Strategy trumps size

THIS WEEK'S TOPIC: Is the business model of a huge, diversified conglomerate on its way out?

Lawrence Loh Director, Centre for Governance and Sustainability NUS Business School

Corporate strategy has been fixated on focus. The business mantra is to stick to the knitting. Do more of the same and you get economy of scale. Yet there are merits of variety in the product offerings - there is also economy of scope. We are all too distracted by failure stories of conglomerates such as General Electric (GE) and Toshiba. Yet there are success stories in Amazon and Microsoft. In the new digital era, we are seeing formidable aggregate approaches in mega-platforms such as China's WeChat and even super-apps such as Singapore's Grab and Indonesia's GoTo. Actually, the problem is not about the conglomerate model. It is about having good strategy.

Victor Mills Chief executive Singapore International Chamber of Commerce

Not necessarily. There will always be conglomerates which make commercial sense and provide attractive returns for their shareholders and stakeholders. Nothing remains static in business, especially when dealing with endemic Covid-19. Businesses will make decisions about divesting business lines or spinning off companies either for tax or regulatory reasons or when they no longer have the advantage of scale; or when they decide to refocus on core competencies and markets. Another key reason some conglomerates decide to downsize is because they simply have become too hot to handle - too difficult, complex and costly to control, manage, lead and strategise for.

John Bittleston Founder and chair Terrific Mentors International Pte Ltd

No, the business model of a huge, diversified conglomerate is not on its way out. The format may be changing but the need - and inclination - to cooperate will still insist on huge businesses dictating the business scene and an increasing amount of the political scene. Given the weakness of worldwide politics, I think that is a good thing. Additional pressure to cooperate is exerted by the current supply chain chaos.

Admittedly that may be short-term, but not as short-term as many are saying. When change quickens pace, forecasting is slow to follow. Big business power is here to stay and grow.

David Kuo Co-founder The Smart Investor

Conglomerates are predicated on the ability of large corporations to allocate internal resources to their subsidiaries efficiently. The assumption may not be true in all cases. But those that can are in a good position to weather economic and business cycles. We should be careful about tarring all conglomerates with the same brush. It is not always true that the sum of the parts is greater than the whole. We should be careful to avoid throwing the baby out with the bath water. Before jumping on the break-up bandwagon, we should ask why there is no antonym for the word ''synergy''.

Marcus Lam Executive chairman PwC Singapore

Traditional large conglomerates have been around for a long time and as the world shifts in profound ways, they are facing pressures from their boards, shareholders and activists to pivot or reposition to grow in the areas of digital and environmental, social and governance (ESG) to compete more effectively on the global stage. No business model is evergreen, and companies must continuously adjust their focus to be fit for growth. Big Tech companies are comparatively young and more agile in how they adapt their models to capitalise on new growth opportunities. They also have the advantage of being able to leverage their tech and innovation.

Ramesh Singaram President GE ASEAN & ANP

I've been in GE for 27 years and have been part of the many changes. I'm excited that we're creating 3 independent, investment-grade industry leaders in key sectors that are very much connected to GE's purpose of building a world that works. Each of them will contribute to the world's urgent needs in energy transition, precision healthcare, and future of flight. We've made a lot of progress in recent years and are now in a stronger position to take the next step in our transformation. We've listened to our customers who want and need GE at its best. I'm confident that this is the right next step for GE in this moment, to position each company for future growth, realise their full potential, and provide value for all employees and stakeholders in each business.

Leon Perera Chairman Spire Research and Consulting

The business model of a huge diversified conglomerate spanning disparate industries and lines of business is almost certainly on its way out. This trend is being driven by investors, who prefer companies to have a single, clearly defined business model and industry centre-of-gravity that they can understand and work into their portfolio management processes. However, conglomerates that are integrated within a single broadly defined industry space may still have a future - for example, a vertically integrated conglomerate or one with linked adjacent business lines, such as advertising and news. The key is whether the conglomerate's various jigsaw puzzle pieces synergise and combine to form a cohesive, well-defined picture about what industry and market that conglomerate plays in.

Jeffery Tan Group general counsel Chief sustainability officer Jardine Cycle & Carriage

Many conglomerates have their roots in innovation and inventiveness, giving rise to new sectors of businesses. As these businesses grew and became giants, the accompanying stability and stature were often achieved at the expense of agility - traded in for 'corporate sluggishness' and the inability to react quickly to fast-changing commercial landscapes and new challenges, thereby posing a threat to the existence of the conglomerates.

