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MK2-106-I

PRODUCT STRATEGY:
PORTFOLIO MANAGEMENT CONCEPTS, TYPES AND
TOOLS
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Original written by professors Teresa Serra Rexach, Jaime López Bengoa and Steven Posner at IE Business School.
Original version, August 25, 2007. Last version, February 1, 2017. Last revision February 20, 2018 (LR).
Published by IE Business Publishing, María de Molina 13, 28006 – Madrid, Spain.
©2007 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.

INTRODUCTION
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The American Marketing Association (AMA) defines marketing as "an organizational function and a
set of processes for creating, communicating, and delivering value to customers and for managing
customer relationships in ways that benefit the organization and its stakeholders." 1

The product or service is the mean by which the company or organization generates value and meets
the needs of consumers, and by which it maintains lasting and profitable relationships with its
customers.

From here on, we will always talk simply about the product, using the term generically to refer not
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only to various types of tangible product but also intangible products (services), ideas, people, places
or organizations. In other words, it refers to anything that has a value to the consumer and which
satisfies some kind of need, whether manifest or latent.

PRODUCT POLICY

The product policy is one of the fundamental aspects of marketing. If you do not have the product
consumers feel is right for their needs, there is little point in developing the rest of the commercial
strategy.

Product policy also implies long-term decisions which will to a large extent determine other related
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commercial activities, such as pricing, channels, communication, etc.

WHAT IS A PRODUCT?

The American Marketing Association (AMA) defines a product as "a bundle of attributes (features,
functions, benefits, and uses) capable of exchange or use; usually a mix of tangible and intangible
forms. Thus, a product may be an idea, a physical entity (a good), or a service, or any combination
of the three. It exists for the purpose of exchange in the satisfaction of individual and organizational
objectives."

1
AMA. (2004 definition, has since been revised, see www.marketingpower.com).

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Stanton defines a product as "a set of physical or psychological attributes (packaging, color, price,

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quality and brand, services and reputation of the seller) that the consumer considers a given good
or service to have in order to meet his desires or needs." 2

This definition includes two fundamental aspects we will look at in this note: firstly, the different
elements, tangible or otherwise, that make up the product, and secondly, the fact that products are
not what producers want them to be, but how they are perceived by consumers.

LEVELS OF A PRODUCT

Products have a structure comprising several different levels, each of which implies a different value
for the customer. Kotler 2 talks of a value hierarchy for the customer and divides it into five product
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levels as shown in Figure 1: core benefit, generic product, expected product, augmented product,
and potential product.

FIGURE 1
LEVELS OF A PRODUCT

Potential product
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Augmented product

Expected product

Generic product

Core
Benefit
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The core benefit is the basic need that a product meets. In the case of washing powder, this would
be washing your clothes, or in the case of a bank, safeguarding your money.

The generic product is the chemical formula or process through which this need is met.

The expected product refers to the set of attributes or characteristics consumers expect when they
buy products of this type. This may refer to a particular type of packaging, a brand, a set of
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installations, customer care staff, etc.

The augmented product is everything offered to the customer which exceeds his or her
expectations. This may include both tangible and intangible attributes and it is what allows companies
to differentiate their products or services by augmenting the value to customers. Financing,
installation, and post-sales service, warranties, training, etc. are some of the elements that can make
up the augmented product.

2
Stanton, W.; Etzel, M. J.; Walker, B. J. (1994). Fundamentos de marketing. (13th. edition). McGraw-Hill.
2
Kotler, P.; Keller, K. L. (2006). Marketing Management. (12th edition, page. 388 in the Spanish edition "Dirección de
marketing"). Pearson-Prentice Hall.

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The potential product includes the possible improvements and changes that may be added to the

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product in the future to add value.

In industrialized societies, it is increasingly common for most products to contain a physical and
tangible part combined with an associated service component. The important thing about all these
elements is that they are perceived by consumers and provide the value consumers expect and for
which they are willing to buy the product.

ELEMENTS THAT MAKE UP THE PRODUCT

There are two different ways to look at a product. Firstly, we can view it as a sum of physical attributes
or characteristics (a chemical formula, a package, a special design). Secondly, we can consider the
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perceived or psychological attributes that constitute the symbolic content of the product and which
are as important as the technical components.

The best way to add differential value for consumers is to understand the product from the point of
view of the needs it satisfies, envisaging the benefits its use or consumption will bring the buyer and
how he or she perceives them. This approach helps avoid us falling into the "marketing myopia"
about which Theodore Levitt spoke in his article published in HBR. 3
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PHYSICAL ATTRIBUTES OR CHARACTERISTICS

Products can have two types of physical characteristics: internal and external.

The internal characteristics are those which are not immediately visible and include factors such
as the technique or formula used to make the product or the internal processes by which a service
is provided.

It is important to highlight and explain these internal characteristics as they are a fundamental part
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of the product's performance, but as we shall see, they are only one part of the quality perceived by
consumers.

From the marketing point of view, quality means the capacity of the product to meet consumers'
needs or requirements. Thus, the best product from the technical point of view is not always the best
for a particular consumers group.

