Conglomerates, at least in the United States, have a checkered history. Hailed in the 1960s as bastions of sophisticated management, they used cheap financing to acquire, then rationalize, many family-owned firms. The discipline they brought to these often loosely-run businesses drove much of the post-war productivity boom. Their job done, they fell out of favor in the ‘80s and ‘90s as focus came into fashion. Wall Street began charging a “conglomerate discount,” saying that diverse operations were hard to analyze with confidence. True synergies across the diverse operations were often hard to see. With GE’s recent announcement to split off its remaining finance operations, and Honeywell also considering divestment, the pressure on these groups remains in force.
With 3D printing, however, industrial conglomerates are about to get a new lease on life. As I described in an article in the May issue of HBR, a single 3D printer can produce engine pumps one day and crankshafts the next. The technology’s flexibility introduces synergies where none existed before.
GE might be first to capitalize on this. It remains a highly diversified manufacturer, making everything from locomotives to ultrasound scanners. The company has invested heavily in 3D printing technologies that are flexible enough to produce a variety of products. GE’s first additive manufacturing facility, a plant in Alabama, is set to make nozzles for jet engines. But over time, there’s no reason it can’t make parts for other GE divisions. As the technology develops, GE could revamp this and other plants into general printer farms supplying all of its manufacturing divisions.
Before, a big conglomerate like GE diversified its risks by mixing pro-cyclical and counter-cyclical businesses. That gave it a steadier cash flow to cover the costs of its large fixed cost investments, but did not eliminate the unused capacity of plants dedicated to one kind of product. In the near future, if jet sales are down, GE’s Alabama plant could switch over to supplying parts for trains, medical devices, or whatever division is selling strong. Running plants at full capacity is often a key to profitability in manufacturing.
Giants like GE and Honeywell get most of the attention, but the American economy also includes a number of midsized industrial conglomerates. Graco, Idex, Danaher and ITW focus on niche businesses in oligopolistic industries, making highly engineered products with skilled labor. Each business has its own specialized production lines and distribution network; they share backroom functions, such as accounting and personnel systems, but little else. Headquarters provides accountability and perhaps better metrics than the divisional managers might otherwise have. But there’s little attention to synergies. Conglomerate executives actually prefer to avoid close ties among divisions, so they can easily sell off any division at a profit.
3D printing offers even more advantages to these groups. Most of their sales are now overseas, but the individual businesses aren’t big enough to justify dedicated factories in Europe and Asia to better serve these markets. When combined in a conglomerate, however, the businesses could have enough scope to make overseas printer farms practical. These regional production centers would reduce transportation costs and currency risks, while developing closer ties to their customers.
The big question, however, is whether any of these midsized conglomerates would be able to develop a 3D printer farm on its own. Because the technology is still developing, they would need not only capital but also a good deal of technical expertise. Perhaps more likely is a scenario where a large outside manufacturer with this expertise swoops in and takes over many of the divisions. Any conglomerate executives who resisted would soon feel the pressure from activist investors eager to create value.
All of this is likely to play out over the next several years. Eventually, however, 3D printing will mature and become ubiquitous in manufacturing. Everyone will have the same machines and everyone will be down the same learning curve on how to use the machines. Rather than rely on in-house production farms, most businesses will just outsource production to independent printer farms.
This is standard practice, after all, in the paper printing industry. No book publisher owns its own production facility – they all just send their digital files for each book to an outside printer. Manufacturers would likewise send their digital files to an outside printer farm, which would work its sales and scheduling to keep the production lines running at capacity. Or think about satellite companies that lease out time on the open market, so customers don’t have to send up their own devices.
When printer farms become such a readily available commodity in the marketplace, conglomerates will lose their advantage in manufacturing synergies. Having worked to build up conglomerates, Wall Street will once again happily preach focus and work to tear them apart. To survive, conglomerates would have to adapt their capabilities to a new kind of value creation.
Given the complexities of a 3D-based ecosystem – so many choices of manufacturing technology, materials, location, speed, and other variables – participants will need sophisticated cross-company software platforms to achieve fully optimized results. The former conglomerates will be ideally positioned to create those platforms because they will have already developed them for their internal production. Just look at how GE is investing in the industrial internet with powerful plant management software such as Predix – all the better to collect information and make rapid adjustments according to market indicators.
These platform providers will have the same advantages enjoyed by Amazon, Facebook, and other digital platforms already with us. They will “see” all the activity going on across the value chain. As I suggested in “The 3D Printing Revolution,” they will arbitrage the key scarce resource: information on customer demand and supplier availability.
Conglomerates, after all, are just a management tool. In some contexts, they add competitive advantage. In others, they weaken it.
Richard D’Aveni is the Bakala Professor of Strategy at Dartmouth College’s Tuck School of Business.
This blog was originally published online by Harvard Business Review on May 19, 2015, at https://hbr.org/2015/05/3d-printing-will-revive-conglomerates
Copyright 2015 Harvard Business School Publishing.