As mentioned last month, Professor Aswath Damodaran had an excellent article on Rim and how it should focus only on the blackberry. I think I may have found another contender.
Large tech companies are big due to their past successful products. Something went right (usually very right) for the company to become a leader in their industry. However, once successful, the company should adapt if possible (and profitable). If not, they should focus on their niche and not develop products that are outside of their circle of competence.
It’s similar to how some music genres come and go. At first, the genre is new, in demand and very popular. However, times change and the old popular genre gives way to a new one. With the spotlight switching to the new genre, a band must adapt to maintain mass popularity or focus on a niche market (kind of like every 80s hair band except Bon Jovi or more recently Kid Rock which both successfully transitioned to country.)
Sometimes band’s can’t change their sound successfully and in that case they shouldn’t. Who would want to see AC/DC make a dubstep album? Nobody. And that’s fine, AC/DC understands this and keeps putting out solid power chord rock to a niche market. Angus and the boys know what they are good at and won’t put their capital into a market that wouldn’t be profitable and hurt their sales with existing customers. This is a good thing. If you can’t adapt, don’t, stick to what you are good at.
Back to the business world, I’d say the best example of a company that should stop trying to adapt is Microsoft. Although, it is a very safe company (due to past Window’s and Office profits), it will never garner Apple’s valuation because it can’t create new products outside of its core franchise.
Instead, Microsoft tries to buy its way to relevance. The Skype acquisition is the perfect example, it made little strategic sense and absolutely no economic sense. You can also see it to a lesser degree with their online services divisions which loses hundreds of millions of dollars every quarter. Finally, its Window’s phone is the latest example. Microsoft is planning on $200 million in marketing
in the US alone to catch up, years after Android and Apple dominate the market and have an extremely strong eco-system.
It’s almost as if Ballmer looks at CNET once a year to see what product category is hot and acquires a new company or starts an internal division to catch up, regardless of any economic analysis. *(Watch for more cloud computing purchases in 2012.)
This isn’t a post on if Microsoft is over or undervalued although I wouldn’t buy based on its shrinking economic moat. With the shares at $28, Microsoft is already priced for no growth. However, if Microsoft focused on Windows and cut R&D to focus on its core strengths, the stock would be worth a lot more. Instead we have the Ballmer risk, The desperate attempts from an ego driven CEO for his company to adapt, regardless of what’s best for shareholders. Microsoft should take a lesson from AC/DC. You can’t adapt, so don’t. Stick to what you are good at.