In marketing, quality is therefore a subjective concept that is relative and changing. It is subjective
because it depends on the consumer's perception, relative because two customers can have different
perceptions of the same product, and changing because expectations, and therefore perceptions,
vary over time.
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The external characteristics are those that can be perceived at first glance by consumers. These
characteristics differentiate a product from its rivals. Some of the external characteristics of a product
might be, for example, its design or packaging.

The design is the set of characteristics which influence the appearance and functions of a product
in the eyes of consumers. This is fundamental for both consumer and industrial goods, although in
the case of the former, the ubiquity of self-service supermarkets makes it even more important.

Good product design can facilitate marketing in many ways, for example, by making the product
easier to handle, extending its useful life, reducing manufacturing costs, making transporting and
stacking it easier for both the distribution channel and the consumer, and it can serve as a
promotional and sales tool.

3
Levitt, T. (1960). "Marketing Myopia." Harvard Business Review (HBR). (Pages. 45-56). (July-August).

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For Tom Peters, "The design is the main reason for emotional connection (or disconnection) with a

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product, service or experience. The design, as I see it, is probably factor number one in deciding
whether a product-service-experience stands out or not." 4

Packaging is a key part of product design. Packaging is defined as the "set of activities aimed at the
design and manufacture of the product container or wrapper." 5 Packaging has several functions:

 It identifies the brand.

 It transmits descriptive and persuasive information.
 It protects the product and enables it to be transported safely.
 It can be used to store it at home.
 It can help the consumer to use the product.
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Packaging design relates to both aesthetic components (size, color, text and typography, materials,
etc.) and the functioning of the product (reusable packaging, ease of opening, ergonomics, etc.)

Particularly in sales modes where visual sales and impulse purchases are important, the packaging
may be the final element in the product's marketing, giving it a key role in whether the consumer opts
for one brand or another.

Therefore, the packaging can be a means of differentiation for the brand and even influencing
customers' perceptions (whether intermediate or final customers) about the performance of the
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product. Moreover, in recent years environmental standards and product recycling requirements
have caused important changes in the design of new product packaging. These are some of the
reasons why companies invest huge amounts of time and resources in modifying and designing new
packages.

PSYCHOLOGICAL/EMOTIONAL ATTRIBUTES OR CHARACTERISTICS

We have seen that products are made up of physical attributes which are fundamental for the product
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to fulfil its objective. However, these attributes do not bind the consumer, especially in developed
societies where the formula, the packaging and other attributes are easy to imitate. As well as the
product's purely functional attributes, it is essential to consider it with emotional attributes which bind
the consumer.

Figure 2 shows these functional attributes in relation to the benefits of a toothpaste brand. 6
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4
Peters, T. (2005). Design: Innovate, differentiate, communicate (published in Spanish as: Diseño: innova, diferencia
comunica). Prentice Hall.
5
Kotler P.; Keller, K. L. (2006). Marketing Management. (12th edition). Pearson-Prentice Hall.
6
Zikmund, W. G.; D’Amico, M. Marketing. (5th. edition). West Publishing Co.

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FIGURE 2

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FUNCTIONAL ATTRIBUTES AND BENEFITS OF A BRAND OF TOOTHPASTE

Easy to keep
Ease of use
White teeth

AUGMENTED PRODUCT

Social Pleasant taste

acceptance
Flip top tube

Brand
(Close -Up) Fresh breath
Taste
Generic product
toothpase
Customer
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help line

Fluor
Fluoride
Manufacturer Controls plaque
name Save on dentists
country of origin bills

Safety

Fights plaque

Core benefit,
Clean teeth and
plaque control
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THE BRAND

One of the main instruments in building a relationship between consumers and products is the brand.

From the point of view of marketing, the brand is one of the key elements of the commercial strategy
used for products and services of all types. The brand is what allows a product to be much more than
a simple bundle of functional attributes which do something for the consumer. The brand, as well as
clearly articulating the functional and emotional benefits of the product, is the mechanism by which
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closer bonds can be built with customers, thereby increasing customer loyalty and the profitability of
whatever type of product or service. It is basically the brand which makes Harley-Davidson more
than a motorcycle, the iPod more than an mp3 player, and Coca-cola more than a soft drink.

According to David Aaker, "For a company, the brand is the main source of resources and a valuable
strategic asset." 7 Aaker also says that "the challenge for any brand is to have a clear and different
image which is important to consumers and really makes it stand out from the rest."

Traditionally, a brand, or more specifically, a trademark, has been understood as "any sign capable
of graphical representation that may be used in the marketplace to distinguish the products or
services of one company from those of others." 8 These signs may, in particular, be:
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 Words or combinations of words, including those used to identify people.

 Images, figures, symbols and drawings.
 Letters, numbers and combinations thereof.
 Three-dimensional shapes, including wrappers, packaging and the form of the product or its
presentation.
 Sounds.
 Any combination of the signs given as examples in the points above.

However, over the last few years, the concept of a brand has gone beyond the idea of the graphical
elements that are used to "distinguish a company's products or services in the marketplace" and it
has become an intangible asset with a high strategic value for the company.

