Have you heard of big group companies like General Electric, Reliance Industries, Raytheon Technologies, and Danaher? Well, these are by far one of the biggest conglomerate companies in the world by market capitalization. But do you know why these are called Conglomerates, and not a typical company? Well, you see, these are the companies that have several companies under their umbrella. And that is pretty much the definition of a conglomerate company. But the real question is: Why is there a need for conglomerates? Obviously, there had to be some benefits in forming such a big group company, but what else? Well, that is precisely what we will be talking about in today’s post. Here we will be going over the possible advantages and disadvantages of conglomerate companies. Alright, here we go now.
Advantages of Conglomerate Companies
1. Spreading Out Business Risks
When a big group company works in many different areas, it spreads out its risks. And no wonder that such a company would be financially stable. For example, if a company makes only tech products and the tech market collapses, the risk is multiplied compared to a scenario in which one owned businesses in health, everyday products, and energy. All in all, to put it simply, diversification across different markets helps to protect the company’s cash.
2. Saving Money by Being Big
Big group companies aka Conglomerates can use their size to cut costs, which is called economies of scale. They can buy things in bulk for all the smaller companies they have, which makes things cheaper. They can manage things like HR and finance from one place, which saves money on managing costs. And yes, their being big helps them work more efficiently and make a lot more money.
3. Reaching New Markets and Customers
By owning different kinds of businesses, Conglomerates can sell more types of products and reach more customers. This is very useful to them once they start selling in new places or to different kinds of people. For example, a group that sells many electronic products might buy a company that is working on smart home devices to quickly reach customers who like the latest technology.
4. Better Use of Money Inside the Company
And yes, Conglomerates can move money around to where it’s needed most within their own company. This is often easier and cheaper than borrowing money from the outside. It’s like having their own bank that knows exactly what each part of the company needs to grow.
5. Protection from Being Taken Over
The big size and mixed types of businesses in a group company make it hard for another company to take over without a lot of money and a good plan. This protects the Conglomerate so it can keep following its long-term goals without worrying about being taken over.
6. Using Resources Well
Conglomerates can use resources like IT support and logistics across all their smaller companies. This minimizes waste and maximizes the effectiveness of the company as a whole. It also reduces costs and allows all parts of the company to focus on doing what they do best because their basic needs are catered to or fulfilled by the larger company.
Disadvantages of Conglomerate Companies
1. Hard to Manage
See, running a Conglomerate means handling many different types of businesses at once. Each one of them poses various needs and problems, which makes the management extremely complex. There are many layers of management required to handle such a large company, which often results in slow decision-making and less clear business strategies. If you are the one in charge of such a company, you may find it difficult to keep an eye on everything, and not running as smoothly as you could.
2. Issues with Being Clear About Money
The financial details of a Conglomerate can hide how well each part of the company is doing. This makes it very difficult for investors and business analysts to actually be able to tell how healthy the business is. If one were contemplating an investment, they might be cautious because of the expectation that the mixed-up financials cause troubles in some areas.
3. Lower Market Value
Even though these companies are very large, they often get valued less by the market than if they were split into smaller, separate businesses. Called the “conglomerate discount,” this lower value exists because the market realizes it is less efficient and harder to manage so many different businesses. This can lead to their stock prices being lower than they might deserve, which affects their ability to get more money for growth and to give profits to shareholders.
4. Risk of Not Working Well
When a Conglomerate handles many different kinds of businesses, it’s hard to manage everything well. Sometimes, parts of the company will not be very good at their work while the other parts really are. This can bring the performance of the whole company down, even though having different businesses is supposed to help the company do better. It can be very tough for you, as a manager in such a big company, to find and fix these problems because there are so many different areas to look at, all at once.
5. Weaker Brand Identity
When a company works in many different industries, it can weaken its brand. Each industry does have its own rules and what is expected by the customer. If a company cannot meet these expectations then it will lead to a bad reputation. For instance, a Conglomerate known for producing great electronics may have a hard time keeping up its good name if it starts working in areas that are not a part of its reputation and where the quality standards differ.
6. Higher Risk Taking
The big size and variety of businesses in a Conglomerate can lead to taking more risks, thinking that its huge resources will keep it safe. That could be disastrous for the conglomerate, and in some cases, the wider economic system if the conglomerate is described as “too big to fail.”
Final Thoughts
And, that’s that. Now you pretty much know why conglomerate companies exist, and what are the positive sides of these companies. But just like any other thing in life, there sure are negatives or challenges to overcome with 3conglomerate structures as well. And we tried our best to lay down both sides of the story with transparency.
