Question

1. One of the most challenging decisions a company can confront is whether to diversify: the rewards and risks can be extraordinary. Success stories abound—think of General Electric, Disney, and 3M—but so do stories of such infamous and costly failures as Quaker Oats’ entry into the fruit juice business with Snapple, and RCA’s forays into computers, carpets, and rental cars.

• Mark Cuban has a more blunt view of diversification: “Diversification is for idiots.”
• Warren Buffett had this to say about diversification: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
• Charlie Munger has this to say: “The whole idea of diversification when you’re looking for excellence is totally ridiculous. It doesn’t work. It gives you an impossible task.”

Do you agree with the above statements? Please explain your rationale? Discuss a real-life example demonstrating why CEOs should be concerned about Environment protection issues and social issues.

Answer 1

Ans ) In finance diversification refers to investment in diverse category of assets. For example we can take an example of portfolio comprises of diffrent sectors. This strategy helps to minimize the risk as if one sector going done the other can be developing for example if a portfolio has companies which are in the sectors like energy , manufacturing ,FMCG etc is better diversified than a portfolio with investment in a single sector.Diversification is not for idiot , Although diversification is to be done keeping in mind , critical things like the past performance of the sector into which we diversified as well as the trends and doing fundamental as well as the technical analysis. Diversification is protection against ignorance , thats correct as in finance as well as the business , if there is uncertainity conditions than it is better to diversify as if not there will be General Electric ,etc , Also diversification helps in exploring new fields and to avoid crowing out effect like reaping the benefits of super normal profits but if there is a certainity of what we are doing , still there should be innovations.The CEOs should be concerned about environmental protection as the case of recent outbreak of COVID -19 that is directly lonked to enviromental damaged. The virus has entered the food chain or through other means and resulted in one of the biggest financial system damaged due to the loss of life and property. The global warming is another concern that is causing climate change and natural calamities that results in the operational discontinuties of the business. Social unrest is not a good indication as it points out the dameged social environment in which a business operate which results in hampered operations and additional financial costs.