What is a conglomerate business? (Benefits, roles and types)

By Indeed Editorial Team

Updated 22 June 2022 | Published 3 January 2022

Updated 22 June 2022

Published 3 January 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Organisations can merge to operate in a single corporate structure for many reasons. One of the key reasons may be to reduce risk by diversifying investment portfolios and improving operations efficiency. Understanding conglomerate business can help you improve operating efficiency by reducing the operating capital of the merged firms. In this article, we define what is a conglomerate, outline the structure and benefits of a conglomerate, highlight the functions of a parent company in a merger and discuss the differences between a conglomerate and holding company and concentric diversification.

What is a conglomerate company?

The answer to 'What is a conglomerate?' is that is a single company that runs multiple smaller companies that conduct different businesses independently. Most conglomerates achieve this by controlling the majority stake in the smaller companies. The process through which a parent company creates subsidiaries is a conglomeration, and it may involve a lot of legal and financial procedures. Conglomerates usually have different objectives, such as diversifying business risks by engaging in different markets.

Mergers can benefit from reduced operational costs and improved efficiency. Some may choose to focus on a single industry, such as mining, while others are multi-industry. Conglomerates may have operations within the country or expand to include foreign subsidiaries. All subsidiaries usually are answerable to the parent company. An example of a general conglomerate is a single trademark that owns a food processing company, a building and construction firm, a hospital and a logistics agency. Another example is a media company that starts as a magazine publishing agency and slowly acquires television stations, book publishing companies and radio stations.

What is a conglomerate company organisational structure?

Conglomerates usually have a basic structure where a single parent company controls a group of subsidiaries. The parent company comprises higher-level employees, such as the group president, the board of governors, division managers, chief operations officer, marketing executives or the chief executive officers. It might be rare to find junior staff within the parent company, such as nurses or programmers. The smaller companies within the business conglomerate act independently, have their organisational structures, operate within their schedules and set independent goals. These smaller companies report back to the parent company.

Here's more information about subsidiaries:

Subsidiaries implement strategies to achieve competitive advantage

While the parent company might set the general objectives, the smaller companies expound on these goals and implement them. An example of this relationship is whereby the parent company explained above sets a goal for all subsidiaries to improve their sales by 5% within the financial year. This goal then transcends to the smaller companies whose task becomes to fulfil the goal. The smaller companies can then set goals dependent on their industry. For instance, a business conglomerate's food processing company may improve the efficiency of food processing to reduce costs and eliminate competition to increase their sales.

The conglomerate's construction firm subsidiary may offer competitive rates for contracts. The hospital may increase its ward capacity to increase sales. The parent company retains veto power to these goals. They maintain the authority to determine which course the subsidiaries can follow. Senior roles within the smaller company typically begin from a job description linked to the parent company. Most conglomerates usually place a representative of the parent company in the small organisation. Examples of a senior role may include a national brand liaison officer.

Related: Hierarchical structures: definition, how it works and examples

Benefits of merging to form a conglomerate company

The key benefits of conglomeration in business may include:

  • Reduces costs: The parent company can reduce costs by utilising fewer resources that the subsidiaries may share. This can make the smaller companies more efficient.

  • Increases investment opportunities: The companies owned by conglomerates can have a greater ability to scale and grow since they have access to more finances. This may lead to increased opportunities and salaries, new roles and better benefits for all members.

  • Reduces risks: There can be a reduced impact of financial risks when firms form a conglomerate because of diversification. Mergers can provide immunity during a recession and increase chances of survival.

  • Improves employee skills: Conglomerates can carry out employee training, which you can use to improve your skills and experience. Since conglomerates are large organisations, they may place you under a large talent pool that can mentor you to greater professional heights

  • Offers career growth opportunities: Conglomerates may offer great networking opportunities since they have large and diversified investment portfolios.

What's the role of a parent company in a parent-subsidiary relationship?

