Dont Write Off the (Western) Focused Firm Yet [Harvard Business Review] Hult Blog

Written in collaboration with Daniel Deneffe, Professor of Strategy and Managerial Economics at Hult International Business School, for the Harvard Business Review Blog Network Dont Write off the (Western) Focused Firm Yet. The rise of Tata in India, Koà § Holding in Turkey, and Grupo Carso in Mexico have some management thinkers contending that the conglomerate is back at the expense of the focused firm. In his article â€Å"Why Conglomerates Thrive (Outside the U.S.)† in the December 2013 issue of the Harvard Business Review, J. Ramachandran concludes from a study of the performance of listed Indian business groups that the conglomerate is a winning organizational structure, even if isn’t popular in North America yet. In its January 11th issue, The Economist also argues that conglomerates are spreading their wings again. Often the debate turns ideological, arguing that the (emerging-world) conglomerate is an intrinsically better construct than the (Western) focused firm. In our opinion, which of the two is the more successful depends on the context in which the business operates. Specifically, focused firms fare better in countries where society expects and gets public accountability of both firms and governments, while conglomerates succeed in nations with high public accountability deficits. Simple micro-economics sheds light on the issue. Imagine you are starting a new business. What will make it successful is your ability to induce customers to buy from you rather than from someone else. As long as the revenues you obtain from those customers exceed your costs, you will turn a profit. You would consider first whether you could offer a distinct product to each individual customer that perfectly matches his or her unique preferences. Of course more often than not you would find out that such extreme customization is not profitable. As a consequence, you would begin to lump similar customers together into segments to which you offer a â€Å"compromise† product. While you no longer extract maximum value from each customer, you are still better off as a result of economies of scale and scope. As this phenomenon repeats itself, the diversified firm is born. You add product families first, followed by business lines, each time addressing extra customer segments. As long as the extra revenues justify extra costs, and economies of scale and scope outweigh the cost of increased complexity, it makes sense to continue diversifying. The nature of these economies of scale and scope change as you diversify more and more. Initially these savings are mainly physical, as you stretch the use of tangible assets such as plants, networks and systems. Subsequently they become more knowledge-based, as you share technologies, brands and customer intelligence. Finally, when you are at the conglomerate stage, they relate to social capital, as you move talent across internal boundaries and leverage personal relations with politicians, government officials, investors and other external parties who can greatly facilitate or obstruct your plans–not necessarily with the greater good in mind. Given the still-prevailing â€Å"conglomerate discount† Western firms are subject to (i.e., the conglomerate share price is less than the sum of the values of its constituent businesses), we would argue that the economies from leveraging personal relations with external parties are non-existent in these firms. The forces of lawmaking, jurisprudence and, yes, ethics bring about sufficient transparency, market efficiency and fair business behavior for the conglomerate not to be worth its salt. In the emerging world, however, these forces may be underdeveloped. In such cases officials, investors and other parties put extraordinary trust in the people they know at the helm of the successful conglomerate, for example to realize their pet projects, invest their funds or set up a joint venture – and are willing to pay a premium for it. For example, the local connectedness of emerging market conglomerates is one of the main reasons why many Western firms, in industries as diverse as electrical power and insurance, set up joint ventures with them. In addition to serving customers – which stays the very raison d’à ªtre of a firm – the conglomerate thus serves also as a conduit for initiatives that the external parties otherwise might find too risky to pursue. For example, investing in a partially listed subsidiary of a conglomerate that has been around for more than 100 years in a volatile emerging market gives a greater sense of comfort than going it alone. Take a tobacco company in the U.S. It may spend fortunes on lobbying, but it is all about promoting its one business activity, i.e. tobacco. It doesn’t get into, say, cereals, because it realizes that knowing this one Congressman won’t make it as successful in cereals as a focused cereals manufacturer. There is no â€Å"scope effect.