Diversification: a dicey move?
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?
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.
Thanks Steve, good points.
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Thoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention.