What Is Conglomerate?
The word "conglomerate" comes from the Latin word "conglomero," which means "to gather into a ball or mass." A conglomerate is a firm that consists of several companies that operate in various areas. These businesses are frequently unrelated to one another and might offer a wide range of products and services.
Definition 2
A conglomerate is a combination of unrelated firms, any combination that is not vertical or horizontal.
More Thorough Understanding of the Term
Conglomerates grew popular in the 1960s and 1970s as firms sought ways to diversify their portfolios and penetrate new markets. Conglomerates have become a popular strategy for businesses to expand their reach without relying on organic growth.
There are various forms of conglomerates, each with its own set of traits and goals. These are some examples:
- Pure conglomerates are made up of enterprises from absolutely unrelated industries. The businesses can operate independently, each with its own management structure and culture.
- Mixed conglomerates are made up of companies in related industries.
- Financial conglomerates are formed up of enterprises in the finance industry. These may include banks, insurance companies, and investment firms.
- Strategic conglomerates are formed to achieve a certain strategic goal. A corporation, for example, may acquire another company in order to gain access to its technology or intellectual property.
- A holding company is a form of conglomerate that holds the stock of other firms but does not operate them.
Pros and Cons of Conglomerate
Conglomerates are business entities that own a number of enterprises in several industries. They each have their own set of benefits and drawbacks. Here are some of the main benefits and drawbacks of conglomerates:
Pros
- One of the primary benefits of conglomerates is the ability to diversify their company portfolio by holding companies in many industries. This diversification spreads the business's risk across numerous businesses and decreases its reliance on any particular industry.
- By utilizing their size and purchasing power, conglomerates can achieve economies of scale. They can negotiate better deals with suppliers, obtain lower-cost financing, and cut costs by pooling resources from multiple enterprises.
- There may be synergies between the different companies if the conglomerate is made up of companies in related areas. A company that manufactures steel products, for example, may simultaneously own a construction company. The conglomerate can cut the cost of steel products for the construction firm and increase its overall performance by owning both companies.
- Conglomerates have easier access to capital than individual enterprises. This is due to investors' preference for a conglomerate with a diverse portfolio and a secure financial position.
Cons
- Managing a conglomerate can be complicated and difficult. It can be challenging to manage several organizations with diverse cultures and management styles, and there may be disputes between them.
- Because of the diversified nature of its businesses, it can be difficult to value a conglomerate as a whole. Investors may struggle to comprehend the conglomerate's operations and evaluate its financial performance.
- Conglomerates may lack concentration and direction because they hold several enterprises in various areas. This lack of concentration can lead to poor decision-making and an inability to respond swiftly to market developments.
- In some nations, restrictions limit conglomerates' capacity to own enterprises in many industries. These laws can limit a conglomerate's expansion potential and raise its running costs.
Examples
Example 1
Warren Buffet's Berkshire Hathaway is a conglomerate that engages in various areas, including insurance, energy, and consumer goods. Berkshire Hathaway owns firms such as GEICO, Duracell, and Dairy Queen.
Example 2
General Electric is a worldwide business involved in a variety of areas, including aviation, healthcare, and energy. GE Aviation, GE Healthcare, and GE Power are among its subsidiaries.
In Sentences
- Conglomerates are classified into several sorts based on their purpose and structure.
- Diversification, economies of scale, synergies, and access to financing are all advantages that conglomerates can provide.