Product Mix (Encyclopedia of Business and Finance)
The product mix of a company, which is generally defined as the total composite of products offered by a particular organization, consists of both product lines and individual products. A product line is a group of products within the product mix that are closely related, either because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. A product is a distinct unit within the product line that is distinguishable by size, price, appearance, or some other attribute. For example, all the courses a university offers constitute its product mix; courses in the marketing department constitute a product line; and the basic marketing course is a product item. Product decisions at these three levels are generally of two types: those that involve width (variety) and depth (assortment) of the product line and those that involve changes in the product mix occur over time.
The depth (assortment) of the product mix refers to the number of product items offered
Hypothetical State University Product Mix
WIDE WIDTH, AVERAGE DEPTH
|State||Post Secondary||Math Theory|
|Chemistry||Advanced Math||European Writers|
|Statistics||Logic Design||Creative Writing|
within each line; the width (variety) refers to the number of product lines a company carries. For example, Table 1 illustrates the hypothetical product mix of a major state university.
The product lines are defined in terms of academic departments. The depth of each line is shown by the number of different product itemsourse offeringsffered within each product line. (The examples represent only a partial listing of what a real university would offer.) The state university has made the strategic decision to offer a diverse market mix. Because the university has numerous academic departments, it can appeal to a large cross-section of potential students. This university has decided to offer a wide product line (academic departments), but the depth of each department (course offerings) is only average.
In order to see the difference in product mix, product line, and products, consider a smaller college that focuses on the sciences represented in Table 2. This college has decided to concentrate its resources in a few departments (again, this is
Hypothetical Small College Product Mix
NARROW WIDTH, LARGE DEPTH
|Geometric Concepts||Intermediate Physics|
|Analytic Geometry||Advanced Physics|
|Calculus II||Topics on Physics|
|Numerical Analysis||Condensed Matter Physics II|
|Differential Equations||Electromagnetic Theory|
|Matrix Theory||Quantum Mechanics II|
only a partial listing); that is, it has chosen a concentrated market strategy (focus on limited markets). This college offers narrow product line (academic departments) with a large product depth (extensive course offerings within each department). This product mix would most likely appeal to a much narrower group of potential studentshose students who are interested in pursuing intensive studies in math and science.
PRODUCT-MIX MANAGEMENT AND RESPONSIBILITIES
It is extremely important for any organization to have a well-managed product mix. Most organizations break down managing the product mix, product line, and actual product into three different levels.
Product-mix decisions are concerned with the combination of product lines offered by the company. Management of the companies' product mix is the responsibility of top management. Some basic product-mix decisions include: (1) reviewing the mix of existing product lines; (2) adding new lines to and deleting existing lines from the product mix; (3) determining the relative emphasis on new versus existing product lines in the mix; (4) determining the appropriate emphasis on internal development versus external acquisition in the product mix; (5) gauging the effects of adding or deleting a product line in relationship to other lines in the product mix; and (6) forecasting the effects of future external change on the company's product mix.
Product-line decisions are concerned with the combination of individual products offered within a given line. The product-line manager supervises several product managers who are responsible for individual products in the line. Decisions about a product line are usually incorporated into a marketing plan at the divisional level. Such a plan specifies changes in the product lines and allocations to products in each line. Generally, product-line managers have the following responsibilities: (1) considering expansion of a given product line; (2) considering candidates for deletion from the product line; (3) evaluating the effects of product additions and deletions on the profitability of other items in the line; and (4) allocating resources to individual products in the line on the basis of marketing strategies recommended by product managers.
Decisions at the first level of product management involve the marketing mix for an individual brand/product. These decisions are the responsibility of a brand manager (sometimes called a product manager). Decisions regarding the marketing mix for a brand are represented in the product's marketing plan. The plan for a new brand would specify price level, advertising expenditures for the coming year, coupons, trade discounts, distribution facilities, and a five-year statement of projected sales and earnings. The plan for an existing product would focus on any changes in the marketing strategy. Some of these changes might include the product's target market, advertising and promotional expenditures, product characteristics, price level, and recommended distribution strategy.
GENERAL MANAGEMENT WORKFLOW
Top management formulates corporate objectives that become the basis for planning the product line. Product-line managers formulate objectives for their line to guide brand managers in developing the marketing mix for individual brands. Brand strategies are then formulated and incorporated into the product-line plan, which is in turn incorporated into the corporate plan. The corporate plan details changes in the firm's product lines and specifies strategies for growth. Once plans have been formulated, financial allocations flow from top management to product line and then to brand management for implementation. Implementation of the plan requires tracking performance and providing data from brand to product line to top management for evaluation and control. Evaluation of the current plan then becomes the first step in the next planning cycle, since it provides a basis for examining the company's current offerings and recommending modifications as a result of past performance.
