Virgin on Business: Beware the new conglomerate

| FROM THE PRINT EDITION |
 
 

Used to be that you could define what a company did, what its function in business life was, in a sentence—or less.

Boeing builds things that fly. Nordstrom sells things you wear. Microsoft writes the invisible things that make your computer operate.

But thanks to a newly emerging trend, one driven in part by companies from these parts, the response to the question of what a company does is akin to the answer Marlon Brando provided in The Wild One when asked what he was rebelling against: “What’ve ya got?”

No longer can a concise description be provided of what lines of business a company is in; no more can many companies be assigned to well-defined silos of industries or sectors.

Consider the case of the aforementioned Redmond-based software company. Microsoft has long dabbled on the device side, sometimes with success (Xbox), sometimes less so (Zune). Of late, though, the company is making a concerted effort to produce the physical gadgets and gizmos powered by its operating systems and applications software. From the introduction of its own branded tablet to its tie-in with mobile-device maker Nokia to its investment in Dell, a transaction whose strategic intent no one has quite figured out, Microsoft has signaled its intent to be a player in the device space.

Microsoft’s moves are driven in part by another local company, Amazon.com, which long ago shed its skin as a mere books-and-CDs retailer. Its expansion into setting up online marketplaces for everything that could be sold wasn’t a terribly radical step. It knew how to sell stuff, it had customers already visiting, and adding new lines of merchandise was a relatively easy process (compared to establishing a chain of bricks-and-mortar outlets).

Then Amazon decided to not only sell digital media content (books, music, movies) but also to sell, under its own brand, the device with which you would consume that content—the Kindle. Going yet another step, Amazon is dipping its toe into the content-development field, much like Netflix has done in going beyond being a purveyor of movies and shows produced by others.

But Amazon might not even be the first, or only, locally based, nationally significant retailer to branch out well beyond the tree trunk of its basic business. Costco, not content to run warehouse stores with a mix of outside-brand and private-label goods, now offers the sorts of services you can’t haul home in the back of the minivan: travel, investments, insurance, credit-card transaction processing for business.

These are not simple cases of extending existing lines of business into related or tangential activities, ones that provide support to the core operations. These are headlong plunges into businesses that may on the surface appear connected but require entirely new skill sets and strategies, and (as is the case of Microsoft) may put the company in direct competition and conflict-of-interest status with companies that have been customers, suppliers and partners.

What’s striking about these moves is that they reflect a 180-degree compass-needle swing in prevailing thinking about corporate organizational structure. In a reversal from the days of the conglomerate—aggregations of unrelated companies—the corporate mantra has been to slim down, shedding those businesses that distract attention and divert capital.

The anti-diversification trend didn’t mean you could only do one thing. Paccar will not only build you a nice truck, it’ll also finance the purchase and sell you the parts to maintain or repair it.

But Paccar years ago owned retail auto-parts chains. Those are long gone, deemed not essential to its basic truck business. Few companies have had as dramatic a corporate pruning as Weyerhaeuser, which, over the years, has unloaded a savings and loan, an annuity firm, a shipping line, short-line railroads, not to mention box plants and office-paper production.

Diversification may just be another temporary fascination in an industry prone to them, but if a few companies have success by venturing beyond their presumed territories, others will be tempted or forced to follow. And if it works for a few high-profile tech companies, then a few daring types in other industries will be intrigued (or threatened) enough to say, “Doing what we already do is boring. Let’s see what other businesses we can meddle in.”

BILL VIRGIN is founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News.

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