Question

Q23: Your reader article (#5.1) discusses how, in addition to market concentration, firms can grow by another process, "conglomeration." Explain what this process refers to and its affects on competition.

Answer 1

Diversification of conglomerates happens when a company diversifies into fields unrelated to its present business line. Synergy may lead by applying leadership knowledge or economic resources, but the main aim of conglomerate diversification is to enhance the acquiring firm's profitability. There is little, if any, concern about attaining synergy with conglomerate diversification in marketing or manufacturing.

One of the most popular reasons to pursue a development strategy for a conglomerate is that there are restricted possibilities in the present business line of a company. Finding an appealing investment chance needs the company to consider options in other company kinds. The purchase of Miller Brewing by Philip Morris was a move by the conglomerate. The brewery's products, markets and manufacturing techniques were quite distinct from those needed for cigarette manufacturing.

Companies can also pursue a plan for conglomerate diversification as a way to increase the growth rate of the company. As mentioned previously, sales development can make the business more appealing to investors. Growth can also boost the managers of the firm's authority and prestige. The development of conglomerates can be efficient if the new region has higher growth possibilities than those in the current business line.

The combined performance of the individual units will probably not exceed the performance of the independently operating units without some form of strategic fit. Combined output may actually deteriorate due to checks imposed by the parent conglomerate on the individual units. Due to longer review periods and complex reporting systems, decision-making may become slower.