With the fracture of Google into its constituent subsidiaries and the birth of new holding company Alphabet, there is renewed consideration of the long-spurned idea of the corporate conglomerate. The model has so few successful examples that it’s difficult to assess. Jerry Useem, writing for The Atlantic (“Can Google Succeed as Alphabet?”), characterizes the conglomerate as a craze of the ’60s and ’70s that, by the ’80s, became a corporate slur.
In The New York Times’ The Upshot blog, Neil Irwin looks back on this time, asking “Is the New Google More Like Berkshire Hathaway, General Electric or AT&T?” Each of these analogues are made to explain a key factor in Alphabet’s makeup: Berkshire Hathaway shows how independent management can be balanced with long-term vision and oversight (Larry Page and Sergey Brin playing the role of Warren Buffett and Charlie Munger); General Electric is considered for the unifying force of its R&D culture; and AT&T’s Bell Labs is a warning that such a forward orientation can be taken too far.
Useem and Irwin each conclude that the most promising example is General Electric, which both predated and outlived that craze. Useem warns that the parallel can only be taken so far: “GE makes money lots of different ways. Google does many things, but it makes almost all its money one way: through online advertising.” Yet hope remains in how Alphabet’s visionary guidance, demonstrated through its “moonshot” projects, can cohere the amalgam of businesses, attract talent, and drive product innovation.
Such coordination of knowledge and human resources will be a critical quality of the modern conglomerate. During the craze phase, this was a secondary function, and conglomerates represented an awkward and unnecessary half-step between subsidiary-/company-level factors and those of the market (Useem):
Gathering dissimilar businesses under a common roof was supposed to make each more valuable. They could balance out one another’s risks, borrow cheaply with a common credit card, and share access to the superior management minds at headquarters. But it actually made them less valuable. Avis Rent a Car didn’t have anything to teach Continental Baking, and vice versa, so neither grew any faster. The management minds at headquarters couldn’t allocate capital as well as the market could. And by the late 1970s, investors looking for diversification could simply buy a mutual fund.
According to John Gapper in the Financial Times (“Alphabet can create a clever conglomerate”), this fraught history has resulted in a “conglomerate discount” that shaves 10 to 15 percent off their value, relative to comparable single-sector companies. Yet Google’s valuation jumped $25bn through the Alphabet reorganization, and he suspects that it has less to do with a renewed interest in GE’s precise means of coherence than upon investors’ need for clarity and trust:
Venture capital and private equity funds are both forms of conglomerate—they invest capital in a broad portfolio of businesses on behalf of outsiders who believe that such funds possess superior expertise.
Why, though, should investors seeking exposure to new companies buy shares in Alphabet, which then channels Google’s surplus cash into its own venture and growth funds, Project Loon, self-driving cars and life sciences? They could instead invest money directly in a venture capital fund. Why take the longer and less-direct road?
It depends on trust… Investors could also have bought shares in Precision Castparts last week for less than Berkshire Hathaway paid this week, but they do not complain because they trust Mr Buffett. Alphabet’s shareholders must believe in Mr Page and Mr Brin’s ability to use their intelligence and avoid the traditional pitfalls.
To judge by the shares this week, they prefer a conglomerate called Alphabet to a company that had not made plain what it was.
Family businesses are another governance model that can be made to sound either antiquated or timeless, depending on the cases put forward. Proponents—even more so than those of the conglomerate—cite trust, reassurance and humanity as foundational qualities of this model. But it is one worth examining based on the mere fact of its persistence and pervasiveness, as summarized in Harvard Business Review (“Leadership Lessons from Great Family Businesses”):
They account for an estimated 80% of companies worldwide and are the largest source of long-term employment in most countries. In the United States they employ 60% of workers and create 78% of new jobs. These aren’t just mom-and-pop shops either: In one-third of S&P 500 companies, 40% of the 250 largest firms in France and Germany, and more than 60% of large corporations in East Asia and Latin America, family members own a significant share of the equity and can influence key decisions, particularly election of the chairman and the CEO.
The purported strengths sound much like those attributed to conglomerates (“Dynasties”—The Economist):
Family companies can be more flexible and far-seeing than public companies. Family owners typically want their firms to last for generations, and they can make long-term investments without worrying about shareholders hunting for immediate profits.
The ways that this long-term perspective is manifest in corporate practice is also received similarly, with a skepticism tinged with renewed intrigue (“The family way”—The Economist):
Critics say these techniques offend against the principles of good corporate governance. Powerful families can use pyramids to transfer money between companies under their control and employ dual-class shares to disenfranchise other investors. Two decades ago the tide seemed to have turned against these devices. But founders of tech companies are keen on them, claiming that they provide protection against short-termism.
