Specialization vs. Diversification Decision Making: Driving Forces and Challenges

Specialization vs. Diversification Decision Making: Driving Forces and Challenges

Dimitris Folinas (ATEI Thessaloniki, Greece & University of Liverpool, UK) and Mohammed Althrawa (Gulf Air Filters Factory Company, Saudi Arabia)
DOI: 10.4018/978-1-4666-5958-2.ch002
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Abstract

This chapter has two main aims: first, to explore the role of various economical, financial, and strategic forces influencing firms towards diversification and specialization decision making within the Saudi Arabian manufacturing industry, and second to assess the challenges for both types of companies at the time of decision making and afterwards. Surveying 100 decision makers in the industrial cities of Riyadh using questionnaires developed for both groups, the chapter initially attempts to identify the factors that had the greatest impact on firm performance based on firm returns on investment. Several factors were found significant; first, attempts of specialization were found associated with risk avoidance and managers craving to achieve industry dominant economic features, whilst results show an increased concern among diversified firm decision makers towards changes in import and export policies and regulations. Moreover, industry type was found effective in managerial responses as they weigh the role of the factors presented to the direction of the expansion made.
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Introduction

One noted business trend of the 20th century was the expansion of the small and medium sized manufacturers forming into large scale or multinational corporations (Chen, Hu and Zhang, 2010). Expansions can take several forms (Wang et al. 2009). Most common approaches are Diversification and Specialization: 1) Diversification, by introducing new products and diversifying businesses into new fields of business (or applying economics of scale), and 2) Specialization, by specializing and enhancing current production line capabilities.

The decision to diversify or specialize depends on many factors economical/financial, technological and strategic. Today, more than ever, the above decision has become crucial and it is a critical success factor of the expansion strategy of manufacturers in order to establish better grounds and sustain growth in face of world free trade and local/international competition (Bartkus and Hassan, 2009; Gompers et al. 2008).

Moreover, this decision has been the subject of many research and business initiatives (Zeleny, 2010; Nooraie, 2011). However the success rates of either of the above expansion strategy have varied, not only across time but also among regions (Michalopoulos, Georgiou and Paparrizos, 2009). Continues changes in the business environment have many consequences on summarizing specific factors for decision makers to consider in regards to expansion decision making.

This difficulty is based also to the complexity to define both strategies (Kang et al. 2011; Markides and William, 1996). Scholars have long argued about the definitions of specialization and diversification in business applications. Table 1 presents the most common definitions that can be found in the literature:

Table 1.
Specialization/diversification definitions
SpecializationDiversification
“Specialization in an economic sense refers to individuals and organizations focusing on the limited range of production tasks they perform best” (Hall, 2009).“A risk-reduction strategy that involves adding product, services, location, customers and markets to your company's portfolio” (Hall and Lee, 1993).
“Organizations each concentrating their productive efforts on a rather limited range of tasks. Specialization entails focusing on a narrow area of knowledge or skill or activity” (Johnson, n.d).“Diversification is the process of purchasing stocks, bonds, and other investments from a variety of different companies and funds so that you have a representation of different industries and market sectors” (Stone, n.d).

Table 2 presents how different definitions can be found in the dictionaries:

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