Competitor-focused strategies happen

Companies often get into new businesses not because they want to create more value for their customers but because they want to keep up with their more successful competitors. Such competitor-focused strategies (CFS) often fail because they are based on copying what another company has done rather than on positioning the firm to sustain superior profitability by creating competitive advantage.

When publicly-traded companies pursue such CFSs, they create opportunities for investors and for competitors. The stock price of companies that pursue CFSs is more likely to decline because the CFS distracts management attention and resources from its core business. If the distraction is sufficiently large, the core business is likely to see its competitive position decline.

In 1998, Dell decided to start a corporate venture unit, Dell Capital, after envying the corporate venture capital success of Microsoft and Intel. At the time, Microsoft’s venture capital portfolio had $6 billion in unrealized capital gains and Intel’s had turned $2 billion worth of investments into shares worth $10 billion. Moreover, in early 1998 Dell had passed up a chance to invest in Network Appliance – causing it to miss an opportunity to own a substantial chunk of this then $18 billion (market capitalization) maker of network storage equipment. Dell Ventures was born later that year with an unfocused strategy described in terms that captured all the era’s most popular Internet buzzwords. After investing billions in 87 companies over six years, Dell Ventures sold its 20 most valuable portfolio scraps for $100 million – the others had simply folded.

Investors can profit by selling short the shares of the company pursuing the CFS. Competitors of companies pursuing CFSs can profit from the distraction as well. Such competitors should evaluate the potential to take customers of the CFS-pursuing company’s core business.