Conglomerate breakthrough 3.0
There was a time, until the 1980s, when conglomerates with unrelated interests thrived. This was the era of MNCs. Although they never vanished, the 1990s and 2000s were driven by an insatiable urge to find core competence. Thanks to reforms across the globe, including those in the US and Europe, empires shed interests to refocus themselves. Specific verticals and horizontals were in fashion. But as new areas opened, and sunrise sectors came into vogue, a silent revolution ensued to bring back the era of conglomerates, albeit in new forms, structures, and systems. In a recent article, the two authors at McKinsey looked at some Asian examples, and dubbed it Conglomerates 3.0 (C-3.0).
Unlike the unrelated-business MNCs and large corporations, C-3.0 builds multiple verticals, i.e., integrations within sectors. While these are unlinked, they use the same management ecosystem to connect and bind them together via shared digital assets “such as identity, payments, data, and loyalty.” In effect, unlike the MNCs of yesteryears, the new ones move beyond the efforts to pool capital, brands, and expertise. In the case of India, we can look at two sprawling empires, one of which successfully morphed into C-3.0, and another which, though equally successful, struggles to find conglomerate glue.
In the 1990s, the Reliance Group (now split into two) was lauded for vertical integration in oil, gas, petrochemicals, downstream, and finished products. From oil to textiles, or oil to plastics via petrochemicals. But when it launched a takeover attempt on L&T, the patriarch was asked the reason to walk into an unrelated engineering-construction arena. Dhirubhai Ambani’s reply was apt for the time. He said that the management expertise the group had to build large refineries and petrochemical plants would help it manage L&T more efficiently, unlock value, and reap the benefits of synergy.
By the late 2010s and 2020s, with vertical integration intact, Reliance Group, managed by Mukesh Ambani, built several verticals, or “multifaceted ecosystems across telecom, content, commerce, payments, and offline retail.” The bind was not just the brand, capital, and management but the digital-driven environment and assets that “enable cross-vertical bundling, and personalised loyalty.” In the past decade, it nearly doubled its annual revenues to more than $100 billion, and its overall profits zoomed, despite huge capital costs. This year, it may launch the largest IPO (Initial Public Offering) in the country.
When he took over the reins at the salt-to-software Tata Group, although software was not visible then, in 1991, Ratan Tata was obsessed with core competence. He tried hard to refocus the empire, and reduce the number of firms from the hundreds to a manageable number, and number of brands from the thousands to hundreds. It worked up to a point, although the group remained diverse, with businesses such as auto, steel, software, and chemicals remaining the strongpoints, even as its entry, mergers and takeovers in auto, steel, and telecom failed.
Towards the end of his career, Tata was criticised for the flops, as is the case with his successor, N Chandrasekaran, who faces the heat under a new Tata, Noel, for the failures in aviation, and others. Unlike Reliance, Tata used the 1980s-based connections to manage a mega empire, which included access to capital, brand, talent, and customer loyalty. Like the Ambani clan, Ratan Tata spotted opportunities in the sunrise sectors like telecom, retail, and software, but was unable to scale up, and combine them into a linked whole. The Tata Group had the expertise in tech, but somehow failed to move on to the next step, digital.
According to the McKinsey article, there is another Asian example of breakthrough success. “Ping An exemplifies this model by making cross-selling a systemic part of how it does business. The company tracks and reports customer contracts within its ecosystem, which spans financial services, healthcare, auto services, and smart-city solutions, all integrated through a unified identity and data platform. A quarter of retail customers hold four or more contracts,” explains the article. With more than 55,000 patents, the group enhances AI and digital skills and tools to allow customers to move seamlessly across the services. It has nearly 250 million customers, with over 70 per cent retention.
Education to build a knowledge sub-economy, or business empire is another feature of some of Asian breakthrough successes. The McKinsey article mentions two Indian firms. Zerodha became the largest stock broker in 2019, and has 16 million customers now, because of the growth engine, Varsity, a comprehensive, free, ad-free educational platform. Through self-education in stock markets and investing, the firm wooed high-value customers, even as Indians desired financial security. Groww came in later as a strong competitor, and “overtook Zerodha as the market leader for active retail clients.” The model was similar: Reliance on education and transparent tools to let customers find it organically.
Some firms, including Indians, use digital and tech to become experts in micro-production, which matches demand and supply at an astonishing pace for the customers. “India’s ONDC demonstrates how digital infrastructure enables micro-producers to scale nationally. The company’s monthly transactions increased threefold within a year of its launch, rising from about five million in 2022 to 15 million in 2023. With more than 7,00,000 sellers, ONDC shows how local artisans, home businesses, and small retailers can access national demand through shared identity, payments, and logistic rails,” explains the article. Others in Asia offer small-batch products at unit costs.
However, a bunch of Indian business empires, the most prominent being the Adani Group, may use multiple strategies to develop multi-layer breakthrough business models. Across some firms, they use digital and tech to create linked and scalable ecosystems like Reliance, and emerge as C-3.0s. Across others, they use the knowledge economy to hook customers. In some areas, they leverage the old MNC-linked ingredients like capital, management, external influence, and valuations. They grab the best from anywhere and everywhere and, in the process, may create a new set of conglomerates, C-4.0.
Such business groups may not be restricted by a specific strategy or synergy. They may opt for multiple ones, which may seem confusing, even random. One can see the business tentacles, coal and power, ports and airports, highways and roads, and telecom and retail. In other words, wherever there is potential, and wherever their clout, and influence may allow them to be. They may be everything at the same time, sometimes you may see it, and other times you may not.
