Thursday, December 15, 2011

Diworsification - Is The Amazon Kindle’s Failure Imminent?

Some times it is the small, unnoticed perturbation that signals a change in trend.  Is this Amazon’s?  Sales of its Kindle appear to be brisk but not everyone is convinced. 

This raises an issue I have written about on here.  That is diversification or diworsification as I like to call it.   Diversification is the death knell of businesses.  Countless studies have proven the horrendous outcomes of this dynamic.  While there may be detailed case studies and analysis the cliff notes are really quite simple to explain in a single sentence.  Companies try to become too many things to too many customers and end up not doing any of them particularly well as a result or sinking the profitability of existing businesses. 

I just saw the results of a neuroscience study that concluded what we as humans intuitively knew already.  That is, it is the obsessive and focused mind that is capable of brilliance.  Multitasking is substantially overrated and multitaskers often thrash unproductively rather than accomplish any greater number of tasks.  Albert Einstein was not a multitasker but instead was obsessively focused.  And, so was Michelangelo.  In a recent study, neuroscience concluded it was obsession that led to dramatic human achievement.  I think we all knew that.   If, by multitasking, we are talking about walking and chewing gum, that’s one thing.  If we are talking about trying to resolve five complex tasks simultaneously, I am extremely dubious that the human mind is capable of the level of problem solving  and detail required to accomplish these tasks concurrently. 

We can apply the concept of multitasking to corporate diversification.   Diversification is essentially multitasking applied to a corporate business model.  And, with it comes the poor focus and mediocrity of execution that defines multitasking.  Jeff Bezos, the founder of Amazon, was obsessively focused with the invention of Amazon.   He was focused on providing a superior experience and superior service for the passionate buyer of books.  Since, the company has embarked on an effort to try to become everything to everyone.  It has a vision of delivering diverse digital content and dominating the devices we are supposedly going to consume it on.  We shall see.  That is an enormous shift with enormous risk. 

Companies diversify in search of the never-ending need to grow to satisfy shareholders and Wall Street.  By the way, why do we need an economic model or monetary system that enforces the need for growth?   We don’t and at some point when society tires of the endless treadmill, we won’t.  Ultimately, all firms that diversify hit the wall in some manner.  Some reorganize.  Some refocus.  Some trim their offerings.  Some suffer under mediocrity.  Some go bankrupt.  Amazon is in a risky game as it seeks to diversify and play in new markets where there is no natural moat or intellectual capital to protect its foray.  All, while such efforts drain focus, talent and cash away from their core business. 

It is one thing to provide a simple e-book reader as Amazon did before.  But, today, they have built a large technology infrastructure to support this launch and  have gone well beyond an e-reader into competing directly with a full line of general purpose computing tablets and a large IT infrastructure to support it.   A solution to the dilemma of diversification might be to spin off profitable new ideas into separate companies with completely separate management, business plans and profit & loss responsibility.  The Kindle business is substantially more complex than simply sourcing a hand-held device.  And, all of those moving parts are  not a profitable business for Amazon.   Amazon would say not profitable yet as it siphons talent, focus, resources and cash into what essentially is a start up business.  In other words, this investment most assuredly does not meet the hurdle rate required for a new business.   Amazon more than likely rationalized this investment as a required extension to its core business model.   The key word is rationalized. 

Remember, as we wrote long ago, much of the demise of American auto companies was because of diversification. American auto companies diversified into home loans, IT consulting, medical research, cruise missiles, satellite TV and buying other car companies such as Ford buying Volvo.  All because management tried to diversify away from their core competency of transportation.   And, because bigger was thought to yield economies of scale.   But the primary driver of this growth in girth is substantially driven not by talent or skill or ability but due to the financialization of our industrial companies and the resultant mismanagement.  (Wall Street fueled the massive corporate diversification bubble over the last thirty years through telling economic lies and through its endless self-serving deceit by telling companies that bigger was necessary to compete in a global economy.)  Now the auto companies have refocused and are profitably making even small cars in the U.S.   At least for now.  As I have noted previously, I expect that could very well change due to supply chain risks and exposures in volatile foreign markets; that dynamic we wrote about many years ago is now starting to reveal itself.

We are going to see a lot of companies that heretofore were considered successful end up with substantial business model crises before this cycle ends.   Wall Street companies fit this bill to a tee and Goldman Sachs is one we have highlighted many times.  None of them are likely to survive in their current form.  I could make a blanket statement and say all of the companies in the S&P fit that bill to some degree because all adopted the same girth and diversification strategies shared by Amazon and Wall Street.  Strategies that may appear on the surface to be successful for some period of time but in fact will turn out to be miserable failures.   In fact, I would argue that most of the large companies in this country are severely mismanaged or even systemically incompetent.   We have highlighted this through numerous data points and analyses over the years.   All it takes are the right macro dynamics to expose this incompetence.  We are nearing that tipping point.  Remember, as we have uniquely noted time and again, this cycle could very well be coined the end of big.   (We’ll continue to discuss this further in later posts.)

Diversification almost always leads to some type of failure or eventual mediocrity.   Almost every new and innovative company that was listed on the Nasdaq from thirty years ago no longer exists.  The same can be said for even mega corporations that existed during the last great economic crisis to hit this country.   Some times that was due to creative destruction or as we see on Wall Street today, some times it was just due to self-destruction through diversification and horrendous management incompetence. 

Is this becoming Amazon’s moment they hit the wall thus forcing them to eventually refocus on their core competency or worse?   The dynamics are present but I am not close enough to the company to know.  We shall all find out over coming years if this foray into diversification was a turning point.

Title link here.

posted by TimingLogic at 2:12 PM

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