Organizations approach corporate strategy in different and unique ways. Some will spend a significant amount of time doing one thing well (be it a task, promotion of service, or building of a product). They’ll relentlessly push perfection, and in the process often drive high-profit margins. Others promote diversification. Branching out/researching new business models can create new services, but, in many cases, it takes away key resources on an existing core competency (hedging their bet in the process). Thus, driving down profit margins, at least at the macro level.
In the market, financial analysts initiate coverage on organizations with complex business models. If more analysts cover XYZ stock it will usually carry a higher valuation than ABC stock. There are always exceptions to the rule but choose an industry. Take two companies. Count the number of analysts. Compare the stock price. More coverage equals a higher price. This almost always plays out.
And here lies the paradox. If an organization is measured by its stock price, most will choose diversification and lower profit margins. Something to ponder.
- Thinking back on this post, there is also an element of survival. One could argue diversification and thinking differently are necessary for survival. Microsoft missed out on large markets due to unique business models entering the industry. After all, Team G often gives many of its services away for free. And open source companies too.
- The book in the picture by Adam Grant. Think Again. And the badge is from my Microsoft days.