The two previous articles are part of a special report in The Economist. In its introduction, “To have and to hold,” Adrian Woolridge separates mom-and-pop shops from global companies and further, those that are incidentally family run from those characterized by the following qualities: family ownership, a large degree of family influence in the board room, and a history of—or plans for—family succession. According to the Boston Consulting Group, even this subset is significant, accounting for 33% of American companies with yearly revenues over $1bn. Therefore, their unique qualities are worth interrogating rather than dismissing as merely suboptimal versions of other arrangements of corporate governance:
...family businesses often suffer from human quirks. Alfred Sloan, the founder of General Motors, argued that the aim of professional management was to produce “an objective organisation” as distinct from “the type that gets lost in the subjectivity of personalities”... But that “subjectivity of personalities” can also enable family bosses to make brilliant decisions which elude professional managers.
These firms are not just immature public companies, nor are they just highly successful startups.
The reconsideration of conglomerates and family businesses demonstrates an appreciation for the necessity of diverse approaches. Rather than approaching management as a process of optimization that can be transferred and applied to all business—as professional managers might—idiosyncrasies are being reframed and appreciated as critical factors of organizational culture.
Design practice is increasingly recognized as a core component of business strategy. A series of design agency acquisitions by large corporations and management consultancies over the past few years has made this movement obvious. These deals include the acquisition of Doblin by Monitor (in 2007, and subsequently by Deloitte in 2013), Fjord by Accenture (in 2013), Adaptive Path by Capital One (in 2014), and LUNAR Design by McKinsey & Company (in 2015).
Robert Fabricant has interpreted this flurry as the sign of the design industry passing through a phase of mass extinction, characterized by corporate takeovers. In his piece for Wired, “The Rapidly Disappearing Business of Design,” he outlines the progression of the industry as follows:
- The First Wave: Digital Change Agents
- The Second Wave: Innovation Consultants
- The Third Wave: Venture Design
- Mass Extinction: The Corporate Takeover
- Rising from the Ashes: Big Design
The big unifying narrative of design's conceptual evolution is misleading, motivated as it is by the marketing interests of those who propagate it. This framework can still provide value if we understand these waves as concurrent rather than as a reductionist narrative that conveniently places Fabricant's Design Impact Group at the cutting edge of “Big Design.” Each wave is a mode of design adoption or integration that is relevant to different organizations at different times.
Doblin, Adaptive Path, and Lunar may have been “taken over” by corporations, but this is consistent with their historic positioning, not indicative of a phase of mass extinction. The acquirers have not blindly swallowed any design firm they could get their hands on. Rather, these acquisitions are an evolution of a longstanding partnership that they have chosen to bring in-house.
The partnership between Capital One and Adaptive Path is based on a shared focus on service touchpoints as an effective means through which to address the relationship between complex organizations and their customers; Deloitte and Doblin value rigorous research. The relevance of product development methodologies to management-centric services is particular to the deal between McKinsey and LUNAR. LUNAR is a relatively traditional design firm, grounded in an engineering approach to industrial product development. This match—based on the legitimacy of facilitative, collaborative, exploratory design methods within the traditional management thinking—exemplifies a repositioning that a growing proportion of design consultants have been manoeuvring into for decades.
Design firms should seek to replicate the unique appropriateness of these partnerships rather than their specific positioning. Design consultancies watching these acquisitions have begun to question the inherent uncertainty of their independent status. The prospect of reliable work, validation, and investment from familiar corporate names is alluring. Many have been caught up in the residual energy of those that were acquired, and have adopted similar vocabulary and aesthetics. But without the goal of positioning themselves for acquisition, such reorientation serves more to smooth the edges of their practice—the differentiating aspects of their perspective—rather than highlighting areas of overlap with specifically-targeted buyers.
Thomas Lockwood, former president of the Design Management Institute, asks ‘Why Are Design Firms Stagnating?” (Co.Design) and concludes “design firms don’t differentiate themselves from one another in a compelling way.” Matthew Milan, co-founder of Normative, agrees and seeks to outline an alternative (“It’s never been more important for design firms to think differently” – Medium):
Ray and Charles Eames spent a lifetime working on their unique perspective. Frog’s mindset had been refined for over a decade by the time they started working with Apple. Their innovation was literally how they saw the world. The digital design field is young, and few agencies have had the time to really develop a unique mindset. Fewer still have tried.
A dozen years ago, companies like Teehan + Lax and Adaptive Path were unique. They thought differently and communicated the value of their perspective through great work and compelling language. Firms like these created and popularized the language of user experience design. They made it possible for their clients and the digital industry at large to think differently. Hundreds of firms followed their lead over the last decade, but they copied the mindset of these formative companies. They didn’t create new language and ideas to challenge what they saw in the digital world. When an entire design industry follows a single mindset, commoditization quickly sets in.