7
Aaker, D. A. (1996). Building Strong Brands. New York: The free press.
8
Spanish Trade Mark Law, Ley de Marcas (2001).

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Today, a brand is understood as the promise a product or service makes to meet customers'
functional and emotional needs such that it is highly significant to them, differentiates the product or
service from competitors, and is credible and consistent. Moreover, the brand may come to define
aspirational factors as it helps customers define the lifestyle they aspire. Just think of the attraction
of luxury brands and how they help customers feel elegant and sophisticated, or Nike's Just do it
slogan which tries to inspire sporting confidence and the feeling that the consumer can become the
best possible athlete.

The brand has advantages for consumers, for the manufacturer and for intermediaries:

 It allows consumers to distinguish the product from its competitors

 It transmits information about the product
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 It gives greater consistency to the product's quality image
 It enables the introduction of new products
 It serves as a vehicle for communications
 It encourages loyalty
 It reduces and simplifies the effort involved in searching for information
 It facilitates the decision-making and buying process
 It reduces the risk associated with the purchase

According to Aaker, some of the main assets on which brand equity is based are: brand loyalty, brand
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awareness, perceived quality, brand associations and other proprietary assets of the brand, such as
patents, trademarks, or relationships with the channel.

There are a series of key requirements which, in principle, every brand should meet, such as the
brands being: 9

 Memorable: Is it easy to recognize and remember?

 Meaningful: Does it represent the category? Does it suggest the advantages of the product?
 Pleasant: Is it pleasant for consumers?
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 Transferable: Can it be used on other products, segments, markets?

 Adaptable: How adaptable is it over time?
 Protectable: Can it be given legal protection?

Increasingly, globalization and the international presence of major multinationals makes it harder to
find brands that meet all these requirements, thus making the process of the construction and
architecture of brands more complex.

BRAND IDENTITY

Developing a brand starts with the strategic process of defining exactly what the company wants the
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brand to promise and to represent in consumers' minds. This brand identity is the "set of assets
linked to a brand’s name and symbol that adds to the value provided by a product or service to a firm
and/or a firm’s customers." 10 In general, these brand attributes are defined by making a detailed
analysis of the answers to the following questions:

1. What are the most important and most relevant functional and emotional benefits for customers?
(Relevance)
2. What are the main factors differentiating the brand from its competitors? (Differentiation)
3. What elements of the offering are highly credible and defendable? (Credibility)
4. What factors are essential in fulfilling the business strategy? (Strategic alignment)

9
Kotler, P.; Keller, K. L. (2006). Marketing Management. (12th edition). Pearson-Prentice Hall
10
Aaker, D. A. (1996). Building Strong Brands. New York: The free press.

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One of the most important elements of the brand is undoubtedly to ensure its relevance vis-à-vis a
target audience such that the brand is perceived as something that really addresses customers'

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needs and provides the most important functional and emotional benefits. For many brands, the
product's attributes are given priority in the search for differentiation, without having a clear idea
whether these aspects of differentiation are genuinely important to the customer. Moreover, many
brands focus on functional aspects of the product or service without highlighting the emotional
benefits they can provide to their customers. It should be borne in mind that it is the emotional bonds
between the customer and the brand that give strength to the relationship.

In the computer industry, there are numerous examples of companies that focus their brands on
functional aspects of the product and try to differentiate themselves on the basis of the outstanding
technological features of their products, when from the consumers' point of view the products offered
may look very similar and these features might have only limited relevance. A case in point is Apple,
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which almost never talks about the technological features of its products but focuses instead on the
benefits for customers such as innovation, simplicity and design. For its target audience, these
factors are much more important. It further demonstrates how Apple understands perfectly that
customers want technology that is intuitive and simple. Apple's growth over the last few years in all
its business lines demonstrates the power of creating a truly relevant brand. Ironically, the relevance
of the Apple brand has become its point of differentiation. It is important to understand that Apple
has always tried to meet the needs of customers (relevance) before worrying about differentiating
itself from the competition.

One of the tools brand managers use to develop a brand identity is a hierarchy of benefits. This
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model makes it possible to identify the connection between the product attributes and the functional
and emotional benefits they provide, and finally, the aspirational values, which consciously or
unconsciously may be the basis for the emotional bond between the customer and the brand.

FIGURE 3 11
DEVELOPING THE BRAND IDENTITY – HIERARCHY OF BENEFITS – NIKE EXAMPLE
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Following Professor David Aaker's brand development model, once all the attributes have been
identified (these may be product attributes, functional and emotional benefits, values of self-
expression, graphical elements, taglines, etc.), these are organized into three main groups in order
to define the final identify of the brand.

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Source: Prophet

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 Extended identity: this includes elements and associations organized and arranged into
significant groups around the central identity which defines the global identity of the brand.

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 Core identity: comprising the associations which constitute the most important aspects of the
brand and which allow it to be considered unique. They are what establish the value proposal
and credibility of the brand.

 Brand essence (brand promise): a unique creative concept which combines all the attributes
of the brand and captures its essence in a simple, clear and powerful way.

