As explained earlier in the precious section, a large number of Japanese enterprises have undergone diversification and are performing multiple number of operations. The view of an enterprise is determined on basis of a very important condition whether the limited management resources can be distributed properly in the multiple operation environment.
The American enterprises which are one step ahead in diversification as compared to Japanese enterprises, have already faced a very serious management problem in 1970’s when it became difficult to manage multiple number of operations as a result of progress in diversification. The distribution of limited resources in the diversified operation scenario became a very big management problem. One of the techniques developed for solving this type of problems is known as PPM (Product Portfolio Management). A large number of methods have been developed in relation to PPM so far. We shall learn the important basis structure here.
(1) PPM
PPM was developed by Boston Consulting Group (BCG). It has already been explained that the management resources comprise men, material, money and information. The PPM lays more emphasis on the capital money, its management resources and especially on the flow of funds. Further, PPM has the experience curve and product life cycle as the pre-requisite conditions and it explains in a vision, how the market share and the market growth and cashflow are linked.
(a) Inflow of funds
Inflow of funds is closely related to the market share. Any enterprise, which is at the position of a leader in the market share obviously produces maximum quantity of products. Therefore, experience curve can progress towards right bottom faster as compared to the other companies and can produce the product a minimum unit cost. Therefore, it has the pre-dominance in the competition and the cash flow is higher. In this way, the cash inflow is determined by the position of the said operation in the market competition.
(b) Cashflow : Outflow of funds
The outflow of the funds related to the growth rate of the market. In a market having higher growth rate, it requires large amount of funds to maintain the market share. Further, the expansion of market share also requires more amount of funds. The cash outflow varies largely depending upon where exactly the operation stands in the overall life cycle. In PPM it is important that the cash inflow and outflow are balanced in overall industry.
In concrete terms, the growth rate of the market and the relative market share (the ratio of market share of one’s own company to the market share of the biggest competitor) are taken as the standards and various products as well as the operations of one’s company are placed in four cells (product portfolio matrix) . The relative market share expresses the competitive strength of the operation and the growth rate of the market expresses the attention of the market.
The PPM provides a tool for striking a balance in the cashflow by clearly defining the required quantity and output quantity of cash for each operation ( it summarises in tabular form) and it suggest what type of strategy must be followed for each operation.
(c) Discrimination of operation unit
First of all, it is necessary to distinguish the operation units, to which the resources are considered for distribution, in order to place various operations in 4 cells and to carry out the distribution of the management resources. Operation units must satisfy the conditions given below.
· It should have an operation mission independent of other operation units.
· Having clearly defined competitors.
· To become an independent competitor in the market.
· To plan and integrate strategy, independent of other operation units concerning the product, market, equipment and organisation.
· The persons responsible for operation unit should be allowed to freely handle within the scope of the plan the technology, manufacturing and marketing, necessary for the success of the operation unit.
(2) Characteristic features and the strategy for each cell can be compiled as given below
(a) Goose that lays golden eggs
Those operations which have lower market growth rate but higher market share are termed as the goose that lays golden eggs. This type of operation belongs to a market which has already reached maturity stage.
Therefore, the attraction of market growth is poor. However, it has pre-dominance of competition, therefore, the cash outflow is low and cash inflow is more. It generates cash for re-investment which is required for maintaining the market predominance. Therefore, the goose that lays the eggs is major fund resource which shall meet the requirement of funds for the growth of other operations.
The typical strategy takes care of diverting surplus cash inflow to a different product, once a strong position has been ensured.
(b) Popular product (*)
This “popular product” can become “goose that lays golden eggs”, if the operation involved can sustain the high share. Further, it can become a resource for supply of cash for the other operation, which require funds.
(c) Problematic child (?)
Any operation, where market growth rate is very high but the market share is very low, is called problematic child. In most of the cases, this operation, requires too much of cash investment as compared to the cash generated. This is so because the market attraction is more whereas the operation has failed to ensure the pre-dominance in the market competition. It requires large amount of funds to ensure higher market share in the high growth market. The cash outflow is very high but the cash inflow is low.
In the event of its just sustaining the share, it reaches the stage of the underdog once the market growth has stopped, even when the cash supply continues. Therefore, it becomes necessary to select to from among the problematic children an operation in which it is possible to attain the pre-dominance of competition in the high growth market by investing funds. It is also necessary to withdraw from an operation when pre-dominance of competition can not be ensured.
(d) Underdog (X)
A product which has low market growth as well as low market share, is called as underdog. The cash inflow as well as cash outflow are low in such an operation. The industry does not have much attraction for this operation and the competition strength is also very weak. There is no other option but to withdraw when possibility of switch over to a better state is remote.
