A Growth Strategy for a Diversified Conglomerate

Capitalism’s going through a major transformation right now. As capital becomes global, resources have to be moved flexibly, globally.

February 2012 | by David Delaney

Executives are always looking for ways to expand their businesses, and diversification is one approach they regularly ask about. The answer is always unambiguous: diversifying, in itself, is neither good nor bad; what matters is whether a company can add value. Although more than 70 percent of large companies around the world already operate in more than two industries, our research finds that creating value through diversification is a lot easier in emerging economies than in developed ones.

Sharp jumps in the price of oil and gas caused by the US Gulf Coast hurricanes of 2005 delivered huge profits to ExxonMobil and other major oil companies, in some cases helping them report record quarterly earnings. But even beyond the oil patch many other companies, in a broad set of industries, also generated massive earnings. Indeed, a growing number of companies, such as Citigroup, General Electric, IBM, Microsoft, Toyota Motor, and Wal-Mart Stores, now earn around ten billion or more annually. The emergence of such mega-institutions and the ways in which they are developing their extraordinary scale and scope represent a basic structural change in the landscape of business. Although the average mega-institution doubled its revenues from 1984 to 2004, by far the most striking increase has come in these companies' market capitalization, which jumped three-and six folds, respectively, during that period.

New Business Models and Value Propositions

Less than two percent of firms (nine) on Fortune’s Global 500 list of the world’s largest companies, for example, derive more than twenty percent of their revenues from three distinct regions. Metrics on the globalization of markets indicate that only ten to twenty percent of trade, capital, information, and people flows actually cross national borders. And international flows are generally dampened significantly by geographic distance as well as cross-country differences. Most firms also remain quite domestically rooted in other aspects of their business, such as where they do their production or where their shareholders live. BMW, for instance, derived fifty-one percent of its sales revenue from outside of Europe, but still maintained roughly sixty-four percent of its production and seventy-three percent of its workforce in Germany. So, going global is obviously not a recipe for success in and of itself.

Globalization’s Critical Imbalances

It’s almost inevitable: to boost growth when a company reaches a certain size and maturity, executives will be tempted to diversify. In extreme cases—the United States during the 1960s and 1970s, for example—a corporation with a sharp focus on its core business can end up as a mix of strange bedfellows. One global oil enterprise famously acquired a computer business, another, a retailer. And a major US utility once owned an insurance company. Although a few talented people over time have proved capable of managing diverse business portfolios, today most executives and boards realize how difficult it is to add value to businesses that aren’t connected to each other in some way. As a result, unlikely pairings have largely disappeared. In the United States, for example, by the end of 2010 there were only twenty-two true conglomerates. Since then, three have announced that they too would split up.

 

Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan