UK: HELLER ON MANAGEMENT - CONCENTRATE ON KEEPING CONTROL. - Diversity needn't mean disaster, says Robert Heller, providing those at the top realise that managing it means restricting themselves to ensuring control - with a light rein - instead of trying

Last Updated: 31 Aug 2010

Diversity needn't mean disaster, says Robert Heller, providing those at the top realise that managing it means restricting themselves to ensuring control - with a light rein - instead of trying to command.

The toughest test for executives is managing diversity, which strongly suggests that their wiser course is to concentrate. Certainly the collapse of the tripartite Daimler-Benz into 'severe loss', hard on the heels of the break-up planned by arch-conglomerate ITT, gives scant comfort to diversifiers.

By the same token, advocates of fashionable strategies revolving around 'core businesses' can preen themselves on their soundness. Yet focusing on core activities of itself guarantees nothing. Olivetti's 1994 losses of $416 million also count as severe: they stem from core failure in PCs, not from doomed diversity.

Pick a rotten core, or a rotting strategy within a correctly chosen market, and corporate decay must follow. Nor do large companies necessarily escape from their problems by regrouping round supposed cores and consigning extraneous buys to outer darkness. These cores are themselves highly diverse, with umpteen businesses and innumerable products.

The overburden of both businesses and products could certainly be removed by vigorous application of Pareto's Law. Very probably, 80% of revenues and profits stem from 20% of activities within the beloved core. But fragmentation of markets leads to proliferation for any company striving to defend and extend a hard-won global market share.

Every large company is presumably mindful of Jack Welch's celebrated dictum for General Electric: become number one or number two in your chosen market, or get lost. In markets with few serious contenders, that makes apparent sense. But what about healthcare, say? The current massive merger wave will have to thunder on until the millennium before the Welch formula can truly apply. Even Glaxo post-Wellcome has no more than 5% of this market. Interestingly, though, its Zantac mainstay has been pressed without mercy by the relatively tiny Astra. Today the smaller company with lesser spread often steals the show in a chosen segment.

Worldwide, growth in employment and prosperity lies not with the giants but the SMEs. Aided by IT and automation, specialists are picking off fragmented markets by building highly focused, crisply modern businesses. These have abundant ability to attract and stimulate top-class managers - the US is already seeing marked MBA migration from big companies to SMEs.

This no longer means trading security for excitement. The wave of rationalisation that is still slashing multinational payrolls hasn't spared the MBAs. Moreover, the attack on costs is bound to continue, because of the income gearing that's so helpful to multinational millions. If you are earning 5% on £10 billion of sales, cutting costs by 1% raises profits by a thumping 19%.

To achieve the same glorious £95 million result by raising revenues will equally demand a 19% rise in sales. Cutting is plainly the cosy alternative: the spunky recovery of IBM under Lou Gerstner results largely from slashing everything from facilities to R&D - but the tougher tasks, like recovering the sadly lost lead in PCs, lie dauntingly in wait.

IT leadership has been seized by feisty specialists - like Compaq and Packard-Bell in hardware; Microsoft and Oracle in software. Whether IBM can now crack the software nut with Lotus depends on that same testing skill - managing diversity. Here, IBM abysmally failed its last test by acquisition; its Rolm telecoms purchase bombed spectacularly.

Nor has IBM coped with the enormous diversity that mushroomed within. Its painful symptoms stem from a disease widely affecting large companies. Protected by income gearing and the consequent cash mountains, the behemoths and their cost-cutting managers are secure - but the growth action is passing them by.

The real villain is the top-down nature of big business life. The grand decisions are taken on high, but the grand design can only be realised much lower down. That gives the small thrusting companies the edge. Their topmost ranks are much nearer to the action.

The joys of concentration can, of course, shine forth, even within a very broad grouping. Jealous rivals, for instance, speak with awe of Hanson's Imperial Tobacco, a money machine replete with cash and profits. But Hanson famously (if not infamously) cares only for profits and cash. It doesn't seek to dictate strategy, though its presence must limit Imps to a narrowly defined field.

Nearly all tobacco companies (including pre-Hanson Imps) plunged into diversity to solve their health problems. That would be forbidden for Imps today, even if its management foolishly flirted with temptation. The folly lies in failure to understand that managing diversity is a business in itself, irrespective of the products or services.

In theory, large companies can give birth to new, diverse, customer-led businesses. From time to time, indeed, they do: but mostly as rare exceptions. Successful management of diversity turns the rare into the commonplace. That won't happen unless top management restricts itself to ensuring control - rather than trying to command. Control, moreover, should be exercised with a light rein. Mostly it isn't, of course; which is why those MBAs are right to migrate to smaller, greener pastures.

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