How focused firms can sometimes get the better of larger, more diversified rivals
In a recently published article in the Harvard Business Review, UConn management professor Timothy B. Folta and two European colleagues discovered that in hypercompetitive business markets, a less-resourced but more spirited and focused company is likely to fight a rival to the bitter end.
Much of Folta's work in the last 20 years emphasizes how diversified firms have flexibility lacking in focused firms because they can redistribute resources, including money, talent, and technology to better opportunities within the firm's portfolio. The diversified company can exploit growth opportunities more quickly than a focused rival.
A diversified company might do well in fast-moving consumer goods or in pharmaceuticals, for example. By investing aggressively, the company can scare off the established players.
However, in the article, titled "In Winner-Take-All Markets, Diversification is a Liability,'' the researchers argue this advantage may not hold in hypercompetitive markets. Folta argues "rivals may recognize that diversified firms can use their flexibility to easily retreat from markets, and this may inspire rivals to attack more aggressively."
The Harvard Business Review article highlights several examples where this proved true.
When Google took on Facebook in social media with its Google+ business, starting in 2011, it was one of multiple business opportunities Google was pursing. But Facebook's survival depended on its social-networking success, and so it responded aggressively to the challenge. Eventually Google retreated from social media and reallocated its resources elsewhere.
"Facebook attacked like crazy and fought tooth-and-nail until Google retreated, because it had no other opportunity for its resources,'' Folta says.
Likewise, in the semiconductor photolithography industry, Dutch tech company ASML has a near monopoly on the market, and is the global provider of systems required to print the most advanced microchips for AI and modern computing. The company bested rival Nikon, in the 1990s and 2000s, which is now a much smaller player and balances its work alongside camera and optical businesses.
A similar duel played out in China and Southeast Asia, when regional ride-sharing firms, including Didi Chuxing, forced Uber from the market in 2016. The competition between the rivals was very expensive, with Uber reportedly losing $1 billion per year. The founder of Didi Chuxing said he was prepared to bleed subsidies for years if Uber kept fighting.
"The more focused firm is certainly more likely to be scrappier,'' Folta says, adding that companies with no alternative businesses wage longer, harder fights, and are a more dangerous foe. A diversified company doesn't have as much to lose as it can shift to other products or processes.
"The corporate strategist who understands the nuances of these competitive conditions, and has the discipline to act wisely, is the one who will come out on top,'' says Folta. He collaborated with professors Phebo Wibbens, of INSEAD in France, and Teresa Dickler of University of Marburg in Germany, on the research.
The authors took lessons from history to make their contribution. "When famed Chinese military strategist Sun Tzu advised armies to burn their ships upon landing in enemy territory, the logic was: eliminating retreat options signals to the enemy that the invading forces will fight to the death,'' Folta says. He thinks Tzu got the argument right.
"When competition is very intense, diversified firms cannot credibly signal that they will persist in a market, so it is more advantageous to be a focused firm,'' he says. "In this case, the commitment disadvantage with diversification overwhelms any flexibility advantage.''
"Our findings are relevant to firms large and small,'' he says. "Diversified corporations should be very careful entering these winner-take-all business realms, as should focused companies considering diversifying into other markets.''
Folta and his peers caution diversified firms to avoid entry into a winner-take-all sector unless they are prepared for a long-term battle that they may not win.
Folta was the keynote speaker at the 34th Conference on Postal & Delivery Economics and Policy in May in Cologne, Germany where he spoke of his findings to an international audience.
