Creating a Stock Portfolio
There are grave risks in unrelated diversification for stock market interests in terms of opportunity costs. The worst parts of these affairs are that minority interests are seldom kept fully in the picture. Management is commonly tempted to gloss over unproductive forays into business areas which lie outside their respective domains. Comparing present earnings with a corresponding quarter in the past may not always be relevant, yet such evaluation is ubiquitous when it comes to the stock market. The differences between statutory accounting and management information systems can be so vast, that it takes armies of accountants and sophisticated software to keep tabs on the different sets of accounts!
The stock market should be especially wary of horizontal integration because customers do not necessarily accept new product categories from their supply sources. There is also the worrying aspect of executive personnel and other resources being distracted from intensive competition in the core business.
There may be significant stock market value to be captured in vertical integration, provided that is executed in small and manageable steps. Raw materials and ingredients which act as cost drivers are most likely to be worth incorporating in internal processes. Integrating forward is tempting in terms of margins for industrial marketers, but is fraught with danger because drawing closer to ultimate consumers calls for entirely new sets of competencies.
Stock market investors who shy away from companies with diversification plans may sometimes lose huge values, but it is prudent to keep one’s portfolio stocked well with companies that focus on adding new values for existing customers, and which strive to expand existing markets shares and brand ranks.