Conglomerate diversification occurs when a company stretches out its business into an area which is dissimilar to its core business. This often occurs due to a merger or buyout of another company, or it can occur if the company simply wants to develop different products that aren’t related to the ones they already produce. In most cases, companies can benefit from conglomerate diversification because of increased profit potential and expanded business reach. On the other hand, a merged company can suffer if management is not adept with the new products or if the new company gets stretched too thin.
It is very common in the business world for a struggling company to attract the attention of another company looking to make a significant investment to expand business. In many cases, the companies involved will be in the same industry and could possibly even be direct competitors, which leads to what’s called “concentric diversification.” By contrast, conglomerate diversification is the product of two companies that have little in common coming together, which presents a unique set of advantages and disadvantages.
The main advantage of conglomerate diversification is that it opens the core company to new opportunities. In certain cases, a company that focuses on a specific product in a specific market may hit a ceiling in terms of the business it is able to do. With a new product, the company can tap into other markets and attract a new customer base which otherwise it might never have been able to reach.
In addition to the extra potential for profits, the company can also use conglomerate diversification to boost its marketing power. Branding capabilities, which allow management to spread name recognition of a corporation as far as possible, improve drastically with the introduction of a new product to an established company. A merger with a company from a different geographical area can further increase the scope of a company and open up even more avenues for business.
With conglomerate diversification, one disadvantage is that there is little opportunity to produce corporate synergy, since the new entity and the old entity have little to no connection with each other. In addition, problem areas could surface when the management team of the core company tries to tackle the new business they have inherited, especially if they lack experience in this new area. Another concern is that a company that devotes too much energy to the new aspects of its business may devour some of the resources that made the initial business so strong.