Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 10: considering the interconnected economics of product portfolios 2

Posted in macroeconomics by Timothy Platt on March 25, 2015

This is my tenth 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 6-9.)

I raised the topic of portfolios of products and how they fit together to meet a providing business’ needs, at the end of Part 8, then focused on that complex of issues in Part 9 where I offered a simplest case example with two products included, in different stages of their product life cycles.

My goal for this posting is to at least begin to move beyond that simplest two product portfolio model, to consider more realistic complexities and their contexts. More specifically, I stated at the end of Part 9 that I would turn here to discuss:

• Forces and factors that would determine how many products need to be in a portfolio pipeline, in their various stages of their product lifecycles at any one time, in order to meet prudent due diligence business stability goals.

I at least begin addressing that by considering the basic product portfolio requirements of two very different types of manufacturing businesses: a bread bakery, and a company that produces and markets low-end fad and novelty items.

The bread bakery scenario: Bread is sometimes called the staff of life, and is a basic food staple. And it has been an ongoing essential product in its many forms, and for many cultures for at least as long as there have been historical records. So as previously noted in this series, bread per se is a quintessentially long-standing example of a product type with a long-term stable and reliable market demand. It is a mature technology product type with an open-ended product life cycle, to use the terminology that I have employed in this series when discussing the economics of what a business brings to market.

In principle, a business that has a sufficiently large marketplace community to sell to, and that offers a quality product that would generate ongoing repeat business from that customer base, could get by and profitably succeed and long-term with only one real product in its portfolio. Most bread bakers in fact offer a range of bread products, and they frequently bake and sell cakes and pastries and other related products too. But this can mean going beyond the minimum level of product offering complexity that would be needed simply to stay in business, as a way to capture and hold a wider market share.

I have already written of product synergies, and about how the various entries in a well balanced portfolio of manufactured products can help to boost the level of sales for each other (see Part 9.) Adding in seasonal and holiday specialty baked goods and other product offerings that would be in demand for at least peak periods can increase ongoing sales throughout the year by building and maintaining repeat customer loyalty. But this all goes beyond simply offering a minimum necessary product portfolio as a strategically planned and executed path to increased competitive strength and business stability. A basic minimal product portfolio is still defined as offering as small as possible a range of distinct products, and in principle and for this type of business it might comprise one long-term, in-demand staple offering.

The low-end fad and novelty manufacturer scenario: When products offer stable ongoing sales and profit generation opportunity, fewer are needed to make a microeconomically stable product portfolio that would meet a manufacturing business’ ongoing fiscal due diligence needs. The more uncertain the sales and income generating potential of any given product in a portfolio and the shorter its expected profit generating phase in its individual product life cycle, the more of them have to be included in a product portfolio if it is to meet those same basic fiscal due diligence requirements. And the quintessential example of that type of manufacturer is the fad and novelty item manufacturer.

As already noted in earlier writings in this blog, short-term profitability at best from any one product, imposes pressures on a manufacturer to reduce all of the cost-center stages of that product’s life cycle, including selecting materials and methods used for manufacturing to minimize per-unit cost to produce. Fad and novelty items tend to be inexpensively and even cheaply made and for a reason. That helps keep their manufacturer in business by making it easier for any given offering in a product portfolio to covers its own costs and bring in at least some profit.

That addresses the issues of minimum product portfolio size, and as with my bakery example from above, I go beyond that first step analysis here too, to consider portfolio expansion beyond an absolute fiscal due diligence-driven minimum. My bread bakery example would offer bread varieties that are essentially always in stable demand and would supplement that core portfolio of offerings with seasonal and other recurringly popular products that will be in predictable demand, but not throughout the entire year. And to help limit any explicitly cost-center expenses in these products’ life cycles most of them would be produced using the same basic equipment and even from largely similar ingredients as would be used in producing their long-term stable sellers – their core product portfolio items.

Now let’s flip that around to consider product portfolios and portfolio expansion in a fad and novelty manufacturing context. My example bakery develops and maintains a loyal customer base by carefully selecting and using premium ingredients and by baking its products with care. And it reduces its overall costs by sticking to products that do not require special additional capital investment in order to produce them – that can be made with the ovens and other equipment and resources that are going to be at hand anyway. The novelty manufacturer sells short-lasting fad and novelty items to impulse buyers, and cuts corners on their production for the materials they use. But at least as importantly, and to greater overall manufacturing cost impact, they design and build their products so as to be able to use as close to the same processes and manufacturing equipment as possible too, again and again and for as many of their different product offerings as possible. So if for example, they use injection moulding equipment to produce the largely plastic parts that go into a product A, they use the same manufacturing equipment with a different injection mould pattern, and the same plastic raw materials that they already know how to work with in their products B,C, D and so on – and with production switchover and re-setup costs kept to a minimum where they mostly just need to swap out one production mould for another to switch to making a new product. And they have the same experienced personnel who made their product A injection moulds, make the next ones as they become needed, and with the same equipment used for that work and again and again too.

In both scenarios, effort is made to reduce product lifecycle costs, and regardless of whether their basic business model means offering few products of ongoing high quality, or a great many different lower quality products that they can sequentially offer for individually short-term marketability and consumer interest.

I am going to switch directions in my next series installment to consider standardized and customized products, and how both of these terms take on distinctly different meanings when considered from the manufacturer and the consumer perspectives. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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