One interesting perspective on how large organisations can remain nimble and relevant in a fast changing world was offered by the late entrepreneur Ross Perot. Although speaking specifically to the business of the behemoth General Motors, it is probably worth repeating, as his words provide insight to all conglomerates: ''Revitalising General Motors is like teaching an elephant to tap dance. You find the sensitive spot and start poking.''

Magnus Grimeland Founder and CEO Antler

In traditional industries where there are fewer technological advantages with operating across multiple industries, a demerger might make sense to increase shareholder value and focus. However, in most emerging businesses where you can leverage technology, platforms, customer acquisition etc across different verticals (as with Grab and Sea Group, for example), large diversified conglomerates (or super-apps) are very much thriving and on the way in.

Svend Janssen Head of Asia Pacific & Japan Nuix

Within-industry diversifications are well-proven means to grow and de-risk a business. For multi-industry conglomerates, it clearly depends on the level of synergy and scale the combination of entities brings. Are there shared resources? Is there a strong corporate centre that drives cross-business innovation and sales? If one core owner is the only common denominator, a demerger might well increase the agility of the individual businesses - and so the overall growth.

Agnes Cai Chief executive officer Foord Asset Management

Conglomerates will still have a place in this new era of business. Firms such as Johnson & Johnson (J&J), diversified across pharma, medtech and consumer, limit volatility to their top and bottom lines as well as cash generation abilities without restricting their abilities to grow faster - highlighting benefits to, as well as continued relevance of, the conglomerate model.

Nevertheless, separating into disparate businesses as a means to increase focus also has advantages. While this may increase the cyclicity of a business, it also allows for more focused strategies and stronger capital allocation, as seen in the recent break-ups of Danaher and Dow-Dupont.

Yean Cheong Executive director SGTech

Historically, growing larger meant companies could derive more significant benefit from economies of scale, market access and ability to out-invest in research and development (R&D) and innovation. However, rapid digitalisation, software as a service, remote and gig work, and the Internet economy have upended business models. What was once out of reach to smaller businesses is now accessible to the masses. Being large does not provide the same benefit anymore. Instead, it may pose a greater risk from geopolitics, environmental, border and labour issues. Marrying a small size with innovative startup agile-type work styles today, small could be the new big.

Dileep Nair Independent director Thakral Corporation Limited

Complexity demands specialisation. Today's enterprises are engaged in increasingly unique and highly differentiated lines of work. It's vital to have a razor-sharp focus on the business. Speed of decision-making, empowerment, as well as resource allocation are critical. Diversified conglomerates do not enjoy these attributes. Even the benefits of synergy and lower volatility because of a diversified portfolio that conglomerates have are often outweighed by the lumbering bureaucracy and infighting that goes on. Pure plays do outperform diversified companies over time. The Bloomberg US Spin-Off Index, comprising companies spun off from larger companies, has outperformed the S&P 500 Index over 15 years. Even the Big Tech companies that seem to be thriving are drawing regulatory fire for extending their reach too broadly. They risk being broken up. It pays to stick to your knitting.

Chia Ngiang Hong President Real Estate Developers' Association of Singapore (REDAS)

The demerger trend will likely continue, driven by rapidly evolving technology, shorter product cycles, more intense competition and activist shareholders' demand for higher and quicker returns. A spin-off's value proposition can be quite compelling. Demergers can resolve many issues associated with huge conglomerates such as excessive bureaucracy, lack of nimbleness, and poor capital allocation. These disadvantages are exacerbated by the potential benefits of demergers - namely tax benefits, sharper management focus, stronger desire of spun-off entities to succeed, and increased market transparency allowing for higher valuations. However, for conglomerates which operate in highly synergistic areas that build on and benefit from each other, the business case for remaining large may be stronger. This is most evident in Big Tech, whose operations in myriad software- and hardware-related areas are complementary and mutually reinforcing. There is thus no one-size-fits-all model for the continuity of all large businesses.

