Conglomeration Mystique – concept – a business ethos with two components.
First, the conviction on the part of a successful entrepreneur or company that a) because it is successful in one field it can be successful in any field to which it applies its brand or capital, and b) that to be a truly great company a firm must be in a diverse range of businesses rather than focus on a single field, all regardless of actual market conditions. Entrepreneurs with this ethos frequently cite examples like Elon Musk, Jeff Bezos, and Steve Jobs as proof of the concept.
The second component is the compulsion, usually the result of the above, to build a conglomerate business, either via acquisition or startups, and usually accompanied by rapid geographic expansion.
Related condition: gigantism
If you believe the writings of Tom Peters – whose thinking informed a lot of my early business career – the conglomerate is a really dumb idea. Peters was not necessarily wrong. During the economic boom following World War II, Corporate America decided that the best, easiest path to growth was acquiring profitable companies with stock, excess cash, and cheap debt.
The decade 1973-1983 threw a sequence of challenges at US businesses that exposed the weaknesses of these companies. The end of cheap energy, the conclusion of the Vietnam War, the end of the Gold Standard, the rise of Japanese and German companies, the emergence of corporate raiders, and the growing disruption of technology all landed on US companies in rapid succession. The conglomerates were the largest and most unwieldy of America’s corporate dinosaurs, and they crumbled: Fansteel, ITT, LTV, Olin, Teledyne, Esmark, Litton, Continental Group, and Sperry were all conglomerates in the Fortune 100 in 1970, and are today either gone or are leftovers of their former selves.
The verdict – and now the accepted wisdom, at least outside of China – is that specialization and focus pay. While a degree of strategic diversification might be good, lumping radically disparate businesses together under a single roof creates more management problems than it solves.
Donning my historian’s hat, I think the verdict is more qualified. During times of rapid economic growth and boom, using cash-cow businesses to fund expansion and acquisition into other promising markets is a viable strategy. And there are exceptions. GE has used a long sequence of acquisitions and spinoffs to keep it a going concern, swinging from industry-to-industry like Tarzan swinging on vines through a jungle. And call it what you will, Warren Buffet’s Berkshire-Hathaway is aught more than a very well managed conglomerate, drawing free cash-flow from insurance operations to fund its growth elsewhere.
So conglomerates can work under some very specific circumstances. Where Peters’ research still stands, though, is that corporate conglomeration is not a viable default strategy, especially when it is used as a substitute for an imaginative strategy.
When any company in China – whether a large state-owned enterprise or an entrepreneurial operation like LeEco – appears to be turning itself into a diversified holding company, the burden of proof rests on the company to demonstrate that there is some really smart thinking behind the activity, and that it is not simply hiding strategic failure.