Product Mix

PRODUCT MIX
The product mix of a company, which is generally defined
as the total composite of products offered by a particular
organization, consists of both product lines and individual
products. A product line is a group of products within the
product mix that are closely related, either because they
function in a similar manner, are sold to the same customer
groups, are marketed through the same types of
outlets, or fall within given price ranges. A product is a
distinct unit within the product line that is distinguishable
by size, price, appearance, or some other attribute.
For example, all the courses a university offers constitute
its product mix; courses in the marketing department
constitute a product line; and the basic marketing course
is a product item. Product decisions at these three levels
are generally of two types: those that involve width (variety)
and depth (assortment) of the product line and those
that involve changes in the product mix occur over time.
The depth (assortment) of the product mix refers to
the number of product items offered within each line; the
width (variety) refers to the number of product lines a
company carries. For example, Table 1 illustrates the
hypothetical product mix of a major state university.
The product lines are defined in terms of academic
departments. The depth of each line is shown by the number
of different product items—course offerings—offered
within each product line. (The examples represent only a
partial listing of what a real university would offer.) The
state university has made the strategic decision to offer a
diverse market mix. Because the university has numerous
academic departments, it can appeal to a large crosssection
of potential students. This university has decided
to offer a wide product line (academic departments), but
the depth of each department (course offerings) is only
average.
In order to see the difference in product mix, product
line, and products, consider a smaller college that focuses
on the sciences represented in Table 2. This college has
decided to concentrate its resources in a few departments
(again, this is only a partial listing); that is, it has chosen a
concentrated market strategy (focus on limited markets).
This college offers narrow product line (academic departments)
with a large product depth (extensive course offerings
within each department). This product mix would
most likely appeal to a much narrower group of potential
students—those students who are interested in pursuing
intensive studies in math and science.
PRODUCT-MIX MANAGEMENT AND
RESPONSIBILITIES
It is extremely important for any organization to have a
well-managed product mix. Most organizations break
down managing the product mix, product line, and actual
product into three different levels.
Political Science Education Mathematics
Political Elementary Calculus I
Theory Teaching
American Secondary Calculus II
Government Teaching
International Teaching Trigonometry
Relations Internship
State Post Secondary Math Theory
Government Teaching
WIDE WIDTH, AVERAGE DEPTH
Hypothetical state university product mix
Nursing Engineering English
Biology Physics English Literature
Chemistry Advanced Math European Writers
Organic Electrical Hemingway
Chemistry Concepts Seminar
Statistics Logic Design Creative Writing
Table 1
ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 609

610 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION
Product Mix
Product-mix decisions are concerned with the combination
of product lines offered by the company. Management
of the companies’ product mix is the responsibility
of top management. Some basic product-mix decisions
include: (1) reviewing the mix of existing product lines;
(2) adding new lines to and deleting existing lines from
the product mix; (3) determining the relative emphasis on
new versus existing product lines in the mix; (4) determining
the appropriate emphasis on internal development
versus external acquisition in the product mix; (5) gauging
the effects of adding or deleting a product line in relationship
to other lines in the product mix; and (6)
forecasting the effects of future external change on the
company’s product mix.
Product-line decisions are concerned with the combination
of individual products offered within a given line.
The product-line manager supervises several product
managers who are responsible for individual products in
the line. Decisions about a product line are usually incorporated
into a marketing plan at the divisional level. Such
a plan specifies changes in the product lines and allocations
to products in each line. Generally, product-line
managers have the following responsibilities: (1) considering
expansion of a given product line; (2) considering candidates
for deletion from the product line; (3) evaluating
the effects of product additions and deletions on the profitability
of other items in the line; and (4) allocating
resources to individual products in the line on the basis of
marketing strategies recommended by product managers.
Decisions at the first level of product management
involve the marketing mix for an individual brand/product.
These decisions are the responsibility of a brand manager
(sometimes called a product manager). Decisions
regarding the marketing mix for a brand are represented in
the product’s marketing plan. The plan for a new brand
would specify price level, advertising expenditures for the
coming year, coupons, trade discounts, distribution facilities,
and a five-year statement of projected sales and earnings.
The plan for an existing product would focus on any
changes in the marketing strategy. Some of these changes
might include the product’s target market, advertising and
promotional expenditures, product characteristics, price
level, and recommended distribution strategy.
GENERAL MANAGEMENT
WORKFLOW
Top management formulates corporate objectives that
become the basis for planning the product line. Productline
managers formulate objectives for their line to guide
brand managers in developing the marketing mix for individual
brands. Brand strategies are then formulated and
incorporated into the product-line plan, which is in turn
incorporated into the corporate plan. The corporate plan
details changes in the firm’s product lines and specifies
strategies for growth. Once plans have been formulated,
financial allocations flow from top management to product
line and then to brand management for implementation.
Implementation of the plan requires tracking
performance and providing data from brand to product
line to top management for evaluation and control. Evaluation
of the current plan then becomes the first step in
the next planning cycle, since it provides a basis for examining
the company’s current offerings and recommending
modifications as a result of past performance.
PRODUCT-MIX ANALYSIS
Because top management is ultimately responsible for the
product mix and the resulting profits or losses, they often
analyze the company product mix. The first assessment
involves the area of opportunity in a particular industry or
market. Opportunity is generally defined in terms of current
industry growth or potential attractiveness as an
investment. The second criterion is the company’s ability
to exploit opportunity, which is based on its current or
potential position in the industry. The company’s position
can be measured in terms of market share if it is currently
in the market, or in terms of its resources if it is considering
entering the market. These two factors—opportunity
and the company’s ability to exploit it—provide four different
options for a company to follow.
1. High opportunity and ability to exploit it result in
the firm’s introducing new products or expanding
markets for existing products to ensure future
growth.
Mathematics Physics
Geometric Concepts Intermediate Physics
Analytic Geometry Advanced Physics
and Calculus
Calculus II Topics on Physics
and Astronomy
Calculus III Thermodynamics
Numerical Analysis Condensed Matter Physics II
Differential Equations Electromagnetic Theory
Matrix Theory Quantum Mechanics II
Hypothetical small college product mix
NARROW WIDTH, LARGE DEPTH
Table 2