† But if this tobacco company wants to enter, say, India, it could establish a joint venture with a local conglomerate that has all the right connections, be it with a governor for land, another firm for electrical power, etc. It doesn’t matter that this conglomerate isn’t in tobacco yet. It just leverages its connections, and will somehow ask a premium for that know-who from its U.S. JV partner, for example by getting a higher stake in the JV than it otherwise would deserve. We don’t expect this phenomenon to re-emerge in the Western world, and thus the conglomerate to regain a foothold. Quite to the contrary. Consider PPG Industries. The US-based company used to be a diversified industrial group, with activities in all types of glass, chemicals, paints, optical materials and biomedical systems. Through a raft of acquisitions and divestments since the early 1990s, it has transformed into a focused world-leading coatings manufacturer with $15 billion sales. In 1995, glass and coatings each accounted for about 40% of sales. By 2012 as the firm became more focused, this split had evolved to 85% coatings and 7% glass. In that same period PPG’s share price has risen by a compound average rate of 6.6%, compared to 5.1% for the SP 500 Industrials. Quite a respectable performance for a company operating in a fairly mature industry. It may well reflect the power of focus. At the same time, we’re not arguing that conglomerates aren’t effective in emerging markets. One statistic that, unfortunately, may point to the lasting importance of local connectedness is the Corruption Perceptions Index published annually by Transparency International. It uses a scale from 0 (highly corrupt) to 10 (very clean). Since 1995 the index has remained stable at around level 3 in India and level 7.5 in the U.S., to take these two countries as an example. Until such public accountability deficits can be addressed, the economies of scope related to social capital (â€Å"this-person-I-know-and-trust-in-an-otherwise-untrustworthy-environment†) will sustain the conglomerate phenomenon in the emerging world. The conglomerate is a â€Å"necessary evil† in many emerging markets: without it, things might not work. But it is a symptom of a deficit that has a high societal cost. That’s something to think through before heralding its return. In the meantime, (Western) consumers, investors, and society at large should be delighted with the focused firm. This article was originally published by the Harvard Business Review Blog Network,Dont Write off the (Western) Focused Firm Yet. Professor Daniel Deneffe is the Professor of Strategy and Managerial Economics at Hult International Business School. Hult offers a range of highly skills-focused and employability-driven business school programs including a range of MBA options and a comprehensive one year Masters in International Business. To find out more, take a look at our blog Hult International Business School launches Master in Social Entrepreneurship. Download a brochure or get in touch today to find out how Hult can help you to learn about the business world, the future, and yourself. 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We look for diverse students with a wide range of experiences, perspectives, and interests—students who will thrive in our unique educational atmosphere. Are you ready for a truly global experience? 📠¸: @iambrunadiniz . Each year, Hult seeks to enroll a talented and ambitious incoming class from all over the world. We look for diverse students with a wide range of experiences, perspectives, and interests—students who will thrive in our unique educational atmosphere. Are you ready for a truly global experience? 📠¸: @iambrunadiniz . We’re excited to start 2020 on a ranking high! Hult is proud to have been placed #28 in Poets Quants 2020 rankings for Best Undergraduate Business Schools in the US. Taking a huge leap of 32 places from our 2019 position, we’re also very happy to have secured top positions in key categories like: life-changing experience, practicality of the degree, and global immersion. . With five global campuses, a student body of over 130 nationalities, and a learn-by-doing approach—Hult offers a student experience like no other. . We’re excited to start 2020 on a ranking high! Hult is proud to have been placed #28 in Poets Quants 2020 rankings for Best Undergraduate Business Schools in the US. Taking a huge leap of 32 places from our 2019 position, we’re also very happy to have secured top positions in key categories like: life-changing experience, practicality of the degree, and global immersion. . With five global campuses, a student body of over 130 nationalities, and a learn-by-doing approach—Hult offers a student experience like no other. . â€Å"I’m from an engineering background and needed a whole new skill set for the industry I wanted to switch to. I learned a lot about myself and how I deal with being out of my comfort zone. I learned both soft and hard skills, from how to work in very diverse teams to key accounting metrics and strategy. I was surprised by how weak I was at certain tasks in English