Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 9: considering the interconnected economics of product portfolios 1

Posted in macroeconomics by Timothy Platt on February 17, 2015

This is my ninth posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-5 and Macroeconomics and Business 2, posting 203 and loosely following for Parts 6-8.)

I have primarily been focusing in this series on individual products that would be brought to market, and in Part 8 on innovative business processes as they can be used to more effectively market and sell them. And in the course of that discussion (e.g. in Part 8), I have at least begun to raise the issues of product portfolios too.

• My goal for this posting is to more fully discuss these suites of marketable offerings and how the economics of individual products in a portfolio impact upon each other and upon the economics of potential innovations that are still under development too.
• I add that a more strictly microeconomic approach to product portfolios such as that, represents only one possible perspective that can and I add should be pursued in developing and offering a product portfolio. So, for example, I have written recurringly about the issues of aligning what is offered to the marketplace to the underlying business model in place, and developing portfolios of offerings that synergistically support each other for marketing and sales. And together those points represent a business strategy and operational implementation approach to product portfolios.
• My perspective here will be essentially entirely business finance and economics-oriented.

And with that noted, I start with the fundamentals, and with a selective discussion of product lifecycles and product windows of opportunity, and by noting a set of conclusion points for this posting that I will seek to build a case for in what follows:

• Every product that goes to market as a source of potential value to its manufacturing business, follows a distinct lifecycle.
• And the effectiveness of a product portfolio, at least when viewed from a business finance and microeconomic perspective, comes from how cost-center and negative cash flow phases of those lifecycles, and positive cash flow revenue generating phases of them can be coordinated, for maintaining ongoing overall positive cash flow for the business as a whole.

To put that into perspective, if a primary goal in developing a coordinated, effective product portfolio from a strategic marketing perspective is to develop a suite of products that will in effect help sell each other and if, I add, the primary goal here from a strictly manufacturing perspective is to develop a suite of offerings that can make the most cost-effective and time and effort effective use of manufacturing resources in place, then from a finance and microeconomics perspective effective product portfolio design is all about developing a set of offerings that with time, can create a smoother and more reliably predictable overall cash flow and steady revenue and profit generation. And in all cases, effective product portfolio design is a business due diligence exercise.

And now let’s consider product lifecycles – as considered from a business finance and microeconomics perspective:

• Initial new product design and development and any initial proof of principle and feasibility prototyping build-outs that would be called for constitute clear-cut cost-centers insofar as they require investment of liquid capital and of a variety of non-liquid assets as well, and all without generating immediate, within-lifecycle phase return on any of that investment.
• Preparing for larger scale manufacturing to bring a new product to market, in and of itself is also primarily a cost-center activity, though it is one that is more likely to lead to a positive return on investment than initial design efforts. That is because new potential products that reach this lifecycle stage have already been pre-selected for favorable likelihood of being successful market offerings for this business. So they have in fact passed beyond simply being potential business offerings per se. But up to here, all activity and all phases of the product lifecycle have represented red ink and accumulating costs.
• When a new product is manufactured for sale, shipped out and marketed and begins to be sold, positive cash flow and revenue generation from it begins to come in, and the above-noted cash flow scenario begins to turn around. And the initial minimal success goal for this new product at this point is to at the very least bring in enough new revenue to cover both earlier, pre-sales lifecycle costs as noted above, and ongoing manufacturing and related costs as well for actually bringing it to market (e.g. the costs of raw materials and preassembled parts acquisition and processing, manufacturing itself, warehousing, shipping, marketing campaigns to help build and drive consumer interest, etc.)
• If a product is never able to even recoup the costs that were expended in bringing it to market, it is a fundamental failure. If it brings in enough new revenue to meet that minimal goal and more, exceeding simple break-even for all of the above noted and related costs that accumulate for it, then it is a real success. And if this success can become ongoing and reliable for this business, it can become a mainstay in developing and maintaining that business’ overall financial and marketplace-competitive strength.

Now let’s consider a scenario that includes two products at a time, creating a simplest case product portfolio. One of them has already been successfully brought to market and at least in the timeframe under consideration here, it is reliably bringing in a stream of revenue above its ongoing break-even expenses – and as such it is generating real profit to the business. The second of these products is new and still in its pre-sales cost-center stages in its lifecycle. From a finance and microeconomics perspective, Product 1 pays for Product 2 through its early stages. And if Product 1 begins to drop off in sales as newer alternative products hit the market and begin to successfully compete with it, Product 2 can (hopefully) replace it as a reliable source of new stable revenue generation as Product 1 enters late phases of its lifecycle.

• An effective product portfolio consists of a series of overlapping lifecycle offerings that cover each other’s cost-center phases and that collectively provide a sufficient, and sufficiently stable minimum positive cash flow and profit at any one time so as to allow for reliable due diligence based business planning.

I am going to switch directions in this discussion in my next series installment, and discuss forces and factors that would determine how many products need to be in the portfolio pipeline, in their various stages of their product lifecycles at any one time, in order to meet prudent due diligence business stability goals. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.


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