This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
4/13/2006
Too Many Products?
Recently in the news an article explained that Mars the candy maker of a variety of candy bars decided to purchase a dog treat producer Greenie. Is this attempt to achieve economies of scope out of hand? I must admit that by selling more products to achieve more profits is one thing but to be associated with dog food from a candy producer stand point is something else. Can companies go too far in providing different products to consumers?
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4 comments:
Yes, companies go too far all the time in their attempt to diversify. A couple of years ago, in a management class, our professor gave us a list of diversification efforts that didn't work. My favorite was Fruit of the Loom fruit juices. Picture a big glass of Fruit of the Loom apple juice. Would you buy Fruit of the Loom apple juice?
Maybe they can go to far. Are you a little freaked, Tom, at the thought of getting the wrong kind of green in your M&Ms?
I think all the analysis is OK here, but we need to throw it out the window.
Mars is a closely held corporation. In this case, it may make sense to diversify since the insiders are not well diversified outside the firm.
Dr. Tufte,
You say, "In this case, it may make sense to diversify since the insiders are not well diversified outside the firm."
It seems to me though that there aren't really that many similarities between a candy bar and dog food. In the strategy class that we all have to take we talk about diversification and how at times it is good to lengthen your product line, but at other times if there are not economies of scale or enough similarities it can be worse off for the company. In this case it seems to me that there are not that many similarities and adding this on could potentially hurt them in the end.
Ahh ... there's a difference between diversifying your product line and diversifying your "company".
What we call product line diversification is a misnomer - that's why some books use product line extension. The point isn't diversification, its price discrimination.
What I was referring to was management diversifying to build more successful companies. The evidence is that most of this is an attempt reduce risk for managers with the shareholders money.
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