PPM analysis is a well-known framework that any student who is studying business administration cannot avoid. Portfolio management is the process by which a company with multiple businesses, products, and services allocates management resources to which areas. PPM (Product Portfolio Management) analysis is a method for evaluating businesses, products, and services on two axes, market growth rate and market share, and classifying and examining the optimal allocation of management resources, making it possible to confirm not only one’s own strategy but also the strategies of other companies.
What is PPM (Product Portfolio Management) analysis?
PPM analysis is a framework for allocating management resources that were developed by the Boston Consulting Group in the 1970s. By understanding the position of diversified businesses and multiple products based on the market growth rate and market share, it is possible to determine where resources should be allocated.
As shown in the figure, they are classified into four quadrants, each with a name such as “Star”, “Cash Cow”, “Problem Child” and “Dog”. Businesses classified into these four quadrants are not necessarily allowed to remain classified as they are, but must contribute to the overall profitability of the company. For example, a new business needs to grow its business from “Problem child” to “Star” to “Cash cow”. Left unchecked, the business could become a “Dog” and each has its own necessary responses. Let’s take a look at the characteristics of each quadrant and what kind of response is necessary.
What is Star?
A “Star” business is one in which both market growth and market share are high. It is a situation where the market share is high and profitable, but the market growth rate is also high, so the business is highly competitive and requires a large investment. It must be nurtured into a future “Cash Cow” while maintaining growth.
What is Cash Cow?
A “Cash Cow” is a business with a large market share and a stable revenue stream. On the other hand, since the market growth rate is low, future growth is not expected to be significant. Therefore, by reinvesting the profits from this business into “Problem Child” and “Star”, you can promote the growth of the business and create future “Star” and “Cash Cow”.
What is Problem Child?
A “Problem Child” is a business in a field with a high market growth rate, but which does not have a market share and is not profitable. This business has the potential to become a future “Star” business if it can gain market share, so the profits from the “Cash Cow” and other businesses must be invested and allowed to grow. It is important to decide whether to grow the business or withdraw from it so that it does not become a “Dog”.
What is Dog?
A “Dog” is a business with low market growth and market share. Since this business is not expected to grow, it is a situation in which the company should consider options such as liquidating the business, withdrawing from it, or selling it. By reallocating the management resources obtained through withdrawal from the business to the “Problem Child” or “Star” business, there is a possibility of contributing to the development of other businesses.
Strategic planning using PPM
Typical strategies that can be derived from PPM analysis are harvesting strategies that seek to maximize profits from Problem Child, Dog, and Cash Cow with minimal investment; expansion strategies that invest in Problem Child to increase market share; maintenance strategies that maintain market share of Cash Cow and Star to generate stable profits; and withdrawal strategies that withdraw from Problem Child and Dog to reorganize the business portfolio.
In this age of diversifying user preferences, it will be even more necessary to allocate management resources properly to create businesses, products, and services with higher customer engagement through selection and concentration. PPM analysis is a traditional method, but if you have not considered it in your company, you may want to plot your business or product against it.