Economics Risks Are Involved With Overly Diversifying

What risks are involved with overly diversifying a product line?

After reading the 2011 Economist article, “Out of India,” it is clear that the Tata Group has executed a highly successful diversification strategy that included; 98 operating companies in a wide range of industries (28 on the Bombay Stock Exchange & 2 on the New York Stock Exchange). The article goes on to point out that diversification is prevalent and necessary in emerging markets due to “weak governments and underdeveloped institutions” (Economist, 2011). This question refers to a product line which is a group of related products sold by one manufacturer. The eFinance Management article states that excessive or mismanaged diversification will create a few issues that include:

            - Products unable to adapt to market changes

            - Required new skills and resources (money, equipment, time)

            - Internal competition that limits growth opportunities

It is also key that companies understand their target market and focus on adapting to their changing purchase habits rather than trying to branch out to alternative market segments.

What level of conformity are you comfortable with?

Kerr (2016) writes an interesting article about the five cultural shifts worth the effort to make. Essentially it is a company culture movement from conformity to celebrating individual thought. He does emphasize the importance of balancing the two and I would agree that a balance between the two is where my comfort level is with a slight lean towards conformity. As an individual that has trained individuals within both the military and business arenas on technical and nontechnical skillsets, I can attest creative thought is most effective after a certain level of mastery. The individuals I train that are obstinate to learning the proven techniques/steps first before wanted to innovate the system are often unsuccessful at the position. Establishing a culture of industry standards and allowing individuals to become innovative when they have had more than a cup of coffee at the position has worked best for me. The company’s culture then translates how it conducts business within the industry. When forming a new business, I assert that following standard business practices, while avoiding common pitfalls, is the correct way to build a foundation. Conformity, outside adhering to business ethics and professionalism, is not a roadmap to long-term success. A degree of innovation, that avoids wasting resources, should become encouraged as the company grows, and systems are in place.

How important is it that your customers understand the diversity of your products?

It is important that customers understand product diversity because it provides them options to remain within a product line rather than heading to a customer. For instance, if a company provides a high-end automobile, a customer may be loyal to the brand but unable to afford that vehicle. Ensuring the consumer knows that there are less expensive vehicles within the product line increases the possibility of a sale. Subtle education through marketing is key to customers understanding product diversity as is clearly seen with current online and television advertisements  

How can you reinvent products to bring about a higher level of diversification?

Products and services can be reinvented with minor changes to be marketed to new target markets. Sometimes a product could also receive a minor facelift and be repacked to the same customer base. Much of it has to do with timing and the marketing campaign. Product reinvention is evident with a company like Coca-Cola that has used successful methods, and sometimes notoriously unsuccessful ways (New Coke), to reinvent its products and appeal to its broad market with products.

References:

Borad, S. (2019, August 29). Diversification. Retrieved from 

       https://efinancemanagement.com/mergers-and-acquisitions/diversification

Economist, T. (2011, March 3). The Tata GroupOut of India. Retrieved from 

       https://www.economist.com/briefing/2011/03/03/out-of-india

Kerr, J. (2016, May 24). How Peer Pressure to Conform Affects Your Business. Retrieved from

       https://www.inc.com/james-kerr/how-peer-pressure-to-conform-effects-your-

       business.html

Response

Hi Benjamin, you have beautifully explained all aspects. I would like to add my opinion on risks involved with overly diversification. The major problem that I see with it is mismanagement and losing focus. When there are several products, market, and competition to manage, then it becomes a necessity that the management is equipped with needed knowledge and skill to manage all. In over-diversification it is quite easy to get lost in the forest and reach nowhere. Mediocrity in the outcome may come out due to this situation due to lost focus (Ibragimov et al, 2011). It is quite possible that the company might be best at one or two core products, but excessive diversification may lose the focus from its core products. This diluted focus may put them to loss against competition even in their core products. Here, it is suggested that the companies should not run towards diversification blindly. Proper checks should be in place to assess external environment and internal strengths and weaknesses before considering diversification.

Reference

Ibragimov, R., Jaffee, D., & Walden, J. (2011). Diversification disasters. Journal of financial economics, 99(2), 333-348.

