Breaking the Conglomerates’ Curse
With rare exceptions, conglomerates get little respect. Labeled “holding companies,” or “portfolio businesses,” the implication is that, at best, they are no more than the sum of their parts. Despite what may be a respectable financial performance, these complicated organisms fail to gain the long-term interest of stakeholders that more focused companies do. In short, they are “cursed” to be forever appreciated, but never admired. The costs of this curse are high, particularly among investors, whose skepticism is ever present. This fact has led many conglomerates and near-conglomerates to attempt to fashion corporate brands that simplify their story. Why so many fail—and most do—can be traced to how they approach the challenge.
Siegel+Gale’s experience shows that conglomerates pursue one of three types of solutions. First is the one-dimensional brand solution, in which companies lay out their main operating areas, hoping to demonstrate their aggregate value. For instance, Cendant’s table is set with four businesses, ranging from hospitality to travel distribution to real estate to rental cars. That’s how they present themselves to the world. Despite the straightforward or “simple” message these four categories are designed to send, this traditional “business diversity” approach almost always fails. People don’t respond to laundry lists, no matter how elegantly they’re presented. They respond to ideas—i.e., brands—that tell compelling stories.
THE CHALLENGE IS TO UNDERSTAND HOW THE CORPORATION AS A WHOLE CREATES PROPRIETARY VALUE.
The second, or two-dimensional brand solution goes further: It aims to simplify the corporate message by describing the shared importance of a conglomerate’s various businesses, products, and services. This is the strategy BASF followed with its focus on “making the products you buy better.” It is also the strategy Tyco followed in highlighting how all of its offerings were “vital.” These solutions are an improvement over the first: They add some dimension to the story, but not enough to survive close scrutiny. What they amount to are post-hoc rationalizations of existing portfolios, rather than insights that reveal strategic intent.
The third, or three-dimensional brand solution looks at simplification through an entirely different lens. It aims to simplify corporate complexity by discovering what lies beneath the pieces and parts of the enterprise. In short, the challenge is to understand how the corporation as a whole creates proprietary value.
Ingersoll Rand offers a case in point. The company operates in multiple businesses, ranging from basic road construction and industrial tools, to technologically sophisticated security systems, climate control products and services, and even golf carts. Venerable names such as Schlage, Club Car, Thermo-King, and Bobcat are among the company’s many brands. But these brands did not define the value-creating nature of the enterprise.
To crack the code on how Ingersoll Rand created value, Siegel+Gale cut through all the layers that obscured the company’s unique characteristics—its core identity. These layers included its brands, products and services, and its structure—Ingersoll Rand is organized into five sectors and multiple business units within each. While taking the company apart in this way, we also studied its history to better understand patterns of value creation over time, including the impact of key acquisitions since the mid 1970s, starting with Schlage. We found that Ingersoll Rand had four institutional strengths or talents that transcended all sectors and were evident in the operations of each—a genius for commercializing “natural properties” such as air, land and temperature; a capacity for enhancing human productivity; a passion for developing economies; and an ability to provide professional grade solutions.
Through the process of simplification we discovered that, over the course of a century, Ingersoll Rand had developed a powerful franchise around the world of work. Everything it did helped individuals and companies work more efficiently and productively. Ingersoll Rand’s identity—its innate drive to turn work into progress-clarified the central value proposition of the organization today, as well as its potential for creating value tomorrow.
With this fresh perspective on the institution, management had what it needed to begin changing its dialogue with stakeholders including investors. Deeply affecting how companies and individuals work suggested opportunities for investment and revenue growth. This brand platform has helped the company shift perceptions of Ingersoll Rand from being a cyclical construction concern to a more technologically driven, diversified industrial.
What is the main advantage of three-dimensional brand solutions? It is that they are based upon the innate identity of the enterprise, rather than by rationalizing existing businesses or product lines. Three-dimensional branding doesn’t just simplify a company’s story; it simplifies with integrity: no seemingly “simple” lists of diverse operations, no “simple” explanations of how all operations fit together by being similarly important. Three-dimensional branding reveals how the enterprise as a whole creates value.
The utility of three-dimensional branding goes well beyond investor communications. It reframes the conversation with employees and recruits, since it is about critical competencies that account for success, which the company, presumably, wants to reinforce. In yielding insights into the organization’s distinctive talents, three-dimensional branding also speaks to the company’s particular way of interacting with customers — as a whole and unit-by-unit-which can help cement relationships beyond pricing and products.
Sometimes, the answer isn’t one, perfectly turned insight. Sometimes, there are two or even three discrete identities among the dozens of businesses that comprise the conglomerate. And sometimes, while there is an overarching story that encompasses the majority of businesses, the simplification process winds up exposing the misfits: operations whose presence in the portfolio is impossible to justify. Pointing them out is a service in its own right to management and investors.
At bottom, conglomerates, and other complex, multiline businesses seeking to build a compelling brand, need to crack the code on their identities, rather than attempting to fabricate one. Getting to the heart of value creation through simplification is the only reliable way to make this happen.