Corporate advantage in customer-centric diversification

Abstract

Our theory explains how multi-product corporations that engage in customer-centric diversification can create and sustain corporate advantage. First, we invoke the concept of customer-centric assets to explain their role as the cornerstone of corporate advantage in customer-centric diversification. Second, our explanation of the corporate advantage in customer-centric diversification goes beyond the hypothetical ‘consumer synergies’ argument to also include the ‘market-power advantage’ argument. We explain the mechanisms employed by multi-product firms to share and/or leverage their customer-centric assets to create corporate advantage. Third, we explain how sustaining the corporate advantage so achieved requires the organizational-renewal activities to go beyond simply addressing the changing nature of the firm’s demand-side resource (i.e. customer-base) to manage revenue and/or profits.

Keywords:

• Customer-centric
• demand-side
• diversification
• corporate advantage
• corporate strategy

Notes

1. Google diversified from its core ‘search’ product into various complementary products (e.g. online adverting, Internet browser, social networking, office productivity, mobile operating system, consumer devices, content/ media & entertainment, et cetera). Google has subsequently grown by investing in start-ups (Google Ventures), home automation (Nest), robotics (Replicant), satellite imagery (Google X), telecommunications services (Google Fiber), and healthcare, et cetera. Amazon diversified from online book-retailing to multi-brand retailing, and subsequently into providing other products (e.g. video streaming, hardware, et cetera.) that are purchased by its retail customers. Apple diversified from personal computers and software to devices (e.g. iMac, iPod, iPhone, iPad, et cetera.), into various complementary products (e.g. Apple Music, Apple Pay, et cetera).

2. http://www.wsj.com/articles/dell-emc-a-question-of-size-1444420195; The enterprise IT market – which includes mobile- and desk-top devices, computer servers, data storage devices, networking gear, and other supporting equipment – is highly competitive, but its structure is bimodal. Although a very large number of companies from around the world vie to serve the enterprise IT market, the core vendors are large firms, such as IBM, Oracle Corp., Microsoft Corp., Alphabet Inc., Cisco, Amazon.com Inc., among others, with an ever-growing number of aggressive start-ups lurking on the industry’s fringe. Somewhere in the market’s middle ground are all other small-, medium-, and large-sized sellers, which include cut-rate East Asian manufacturers and other types of IT specialty firms.

3. Toby Keith, Cowboy Capitalist: Country's $500 Million Man, Zack O'Malley Greenburg, Forbes, June 23, 2013; http://www.forbes.com/sites/zackomalleygreenburg/2013/06/26/toby-keith-cowboy-capitalist-countrys-500-million-man/.

4. For instance, adverse corporate reputation may negatively influence firms’ efforts to pursue customer-centric diversification because customers identify vendors with a particular core or focal product, which has provided poor product or service quality. A good example would be that of Qwest International, a land-lines communications services provider, which could not successfully provide wireless communications services to its same customers because of its poor wireline services.

5. http://www.wsj.com/articles/nokia-launches-16-6-billion-offer-for-alcatel-lucent-1447845588.

6. http://www.wsj.com/articles/ericsson-cisco-pool-telecom-internet-savvy-in-digital-tie-up-1447069276.

7. The phenomenon of bundling has been ignored by the diversification literature in management even though popular strategy textbooks do explain the same (e.g. Barney, 2011; Grant, 2016). We think the diversification literature has shied away from trying to explain this corporate phenomenon because it does not render itself amenable to a theoretical explanation by employing the extant product-centric logic of firms’ choice to diversify and the performance benefits of diversification: (a) the resource-based view of related diversification, and (b) the ‘market power advantage’ logic of unrelated diversification.

8. Pure bundling can be considered as a specialized case of customer-centric diversification. While consumers are forced to purchase all the elements of a bundle in ‘pure bundling,’ they are offered a choice to purchase a bundle or individual elements in the case of ‘mixed-bundling’ (Nalebuff, 2003). A third case of variety bundling simply refers to firms’ decision to sell a variety of complements that need to be purchased individually.

9. The ‘market power advantage’ logic of unrelated diversification considers market power as both a cause and outcome of diversification (e.g. Montgomery, 1994). However, barring a few early exceptions (e.g. Montgomery, 1985) the literature in management has neither extended nor empirically examined the theoretical arguments concerning the ‘market power advantage’ of diversified firms (Hoskisson & Hitt, 1990; Montgomery, 1985, 1994; Palich, Cardinal, & Miller, 2000).

10. It is beyond the scope of this paper to explain the various inflection points; first, at which point the customer’s value only increase at a decreasing rate with the consumption of an additional complement, and second, at which point it even starts declining with the consumption of an additional complement, and so on.

11. For example, although Amazon.com sells everything related to babies to mothers through its Quidsi subsidiary, shoppers on that and its other websites share a common shopping cart across all of Amazon.com’s offerings – regardless of whether they choose merchandise from an owned subsidiary or from one of the third-party merchants represented on Amazon.com’s website.

12. Amazon.com’s automated robots for warehouses (Kiva) improves its shipping and materials handling activities in order to lower fulfillment costs; Amazon Robotics also develops drones to deliver packages. In 2009, Amazon Robotics began selling units to clients (or performing warehousing services on an outsourced basis for them). From the intelligence gathered in using robots, the firm reduced cycle times to shipping orders, analyzed high-traffic items to rearrange warehouse layouts, and optimize trade-offs concerning shipping costs. Likewise, Zappos and third party retailers both benefit from using Amazon.com’s inventory-optimization technology platform.

13. Google provides powerful and inexpensive computing infrastructure for a wide variety of applications for its customers because it faces low opportunity costs in providing search, email, entertainment (YouTube), and mapping services to them while using the same strategic assets. Experience with providing infrastructure services enabled Google to develop new core customers for mobile working applications, online storage, cloud computing, and personal finances (Google Wallet).

14. http://www.wsj.com/articles/dell-is-in-talks-to-strike-merger-deal-with-emc-sources-say-1444259189; In 2015 VMware’s software revenue was about a third of EMC’s revenue from its data-storage business. However, EMC’s 80% stake in VMware accounted for almost half of its market value (FBR Capital Markets estimates in WSJ, 2015a). In 2015 VMware had a market value of $34 billion.

15. VMware’s virtualization software allows servers (and other equipment) to run more efficiently used in corporate data centers. This technology paved the way for cloud-computing, which substituted hardware with software and drove down IT costs. It later took VMware public through an IPO but retained 81% stake. Later VMware expanded into the growing mobile-device market. In 2014 it purchased AirWatch, a mobile-device management company.

16. Advances in Information Technology have enabled firms to invest in a plethora of digital tools (e.g. web-based apps or videos that can be accessed through multiple devices or channels) to improve both pre- and post-purchase ‘user’ experiences. In the age of social media word about customers’ experience can spread like a contagion thereby influencing financial performance.

17. It is therefore logical to expect that positive brand identity will positively influence the multi-product customers’ decision in the market for complementary product thereby positively influencing the multi-product firm’s performance in the target market for complementary products. Customers expect similar quality of the product, service, etc.

18. Carl Icahn in letter to AIG CEO http://carlicahn.com/aig-ceo-letter/.

19. http://blogs.wsj.com/moneybeat/2015/11/17/aigs-hancock-faces-investors-after-icahn-calls-for-split/.