Tasks within a conglomerate can vary. Primary roles that may involve the parent company include planning and controlling policy, while the subsidiaries mainly implement. The following are some of the functions of each player in the parent-subsidiary relationship:

Offer strategy

The parent company can develop the strategy for growth, utilisation of resources and kick-starting change for their subsidiaries. It sets goals and objectives through planning, risk assessment and decision-making. The parent company also analyses the strengths and weaknesses of the whole organisation. The subsidiaries may perform similar roles, usually within the smaller company. Some strategies for the parent company may be diversification and conglomeration, while the smaller companies may implement cost leadership, cooperative strategy partnerships and social media engagement.

Related: What is strategic management and why is it important?

Make budgeting decisions

Conglomerates budget, account and report on their finances. The subsidiaries usually submit their budgets to the parent company for approval. The parent company may also use financial experts, auditors and accountants who coordinate the finances of the conglomerate members. Each subsidiary is directly responsible for managing daily expenses, paying taxes and distributing employee paychecks.

Manage HR

Conglomerates usually have a complex way of managing their HR functions. Some conglomerates opt to have a centralised HR department that handles all functions, such as staffing, performance management and fostering organisational culture. Other conglomerates may choose to leave the HR function to the individual subsidiaries.

Related: What is matrix management and how to implement it

Make policies

Within conglomerates, the parent company retains supremacy in the direction and control of the organisation by defining rules, policies, procedures and practices. The smaller organisations are left with identifying the roles within the organisation that decides and promotes accountability. An example is a manufacturing conglomerate that has a policy of using 100% clean energy. The smaller businesses may then determine how they can implement and promote the policy.

Related: The role of senior managers: duties, benefits and skills

Types of conglomerate companies

There are different conglomerates, including:

Basic conglomerate

A basic conglomerate is a business comprising multiple subsidiaries. The organisational policy may restrict the subsidiaries to operate within the country. Basic conglomerates can be multi-industry or single industry in nature.

Multi-national conglomerate

A multi-national conglomerate usually has a stake in companies across the national boundary. Individual subsidiaries are physically located both within the country and in foreign areas. Their workforce is also highly diverse, comprising employees of different nationalities, cultures and languages. An example is an oil mining company with subsidiaries in different continents and nations.

Multi-industry conglomerate

A multi-industry conglomerate has diversified its businesses and operations to include different industries that are not related. For example, a conglomerate may include pharmaceutical subsidiaries, software as a service (SaaS) firms and food processing companies. Conglomerates may have a single starting point and diversify as they progress and grow.

Conglomerate mergers

A merger is a conglomerate comprising two or more firms that may or may not have an equal share of the business. There are two types of conglomerate mergers. Mixed conglomerate mergers involve businesses with nothing in common, while pure conglomerate mergers include companies primarily pursuing product extensions or market extensions. For example, a leading footwear company may merge with a soft drink business to form a mixed merger. Their goal may be to counter a single business competitor from two fronts. A textile importing company may merge with a clothing brand to form a pure conglomerate.

What's the difference between a conglomerate and a holding company?

A holding company is a company that does not conduct any operations, active tasks or ventures for itself. Instead, it thrives by owning assets. The company does not directly engage in buying or selling any services and products. Conglomerates usually form holding companies to gain control over one or more companies. Unlike holding companies, conglomerates involve themselves in the operations and tasks of their subsidiaries directly. Conglomerates usually stand on their own, while holding companies share the voting stock and control of a company. Conglomerates can comprise holding companies, but vice versa is not possible.

Difference between concentric and conglomerate diversification

Firms can diversify their products using concentric or conglomerate diversification to avoid market saturation. In concentric diversification, the company goes into a new business closely related to the current business. The company may develop new products or services closely related to its existing core activities. In conglomerate diversification, the company may venture into completely unrelated companies or related businesses.

For example, a pizza restaurant owner selling pizza may decide to open a new juice outlet in an unfamiliar area of the city. This is concentric diversification since the owner remained within the same food processing business. If the owner opts to open a motorcycle repair shop or a recruitment firm, this is conglomerate diversification. Both methods of diversification can lead to the formation of a conglomerate.

Related:

  • Most common types of mergers explained (with examples)


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