Diversification: a dicey move?

3/7/2012

Why do seemingly successful companies choose to diversify and, in doing so, put their future success at serious risk? The latest is a long line of companies to expand their reach is Dell. This week, with their acquisition of Quest Software, Dell made the move from being a hardware company (they make computer systems), to being a hardware and software company.

On the surface, this looks like a good move. But when one looks at history, I'm not so sure. The sustaining of high performance over time is hard. When Zook and Rogers surveyed 2000 companies, they found just 10% sustained profitable growth continuously through the first decade of the new millennium. That's right, just 10%. They identified three characteristics that were common to the successful companies. Profitable companies reduced the scope of their business (Dell has just expanded theirs); they looked for profitable opportunities within their core business boundaries; and, they set high performance targets. So, with this insight, why would any company complicate its business as Dell has just chosen to do?

Steven Stewart link

3/7/2012 14:01:41

I can sure understand why Dell has gone down this track. Their profitability is under severe pressure through selling commodity hardware items. They're effectively saying they have innovated all they can in this area. They appear to be looking to use their existing business relationships to help them grow in higher margin areas provided by the purchase of Quest.

In saying this though, there is a misconception that growth equals profitability. It's an almost lazy assumption in a similar way that discounting is for marketing and sales.

Diversification may not make a firm more profitable, and on the face of it, certainly won't in the short-term. The West seems to be obsessed with growth, market share and leaders, but not profitability.

Is this personal ego - my sandpit is bigger than yours? Or, is it a way for companies to attempt to remain relevant?

I'd say it takes more courage to reduce the scope of your business than it is to diversify.

Peter Crow link

3/7/2012 15:05:44

Thanks Steve, good points.

Your final statement is very true—but it's what the successful companies do (according to Zook and Rogers comprehensive research). Given the view you expressed in the first statement, it could be that Dell is trying to reinvent itself as a software company...as others have also tried in the past. This is a risky strategy, because the entire Dell business is oriented around hardware products. Moving to software products won't be trivial.

-prc.

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Diversification: a dicey move?

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