Right off the bat, what is a conglomerate?
A business that operates in multiple industries under one name, one management.
How has time evolved?
Traditionally, big businesses were considered to be powerful and efficient. But, times change and in the 21st century, the notion of “big is relevant” might not stay in fashion.
In the past couple of weeks, we had three 100+ years businesses announcing to splinter into different, individual units.
Changing landscape
On the list, we have General Electric (GE), a behemoth that’s been underperforming for quite some time and hence losing market share announced to break itself aka de-conglomerate into 3 different public units/companies dabbling with:
- Aviation
- Healthcare
- Power
Every company will have a different board of directors running the company with a relatively lesser workforce, focusing on one industry at a time, thus resulting in efficient value creation.
Similarly, we had Johnson & Johnson announcing its break up into 2 units:
- Drugs & medical devices
- Consumer products
In the same week, Japanese giant Toshiba also revealed a similar arrangement.
What’s driving this break-up?
In today’s day and age, competition is constant. At a time when startups are taking every sector of the economy by storm by going aggressively vertical (focusing on one niche), it’s incredibly difficult to protect your customers from them if you dabble with a lot of things at the same time, your attention is limited and once it gets divided, you take a beating in terms of sales, profits, etc!
This is precisely happening across the board and taking decisions to make the business model simpler, leaner, and power comes as no surprise.
What about the emerging markets?
Well, this trend is panning out in the US, some parts of Asia but not in emerging markets like India, Vietnam, etc.
One reason can be that the landscape there has not become so competitive and mature therefore the cost of breaking up a large multi-industry business outweighs the benefits.
Wrapping up
Sooner or later, complex things have to become simple to work, so de-conglomeration seems to be way ahead for companies that are hindered by complexity in any shape or form.