Conglomerate Diversification – Definition, Steps and Advantages

Conglomerate diversification is a diversification strategy that can take many forms, but all involve the acquisition or launch of new businesses that are not related to the company’s existing products or services.

So, when an organization expands into unrelated sectors, it is said to have conglomerate diversification. The primary aim of conglomerate diversification is to improve the acquirer’s profitability.

What is Conglomerate Diversification?

Conglomerate diversification is a form of business expansion where a company expands into an unrelated industry. It can be achieved in a number of ways, including through mergers and acquisitions (M&A), joint ventures, or by launching new products or services.

By diversifying into new markets and sectors, companies can reduce their reliance on any one particular market or product line, which can help to insulate them from shocks and downturns in any one specific industry. Additionally, by expanding into new areas, companies can tap into new growth opportunities and achieve economies of scale.

Understanding Conglomerate Diversification Strategy

Conglomerate diversification is used by corporate strategists to expand a company’s operations into new areas or industries by taking the business risk of starting separate companies from a parent company and doing fund expansion to optimize company profitability.

It is done through acquiring new businesses, investing in new products or services, or entering new markets. Its goal is achieving higher profitability by taking an existing business to a new market associated with a totally different industry. Companies diversify to safeguard themselves from the industry downturn.

Most conglomerate diversifications let companies grow and expand their operations, but it also comes with some risks. Businesses that pursue this strategy need to be aware of the potential risks and make sure that they have the resources and capabilities to succeed in new areas.

Why Choose Conglomerate Diversification?

It is a desirable corporate strategy because it diversifies corporate financial resources to enjoy substantial capital gains. Some of the common reasons why companies choose conglomerate diversification as their growth strategy are-

1. To reduce reliance on any one particular market or product line

Conglomerate diversification can help companies to become less reliant on any one particular market or product line. This can insulate them from shocks and downturns in any one specific industry.

2. To tap into new growth opportunities

Conglomerate diversification can also help companies to tap into new growth opportunities. By expanding into new markets and sectors, companies can gain access to new customers and generate new sources of revenue.

3. To achieve economies of scale

Another reason why companies choose conglomerate diversification is to achieve economies of scale. By expanding their operations, companies can benefit from economies of scope and scale, which can lead to cost savings and increased profitability.

Conglomerate vs Horizontal vs Vertical vs Concentric Diversification

For diversification of a company, its strategic management might go through four types of diversifications

1. Horizontal diversification

Horizontal diversification occurs when your firm adds goods or services that are unrelated to what it currently offers, but may satisfy some of its current customers.

2. Concentric diversification

A concentric diversification strategy lets your firm adds new goods or services that are technologically related to what it currently offers, but may appeal to new customer groups as well.

3. Conglomerate diversification

Conglomerate diversification occurs when your firm acquires or creates new businesses that are unrelated to what it currently offers.

4. Vertical diversification

Vertical diversification occurs when your firm adds goods or services that are related to what it currently offers, but at a different point in the production process.

Steps to make a Conglomerate Diversification Strategy

1. The first step is to conduct a market analysis in order to identify new markets and sectors that offer growth potential. This will help you to understand the opportunity that Conglomerate diversification presents.
2. The second step is to assess your company’s capabilities and resources. This will help you to identify which areas of Conglomerate diversification are within your company’s reach.
3. The third step is to develop a plan for Conglomerate diversification. This should include an analysis of the risks and rewards associated with Conglomerate diversification.
4. The fourth step is to implement your Conglomerate diversification strategy. This will involve putting in place the necessary resources and processes to support your expansion into new markets and sectors.
5. The fifth step is to monitor and review your Conglomerate diversification strategy on an ongoing basis. This will help you to make sure that your strategy is on track and identify any areas where adjustments may be needed.

Advantages of Conglomerate Diversification

1. Conglomerate diversification can help companies to become less reliant on any one particular market or product line. This can insulate them from shocks and downturns in any one specific industry.
2. Conglomerate diversification can also help companies to tap into new growth opportunities. By expanding into new markets and sectors, companies can gain access to new customers and generate new sources of revenue.
3. Another reason why companies choose conglomerate diversification is to achieve economies of scale. By expanding their operations, companies can benefit from economies of scope and scale, which can lead to cost savings and increased profitability.

Disadvantages of Conglomerate Diversification

1. Conglomerate diversification can be a risky strategy as it involves investing in new businesses that are unrelated to your existing operations.
2. Conglomerate diversification can also be a costly strategy, as it requires a significant investment of resources and capital.
3. There is also the risk that Conglomerate diversification may lead to a loss of focus on your core business. This can result in your company losing its competitive advantage and market share.

What are the Risks of Conglomerate Diversification?

There are a number of risks associated with conglomerat diversification, including

1. The risk of over-diversification

One of the risks of conglomerate diversification is that companies can spread themselves too thin and become over-diversified. This can lead to companies losing focus on their core business and becoming less efficient.

2. The risk of poor integration

Another risk of conglomerate diversification is that companies can struggle to integrate their new businesses properly. This can lead to problems such as duplication of resources, conflict between different business units, and a loss of focus on the company’s core competencies.

3. The risk of management distraction

Conglomerate diversification can also lead to management distraction. When managers are focused on running new businesses, they can lose sight of the company’s overall strategy and objectives. This can have a negative impact on the company’s performance.

