Portfolio Models Essay
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The use of portfolio models in marketing has been gaining increasing use since 1960s. The portfolio models were developed with the aim of helping in the development of market share and growth. These models have been used as strategic thinking model in the making of business decision. These models include BCG, General electric/shell, Hofner-Schendel, Experience Curve and Porters Competitive models. Each model has been criticized on the capabilities and according to its scope on market share. These models have been found to lead to the wrong decision in investment and other business processes.
The portfolio models assume a causal relationship between the market share and the profitability of a product in the market. The common scope of portfolio models is the way it tries to ignores some of the most relevant strategic issues in business. Therefore, all models cannot be taken as an effective strategic decision making model. It should however be discarded or it should be used with caution.
This paper does not recommend the use of portfolio models and an alternative way should be sought to replace this. Introduction
Portfolio models can be defined as a method or strategy in which a new product will be introduced in the market and perform as it was expected. In the 1960s, there was growing assertion of the use of portfolio models in marketing. There was growing interest on the development of market share and growth strategy which later came to be known as marketing portfolio. The BCG matrix, Hofner-Schendel, Experience Curve and Porters Competitive models and GE/S were meant to achieve the marketing needs especially when introducing new products in the market.
They were meant to stimulate strategic thinking especially among the senior marketing executives in the turbulent business environment. However, there has been dysfunction of these models in the way they are taught and the way they are applied in the market. This study will look into the applicability of portfolio models in strategic decision making in marketing. The study will evaluate the view from a number of literature to understand whether the model can really be applied to the decision making process or not.
This paper therefore evaluates the available literature which has given an insight into this model to understand how it can be applied in strategic marketing decision. There are other methods that were introduced to give a product a distinctive market share especially when it’s introduced. There are four commonly used methods to approach this matter, the Boston consulting group (BCG), the General electric/shell (GE/S), Hofner-Schendel, Experience Curve and Porters Competitive models.
Therefore to give the clear meaning of the portfolio model, there is a need to understand how the portfolio models work. The first step to be taken when using the above models is to understand the different business/ marketing strategies of the company. Portfolio models in marketing decisions Portfolio models management generally defines the way business comes up with strategic decision to venture into the market. In this definition, the strategic marketing decision is a method by which marketing ideas are made and implemented in order for a product to have stronger grounds in the market.
At any one time, company will be coming up with new product which will need to be introduced to the market in the most successful way. Portfolio models therefore provide the business with important tools for analyzing of the strategic decision to determine their effectiveness in the market (Abell and Hammond, 1979, p. 42). Purpose of portfolio models in strategic decision making in marketing There are mainly four main purpose of using the portfolio models in the strategic marketing decisions which are pursued in portfolio management and must be achieved through any model that is used.
These goals include the maximization of portfolio, seeking of the right balance of the available projects, aligning of the portfolio strategically, and aligning the projects to the available resource (Ansoff, 1984, p. 12). Smith and Swinyard (1999, p. 2) also show that portfolio marketing models are important for an organization to assess the overall success of a new product in the market before a lot of money is used in the development of the product. They both call for the use of multiple marketing models in order to achieve the overall success of introducing new products in the market.
This will reduce the failure rate of the products and extend their life cycle in the market. (Thomas, 2002, p. 61) The models can also be used as important tools to forecast the level of competition and therefore draw upon effective way of beating this competition. They help to forecast the performance of a product in the market so as to draw up strategies to effectively introduce it in the market. Edgett, Cooper, and Kleinschmidt (2002, p. 2) showed that in order to achieve full development of a new product in the market, there has to be effective portfolio management.
There are different types of portfolio models that include the BCG, GE/S, Hofner-Schendel, Experience Curve and Porters Competitive models. In his review of the portfolio models, Day (1977, p. 32) showed that the use of bubble diagrams had been gaining increasing use in business. Day shows that these models resemble the portfolio models with stars, cash cows, dogs, and others. He showed that these models could be used successfully to forecast the market in the future.
