Manufacturing guy-at-large.

Strategy Tax

Added on by Spencer Wright.

From the second of Ben Thompson's posts on Microsoft's recent reorganization. Emphasis mine.

Let’s follow the typical path: Company A makes an amazing product, finds a great market fit, and starts to make a lot of money. They IPO. They continue to grow, and the stock goes up. And then the stock stops going up, because it’s not clear how they will continue to grow. A stock’s worth, after all, is simply the discounted sum of future earnings.

And so the company looks for another avenue of growth. They diversify, maybe successfully, but now they have two products. And soon, like DuPont, they see the wisdom in having two divisions.

Of course, those divisions are certainly related in some way, and it’s inevitable that considerations are given – or dictated, from the CEO – that decisions in one divisions favor the other division whenever possible. This consideration is called a strategy tax, and it’s a hindrance to product quality. So is the inevitable competition for resources, and the increasingly divided attention of the CEO.