The Complete Guide to Product Portfolios
Product portfolio definition
Most companies define “product portfolio” as the collection of products they sell to customers, and that’s definitely a solid start. At Pragmatic Institute, we use a slightly broader definition of the term. We like to think of a product portfolio as any collection of individual things that can be used to solve market problems. That includes products, of course, but it also could include partners, strategy, service and delivery, and more.
Once you’ve developed and defined your product portfolio, it should be managed like a product in and of itself, with its own business plan, positioning statement, buying process, market requirements and marketing plan.
Why product portfolio management is important
Product portfolio management is a critical tool for prioritizing multiple products, assigning resources to the right products and ensuring you have a pipeline of new product ideas.
Whether you’re in a small but growing company or an established enterprise, it’s natural to tend toward the status quo. It’s easy to get stuck following the same patterns that got you to this point. Focusing on your cash-cow product to the detriment of other products is a natural bias. But it can spell doom for your company. That’s why product portfolio management is critical for companies that have multiple products. It allows you to objectively consider each product in your portfolio and then plan accordingly. Here are a few of the things that make product portfolio management so valuable.
It encourages new ideas. In the beginning, there will be a lot of ideas that fail, and that’s OK. By staging your resource allocation, you can ensure that only validated ideas progress from research to product development, and that only validated products progress to the growth and marketing stages.
It focuses on learning. At the start, you should be measuring only knowledge gained. It’s only once you have launched a product to the market and gained traction that you should even think about measuring revenue and users.
And throughout every stage of the process, everything you learn—every assumption, every failed idea, every test—should be stored in a central database. This allows others in your organization to access your hard-won knowledge, springboarding them to the next piece of learning they need to make their own product better.
It frees up resources. Product portfolio management allows you to assign resources when and where they’re most appropriate. For instance, developers can be tasked with the right projects. Resources being used by a declining product can be reassigned to ensure the growth of the next big idea. Marketers can focus on current offerings rather than worrying about products that haven’t been validated yet, and so forth.
It reduces risk throughout the process. With proper portfolio management, you’re only ever investing as much as an idea or product needs to get to the next stage, answer the next question or validate the next assumption.
It is a great sanity check on your strategy. Once you map all your products and ideas against the product portfolio management life cycle, you’ll quickly see if you’re spending enough time and resources on the front end of the process, generating new ideas and new products. You’ll determine if your execution matches your strategy.
It simplifies the sales process. If you have numerous products, it’s not uncommon to get to a point where the sales team has more than they can sell. Focusing on a collection of capabilities that solves a problem can streamline messaging and simplify the sales/buying process.
It can make you competitive. The right product portfolio strategy is especially useful for companies with products that don’t have the same set of capabilities as competitors’ products. When you start to think about those products as a part of a whole portfolio, you have a lot more strength in the competitive sales cycle. You can talk about getting started with the product and then having a customer say, there’s so much more to this portfolio than just this one product.
Product portfolio management is a critical tool for prioritizing multiple products, assigning resources to the right products and ensuring you have a pipeline of new product ideas.
How to build a product portfolio
Product portfolio strategy starts with mapping out all your products so you know what stage each one is at. Whether you call it the product life cycle, stage gates or “explore, exploit, sustain, retire,” it’s about classifying all your products into groups so you can ensure they get the appropriate level of resource investment.
Many product teams and companies fly blind when it comes to managing and making resource decisions about existing and new products. What product managers need is a practical approach to assess and manage their product portfolios that includes both analytics and planning.
- Analytics requires companies to assess their current state and determine where they are.
- Planning requires companies to determine where they’re going, how to invest resources for the best results, what their pipeline looks like and how to achieve portfolio goals. Planning also helps companies decide what to do about the products that aren’t going to make it.
The objective of both analytics and planning is to determine the optimal allocation of money and resources to deliver products that help meet a company’s strategic goals.
Visual tools are important for identifying ways companies can grow their product pipeline and plan for the future. They can help companies determine how to align their capabilities with their investment, what’s happening in the market and how their products are doing today.
First, choose a growth-share strategy matrix such as the Boston Consulting Group (BCG) chart. The purpose is to plot products based on relative market share versus the growth of the respective market. The BCG matrix is divided into four quadrants.
- The lower left quadrant represents cash cows — products that have a dominant market share in a relatively slow-growth market.
- The lower right represents dogs or loss leaders. As a rule, these products have a relatively small market share in a slow-growth market. They don’t contribute much to the business and typically businesses want to divest themselves of them.
