With rapid technological change posing ever more intense competitive challenges, companies are often advised to scrutinize their portfolios and eliminate unprofitable products. Every product, the reasoning goes, must stand on its own bottom line. That, however, may be exactly the wrong mantra for these times. A broader portfolio of products—even if some are, for a time, unprofitable—often can help a company capture more value.

To understand why breadth matters, it helps to look at how today’s strategic landscape is changing. New, less-expensive production technologies and ease of entry into some markets have led to a proliferation of products and services; at the same time, the cost of reproducing and distributing certain classes of products has dropped dramatically. The result is a heightening of two core strategic challenges facing businesses: getting noticed and getting paid.

How is a brand to get noticed when there are some 13,000 US mutual funds to select from and, as Barry Schwartz notes in The Paradox of Choice, supermarkets can offer 175 varieties of tea bags and 285 kinds of cookies? In information industries, the problem is particularly acute: US publishers produce more than twice as many books today as they did a decade ago and the volume of information our society generates is far outstripping our ability to consume it all.

And how is, say, a music company to recover its investments when people can cheaply copy and distribute the products? Media organizations are currently having the most trouble getting paid—think of big metropolitan newspapers and the competition from free dailies and free online content such as blogs. Other types of businesses face similar problems—witness the challenge to Microsoft by Linux.

It’s tempting for companies to try to meet the twin challenges of getting noticed and getting paid by shedding product lines, but successful firms have shown that the best approach is often the opposite one: to expand and extend the product portfolio. Expanding it increases not only the chances for a big win but also the number of other products that can benefit from a hit’s popularity. The portfolio approach has been used for years in the traditional supermarket—that brawling arena of product proliferation—in such tactics as umbrella branding and loss-leader pricing.

Indeed, the technique is showing up in a range of industries. Apple’s expansion of its portfolio to include the iPod has not only launched a whole economy of “i-” add-ons, including the iPhone, but also boosted sales of Apple’s existing computers. The Indian network Star TV saw its prime-time viewer share increase from less than 5 percent to more than 80 percent in one year after a single hit show, Kaun Banega Crorepati (the Indian version of Who Wants to Be a Millionaire), helped all its productions become more popular. The benefits can even extend to other firms.        

Author Dan Brown had written three books with mediocre sales prior to his best-seller The Da Vinci Code. When his former publishers then rereleased the older works, they became bestsellers as well.

The portfolio approach can also help a company tackle the getting-paid problem. When there’s price pressure in a company’s core business, a product-oriented strategy would be to try to boost the return from each product by, for example, giving up price-sensitive customers and pursuing those who are willing to pay more. With a portfolio approach, a company doesn’t have to do that—it can protect itself by expanding into sectors that make more money when prices of the company’s core products fall. Recording studios were kicking themselves for not seeing the opportunity in products such as MP3 players that were adjacent to easily duplicated CDs. Many media firms, such as the Norwegian company Schibsted, have aggressively expanded into complementary businesses such as free newspapers and online classifieds.

With technology moving so quickly that virtually no manager, engineer or technologist can predict next year’s winning and losing products, a portfolio approach presents greater opportunities for creative solutions than does fighting with your competitors on a product-by-product level. 

Bharat N. Anand is a professor in the strategy unit at Harvard Business School in Boston.

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