or how strong I actually was in other areas. Hult gave me opportunities to try new things and meet people from places I never thought I would have friends. . My internship experiences gave me the chance to broaden my view of different cultures and different companies. I had the opportunity to work and live with people whose values differed from people in my home country. I thought that this would be difficult, but it gave me the chance to reflect on my own values and assess if they were a result of my home country environment or if they were intrinsically mine. . Diederick ter Kulve (@diederick.terkulve) Netherlands Masters in International Business . â€Å"I’m from an engineering background and needed a whole new skill set for the industry I wanted to switch to. I learned a lot about myself and how I deal with being out of my comfort zone. I learned both soft and hard skills, from how to work in very diverse teams to key accounting metrics and strategy. I was surprised by how weak I was at certain tasks in English or how strong I actually was in other areas. Hult gave me opportunities to try new things and meet people from places I never thought I would have friends. . My internship experiences gave me the chance to broaden my view of different cultures and different companies. I had the opportunity to work and live with people whose values differed from people in my home country. I thought that this would be difficult, but it gave me the chance to reflect on my own values and assess if they were a result of my home country environment or if they were intrinsically mine. . Diederick ter Kulve (@diederick.terkulve) Netherlands Masters in International Business . Say a big hello to our Bachelor of Business Administration program cover star, Elisa Orus Plana âÅ" ¨ . â€Å"I’m excited for the future—especially that I cant predict whats going to happen. Maybe Ill end up in Mexico working for a trading company or maybe in Africa, developing my own business. Everything is possible, and the options are constantly changing. I love the idea that Im never going to be stuck doing the same job until the end of my life if I dont want it to be like this. . Hult really supports me and my ambitions and truly believes that we deserve to be considered as professionals as well as students. Here, I get to express not just my opinions but all elements of myself. From my creative side with the Fashion Society to my finance and business sides in Trading Club and the Management Consulting Club. We get a different type of learning here. Not just essential knowledge and theory, but practical skills and mindset. The school is always evolving. We’re encouraged to innovate and to always look for new ways of doing traditional things. We learn how to be more confident and become aware of how we can impact our environment. The school aims to help you become a better version of yourself and to stand out from the crowd.â€Å" . Elisa Orus Plana French Bachelor of Business Administration Class of 2021 Say a big hello to our Bachelor of Business Administration program cover star, Elisa Orus Plana âÅ" ¨ . â€Å"I’m excited for the future—especially that I cant predict whats going to happen. Maybe Ill end up in Mexico working for a trading company or maybe in Africa, developing my own business. Everything is possible, and the options are constantly changing. I love the idea that Im never going to be stuck doing the same job until the end of my life if I dont want it to be like this. . Hult really supports me and my ambitions and truly believes that we deserve to be considered as professionals as well as students. Here, I get to express not just my opinions but all elements of myself. From my creative side with the Fashion Society to my finance and business sides in Trading Club and the Management Consulting Club. We get a different type of learning here. Not just essential knowledge and theory, but practical skills and mindset. The school is always evolving. We’re encouraged to innovate and to always look for new ways of doing traditional things. We learn how to be more confident and become aware of how we can impact our environment. The school aims to help you become a better version of yourself and to stand out from the crowd.â€Å" . Elisa Orus Plana French Bachelor of Business Administration Class of 2021"> During the final days of 2019, you probably reflected on what you’ve accomplished this year—and even this decade—and what you’d like to achieve in 2020. Let us know in the comments below. During the final days of 2019, you probably reflected on what you’ve accomplished this year—and even this decade—and what you’d like to achieve in 2020. Let us know in the comments below. â€Å"The first time we did group work on the program, I went head-to-head with a colleague. It taught me a lot about how I see people, how people see me, and how conflict can be resolved in a kind and productive way. The best feedback you get, when delivered constructively, is the most critical because it really feeds into how you lead. I’ve completely reversed