Since top management is ultimately responsible for the product mix and the resulting profits or losses, they often analyze the company product mix. The first assessment involves the area of opportunity in a particular industry or market. Opportunity is generally defined in terms of current industry growth or potential attractiveness as an investment. The second criterion is the company's ability to exploit opportunity, which is based on its current or potential position in the industry. The company's position can be measured in terms of market share if it is currently in the market, or in terms of its resources if it is considering entering the market. These two factorspportunity and the company's ability to exploit itrovide four different options for a company to follow.
- High opportunity and ability to exploit it result in the firm's introducing new products or expanding markets for existing products to ensure future growth.
- Low opportunity but a strong current market position will generally result in the company's attempting to maintain its position to ensure current profitability.
- High opportunity but a lack of ability to exploit it results in either (a) attempting to acquire the necessary resources or (b) deciding not to further pursue opportunity in these markets.
- Low opportunity and a weak market position will result in either (a) avoiding these markets or (b) divesting existing products in them.
These options provide a basis for the firm to evaluate new and existing products in an attempt to achieve balance between current and future growth. This analysis may cause the product mix to change, depending on what management decides.
The most widely used approach to product portfolio analysis is the model developed by the Boston Consulting Group (BCG). The BCG analysis emphasizes two main criteria in evaluating the firm's product mix: the market growth rate and the product's relative market share. BCG uses these two criteria because they are closely related to profitability, which is why top management often uses the BCG analysis. Proper analysis and conclusions may lead to significant changes to the company's product mix, product line, and product offerings.
The market growth rate represents the products' category position in the product life cycle. Products in the introductory and growth phases require more investment because of research and development and initial marketing costs for advertising, selling, and distribution. This category is also regarded as a high-growth area (e.g., the Internet). Relative market share represents the company's competitive strength (or estimated strength for a new entry). Market share is compared to that of the leading competitor. Once the analysis has been done using the market growth rate and relative market share, products are placed into one of four categories.
- Stars: Products with high growth and market share are know as stars. Because these products have high potential for profitability, they should be given top priority in financing, advertising, product positioning, and distribution. As a result, they need significant amounts of cash to finance rapid growth and frequently show an initial negative cash flow.
- Cash cows: Products with a high relative market share but in a low growth position are cash cows. These are profitable products that generate more cash than is required to produce and market them. Excess cash should be used to finance high-opportunity areas (stars or problem children). Strategies for cash cows should be designed to sustain current market share rather than to expand it. An expansion strategy would require additional investment, thus decreasing the existing positive cash flow.
- Problem children: These products have low relative market share but are in a high-growth situation. They are called "problem children" because their eventual direction is not yet clear. The firm should invest heavily in those that sales forecasts indicate might have a reasonable chance to become stars. Otherwise divestment is the best course, since problem children may become dogs and thereby candidates for deletion.
- Dogs: Products in the category are clearly candidates for deletion. Such products have low market shares and unlike problem children, have no real prospect for growth. Eliminating a dog is not always necessary, since there are strategies for dogs that could make them profitable in the short term. These strategies involve "harvesting" these products by eliminating marketing support and selling the product only to intensely loyal consumers who will buy in the absence of advertising. However, over the long term companies will seek to eliminate dogs.
As can be seen from the description of the four BCG alternatives, products are evaluated as producers or users of cash. Products with a positive cash flow will finance high-opportunity products that need cash. The emphasis on cash flow stems from management's belief that it is better to finance new entries and to support existing products with internally produced funds than to increase debt or equity in the company.
Based on this belief, companies will normally take money from cash cows and divert it to stars and to some problem children. The hope is that the stars will turn into cash cows and the problem children will turn into stars. The dogs will continue to receive lower funding and eventually be dropped.
Managing the product mix for a company is very demanding and requires constant attention. Top management must provide accurate and timely analysis (BCG) of their company's product mix so the appropriate adjustments can be made to the product line and individual products.
Assel, Henry. (1985). Marketing Management Strategy and Action. Boston: Kent Publishing Company.
Bernhardt, Kenneth L., and Kinnear, Thomas C. (1983). Principles of Marketing. Scott, Foresman and Company.
Dickson, Peter R. (1994). Marketing Management. Harcourt Brace College Publishers.
Kotler, Philip (1980). Principles of Marketing. NJ: Prentice-Hall.
Myers, James H. (1986). Marketing. McGraw-Hill.
Schewe, Charles D., and Smith, Reuben M. (1983). Marketing Concepts and Applications. McGraw-Hill.