Optimisation of product portfolio sales and their risk subject to product width and diversity

Abstract

Abstract Prior research and theoretical studies claimed that a company extends offered product and commodities scope in order to make sales and profits grow, and the most important to decrease market risk. Others claimed that in some circumstances product category reduction leads to such results. So in our opinion every adjustment of product width and diversity should be called a diversification, if it achieves mentioned goals. In literature there is lack of methods of prediction and assessment of diversification effectiveness. To explore this issue we measure sales risk in terms of the expected error of sales forecast. We develop modern portfolio theory and forecasting theory to address their limitations in product portfolio analysis. We formulate a set of decision models, whose objective functions include different measures of an expected prediction error. We separately take it into consideration, whether to reduce or extend width of portfolio by one product category. Finally, we verify models using an agricultural production factors and equipment wholesaler’s real sales data and sales forecasts for considered new product categories. Sales data are organised into samples for the evaluation of decision model parameters and for forecast testing. We have found that product expansion usually leads to business’s higher forecasted sales and its nominal risk but also to lower relative risk. In our model any decision about product introduction or termination is assessed in relation to business’s sales and their risk, unlike in popular financial methods of project or product investment performance and return assessment.