decision for any company who maintains product portfolio is the technique and process of allocating investment to product or service being offered. Lofsten (2014) asserted that to maximize profitability, firms make this decision based on the respective market share and market growth rate of each product they offer in the market. There are three major aspects of product portfolio to consider namely (1) different product lines, (2) different product categories, and (3) the individual products: all the three levels of product portfolio require management because they are focused on one goal, which is the betterment and profitability of the firm (Dunne & Dunne, 2011).
In a portfolio, products are classified using the principle of Boston Matrix. The Boston Matrix classification method is based on two aspects namely the level of growth rate and the market share of all the products offered by the firm – it recognizes that every product offered by the firm may have different growth rate as well as different market share thus performing and contributing differently to the company. As explained by Lapasinskaite and Boguslauskas (2015), based on its growth rate and market share, a product manager decides the level of investment that should be given to each particular product in order to achieve the desired results. The number and type of products that a company has determines its strength and position in the market. This argument essentially makes the portfolio management very important in the business field because it leads to better firms with planned goals and optimal allocation of resources (Jugend & Leoni, 2015).
Boston Matrix is a model that is widely used in the business field to analyze portfolios and brands. When a firm owns a wide range of products, managing them becomes problematic because the firm must decide how to allocate its investments within the portfolio in terms of promotion, product development and so on. Boston Group Consulting Matrix (BGC) model helps firms to manage their product portfolio and decide how to allocate the investments (Gmelin & Seuring, 2014). The matrix categorizes products into four different groups namely (1) stars, (2) cash cows, (3) question marks, and lastly (4) dogs, all of which are grouped based on the level of market share and market growth rate. Under the market share, the firm should consider whether the product being sold has high or low market share while market growth considers whether the number of potential customers in the market are increasing or decreasing (Schultz, Salomo & Talke, 2013). The four categories of products are described below:
Stars are products that have the highest share and are growing faster in the market. In addition, they have the highest competitive advantage in the market. Bernard, Rivest and Dutta (2013) asserted that companies invest heavy on star products in order to sustain them. An analysis shows that in the later stage, stars start assuming slow growth rate and eventually become cash cows if they maintain their market share (Hellweg & Canals, 2014).
Using the coca cola company as a case study in the soft drink industry can help enhancing the understanding of the categories of products in the Boston Matrix. The Coca Cola Company is recognized for producing and maintaining a wide range of products that constitute its portfolio. Within the coca cola product portfolio, brands such as Sprite, Fanta, Thump-up, and Maaza are considered to be in the star category in the Boston Matrix because they have highest market share and growth rate. Despite the high competition in the market, these brands still manage to achieve substantial growth thus benefiting the company (Hollensen, 2015).
Over the past, the Coca Cola Company has maintained these brands in the same quadrant, a strategy that has been successful for the company. Companies such as the Coca Cola Company use holding strategy because it cannot invest in other products in the same quadrant with the primary goal of moving them into the cash cow quadrant.
Cash cows are products that despite having high market share are operating in slow growing markets. They are products that are mature, successful and need relatively little investments to perform in the market. An analysis shows that for the cash cows to continue making profits, they must be managed well by the company (Rad & Levin, 2006).
For the case of the Coca Cola Company, the coke brand is considered the company’s cash cow product because it has high market value but experiencing relative slow growth rate. The coke brand is loved and consumed by majority of consumers across the world and the company generates a lot of revenue through its sales.
The Coca Cola Company is subsequently using the harvesting strategy for the coke brand because it is in the cash cow quadrant. As a result, over the past, the company has tried to reduce the amount of investments (through marketing strategies such as advertisement and promotions) in the coke brand but rather focus on maximizing the cash flow in overall profitability level.
Products in the question mark quadrants are fast growing but have low market share. The question market products have great potential to yield profits but need some level of investment to grow their share in the market – because they are relatively new, they cannot compete well in the market without investment (Jugend & Leoni, 2015). The company has to think and make a decision in which products in the question mark category to invest in and the ones they should allow to fail (Cooper, 2001).
