When I was reading Business Innovation For Dummies by Alexander Hiam, I came across the Innovator’s Portfolio Matrix.
I think it’s a powerful way to think about differentiation in your product mix.
What Is The Innovator’s Portfolio Matrix?
It is a 2 x 2 matrix (much loved by strategy consultants of course) with uniqueness on one axis and profitability on the other.
Profitability is measured through the margins you achieve but it’s up to you to decide what’s a high and what’s a low margin in your business or industry. There can be a long debate on the right margin information to use but I favour contribution margin (after variable production and sales costs) and all other directly attributable costs which would disappear if the product was taken away. This would therefore include advertising costs for the product and any special promotional deals with customers.
Uniqueness is an assessment of how your product compares to its close competitors. If it’s a commodity with all competitors selling the same basic item, then unique is very low. If it is totally only supplied by you, then your uniqueness is high. The best assessment of uniqueness is from your customers and non-customers in the market but that means a market survey. You can make your own assessment provided you try to look through your customer’s eyes.
The Four Cells
The four cells in the product portfolio matrix are:
- Develop – high uniqueness, low profitability
- Maximise – high uniqueness, high profitability
- Update – low uniqueness, high profitability
- Eliminate – low uniqueness, low profitability
When a new product concept is brought to market it is unique but no one knows about it or understands its advantages. While selling prices are high, production costs may also be high because there’s been little benefit from accumulated learning and there’s a big marketing job to be done to educate the market.
If things go well, the product moves out of the Develop stage to the Maximise stage where profits are high and uniqueness is maintained.
Unfortunately success attracts imitators who will also have high costs at this stage and will want to shelter under your price umbrella. Profitability can stay high in the short term but to maintain it, the uniqueness needs to be renewed through additional product innovation.
If it isn’t normal competitive forces will mean that the product is commoditised and prices and margins are competed away in the scramble to win volume from customers who know they only need to focus on price comparisons rather than a more complicated value assessment.
How Do Your Products Fit In The Innovator’s Product Portfolio Matrix?
The logic of the Matrix is clear but it’s power to help you to think through your strategic issues only really becomes apparent if you plot your products into the matrix.
It can help you to add in elements into your SWOT Analysis:
- Products in the Maximise cell represent both a strength and a current opportunity.
- New products in the Develop cell represent an opportunity that is worth pursuing.
- Older products in the Develop cell could be an opportunity or a weakness – while the product is uniqueness, that uniqueness doesn’t appear to support a price premium. This may be because the uniqueness isn’t appreciated by the market (the weakness) or it might be because you are under-pricing.
- Products in the Update cell are a threat – while profitability is currently good, unless you do something to restore the differentiation, you can expect prices and margins to fall sharply as customers exert their buying power in negotiations.
What Do You Think Of The Innovator’s Portfolio Matrix
I’m kicking myself that I hadn’t thought of this 2×2 matrix because it is such a neat way to summarise the differentiation issues within a business.
I like it but I’d like to know what you think of this Matrix so please leave me a comment.