Thursday, July 03, 2003

Horizontal expansion and conglomerates Diversity may be a good thing in universities and in offices, but in corporations too much can be dangerous. As big companies grow bigger, it's becoming clearer and clearer that there should be a sensible reason for moving horizontally to take a position in another market. The problem with expanding randomly can be shown in the most famous conglomerates of the 1960s and 1970s. Gulf + Western in its time was involved in oil, moviemaking (Paramount), recording (Stax), rocket engines, stereo components, finance, publishing (Simon and Schuster), auto parts, cigars, and many more. ITT was similarly diverse: hotels (Sheraton), baking (Wonder Bread), auto parts, pumps, rental cars (Avis), insurance (Hartford), cosmetics, publishing, and so on. Both companies crashed and split up in the 1980s, and the wonder is how they lasted as long as they did. Only the ego and energy of their CEOs, one suspects, kept them together. Their markets were so many and so different in profit models and sales cycles, that there was no way they could be properly managed in coordination. In recent years, we've seen companies that simialrly got off target, though in a more modest way. First Seagram then Vivendi, driven by the egos of their principals, get into the entertainment industry, disastrously. Time-Warner got into the technology business with AOL, and here was also a disaster. Tyco, it seems, acquired everything from electronics to healthcare, adhesives to alarm systems, another disaster, one tinged with fraud. General Electric stands out as perhaps the only thriving company that has a similarly diverse portfolio that actually did well. GE owns NBC, a major financial operation, home appliances, aircraft parts, and so on. Perhaps the secrets of Jack Welch was in keeping such a motley collection of businesses straight. The pattern of the modern multinational has been to acquire in markets that are adjacent to, or parallel to the ones you already own; or alternatively to buy vertically in other parts of the supply chain you are already in. Pepsi has made a great success with its Frito-Lay snack food branch. It's a very similar business to the core beverage line, with pretty much the same set of retailers to talk to, similar delivery problems, and the same set of end-consumers. Pepsi sold off its ownership of Kentucky Fried Chicken and Taco Bell, partly because they had a totally different business model, and thus it became too much like patting your head and rubbing your stomach at the same time. Cadbury-Schweppes is a big player in two markets: beverages and candy, two very similar industries. Sara Lee specializes in three: baked goods, processed meat, and underclothes. A bit of a leap, but not that different in basic structure. Clear Channel specializes in radio, billboards (a horizontal move), and concert promotion (a vertical move). All of these companies strive to be number one or two in their fields, and being in too many diverse markets would be a distraction to that goal. 10:00:29 PM

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