Bigger is better, right?
Not so fast. Corporate America appears to have had second thoughts last year.
Frank Blake, who replaced Robert Nardelli as chief executive of Home Depot, sold off the US$12 billion division that Nardelli set up to serve professional builders.
"Bob's strategy was, `Enhance, extend, expand,' go after adjacent markets and adjacent customers," Blake said. "My vision is that all key investments, be they human resources or money or time, should be focused on the core retail business."
When Fred Poses became chief of American Standard Cos. in 2000, he inherited a company that had steadily branched out from bath and kitchen fixtures into such disparate areas as air conditioning and braking systems for vehicles. Last year, he sold the legacy business, spun off the Wabco braking unit and changed the company's name to Trane, its signature air-conditioning brand. And just last month, he sold Trane to Ingersoll-Rand, which had itself pared down in prior months.
American Standard "had three good businesses that didn't have commonality of customers, of the way they went to market, of materials or manufacturing processes or technology," Poses said. "We realized there just wasn't a lot of value in keeping them together."
Corporate executives and their Wall Street mavens are subject to fads, and they have gone through previous periods in which first broadening and then narrowing business portfolios have taken center stage. At the moment, scaling back appears to be enjoying the upper hand.
Edward Breen, who replaced Leo Dennis Kozlowski as Tyco International's chief in 2002, spun off Tyco's electronics and health care businesses last year, leaving Tyco with its product roster of safety equipment, valves and controls.
DaimlerChrysler is once again Daimler and Chrysler. Many investors speculate that Time Warner may hive off parts of itself.
Many Citigroup investors are clamoring for the company to undo the financial supermarket model that had guided its growth strategy for years.
"There's a huge pressure on chief executives for performance these days," said Joseph Bower, who specializes in management at the Harvard Business School. "So when the corporate office starts looking at its portfolio, it often discovers there are pieces that don't fit."
This is not the first time that company executives have devoted their energies to getting big, only to find that size does not necessarily equal profit.
Throughout the 1960s, companies like ITT and Textron bought up businesses as disparate as hotels, food and machine tools. The prevailing ideas were that a good manager can manage anything, economies of scale would always yield lower costs and a hodgepodge of businesses was the best hedge against economic cycles. Shareholders believed all that, too, and conglomerate shares soared.
Then management consultants and business schools started to promulgate the idea of "core competencies" -- the notion that firmss should focus only on businesses that best fit their skills and distribution channels.
Shareholders hopped on board and began selling conglomerate stocks, prompting many such companies -- General Electric is an exception -- to shed businesses that weren't an obvious fit.
Over the last few years, many companies, scrambling for new ways to increase the scale of their core businesses, broadened their definition of core competency.
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