Business Portfolio

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.

The Boston Matrix is a valuable method of analyzing a business's product portfolio.

The Boston Matrix categorizes products into one of four areas (see Figure 1 below) based on:

• Market share - does the product have a low or high market share?

• Market growth - is demand for the product on the market low or high?

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.

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.

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.

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.

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.

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.