'You have to be fast on your feet and adaptive or else a strategy is useless.' - Charles de Gaulle.
Conglomerates have often been accused of being “too bloated” or “unwieldy” to follow Charles de Gaulle’s strategic recommendation. However, reality seems to diverge from the theory as many diversified business groups such as Jardine Matheson in Hong Kong (1832), the Tata Group in India (1868), Mitsubishi in Japan (1870), General Electric (1892) or Doosan in South Korea (1896) have not only survived for more than a century but also continue to thrive.
In emerging markets, conglomerates have expanded at a rapid pace and are becoming increasingly diversified. McKinsey research shows that, over the past decade, conglomerates in China (representing 20 of the largest 50 companies by revenue) and India (45 out of the largest 50) expanded their revenues by more than 20% per annum, while conglomerates in South Korea (40 out of the largest 50) generated a compound annual revenue growth in excess of 10%.
Their strategies, fueled by aggressive M&A, joint ventures or technology partnerships, resulted in an average of one new business entry every 18 months, with nearly half of these through businesses completely unrelated to the parent companies’ operations. The Tata Group, for instance, comprises affiliates operating in a wide range of industry sectors including automotive, chemicals, communications, consumer products, energy, engineering services, financial services, hospitality, information technology, and steel businesses.
Over the same period, their average revenue increased 17% per year to US$12 billion. In addition, most of these are profitable. In India, they appear to deliver above-average performance as companies belonging to the largest Indian business groups generated higher returns on assets from 1997 to 2011 than the rest of the companies listed on the Bombay Stock Exchange. Not bad for an old-fashioned business model.
In the so called developed world, the number of conglomerates has dropped as stock markets continue to apply a “conglomerate discount” and investors still argue that investing in several focused companies beats backing a diversified one. However, conglomerates remain a competitive force as they have modified their strategies to allow localised product and business-model innovation.
General Electric is the epitome of such a survivor conglomerate. Its performance was obviously affected by the failed purchase of Honeywell as well as tail-risk events such as 9/11, Enron, hurricane Katrina, Fukushima and the global financial crisis. However, it has subsequently embraced globalisation, increased spending on research and developed environmentally friendly products as key tenets of its new strategy.
It has pruned low margin activities such as plastics or its media empire, NBCUniversal, to focus on those it sees as having the most growth potential such as energy, water, transport and healthcare. Its evolution from a bank in disguise to a high-margin industrial company (with a smaller but profitable financial business) was accompanied by the transition from a quintessentially American firm into an increasingly global company (55% of GE’s revenues are now generated internationally) with a strong exposure to higher growth emerging markets.
Its strategy was built on the understanding that one can make a lot of money in emerging markets with the right localised business models, moving away from simply offering modifications of products developed for more established markets and introducing innovative breakthrough products that meet the specific needs and budgets of customers in such emerging markets.
Those are becoming centers of innovation in fields such as low-cost healthcare devices, solar and wind power, biofuels, power distribution, batteries, water desalination, microfinance, electric cars, and even ultra-low-cost homes. In addition these products can create brand-new markets in the developed world by establishing dramatically lower price points or pioneering new applications.
A perfect example is GE’s healthcare business. In 2009, GE launched a US$3 billion investment programme to create at least 100 healthcare innovations offering substantially lower costs, increased access and better quality. Two major outputs are a US$1,000 handheld electrocardiogram device and a portable, PC-based ultrasound machine that sells for as little as US$15,000. These are revolutionary, not just because of their small sizes and low prices, but also because they were originally developed for markets in emerging economies (the ECG device for rural India, and the ultrasound machine for rural China). They are now being sold in the United States, where GE is pioneering new uses for such machines.
Innovations like the low-cost ECG and ultrasound machines not only help GE to expand beyond high-end segments in countries such as China and India, but also preempt emerging giants such as Mindray, Suzlon, Goldwind, and Haier from creating similar products and in turn from using them to disrupt GE in more established countries.
GE’s latest deal with Alstom will also enrich its emerging markets strategy in industries such as wind power and clean-coal technology, bolstering it presence in both India and China.
This year, GE is expected to earn US$17 billion on revenue of US$146.3 billion (segmented as follows: 30% for GEC, 16% Power & Water, 15% Aviation, 12% Healthcare, 11% Oil & Gas, 6% Home and Business Solutions, 6% Energy Management and 4% Transportation).
More findings on GE’s strategy as reviewed by from The Economist can be found HERE
by Christelle Espinasse - inSTRATEGIA
