4 Lessons for Startups From the United Technologies Breakup and the End of the Conglomerate Era
Here’s how growing companies can create top shareholder value.
PHOTO CREDIT: Getty Images
Conglomerates were all the rage in the 1990s, as companies from Tyco to GE gobbled up businesses though aggressive mergers and acquisitions and integrated horizontally to handle a wide range of customer needs. Back then, the strategy looked brilliant; today, not so much.
This week, United Technologies (UTX) announced that the company is breaking itself into three, separating out its Otis and Carrier divisions from the core business. In doing so, UTX is following other industrial companies -- including DuPont, GE and Honeywell -- in undoing the era of mega conglomerates.
This begs the question: What has changed, and what does it mean for businesses today? The short answer is that today's market is more demanding and segmented than ever before, and that mega corporations can't keep up.
Here's what growing companies can learn from watching the big guys fall down on the job of creating top shareholder value.
1. It's hard to be all things to all people.
Before this move, United Technologies was making everything from helicopters to elevators, airplane engines and HVAC systems. That's a broad range of technology to keep track of. Splitting the company up will make it possible for each new business to focus on its core area, set appropriate priorities and ultimately make the best decisions for each unique set of customers.
This statement by the company's chairman and chief executive, Gregory J. Hayes, says it all: "Our decision to separate United Technologies is a pivotal moment in our history and will best position each independent company to drive sustained growth."
I know that in our own business, when we decided to scale back the number of services we offered and focus on a few core areas instead, our growth rate doubled within the next six months. We had underestimated the real costs and distractions of being in many different businesses.
2. Economies of scale are no longer paying off.
Historically, many mega conglomerates came into being to take advantage of bulk buying and shared resources. The rationale was cost savings and reduced overhead -- but operational costs have come way down over time.
Cloud-based technology has reduced the need for companies to invest in servers and other hardware, which used to be a major expense. And many non-core functions can now be outsourced, including payroll, human resources, training, travel and information technology. In fact, the majority of our operational expenses at Acceleration Partners are on a per head or per seat basis today, there are very few fixed cost investments that we make.
Finally, marketing has moved away from big-budget print ads to online advertising, and sales are increasingly conducted online.
3. Specialization sells.
Customers -- including business-to-business customers -- increasingly use the internet to find exactly what they want at the price they want to pay. No longer blindly trusting of the biggest brands or best-known names, people today are looking for experts. They want more control and more choices than most giant companies are willing or able to provide.
Look at what has happened to television. More and more households today are cutting the cord on cable service, unwilling to pay for packages that include a lot of channels they don't want. Instead, they are choosing to purchase only the apps and shows they want directly from content providers such as HBO and Hulu.
Similarly, in our industry, the agency of record (AOR) concept in which marketing agencies sell large integrated projects and then find other firms to deliver that work and mark up those services is quickly becoming obsolete.
4. Smaller organizations are more nimble.
The pace of business today is fast and getting faster. Large, bulky bureaucracies simply can't keep up.
Look at how quickly Uber disrupted the entire U.S. taxi business. Markets evolve quickly, and companies need to be lean and nimble, not bogged down in the internal politics and exhaustive procedures so common to mega corporations.
It's also way easier today to be small, since businesses can team up via a concept we at Acceleration Partners call "Performance Partnerships" -- making deals with other companies to supply non-core functions, while collecting a commission or referral fee. A company can outsource marketing and sales, for example, or pass off the hassle of worrying about delivery and fulfillment -- while keeping all its most critical functions in-house. As a study by Bain Capital has shown, companies benefit most when they divest themselves of non-core businesses and focus their time and capital on growth areas.
The bottom line is that today's business landscape is no longer rewarding generalists -- those companies that provided just-OK goods or services across a wide swath of areas. Companies today need to be best-in-class, responsive and 100 percent focused on the customer. That is the blueprint for success going forward.