Harvard Business Review: Why Conglomerates Thrive (Outside the U.S.)
1. What is a conglomerate? What is a subsidiary?
2. What is the difference between affiliate, associate, and subsidiary companies?
3. All three of these terms refer to the degree of ownership that a parent company holds in another company. In most cases, the terms affiliate and associate are used synonymously to describe a company whose parent only possesses a minority stake in the ownership of the company.
A subsidiary, on the other hand, is a company whose parent is a majority shareholder. Consequently, in a wholly owned subsidiary the parent company owns 100% of the subsidiary. For example, the Walt Disney Corporation owns about a 40% stake in the History Channel, an 80% stake in ESPN and a 100% interest in the Disney Channel. In this case, the History Channel is an affiliate company, ESPN is a subsidiary and the Disney Channel is a wholly owned subsidiary company.
4. What are conglomerates called in Latin America, China, Turkey and India?
5. In Korea, what is a Chaebol?
6. In Japan, what is a keiretsu?
7. What is the difference between a conglomerate and a keiretsu?
8. Are there any major conglomerates in Taiwan?
9. Is it a good business strategy for companies to pursue opportunities in unrelated industries? Why (not)?
10. Do you think social and cultural factors contribute to how a business culture structures their companies? For example, the US is more individualistic, so perhaps the Indian Business House model cannot work well in the US for cultural reasons?
11. Do family run multinational corporations in Korea and India, for example, have any advantages over US multinationals that are not run centrally by families? What are their disadvantages?
12. What are the advantages of a conglomerate? What are the disadvantages?
Advantages
Diversification results in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another division. For example, if Berkshire Hathaway's construction materials business has a good year, the profit might be offset by a bad year in its insurance business. This advantage is enhanced by the fact that the business cycle affects industries in different ways. Financial Conglomerates have very different compliance requirements from insurance or reinsurance solo entities or groups. There are very important opportunities that can be exploited, to increase shareholder value.
· A conglomerate creates an internal capital market if the external one is not developed enough. Through the internal market, different parts of conglomerate allocate capital more effectively.
· A conglomerate can show earnings growth, by acquiring companies whose shares are more discounted than its own. In fact, Teledyne, GE, and Berkshire Hathaway have delivered high earnings growth for a time.
Disadvantages
· The extra layers of management increase costs.
· Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerate's accounts make them harder for managers, investors and regulators to analyze, and makes it easier for management to hide things.
· Conglomerates can trade at a discount to the overall individual value of their businesses because investors can achieve diversification on their own simply by purchasing multiple stocks. The whole is often worth less than the sum of its parts.
· Culture clashes can destroy value.
· Inertia prevents development of innovation.
· Lack of focus, and inability to manage unrelated businesses equally well.
· Some cite the decreased cost of conglomerate stock (a phenomenon known as conglomerate discount) as evidential of these disadvantages, while other traders believe this tendency to be a market inefficiency, which undervalues the true strength of these stocks.
13. What is the meaning of the following quotation:
“Conglomerates may be regarded as dinosaurs in the developed world, but in emerging markets, diversified business groups continue to thrive.”
14. How well have conglomerates been performing in India and China?
15. Are conglomerates in the developing world performing better than standalone companies?
16. The article author notes that “Conglomerates were all the rage in the United States and Europe for decades, but hardly two dozen of them survive there today.” What does “all the rage” mean? Why do you think conglomerates became less popular in the US?
17. What is a multi-divisional company? Which two companies pioneered this business structure, and when?
18. Multidivisional company is a company that owns smaller companies that make use of its brand and name. The whole organisation is ultimately controlled by central management, but most decisions are left to autonomous divisions. The main company that owns the small divisions is known as the parent company.
19. In the U.S., the divisional structure was supposed to improve the parent company’s ability to deal with diversification. Did it do so?
20. What is meant by the following quotations?
A.
[T]he unbridled expansion of business groups challenges the conventional wisdom that they have succeeded in developing countries mostly because they’ve been able to compensate for institutional voids there and, in the process, catalyzed their own growth. Since the early 1990s, however, economic reforms in those nations have led to the creation of new institutions modeled along Anglo-American lines: Legal infrastructures and corporate governance requirements have been strengthened, and sophisticated market intermediaries have emerged. Although institutional voids have contracted, and markets have become relatively more efficient, business groups haven’t imploded, suggesting that making up for institutional inadequacies may not be their only raison d’être.
B.
Third, business groups in developing countries have grown mainly through diversification, even though U.S. investors believe that diversification destroys value. On Wall Street the typical conglomerate discount ranges from 6% to 12%. That makes the structural choices today rather stark: If a CEO can convince Wall Street that a new business relates to the current one, it can be accommodated in the form of a division. Otherwise, the CEO will be compelled to divest or let go of the opportunity, regardless of its promise, in order to retain the benefits of a focused enterprise. Not surprisingly, in recent times conglomerates such as Fortune Brands, ITT, McGraw-Hill, and Tyco have all broken up into more focused entities.
21. How do business groups in India “represent an alternative to this “divisionalize or divest” approach”? Do business groups manage a portfolio of enterprises better than multidivisional companies, according to the author?
22. What is the difference in how a Multidivisional Company (M Form) and a Business Group (G Form) is structured?
23. What does “federation” mean? Why is a Business Group described as a “federation” of companies?
24. Due to the different structure, what are the three critical areas in which business groups are better at operating diverse businesses than multidivisional companies?
25. Decision making. Incentive design. Resource allocation: How does a business group do these differently from multidivisional companies?
26. What is the example given of Tata’s Group Center Driving Cross-Business Innovation, and does the example provide evidence of the superiority of the business Group model in India versus the multidivisional model in the US?
27. Are the structures of conglomerates in Taiwan different from the structure in the US?
28. From 1997-2011, did Business Group Affiliates Outperform Other Enterprises in India?
29. In 1998, the Tata Group created a group executive office that would strengthen its relationship with its affiliates and review strategy issues. Also, the Aditya Birla Group, the Murugappa Group, and the Mahindra Group, created the formation of “group centers to explore synergies between businesses and forge strategic plans. The job of coordination in the business group has shifted to the group center, which acts as a centripetal counter to the forces of fragmentation.” What is meant by the bold?
30. Are Asian countries creating business structures that reflect their cultural context, and in many cases, will prove superior to the US business structures?