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Have you seen a fruit seller start selling daily consumables and dairy products? This is a perfect example of a business diversifying into other fields. If a large organization ventures into a new line of business, it can be called conglomerate diversification.
There’s a lot of research involved in adding a new line of business.
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Conglomerate Diversification Meaning
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Conglomerate Diversification Example
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Conglomerate Diversification Strategy
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Advantages And Disadvantages Of Conglomerate Diversification
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Disadvantages of conglomerate diversification
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Growth: The Ultimate Aim of an Organization
Conglomerate Diversification Meaning
When an organization diversifies into sectors that are unrelated to its existing line of business, it’s known as conglomerate diversification. The fundamental goal of conglomerate diversification is to increase the acquiring organization’s profitability.
With conglomerate diversification, organizations often aim to achieve marketing or production synergy.
A prominent reason for diversifying into a new line of business is limited opportunities in the existing line of business. Further, finding an appealing investment opportunity necessitates an organization’s consideration of different types of businesses.
Conglomerate Diversification Example
There are many conglomerate diversification examples, which make it easy to understand the conglomerate diversification meaning. Some of the best examples include:
ITC, a tobacco-to-hotels conglomerate, is one of the few organizations that successfully diversified far beyond its main sector. The organization, which began as a tobacco product producer, has now grown into hotels, paper and packaging, as well as agribusiness and food.
Ola, the ride-hailing platform, has successfully ventured into electric scooters with its Ola Electric brand.
Another conglomerate diversification example is Reliance Industries. The organization’s business portfolio has grown significantly beyond its textiles and petrochemicals roots.
Conglomerate Diversification Strategy
Organizations may also seek a conglomerate diversification strategy to boost their growth rate. Increased revenue may make an organization more appealing to investors. The influence and reputation of the organization’s management may rise as a result of its growth.
Conglomerate growth can be beneficial if the new area offers more prospects for expansion than the present line of business.
As part of conglomerate diversification strategy, it’s not necessary for an organization to deploy its own resources and team and start a new line of business; the organization can also take the acquisition route to diversify.
The rationale behind most conglomerate diversifications is that expanding into unrelated areas has great potential.
Typically, corporate strategists look for organizations that meet certain characteristics, such as:
- Whether or not the organization will be able to reach its profit and return on investment targets
- Whether the new organization would require significant cash injections to replace fixed assets, fund expansion and provide working capital
- Whether or not the organization is in a growth-oriented industry
- Whether the organization is large enough to make a meaningful contribution to the parent organization’s bottom line
- The possibility of labor disputes or unfavorable government rules relating to product safety or the environment
- Recession, inflation, high-interest rates and policy shifts, which are all threats to an industry
For this, we must also look at the categories of business, as discussed below.
Three categories of businesses are especially appealing as acquisition targets. These are:
- Organizations with undervalued assets
- Organizations that are in financial trouble
- Organizations with promising development possibilities but a lack of funds to invest
Now, let’s move on to the next section of this blog.
Advantages And Disadvantages Of Conglomerate Diversification
There are different scenarios attached to conglomerate diversification. For some businesses, a conglomerate diversification strategy works the best, while for others, the strategy may not achieve the desired results.
Here are some advantages of conglomerate diversification:
- People’s spending patterns alter as the economy changes. Diversifying into many industries or product lines may help an organization maintain a sense of equilibrium during these ups and downs
- Within a single investment, there will always be negative shocks. A conglomerate diversification strategy can help balance such unexpected outcomes
- It aids in the optimum utilization of potentially underutilized resources
- Due to economic circumstances, certain industries may experience a period of decline. Conglomerate diversification allows people to move away from diminishing activities
The above were some of the advantages of conglomerate diversification.
Disadvantages of conglomerate diversification
The rise in administrative challenges involved with maintaining unrelated businesses is perhaps the biggest downside of a conglomerate diversification strategy. Managers from various departments may come from different backgrounds and, therefore, be unable to collaborate effectively.
Because of the competition for resources among strategic business units, resources may be diverted from one division to another. A move like this could lead to rivalry and administrative issues between the groups.
Other disadvantages include:
- Profit maximization will be enjoyed by entities that are totally involved in profit-making areas. A diverse organization, on the other hand, will lose out due to its limited investment in a single segment. As a result, an entity’s expansion options are limited
- Diversifying into a new market segment will necessitate the acquisition of new skills. An entity’s lack of knowledge in a new field can be a hindrance
- An organization’s diversification into different fields at the same time may lead to mismanagement. In this circumstance, due to a lack of resources and attention, the organization’s existing sectors can suffer, thereby hampering the new line of business as well
- Due to lengthy review durations and intricate reporting systems, decision-making may become slower
These were the pros and cons of conglomerate diversification, along with an overview of the concept for those interested in learning about it.
Growth: The Ultimate Aim of an Organization
Diversification is one of the strategies that facilitate growth for an organization. Many managers often get confused while advising senior leadership on conglomerate diversification.
Harappa’s Select a Strategy pathway will train you to think long-term and think sustainable. With approaches such as this one and many others, this pathway will enable you to focus on growth backed by sound strategic decisions. Explore Harappa’s pathways to success today.
