Surely you have noticed that many companies offer more than just one product. For example, fast-moving consumer goods (FMCG) giant Procter & Gamble manages 65 brands organized into ten different product categories.1 Although companies might start with only one product, as Procter & Gamble started by producing a simple soap, they typically expand and develop new ones over time. This expansion is known as their product or business portfolio. Let's take a look at this concept in more detail.
Business Portfolio Definition
Usually, businesses produce and sell more than just one product or service. They offer several products or services that match the needs of different customers.
A business portfolio, or in other words, a product portfolio, is a collection of all the products or services offered by a business.
For instance, technology companies typically produce and sell more than just one product. For example, Samsung offers a range of products such as computers, laptops, TVs, printers, fridges, cookers, etc.
Business Portfolio Purpose
There are many reasons why a company might want to sell more than one product. Some of the main purposes of having a business portfolio are as follows:
Higher profits - Producing and selling more than one product can increase a company's profits. If there are more products, there will probably be more customers, and as a result, the company will sell more units.
Risk spread - When a firm produces and sells more than one product, the risk is automatically spread over all of its different products. The reason behind this is that if one of the products reaches its decline phase, there will still be other products on offer.
Different market segments - If a business offers a range of products, it can sell them to various market segments. People have different needs that are hard to satisfy with just one standardized product option.
Business Portfolio Analysis
When a business has a portfolio of products, it might face issues with its management. It might have a problem allocating investments (product development, promotion, etc.) across the portfolio and deciding what products to pay more attention to. Thus, managers must analyze the company's business portfolio in terms of how all the products are doing.
Product portfolio analysis refers to looking at a business's collection of products to assess which ones require more or less investment.
The Boston Matrix is a valuable method of analyzing a business's product portfolio.
The Boston Matrix is a model that helps businesses analyze their product portfolios. It is a tool that analyzes products regarding their market share and growth.
The Boston Matrix categorizes products into one of four areas (see Figure 1 below) based on:
Market share is a percentage of total sales in a market that a business makes up. For example, if a company's market share is 40%, the company sells 40% of all the products in the market.
Fig. 1 - The Boston Matrix
Business Portfolio Examples
The four types of product categories in the Boston Matrix are:
Stars,
Cash cows,
Question marks,
Dogs.
Let's now examine each product type's implications along with some business portfolio examples.
Product Portfolio: Stars
Stars are products that have a high market share and high market growth. These are products that are doing well in an attractive market. Stars present vast growth opportunities for the company and are worth investing in. However, attractive markets are very competitive; therefore, businesses need to invest heavily in stars to keep them in the market and turn them into cash cows in the future.
Netflix's streaming service dominates the global market for streaming services. However, since the market grows fast and there are many competitors, the company must invest to continuously improve its service.
Fig. 2 - Netflix Offices
Product Portfolio: Cash cows
Cash cows are products that have a high market share and low market growth. These products are doing well in a slowly growing market and provide a constant revenue stream. Cash cows require relatively little investment, but they still need to be managed to stay successful in the market.
Heinz baked beans dominate the market for baked beans. As they have a solid and stable position in a market that is not growing very fast, they do not require a significant investment. However, the product still has to be managed effectively.
Product Portfolio: Question marks
Question marks are products with low market share and high market growth. These are products that have the potential to grow in an attractive market. They require investment to beat the competition and gain market share. With significant investment, question marks may turn into stars. Therefore, it is up to the company to decide whether they wish to take that risk.
Just Eat's food order and delivery service has little market share but has the potential to grow in the highly competitive food delivery industry. However, to do so, it needs investment to beat its competitors, like Uber Eats and Deliveroo.
Product Portfolio: Dogs
Dogs are products that have a low market share and low market growth. These products are not doing very well in a slowly growing market. Dogs typically do not bring any profits and are not worth the investment. Their production is typically discontinued as the product is reaching the end of its life cycle.
Check out our product life cycle explanation to find out more about the stages a product passes through on the market.
Consider McDonald's. If the Apple Pie dessert has a low market share in a market that is not growing, it might not bring much profit to the company, and McDonald's would not expect it to do so in the future. Therefore the apple pie could eventually be discontinued.
Fig. 3 - McDonald's Restaurant
Business Portfolio Management
All companies want to have a portfolio of balanced products. Companies aim to have a mix of products that can bring various benefits. As a result, all businesses need to manage their portfolios.
Typically businesses aim to have stars, cash cows, and question marks. The only products they do not want are dogs, which do not bring much profit and are not expected to do so in the future.
Cash cows seem to be the most deserved products. They bring profit and do not require much investment to keep them in the market. However, having too many cash cows can also be a problem.
If a business has cash cows only, it does not have any products in markets that are growing. For example, although stars require high investment, they bring high profits and have the potential to create high returns on investment. Stars might, therefore, provide value to a company.
Question marks are also products a firm can benefit from having. Even though they typically do not bring profits, they can be invested in, resulting in high returns in the future.
Apple has a balanced product portfolio. It has the most desired cash cows on the market, such as the MacBook and the iMac. It also has stars like the iPhone, iPad, and Apple Watch and question marks like Apple TV. However, it also has dogs, such as the iPod.
Benefits and risks of developing new products
Although developing new products may bring many benefits, many risks are also involved.
Developing new products is a massive opportunity for a business. It is an opportunity not only to increase profits but also to improve competitiveness. A company earns money enabling further development if a new product is successful.
Moreover, when a product is successful, it means that it has brought customers' attention and strengthened a brand name. These factors make a company stand out from the competition and improve its competitiveness.
Unfortunately, developing new products is also risky, as it requires investment, and if a new product is not successful, it might make a firm lose a lot of money. This is particularly important as products with the most significant potential, and highest returns typically require the largest investments.
Further, an unsuccessful product can deteriorate the image of a company. A big failure may ruin a firm's reputation for a long time, which can be tough to repair.
Most businesses have a complete portfolio of products. Some of these products are more successful, bringing large profits, while some may be unsuccessful and not bring any profits at all. Nevertheless, a balanced portfolio typically consists of various products that complement one another.
Business Portfolio - Key takeaways
- A product portfolio is a collection of all the products or services a business offers.
- The benefits of having a portfolio of products are high profits, risk spread, and exposure to different market segments.
- Product portfolio analysis refers to looking at a business's collection of products to assess which ones require more or less investment.
- The Boston Matrix is a model that helps businesses analyze their product portfolios. t is a tool that analyzes products regarding their market share and growth.
- The four product categories in the Boston Matrix are stars, cash cows, question marks, and dogs.
- Although stars might be the most desired product type, companies should aim to have a balanced portfolio, as stars require significant investment.
References
- Procter & Gamble. BUILD BRANDS THAT ARE MORE THAN JUST BRANDS. 2022. https://www.pgcareers.com/about-us
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