The Conglomerate Factor
“Who killed the GE model?” Was the title of the July 2018 article in the Harvard Business Review. The GE model dates back to 1970s when Reginald Jones created a structure that would end up becoming a standard for the industry. This was carried forward by Jack Welch for next two decades. When Welch was replaced by Jeff Immelt, he continued with the tried-&-tested model, however, the situation was not smooth, especially the losses from GE Capital. When John Flannery took over from Immelt, he tried to stick to the core by selling off the non-core businesses. The present CEO Larry Culp faced the new challenge and he took the ultimate decision that raised questions on the future of conglomerates.
In my article published on 29th July 2021on Medium, I had touched upon the possibility of GE filing for bankruptcy if it does not rediscover itself. Recently, GE decided to break itself under the leadership of Larry Culp in three verticals to survive in this highly competitive market where disruption has become the new normal. Does this help the company build a sustainable business model and survive for decades to come? Forecasters are already building scenarios to help us understand the plausible outcomes of such strategies. GE is not alone. Johnson & Johnson also decided to split its business into two. Some observers termed it as the end of conglomerates. GE’s story reflects how even the most valuable American companies may be flawed, and once the flaws are highlighted, the process of transformation begins.
Over the decades we have seen conglomerates being built and dissected to ensure better survival rate. This is more so even as the industries search for better ways to define itself, with players from undefined industries disrupting the existing industries. The startup culture gets the priority over typical corporate culture by a certain group of young employees as the startup culture offers fast-paced ever-changing work environment because of the sheer size. But the biggest factor that has, over time, challenged the ‘conglomerates’ is easy availability of finance for the start-ups in the last couple of decades. Conglomerates were built and are continuing to flourish in underdeveloped and developing countries is because of easy availability and transfer of finance between group companies. In the US, however, with easy availability of capital for entrepreneurs, the culture of conglomerate has become unfavourable. This could be the reason why companies are breaking up conglomerates to insulate specific businesses within the conglomerate from the adverse impact of disruptions in industries. Needless to mention here that there are always some exceptions such as Alphabet and Meta, even as they continue to grow and disrupt the industries on a continuous basis.
Will conglomerates flourish in the future? Yes, they must for couple of reasons:
- Flow of funds in newer opportunities: As a conglomerate, it’s easier for the businesses to arrange for funds and channelize the same for better, effective use. This has been done for ages and has worked well for the conglomerates.
- Attracting talents and retaining them: One of the major resources for any organisation is attracting the talent and retaining it for a longer time. Conglomerates find it easy for attracting the talent, as these companies are better placed in paying the right salary and offer better work environment. Start-ups do offer freedom, and this is what many conglomerates have tried offering in the recent past.
For me, GE and J&J are exceptions as conglomerates have and will continue to evolve with time