my leadership style—the result is so much richer and more powerful when you lead from behind and lead with strength. . Studying in tandem with working, whilst challenging, gave me the perfect platform to directly apply learning concepts into my business environment, the competitive landscape, and the real-estate industry as a whole. When I started the program, I was very happy in my corporate role. But my courage and aspirations grew to the point that I took on a whole new direction. Having my career coach, Joanna, as a sounding board allowed me to really be strategic and get to know myself. She coached me thro ugh all the interviews, the research, and the questions. It went in parallel with what I was doing academically and after six months everything just clicked. . I went into the EMBA knowing I had nothing to lose and I’ve come out with everything. Great strength, global friends, amazing learning, mentors from professors, a job I love, and the knowledge that I can set my mind to achieve anything and with the right support and resources I’ll get there.† . Kashani Wijetunga British, New Zealand Sri Lankan Associate Director Senior Strategy Consultant CBRE EMBA Class of 2019 . â€Å"The first time we did group work on the program, I went head-to-head with a colleague. It taught me a lot about how I see people, how people see me, and how conflict can be resolved in a kind and productive way. The best feedback you get, when delivered constructively, is the most critical because it really feeds into how you lead. I’ve completely reversed my leadership style—the result is so much richer and more powerful when you lead from behind and lead with strength. . Studying in tandem with working, whilst challenging, gave me the perfect platform to directly apply learning concepts into my business environment, the competitive landscape, and the real-estate industry as a whole. When I started the program, I was very happy in my corporate role. But my courage and aspirations grew to the point that I took on a whole new direction. Having my career coach, Joanna, as a sounding board allowed me to really be strategic and get to know myself. She coached me thro ugh all the interviews, the research, and the questions. It went in parallel with what I was doing academically and after six months everything just clicked. . I went into the EMBA knowing I had nothing to lose and I’ve come out with everything. Great strength, global friends, amazing learning, mentors from professors, a job I love, and the knowledge that I can set my mind to achieve anything and with the right support and resources I’ll get there.† . Kashani Wijetunga British, New Zealand Sri Lankan Associate Director Senior Strategy Consultant CBRE EMBA Class of 2019 . â€Å"It was now or never. I knew that I’d have likely stayed in my neighborhood for years to come if I didn’t take this opportunity. I’d not lived or studied outside of the U.S. before. So I left my job as a global strategist at an advertising agency and moved halfway around the world. I’ve come back a more culturally aware, well-versed person. I’ve realized that everything is a learning experience and an opportunity for growth. Ill definitely carry this mindset with me into the future. Technology and social media allow us to be different people in several places at once. Im excited to see how I can establish myself in whatever city Ill be lucky enough to call home and still maintain deep connections with people all over the world. I’m inspired by my classmates every day. Hearing some of their life stories and how getting this degree fits into their greater mission has been very humbling. My biggest challenge has been finding the ‘right’ path for me. There have been rooms Ive felt like I shouldnt be in, but now Im proud to feel as though I truly belong, wherever I am.† . Dwayne Logan, Jnr. American MBA Class of 2019 . â€Å"It was now or never. I knew that I’d have likely stayed in my neighborhood for years to come if I didn’t take this opportunity. I’d not lived or studied outside of the U.S. before. So I left my job as a global strategist at an advertising agency and moved halfway around the world. I’ve come back a more culturally aware, well-versed person. I’ve realized that everything is a learning experience and an opportunity for growth. Ill definitely carry this mindset with me into the future. Technology and social media allow us to be different people in several places at once. Im excited to see how I can establish myself in whatever city Ill be lucky enough to call home and still maintain deep connections with people all over the world. I’m inspired by my classmates every day. Hearing some of their life stories and how getting this degree fits into their greater mission has been very humbling. My biggest challenge has been finding the ‘right’ path for me. There have been rooms Ive felt like I shouldnt be in, but now Im proud to feel as though I truly belong, wherever I am.† . Dwayne Logan, Jnr. American MBA Class of 2019 . Happy New Year, Hultians! . Happy New Year, Hultians! .