Most firms, and the managers who operate them, seek to grow. Indeed, a review of most CEO letters associated with annual reports, finds growth to be one of the two most frequently identified objectives (the other is cash flow). Growth, or at least well-managed, profitable growth, is important for many reasons. It makes the firm more valuable to shareholders. It makes the firm a more exciting place to work, which makes it easier to hire and retain talent. It enhances the general reputation of the firm, which often results in a greater ability to attract resources, more desirable suppliers and distribution partners, and greater trust among customers and potential customers. Finally, growth increases the likelihood of the firm’s survival over time. Given the many advantages of growth, it is not surprising that it is an important objective that is a central focus of senior managers.
It is a market reality that a product cannot grow forever. No matter how good the product and how weak the competitors, a firm will eventually run out of new customers to which it can sell any given product. When this happens a firm may settle into a comfortable maturity selling to repeat customers. Such businesses can be very profitable, at least for a while, but they are not very exciting to shareholder, employees, or other stakeholders and the possibility of obsolescence is always present. Thus, most firms seek to add products and open new markets. As a firm’s market matures, it can only grow in one of two ways: sell more product of the same product to current customers or find additional products to sell to current or new customers. The former strategy focuses on capturing greater market share or convincing customers to use a product more often. Both are difficult and expensive to achieve. Thus, the addition of products to the firm’s portfolio of products is a common strategy for growth.
Bringing new products to market is not easy. This is well-documented by the sizeable failure rates of new products. Much of this failure is due to new products not meeting a market need or failing to perform better than competitors. However, another reason for such market failures revolves around failures to understand the complexity of managing multiple products. These complexities arise from the interdependencies that often exist among multiple products. For example, a new product may cannibalize the sales of an existing product. Such cannibalization may result in an increase in the firms’ overall costs (it costs more to produce and distribute two products than just one) without adding much additional revenue. On the other hand, having two or more products that appeal to different groups of customers may not only increase overall sales; they may make the entire portfolio more appealing to distributors who want to carry a full line of offerings.
Economists and marketing scholars have devoted a great deal of time to the study of such product interdependencies, and consideration of such interdependencies should be an explicit part of the planning of any portfolio of products. At a very simple level, there are two types of product interdependencies: demand interdependencies, which are the result of characteristics of the customer and market as a whole, and supply interdependencies, which arise from producer characteristics such as how the product is produced and distributed. As the examples above illustrate, these interdependencies can be either positive or negative. The ideal situation involves products with both positive demand-side interdependencies and positive supply-side interdependencies. A good example is Procter and Gamble’s portfolio of dental hygiene products. There are positive demand-side synergies, e.g., customers recognize the “Crest” brand common to all products in the portfolio, tend to buy multiple products in the portfolio (toothpaste, toothbrushes, mouthwash, etc.), and shop for these products in the same retail outlets. On the demand side, the products share common distribution and production characteristics.
In contrast, consider the case where there are negative interdependencies: an automobile manufacturer may be able to use a production facility to make four-door sedans or pick-up trucks but not both simultaneously, and customers tend to buy one or the other product, but not both. This is clearly a circumstance to avoid. Indeed, in such circumstances, it would be better to manage the products as two separate businesses and two separate brands or sub-brands, rather than as part of a portfolio of related products.
What makes management decision-making complex is that supply-side and demand-side interdependencies can operate in opposite directions: positive demand interdependencies can exist side-by-side with negative supply interdependencies and vice-versa, creating an interesting two-by-two matrix of interdependencies. For example, there are clearly positive supply-side interdependencies among the many brands of laundry detergents offered by Procter and Gamble, but there are also negative demand-side interdependencies because purchasing one detergent reduces the likelihood of purchasing another. Of course, this dilemma is easily resolved if customers are segmented and prefer to buy one brand or type of product; that is, the products are not competitive. In such a case, the firm enjoys the benefits of positive supply-side synergies, and there are no, or few, negative demand-side interdependencies. Rather, more detergent is sold because different segments buy different products; the products are not really competitive.
Analysis of interdependencies among products can become very complicated and requires expertise from throughout the firm: procurement, production, distribution, and marketing. This means good analyses involve cross-functional teams. Interdependencies are also dynamic, so, like other environmental factors like the general economy, technology, and competitive environment, they need to be reviewed on a regular basis as part of the business planning process. Finally, because the relevant business decisions, such as resource allocation, involve trade-offs among products in the portfolio, senior management must play a decisive role.
Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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