Within two years after becoming chief executive of General Electric in 1981, Jack Welch completed one of his most far-reaching initiatives: reducing the number of GE business units from about 150 to 15. In effect, Welch set out to focus the company on the businesses where it had the potential for greatness, and to jettison everything else. That was the point of his famous requirement that every business had to be No. 1 or No. 2 in its market; he also insisted that every business provide value no competitor could match, and that they all should be able to gain leverage from GE’s distinctive strength in complex, engineering-intensive industrial enterprises — or they wouldn’t fit. Welch articulated both what GE did well, and what it would not do at all: a critical challenge for all large companies, especially conglomerates.
A conglomerate, by definition, is a large corporation with diversified product lines, owned and run by the same management. Conglomerates are defended for their synergies, and for the benefits of diversity as a hedge against failure in one sector (though this argument is often oversold by management, since shareholders can diversify and thus hedge risk for themselves). But conglomerates are inherently more vulnerable than other companies. As many economists have argued, the burden of proof is on the company’s management to show that these diverse businesses are better off together than they would be independently. GE’s experience shows that conglomerates can, in fact, meet this test, but it also shows how difficult it can be: GE stumbled with Kidder, Peabody and NBC, and most conglomerates, no matter how well managed, experience similar blunders.
The trick with conglomerates is to manage those diverse businesses in ways that create meaningful and relevant scale. Today, this almost always means drawing on the most distinctive, most significant capabilities that the company has — on the things it does particularly well. This glue, what we call coherence, is one of the primary drivers of success for organizations, regardless of how diverse they may seem to be, and it may, in fact, make all the difference for a conglomerate’s survival.
Every successful conglomerate we know of — GE, Honeywell, Tata and United Technologies Corporation among them — has prospered by doing two things. First, it has applied a few critical capabilities to all the disparate parts of the enterprise, Second, it has taken advantage of its diversity in other ways, not forcing scale where scale would merely add cost and complexity. The conglomerate might not seem, at first glance, to stand together as a single business. But it stands together as a relatively coherent entity, through the power and universal applicability of the things it does well.
GE has its strengths in the management of large-scale industries. Danaher, a smaller but very profitable conglomerate with a diverse range of manufacturing businesses, has a very different set of strengths; it applies its distinctive lean production system to a variety of product sectors, often through companies that it acquires and then transforms. Even Tata, which operates in such diverse businesses as automobiles, electric power generation, tea, IT services, and tableware, has a distinctive managerial approach, grounded in its history of frugality and its philanthropic aspirations.
Of course, the very diversity that defines a conglomerate makes it hard to enforce the discipline of coherence. There is always a question about whether the conglomerate is at an inherent disadvantage It takes a great deal of capital, thought, and ingenuity to develop a powerful capability and apply it at the relevant scale. A conglomerate, which must maintain many capabilities for its various types of businesses, will sooner or later find itself slipping behind more focused competitors. It won’t be able to muster the same kind of focused investment and attention, or attract the same kind of specialized talent.
How, then, can conglomerates succeed over the long term while remaining large and relatively diverse? We would offer two alternative ways to become a more coherent conglomerate. The first is to undertake a wholesale reconsideration of the portfolio of your enterprise, divesting businesses that don’t fit your distinctive capabilities and acquiring businesses that do, in the same way GE did. But very few conglomerates are set up to embrace this sort of abrupt shift of direction, and it takes a long time to execute.
The second alternative is to seek out ways to create coherence across what may seem like very diverse businesses. Instead of simply aggregating your various business opportunities and strategies and finding commonality, build a different kind of diversity. Rethink the strategy by which each of your individual businesses competes — and therefore how they can leverage your organization’s truly differentiating capabilities. Re-think the role that the enterprise could provide by enabling and building differentiated capabilities, and helping businesses find better ways to leverage them.
You might be tempted to start by force-fitting your biggest and best capabilities to all your products and services. But that probably won’t work. For example, if you have a world-class distribution system for your consumer-packaged goods businesses, and you try to merge it with your specialty chemicals supply chain; the specialty chemicals business will no longer be able to rely on the capabilities its portfolio really needs. GE, for example, has done a good job of recognizing the logical boundaries between its divisions. It does not force its medical systems business to adopt the same market positions or capabilities that work for major appliances or locomotive engines.
Instead, start by moving toward coherence within each individual business unideveloping an internally well-aligned value proposition (articulating the distinctive way you expect to approach customers), a capabilities system aligned to it, and a portfolio of products and services. It is better to have coherence in each business unit, and nothing shared between them, than to try to force different units to adopt the same value proposition or share capabilities that don’t fit their purpose. We have seen the market penalize that approach.
Having chosen one of these approaches, the next step is to identify the few differentiating capabilities that might be legitimately shared across business units, things that one business does well and that will be relevant to others. These might include a unique approach to human capital (recruiting, talent management, and succession planning); a distinctive, team-based manufacturing approach, with highly refined factory technology; or a far-sighted customer service system that makes use of “big data.” There is no universal answer. True success comes to those that create a unique system of capabilities that fits the way they have decided to compete. You should also ask a question that often goes unasked: How might the individual businesses reconsider their strategy in light of what the enterprise brings to the table?
You don’t have to be a conglomerate to benefit from this approach. Most large companies struggle with issues of focus, even if all of their products fall into related industry sectors. Like real conglomerates, every large company pays a penalty for incoherence. And like conglomerates, all large companies have an opportunity to get on a new, more coherent path, producing more value for their customers, employees and shareholders.