Excess innovation should worry a company
Innovation propels the world towards progress and advancement. When a commercial organisation exists for a long time, innovation becomes its unparalleled responsibility.
For instance, the global automobile giant Volkswagen started its business with the motto of "people's car" to provide affordable cars to middle-income people. Gradually, they created and acquired multiple brands over the decades and began to offer high-end cars to wealthy consumers. Audi, Lamborghini, Scania, Porsche, and Bugatti are among the fruitful variety of their brands that target a diversified customer base. It allowed Volkswagen to enter untapped markets, create new industries, and increase market shares. It also protected them from both external and internal risks such as remaining undefeated to the competitors, surviving a decline in operations, and overcoming the possibility of incurring losses.
For all latest news, follow The Daily Star's Google News channel. Not only mature companies, but startups should also map out an innovative strategy. It makes them futureproof and resilient.
However, a company's costs could outweigh the benefits if its innovation grows uncontrollably. This is why diversifying the portfolio should be carried out with scrutiny. A common form of portfolio diversification is "product proliferation," where a company creates variations of the same product or launches new product lines to saturate the market. When a company expands its portfolio, it also needs to develop new supply chains, extend promotion and marketing, increase costs, and make all the administrative procedures more tiresome. This sometimes may lead to considerable difficulties in the management process. From a layman's perspective, when a company gets too big, it becomes so sluggish and ponderous that it often loses the race.
A relevant example of this is the crisis facing Philips. At the beginning of this century, Philips kept increasing its portfolio by introducing innovative products one after one. By 2011, the brand had around 60 product categories under its radar. As a result, their management started to become incoherent, which hurt their operations that ultimately led to losing a significant portion of their market share.
Another company that was subject to a similar disaster is Lego. The beloved toy company was on the brink of bankruptcy in 2004. As the patent on its iconic brick started to expire, Lego created variations of its bricks that totaled more than 12,000 unique pieces. They also tapped into different industries such as computer games, kid's apparel, and amusement parks. Hence, their supply chain and logistics became too complex to manage.
Nevertheless, both Philips and Lego recovered from such abysmal states by undergoing major transformations. Lego sold off its amusement parks and reduced the unnecessary variations of bricks. Philips decided to focus on its HealthTech business by spinning off and carving out its other businesses.
There is no denying that acquiring new brands helps a company to utilise potential synergies. Disney, Unilever, Nestle, P&G, and other world-renowned titles are known for executing a strategy called brand proliferation. It is another similar tactic that refers to increasing the number of brands through either creation or acquisition.
But an apparent consequence that results due to brand proliferation is internal rivalry. Take Unilever, for example. They have multiple brands within their product lines that compete with each other. Yet, internal rivalries can be manageable if the brands have distinct identities and specific target markets. Proper brand management plays a crucial role there.
Interestingly, if we take a closer look at successful enterprises, we will notice that most of their revenues (let's say 80 percent) come from a small number of their brands (around 20 percent), and the majority of revenues of a brand comes from a minority of its customers.
This phenomenon is known as the Pareto principle, or most notably, the 80/20 rule. That is why reducing the number of products can sometimes be a better tactic to ensure growth. It helps a company concentrate its resources on those areas that have the most potential. That is why in 1998, after Steve Jobs' nine-year return to Apple, he reduced the number of products from 350 to 10. It allowed Apple to identify the great scopes of opportunity and succeed seamlessly.
The cases of big corporations losing astronomical sums of money due to excess diversification are indeed a vital lesson to learn. The cost of entering countless markets is to contend with an overcomplicated administration, which should be duly noted. Or else, a company can go down the primrose path if it immerses itself in the proliferation game. Since we cannot afford to ignore innovation, businesses should rethink their decision to diversify – unless diversification is an absolute necessity and enough resources are available to fuel the additional operations.
Sirazum Monir Osmani is a Marketing and International Business major at North South University, Dhaka.
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