Does diversification helps?

In this week’s lecture, I have learned that portfolio theory helps investor to maximize their return by holding a diversified portfolio of assets with various level of risk. Most of the investors are believed to receive a return for taking risk, the type of risk can be categorize in 2 different category, which are systematic risk, and unsystematic risk. Systematic risk affects all investment of a business. Unfortunately, this type of risk cannot be diversified, whereas unsystematic risk  is the risk which can be diversified in different ways to reduce the risk of one specific share or more. However, in a world of high correlation, it is hard to deal with diversification.

Research has confirmed that the act of diversification for most companies had cut down their profitability. Therefore, an investor must take serious consideration of the risk and return while taking diversification into account. However, a proper diversification reduces the unsystematic risk of business by spreading the risk into different investment. Other than that, a well diversified portfolio would maximize the profit of one’s business  . Amazon, the biggest e-retailer in the United State started their business as an online bookstore, and then diversifies to sell wide variety of stuffs such as DVDs, electronics, software and video game. What made Amazon successfully diversify into different investment in a competitive market? Is it by considering the risk and return of spreading their assets? Or by analyzing the capital asset pricing model (CAPM) including capital market line (CML) and security market line(SML) in the company? In my opinion, I think we have to take 

consideration of all of those I have mentioned.

Now, what strategy had IKEA used on their diversification in China to make it effective? In return of higher market share return,  IKEA chose to take the risk  of investing in foreign country like china. Firstly, IKEA identified its own competitive advantage among other competitors, then globalizing in Asia country with strategies like pricing strategy and joint venture. These strategies, together with other right strategy that IKEA implied over the year has successfully expand their product sales, leading to an increase in revenue as return. The graph below shows the total revenue of Ikea over the years until 2014. in the year 2015, IKEA's total sales increased by 8.9 %.

Furthermore, diversifying in china and other countries will too minimize the risk of IKEA than investing in only one country. I think that IKEA definitely made the right choice as china has become the top 1  purchasing country of IKEA’s product in 2015. China remained to be the fastest growing IKEA Group market in 2015, followed by Russia.

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Lastly, I think that a business could enhance their efficiency by analyzing CAPM, a model that show the relationship between risk and expected return for any risky asset. Since CML define efficient portfolios, therefore it is useful when measuring risk factor. If all the stocks and portfolios lie on the SML, it means the market portfolio is efficient, if not, then adjustment need to be done to ensure an efficient portfolio. Do you agree with the statements above? Tell me what you think. :)

Digby Jones- the troubleshooter

From the video that I have watched, Digby jones , the champion of British business has returned to TV screens as a troubleshooter .In this episode, the Digby's mission was to solve urgent problems encountered by a medium size furniture company called Hereford furniture.

after watching the video, I agree with Digby that Hereford furniture should just focus on one thing first instead of doing all manufacturing, importing and retailing at the same time. Although this range they provided was what made them survive during recession, but this will not last long as threat from competitors in the same firm keep increasing, that will lead to a contract in the market share. In addition to that, the managing director of Hereford furniture, Mike Muxworthy could not provide an excellent reason on what specialist knowledge they have. Therefore, it is most likely better if they just focus on either manufacturing, importing or retailing at the moment. In my opinion, focusing on one task at one time is more efficient and effective than multitasking at one time to focus on their workforce, working capital and maximize their value.

Does launching a new brand help the business? A brand is not just a logo to represent themselves, it is also something that link the company and customer together .An outstanding design or brand name may become a topic of discussion among us on social media., As social media is the largest influence in the 21^st century, it is important for a brand name to become a hot topic on the net. it is a way to grab attention of others and make them start questioning about the  brand, searching for products of the brand, looking for information or  and start talking about the brand, which will then lead to an increase in the brand reputation. A rise in product sales might be seen as customers has built a good amount of interest on the brand, which will lead them to buy the product with the brand on it. All these can be achieved by  Hereford furniture once  they launched the brand Hygge, which is the wonderful Danish word with no definition in English.

Another issue discussed in the video was the poor management of  Mike Muxworthy. As the head of a company, he should ensure that every area including production area, spray shop area and machine shop area in Hereford furniture to work together as a whole, and not just work together in one specific area. This will not only improve the communication among employees, it will also increase the productivity of the company. Furthermore, Mike should have strengthened the bond between himself and his employers to further improve productivity. As what I watched from the video, the impression of Mike in the eyes of his employer is not great.  Other than that,Mike should have employed another accountant who can come out with forecast and statement of cash flows because it approximately show how well or how bad is the company doing. Without it, the business may be drove to ground.

At the end, the video did not mention if the advice of  Digby works for Hereford Furniture. However, it is great to see how Mike is willing to accept the new challenges for himself as well as the business.