General Electric announced yesterday (November 9) its separation into three businesses focused on aviation, health and energy. This decision marks the end of an era for a conglomerate that increased its market value from $ 15 billion to $ 594 billion in the 1980s and 1990s by diversifying its portfolio, only to see this same strategy fail in recent years. decades.

The latest move puts an end to GE’s conglomerate structure, but the company has sought to reduce the size of its portfolio for several years. In 2013, GE sold the remainder of its stake in NBC Universal to Comcast for $ 16.7 billion. And in May 2020, the company sold its bulb business to Savant Systems, bidding farewell to a flagship product that has helped put the 129-year-old company on the map.

GE is the latest in a series of conglomerates to downsize in recent years, suggesting the model is “on the way out” in the United States, says Michael Useem, professor emeritus of management at the Wharton School of Business. ‘University of Pennsylvania.

Why conglomerates are no longer a viable business model

GE’s expansion, which was led by the late company CEO Jack Welch, came at a time when diversifying business portfolios was seen as an effective way to mitigate risk. The argument was that when one industry was in recession another could thrive. As this line of thinking gained popularity, companies like Coca Cola acquired Columbia Pictures, and service company Cendant bought companies ranging from Avis Car Rental to Match.com to Century 21.

During his tenure as CEO, Welch invested in new companies ranging from aviation and media to oil and gas, in turn transforming GE into one of the most trusted publicly traded companies on the market. scholarship holder. But that success took a turn at the start of the new millennium, when GE suffered losses triggered by the dot-com crash and the 2008 recession from which it never fully recovered. The company is now valued at $ 120 billion, which is one-fifth of its maximum valuation under Welch’s leadership.

While GE has experienced a very visible disgrace, it is far from the only company to shy away from a conglomerate structure in recent years. Honeywell, ITT and Dupont have also sold companies from their once diverse portfolios. Useem believes that two main factors are behind this trend: Wall Street is not suited to valuing very diverse companies, and companies are no longer adapting their leadership and management to oversee such large portfolios.

Stock analysts and investors specialize in sectors such as consumer goods, insurance or specific types of manufacturing, explains Useem. As a result, they “have a very difficult time understanding a business or predicting its results one year if it has several different businesses under its umbrella,” he said. This is not necessarily true in countries like China and India, where conglomerates continue to thrive, but it is in the United States.

In addition, adds Useem, top business leaders are no longer prepared to manage all sectors. Under Welch’s leadership, GE focused on identifying and training managers who would be as adept at running industrial equipment companies as they are in television or financial services. But today, the market requires managers to be agile and qualified to deal with uncertainty. As such, he adds, “the process of selecting and promoting senior executives has become more difficult, and often more specific to industrial and commercial sectors.”

Some American companies, like Amazon and Alphabet, have successfully adapted their conglomerate structures to the digital age. But it is clear that the model no longer makes sense for executives of industrial companies such as GE. CEO Larry Culp said in a statement that the breakup was a “defining moment” for the company, and that splitting GE into three separate companies would allow them to tailor their investment strategies to the “unique dynamics of the business. ‘industry”.