Figure 4 shows the various levels of brand identity, using Nike as an example.
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FIGURE 4 12

Extended Identity

Top athletes
Innovative
Core Identity
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Performance
High Swoosh
Tech Brand essence
Exciting
Sport,
Exercise and
Be the best
Health
Design

Michael Winner
Jordan Cool
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Just Do It

TYPOLOGY OF BRAND STRATEGIES

Brand strategies can be classified according to various different criteria. The classifications outlined
below are those most commonly used by companies.

Single brand strategy: This consists of putting the same brand on all the products a company
markets. This is also known as umbrella branding. The advantages of this strategy are clearly the
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savings in brand promotion costs, particularly when introducing new products on the market. The
downside is the impact the bad image of one of the products can have on all the others. This strategy
is normally used when a company competes with similar products on similar markets, although there
are always exceptions.

Some of the companies that follow this branding strategy are Nivea, Yamaha, Kellogg’s, General
Electric, etc.
Multibrand strategy: This consists of using different brands for different products. This strategy is
sometimes driven by the fact that multinationals have acquired local companies whose brands have
significant local market share, and so the brand needs to be retained. The main advantage is the
flexibility this approach allows when serving individual market segments with different brands, without
exposing the name of the company. The downside is the much higher cost of promoting the brands.

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Prophet

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This is the situation of many manufacturers of mass consumption products, such as Procter &
Gamble with brands such as Gillette, Ariel, Braun, Pringles, Pantene, H&S, Duracell, etc.; Henkel;
Unilever; and many more.

Some authors talk about a strategy of a brand per product line, brands accompanied by product
names, etc. We think it is simpler to bear in mind that a lot of combinations are possible between the
first strategy (branded house) and the second (house of brands).

Given their growing market share, we also think it is worth mentioning own brands or house brands,
which are a phenomenon which is gaining in significance, particularly in retail markets. Distributors’
own brands include a variety of types of brands which are not linked to the manufacturer producing
the goods but commercialized by a particular distributor, which gives them its own, or in some cases
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another, name. It is the distributor who does all the marketing work.

Distributor own brands cover a wide range of typologies, and like manufacturer's brands, they may
follow different strategies depending on where they lie in the value chain. Thus, a retailer may decide
to follow an own-brand strategy in order to ensure a strong presence of its name in the store (for
example, Carrefour in Europe, Wal-Mart in the US). The retailer may use a different brand for each
line of products (as does Mercadona in Spain, with the Hacendado, Deliplús, Bosque Verde and
Compy brands for different product lines), or it may follow a strategy of having individual product
brands along with their own brand (Lidl, Aldi). As in the case of manufacturers, distributors and
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retailers may opt for a portfolio of own brands according to their needs and the markets they operate
in at any given time.

CLASSIFICATION OF PRODUCTS

As mentioned earlier, the term product refers to a diverse variety of different things. A wide variety
of product classifications has been developed, some depending on how tangible the product is
(products and services), or its durability (instant or durable), others in terms of consumer behaviour
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in the market it is aimed at (convenience, shopping or speciality), or the type of buyer (private
consumption or industry).

In the classification we are going to look at below we will distinguish between consumer goods,
industrial goods and services.

CONSUMER GOODS

These are goods bought by individuals or households for their personal use or consumption.

Based on a consumer's buying behavior, Stanton, Etzel and Walker 13 distinguish four types of
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consumer products:

1. Convenience goods: These are products the consumer finds convenient to buy without
searching for much information and is able to purchase with a minimum of effort. Consumers
often do not have a clear brand preference so they buy whatever is most readily accessible. Light
bulbs, Christmas cards and certain foods are examples of products of this kind.
The distribution policy is essential in the case of products of this type.

2. Comparison shopping goods: These are products for which the consumer compares criteria
such as quality, price, style and features before making the purchase. The process of searching
for and obtaining information is lengthy. Household electrical appliances, fashion clothing,

13
Stanton, W. J.; Etzel, M. J.; Walker, B. J. (2007). Fundamentals of Marketing (Published in Spanish as Fundamentos de
marketing). (14th edition). McGraw-Hill (Spanish edition by McGraw-Hill Interamericana SA).

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electronics and cars are some of the products in this category. Distribution and communication

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are essential in the case of this type of product.

3. Speciality goods: These are products for which the consumer has a strong brand preference
and so dedicates more time and effort to finding them. Clothes for special occasions,
photographic or sound equipment, health-care products and certain sorts of cars are in this
category. Communication becomes one of the fundamental aspects when marketing this kind of
product.

4. Unsought goods: These are new products that the consumer does not yet know about or is
unfamiliar with and has not yet felt a need for them. The Segway (self-balancing personal
transport device), funeral services or technological innovations are just some examples.
Making the product known, creating familiarity with it by testing and communicating its attributes
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and characteristics are very important elements in the case of this type of product.

INDUSTRIAL GOODS

These are goods traded on B2B markets used by businesses and other organizations for final use
or as part of the production process.

Industrial goods can be classified into five categories 14: raw materials, materials and component
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parts, installations, accessory equipment and supplies.

