Expansion of product lines beyond core business

Question:

Discuss about the Concepts like Profit Maximisation and Risk Diversification.

The aim of the paper is to delve into the necessities of business organisations and non profit organisations expanding beyond their core business. The aspect of expanding beyond core business is studied against the backdrop of Grant MacEwan Mountain Club (GMMC) seeking credit line in response in sales growth, which would lead to increase in profitability and reduce their risks. The paper points out the business advantages which is compelling organisations to enter new areas of business.

According to Caudillo et al. (2015)    companies today grow beyond their core business and expand their product lines. This expanded product lines allow the companies to cater to new groups of customers, which help them to earn more profit. According to Timoshenko (2015), companies today diversify their business risks associated with the market conditions like fall of profit due to entry of new powerful competitors. The increased base of customers due to expansion in product line and the consequent increase in profits provides base to the companies to diversify their risks. The investors investing in companies view this growth of companies beyond their core businesses and expansion of their product lines as a security parameter and normally support this growth of companies beyond core business. the banks offering credit offer and allow credit lines to the companies as they see this growth as way to increase revenue and business relationship with the companies. The nongovernmental organisations like Grant MacEwan Mountain Club, Canada or GMMC too view this product expansion as a means to increase their profits and diversify their expenses and risks. The banks financing these organisations allow extension of line of credit[1]. Caudillo et al. (2015) reiterates that most of the companies either have adopted the strategy of product expansion beyond their core business or are forming future strategy in the direction. The following discussion would shed light on importance of product expansion beyond core business, which the management of GMMC can incorporate to diversify risks and augment their profits:

Companies today view expansion of their product lines beyond their core product as ways of increasing their customer base[2]. They concentrate on conducting open innovations with other firms of same and different industry to bring about new innovative products. For example, Grant MacEwan Mountain Club or GMMC is offer mountain trips of various categories like easy and challenging ones. The non-commercial enterprise offers these products to people and often requires having certain trainings to participate in very risky treks. It is clear from the discussion that the main customers of the company are mountaineers and people who love going on dangerous   treks[3]. The non-government organisation  can extend its product line and include products like giving advanced trainings on mountaineering to mountaineers aiming to go on dangerous treks requiring a lot of technical knowledge. The organisation can expand its core product of mountain trips and treks to include other adventure sports as well like sea diving. This would allow GMMC to cater to a larger segment adventure sports loving people and consequently increase in the profits.

Financial support from banks when organizations grow beyond core business

Commercial and non-commercial organisations can avail more financial support from the banks financing their business when they adopt the strategy to grow beyond their core business[4]. Line of credit is the facilities institutions financing businesses of both profit making and non-profit organisations. The financing institutions especially banks allow the organisations to avail the facilities of borrowing minimum amount of loan that they are entitled to have access to. The profit and non-profit making organisations can avail this facilities based on several criteria like revenue earning capacity and risk diversification power. Chen and Schwartz (2013), reiterates that expansion of product line beyond their core business leads to profits. As a result, the banks view this expansion of products beyond core businesses of both non-profit making organisations and profit making organisations as signs of their increasing financial strengths and risk minimising capacity. They consequently allow increase in letter of credit to fund their newly expanding product lines. GMMC is a non-government organisation of Canada whose core business is providing trekking and mountaineering facilities[5]. The organisation must seek expansion of its products beyond its core business products to incorporate other adventure sports like scuba diving. This increase in product would result in growth of sale of its adventure sports products, which would earn more revenue. This future growth of sale and revenue would enable GMMC to avail increase in the letter of credit facility from banks. Thus, it can be inferred from the discussion that growth of business beyond core business helps organisations avail more finanxial help from banks like increase in letter of credit.

Organisations view growth beyond their core products as the modern ways of reducing their business risks. Caudillo et al.(2015) state in their work that, most of the companies are considering this growth outside their core businesses as strategies to diversify their risks. As discussed before, this growth of business beyond the core products requires heavy investment and attracts high risks. The high risks stems from the fact that the new products may not be successful in the market and the companies may not be able to earn positive returns on their heavy investments. This would lead to heavy losses in the market, which may have serious implications like fall in the share prices and consequent reduction in capital generation[6]. However, it can pointed out that with existing the companies and the non-profit making organisations need to expand their product lines to counteract threats from organisations manufacturing similar products. This shows that not expanding beyond core business once again attracts challenges from competitors, which is again a market risks[7]. Thus, business and non-business organisation require expanding beyond their core business to counteract this market risks is increase in credit limit would fuel production of both core business products and non-core products[8]. The expansion of profit and non-profit organisations may take place in other areas like entering new markets beyond their traditional markets. For example, GMMC is a mountaineering club in Canada, which arranges trekking and mountaineering. The club can expand its branches into new markets like the United States of America and Mexico[9]. The club can expand into other segments of adventures sports like scuba diving. These expansions of operations would allow the club to cater to new market segments, which would lead to increase in sale of its adventure sports services and profitability. This would allow the club to diversify and reduce the risks it would face if it limits its operations within Canada like competition from similar mountaineering clubs. It can also face competition from sports clubs catering to adventure sports loving people preferring both sea and mountain adventures. This discussion shows that expansion of business beyond the core products and markets have evolved as new competitive strategy organisations use to earn more profits. This provides substratum, which allows organisations to diversify their losses and risks[10].

