Time's Eye: Wesfarmers Variety Stores

Hardware, retailing, coal, chemicals '¦ Australia’s biggest private sector employer, Wesfarmers, is that rarest of modern commercial phenomenon, a conglomerate: something that to business is what the centaur and the unicorn are to mythology.

It’s less a stretch than for most companies. In its original incarnation as a rural cooperative, Wesfarmers performed such diverse functions as distributing oil, selling insurance, auctioning hides and running Western Australia’s first radio station. Its history is entitled A Bunch of Pirates (1984).

But while Jack Sparrow may have brought pirates into fashion, conglomerates are assuredly not. Diversification these days is a circumspect affair, an acquisition being expected to slip like a penny into a slot. How different from the days when conglomerates were all the rage.

The concept of the conglomerate was simple and radical, involving a rethink of the corporation as a portfolio of businesses rather than a business tout court. The theory was that a range of diverse businesses beneath the same organisational roof but following different economic cycles should theoretically be inured from exogenous economic shocks. Better still, a chief executive should be able to optimise capital deployment by stripping surpluses from one constituent to bestow on another.

The pioneer conglomerateur was Tex Thornton, one of the so-called Whiz Kids who came out of the statistical process control area of the US Air Force and helped Henry Ford II revive his flagging motor dynasty after the Second World War. Too much his own man to fit with Ford the way his protégé Robert McNamara could, Thornton acquired control of a small vacuum tube maker called Litton Industries, on top of which he piled 103 companies in nine years: its interests spanned calculating machines, cash registers, price tags, label adhesives, office furniture, trading stamps, medical devices, marine navigation systems and microwave ovens. In 1961 it even acquired Ingalls Shipbulding in Pascagoula, Mississippi, and started selling warships to the US Navy. Litton’s lavish annual report had the quality and gloss of an auction house catalogue, and rejoiced in the buzzword “synergism”: “working together” by any other name.

The conglomerates that followed in Litton’s footsteps were alike in having a dynamic principal, usually a hard-driving outsider, like swaggering Texan Jimmy Ling of Ling-Temco-Vought; Palestinian Meshulam Riklis of Rapid-American, who married Pia Zadora and demolished Pickfair to build their matrimonial home; Peter Grace of WR Grace, so fervently of the faith that “numbers are reality” that he pasted spreadsheets in the corridors of hotels in which he resided; and Charles Bluhdorn, “the mad Austrian” whose Gulf & Western was the model for Engulf & Devour in Mel Brooks’ Silent Movie.

Most successful was Harold Geneen, of whom it was said that “the g is soft, as in Jesus, not hard, as in God”, and whose ITT acquired 275 companies in two decades, from Avis and Sheraton Hotels to Aetna Finance and Hartford Insurance. Publicity-shy but boundlessly ambitious, he presiding over 200 days of meetings a year in unflagging pursuit of the “cold, hard facts”: it was said that he could sit for 12 hours, and was accompanied on trips by as many as 14 briefcases. In his classic critique of ITT, The Sovereign State (1973), Anthony Sampson describes Geneen in full spate.

As he warmed to his tirade, his whole frame came to life; he began gesturing, pointing and laughing, his finger darting around, touching his nose, his ear, his chin, as if weaving some magic spell; his greeny-brown eyes twinkled, and he grinned and laughed like a gargoyle. He seemed no longer a dark-suited owlish accountant, but more like an imp or a genie: almost like Rumplestiltskin, magically turning thread into gold. I noticed that a clutch of vice-presidents were standing around listening, watching him carefully: they laughed when he laughed, and nodded when he nodded.

Everyone loves a business fad, not least consultants, among which Boston Consulting Group was best known for spreading the new religion with its famous matrix, classifying businesses as dogs, cash cows, stars and question marks. Mergers and acquisitions in the US grew from 2000 in 1965 to 6000 in 1969 as even industry giants became mini-conglomerates. The cracker kingdom Nabisco acquired a toy maker, a carpet weaver, and the world’s biggest shower curtain maker. Gulf Oil bid for the Ringling Bros and Barnum & Bailey Circuses. Legend has it that British cement manufacturer Blue Circle acquired lawn mower maker Qualcast on the strategic principle that “your garden is next to your house”.

In Australia, the glass of fashion was Dunlop, whose managing director Eric Dunshea in October 1968 convinced his board that the old tyre and rubber company needed to diversify. The board paper he prepared, writes Geoffrey Blainey in Jumping Over the Wheel (1993), was “more a speech borrowed from a management manual than a sermon based on experience” and “justified almost any purchase”: he took the mandate and ran with it, acquiring scores of businesses in the next two years.

In fact, Dunshea had bought into the cycle at its peak, for conglomerates were about to go the way of Humpty Dumpty. For while it was true that some businesses are more cyclical then others, some economic factors effect all of them: rising interest rates, ailing stock prices, industrial unrest and anti-trust regulation. In July 1969, the octogenarian head of the US House of Representatives Anti-Trust Committee, Emmanuel Celler, began investigating the activities of ITT, Litton and others. Seventy-two witnesses appeared over 10 months of hearing, including Geneen, whose Randian rantings elicited from Celler the immortal reply: “Every man for himself, said the elephant, as he danced among the chickens.”

ITT was criticised as a destroyer of value, the data suggesting that “efficiency and performance of its constituent units deterioriate after they are taken into ITT’s system”. Litton was damned for having turned “flamboyant sham into an art”, its “image of technological and organisational superiority” owing everything to “sophisticated accounting techniques and statistical gimmicks”. In the 18 months to 1970 the average price of the 10 biggest American conglomerates slumped 86%.

With the exception of phenomena like GE in the US, BAT and BTR in the UK, and Dunlop in Australia, which bounced back under Dunshea’s successor John Gough, the Tom Peters dogma of “sticking to the knitting” was the management catchcry of the 1970s and 1980s. What Wesfarmers can achieve with Coles, then, is the test not just of a company but of a concept.