Jack of All Trades

Does the conglomerate model work? Judging from the success of General Electric and Virgin, it seems that the model does work and it is somehow proven by the fact that GE is the second most profitable non-petroleum company in the world. However upon further scrutiny, we will see that those companies making the most money tend to be those focussed on one core business.

Fortune Global 500 2009 ranking by profits:

1        Exxon Mobil - USD45.22b

2        Gazprom - USD29.86b

3        Royal Dutch Shell - USD26.28b

4        Chevron - USD23.93b

5        BP - USD21.16b

6        Petrobras - USD18.88b

7        Microsoft - USD17.68b

8        General Electric - USD17.41

9        Nestlé - USD16.67

10      Industrial & Commercial Bank of China – USD15.95b

*non oil & gas companies in blue

Other than the banks and oil companies, the rest of the top 25 most profitable companies in 2009 are focussed on one core business. They include Wal-Mart (general merchandisers), Johnson & Johnson (pharmaceuticals), Procter & Gamble (household & personal products), BHP Billiton and CVRD (mining), International Business Machines (IT) and AT&T, China Mobile Communications and Telefónica (telecommunications).

Even in Malaysia, our biggest companies such as Petronas, Telekom, Tenaga, MISC, Genting, YTL and KLK are primarily engaged one sector. Sime Darby, Hong Leong, IOI and Berjaya are the conglomerates listed among the largest corporations in Malaysia. The stable of companies owned by tycoons Ananda Krishnan and Syed Mokhtar are not centrally managed like Sime Darby and thus may not qualify as a conglomerate per se.

Tobacco companies were ‘forced’ to diversify into other industries because of the uncertainty surrounding their industry. They had to search for other sources of income in case regulators decide to impose measures which could threaten their revenues.

So, does the conglomerate model really work?

According to management expert Roshan Thiran who had worked in GE before, the key to the success of GE and Virgin is a cohesive culture and brand name that is present throughout the group. He adds, “Everyone in the group knows the vision and mission and this is inculcated very strongly and across every single segment of the group”.

My personal view is not everyone can do a Jack Welch. It would be better for businesses to be focussed in one sector, diversification into a myriad of unrelated businesses could cause the board and management to lose focus and unable to effectively manage the company.

An overly diversified company could also see profitable units subsidising the less profitable divisions. This will affect the morale of those working in the profitable divisions because they will feel their efforts (and profits) are used to support their colleagues who are not making money for the group.

That’s why I feel Sime Darby should be broken up into individual, independent companies.

Btw, our Petronas is ranked the world’s 13th most profitable company in 2009!