Denver - Berlin
303.786.9000
720.282.5800

The Death and Disintegration of Conglomerates

what the break up of GE means
for diversified industrial enterprises

With the announcement of the break-up of the General Electric company, the era of diversified industrial enterprises appears to finally be coming to its end.

A SIMPLE HISTORY LESSON

Very large so-called “conglomerates” emerged in the 1960s. Companies like Ling-Temco-Vought (LTV) with its dozen different lines of business (aircraft, steel, consumer electronics, tennis rackets, packaged meat, etc.), and its peers ITT Corp., Rockwell, Litton and more came about because mergers and acquisitions of unrelated businesses were not as closely scrutinized by regulators as similar industry deals.

For most of the original conglomerates, the purported synergies and benefits proved to be an empty suit of promises.  These conglomerates didn’t create any efficiencies, were very hard to manage and were, in many instances, excuses for empire building at the expense of unsuspecting investors.

A second generation of multi-line of business organizations turned up in the 1980s and 1990s exemplified by General Electric, UTC and Emerson.  This generation of organizations avoided the term conglomerate in favor of “diversified industrials.”  With changes in antitrust laws and politics, these organizations developed and evolved their portfolios into groupings of related businesses that shared similar characteristics, organization structures, product development protocols and sales and marketing practices.

While this new “recipe” may have made it easier to manage these large-scale organizations, academic and business researchers who have closely studied these organizations identified a substantial “diversification discount” (loss of value) of almost 10% when they compared the market value of diversified industrials with that of similarly focused (single industry) enterprises.

Charles Knight, the legendary CEO of Emerson, might argue this point if he were still alive. Knight led St. Louis-based Emerson from $1 billion to over $15 billion during his 27 years and achieved an unprecedented record of 43 consecutive years of earnings. However, even with superior leadership, many observers have continued to question the underlying logic of diversified enterprises, which brings us back to General Electric (GE).

Perhaps the only large diversified that defied this economic logic has been GE, which under the leadership of Jack Welch kept rising in value during the 1980s and 1990s (largely fueled by its financial services business). But after Welch, GE’s value plateaued, then gradually decreased and in recent years, has suffered the same inevitable fate, becoming a shadow of its former glory.

With the news of GE’s break up, they join a group of peer organizations that have all reached the same fate, including Westinghouse, Honeywell, United Technologies, Hewlett Packard, DowDupont, Toshiba and more. For most of these diversified enterprises, spotting the isolated trends that have informed their demise is like watching waves break on the shore, one after the other, while remaining unaware of the deep currents and invisible undertows that cause this surface-reality.

EVOLVING OEM GROWTH AND VALUE CREATION MODELS

source: Harbor Research

THE LAST NAIL IN THE COFFIN

Whatever we choose to call these organizations – “conglomerates,” “diversifieds” or “holding companies” – we are referring to companies with entities operating in different industries or diverse lines of business. But even this makes too many assumptions about the underlying thesis that has supported creating diversified enterprises.

Scale and scope do not equate to fast and agile. Seen in this way, the value “discount” the equity markets place on diversified industrials seems logical and reasonable. For that matter, these characterizations do not even begin to address the significant impacts that digital technologies have had on the business models of these organizations. Witness the challenges of GE Software né GE Digital.

Large diversified manufacturing and services companies have been playing with their portfolios and strategies for a long time. They’ve all made many obvious and similar maneuvers. Global expansion, lean practices, reengineering, restructuring, corporate business systems and a slew of acquisitions to offset lower organic growth are all reasonable strategies for value creation. However, what worked in the past is less likely to work now or in the future. For the diversified industrial players, those strategies have clearly reached the point of diminishing returns.

THE TYRANNY OF SCALE AND REPLICATION

Traditional management in many businesses tends to assume that whatever their portfolio mix is, their business and their peers share similar characteristics and practices. Management attention in these businesses has traditionally focused on the known, the visible and the predictable.  Anything too difficult to measure is too often treated as if it were unreal.

Even more misleading is the assumption that “business as usual” will prevail over a given planning period. Such assumptions leave little room for dynamic management (or creation) of change, the early identification of emerging markets or technical discontinuities, or the increased presence of unfamiliar competitors. Traditional planning processes, with their linear view and built-in bias toward the established and predictable, will fail to prepare organizations for significant discontinuities and disruptions.

Traditional business practices, company cultures and operating models inhibit the required creativity and speed to effectively drive new customer innovation and value creation in many OEMs today. Leadership teams in most OEMs live in two distinct worlds—running their core business as efficiently as possible while also trying to identify new and novel products and solutions. The two thrusts—operating the business and enabling new innovations—often creates contention.

At the end of the day, any successful business that has attained scale is really a bureaucracy that is organized to perform processes and tasks with uniformity and regularity. This inherent attribute presents the strategic innovator with a dilemma: OEMs must innovate to survive, but they must also resist innovation to survive.

DIS-INTEGRATION OF THE CONGLOMERATES

The dis-integration of the diversified industrials is driven, in part, by the decades long wave of outsourcing which is causing the restructuring of many businesses into three broad segments or roles: platform players, horizontally focused providers of outsourced “professional services” and vertically focused “specialist” product, software and service businesses.

Traditional OEM businesses are coming to understand that future enterprises will all be part of ecosystems and new value delivery networks largely comprised, in varying combinations, of these new roles. They are recognizing the era of “going it alone” or “flying solo” is over and the “command-and-control” alliance and partnering strategies of the past will not be effective in the complex, instantaneous, interwoven digital economy of today. ◆


This essay is supported by our market insight, “Developing New Growth Opportunities at the Intersection of Smart Systems, Services and the Internet of Things.”

Fill out the form below to download it for free.

PDF Cover

Download to learn:

  • How to frame Smart Systems growth opportunities
  • Smart Systems growth models and strategies
  • The Smart Systems design and development process
  • and much more!


Related Posts