- The top two quadrants represent high-growth markets. They’re divided into stars, which have a dominant market share, and question marks, which are products that are just entering a fast-growth market.
Identifying where company products fit on the chart provides a good sense of where to invest aggressively to maintain or grow market share and where to harvest product revenue to actively fund high-growth markets.
Also, incorporate time-based visual charts, including roadmaps and capacity charts that illustrate how changes in investment, market condition, etc., will impact the portfolio. Because there’s a lot of uncertainty involved in creating product portfolios, it’s important to manage that uncertainty by identifying ways to grow the portfolio over time. These visual tools help identify what is and isn’t in your product pipeline to plan for the future.
Lastly, apply R-W-W analysis to test assumptions. The ultimate goal is to produce a portfolio with products prioritized for resources and funding by asking:
- Is it real? Is the opportunity for the product linked to a market problem that is urgent and pervasive? Is there market value in solving the problem?
- Is it winnable? Does the company (and the product) have a decisive advantage with distribution, channel and overall go-to-market execution?
- Is it worth it? Is this the best strategic fit for the company? Are there other products or product opportunities in the portfolio that are a better use of resources and money?
As with any risk-based assessment activity, it’s counterproductive to look for perfect answers. Don’t look for certainty beyond a confidence level of 80%–85%. The goal is to eliminate flawed assumptions and avoid obvious miscalculations.
Practical portfolio management is a strategic, high-impact activity with potential results in the short and long term. It requires insight based on reliable market evidence and intuition. It requires rigorous quantitative and qualitative analysis, as well as strategic planning and execution that factors in things like growth through acquisition. Finally, it requires collaborative, iterative work from the entire product team to balance the different pieces of information and data, along with the uncertainty and risk.
The product team must:
- Be ready and willing to retire favorite products that don’t meet the needs of the market or the business
- Be ready and willing to kill — or at least defer — products that have potential but don’t fit the company’s business strategy or business model
- Rebalance money and resources with objective metrics
- Understand that there are no magic bullets
- AAccept the fact that high levels of precision are not possible
- Start here and start now
Creating a high-value, high-impact portfolio will maximize the return on a company’s innovation investments and maintain its competitive position. It will also achieve the efficient and effective allocation of resources while forging a link between project selection and business strategy.
The objective of both analytics and planning is to determine the optimal allocation of money and resources to deliver products that help meet a company’s strategic goals.
Horizon planning: A strategy for managing a product portfolio
Product portfolio management probably sounds pretty easy. But it’s tougher than it appears. After all, it’s not just about adding the right products and partners to meet your customers’ needs. You also have to consider:
- How to manage your product portfolio to achieve your goals today as well as tomorrow
- How to divide your resources, time and investments across your portfolio to support both long- and short-term goals
- How to balance the need to fully support your existing products that are bringing in the revenue while not losing sight of the need to innovate
This is where the horizon planning framework comes in. It has three stages that you’ll assign each of your products to.
- Horizon 1: This is where your core products live that make up the majority of your revenue. The innovation that happens here is incremental.
- Horizon 2: These are new and/or underperforming products that have the potential to grow much faster on a smaller base. Innovation is focused on differentiation.
- Horizon 3: Think of this as your pipeline. This is where the transformational innovation happens. This is where you study market problems and source and validate new product concepts to solve those problems.
The goal is to have balance across all three horizons. You don’t want any one horizon to be under- or oversaturated. If you only have products in horizons one and three and nothing in horizon two, that probably means you’re generating ideas, but no new business.
You may have a problem identifying new concepts that the market actually wants. If you only have products in horizons one and two, then you’re likely failing to see the future and your long-term viability could be at risk. But when you have products in all three horizons, you have a much greater likelihood of sustained growth.
Examples of product portfolios
To give you a better idea of what a product portfolio might look like and how product portfolio management can benefit your organization, consider the following examples:
Apple
The tech giant excels at portfolio management. Where once the Macintosh was their only product, today the iPhone is Apple’s cash cow, accounting for more than 60% of sales. Apple strategically offers products within its portfolios to appeal to all different market needs. Where they’ve determined not to invest development dollars, they partner with other brands to address customer needs, such as by selling Beats headphones and Belkin adapters. Of course, not every company is perfect — not even Apple. Case in point: When the company decided to release iPhone 8 and iPhone X at the same time.
Coca-Cola
The iconic red can or bottle of soda probably comes to mind when you think of The Coca-Cola Company, but the company actually owns more than 200 different brands of beverages, including Minute Maid juices and Fairlife milk products. In 2020, Coca-Cola retired a few products, including TaB, to focus on growing brands, such as Simply, and to make way for innovations like Coca-Cola Energy and AHA flavored sparkling water.
