The rationale behind conglomerates
As we've noted before, the opposite strategy to the new oligopoly is the one that was so popular in the 50's and 60's, namely the conglomerate. In the euphoria of the postwar business expansion, the theory was that the same successful business techniques could be applied equally to all industries.
This trend is described by Louis Galambos and Joseph Pratt in their book, The Rise of the Corporate Commonwealth (Basic Books, 1988):
The managers of some firms began to assume that they could efficiently supervise almost any sort of business that promised to turn a profit, even in the short term. They began to abandon the idea that corporate activities should be technologically related or linked by common markets. The conglomerate acquired various unrelated types of businesses, even those that might be profitable because they had tax advantages.
The authors bring up several examples. One was Textron, a "hodge-podge" of unrelated industries (textiles, auto parts, helicopters, chainsaws, golf acrts,snowmociles, greeting cards) that was mostly a financial manipulation. Other examples were Ling-Temco-Vought (aviation, eelctronics, resorts, steel, car rentals, etc.) and Gulf and Western (movies, insurance, cigars, publishing, zinc, etc.), both of which were also spread over a motley range of industries. (Of the three, only Textron still exists, much pared back.)
The key to this era in the economy was a changed attitude toward management, which led to the idea of management being a science that could be easily applied to any industry. As the author put it:
No longer was management industry-specific. Top managers did not reach their positions by working their way up through manufacturing or marketing, learning a single business from the ground up. Instead, they approached the business as a packet of diversified assets that they directed by allocating or cutting off capital, and by supporting or changing the managers of the various lines of business.
Even though most firms now concentrate on one or several related businesses and tend to trim off hard-to-integrate offshoots and buy up closely related assets, some of the attitude remains. So that a CEO or division president who has been successful in a totally unrelated industry is often chosen ahead of those managers that have proven themselves in the company is one such symptom.
Sometimes, the "breath of fresh air" from an outsider can stimulate innovative thinking and jolt a company out of complacency. Quite often, however, the new CEO flails about in ignorance, disregards and alienates the experts working for him, perhaps manipulates the financials for a short time, and collects his options and exits into luxurious retirement or into another company where the process repeats itself.
At least in a focused oligopoly it is easy for analysts and shareholders to keep score. But more important, the kind of influence that the new oligopoly can bring to bear on regulators, suppliers, and competitors takes concentrated, systematic work from upper management. Companies that have too many balls in the air and whose executives are concerned almost exclusively with short-term financial manipulations suffer in the long run against more focused rivals.