  It is the old adage of "Don't keep all your eggs in one basket." Diversification is a strategic approach for small business development. Wisely implemented, it can prove very useful and helps companies gain competitive advantage diversifying their production, services and/or markets.

  Diversification is also a very common strategy among large companies that already dominate some market sector, as it is a way to make the company even bigger and, thus, more and more assured against possible crises in its market niche or other problems that may come into existence in the future.

  The diversification of an activity works in the same way as in the financial market. By acting on more fronts, it is possible to balance losses and gains, and maneuvers to focus on fronts that are yielding more profits become faster. However, in some cases the diversification strategy can also be detrimental to the business and, thus, can even cause the company to lose market where it once dominated.

  That is why diversification is an extremely critical point in business growth, being a delicate phase of the company's transition. Therefore, in order to cross this path towards new markets, it is important to keep in mind that some things can fail.

  Diversification strategies are adopted to control the risks of this maneuver, making the entrepreneur exposed to different risk patterns. Therefore, although you are still investing in something risky, at that moment you will no longer be in the hands of destiny, as you will not depend on a single factor to reach the final goal. The same is true of large companies, which are already market leaders in the niche in which they operate and have decided to seek new horizons in this regard.

  Diversifying the company's investments or products has many competitive advantages in relation to the market, which is a very interesting way to make your business better and broader. However, diversifying can only be positive for a company, in many cases, when the process is poorly performed and more than is invested in diversification, the results can be disastrous and bring many problems to even the company's main sales channel.

  Advantages of diversification:

·     Provides substantial potential for development and profits

·      Increases competitiveness on existing markets

·      Unveils new market opportunities

·      Reduces financial risk by spreading it across multiple investments

·      Protects against financial collapse in times of market stagnation

·      Offers opportunities for human resource development and attracts competent professionals.

  Disadvantages of diversification:

·        A lot of time and funds are needed for initial research and development of first-class diversification strategy.

·        The implementation of each new project requires investment and human resources which diverts the focus from the main company business.

·         Some diversification types need significant capital costs, human resources, technologies, market research, etc.

·          Any new project often reduces performance. The company is no longer able to provide its old, loyal customers with its traditional products and services at the same level of quality. This may lead to dissatisfaction and sometimes to loss of key customers.

  Thus, diversifying is one of the last levels when it comes to market development strategy. This is because, in order to diversify its investments/products to other sectors and to other niche markets, you must first have your own market segment under your control.

  As we know, it can be very difficult to become a market leader, being as difficult as remaining a reference in a specific sector, which means that few companies are even able to dream of a diversification strategy. However, for those who want to diversify their businesses and enter other market segments, there are correct ways to do so and the process must be followed faithfully.

References

Craig, W. (2018, July 6). Business Diversification: The Risk And The Reward. Retrieved February 17, 2020, from https://www.forbes.com/sites/williamcraig/2015/04/24/business-diversification-the-risk-and-the-reward/

Strategy Train. (n.d.). Retrieved February 17, 2020, from http://st.merig.eu/index.php?id=150&L=5

What is product diversification? Definition and meaning. (n.d.). Retrieved February 17, 2020, from http://www.businessdictionary.com/definition/product-diversification.html

Response

Hi Andre, you have given excellent details on diversification. I would like to add with your discussion that diversification has become a need of the hour at present business scenario. Due to volatile market scenario one cannot be sure which product will work well and which one will fail. Therefore diversification acts as a fail safe opportunity. Moreover, diversification should not be limited to specific geography. It should extend to various countries as well so that economic turmoil in one geography does not severely impact the company’s growth and performance. Expanding with multiple products and businesses increases the immunity of a business (Neffke & Henning, 2013). And this has been the reason that major businesses around the world try to cater to multiple markets through different ranges of products and services. However, on one hand where diversification can be a boon, it can also bring its own set of challenges that cannot be ignored as well.

Reference

Neffke, F., & Henning, M. (2013). Skill relatedness and firm diversification. Strategic Management Journal, 34(3), 297-316.