Analysis of Conglomerate Firm Challenges in Emerging Economies

This report examines the challenges and opportunities faced by conglomerate firms in emerging market economies. It begins with an introduction to conglomerates, their roles, and the complexities they encounter, especially in countries like Malaysia. The report explores the competitive advantages of nations and the importance of conglomerates in economic development, while also addressing issues such as fund tunneling and talent management. It further analyzes how government intervention, privatization, and market dynamics influence conglomerate strategies. The study also delves into the competitive advantages gained through innovation and the need for firms to adapt to dynamic environments. The report discusses the evolution of conglomerates, their global presence, and the various forms they take in different regions, highlighting the strategies that enable them to thrive in competitive markets. The analysis provides insights into how conglomerate firms can achieve sustainable growth and competitive advantage.

Conglomerate
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Table of Contents
Chapter 1: Introduction..............................................................................................................3
The roles of the firms.............................................................................................................4
The complexities of firms- conglomerate prevail in emerging economies ..........................5
The competitive advantage of nation....................................................................................6
Conglomerate.............................................................................................................................7
What is Conglomerate?.........................................................................................................8
Conglomerate - worldwide ..................................................................................................9
Importance of Conglomerate...............................................................................................10
Challenges of Conglomerate...............................................................................................13
REFERENCES.........................................................................................................................16
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Chapter 1: Introduction
Title: “ Issues faced by conglomerate firms in the emerging economies of country”
Aim
The aim of the dissertation is to identify various challenges faced by the conglomerate
firms or organisation in order to survive in the emerging market economies of the country.
Objectives
 To identify various issues and challenges faced by conglomerate firms in
emerging market economy.
 To analyse the competitive situations faced by the conglomerate firms.
 To identify various importance of conglomerate firms towards nation
economy
 To recommend suggestions to eliminates the various challenges faced by
conglomerate organisation
A conglomerate deals with different markets and products by acquiring or merging with other
organisations or firms. One or prime organisation owns the major stake or controlling stake in
a number of smaller companies, which conduct business separately(Quigley, Evans and
Guthrie, 2012). Each conglomerate subsidiary business runs independently of the other
business divisions, but the subsidiaries' management reports to senior management of parent
company. The current research study is based on the issues faced by conglomerates firms
while conducting business activities (Liu and Ying, 2014). Conglomerates are thriving in
Malaysia and the rest of South-east Asia. This dissertation will cover the importance of
conglomerate organisation towards development of nation economies. Further, the issues and
challenges faced by the conglomerate companies due to various environmental condition of
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the nation (Decuyper, Dochy and Van den Bossche, 2010). The issues regarding fund
tunnelling, conglomerate discounts and talent management will be addressed in the research.
The ways in which the family and other stakeholders influence the conglomerates firms in the
emerging market and economies will be analysed in the dissertation (MK, 2014). Importance
of conglomerates will be discover that helps the reader to understand the benefits of
conglomerates organisations.. All these segments of investigation process will help in getting
appropriate solution of the research problem (Nawan and Intarakumnerd, 2017).
The roles of the firms
Conglomerate firms are the combination of two or more companies that merge with or
acquires entirely different market (Markovits, 2014). They combine together in order to
increase their profits and eliminates the competitions from the market. This will help them to
increase their market growth and market share. There are various roles played by
conglomerate firms in order to increase their efficiency and market goodwill (Sharma, 2010).
These roles describe the nature, purpose and objective of conglomerate organisation which
help them to safeguard their future success. All businesses have a flow to their productions.
The conglomerate firms assist in growth and development of nation economy in effective and
efficient way. The role of decision makers are played by the management of conglomerate
firms. The top management is empowers to make effective decision in multi divisional
organisations (Othman, 2017). In conglomerate firms, the parent company has the authority
to take critical decisions. Another role played by the conglomerate firms is to designing
incentives on the performance of each subsidiary. Each and every subsidiary of conglomerate
firms is provided with incentives both monetary and non monetary on the basis of their
performance (Hill and Cuthbertson, 2011). This increases the motivation in management of
subsidiaries and they work with more determination and dedication. Conglomerate firms
allocate resources in effective and efficient ways (Tapsell, 2014). As executive members in
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the organisation possess wider and broader knowledge they allocate business capital more
efficiently than external capital markets could.
