Specialize or Diversify?

pareto 1Balancing Portfolio: a daily fight against Pareto

 

Electronics is probably one of the most rapidly changing sectors of all, and also one of the most sensitive to the randomness of demand. It is a sector in which producers are not only faced with intense competition, but are also often confronted with the choice of whether to specialize in specific components or specific user sectors, allowing them to focus their research development efforts, or whether instead to diversify in order to spread the risk, albeit at the price of increased associated engineering and research costs. Pareto 2

 

The danger that a brand will age as a result of the ageing of its target market is even greater in cases where this segmentation is concentrated on a narrow segment of the population. The Pareto principle, also known as the 80-20 rule, stipulates that 20 per cent of a company’s clients contribute 80 per cent of its business; or, in terms of the product portfolio, that 80 per cent of the various products manufactured are bought by only 20 per cent of the company’s consumers. If the Pareto principle is correct, the company’s business is centered on a small number of customers. In an environment in which consumer volatility is a fluctuating but constant variable, it is easy to appreciate the potential danger this can entail. My aim in this case is not to criticize specialization while eulogizing the virtues of the diversification. However, although extreme specialization is likely to increase the company’s skill in its chosen field and enable it to benefit from optimal economies of scale, it is also – inevitable – a source of potential fragility, as it is particularly susceptible to downturns in market trends that affect the company’s product. Some companies have been able to master the art of combining both approaches without placing themselves in a situation of contradiction.pareto 3

Posted in Good Read, Perspectives to Ponder Upon.