7.7 Specific Benefits of Conglomerate Integration

Question 1

What is conglomerate integration?

Answer 1

Firms combining that operate in unrelated markets.

Question 2

Benefits: Businesses can diversify their product range

Answer 2

Businesses can diversify their product range. Through conglomerate integration, new products can be added to a production line. As a consequence, a firm can boost their consumer base with a larger product offering whilst spreading risk over a larger output range profiting from risk bearing economies.

Question 3

Benefits: Profits can rise allowing for greater dynamic efficiency

Answer 3

As a business can now produce and sell a wider range of output, profits can rise allowing for greater dynamic efficiency. Such profit can then be reinvested back into the company in the form of technology advances, innovative new products and R&D. This is hugely beneficial for consumers who will receive brand new, better quality products over time - perhaps being able to purchase products that do not yet exist. Prices could be lower over time if technology advances reduces costs for businesses, which are then passed on to consumers. The choice available to consumers would increase too. Once more with higher profits being made, loss making goods can be cross subsidised benefitting consumers with this demand and the firm through retained brand loyalty.

Question 4

Con: There may be a lack of staff/management expertise to manage a conglomerate takeover

Answer 4

There may be a lack of staff/management expertise to manage a conglomerate takeover. This could easily occur given the lack of knowledge of a brand new industry area. Therefore such integration carries the risk of major disruption, inefficiency and a reduction in quality standards, reducing productivity, increasing costs and potentially reducing the size of a loyal consumer base.

Question 5

Con: Conglomerate intergration can result in excessive debt

Answer 5

Conglomerate integration can result in excessive debt. This is because the takeover can be overvalued if price negotiation was weak or the added benefit of the firm being acquired had been miscalculated given that it is in a different industry or simply the large cost of the merger/acquisition has been financed through borrowing. As a consequence the return from investment can be lower than expected impacting on share prices and future profitability. Furthermore if debts are paid off by cost cutting or implementing risky pricing decisions, consumer loyalty could be harmed creating lasting damage to profitability and reputation.