Focus, focus
There is a prophetic economics article that bears out much of what we have been saying about how the new oligonomy has found it is better to be the best at one or two things than to be an also-ran in lots of different markets. In fact, the article "Corporate Focus and Stock Returns" by Robert Comment and Gregg Jarrell (Journal of Financial Economics, January 1995) is doubtless truer today than when it was written. (The paper costs money to download here, but there's a readable summary with excerpts here.)
The article documents a switch in thinking about diversification, which as we have noted, was popular in the 1950s and 1960s but has been considered a losing corporate strategy ever since. The authors of the article looked at some 2,000 public companies throughout the 1980s, and compared profitability to a measure of concentration in specific business segments. First they found over the decade a major switch in the amount of companies concentrating on only one business segment (As designated by SIC, or Standard Industry Classification, codes), from around 35% to 64%.
More important, they found that the amount of focus on one or several segments directly corresponded with significantly higher profitability and stock value. Likewise, divesting non-core businesses had a major positive effect on profits and valuations of the company. These were effects were not always immediate, so the longer scope over their study showed changes over two, three, or more years.
Focusing on one or a few well-understood business in which the company can be a significant player is usually what is behind the gin rummy game. But I think it has progressed even further beyond SIC categories. Kraft's recent sell-off of Life Savers and Altoids to Wrigley and Citigroup's 2002 spinning off of its property/casualty insurance businesses are typical of a fine winnowing that now is a part of all big corporations. Focus is a big driver of acquisitions and de-acquisitions.
8:19:46 PM 
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