Raw materials: These are goods which are partially transformed into another tangible product or
which help in the process. They can be products found in their natural state, such as minerals, timber,
products of the sea, etc. or agricultural produce such as fruit, cotton, or animal products such as
cattle, eggs, etc.

Materials and component parts: These are parts and materials that are turned into the finished
product by means of a process of transformation. Ingots of iron and flour are materials, whereas
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microchips and zips are manufactured components that are added to other components without
further changes.

Installations: These are manufactured products that comprise the organization's main high-cost,
long-lasting equipment. Elevators, factories or offices, generators at the foot of a dam, etc. are
examples of installations.

Accessory equipment: This refers to high value tangible goods used in a company's operations.
Machines, office equipment, electronic terminals, etc. are a few examples of this category.

Supplies and services: These are industrial goods that are not included in the finished product.
Supplies are usually goods that are commonly used in production, such as lubricants, coal or paper,
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or in maintenance, such as paint or nails. Services may include repair and maintenance (for example,
cleaning or repairing machinery), or consultancy (whether legal, administrative, training, etc.)

Each of these industrial products has its own specific characteristics in terms of the buying process,
type of negotiation, channel management, etc.

SERVICES

14
Stanton, W. J.; Etzel, M. J.; Walker, B. J. (2007). Fundamentals of Marketing (Published in Spanish as Fundamentos de
marketing). (14th edition). McGraw-Hill (Spanish edition by McGraw-Hill Interamericana SA).

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Kotler defines service as "any activity or benefit that one party can offer to another that is essentially

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intangible and does not result in the ownership of anything. Its production may or may not be tied to
a physical product." 15

Services are intangible activities which may be individually identified and which are not necessarily
linked to the sale of other products or services. They can be used by individuals, families, firms or
other organizations. Services basically have three components: the physical medium (a hotel room,
an aircraft or a movie theater), the contact staff (the receptionist, pilot or usher), and the customer
(the guests of a hotel, the passengers on a flight or the audience in a movie theater). Although
services may be based mainly on physical media (cash dispensers, car washes, the Internet, etc.)
or persons (training, cleaning, legal services, etc.), the customer is an essential part of the service
as he or she has a fundamental role in the final perception of the service. In certain cases, the
physical presence of the customer is necessary (hairdressers, hotels, classroom training, etc.) and
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in others it is not (repairs, goods transport, etc.).

In general, services typically have the following characteristics:

 Intangibility. They are intangible goods, therefore cannot be measured in advance. They are
sold based on the utility derived from the service itself. What is sold is trust in the brand or the
seller. Thus, the image the customer has through the brand and other indicators is very
important.
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 Perishability. Services are highly perishable and cannot be stored. It is therefore necessary to
watch fluctuations in demand closely.

 Inseparability. Services are normally inseparable from the person providing them and the
moment in time they are provided.

 Variability. Services are usually difficult to standardize. Given that they are often provided by
people, it is difficult to ensure that the level of quality remains the same.
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All these characteristics have given rise to the development of specific studies on the marketing of
different types of services in recent years (financial services, public services, etc.).

Some of the strategies proposed for services marketing include:

Making the service tangible: Here the aim is to develop a tangible medium for the service that
somehow makes it visible. This may be a presentation folder or dossier, a customer card for a hotel,
etc. Thus, while it is necessary to add abstract ideas and services to the sale of physical products,
in the sale of services it is necessary to add physical evidence and images.

Identifying the service: By means of a name or brand that differentiates it. This includes not just
the brand or logo, but also uniforms, interior design and everything relating to corporate identity.
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Bolstering the selection and training of salespeople: As they will be responsible for transmitting
the image of the company and therefore creating trust in it.

Counteract the perishability of services: By encouraging demand at times when it is usually slack,
setting price policies, or developing complementary services. New technologies (advanced booking
systems, last minute offers, advance sale of seats, etc.) have greatly mitigated many of these
common problems.

The challenge faced by most companies is that of improving their quality of service, regardless of
the type of product they offer. Therefore, systems of communication, staff training and measuring

15
Kotler, P.; Keller, K. L. (2006). Marketing Management. (12th edition). Pearson-Prentice Hall.

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customer satisfaction are absolutely essential in achieving effective differentiation and building

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loyalty among customers.

MANAGING A PORTFOLIO OF PRODUCTS

Most companies have a variable number of products which cover different needs in the markets in
which they compete. The set of products offered by a company is known as its portfolio, range,
assortment or mix of products.

A product range can be measured along three dimensions: breadth or number of product lines in
the range, depth or number of products per line, and length, or sum of all the products manufactured
or sold by the company. For example, retail banking is a line of products for a bank and investment
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banking is another. The various retail banking products (accounts, mortgages, cards, etc.) determine
the depth of the line. In turn, each product/brand can give rise, as we will see in the next example, to
a new range.

