Most common product portfolio models and their assumptions
Modern companies are seeking strategic ways of dominating market share and increasing profitability. Through product portfolio planning, companies design portfolio to assist them in making decisions regarding market selection and other business decisions. There are different product portfolio models that include:
Two Single-Factor Dimensions
The Boston Consulting Group (BCG) product portfolio approach categorises businesses in two major dimensions, namely market growth and relative market share. The BCG growth-share matrix illustrates market products in the form of only two inherent factors that involve relative market share and growth rate.
Relative market share represents the ration of company’s dollar sales of a particular market product versus dollar sales of its immediate most massive business contender in the same product. In this kind of chart, the growth rate in the sales of the product is measurable along the vertical axis, while the relative market share is indicated in circles positioned along the horizontal axis.
The model, in its practical application, assumes that each product involved in the company’s dollar sales (or any form of assets used) represents a certain growth proportion in the market share.
Key assumptions in this model
Based on the convictions of the chart developed through the two single-factor dimension matrix, analysing businesses in terms of growth-share matrix hinges upon four key principles. The first principle is that both growth margins and cash invention have a propensity to escalate with the increasing relative market share.
The scale effects and the experience curves connect high growth margins with elevated relative market share the reason why higher market share results in accrued experience. Another significant assumption in this model is that product sales growth necessitates cash input to help in financing added capacity and working capital among business operation aspects.
This aspect explains why cash input is necessary for maintaining share in a developing market. Subsequently, within a growing market, an important notion associated with this model is that increasing market share requires intensive cash input to endow increasing marketing expenses, build new plant among others.
The last assumption regarding the abovementioned model is that sales growth in each market will eventually dawdle as the marketed product draws near maturity.
Two Composite-Factor Dimensions
Another component of the Boston Consulting Group (BCG) that has ultimately undergone criticism over its reliance on cash flow as the main objective is the two single factors. Following such criticism on Boston Consulting Group (BCG) deploying the use of two single factors, McKinsey and General Electric developed the two composite-factor approach.
The model relies on the objective of industry attractiveness and business strengths, with each of these built from a larger number of variables. From a systematic analysis, the industry attractiveness as a dimension contains a large number of variables that include size, market growth, pricing, market diversity, competitive structure, industry profitability, technical role, social, environmental issues, legal and human aspects.
The business strength facet in the model has variables such as size, growth, share, position, profitability, margins, technological position, image, strength/weakness pollution, and people.
Assumptions about the Model
Several principles and assumptions have developed from the two composite-factor dimensions in relation to its connection with business and market product portfolio planning techniques. There are three key assumptions regarding the flexibility and comprehensiveness that ultimately prove problematic in their application while using the two composite-factor approach.
One of the major assumptions is that for the model to prove successful in each independent business, various factors that contribute to business strength or industry attractiveness must remain identified. The analysts must determine the direction and form of each of these correlations.
Finally, in employing this technique in businesses, the analysts must use a scheme, whether clear or unclear, in determining the contributing factors involved in each composite dimension.
Multiple Dimensions
There is also a multiple dimension model used in product portfolio planning where the Par ROI Model of the PIMS (Profit Impact of Market Strategy) program of strategic planning institute forms part of the multidimensional portfolio approach.
Although not considered, from the technical view, as a product portfolio model due to its connection with single businesses, the Par ROI Model focuses on tackling similar strategic direction issues and market selection issues in the portfolio.
The primary purpose of the Par ROI Model rests upon envisaging the innate (“par”) representing profitability of the business based on its competitive position, market’s attractiveness, and other marketing factors.
When intrinsic profitability is high, investment is justifiable despite the current actual profitability being low and hence, the Par ROI Model enables administrators to profit and promising non-profit businesses. For an individual company, the Par ROI, 28 variables very similar to those in two composite dimensions are integral though variables are measurable systematically on a statistical experience scheme.
Key assumptions involved in Par ROI Model
Based on PIMS findings regarding Par ROI Model, market share positively correlates with ROI and that a product quality advantage in market competition is one of the major factors associated with high ROI.
On PIMS assumptions, rapid market growth rate helps in advancing ROI, primarily through its interface with other essential marketing variables. The investment-to-scale ratio or high investment power significantly negatively affect the ROI.
Some of the PIMS findings dealt with an interchange of two variables and through such analyses, PIMS revealed that a high level associated with marketing expenditure damages ROI especially when the value of the involved product is inferior. High research and development in marketing affect profitability when the market position is relatively weak but enhances ROI when the market share is high.