Diversification or Core functionalities?

In a recent interview to The Economic Times, Chris Zook, a noted business writer and partner at Bain & Company talks about the importance of focusing on the core functionalities of an organization. Not just that, Zook advocates the cause of concentrating on the core business to the extent of ‘outinvensting’ competitors in that particular domain. In Zook’s words, “The number one rule is that if you can discourage your competitors from investing in attacking your core, it is ‘game set & match’ “.

Chris Zook’s thoery is based on the fact that the average growth investment has a success rate of one in four. Though in such turbulent times when most businesses are cutting down on diversification and risk-taking, his views are pretty much justified but is it really worth sticking to the same principle all the time? The classic case which brings out a completely new dimension to the concept is that of Microsoft vs Google.

As a matter of fact, Microsoft has always focussed on its core business (software products) ever since its inception. Microsoft’s strategy has always been in complete adherence to Zook’s views, even to the extent that when the internet boom had started gathering momentum, MS didn’t take it seriously enough to start tapping into the huge opportunity lying ahead. By the time it realised its folly, it was too late. Google had already become a dominant force in the search engine market and was rapidly diversifying with utilities like Gmail, Gtalk, online advertising, etc. Microsoft remained stuck to its core business, in which it still remains the undisputed leader but look at the irony….Google despite being focused on its own core (internet based applications) has started diggning into Microsoft’s business. First came Google’s online office applications, then the browser and now its making a big time entry into the OS market and guess what even the OS would be have the internet as its base.

Doesn’t this make for a really interesting case study? Both companies have remained focused on their core domains yet Google’s core has started eating up Microsoft’s business. Microsoft has always followed Zook’s policy of out-investing its competitors by maintaining absolute monopoly even to the extent of stepping over ethical boundaries at times, yet Google has managed to create some serious holes in Microsoft’s umbrella without even touching it. Howzzatt?

On a completely different note, right from the very beginning, Apple’s strategies have blown apart Zook’s thoughts left, right and center. Apple started off, focusing equally on both hardware(Macintosh) and software(OS). It continued to build a strong base in both the domains. Then came some serious diversification in the form of the ipod and iphone. Interestingly, Apple’s core strength at this point of time is neither the Mac nor the OS, its actually the mutimedia market (ipod/itunes/iphone). Yet, it continues to focus equally on all its domains and has managed to carve out a niche for itself as a company dedicated to innovation.

Despite all the anomalies mentioned above, Zook’s theory does get vindicated in numerous cases like Daewoo’s obsession with diversification which eventually resulted in the company going bankrupt or for that matter failed attempts by companies like P&G and Escorts to move away from their core LOBs. Probably at the end of the day, its all about being flexible without sticking to a pre-meditated set of strategies.

Wonder what Chris Zook would have to say about Oracle’s acquisition of Sun Microsystems. On a much lighter note, he would probably be hoping that someone like Dr. Vijay Mallya stays in business for as long as possible. The man has made investments in all sorts of domains starting from alcohol to airlines to sports (read Formula One and IPL). However, unfortunately for him (and fortunately for Zook’s theory), all his ventures apart from the alcohol line have bombed bigtime (at least financially), thereby making him Chris Zook’s ideal muse.

Footnote: All opinions stated in this post are completely analytical without any intentions of presenting companies or individuals in an embarassing light.