Advantages and Disadvantages of Conglomerates

Introduction

The first conglomerates in the modern era came into being in the late nineteenth century in the US. The main conglomerates were in the steel, oil, shipping, and railroad sectors. This business model has several advantages and disadvantages.

The first advantage of a conglomerate is that it develops unique advantages that competitors cannot replicate (Rosset 2012). Conglomerates bring together businesses in diverse industries under one management. This usually leads to greater specialization among the business units, which in turn creates unique competitive advantages. Upstream business units can benefit from the output of downstream business units in ways that reduce production costs, and increase the efficiency of production.

Secondly, conglomerates have easier access to capital markets. The size of conglomerates makes them attractive to investors because of their perceived stability. Furthermore, the conglomerates have various business units that can raise capital for expansion on their own. In this regard, the conglomerate can raise capital either as a single business or through any of its business units.

The third advantage of the conglomerate model is the ease of maximizing returns. As a conglomerate, it is possible to influence how an entire industry operates based on the advantages gained by horizontal and vertical acquisitions. This increases the opportunities available for maximizing profits.

The fourth business advantage achieved by conglomerates is that they have a better risk portfolio. A conglomerate has business units based in several industries. This reduces the impacts of shocks that hit some sectors of the economy. For instance, during the economic crisis, conglomerates with interests in several sectors fared better than companies that had investments in the real estate sector only.

The main disadvantages of the conglomerate model are as follows. First, conglomerates tend to have mixed results from their various business units. This leads to an overall reduction in earnings. The returns from high performing business units within the conglomerate compensates for the low performing ones. Secondly, the conglomerate management model can lead to the collapse of some of its business units. The managers of business conglomerates try to create stable environments for all the business units under their control. One way of doing this is by to speeding up or slowing down the growth of the business units to maintain a desired pace of growth for the organization. This can cause stress in the business units, leading to eventual collapse.

Madonna’s Commercial Success

Madonna’s success in the music industry stems from three sources. First, Madonna understands her market very well. Secondly, she knows how to exploit her competitive strengths. Thirdly, she has the ability to adapt to changing market conditions.

Madonna’s grip on the music market arises from her clear understanding of her fan base. She has kept its attention and has continued to meet its demands. She has kept in touch with their demands over time (Johnson 2011). As music genres came and went, she managed to keep ahead of the curve.

The second reason for Madonna’s success is her ability to use her competitive strengths to grow her brand. She first focussed on getting a portion of the music market. Thereafter, she focussed on expanding her market share while retaining her traditional market. She has branded herself so many times to suit prevailing market needs (Johnson 2011). She has always retained her traditional fan base while increasing her market share.

Thirdly, Madonna has the ability to adapt. She knew when to switch genres in order to appeal to the changing tastes of her fan base, as well as when to rebrand to fit into new roles. She has the “ability to sustain her reign as the queen of pop” (Johnson 2011, p. 226).

The Ansoff model provides insights into some of the things Madonna can do to remain successful. At this point, she needs to concentrate on attracting a youthful global audience since her primary fan base is shrinking in size due to natural attrition (Ferrell & Hartline 2008). The two main suggestions for Madonna gleaned from the Ansoff model are as follows.

First, Madonna needs to think about how to please the growing number of young music lovers across the globe. The largest market in the world right now consists of people aged between fifteen and thirty-five (Walker 2004). This demographic is in the emerging economies such as India, Brazil, Russia, and China (Ab Hamid 2008). Madonna must find ways of appealing to this audience in addition to her traditional western market.

Secondly, Madonna must start creating new products for this market by attracting a “new audience” (Johnson 2011, p. 226). The collaborative project with Kanye West and Justin Timberlake in her latest album is a step in this direction. She needs to work closely with musicians who appeal to the target group (Dalic 2007).

Honda Case Study

The main features of a deliberate strategy include clear-cut objectives, action plans, and a budget (Daughtry & Casselman 2009). If these four elements are present in Honda’s market entry strategy, then it had a deliberate strategy. When two Honda executives went to the US in “late 1958” to study the market, their goal was to understand how the US motorcycle market works (Pascale 1984, p. 1). After their stay, they left with a reasonable understanding of the motorcycle industry. They decided to aim for ten percent of the motorcycle import market within a year. This shows that they had a clear objective. The two executives chose to start their work in Los Angeles, where there was a “large second and third generation Japanese community, a climate suitable for motorcycle use, and a growing market” (Pascale 1984, p. 2). They also made decisions regarding where to locate their warehouse and the type of motorcycles to stock. This shows that they had an action plan. The two executives had a clear budget. Their funding did not meet their projected needs, but they worked with it. They managed to start the Honda operation in the US with two hundred and fifty thousand dollars. This proves that they had a budget.

On the other hand, the defining characteristics of an emergent strategy include logical incrementalism, political processes, prior decisions, and the product of organisational systems (Johnson, Scholes & Whittington 2011). When Honda decided to get into the US, the company had almost no knowledge of the motorcycle market. The executives relied on their observations and experiences to understand the US motorcycle market (Pascale 1984). Most of the decisions taken towards the establishment the Honda operation in the US took place as they went along. This shows that incrementalism was at play. Secondly, political processes influenced the establishment of the US operation. They include the financial controls instituted by the Japanese government that restrained the activities of the company, and the goodwill given to the US operation by the Honda CEO. The third criterion for determining if there was a deliberate strategy is whether prior decisions influenced the activities of the company. Prior decisions guided the activities of the executives in the country, and guided Honda’s initial activities in the US. Organisational systems played a major role in solving problems encountered in the new territory. These systems were also necessary for availing inventory.