The example in Figure 6 shows what the global portfolio of a consumer goods manufacturer like P&G
might look like (not all the brands are included). In turn, each of the brands is further subdivided into
new ranges with different lines. For example, as Figure 7 shows, the Pantene brand has different
finishes, colors, and beauty variants, etc.
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FIGURE 6 16

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PROCTER & GAMBLE: GLOBAL PORTFOLIO
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Source: The authors

FIGURE 7 17
PROCTER & GAMBLE: PANTENE BRAND
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EFFORTLESS SPECIFIC
FINISH COLOR
BEAUTY CARE

The size of the range, its breadth or depth have little or nothing to do with the business results. There
are successful examples in both directions. Whether a range is effective or not depends on how
different customer and/or consumer needs are met and if they are met economically (for example,
by producing economies of scale or barriers to entry).

As Figure 8 shows, a company has four basic ways of extending the range, depending on whether it
uses an existing brand or a new one, and whether the company intends to compete in a product
category in which it is already present or not.

16
Source: The authors
17
Source: The authors

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FIGURE 8

Product category

Existing New
Brand name

Existing Line extension Brand extension

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New New brand Diversification

Source: Anita Elberse. Principles of Product Policy. HBS

There is no ideal number for a range of products. It will always depend on the company’s strategy
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and the market in which it is operating. However, it is worth mentioning that a single-product company
might face large risk in the event of changes in the market.

Within the product portfolio, each product is launched with a specific objective, at a particular
moment, and has a different role. Products can be classified in many different ways depending on
the functions they perform. We will look here at some of the most common classifications:

Image anchors: The products that the product mix is built around. They are usually the most
profitable products and require the biggest investments, as the other products depend on the image
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they create.

"Promise" products: Those that are in the launch phase and whose function is to replace the leader
in the short term or complete a line.

"Regulator" products: They are those whose function is to absorb overheads and compensate for
fluctuations in the sales of other products. They are typical in highly seasonal markets.

"Tactical" products: These are created to defend the company from competitors and prevent them
from stealing market share. This may also be a product which is almost identical to another product
in the range but which are sold at a lower price in order to cover a different market segment.
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PRODUCT/MARKET LIFE CYCLE

Products/markets have a limited life during which they go through several phases, each of which
presents its own challenges, opportunities and complications, as well as variations in profits.
Products require different strategies depending on what stage of their life cycle they are in.

The product life cycle (PLC) model tries to describe not only the life of the product, but also that of
its target market. The life cycle of the product is primarily determined by technology. The life cycle of
the market is shaped by overall demand and its determinants. The model is also applicable to brands
which, although conditional upon the market concerned, have a cycle that is affected by the

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marketing efforts made by different competitors. It is therefore possible to observe declining brands
in an expanding market and vice versa. 18

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Figure 9 shows a graph representing the life cycle of a product-market.

FIGURE 9
PRODUCT-MARKET LIFE CYCLE

Global
Demand
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Development Introd. Growth Maturity Decline Time

INTRODUCTION STAGE

This refers to the launch period and is usually accompanied by slow sales growth. The company
usually experiences a loss during this period as a result of the sizeable investments in marketing and
sales.
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The objective of this phase is to inform consumers and/or potential customers about the new product,
and to induce consumers to try it and generate the appropriate distribution.

GROWTH STAGE

This stage is characterized by rapid growth in sales and profits. The product starts to become popular
and the market expands. New competitors emerge due to the increased attractiveness of the market.

The costs of communication and promotion stay level or rise, depending on the strength of demand.
The objective is to develop the market and increase market share.
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Some authors consider there to be an intermediate phase between growth and maturity. This is
known as competitive turbulence, and is a stage at which many competitors fall by the wayside, after
achieving fleeting success insufficient to sustain them long term.

MATURITY STAGE

This is the period in which sales grow at an ever slower pace due to the fact that the product has
now reached the majority of potential purchasers. In this phase, profits level off or decline due to the
numerous marketing and sales activities which are necessary in order to defend against attacks from
competitors.

18
Lambin, J.-J. (1987). Strategic Marketing Management (Published in Spanish as Marketing estratégico). McGraw-Hill.

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The objective is to maximize profits and defend market share. Fresh investments are made in R&D
in order to enhance the product so as to defend it against attacks from competitors. This may make
it possible to start another growth phase or delay the onset of the next phase, which is decline. In
this phase, an effort is usually made to segment the market and make it more profitable and thus
differentiate the company's offering from that of its competitors.

DECLINE STAGE

This is the final phase, in which sales fall and profitability shrinks. The basic goal in this stage is to
cut costs and optimize profits. There is always the possibility that the company will be able to hold
on to a sufficiently profitable residual demand.
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There are many reasons why markets go into decline. For instance, technological change may lead
to products being developed that better meet the consumers’ need. Changes in purchasing and
consumption patterns and changes in the environment (political, social or economic) are the main
causes of obsolescence in markets.

In general, the PLC model should be treated as a reference framework rather than a planning tool.
The duration of the life cycle and its phases will vary widely from one product or market to another.
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NEW PRODUCT DEVELOPMENT

Nowadays technological and social change is much faster than it was in the past and this is making
life cycles shorter all the time. It is therefore essential for any company that wishes to remain
profitable over the long term to develop new products. The development of new products has a wide
range of action and may vary from small modifications to existing products to genuinely revolutionary
innovations. However, we can define a series of stages within the development of new products:
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 Generation and selection of ideas. Companies use an almost unlimited range of resources at
this stage, from simply observing what their competitors do in other markets (investigate and
reapply), to contracting specialist agencies to detect trends, and of course, running their own
R&D and marketing departments.