Potential pitfalls in product portfolio management
In any business, it’s important to constantly assess and optimize your product portfolio. Each time, you’ll want to keep an eye out for these common pitfalls:
- Having too many products in any one horizon
- Not retiring products that are past their prime
- Not investing in innovative products for the long term
- Being tempted to fill in every gap (it’s OK to not offer every possible solution if they aren’t in your company’s best interest)
- Not allocating resources in accordance with your product portfolio map
Consider the following example of how a technology company strayed from product portfolio management and into serious trouble — rediscovering the volume of a product portfolio.
Linchpin Technology* was a midsize business-to-business software company focused on network-based applications and solutions. For seven years, the company grew almost exclusively through acquisitions, adding more than 21 different products to its portfolio.
Several of Linchpin’s products were the de facto solution in their segments, but as the products matured, profits and market share declined. Although there were many expectations and promises for synergy between new product lines and existing products, a series of acquisitions did nothing to promote a synergistic product portfolio. In 2013, the company was purchased and became private, and the new CEO launched an initiative to assess the product portfolio.
Using the BCG matrix, available market data on the competition’s market share and growth rates for the segment, the product team placed Linchpin’s top five products in the applicable quadrants. They factored in other inputs such as each product’s relative contribution to Linchpin’s overall revenue, and indicated upward or downward trends for all products. The exercise, which combined quantitative and qualitative data, provided the leadership team with a fresh perspective on the portfolio’s health.
One product was a significant cash cow. The product’s relative size — and its significant contribution to current revenue — proved there was a funding source for new opportunities. Products previously thought to be stars, or big contributors to revenue, were actually less healthy, and the forecast for future growth wasn’t positive. One product, placed in the loss-leader quadrant, was a candidate for immediate retirement. Surprisingly, no new product opportunities were in the pipeline to take advantage of the available funds from the cash cow.
Linchpin was in an emergency situation and needed to find an opportunity or an acquisition target to replace several unhealthy products and change the negative outlook. The exercise pinpointed a portfolio with too many unhealthy products and a lack of product pipeline. It created a sense of urgency that encouraged stakeholders to aggressively balance the portfolio and align the product direction with the needs of the business.
The product team shifted its focus to:
- Implement a process to retire underperforming products
- Launch an initiative to target new product opportunities
- Manage risk and uncertainty within the current products
Senior leadership continued to evaluate the portfolio’s overall health by reviewing updates to the growth-share strategy chart and tracking progress and delivery through product roadmaps reviews, project reviews and release plans.
The moral of the story: Linchpin was like many product companies and most product portfolios. It included too many products and there were too few high-value products in the pipeline. The portfolio wasn’t balanced across risk and value, it didn’t align with the organization’s strategy, and it didn’t deliver the value it should. By strategically reviewing its portfolio, Linchpin was able to introduce a much-improved version of its technology to the market.
* Linchpin Technology is the pseudonym for an actual company.
How to manage a portfolio during mergers and acquisitions
Inorganic company growth through acquisition is a reality for most companies. It’s also an important way to achieve many of the product organization’s goals. For some companies, acquisitions are one of the best ways to advance technologically. Not only do they bring in necessary new technology, they’re often directly accretive in terms of market share, product revenue and profitability. However, the success rate for acquisitions isn’t great, especially in the technology sector.
Here’s what typically happens:
- The board of directors advises the executive team to look for a target company or product line to accelerate growth
- The executive team engages a firm to source potential acquisition targets
- The product team is aware but uninvolved
- The executive team selects a target and proceeds to due diligence
- Due diligence is completed and the deal closes
- Product management is asked to integrate the new products into the portfolio
- What product gaps or vulnerabilities does the acquisition address?
- How compatible is the selected target with our product strategy?
- Does the target product suite have a similar value proposition or similar go-to-market strategy?
- What level of product integration is necessary to achieve acquisition goals and objectives?
- Does the combined portfolio offer efficiencies that result in higher combined profits?
- Can the unique architectures coexist as new customers are added to both platforms?
- What new positioning must be created to solidify the new customer base?
- What critical roadmap elements will stretch the product team?
- What is the new priority for investing in products going forward?
Learn more about product portfolios
Developing the right product portfolio strategy will allow you to prioritize products, appropriately allocate resources and ensure you have a pipeline of new product ideas at the ready. Learn more about how to build and successfully manage a product portfolio and more in Pragmatic Institute’s Focus class today.