Should ERP vendors enter adjacencies?

strategyThere is a tendency these days to advise that people and companies ‘focus’, and not try to do too much. Should companies stay with one set of products, or broaden out into other related areas or ‘adjacencies’?

Recently an analyst I follow on Twitter commented that SAP has spend $50billion over the years to acquire innovative products the company could not build. I can’t remember whether it was Vinnie Mirchandani or Ray Wang, but there is a Wikipedia link that shows the SAP acquisition list. The money for those acquisitions came from the annual license fees that SAP customers pay, an issue that Vinnie has said before is a concern to customers, for example here.

SAP is not alone, Oracle has also spent billions on acquisitions over the last 10 years to broaden its footprint from a database and finance applications player, to one that has its own complete technology stack.

In an era when ‘focus’ is often evoked, the question is how do executives of a company identify opportunities and prioritise goals when they move from specialising in one area of technology to a huge range of technology products? An article in 2014 raised the issue of the dangers of adjacencies. When growth begins to decline, the reaction is for companies to enter other related areas of business, and this seems to have become almost an addiction. When it comes to SAP and Oracle, their acquisitions appear to be driven by a need to continue an aggressive growth strategy.

The basis of the article is that adjacency moves distract the company leaders from finding new ways to grow the business they are already in, and so the core business grows slower. This reduces the focus on the core area, what makes this area unique and valuable, and the business loses the advantages it used to have. Again, SAP’s core ERP area has not recorded strong growth in recent years.

Interestingly, the writer of the 2014 article published another one in 2015 that discussed how diversification into adjacencies could work. What needs to be done to succeed is to:

think about focus in terms of how much your businesses materially benefit from the distinctive capabilities that make your company better than any other at its way of creating value.

According to the new hypothesis, you don’t diversify just to enter more attractive growth markets, you do it for these two reasons.

To use your company’s way of creating value and its distinctive capabilities to generate new avenues for profitable growth.

To strengthen your company’s current business, by enhancing either its capabilities or its value proposition.

The adjacency strategy for a business therefore is not to diversify away from your base, but to diversify for your base.

Looking at SAP, Oracle, and also IBM, the question seems to be, what did they diversify for?

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