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General Electric is breaking itself up. By 2023, the famous US conglomerate will become three separate publicly listed businesses: one in healthcare, one in energy, and one in jet engines. Toshiba, the Japanese conglomerate founded in 1875, announced Friday that it will also break itself into three separate companies. Same with Johnson & Johnson, which will break in two.
It’s tempting to consider these developments a signal that the conglomerate is dead—many this week declared that to be the case. But what of the tech giants? Amazon spans e-commerce, cloud computing, movie and TV production, and groceries. Alphabet makes most of its money in search, but also owns businesses working in drug discovery, life extension, robotics, drone delivery, and autonomous vehicles. Even Facebook, which has focused on social media and messaging, makes gaming hardware and wants to be your at-home gym. In the face of these highly diversified companies, it’s more accurate to conclude that GE was just the wrong kind of conglomerate.
Over its 129 years, manufacturing-centric GE dabbled in insurance, finance, broadcast television, and consumer electronics. But for well over a decade, shareholders have pushed some industrial companies to break up or sell off unrelated businesses in an attempt to focus their operations. GE’s response to these concerns was that its advantage was in management. Today’s tech giants, by contrast, are excellent at making software. A stint as product manager at Google is the new GE management training.
But there’s something difficult about becoming a software-centric company if you weren’t born one: Former GE CEO Jeff Immelt tried and failed to turn the conglomerate into a tech firm. The tech giants, for their part, largely choose to start or acquire tech firms as they expand into new markets, rather than buying established players. (Amazon’s purchase of Whole Foods is a notable exception, and has not been particularly successful.)
GE was formed by combining electrical businesses that Thomas Edison had created. It took decades for electricity to transform the US economy (pdf), and that transformation allowed GE to thrive. The same decades-long process is playing out for software, and only conglomerates on the right side of it are likely to win.
- GE is consciously un-thrupling. The company has been downsizing its portfolio for years. In 2013, GE sold off the rest of its stake in NBC Universal to Comcast for $16.7 billion; last May, it sold off its signature lightbulb business to Savant Systems.
- Diversification was a hedge against risk. When one industry is in a downturn, another might be thriving, or so the argument goes. As this line of thinking gained popularity, Coca Cola acquired Columbia Pictures, and service industry giant Cendant bought companies ranging from Avis Car Rental to Match.com. The biggest winner? Investment banks, which profit whenever a company is bought or sold.
- Execs now struggle to manage across sectors. In its heyday, GE trained managers to run a financial business as well as a manufacturing one. But while companies like Amazon and Alphabet have similar leadership structures, the model no longer makes sense for industrial giants. GE CEO Larry Culp said that splitting into three companies (pdf) will allow each to tailor investment strategies to “industry-specific dynamics.”
Why are software skills such an advantage? James Bessen, an economist at Boston University, argues that software has made it easier for companies to handle complexity—to offer more varieties of a product, for example—as operations become more digital and data-driven. Bessen’s research has also linked software investment to the growing market share of big firms.
What to watch for next
- The biggest threat to software conglomerates is antitrust. Old-fashioned industrial conglomerates often got a pass on antitrust, because they were spread across industries and, in the US, because antitrust enforcement grew weaker in the late 20th century. But the tech giants are attracting scrutiny from regulators all over the world.
- Will Asia cool on conglomerates? Traditional conglomerates may be doomed in the US, but they have thrived in Asia. In India, the Tata Group does business in everything from cars to software to jewelry to tea. In South Korea, chaebols like Samsung and Hyundai are still dominant, though the government is pushing to reform corporate governance. That makes Toshiba’s decision to break up all the more notable.
- How big can private equity get? In 2006, Immelt told the Financial Times that “private-equity funds are the conglomerates of this era.” Like conglomerates, they bring both capital and managerial expertise; unlike conglomerates, they often prefer to break firms apart rather than put them together. PE has exploded over the last 20 years: The bigger it gets and the further it spreads, the less need investors will have for traditional conglomerates.
- Software-driven management. GE’s management strength of yore came in part from its focus on efficiency and precision, which are advantageous in most manufacturing settings. Even today’s prevailing management philosophies tend to be more software-centric: self-organizing, collaborative, and iterative.
- Watch out for activists. Toshiba’s breakup was precipitated by activist hedge funds; so was GE’s, albeit over a period of years. These strategies aren’t new—hectoring CEOs to sell off pieces of their company is the original activist strategy—but nothing inspires hedge funds like success. In the wake of three major breakups, activists will be hunting for the next one.
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One 💼 thing
If anything embodies GE’s relentless focus on management principles, it’s Six Sigma. A system for eliminating defects in manufacturing, Six Sigma was adopted by GE in 1995, and became its corporate religion.
- The name refers to a statistical model, based on deviations on a bell curve, that dictates the number of acceptable defects per million manufacturing steps.
- Six Sigma’s rankings borrow from martial arts: Newbies are called “green belts” and masters are “black belts.” For a time, no one at GE could be promoted to management without at least green-belt training.
- Like GE’s breakup, Six Sigma’s decline is a symptom of broader change in the corporate world: Innovation became more valued than efficiency.
To learn more about Six Sigma, make sure you’re subscribed to the Quartz Obsession podcast. We’ll spend an upcoming member-exclusive episode digging into its legacy.
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Best wishes for a diversified weekend,
—Walter Frick, executive editor (considering splitting self into pieces, to clarify value for Wall Street)