 Concept development and test of potential. The ideas with the greatest potential are turned into
concepts by transforming them into words, phrases, and/or simple visuals in order for consumers
to be able to assimilate them and say if they are interested or not.

 Product development. In parallel, or once feedback from customers has been received and/or
consumers, the industrial process is developed and the investments needed for the production
line and the cost of production are evaluated.
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 Commercial development. The distribution channels, price, marketing investments and sales
objectives to make the investment profitable are determined.

The most successful companies invest a considerable part of their resources in the development of
new products and usually have ambitious objectives in their strategic plans regarding the contribution
to be made by new products. They therefore usually have well-defined innovation processes.

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GENERIC MARKET STRATEGIES

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In essence, it is possible to distinguish four different strategies regarding products and markets. The
two criteria are whether we plan to compete on the market with an existing product or a new one,
and if the market on which we plan to compete is the same as that in which we are already operating,
or if it is a new market. Figure 10 shows the different strategic alternatives according to Igor Ansoff's
model.

FIGURE 10 19
GENERIC PRODUCT-MARKET STRATEGIES
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Product
Actual New
Market (Not modified) (Modified)

Market Product
Actual
penetration development
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Market
New development Diversification

Source: Igor Ansoff

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Market penetration: The current product is sold in existing markets. The aim is to gain share by
means of a good marketing strategy allowing us to wrest market share from our competitors. A typical
example is to give out messages of superiority ("washes better than other detergents") or better
conditions ("our bank does not charge fees").

Market development: This consists of selling the product in its existing form in new markets. This
is mainly achieved by finding new uses for the product or identifying new segments of users or new
geographical areas ("an aspirin a day reduces the risk of heart attack").

Product Development: This means to carry on competing in the same market with a product after
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modifying one of its internal or external components. For example, with improvements of products
("car X is now even more powerful") or new versions of products ("economy size").

Diversification: The aim is to create new products or modify existing ones to sell them in new
markets (for example, a diet version of a soft drink or a men's version of ladies' perfume).

In short, a good product strategy consists of maintaining a sufficiently balanced product mix for the
company to be able to obtain the profitability it expects and to maintain a competitive position that
ensures its long-term survival.

19
Ansoff, I.(1957). “Strategies for Diversification.” Harvard Business Review. (Vol. 35, Issue 5). (Sep.-Oct.).

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TOOLS FOR ANALYZING AND MANAGING THE PRODUCT PORTFOLIO

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Analyzing the portfolio of products consists of determining the company's strategic position in relation
to two dimensions: the attractiveness of the market and the competitive position of the company in
each product-market.

Numerous models have been developed to determine the attractiveness and competitiveness
dimensions. We will look at two of the most commonly used ones, both of which were developed by
consultancy firms. Their aim is to allow us to determine the strategic situation of a company’s
products/markets.

BCG GROWTH/RELATIVE MARKET SHARE

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This matrix was designed by the Boston Consulting Group (BCG) as an instrument for the analysis
of a portfolio of products. It has a simple and readily quantifiable structure which is based on the
product lifecycle. The matrix is used to place products on a four-quadrant square defined by two
parameters: market growth and relative market share. It can be used to determine what priorities
should be given to a strategic business unit in the product portfolio.

Market growth is considered to be high or low according to the chosen criterion. This may be GNP
growth, the weighted average growth rate of each activity or any other desired criterion.
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Relative market share is the ratio between the product's sales and those of its main competitor.
This is obtained by dividing the product’s share by that of its immediate competitor. This is extremely
important as it is not the same thing to have a 50 percent share of a market in which the main
competitor has the other 50 percent, as a 50 percent share in which the other competitor has 10
percent (the relative market shares in these two cases being 1 and 5, respectively). A relative market
share of more than 1 is high, and less than 1, is low.

Using these criteria, the BCG model postulates the following: 20

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1. Products with a large market share are usually able to command bigger profit margins on their
sales, as they can charge higher prices, and achieve lower costs structure due to economies of
scale.

2. Fast growing markets call for high levels of investment in order to retain market share.

3. It is easier to earn market share in growing markets than in stagnant ones as market share in
declining markets has to be acquired at the expense of other companies.

4. A sales effort can shift a company’s products to the left of the graph, but the lower the growth
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rate, the harder this is to achieve. A sales effort by rivals, if not countered, can move a company’s
products towards the right of the graph.

5. Over time, a market will mature and its growth rate will slow down. Therefore, over time all
products will tend to sink towards the bottom of the graph.

6. The market leader always has a size advantage when it comes to dedicating marketing
resources to a product, due to their larger sales volume and profit margins.

On the basis of these postulates, the BCG model defines four groups allowing precise diagnosis, as
shown in Figure 11.

