What is a Conglomerate?
Conglomerates are corporations that engage in various business pursuits that are completely unrelated in nature. Sometimes referred to as a multi-industry corporation, the assets of a conglomerate will be used to set up business operations in two or more fields that have nothing to do with one another. The basic idea behind a conglomerate corporation is to ensure that there is enough generated revenue from all the business interests to allow for the continued operation of each business enterprise. This would be true even if one of the interests is currently experiencing a downturn in revenue.
The concept of a conglomerate or multi-industry corporation is not new. Since the 1960’s, the model has become increasingly common throughout the world. This approach has been a great benefit to many long time companies that found it necessary to redefine their purpose in light of changing technology. In some cases, becoming a conglomerate meant the ability to continue serving a shrinking traditional market, while establishing a presence in emerging markets.
At its best, the conglomerate is an excellent way to maximize profits while building protection against economic and other shifts that could weaken a given market. Since the business operations of the conglomerate will include several disparate directions, it is relatively easy for some operations within the company to make up for lost revenue when one arm of the corporation is undergoing a rough period. For example, if a conglomerate involved one arm that produced widgets and another that focused on Internet based retail sales, the online corporate interest would be in a position to offset a drop in revenue when the widgets business lost a large customer. Until the widgets business recovered and generated new clients to replace the lost customer, the online retail business would essentially carry the entire corporation.
However, this diversity in the conglomerate company can also be seen as involving business risks not associated with a single-industry company. One school of thought is that a conglomerate that seeks to operate in too many different business industries will be unable to focus enough resources to create a strong presence in any one market.
According to this understanding, the lack of a solid base in any one market leaves the conglomerate open to fierce competition that the corporation cannot overcome. As the same time, too much diversity can decrease the availability of resources from other arms when one arm is to realize a profit. When this is the case, the failure of one arm of the corporation may also lead to the failure of one or more other arms in the multi-industry company.
@Izzy78 - I agree, and I think there are several reasons for that. Part of it is that if you have a company developing unrelated items, your chain of command gets very confusing. It's highly unlikely that the CEO and other officers of a company can be intimate with each part of a company like that, so it makes it hard for them to manage.
One of the other things that I have noticed happening as of late is that there is too much competition for conglomerates to successfully compete. Since they are stretched so thin, their research and development departments can't stay ahead of the curve. I think this is especially true of technology companies.
IBM is famous for this scenario. They used to make computers and everything that went in them. Once computers got more popular, though, it wasn't profitable for them to keep making the computers themselves, so they halted those and just started making hardware and software.
@matthewc23 - I think the interesting thing about Time Warner is that each separate company was kind of a conglomerate in its own right. I remember for a while Warner had some sort of relationship with a credit card company. I think it was American Express. I'm not sure if they still have involvement with that or not.
I do agree, though, about conglomerates specializing in a certain area. I'm not sure if it would technically be classified as a conglomerate, since everything is marketed under one brand, but I was reading about one company that makes items out of rubber. They make everything from tires to toys, but it all deals with rubber. Once a company is stretched too thin, it's hard to regroup.
Whenever I think of conglomerates, I always think of Time Warner. Warner, of course, started off making things like Warner Bros. cartoons and comic books and different things. Obviously, Time published a bunch of different magazines. Once they merged, they kept all of their previous business and added several more. Now, Time Warner runs several TV stations and has their own cable provider. That's not to mention them buying America Online and taking over that branch.
I think one of the important things for conglomerates is that they don't get too spread out into different things. At least in my opinion, companies should stick to what they know, but just branch out into different areas of that industry just like Time Warner controls a lot of different media outlets.
I have always thought conglomerates were interesting from a business standpoint. I think the article outlines pretty well the risks associated with it.
I read a book several years ago that was talking about how conglomerates can fail easily if they aren't careful. I wish I could remember what the company was, but it was some company during the 1930s that made a bunch of different products. They were originally going along like a good conglomerate does. When one product wasn't selling well, the others were and vice versa.
Once World War II came along, though, the demand for all of their products decreased and they had a harder time getting the raw materials, and they eventually had to shut down several of their branches. Interestingly enough, another large company at the time bought them out and started making cheaper home products and was very successful.
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