To maintain its competitive edge against Microsoft Corp. (MSFT, Financial), Zoom Video Communications Inc. (ZM, Financial) needs to keep innovating, lock customers in and bundle its products together with other applications developed by pioneering companies.
That's according to a study by Andy Wu and Duke Kominers titled "How Long Can a Company Thrive Doing Just One Thing?" that was published in the December 2020 issue of Harvard Business Review.
The study compares and contrasts two well-known business strategies: the strategy of focus and the bundling strategy.
Corporations pursuing a strategy of focus allocate most of their resources to doing one thing, where they can excel, be the "best-of-breed" as the authors put it.
"Best-of-breed companies, which do one thing extremely well, have clear priorities, and their incremental edge creates value for customers on mission-critical uses and when customers use them intensely — particularly at large organizations," Wu and Kominers wrote.
Zoom and Slack Technologies (WORK, Financial) are two examples of this. Zoom has allocated most of its resources where its strengths are, video communications. Slack has allocated its resources in one thing it can do best, too, which is team collaboration.
"Because the goal is to ensure that the application is the best of all available options, best-of-breed companies never have to move resources to other projects or accept trade-offs that undercut product quality," Wu and Kominers said.
Corporations pursuing a bundling strategy allocate their resources to several products or services, which they package together in one offering. This strategy is working nicely in software applications where companies can offer add-on applications to their customer offerings.
As the authors explained, "Bundles, however, drive value through integration and can take advantage of more efficient go-to-market sales, not to mention by offering customers the convenience of one-stop-shopping for both sales and support."
While a strategy of focus may lead to breakthrough products that can create new markets, a strategy of bundling can lead to economies of scale, scope and lock-in relations that make it a more viable strategy in the long run. This means that best-of-breed companies have a hard time surviving the competition from larger companies that can offer similar services.
That leaves these companies with two options: merge with a larger company that offers similar products to a broad customer base or partner with other best-of-breed companies.
Slack has chosen the first option, merging with customer relationship management leader Salesforce.com (CRM).
Zoom, on the other hand, pursued the second strategy, counting on Slack, Dropbox (DBX) and 25 other partners to promote its Zoom Apps platform.
"By remaining narrow, the best-of-breed can present itself as a non-threatening partner to other best-of-breed applications in different categories," Wu and Kominers wrote. "Sustaining this position leaves open a growth opportunity to transition from alone application to a multi-sided platform that creates value by allowing for integration with other complementary best-of-breed applications."
Thus far, Zoom's strategy has been working. Zoom is beating Microsoft in several key metrics, including three-year revenue and Ebitda growth and economic profit (see tables).
| ZM | MSFT | |
| Three-year Revenue Growth (%) | 121.3 | 14.7 |
| Three-year EBITDA Growth (%) | 184.4 | 19.5 |
| Current Operating Margin (%) | 21.17 | 38.17 |
| Market Price | $337.32 | $222.42 |
| Intrinsic Value | - | $160.70 |
| Company | ROIC | WACC | ROIC-WACC (Economic profit) |
| ZM | 37.92% | 6.93% | 30.99% |
| MSFT | 28.10% | 5.87% | 22.23% |
Will Zoom's strategy work in the future? That remains to be seen.
Disclosure: I own shares of Microsoft.
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