Have you heard about big group companies such as General Electric, Reliance Industries and Raytheon Technologies? These are the largest conglomerate companies by market capitalization. Do you know why they are called conglomerates and not just a company? You see, conglomerates are companies that own several other companies. That’s pretty much what a conglomerate is. The real question is why are conglomerates needed? There had to be benefits for forming a large group company. But what else? In today’s article, we will discuss this topic. We will discuss the advantages and disadvantages that conglomerate corporations may have. Let’s get started.
Conglomerate companies: advantages and disadvantages
1. Spreading out business risks
Spreading out the risks of a large group is possible when it works in different fields. It is no surprise that a large group company has a stable financial position. If a company only makes tech products, but the tech market crashes, then the risk is multiplied. Diversification helps protect the cash of a company by allowing it to operate in different markets.
2. Save Money by Being Big
Conglomerates, or large group companies, can reduce costs by using economies of scale. The smaller companies can purchase in bulk, making things cheaper. The ability to manage HR and Finance from one location saves them money. Yes, being large helps them to work more efficiently and earn more money.
3. Reaching new markets and customers
Conglomerates are able to reach more customers and sell more products by owning a variety of businesses. It is also very helpful for them when they begin to sell in new areas or to people of different types. A group that sells a lot of electronic products could buy a company working on smart home gadgets to reach out quickly to customers who are interested in the latest technology.
4. Improved Use of Money Within the Company
Yes, conglomerates can move their money to the most needed areas within their company. It is usually cheaper and easier to borrow money than from outside. This is like having your own bank, which knows what each department of the business needs to grow.
5. Protect yourself from being taken over
A group company’s size and mix of business types make it difficult for another company to takeover without having a lot of cash and a solid plan. The Conglomerate can continue to pursue its long-term objectives without fear of being taken over.
6. Use Resources Well
Conglomerates are able to use their resources, such as IT support and logistical services, across all of their smaller companies. It minimizes waste, and increases the efficiency of the entire company. This reduces costs, and all departments can focus on what they do best.
The disadvantages of conglomerate companies
1. It’s Hard to Manage
Conglomerates are a complex business model that involves managing many different businesses. The management becomes extremely complicated because each one has different needs and issues. The management of a large business is complex, with many layers. This can lead to slow decisions and unclear strategies. You may not be able to manage such a large company as well as you would like.
2. The Problems of Being Clear about Money
The financial details can conceal how each part of a conglomerate is performing. Investors and analysts find it difficult to determine the health of a business. If you were to consider an investment, you might be cautious due to the fear that the financials will cause problems in certain areas.
3. Lower Market Value
These companies, despite being very large, are valued by the market at a lower price than if they had been split up into smaller businesses. This lower value is called the “conglomerate discounts” and exists because the market understands that it’s less efficient to have so many businesses. Stock prices can be lower than what they deserve. This affects the ability of companies to raise money to grow and give profits to shareholders.
4. The Risk of Working Poorly
It’s difficult to manage all the different types of business when a conglomerate is involved. Some parts of a company may not do their jobs very well, while others are excellent. It can affect the overall performance of the company, even though the different businesses are supposed to improve the performance. As a manager, it can be difficult to fix problems in a large company because you have to deal with so many things at once.
5. Weaker Brand Identification
A company’s brand can be weakened if it works in multiple industries. Each industry has its own set of rules and expectations from the customer. A company’s reputation will suffer if it cannot meet the customer’s expectations. A Conglomerate that is known for its great electronics might have trouble maintaining its good reputation if they start working in other areas where quality standards are different.
6. Higher Risk Taking
Conglomerates can be tempted to take more risks because of their size and diversity, believing that they are safe due to their vast resources. It could be devastating for the conglomerate and, in some cases the wider economy if it is referred to as “too large to fail.”
Final Thoughts
And, that’s that. You now know the benefits of conglomerate corporations. As with anything else in life, 3conglomerate structure also has its challenges and negatives. We tried to be transparent and present both sides.
