The news out of China this week about the break up of Alibaba into six separate companies was startling and exciting for investors and followers of high-tech companies with high valuations. The e-commerce giant said Tuesday that it would split into six business groups, which will each be managed by their respective CEOs and follow a holding company structure. Each CEO will report to a board of directors and assume full responsibility for company performance.
At Advantexe, we have had the privilege of working with dozens of large companies that have made the decision to break up into smaller companies. Much of our work uses business simulations to help the new leaders and contributors adjust to the new environment by providing the business acumen and business leadership skills needed to thrive. Based on years of experience and working directly with hundreds of executives, senior leaders, and the managers and contributors who do the work, here are five insights into why breaking up is good for business:
Focus, focus, focus
Big conglomerates lose their way as the portfolio and managing the sum of the parts gets larger and more cumbersome. Instead of focusing on the needs of their customers, too many large conglomerates focus on the internal needs of creating scale and spreading costs because inevitably some of the businesses do well and some of them don’t. But that creates a self-fulfilling prophecy of averaging and mediocrity. By breaking up conglomerates, the new businesses can choose their own differentiated value proposition, where they are playing to win, and choose the customers they want to focus on.
Despite what they may say and publicize about the resources and grittiness of a large organization, everyone knows that the bigger the conglomerate, the slower the pace and ability to grow quickly. There are typically more processes and decelerators the larger the conglomerate gets. By breaking up, leaders can take more risks, move more quickly, and accelerate growth that big conglomerates only dream of. There is a certain entrepreneurial spirit that is re-ignited when a company spins out from a larger parent and is able to move at accelerated speeds to achieve quick success.
One of the most underrated benefits of larger companies breaking up into smaller ones is the career opportunities that it creates for hungry employees who want to drive their careers and succeed. Those sorts of opportunities don’t exist in the big conglomerates and over time it drains the talent pool of superstars.
Easier to measure Return on Invested Capital (ROIC)
Capital deployed and the return on capital is very hard to measure in big companies. Smaller companies and spin-off companies are best able to watch their investments in the business (Capital equipment, property, and plant, and even R&D in some cases) and track their returns much easier.
Keeps Competitors Guessing
Big conglomerates get stagnant. They become predictable and some of them rely on their brand years after their customers have bought value that doesn’t exist anymore. The new spin-out that is agile can keep competitors guessing about strategy, new innovations, and much more.
In summary, something big and different is happening in China. And for the first time in a while, they may be doing things that the US companies will react to instead of the other way around. Be prepared for a fresh wave of breakups. Most of them will be good for business.