The analysis above supports the conclusion that both strategies existed. However, the interviews with the executives show that a deliberate strategy was not formalised. The planning process lacked the usual rigidity associated with strategic planning frameworks. Therefore, the superseding strategy in the establishment of Honda in the US was the emergent strategy. Often, both types of strategies exist together in a dynamic relationship (Grant 2005).

Strategic and Transcendent Leadership Models

The five elements of strategic leadership include developing and communicating the organisations’ purpose, sustaining competitive advantage over time, managing human resources, & organisational decisions, defining and delivering value to stakeholders, and setting ethical standards (Lynch 2009). On the other hand, transcendent leadership includes the leadership of self, leadership of others and leadership of organisations (Crossan, Vera & Nanjad 2008).

The similarities between the two models are as follows. First, both models try to provide an overview of strategic leadership. In this sense, the models provide inclusive descriptions of all the key components of organisational leadership. Secondly, both models stress the leadership demands for both human and non-human elements of an organisation. In this regard, the two models give space to leaders and recommend the appropriate structures and relationships necessary for the effective running of organisations. Thirdly, both models see the leader as the anchor of effective strategic leadership. The models recognise that the leader is a central part of any organisation (Bell & Smith 2010).

The main differences between the two models are as follows. Transcendent leadership is easier to conceptualise compared to Lynch’s model. This arises from its simplicity and the clear demarcation of its constituent elements. Secondly, Lynch’s model does not separate the human elements from the non-human elements in an organisation. It mixes up the human and non-human elements of the organisation. Thirdly, transcendent leadership promotes a relational approach to strategic leadership. On the other hand, Lynch’s model promotes a functional approach to strategic leadership. The two models cover the same ground, but they differ in their areas of emphasis.

Options Theory

The basic premise of the options theory is that the modern business environment is too unpredictable (Grant & Jordan 2012). Therefore, a business should develop options in its current business environment because there is no reliable way of predicting the future (Ferrell & Hartline 2008). One of the notable deductions from this theory is that the only competitive advantage that matters in the long term is the ability to generate new competitive advantages.

The main reasons why this theory is more relevant today than in the sixties are as follows. First, the pace of change of the current business environment is faster than the rate of change in the sixties. According to Moore’s law, computing power doubles every eighteen months (Larkley & Maynhard 2008). For some businesses, this means that they have to double their capacity every eighteen months just to remain relevant. A fitting example is the rate of change of data storage devices. In the eighties, 2.4 MB floppy disks were the state of the art data storage mediums. Currently, thumb drives of up to 20 GB, and external hard drives rated in TB are readily available to consumers.

Secondly, consumer preferences are changing too quickly. This gives producers no time to adapt to meet emerging demands and to beat competitors (Harvard Business School 2005). Facebook acquired Instagram in 2013 followed by WhatsApp in 2014. These two companies offered services that Facebook had the capacity to develop, but it was simply out of time. When Google entered the social media scene via Google+, Facebook was already the market leader in social media (Cruz & Mendelsohn 2010). Despite Google’s abilities to match and even surpass Facebook’s technical capabilities, the market had already responded in Facebook’s favour. Google was late. The point here is that businesses do not have the time to build new products from scratch to respond to an emerging need. The current market conditions require companies to predict what users will demand, and to make it available (Guttal 2007). If the prediction is right, then the company stands to reap the benefits.

These two trends were not present in the sixties. Companies took time to develop products, and rivals could develop new products and catch up with the market leader. When Apple Inc. first produced its computers, IBM was a market leader in the manufacture and sale of technology equipment. IBM had failed to study the market well. Therefore, it missed the opportunity of becoming the first company to develop the personal computer. This did not stop IBM from becoming a major computer manufacturer. The company leveraged on its strategic advantages and went ahead to produce its own computers. Today, it would be very difficult to achieve the same feat.

In addition, the consumer culture in the sixties was not as rabid as the current one. In today’s market, consumers constantly search for the latest products (Volberda et al. 2012). This insatiable demand keeps manufacturers under pressure to produce new products.

Interview Response on Strategy

The strategy module has been very instrumental in shaping my views on business strategy. I have developed a clear understanding of the importance of strategy to an organisation. Before I went through this strategy module, I had a narrow view of strategy. I was more conversant with the traditional models of strategic planning that usually resulted in rigid plans that could only function in stable environments (Verweire & Berghe 2004). I now know that every business has strategic options that can fit into any environment, no matter how unstable (Wilson et al. 2011).

Secondly, the module gave me the opportunity to think about myself as a strategic leader. In the process of the course, I became aware of my weaknesses in regards to strategic thinking. For instance, in the initial phases of this module, I was very self-conscious in regards to my people skills to the extent that I sometimes failed to deliver on targets just to avoid conflict. I now see that when it comes to the delivery of value to stakeholders, I must think either as a team leader or as a team member (Kaplan & Norton 1996).

Finally, I have developed the skills needed to develop strategy at any business level. Through the module, I learnt about alternative strategy development processes and the elements of a good strategy. I believe this has prepared me to work as a business strategist at any level in the organisation.

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