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Corporations: The end of the conglomerate — again

The history of conglomerates is cyclical

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Once-mighty conglomerates have been shrinking for decades, and last week "one of the biggest survivors waved the surrender flag," said David Nicklaus at the St. Louis Post-Dispatch. In spinning off its medical and energy businesses, General Electric was dismantling an empire that had loomed over U.S. business since 1892. Shortly after, Toshiba, based in "conglomerate-loving Japan," and Johnson & Johnson said they were splitting up their sprawling entities, too. These economies of scale make sense "when buying office supplies or accounting services, but their layers of bureaucracy" come with a cost. Some companies still cling to this model, like 3M, which "makes 60,000 products ranging from Scotch tape to medical software." Warren Buffett's Berkshire Hathaway has been "a longtime investor darling," but its portfolio includes "an electric utility, a railroad, insurance, and chocolate." The Buffett-GE model "was all the rage in corporate boardrooms." Now it's ancient history.

We hear conglomerates are dead every few years, said Brooke Masters at the Financial Times. That's because the history of conglomerates is cyclical. First giants — ITT and Tyco are examples — grow by acquisition, then they come apart. After it "becomes conventional wisdom that conglomerates need to be broken up, we end up with companies so specialized that somebody decides there is merit" in being all-encompassing, and the cycle starts again. Resist the temptation to make too much out of GE's demise, said Brooke Sutherland at Bloomberg. That's "a cautionary tale" about how "hodgepodge, omnidirectional growth, and size for size's sake" can go terribly wrong. But a "key tenet of the modern conglomerate is continuous reinvention and a willingness to pivot." That philosophy has benefited other "reimagined conglomerates" such as Honeywell and Roper Technologies.

What kills conglomerates is "the myth that great management can always work miracles," said Jason Zweig at The Wall Street Journal. ITT first "popularized the idea that hundreds of elite managers" could provide expertise on a wide range of subjects. GE, under iconic CEO Jack Welch, elevated "management to a kind of science," with its "leadership institute" in New York's Hudson Valley. But "by the early 2000s, the company was spending $1 billion a year on training." GE became complacent in the belief that "management technology would always save" it.

A new incarnation of the model seems alive and well, said Matthew Boyle at Bloomberg. The giants of yesterday have been replaced by what University of Michigan business professor Jerry Davis calls "neo-conglomerates," such as Amazon, which sells everything from groceries to corporate cloud-computing services. This "new breed, fueled by coders and cheap capital, now command the same awe and respect in management and investor circles as Welch's GE did in the 1980s." What they do better than GE is "skate quickly to where the profit is, whether that's automation, social commerce, sustainability, or even the much-hyped metaverse."

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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