How to Manage Conglomerate Diversification Risks?

There are a number of ways in which companies can manage conglomerate diversification, including

1. Defining clear objectives

One of the most important things that companies need to do when undertaking conglomerate diversification is to define clear objectives. Without clear objectives, it can be very difficult for companies to measure their success or failure.

2. Conducting due diligence

Another important thing that companies need to do when undertaking conglomerate diversification is to conduct due diligence. This involves carefully researching and evaluating potential new businesses before making any decisions.

3. Focusing on the core business

One of the most important things that companies need to do when undertaking conglomerate diversification is to focus on their core business. This means ensuring that the company’s core competencies are not neglected in favor of new businesses.

4. Hiring experienced managers

Another important thing that companies need to do when undertaking conglomerate diversification is to hire experienced managers. This ensures that new businesses are properly managed and integrated into the company.

5. Monitoring performance

One of the most important things that companies need to do when undertaking conglomerate diversification is to monitor performance closely. This allows companies to identify problems early and take corrective action if necessary.

Examples of Successful Conglomerate Diversification

Some of the examples of successful conglomerate diversification by big brands around the world and their strategies are

1. GE

One of the most successful conglomerate diversification examples is that of GE. GE is a Conglomerate headquartered in the United States. The company has operations in various sectors such as Healthcare, aviation, transportation, and power. GE has been successful in Conglomerate diversification by making strategic acquisitions in different sectors.

2. 3M

Another example of a Conglomerate that has been successful in Conglomerate diversification is 3M. 3M is a Conglomerate headquartered in the United States. The company has operations in various sectors such as healthcare, manufacturing, and consumer goods. 3M has been successful in Conglomerate diversification by carefully selecting businesses that complement its core competencies.

3. Samsung

Another Conglomerate that has been successful in Conglomerate diversification is Samsung. Samsung is a Conglomerate headquartered in South Korea. The company has operations in various sectors such as consumer electronics, semiconductors, and telecommunications. Samsung has been successful in Conglomerate diversification by making strategic investments in different businesses.

4. IBM

Another Conglomerate that has been successful in Conglomerate diversification is IBM. IBM is a Conglomerate headquartered in the United States. The company has operations in various sectors such as software, hardware, and services. IBM has been successful in Conglomerate diversification by carefully choosing businesses that complement its core competencies.

5. Siemens

Another Conglomerate that has been successful in Conglomerate diversification is Siemens. Siemens is a conglomerate headquartered in Germany. The company has operations in various sectors such as healthcare, energy, and transportation. Siemens has been successful in Conglomerate diversification by making strategic investments in different businesses.

Conglomerate Diversification Strategies

There are various Conglomerate diversification strategies that companies can use to achieve success. Some of these Conglomerate diversification strategies are-

1. Conglomerate Mergers and Acquisitions

Conglomerate mergers and acquisitions involve the merger or acquisition of two or more companies by a Conglomerate. This Conglomerate diversification strategy can be used for acquiring particularly attractive acquisition targets.

2. Joint Ventures

Joint ventures involve the formation of a partnership between two or more companies. This Conglomerate diversification strategy can be used to quickly expand the operations of a Conglomerate.

3. Greenfield Investments

Greenfield investments involve Conglomerate using investment capital for investing in a new business. This Conglomerate diversification strategy can be used to quickly expand the operations of a Conglomerate.

4. Strategic Alliances

Strategic alliances involve the Conglomerate forming a partnership with another company. This Conglomerate diversification strategy can be used to quickly expand the operations of a Conglomerate.

5. Portfolio Management

Portfolio management involves Conglomerate managing its investment portfolio. Managing broad diversification strategy this way can be used to reduce risk and achieve success.

Key Factors to Consider

There are various factors that companies need to consider when undertaking Conglomerate diversification. Some of these factors are-

1. The Conglomerate’s Core Competencies

The Conglomerate’s core competencies are the skills and capabilities that give the Conglomerate a competitive advantage. Conglomerates need to carefully consider their core competencies when undertaking Conglomerate diversification.

2. The Conglomerate’s Resources

The Conglomerate’s resources are the financial and human resources that the Conglomerate has available. Conglomerates need to carefully consider their resources when undertaking Conglomerate diversification.

3. The Target Market

The target market is the group of customers that the Conglomerate is trying to reach. Conglomerates need to carefully consider their target market when undertaking Conglomerate diversification.

4. The Competitive Environment

The competitive environment is the level of competition that the Conglomerate faces from other companies. Conglomerates need to carefully consider the competitive environment when undertaking Conglomerate diversification.

5. The Economic Environment

The economic environment is the condition of the economy. Conglomerates need to carefully consider the economic environment when undertaking Conglomerate diversification.

Conclusion!

In conclusion, conglomerate diversification is the practice of a conglomerate extending its operations into new and different fields. Conglomerates can use Conglomerate diversification to quickly expand their operations.

Conglomerates need to carefully consider their core competencies, resources, target market, competitive environment, and the economic environment when undertaking Conglomerate diversification.

How effective do you consider Conglomerate diversification strategies are in achieving success? What other factors do you think Conglomerates need to consider when undertaking Conglomerate diversification? Let us know your thoughts in the comments below!