How do Business Diversification affect performance of Company?

Impact of Business Diversification on Performance of Company

All the M’s of Management (i.e., Men, machine, material, money and methods) are affected by a diversification programme. The company should designs its various policies and procedures after carefully weighting the advantages and disadvantages of diversification. The ways in which diversification may impact the sales of a company’s products have been discussed in the following paragraphs.

1. Difficulty in handling product line

Diversification in business calls for effective management of product lines. More often than not, a salesman cannot effectively handle the entire product line. If he is asked to sell a variety of items, he tends to focus on those items which are fast-moving and relatively costly rather than on those that enjoy the customer’s patronage.

This will result in the neglect of uneconomical products. For instance, if a biscuit manufacturing firm adds new varieties of spicy biscuits at a low price, there is every likelihood that salesmen would neglect this line because of its newness to the market.

2. Affects production

Usually, firms cannot efficiently produce a wide range of products at the same time. For instance, manufacturers of high-quality machinery find it difficult to take up the production of spare parts.

Similarly, mills producing superfine cloth may find it difficult to venture into the production of cheaper varieties, because the manufacture of these varieties would necessitate the setting up of an altogether different production system and quality-check procedure. Obviously, a roadside hotel cannot be converted into a five-star.

3. Affects Control of activities

Business Diversification affects the the ability of the management to direct and control the activities related to the sale of a large number of products is quite restricted.

For instance, if a textile manufacturer enters the field of chemicals and drugs, the marketing executive will find it difficult to manage the sale of products which are entirely new to him; and this fact may force him to divert his attention from the existing product to newer products, which may, at times, prove quite harmful to the company.

4. Incur additional expenditure

A critical factor governing diversification is the availability of company resources (both human and non-human) for the production of new products. If new products are to be produced, the company will have to incur additional expenditure on adequate technology, raw materials and expertise, etc.

Moreover, it will require salesmen to focus their attention on newer products which at times may result in the diversion of their interest from profitable to non-profitable lines. And if, inspite of concentrating on the new product, the salesmen fail, the company’s financial health will be in jeopardy.

5. Affects cost structure of a company

The production of a wide variety of products has a marked effect upon the cost structure of the company. Diversification in business calls for the installation of plant, machinery, procurement of tools, spare parts, etc. Unless the new product achieves a higher sales volume, it will unduly inflate the per unit cost of production, as a result of which the objective of diversification will be defeated.

Many factors have to be considered while deciding upon diversification or specialization. While venturing into a new product line, the existing situation in the company and the market environment at any given time may exhibit so many variations that it may not be possible for it to reach the best decision. It has been noted that a large number of companies have suffered as a result of diversification, whereas others have reaped benefits.