In today’s complex business environment, balancing the product portfolio has become more
Of the three existing products:
There are three products in the portfolio which require additional investments which causes stress on the system because there is just so much cash to go around.
This is a classic portfolio and a classic business challenge.
Traditional business acumen tells you to “milk” the two existing products and use the margin to nurture the newer products and the product pipeline.
But things are changing. New, provocative players such as activist investors have added a new voice and new thinking to the conversation. A different way of thinking is to:
The voice of the activist investor says that companies are wasting value and potential positive cash by not focusing on the new, more expensive, high margin products.
In my opinion, a deciding factor in this debate should come from the voice of the customer which all too often the new thinkers and the activist investors tend to forget about.
The Voice of the Customer and the Product Portfolio
In the learning session we ran last week introducing the new biopharmaceuticals simulation, the best performing team was the one who was able to optimize their portfolio to the size and needs of their targeted customers. A few key learning points:
In addition, the new product which was ready to launch:
Based on these factors, the team that performed the best, took big, bold steps to focus on the new products and evolved the portfolio to eliminate the mature lower margin products even though they still made up a significant amount of the top line revenue.
Associated Costs and Impacts to Profitability of Optimizing the Portfolio
Another reason why “traditional” product portfolio management suggests that company’s “milk” their mature products is because they use up manufacturing capacity that would otherwise go wasted. 30 years ago, that may have been a huge issue, but today it’s not. Today, companies – just like my team did in the simulation – can sell or divest excess manufacturing capacity and utilize contract manufacturing organizations. Many times, these CMOs can produce higher quality products at substantially lower costs increasing profitability even further.
In summary, it’s a different business world and one place where it’s critical to have evolved business acumen skills to better understand managing the product portfolio. The new approach is to be more flexible, take bigger and bolder steps, and focus on the products that customers want and will give you the most value in your value chain.