Products and services form the core of any business. While some businesses focus on a single product and aim to make it big, others diversify their product lines and venture into different varieties.
A product portfolio is a strategy that businesses use to expand their presence and gain bigger portions of the market share.
In this article, we will go through what a product portfolio is, why it is essential and how it impacts the investment decisions of investors.
What is a product portfolio?
Portfolio is a term that is commonly used in connection to investments. It refers to a collection of investments in different kinds of securities like equity, debt, mutual funds, real estate, etc.
Similarly, a product portfolio refers to the collection of various kinds of products and services that a company offers. Some companies diversify their products within the same industry, while others include products from different sectors.
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What is product portfolio management?
Product portfolio management is the process of managing the product portfolio of a business. It is the strategy that businesses apply to diversify their products in the most profitable manner.
Companies have specific managers who handle product portfolios. They analyse the needs of their customers and plan to produce products that meet the customer’s needs and also align with the vision of the business.
Why is product portfolio analysis essential?
Product portfolio analysis refers to analysing the different products, their performance in the market and each product’s contribution to the company’s revenue and profits.
Analysing a company’s product portfolio is essential for all stakeholders. Here is why:
- From the business perspective
Product portfolio analysis is one of the key factors that aid companies in making the right decisions. It suggests the amount of investment that should go into promoting a certain product. It also advises the management about the products that must be removed from the portfolio if their impact on the company’s profit is immaterial.
The analysis also involves ascertaining each product’s market share, which helps formulate promotional strategies to increase awareness about certain products in the minds of consumers.
- From the investor’s perspective
For an investor who relies on fundamental analysis of stocks, analysing the product portfolio is essential. It talks about how each product is performing in the market and the company’s earning capability using the current product line.
Some investors also look at companies whose products match their individual vision, principles and ethics.
For example, an investor who is strictly against smoking, would not be interested in investing in a company that produces or sells cigarettes.
Companies use various tools to analyse their product portfolios. The BCG matrix is one such tool. BCG stands for Boston Consulting Group. The matrix is a graphical tool that plots the position of products into different quadrants based on their market share and growth. The placement of the products in different quadrants helps companies in analysing the product’s performance based on which they make decisions.
The four quadrants of the BCG matrix are:
- Star – Products with a high market share and growth rate fall in this category. In an ideal scenario, the firm should invest more in such products.
- Dogs – Products with low market share and low growth fall under this quadrant. It is better to discontinue these from the company’s product line.
- Cash cow – Products with a high market share but low growth are under this category. Companies try to use these products to milk the cows until they stop providing any return.
- Question marks – These are products with high growth rates but low market share. They are profitable but also expensive. Hence, companies must assess time and again the worth of these products.
Benefits of product portfolios
- The primary benefit of owning a portfolio of products rather than a single product is risk diversification. When one product fails to perform well in the market, the other products make up for it, thereby mitigating losses.
- A varied range of products helps in increasing the customer base, which leads to increased awareness of the brand, thereby widening the market share.
- Having a product portfolio encourages innovation. It gives companies access to first mover advantage during changing trends.
- A product portfolio helps in the optimum usage of resources.
Product portfolio for different kinds of companies
- Mature companies
These companies are the ones that have been operational for a long time. Such companies are stable as they have already grown to a large extent. Since their day-to-day operations are stable and not very volatile to external conditions, they can focus on expanding their product range and capturing larger markets.
- Growing companies
These are companies that are still in the phase of growth. Such companies are yet to stabilise their daily operations and establish a market share for their core product. Hence, venturing into new product lines may not be very suitable as it will divert the focus. Ideally, growing companies must stick to one product and wait for it to stabilise before they create a product portfolio.
Product portfolio example
Consider the example of Reliance Industries, one of the largest multinational companies in India. They have a vast product portfolio. Some of their products are as follows:
|REPOL, RELENE, REON, etc.
|Refining and marketing
|Reliance Petroleum Retail, Reliance Aviation, Auto LPG The Green Fuel, etc.
|Ensure, Marco Mancini, Only Vimal, etc.
|Reliance Fresh, SMART
|Gourmet retail chain
|Jio Digital Life
|Online fashion store
Product portfolio is a significant concept for both businesses and investors. Analysing a company’s portfolio aids the management in making the right business decisions. It also helps investors understand the strengths and weaknesses of the stock they would like to invest in. Hence, it is essential for all stakeholders to understand the vitality of product portfolio analysis and management to use it to their best advantage.