Competition and Convergence
Convergence refers to the way in which the requirements to enter different industries become so similar that firms can just as easily take part in one as in another. One of the areas where convergence was evident in the 1990s was banking and insurance. So common was the phenomenon of banks getting into the insurance business that the practice was given a name: “bankassurance”. In utilities, too, convergence became more and more common. In general, it had the effect of greatly increasing competition. There were two main reasons for this outbreak of convergence.
- Companies found that their own markets were too crowded. it and deregulation enabled impudent new entrants to do things that would have been unthinkable a decade before. Firms felt they needed to move into new fields to find some breathing space. This was particularly obvious in banking. In a number of European countries the degree of concentration in the industry was such that firms had few domestic takeover options that would not have incurred the wrath of the antitrust authorities. In effect, they were forced to vegetate or to go elsewhere.
- As firms became more customer-focused, they realised that customers who trusted them to supply one type of product or service were inclined to trust them to supply many more. In utilities, for example, big customers in the United States increasingly turned to companies like Enron that could supply them with all their energy needs. Given the choice, many of them preferred the convenience of a single supplier. Given the ultimate fate of Enron (bankruptcy), it was a choice that many of them came to regret.
Convergence produced firms that looked much like the conglomerates formed by the periodic enthusiasm for diversification. But the motivation for the creation of these conglomerates was very different from that which formed conglomerates in the 1960s. Diversification then was driven by a desire to spread financial risk, largely for the benefit of shareholders.
The conglomerates formed through convergence were driven by a desire to please consumers in a world where the balance of power between buyer and supplier was rapidly changing. Customers wanted convenience above all things, and one way of getting it was by buying a wide range of goods and services from a single trusted supplier.
As the utility industries (electricity, gas, telephone, water) were deregulated in the 1980s and 1990s, firms found that they required a hard core of competencies to run any one of them. These included sophisticated metering and billing services, a tightly controlled fleet of maintenance vans, and call centres that could deal with a high volume of orders and customer queries. This made firms that sold gas to retail customers feel competent to offer them electricity (bought wholesale from a deregulated manufacturer). Power generators went into electricity distribution, and water companies seemed to flow everywhere.
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