Discuss the shift away from the conglomerate form in the advanced industrial countries, and its persistence in most emerging markets performance?
- What is a conglomerate?
- From diversified to focus firms in industrial countries
- Persistence in most emerging markets
Western business strategies are often held as models for emerging countries. Despite General Electric being the largest worldwide conglomerate, such success stories have become rather rare nowadays in the United States and Europe, although this is not true in Japan for cultural and historical reasons. For this reason, the dismantling of most conglomerates from the developed countries is for many a path to follow in the emerging markets. This belief was reinforced by the financial crisis in Asia and Latin American as multi-lateral financial institutions and consultants pressed for a closer convergence between first and third-world business models, to improve efficiency and productivity. The inefficiency resulting from the family-controlled enterprise model is another arguments used by proponents of this convergence.
Due to the word limit, this paper only aims at presenting the differences between developing and developed countries which could explain why conglomerates have disappeared from the former and are still persistent in the latter. Firstly, the very notion of Conglomerate and its characteristics will be analysed with the support of the literature review. In a second part, the paper will analyse the shift away from the conglomerate form in the industrialised countries, studying the case of the ITT Corporation, a conglomerate that is now only a shell of its past glory. Finally, the paper will evaluate the reasons that maintain into existence in the developing countries, based on an analysis of the Tata group.
[...] A conglomerate has certain advantages and might be appropriate in some cases when it is necessary to fill in the institutional voids from the operating environment. Khanna and Palepu (1999) estimate that the institutional voids originate from five factors, namely product markets, capital markets, labour markets regulation, and contract enforcements. In an imperfect product market, buyers and sellers can suffer from inefficient markets due to underdeveloped communication infrastructure. Even if information is conveyed rapidly through modern telecommunication means, the power of the watchdogs might be too weak to control the veracity of the information conveyed and hence protect the consumers. [...]
[...] Four decades of management thinking', Academy of Management Executive, Vol Issue 3. Hubbard, R.G., Palia, D. (1999) Reexemination of the Conglomerate Merger Wave in the 1960s: an Internal Capital Markets View', The Journal of Finance, vol LIV, issue 3. Khanna, T., Palepu, K. (2000) Group Affiliation profitable in Emerging Markets? An Aanlysis of Diversified Indian Business Groups', The Journal of Finance, Vol LV., No2. Khanna, T., Palepu, K. (1999) Right Way to restructure Conglomerates in Emerging Markets', Harvard, Business Review Khanna, T., Palepu, K. (1997) Focused Strategies might be [...]
[...] Beyond its participation to the national industrial and economic development, the Tata conglomerate offers nowadays added value to its business units thanks to its size and power, but also because of the market imperfections and the five factors at the origin of institutional void. Khannu and Palepu (1997, p44; 2000, p869) identify that being a conglomerate offers many advantages in India today, an emerging market with many deficiencies in its infrastructures and systems. Although deregulation took place recently, regulators in India had for long place political goals over economic efficiency, distorting the functioning of markets with consequences still visible today. [...]