Growth beyond core products as a modern way for reducing business risks

Caudillo et al.(2015) state that expansion beyond conventional operations allow business and non-business organisations to diversify their risks and increase their profits. However, it can be pointed that business risks are not restricted to threats from competing organisations. The profit and the non-profits organisations come under influence of myriads of external economic factors like political conditions, economic conditions and technological factors, which remain out of their controls but have deep impacts on them[11]. Diversification of products and operations into new areas enable the business firms to face market uncertainties like economic downturns and shift of customer demands to new products[12]. For example, GMMC can expand its operations into new markets like the US and new products to diversify risks like inflation in Canada. Moreover, the revenue it would earn by catering the customers in new markets and in terms new product lines would help it to counteract loses it would incur due uncertain negative market movements like inflation in Canada.

Thus it can summarised that expansion of business operations enables business and non-business organisations to achieve growth in terms of sale, revenue and enable them to get financial supports from banks like increase in their credit limit. This expansion also helps them to maximise their profits and diversify their risks.

References:

About The GMMC – GMMC”. 2017. Gmmc.Ca. https://www.gmmc.ca/home/about.

Artinger, Florian M., and Gerd Gigerenzer. “Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality.” (2016).

Biyalogorsky, Eyal, and Oded Koenigsberg. “The design and introduction of product lines when consumer valuations are uncertain.” Production and Operations Management 23, no. 9 (2014): 1539-1548.

Bocken, N. M. P., P. Rana, and S. W. Short. “Value mapping for sustainable business thinking.” Journal of Industrial and Production Engineering 32, no. 1 (2015): 67-81.

Chen, Y. and Schwartz, M., 2013. Product innovation incentives: Monopoly vs. competition. Journal of Economics & Management Strategy, 22(3), pp.513-528.

Fuller, Gordon W. New food product development: from concept to marketplace. CRC Press, 2016.

Galí, Jordi. Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press, 2015.

Growing Beyond The Core Business”. 2017. Mckinsey & Company. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/growing-beyond-the-core-business.

Mills, Karen, and Brayden McCarthy. “The state of small business lending: Credit access during the recovery and how technology may change the game.” (2014).

Pozo, David, Enzo E. Sauma, and Javier Contreras. “A three-level static MILP model for generation and transmission expansion planning.” IEEE Transactions on Power Systems 28, no. 1 (2013): 202-210.

Timoshenko, Olga A. “Product switching in a model of learning.” Journal of International Economics 95, no. 2 (2015): 233-249.

Timoshenko, Olga A. “Product switching in a model of learning.” Journal of International Economics 95, no. 2 (2015): 233-249.

Tock, Laurence, and François Maréchal. “Decision support for ranking Pareto optimal process designs under uncertain market conditions.” Computers & Chemical Engineering 83 (2015): 165-175.

Wei, Wei, Feng Liu, and Shengwei Mei. “Offering non-dominated strategies under uncertain market prices.” IEEE Transactions on Power Systems 30, no. 5 (2015): 2820-2821.

Pozo, David, Enzo E. Sauma, and Javier Contreras. “A three-level static MILP model for generation and transmission expansion planning.” IEEE Transactions on Power Systems 28, no. 1 (2013): 202-210.

Chen, Y. and Schwartz, M., 2013. Product innovation incentives: Monopoly vs. competition. Journal of Economics & Management Strategy, 22(3), pp.513-528.

Timoshenko, Olga A. “Product switching in a model of learning.” Journal of International Economics 95, no. 2 (2015): 233-249.

Mills, Karen, and Brayden McCarthy. “The state of small business lending: Credit access during the recovery and how technology may change the game.” (2014).

Galí, Jordi. Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press, 2015.

Bocken, N. M. P., P. Rana, and S. W. Short. “Value mapping for sustainable business thinking.” Journal of Industrial and Production Engineering 32, no. 1 (2015): 67-81.

Bocken, N. M. P., P. Rana, and S. W. Short. “Value mapping for sustainable business thinking.” Journal of Industrial and Production Engineering 32, no. 1 (2015): 67-81.

Fuller, Gordon W. New food product development: from concept to marketplace. CRC Press, 2016.

Wei, Wei, Feng Liu, and Shengwei Mei. “Offering non-dominated strategies under uncertain market prices.” IEEE Transactions on Power Systems 30, no. 5 (2015): 2820-2821.

Biyalogorsky, Eyal, and Oded Koenigsberg. “The design and introduction of product lines when consumer valuations are uncertain.” Production and Operations Management 23, no. 9 (2014): 1539-1548.

Tock, Laurence, and François Maréchal. “Decision support for ranking Pareto optimal process designs under uncertain market conditions.” Computers & Chemical Engineering 83 (2015): 165-175.

Artinger, Florian M., and Gerd Gigerenzer. “Heuristic Pricing in an Uncertain Market: Ecological and Constructivist Rationality.” (2016).