20
Alfaro Drake,T. (1992). El marketing como arma competitiva. McGraw-Hill.

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FIGURE 11

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BOSTON CONSULTING GROUP MODEL

R
A
T
H
I
?
E G
H
O
F RISING STAR QUESTION MARK
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G
R
O
W
T LB
H OO
WW

CASH COW DOG

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HIGH LOW
RELATIVE MARKET SHARE

Rising stars are high potential products in fast-growing markets. This means they require
considerable investment to sustain their growth and maintain their leadership. They are neutral in
terms of cash flow, i.e., they earn a lot but also call for considerable spending. Over time, if they
maintain their leadership position they evolve into cash cows, which is when they start producing
significant profits.
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Problem children or question marks are products that have a relatively small share of a fast-
growing market. They require considerable investment to avoid losing their position in a growing
market, but they do not generate income. They call for radical decisions, i.e., either keep them, and
give them all the support they need to become stars, and in time, cash cows; or abandon them after
having obtained as much as they can offer. Having products in this situation is good, insofar as it
allows to obtain a large market share and therefore greater profitability.

Cash cows are products with a large relative market share in a slow growing market. They are an
ideal source of cash as they do not require large investments. The main goal is to milk them so as to
use the cash they produce to invest in other products that need it.

Dogs are products with a low relative market share in an aging market. If they do not require
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significant investments, they can be kept occupying specific market segments but if they start to
require cash to survive it is best to drop them

This model allows us to consider different strategies for each product and analyze the financial needs
and potential profits of each product and assess how well balanced our portfolio of products is.
However, a number of clarifications should be made regarding the BCG matrix.

It is essential to define correctly the reference market in which the business is competing. If you
define the market too narrowly the model can suggest false positions of leadership, and vice versa.
In the same way, it is fundamental to determine which products to use as a yardstick when calculating
the product’s relative market share. A paradigmatic example is Coca Cola, which has a very large
share of the soft drinks market but a very small share of the "liquids a person drinks during the course
of the day" (the famous stomach quota). The strategic options vary radically depending on whether
you look at the competitive environment one way or another.

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In short, when looking at a product portfolio, the BCG model should be considered as an analytic tool
which needs to be backed up by other tools in order to allow decisions to be made about the various
different components of the marketing mix.

MCKINSEY-GENERAL ELECTRIC: COMPETITIVE POSITION/ATTRACTIVENESS OF THE

MARKET

The attractiveness of a market can depend not only on its rate of growth, but also on many other
factors, such as technology, distribution channels or the size or accessibility of the market. In the
same way, competitiveness in a market can be measured by brand image, access to a particular
technology or commercial organization.
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The “attractiveness-competitiveness” (AC) matrix developed by McKinsey-General Electric analyzes
the same parameters as the BCG model but expands the elements of the analysis.

If we look at the consumer software market, it may seem at first sight that its high rate of growth
defines it as an attractive market. However, if we look at the rapid obsolescence of the product, the
high investments in R&D and the intensity of the competition, we see it turn into a high-risk market,
and therefore less attractive.
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The AC matrix is determined by the two factors mentioned above. To determine the attractiveness
and competitiveness of a market, a series of objective indicators are created which depend on the
market’s particular situation.

To determine the attractiveness of a specific market the following criteria can be used: size and rate
of growth of the market, degree of concentration of the distribution and accessibility of channels,
level of concentration and aggressiveness of the competition, technical complexity of the product,
gross margin potential and investment needed and employment situation in the sector.
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To determine competitiveness in the same market, the indicators used could be: percentage market
share and penetration power, sales techniques and physical distribution, negotiating power, relative
market share, distinctive qualities of the product differentiating it from its competitors, access to
technologies, financial resources, and social climate.

All these indicators have to be measured against the sector and the main competitors. Some of them
can be weighted for their importance in the market being analyzed.

This leads to a two-dimensional classification subdivided into three levels. The result is nine boxes
corresponding to different strategic positions. The different activities of the company may be
represented by circles, whose surface area is proportional to its importance of total sales.
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As Figure 12 shows, the most important positioning is that of those at the corners of the matrix. Each
of these positions indicates a different strategy to follow.

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FIGURE 12

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MCKINSEY – GE MATRIX

A HIGH SELECTIVE OFFENSIVE

T DEVELOPMENT GROWTH
T
R
A
MEDIUM
C
T
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I
V LOW PROFILE
DIVESTMENT
E
LOW
N
E
WEAK MEDIUM STRONG
S
S COMPETITIVENESS

The AC matrix has the advantage of flexibility when selecting the evaluation criteria and provides an
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objective analysis whether the criteria are chosen and measured properly. However, the drawback
is that the analysis is tedious and demanding, especially if the right information is not available or it
is imprecise. Moreover, the relationship with financial returns is less clearly established than in the
case of the BCG model.

These and other portfolio analysis models have the advantage that they show us the strategic
position of our products in the market in a straightforward and intuitive way. However, they are not
always easy to prepare, as they require complete and reliable information about markets and
competitors. Moreover, the incorrect use of models of this kind carries the risk of obtaining a partial
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and simplistic view of the situation. ■ ■ ■

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