Simplification of a product line means the elimination of all unnecessary or marginal products from it: Diversification means that new products will be added for achievement of a well-rounded, balanced line of products. Having a diversified line of products is more essential for consumer goods producers than for machine tools builders or other capital goods producers. This is because. ultimate consumers are influenced more readily by advertising, as such, than industrial buyers are.
Diversification may also be forced on a firm by its competitors, as when they have diversified their product lines already. It is noteworthy that manufacturing cost and sales price tend to move together. Hence if simplification reduces sales volume, as is logical, the lower costs of the narrower, less-complex product line could make price reductions possible, and this could recover all the lost sales volume. Whereas diversification of the products manufactured would elevate manufacturing cost because more, and more complex, products are made, which would force sales prices up.
This logically would reduce sales volume and perhaps Offset the gain in sales volume accruing from the offering of the additional related products. The degree of offset might depend upon the elasticity of demand and the expand-ability of sales with advertising expenditure, and the offset would seldom if ever be exact. However, management should ponder this possibility before deciding to simplify or diversify its product line,
Advantages of Simplification
Simplification enjoys several advantages. Among these are the following:
1. Fewer kinds and sizes of product mane factored. leads to reduction of raw materials inventory (and the investment therein).
2. Simpler manufacturing processes may be utilized, leading to lower conversion cost and to reduced supervision requirements.
3. Special-purpose machines, with permanently mounted, special purpose tooling, can be used to greater advantage.
4. Semiskilled workers can then replace men of high skill. This will lower labor costs.
5. The released cash, due to smaller materials inventory and to lower operation costs, can be used, in part, to permit quantity discount buying of raw materials and parts, thus effecting a further saving.
6. Production control problems will be fewer, so that a simpler system of production control may be used. These advantages derive from the manufacture of fewer and less complex products.
Advantages of Diversification
Diversification also presents advantages. Among these are the following:
1. Better customer service is provided since the diversified line of products more nearly permits one-stop buying by the customer (for the given class of products).
2. The risk of loss due to product obsolescence or to onset of depression is reduced.
3. Seasonality of demand for the products in a narrow line can cause seasonality of employment and payrolls, and appropriate product-line diversification can overcome or minimize this situation, so the company can offer stable employment to its personnel.
4. Overhead costs are spread over a greater volume of production, as diversification ordinarily leads to expansion of sales volume, thus elevating the firm’s scale of Operations. This tends to lower overall manufacturing cost.
5. Fixed costs of distribution are also spread over more units handled, thus effecting a cost saving. These advantages derive from the offering of a broader, better balanced line of products.