Business diversification won't guarantee success

When a technology company diversifies beyond its core business to become a vendor playing in different markets, such as hardware, software, mobile and services, there are risks as well as rewards, analysts said. The multi-market approach, they added, does not guarantee success, and whether a company thrives or spreads itself too thinly ultimately depends on how the individual corporation straddles the many hats it wears.

Diversification can be beneficial as it brings with it the potential of additional sources of revenue, said Andrews Whit, vice president at Gartner. But there are also risks that vendors who adopt broad-spectrum offerings could alienate partners and over-commit themselves in markets insufficiently lucrative to support their business.

Carter Lusher, research fellow and chief analyst for enterprise applications ecosystem at Ovum, pointed out that taking a "jack of all trades" approach does not equate to eventual failure--or success.

For instance, IBM was the original IT stack vendor--owning and integrating most or all components of enterprise IT infrastructure--from the 1950s through to the mid-1980s, but was "failing...to the point where it was close to implosion", he noted in an e-mail. "It was only after Lou Gerstner was appointed CEO in 1993 that IBM revised the 'IT stack' vision and strategy, retuned the product and service portfolio, and imposed disciplined execution that IBM was able to save itself."

It is never an easy task for any company that wants to "do and control mostly everything" to excel on all four critical success factors--vision, strategy, resources and execution--and repeatedly retune, rethink and refine them, Lusher acknowledged.

"There is a fine line between success and failure...Get everything right, and you have the success of Apple with its iOS platform [and gadgets], or IBM with its corporate computing portfolio," he said. "Get any one part of the factors wrong, and the vendor ends up a muddled mess that sub-optimizes the portfolio, where one plus one equals less than two."

Pranabesh Nath, Frost & Sullivan's industry manager for ICT practice in the Asia-Pacific region, added that it is also rare that a company can operate in a lot of different areas because the skills and resources required to do so are very high.

He agreed that trying to corner new markets can be a "high risk venture but can also bring high returns"--and there is no guarantee of automatic success when entering a new segment.

For instance, IT bellwether Hewlett Packard's strategy to acquire Palm last year for its WebOS platform was a good one, but "the execution was anything but", he pointed out. Two weeks ago, HP announced it will drop WebOS products and also disclosed plans to sell or spin off its PC business--to concentrate on enterprise software.

When contacted, HP said that focus is required to recognize any organization's greatest strengths and opportunities. In an e-mail interview with ZDNet Asia, Kelly Tan, managing director and vice president of global sales at HP Singapore, explained that the company understands the themes that cut across its business--which are cloud, connectivity and software, and aims to deliver value in these areas.

The main driver behind HP having a variety of different products and services is to understand customer needs, Tan added. The "broad portfolio" and rich ecosystem of partners and services from data centers to devices means the company is in a "unique position to deliver" and leapfrog directly to what customers want.

Bad vision, complexity spoil diversification
According to Frost & Sullivan's Nath, the greatest benefit from business diversification for a company is the ability to have a very wide pool of resources and expertise which enables it to provide a variety of solutions to a wide set of customers. This will also help the vendor expand into newer profitable segments in future, he explained.

As for risks, they would vary depending on how different the new business is from what the organization has hitherto been selling, he said.

If a company falters from the sprawl of diversification, it would depend on factors highly specific to the individual company, such as mistaken vision or failure to integrate and manage the new businesses it acquired or branched into, added Nath. The management team must be able to look beyond short-term profits, create solutions that bring genuine benefit to the communities at large, and have a constant focus toward innovation, he said.

Ovum's Lusher also noted a similar hurdle of identifying real opportunities for synergy between products and services that creates true business value to the vendor itself and its customers. There have been many instances where company executives misread the opportunity or engaged in magical thinking, he said.

For example, Cisco System's Flip acquisition, where the goal was to help push sales of networking gear due to bandwidth-hungry video, turned out to be an "expensive fantasy", he pointed out. The networking giant eventually ceased its Flip business in April , ending its failed venture into the consumer or personal device market.

On the other hand, Cisco's TelePresence, the high-definition--and high-end--videoconferencing solution, was a win-win for Cisco and its business customers. Not only does the technology help customers save on travel expenses, it also drives incremental upgrades to existing network infrastructures, Lusher noted.

The Ovum analyst added that another risk is managing the complexity that comes with a diverse portfolio of products and services. Besides technical complexities, there could also internal management conflicts, financial margin tradeoffs, research and development imbalances leading to wasted investments or missed opportunities, as well as branding issues.

HP, for instance, has a mix of low-margin business in the form of its PC unit and high-margin software, according to Lusher. It also pushed too many messages--that it was a consumer company and a data center company for enterprises.

"Even though HP's personal systems group (PSG) of computers had been one of the most successful PC vendors, the best PC companies deliver razor-thin margins even in the best of times," he said. "Wall Street was screaming for HP to deliver quarterly margins close to IBM and thus PSG might have been sacrificed in order to reduce its drag on HP's overall margins."

Lusher added: "Google will face the same margin pressures if it chooses to go into the mobile device hardware in a major way and [may] have trouble convincing Wall Street that the hardware drag on its plump search-based advertising margins are worth it for a long-term strategic goal."

Unclear how Google hardware expansion will turn out
On Aug. 15, Google's announced its US$12.5 billion purchase of Motorola Mobility, a sign that it aims to become a "managed device platform", where it has a hand in all aspects of a mobile platform, that is, the hardware, software, online services and content--a position similar to that of rival, Apple, Lusher pointed out.

On Google's chances of successfully tackling the mobile hardware market, Lusher replied that it is important to note that Google already had hardware in its portfolio with the Nexus One smartphone and Chrome laptop, although Motorola will "dramatically add to the breadth and complexity of hardware offerings".

"One cannot really access the chances of success or failure merely because we do not know what Google's vision or strategy really was behind the Motorola acquisition. There is a distinct possibility that Motorola was acquired simply for the patents as a negotiating tool for the many intellectual property lawsuits Google is fighting."

Gartner's Whit concurred: "Do not assume Google will make manufacturing look the way it has looked for Motorola thus far. They may spin [off] the business or substantially rearrange the value proposition."