The conglomerate discount

As of now I have 55 years of working experience in the corporate sector. I was a failure. Accomplished zero. Zilch. And I did it with great finesse and aplomb. I was very fond of fast cars, fast women and fast horses. The problem was, I always bet on the wrong horse and the wrong woman. As for the fast cars, there’s no sync between Shahra-e-Faisal and a Lamborghini. My most up-scale car was a VW Beetle. But I was true to my profession. I stayed within the broader confines of Corporate Management. I made no attempt to be a politician, a bureaucrat, an anchorperson, a philanthropist, a social worker, etc. That brings us to the subject at hand – the failure of conglomerates and the power of Focus.

One of the most powerful management books was launched in 1996 titled “Focus” by father and daughter team Al and Laura Ries. Followed by many other best sellers. I had good networking with Laura when I was running the Management Association of Pakistan (2000-9).

The essence of this book is: companies that stay focused on their “core strengths” are more profitable and successful than companies that diversify willy-nilly. The term “conglomerate discount” applies to this. So too with people. In order to impress the world, or satisfy their own insecurities, people branch out in every field – business, commerce, politics, diplomacy, philanthropy, teaching, media, commentators, analysts.

In our part of the world the first encounter with a conglomerate is the British East India Company (EIC). It commenced operations in 1600 as a trading outpost. Gradually, it diversified into farming, mining, manufacturing, exports, infrastructure (roads, railways, telegraphs), shipping, etc., eventually it virtually managed India. After the War of Independence of 1857, the British crown took over the interests of EIC. The strategy in London was “If a company can manage the natives, why can’t the crown? Let’s move in.” In its heyday, the EIC was the most powerful non-government entity in the world. Earlier, there have been other organizations which could classify as MNCs – the Medici Empire, the Knights Templar, the Knights Hospitaller.

In the USA, the period 1870-1930 was the age of the tycoons. The Rockefellers were focused on oil. The Vanderbilts on railroads, Ford on automobiles, Morgans on financial services. The Rothchilds, perhaps the richest family of all time, diversified. Their core business remained finance, but they ventured into real estate, infrastructure, etc. They also financed sovereigns in Europe, especially during wars and conflicts. The Rothchilds were notorious for funding both sides of a conflict. After the WWI, the monopolies were broken up by the US government. Rockefellers’ standard oil was eventually carved out into 20 entities. So too with railroads and other sectors.

After the WWII, peace prevailed. The European and Asian Marshall Plans were launched to stimulate development. The MNCs became larger and larger. The emphasis was on growth and diversification. In the 1950s, the biggest conglomerate was International Telephone & Telegraph (ITT) of the USA. ITT became famous or infamous, when its chairman, Harold Geneen, orchestrated a coup in Chile to protect its interests. Closer to home, in Iran, the Anglo Asian oil company (the precursor to BP) in collaboration with CIA and MI6 overthrew Iran’s legitimate prime minister, Mohammad Mossadegh, to restore Mohammad Reza Shah Pahlavi to power.

As the Japanese economy grew after the WWII, companies became more diversified. The Japanese trading groups had no boundaries – the likes of Mitsubishi, Mitsui, Sumitomo, Itochu, etc. Till recently, the Yamaha brand covered over 100 product lines from marine engines to pianos to motorcycles to machinery. For the Yamaha top management, brand extension has no limits. The other famous Japanese company, Toshiba, has been crippled by diversification. From nuclear power plants to music systems – and 75 product lines in between. The board of directors of Toshiba has now undertaken restructuring to stave off bankruptcy. General Electric (G.E.), the iconic American company (as American as apple pie) has suffered a similar fate – diversification blues. Jack Welch (Neutron Jack) was declared the “Manager of the Century” a few years ago. Now G.E. has announced a complete product overhaul to regain “Focus”. Sir Richard Branson has extended the “Virgin” brand to over 15 product groups – from airlines to resorts, drinks and condoms. Branson, once a posterchild of entrepreneurship, has been left far, far, behind in net worth by the recent I.T. entrepreneurs like Musk, Bezos, Gates, etc.

Laura and Al compared Coca-Cola and Pepsi. Coca-Cola was, and is, focused purely on beverages. Pepsi has a strong beverage line up but was weighed down by its snacks and restaurant business. Indra Nooyi made many structural changes to put Pepsi on the right trajectory. The Pakistani Business groups have always believed in diversification. The original 22 families were into everything – textiles, banking, insurance, manufacturing, shipping etc. This offended Zulfikar Ali Bhutto. Heads rolled. Even today, business groups venture into anything. Flavor of the mouth. But there are some sensible groups that stay focused. EBM in snacks, Shirazi group in engineering, Avari in hospitality. Largely speaking, any group that cannot manage its existing business, can always get into education (schools& colleges).

(The writer is a former Executive Director of the Management Association of Pakistan)

Copyright Business Recorder, 2021