Conglomerate diversification occurs when a company expands into a different area from its core business, often through a merger or purchase. It can increase profit potential and marketing power, but may lack corporate synergy and strain resources.
Conglomerate diversification occurs when a company extends its business into an area that is different from its core business. This often happens due to a merger or purchase of another company, or it can happen if the company simply wants to develop different products that are unrelated to the ones they already produce. In most cases, companies can benefit from conglomerate diversification due to the increased profit potential and increased business scope. On the other hand, a merged company may suffer if management is not adept at the new products or if the new company stretches itself 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 the business. In many cases, the companies involved will be in the same industry and might even be direct competitors, leading to what is called “concentric diversification.” By contrast, conglomerate diversification is the product of two companies that have little in common, presenting a unique set of advantages and disadvantages.
The main advantage of conglomerate diversification is that it opens up the parent 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 can do. With a new product, the company can tap into other markets and attract a new customer base that it might never have reached otherwise.
In addition to the additional profit potential, the company can also use conglomerate diversification to increase its marketing power. Branding capabilities, which allow management to spread a corporation’s name recognition as far as possible, are dramatically improved by the introduction of a new product at an established company. A merger with a company from a different geographic area can further increase a company’s reach and open up even more avenues for business.
With conglomerate diversification, one disadvantage is that there are few opportunities to produce corporate synergy, since the new entity and the old entity have little or no connection to each other. Additionally, problem areas could arise when the management team of the parent 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 puts too much energy into new aspects of its business can eat up some of the resources that made the initial business so strong.
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