In normal situation, new entry products in the market constitute the question marks. Quite often companies introduce new products in their portfolio especially targeting new markets or expanding their dominance in the same markets. In such cases, companies might come up with new innovate products and introduce them in the market but immediately experience slow growth rate and low market share.
The problem with new products is that their fate in the market is unknown, thus, the best strategy that most companies use is to build and develop them with the hope of moving them to star or cash cow quadrants: they are built by increasing investments in the product (Kodukula, 2014).
Not only do they operate on the slow growing market, the dogs also have low market value. These products operate in low growth unattractive markets, thus, they may generate cash that can only break-even. Morris and Pinto (2007) argued that because dogs do not generate enough cash they are not worth investing in: a deeper analysis indicates that most companies usually sell or close their products in this category because they are rarely profitable and also very expensive to maintain (Levine, 2005).
For the case of the Coca Cola Company, brands such as tea, coffee, and coke-diet are considered to be in the dog quadrant because they have not attracted significant amount of customers and sales since their introduction. The best strategy that the Coca Cola Company can use to deal with these brand is to divest them because they are probably more long term and less profitable. Over the past years, the company has been using revenues from the coke brand to develop products in this quadrant.
Table 1: Boston Matrix
Table 2: Characteristics of Products
|Cash Cows High market shareLow market growth rateProduct generating cash Recommendation: harvest the product||Question Marks Low market shareHigh market growthAbsorbing cash Recommendation: Build the products|
|Stars High market shareHigh market growth rateNeutral cash Recommendation: Hold the product||Dogs Low market shareLow market growth rateNeutral cash Recommendation: divest the product|
A number of assumptions are made when managing product portfolio using the Boston Matrix model. First, the model assumes that a company can gain significant market share by investing in marketing. Thus, a company is expected to determine the type and level of marketing mix for each product within its portfolio to increase its market share (Lofsten, 2014). Secondly, the model assumes that a firm will always generate positive cash surpluses whenever its products gain market share. When managing product portfolio, it is assumed that the firm would generate cash surpluses whenever the product has reached the maturity stag in the product life cycle (Green & Indiana University, Bloomington, 2007). Finally, the growth phase provides the best opportunity that a firm can use to build a dominant market position or share.
According to Katsifou et al (2013), product life cycle management is a strategic marketing approach that uses a set of business solutions to promote particular products in the market. Companies mainly use PLM strategy when it maintains a portfolio of products in the market: the strategy is used for creation, promotion, as well as dissemination of products within their respective markets throughout the product life cycle starting from creation until the end. The product life cycle management strategy involves various elements such as marketing plans, customer feedbacks, vendor application notes, and archived product schedules among others (Mello, 2006).
Products constantly change positions within the Boston Matrix in their entire life cycle process. Levine (2005) noted that firms that maintain few products in their portfolios might not undergo all the four stages of the product life cycle. Such firms are in the dangerous position of keeping all their eggs in one basket thus cannot exploit all the markets effectively and generate sustainable profits. In essence, firms that do not have a wide range of product portfolio usually prioritize in broadening their particular product ranges (Morris & Pinto, 2007).
A vital question that is being addressed in the product life cycle management is how the firm should invest its cash and human capital most effectively and increase its profitability in the market. However, this should be done in such a manner that not all products in the portfolio are in the same stage of the life cycle at the same time. Kodukula (2014) added that the primary of portfolio and product life cycle management is to allocate company’s resources to achieve the objectives of the corporate product. The need of product life cycle management is to make every product accessible to everyone in the market. In addition, it should address the comprehensive need of the entire organization as well as provide comprehensive product information.
Ideally, in a product life cycle management, a business would prefer to have all its products in the four categories of the Boston Matrix except in the dogs. According to Mello (2006), most business choose this approach because it gives them a balanced portfolio of products, which would greatly enhance their level of profitability as well as effective management of human capital and cash. There are particular sequences that take place within the Boston Matrix which are considered in the product life cycle management namely the success sequence and the disaster sequence.
