Determining the Appropriate Depth and Breadth of a Firm's Product Portfolio

Abstract

Some firms have broad product lines; others have lean product lines. To determine the appropriate number of entries in a specific firm's product line, the author develops a model that balances the benefits of increased revenue from a broad product line against production and engineering costs. Two innovations were central in the development of the model: (1) redefining how products are scored on various product attributes so that attribute scores vary normally across the population of products and (2) redefining how the number of entries in a product portfolio is calculated in order to discount the significance of entries that are highly similar to existing products. The author also introduces the notion of a centroid time to more easily adjust sales and total development costs for product life cycle and investment life cycle effects. These redefinitions enable a firm's profit to be modeled as a simple function of its effective number of product entries, the effective number of competitors entries, the total sales in the segment, variable profits adjusted for capacity constraints, and product development costs. This leads to a simple expression for the profit-maximizing number of effective entries, both when competitor portfolios are fixed and when competitors dynamically adjust their portfolios. The author illustrates how to estimate and apply the model on a realistic example.