Ian Chapman-Banks CEO and co-founder SQREEM Technologies

Diversification and demergers are effective corporate strategies in their own right when applied at the right stage of growth. For conglomerates such as J&J, where divisions have a larger market capitalisation than their parent company or deal with vastly different market segments, the decision to demerge could increase value to stakeholders. As long as each division has a healthy cash flow and is big enough to stand on its own, demerging could collectively increase value compared to when they remain combined. Demerging also allows each entity to shift its focus to specific market segments, leading to more efficient allocation of resources and competencies.

Mario Singh Chief executive officer Fullerton Markets

There are certainly benefits of maintaining and growing a diversified conglomerate. One key advantage is the ability to maintain various income streams regardless of economic conditions. As an example, businesses focused on specific sectors such as travel, food and beverage (F&B) and events are the hardest hit during the current pandemic. A conglomerate of various business units would be able to hedge their risks and still ride out the storm.

That said, there are at least 2 reasons why conglomerates choose to break up. Firstly, it allows them to reduce inherent costs and inefficiencies. Secondly, separation of business units can allow each entity to drive more value without the risk of being pigeon-holed into any broad category vis-a-vis a conglomerate.

Ultimately, the decision on whether to grow or break up lies in how the future plans of the conglomerate dovetail with the macro trends of the global economy. There is no one-size-fits-all.

Sanjeev Kumar Senior country manager for Singapore and head of SE & South Asia Natixis

So long as conglomerates have the ability to release the full potential of all divisions and businesses for stakeholders, we will continue to see their existence - whether this be in the traditional sense of the industrial conglomerate, or the Big Tech variation. For me, success boils down to allowing the divisions or businesses to operate as their own entities, with the backing and, where appropriate, guidance of the holding company. This is not dissimilar to our multi-boutique merger-and-acquisition (M&A) business at Natixis CIB - strong management teams with local knowledge and expertise backed by the global footprint and financing capabilities of Natixis. This blend of big banks and boutiques has allowed our business to thrive and remain resilient.

Lex Lee Chief strategy officer TOP International Holding

A diversified investment portfolio is a fundamental risk management strategy. What we are seeing is a trend of profit-taking by divestments, reorganisation of groups into leaner and more efficient entities, as well as prioritising potential faster growth over steady growth.

This means that a more evolved conglomerate needs to address these points, and learn from the models of tech giants to create more value. An example is Apple which created an ecosystem with its core business (iPhone) at the heart providing leverage to diversified businesses (smartwatch, mobile gaming etc). In short, diversified conglomerates need to up their game.

James Chan CEO and founder ION Mobility

Technology-induced disruption is the great leveller that easily elevates new-age fast-growing firms that can capitalise on shifting trends to serve new demand. As such, it threatens the incumbency of established big companies that see the need to demerge to respond more nimbly and compete.

Differences between companies in their organisational dynamics (such as leadership style, innovation, management and employee culture) also play a role in determining whether these big companies can sustain multiple business lines as the likes of Sea Group, ByteDance or Meta have done, or demerge so as to give breathing room for them to reinvent themselves.

However, even these new-age big companies are not immune and have to respond quickly and multiple times to shifting trends. Take Meta for instance, which has had to acquire WhatsApp and Instagram to stay ahead of the game. This cycle shall continue and affect all companies at some point in time.

David R Hardoon Managing director Aboitiz Data Innovation

The business model of conglomerates is morphing to match the relevancy of our times. The ability to share data across businesses will define the conglomerate in years to come. ADI is tapping the wealth of data from Aboitiz Group's diverse interests to allow quicker and better decision-making and find synergies across its businesses. By using a 'try, test, and fail' approach to data projects, the group's business units across the power, land, infrastructure, food, and banking, are serving as an ideal testing ground for operationalising artificial intelligence (AI). One such case being using electricity bill data to predict credit scores.

Toby Koh Group MD Ademco Security Group

The diversified conglomerate is history as investors see the value of commercial and industrial plays focusing on a smaller and more aligned core business model. Having said that, the diversified software platform conglomerate will emerge in the future. Data will be easily synchronised and create immense value for such conglomerates and their clients. Data, content and platforms will reign.

Jolin Nguyen Managing director AYP Group

The break-up of major conglomerates is a tribute to the common phrase in business that ''change is the only constant''. The zeitgeist of business today seems to favour the model of tech firms that are smaller in size and leverage heavily on technology to improve business outcomes.

While traditional conglomerate businesses are undergoing rapid change through corporate exercises and restructuring, we cannot help but observe that technology companies are the ones that are leading the charge in terms of M&As. This shows the importance of innovation in business and how technology presents great opportunities for businesses that leverage them well.