Figure 1: Sequences in Boston Matrix
In the Boston Matrix, the success sequence occurs when products in the question mark becomes a star then finally a Cash Cow to the company. As explained by Kendall and Rollins (2003), this is the best sequence in the product life cycle management because it not only increases the profitability of the firm but also leads to efficient allocation of human resource and cash. In addition to profit, the success sequence greatly boosts the firm’s growth rate in the market. Vinten (2005) asserted that the occurrence of success sequence greatly depends on the right decisions made by the firm. For example, when introduced, eth coke brand was in the question mark quadrant but it later moved to the star before becoming a cash cow for the Coca Cola Company.
In the Boston Matrix, disaster sequence occurs when products in the Cash Cow category move to star and subsequently to the question marks due to high level of competitive pressure in the market. Once in the star category, the product the fall to the question mark due to increased competitive pressure in the market, which should be a worrying trend to the company (Schultz, Salomo, & Talke, 2013). At the end, the company may choose to divest the product because it is associated with low growth rate and low market value. In practical situation, the disaster sequence occurs due to wrong or inappropriate decision making by the company. When it occurs, the disaster sequence may drastically affect the company because it loses a lot of investment when it decides to divest the product. In addition, the company would lose other moneys coming from the Cash Cow product because they are being used to divest the failed products in the question mark (Stark, 2015). For example, the Coke-diet Tea and coffee brands moved to the dog quadrant due to intensive competitive pressure from the beverage manufacturing companies such as nestle café and coco.
In order to have the most efficient use of cash and human resource management, companies can use specific strategies for each product in the Boston Matrix. The strategies are developed to suit the position of each product in the Boston Matrix: cash cow, dogs, stars, and question marks.
Products in the cash cow position are the most stable for any business; hence, companies usually develop strategies for retaining them in the market and increasing their market share. Because their market is not growing, acquisition becomes rarely impossible thus leaving retention as the only strategic option for the business. A company can use a wide range of retention strategies such as loyalty programs, customer satisfaction, and other promotional approaches to retain market share of the product (Dunne & Dunne, 2011).
Because they have high growth rate as well as high market share, the best strategy for products in the star category is to retain and promote them: as a result, their strategy includes all types of sales promotion, marketing as well as advertisement in the market to increase their awareness. Because competition is very high in the star category, the best strategy is to market, advertise, and promote the products using all the available tools in the market. Companies with products in the star category usually concentrate and focus their investment needs in the marketing and advertising activities.
In practical situation, the telecom products such as handsets, tablets, laptops, and so on are all in the star category. According to a research by Jugend and Leoni (2015), the latest statistics indicates that all top five telecom companies are in the star category because they have good market share and growth rate. Because of good market share and high growth arte, the telecom companies are always competition with one another in the market. They constantly juggle between harvesting and investing in marketing their products or taking money time to time. This constantly happens in the market because other companies in the market can immediately overtake the stars even if they are top on the game (Vinten, 2005).
Because of their new entry in the market, the best strategy for products in the question mark category is to capitalize on their growth rate. This should be done in such a manner that the market share of products in the question mark category is significantly increased. Cooper, Edgett, and Kleinschmidt (2005) asserted that the best strategy for products in the question mark category is the acquisition of new customers because it would subsequently convert them into stars and later cash cows. Another important strategy to apply is the use of market research to determine the prevailing consumer psychology for the new products. Products in this category can easily slip into negative profitability thus forcing the company to make hard decisions (Tan & Theodorou, 2009).
The most common strategy that is being used for products in this category is divestment. However, depending on the amount of cash that the company has invested in the product, it can choose to divest or revamp it through rebranding. Alternatively, the company may choose to innovate the product by addition or removing some features to make it likeable in the market to move it towards a star or cash cow: however, Tan and Theodorou (2009) noted that it is a very difficult task to complete successfully. Fortunately, it can be easily moved to the question mark region of the Boston Matrix but its future would still be unknown, which actually make divestment as the best strategy for dealing with products in the dog category (Mahajan, 2009).
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