Considering from the view point of balance of cash flow, the popular product which has high growth and strong competition strength, the goose that lays golden eggs, which can supply cash required for the growth in the future and the problematic child which can be turned into popular product by further investment are necessary for the growth of the enterprise. The underdog is not required.
(3) The Problems and the Limitations of PPM
Various problems and the limitations of PPM have also been pointed out. These have originated mostly because of classification based on simple common standards and due to excessive importance given to positioning.
PPM helps in forecasting the flow of funds in the existing operations. However, a large number of problems are faced when PPM is applied mechanically. There is possibility that an operation which can be switched over to a better state is positioned with undergo and is processed accordingly. The use of PPM in a mechanical manner ends up in giving importance to simple and common standards. This means that the typical characteristics of each operation are not given the due importance.
The standard also varies depending upon the industry. Further, life cycle also varies many times depending upon the industry and is not fixed feature. Variations in experience curve on the basis of industry is also not a rare phenomenon.
Further, in PPM the market share is given importance, therefore, the pre-dominance of competition on the basis of low cost gets emphasised. Pursuing the logic of PPM in analytical manner also results in giving importance to low cost strategy. However, the low cost strategy is not the only strategy that ensures the competitive strength. There are two more strategies which were learnt in previous posts, namely the strategy based on creation of distinction and the strategy based on concentration, besides the low cost strategy, that ensures the competition strategy.
Besides these important aspects there are other problems and limitations of PPM which are given below.
(a) Does not take into account the synergy other than the financial aspect between various operations.
The typical characteristics of individual operations are given less importance in PPM. In addition, the relationship between different operations and the aspects other than the financial part are not given due consideration. The PPM gives a lot of importance to striking an overall balance of cash flow. Therefore, it gives emphasis on mutually supplementing the financial relationship. Whereas, synergy among the operations, ups and downs as well as the effect of operation are not given due importance. Such operations are those which have deeper mutual relationships on technological front and all other aspects like marketing etc.
The diversification of an enterprise includes acquiring of new management resources and it is the process of accumulation also. These management resources help in strengthening the competitive power of existing operations and sometimes these resources provide the capabilities which form the basis for conducting new operations. There is a high risk that such important aspects of operations may not be given due importance in PPM.
(b) Does not touch upon raising of funds from outside sources.
The balance of cash flow is given important in PPM. However, it is also possible to raise the funds from outside sources. It may not always be necessary to strike a balance of cash flow in the event of raising funds from outside sources.
(c) Little concern of psychological aspect of the constituting member.
Similar to the direction of the operation, the energy required for moving the members constituting the organisation from inside is also important for any action of the enterprise. It is closely related to the psychological status of the people, who form the organisation and to the policy which must be adopted. In PPM, sufficient funds are not distributed to the operations which are positioned as goose that lays golden eggs and the underdog.
It is not possible to expect growth in future for the operations that are positioned as underdog or the goose that lays golden eggs. Therefore, it is difficult to motivate the inhouse members. It is necessary to give due consideration to the inhouse morale and motivation.
(d) PPM can hardly become a tool helpful for new operations.
It is difficult to position absolutely new operation through PPM.
There are many cases where the limited the management resources are distributed to a large number of operations which amount to tips for all or where large amount of management resources are distributed to strong operations. The PPM was adopted by many large enterprises in America as it allocates positions to large number of operations on the basis common standards and provide index for rationalisation of management resources and for reasoning of withdrawal.
However, considering the various problems and limitations of PPM it is dangerous to distribute the management resources by totally depending on PPM. It is necessary to understand that PPM is one of the logics for resource distribution. The logic of PPM forms the guiding principles for actual distribution of resources only on proper combination with the logic of domain.
PPM can also be used on a very limited basis. It is possible to obtain the information necessaryPPM can also be used on a very limited basis. It is possible to obtain the information necessary for formulation of strategy. For example, the directions of changes in portfolio and the relatives strong as well as the weak points of one’s company vis-a-vis the rival company by comparing with the operation portfolio with the other company by analysing the operation portfolio on time series.
This was the basic structure with main focus on PPM as developed by Boston Consulting Group (BCG). However, there are various other techniques of PPM which have been developed besides this basic structure. Most of these techniques are based on upgradation of BCG matrix.
One typical technique is the business screen as developed jointly by McKinsey and G.E. (General Electric). It is formed on two axis, namely degree of attraction of industry and the operation unit. These two axis are not divided equally into high and low only, but a third measure is also added. Further, the degree of attraction of industry and the position of operation unit are not evaluated only on the basis of single standard like market share or the growth rate of the industry. These are evaluated on the basis of multiple number of standards. Various operations are positioned in 9 different cells on the basis of many standards through which the position of the operation unit can be evaluated.