Day therefore asserted the role of matrix like Boston matrix in marketing. The Boston matrix could be used to show four quadrants as has been shown by Day and corresponding strategies which could be used in each quadrant. However Day criticizes the matrix on the sense that it is too narrow on its scope. He asserts that the BCG matrix has a narrow focus on the market share of the product. On the other hand Morrison and Wensley (1991, p. 106) provided an insight into the portfolio planning models as used in making business decision.
They asserted that the use of BCG matrix in portfolio management is inhibited by difficulties in measurement of the rate of market growth and the relative market share of the product. This is due to a number of reasons. They gave the most prominent reason being the fact that market boundaries are often very difficult to fix which meant the different matrix methods will give different recommendations for a given situation. Therefore they argue that the common scope of BCG matrix in a way ignores some of the most relevant strategic issues in business.
Though these other models are not as famous as BCG, Day still argues that use of them could also lead to success in the market. Day advocated and recommended the use of Porters competitiveness that he viewed to have higher possibilities of success than other models if its well implemented. It is commonly used in an already operating business with other products in the market. The experience curve can only be help to the company that has been in the market for sometime with a different product.
The experience that the company has gained in the given period will determine the strength of the company in the market. This has been used by several companies like coca-cola in the introduction their mineral water. It would be hard for a company that has not been doing well in the market to succeed with the new product. They showed that Boston matrix was a technique for one season and not for all the season. This is because its popularity and use increased in the 1960s and 1970s and then plummeted due to the challenges faced in the market.
They showed that the single chart could be successfully used to determine the growth potential and the competitive strength of a product in the market but this has rapidly changed with time. Armstrong and Brodie (1994, p. 38) evaluation on the applicability of the Boston matrix concluded that the use of the matrix to guide investors often would result to wrong decision through the use of BCG. General Electric and Shell, Porters competitive models are designed for long term use in the market, once the product has been introduced in the market, the models techniques still continues to support the product through the entire life in the market.
Whichever model is used, it has to be used for entire life of the company because no other model will fit without altering the companies business especially when the company is introducing new product in the market. Although they based their study on a small number of graduates in a class, they gave a further warning against the use of the matrix in a simple mind. Armstrong and Brodie (1994, p. 3) carried out a study on the effect of the portfolio planning methods on the overall decision making process.
Their study pointed out the weakness in the use of BCG matrix in making strategic decision in an organization. Their study revealed that the use of BCG matrix in making investment decisions was highly likely to lead to unprofitable investment while Robert and Merton (1989, p. 210) advocates that the implementation of other models instead of matrix were intended for lifetime decision making. If not well implemented, there is a probability of causing life time losses and would be hard to recover unless the product is withdrawn from the market.
Each model has some weaknesses bas they are exposed out in the way models assume a casual relationship between the market share and the profitability of a product in the market. Morison and Wesley (1991, p. 26) also pointed out lack of consistency in the use of the portfolio models in determining market growth and profits. These studies give varied views on the use of Boston matrix, GE/S, Hofner-Schendel, Experience Curve and Porters Competitive models in making marketing decision. They all seem to point out on the weaknesses of these models in light of their theory and application.
There are other ways a business can prosper other than using portfolio models. The strategies used in introducing the product in the market is all that matters, portfolios are just to give the business a rough idea on how to approach the marketing matter but not to give a conclusive tread which the business should follow. Conclusion Portfolio models are applied in portfolio management. They are applied in management to make strategic marketing decision. Though they had gained increasing use in different times, they have some weaknesses that are fatal to the welfare of the business in future.
On the other hand they may give a rough idea on how to approach the market issues and on how to introduce the new product in the market. In all portfolios, not is able to predict the growth and the profit margins or losses on the other hand for the product, thus making them less important tool for the marketing. However the use of models should be discarded and there be implemented new strategies that would be able to address the issues of the business on long term and in both growth and revenues that are likely to be gained by the introduced product.
Recommendations: The use of portfolio models is not recommended and if they have to be used, they must be implemented with great caution. None of all models has proofed an effective strategic decision making in regard to the marketing issues. It should however be discarded or it should be used with caution. This paper does not recommend the use of portfolio models and an alternative way should be sought to replace this.