Conglomerate definitions, advantages, drawbacks, and examples.
Conglomeration is a concept that is woven into the fabric of the modern corporate landscape, yet it often remains invisible to consumers. Many of the world’s largest and most profitable corporations can be classified as conglomerates, based on their role as parent company to a collection of acquisitions and subsidiaries. At the same time, leading brands in nearly every industry are often just one piece of a much larger entity.
In this blog post, we define conglomerates and the conglomeration process, review some important conglomerate advantages and disadvantages, and provide some current examples that exemplify the purpose and impact of this strategy.
What is a conglomerate?
A conglomerate is a large company made up of several smaller businesses that are typically combined through mergers and acquisitions (M&A) or joint ventures. Each entity within the conglomerate operates independently while remaining financially tethered to the parent company.
Conglomeration has been a popular strategy in the business world for over 50 years, since it strategically combines the resources of the conglomerate companies to increase buying power and access to capital. Conglomeration also provides additional flexibility to help mitigate the risk of market shifts.
Key terms and definitions related to the conglomeration process include:
- Horizontal integration: When conglomerates acquire businesses within the same industry to increase market share.
- Vertical integration: When companies within the same industry, but at different stages of the supply chain, are combined to streamline manufacturing.
- Parent company: A corporation or business that owns or controls one or more other businesses, also known as the holding company.
- Spin-off: The process of turning conglomerate companies into newly formed standalone businesses.
- Subsidiary: A company that is either fully or partially controlled by a parent organization.
- Synergy: The concept of two or more organizations working together to create unique value.
The reasons for conglomeration
The conglomerate definition economics professionals established over half a century ago has evolved to encompass a broad range of modern organizations. While some conglomerates are formed when small businesses join forces to improve their market share, others are the result of a large parent company looking to expand into new markets. While each conglomerate has its own unique origin story, diversification is a common theme.
What is the main reason for a conglomerate to want diversification? Spreading assets across multiple entities is a tried-and-true strategy to reduce financial risk. For example, a conglomerate in the retail industry might own businesses offering discretionary products like jewelry and luxury handbags, along with subsidiaries providing more recession-proof household items like cleaning supplies and toothpaste.
Benefits of conglomeration
Diversification to mitigate risk is among the key conglomerate advantages, but there are many others. Conglomeration can provide a “best of both worlds” scenario by combining the financial prowess, stability, and global presence of a large company with the innovation, flexibility, and local connections of small businesses. Successful conglomerate examples reflect the blending of these traits. Additional benefits of conglomeration include:
Cross-promotion: Conglomerates with large portfolios can use the marketing resources and brand recognition of one subsidiary to benefit others. For example, a business might strategically place product offerings from one or more co-owned companies into a high-profile television commercial, while consumers remain unaware of the financial connection between the brands.
Conglomerate disadvantages
Parent companies strive to diversify their portfolios, but some naturally gravitate towards their areas of specialization and expertise, which is a potential issue with conglomeration. When the core business model is threatened by industry changes or global economic downturns, this can put the entire conglomerate at risk. At the same time, companies that counter this tendency by leaning into diversification might find their upper management and administrative teams stretched too thin.
The benefits of internal capital allocation can also become a double-edged sword, since conglomerates may sacrifice growth and reinvestment for stronger business units to keep poorly performing subsidiaries afloat. Cultural differences between businesses can also make it challenging to keep all entities united through a common set of high-level goals and objectives.
Berkshire Hathaway
Perhaps the best-known conglomerate example in North America, Berkshire Hathaway was primarily a textile manufacturing firm prior to being purchased by their largest shareholder (Warren Buffett) in 1965. Today, the parent company holds over 60 diverse companies as subsidiaries, including Geico, Dairy Queen, See’s Candies, and Ben Bridge Jewelers. The parent company is known for its consistently strong financial performance and growth. Buffett credits the success of his conglomerate companies to evidence-based investment and long-term thinking.
The Walt Disney Company
Despite being world famous for his indelible characters and storytelling, the conglomerate model was always a part of founder Walt Disney’s vision. The company originated as an animation studio (Walt Disney Productions) in the 1920s, but it wasn’t long before subsidiaries for television (Walt Disney Television), theme parks (Disneyland Inc.), and movies (Buena Vista Distribution) were formed.
This successful conglomeration model has continued for decades through the acquisition of companies such as Pixar, ESPN, ABC, Lucasfilm Ltd., and Marvel Entertainment. Disney has served as a classic conglomerate example by merging the talents and resources of disparate organizations while strategically adding businesses that enhance the overall synergy.
Danaher Corporation
As a multi-billion dollar conglomerate with more than 15 subsidiaries in the biotechnology, life sciences, and diagnostic industries, Danaher Corporation has integrated their holdings through a set of common practices known as the Danaher Business System. No two subsidiaries operate under the same quality, inventory control, or marketing umbrella, but a set of best-in-class root cause analysis, project management, and lean manufacturing practices have been instilled into each business entity to create a unified culture based on continuous improvement.
Conclusion
Conglomeration is an ongoing process that shuffles the deck of the corporate world, often creating synergies for businesses and their employees in unexpected ways. The joining of smaller entities, or the disassembly of large corporations into more nimble and manageable subsidiaries, helps conglomerate companies navigate uncertain financial times by emphasizing diversification and economies of scale. The historically strong financial performance of the world’s largest and best-known conglomerates provides further evidence that this beneficial business model is here to stay.