David Leong Managing director PeopleWorldwide Consulting Pte Ltd

This trend of portfolio simplification to shake up the whole into viable parts is necessary to recover shareholders' value when the market undervalues the conglomerates' worth. A conglomerate discount is the tendency of markets to value a diversified group of businesses and assets at less than the sum of its parts.

Each viable part that is hived off can independently exist and may prosper with better and higher valuations. In such cases, when J&J, GE and Toshiba decide to break up, they do so with economic rationality and inherent worth rationalisation.

Conglomerate construction and demerger are part of a vacillating pattern relevant for a time. When businesses seek growth, they are likely to look into unrelated businesses for diversification, to mitigate risks to grow sustainably. When they become an unwieldy conglomerate with different focuses and weights in other sectors, the sums of the parts may be more than the whole. This is the trigger point for a break-up to happen. So this is not a trend. It's just a cyclical phenomenon.

Lim Soon Hock Managing director PLAN-B ICAG

The business model of a huge, diversified conglomerate is certainly not on its way out. It will remain as companies expand over the years through diversification or acquisitions in pursuit of growth, profitability, and better returns for shareholders. It was even fashionable in the 1980s for big companies to merge to become mega-companies.

When GE, Toshiba, and J&J - and AT&T in the past - break up into multiple entities, the board or shareholders must have decided that it is a more effective and efficient way to increase returns for shareholders. Each spin-off would be able to focus on its respective business and have the critical autonomy to reshape, reinvent and reallocate to take the business to new heights.

Big companies should not be stuck in the status quo, get sluggish or cruising, and should do what is necessary to achieve unstoppable growth - that is, unlock the full potential of each of its entities. Breaking up is one strategy to increase returns for shareholders.

Terence Zou Founder and CEO Ryde

It depends, in part, on whether companies can create value by making use of data seamlessly across business segments as they grow. Huge diversified industrial conglomerates may previously have grown in size due to cheaper cost of capital and cost savings across functions. But they may not have been able to capitalise on using data effectively across segments to increase business synergies. For instance, GE's healthcare and aviation businesses probably have very little synergies, if at all.

At the same time, large tech firms have emerged due to the ability to use data effectively across business segments. For instance, they can leverage on the 'flywheel of data' as they scale, as opposed to merely achieving cost reductions by economies of scale. Take the Amazon flywheel for instance, where it moved from selling books to selling and delivering everything else within the Amazon network.

Darryl Lim Founder, CEO and artistic director Split Theatre

Whether streamlining or diversifying, the key is to constantly review, reimagine and reinvent the business model, and to do so creatively and sustainably. A business model breakthrough can effectively boost other operational parts.

As a startup in the growing arts and culture space, Split Theatre recently reshaped our business model, establishing a new cyclical training wing to build a comprehensive and permanent performing ensemble rather than holding auditions for each production. We have also expanded our portfolio to reach new segments by launching the recurring 10-week ''Work On The Self'' public programme, which provides a much-needed safe space for healing through theatre during and beyond the pandemic.

With our permanent ensemble members doubling up as programme facilitators, we can establish and sustain fresh revenue streams by running these continual programmes. These streams will help fund our ongoing training as well as subsequent productions. Re-engineering our model and processes has allowed us to enhance our core services, increase self-sufficiency, and translate to more quality offerings for our audiences.

Maren Schweizer Chief executive officer Schweizer World Group

Carve-outs are the ''next normal'' after a decade of optimism for M&A. Several factors drove this change. The global economy slowed down, while the business environment had become more uncertain and volatile amid the threat of trade conflicts. Then came the Covid-19 crisis and survival strategies. With markets beginning to recover, many businesses will consider new strategies for structuring their operations and portfolios. The focus is around reinforcing balance sheets against future market disruptions and economic anomalies, reducing costs, and optimising operational efficiency.

Digital transformation also prompts focus on optimising the core business with enterprise AI, intelligent agents, robotics, and predictive data analytics. The strategic argument for carving out grows stronger with less capital available to invest in non-core functions. Furthermore, the ESG agenda is increasingly causing businesses to reconsider their portfolios in respects to sustainability.

As economic trends and regulatory changes evolve rapidly, while product life-cycles are shortened, we need to aim for agility in our strategic portfolios.