Concentration or Diversion

General Electric announced a disappointing financial report and the company's performance has been dragged by its financial services division. Unlike other industrial companies which use their financial services to support sales, the financial services division which also provides consumer credit and mortgage lending services historically generated more than half the company's profits. Based on the historical record, this division was very successful; however, when the division does not generate as many profits as previous, people would ask whether a company should have very diverse operation or not.

Diverse portfolio is help to reduce the risk, this is the same for companies. When a company is running very diverse operation, it can help the company to reduce the risk it faces. However, running diverse operation has higher costs. Starting operation in a new field involves a fixed cost of starting the business; therefore, a company running operation in many fields requires very high costs. Then a company has to ask itself whether it is cost efficient to run very diverse operation or not. Running a concentrated operation is not a bad thing. Though the risk is higher, as the companies are heavily dependent of their businesses in single fields, they are much more likely to be better at what they are doing. Moreover, sometimes diverse operation is started from companies' original businesses. For examples, Rolls-Royce is a very famous car brand; meanwhile, a jet engine maker is also called Rolls-Royce, which used to be a division of the car maker. In the past, because car makers also made engines, some car makers tried to make jet engines as well, including BMW and other famous car makers. Therefore, diversifying operation is not necessary for pooling a company's risk, but also targets advancing its strength further.

Overall, there is not a clear line to separate the two types of business operating. Both styles of operation can be profitable and do not contradict with each other.