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 611
Product Mix
2. Low opportunity but a strong current market position
will generally result in the company’s attempting
to maintain its position to ensure current
profitability.
3. High opportunity but a lack of ability to exploit it
results in either (a) attempting to acquire the necessary
resources or (b) deciding not to further pursue
opportunity in these markets.
4. Low opportunity and a weak market position will
result in either (a) avoiding these markets or (b)
divesting existing products in them.
These options provide a basis for the firm to evaluate
new and existing products in an attempt to achieve balance
between current and future growth. This analysis
may cause the product mix to change, depending on what
management decides.
The most widely used approach to product portfolio
analysis is the model developed by the Boston Consulting
Group (BCG). The BCG analysis emphasizes two main
criteria in evaluating the firm’s product mix: the market
growth rate and the product’s relative market share. BCG
uses these two criteria because they are closely related to
profitability, which is why top management often uses the
BCG analysis. Proper analysis and conclusions may lead
to significant changes to the company’s product mix,
product line, and product offerings.
The market growth rate represents the products’ category
position in the product life cycle. Products in the
introductory and growth phases require more investment
because of research and development and initial marketing
costs for advertising, selling, and distribution. This
category is also regarded as a high-growth area (e.g., the
Internet). Relative market share represents the company’s
competitive strength (or estimated strength for a new
entry). Market share is compared to that of the leading
competitor. Once the analysis has been done using the
market growth rate and relative market share, products are
placed into one of four categories.
• Stars: Products with high growth and market share
are known as stars. Because these products have high
potential for profitability, they should be given top
priority in financing, advertising, product positioning,
and distribution. As a result, they need significant
amounts of cash to finance rapid growth and
frequently show an initial negative cash flow.
• Cash cows: Products with a high relative market
share but in a low growth position are cash cows.
These are profitable products that generate more
cash than is required to produce and market them.
Excess cash should be used to finance highopportunity
areas (stars or problem children).
Strategies for cash cows should be designed to sustain
current market share rather than to expand it.
An expansion strategy would require additional
investment, thus decreasing the existing positive
cash flow.
• Problem children: These products have low relative
market share but are in a high-growth situation.
They are called “problem children” because their
eventual direction is not yet clear. The firm should
invest heavily in those that sales forecasts indicate
might have a reasonable chance to become stars.
Otherwise divestment is the best course, since problem
children may become dogs and thereby candidates
for deletion.
• Dogs: Products in the category are clearly candidates
for deletion. Such products have low market shares
and unlike problem children, have no real prospect
for growth. Eliminating a dog is not always necessary,
since there are strategies for dogs that could
make them profitable in the short term. These
strategies involve “harvesting” these products by
eliminating marketing support and selling the product
only to intensely loyal consumers who will buy
in the absence of advertising. However, over the
long term companies will seek to eliminate dogs.
As can be seen from the description of the four BCG
alternatives, products are evaluated as producers or users
of cash. Products with a positive cash flow will finance
high-opportunity products that need cash. The emphasis
on cash flow stems from management’s belief that it is better
to finance new entries and to support existing products
with internally produced funds than to increase debt or
equity in the company.
Based on this belief, companies will normally take
money from cash cows and divert it to stars and to some
problem children. The hope is that the stars will turn into
cash cows and the problem children will turn into stars.
The dogs will continue to receive lower funding and eventually
be dropped.
CONCLUSION
Managing the product mix for a company is very
demanding and requires constant attention. Top management
must provide accurate and timely (BCG) analysis of
their company’s product mix so the appropriate adjustments
can be made to the product line and individual
products.