Why Conglomerates Thrives (Outside the

U.S)

A conglomerate is a large corporation or business entity that consists of multiple distinct and often
unrelated businesses, subsidiaries, or divisions operating under a single corporate umbrella. These
different businesses or subsidiaries may operate in various industries and sectors, and they are usually
united under the ownership and control of a single parent company. They are regarded as dinosaur in this
developing world.

Conglomerates are known for their diversification across different sectors and industries, which can
include manufacturing, finance, healthcare, technology, and more. The idea behind a conglomerate is to
spread risk and enhance financial stability by not relying solely on one industry or market.

Despite of the recent global economic slowdown, their sales rose rapidly during the past decade in China
India South Korea etcetera. On average, they set up a new company every 18 months more than half
time in a sector unrelated to their existing operation.

The passage highlights that business groups have thrived despite institutional changes, and their
effectiveness in managing diversified portfolios may be attributed to their structured approach and
formal management layers, which set them apart from the traditional divisional structure found in
Western multidivisional companies. Challenges of the Multidivisional Company, Effectiveness of Business
Groups, Evolution of Business Groups, Longevity and Diversification, Effectiveness of Business Groups in
Managing Portfolios etc. The traditional multidivisional company structure has faced challenges due to
issues such as excessive layers of senior executives, opaque accounting, and the struggle of headquarters
to manage diverse businesses effectively. In contrast, business groups, especially in developing countries,
have shown growth despite the contraction of institutional voids and the emergence of efficient markets.
Unlike the belief on Wall Street that diversification destroys value, business groups in developing
countries have grown through diversification. Instead of adopting the "divisionalize or divest" approach
followed by many conglomerates, business groups have managed diverse portfolios effectively by
creating a formal management layer called the group center. This approach, observed particularly in
India, involves leaders establishing a structured management layer, distinct from family and associates,
to oversee companies within the group. This organizational strategy has enabled smart business groups
to identify and capitalize on opportunities while preserving their identity and values, making them a
viable alternative to traditional multidivisional structures.

Business groups differ from multidivisional organizations in two keyways:

1. Legal Independence: Business groups consist of multiple companies or affiliates that are legally
independent entities. This structure is often referred to as a "federation" of companies, as seen
in the Tata Group, which comprises numerous listed and unlisted entities, each with its own
divisions.
2. Ownership and Management Involvement: In business groups, there is a high level of
involvement between ownership and management. Core owners, who may hold significant
equity interests in affiliate companies, actively oversee them, often taking on roles such as CEOs,
functional heads, or board members.

These distinctive features enable business groups to better address challenges associated with
operating diverse businesses in three critical areas:

1. Decision Making: In multidivisional organizations, corporate headquarters often poses

significant control over divisional management, which can hinder value creation. In contrast,
the separate boards of directors and distinct fiduciary responsibilities in business groups
allow affiliates' top management greater autonomy in decision-making.
2. Incentive Design: Multidivisional organizations face challenges in designing incentives based
on the performance of each business due to limitations in variation and the creation of
separate performance measures.
3. Resource allocation: In a multidivisional structure, business divisions allocate capital more
efficiently due to their access to better information, but they often have limited control over
surplus cash, which typically flows to headquarters. This centralized system can lead to
issues like supply-and-demand mismatches, bureaucratic delays, and favoritism. Business
groups, on the other hand, allow each affiliate to retain the capital it raises and the cash it
generates. This decentralized approach mitigates problems associated with centralization
and allows affiliates to raise capital directly from financial markets, ensuring better
valuations.

The group center adds value by providing strategic guidance, promoting innovation, and
maintaining a cohesive group identity. It plays a crucial role in encouraging affiliates to think
beyond their current capabilities and safeguards the group's core values and purpose.
It adds value by guiding activities along two key dimensions: strategy and identity.
In strategic ways it helps with Sensing Distant Opportunities, Pursuing Stretch Opportunities,
Shepherding Cross-Business Opportunities. Its identity work includes managing different
identities, safeguarding values etc.