The complexities of firms- conglomerate prevail in emerging economies
Conglomerates can help in providing optimum support and solution to overcome
frequent market failure in emerging economies. Advanced economies generally exhibit two
important characteristics: the economy is reasonably open with little state intervention and
the underlying factor markets are well developed. In emerging market, these two situations
are either absent or partly present (Ohnesorge, 2016). Government intervention is very
essential in order to growth and development of conglomerate firms. The effective
relationship between government and business organisations will increase the efficient of
conglomerates firm (Chandprapalert, 2015). For Example Malaysia's largest conglomerate
Renong Bernhard specialises in construction, engineering, property development, financial
services, telecommunication oil and gas. It implies that the organisation deals in various
department to increase its profits and gain the competitive advantage (Kao and Oh, 2015).
In 1989 under the leadership of Dr. Chan Chin Cheng, an entrepreneur with close ties to
Malaysian government, he was provided with certain rights to purchase the assets of ruling
party (Gyan and Gyan, 2017). Thus, with the intervention of government Renong was
transformed into one of the largest conglomerate organisation in the country. In emerging
economies privatisation plays a critical role (Tsokhas, 2014).
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Many big companies acquire small firms in order to increase their profits and revenue.
Malaysian organisation Sime Darby increased its business from plantation house to banking
and motor vehicle distributions (Agrawal and et.al., 2016). Conglomerates in emerging
market have sensed practicality and they need to reduce the pace of diversification to move
abreast with dynamic environments. Conglomerates need to focus on opportunities that will
help them to grow their business more efficiently. Conglomerates needs to establish their
business in efficient and effective way, that will increase their efficiency (Sidhu and Christie,
2014). In emerging economies these firms are required to capture markets in order to
eliminates the competitions.
The competitive advantage of nation
The development of any country depends upon the growth and production of industries
established and operating in the particular country. Due to constant increase in the
competitive pressure, organisations are focusing more on continuous improvements in their
products and services (Hassan and et.al., 2017). Any company can only gain competitive
advantage through continuous innovations. Innovations include frequent modification in
technologies and discovering new ways to conduct business activities. This will help the
organisation to increase their efficiency and market growth. Some innovations generate
competitive advantage by capturing an entirely new market opportunity or by serving market
segments that other companies have ignored (Miko and Kamardin, 2015). This will increase
the market opportunity and help the organisation to provide unique and quality goods and
services to the consumers. Innovation plays a critical role in improvement and development
of conglomerate organisation. With constant improvement, these firms will able to increase
their sales and customers attraction in effective and efficient way (Cao and Murdock, 2015).
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New technology will help the organisations to reduce the manual efforts and increase the
efficiency and quality of goods and services provided by them. Globalisation and
international organisation with the help of foreign direct investments help the existing and
internal organisation to develop their technologies and establish new ways for doing things.
With few exceptions, innovation is the result of unusual effort (Kantabutra and Avery, 2013).
Competitors will easily surpass those companies who are not able to implement new
strategies for improvement and innovations. This will impact on their sales, customer base
and will lead to financial crises. Thus, for conglomerate firms, it is very essential to develop
new and unique ideas that will aid in growth and development of organisation and also gain
the competitive advantage. To gain competitive advantage, conglomerate organisation needs
to focus on broader markets (De Haaff and Urban, 2013). This will help them to increase
their efficiency and reduces competitive situation in the market. In the emerging economy
and markets, conglomerate organisations faced various challenges regarding competition.
Continuous innovations in products and services will help them to gain the competitive
advantages. New strategies must be implemented in the organisation that help in efficient
growth and development (Sabran, 2014). It implies that it is very essential for the
conglomerates firm to gain competitive advantage for growth and development. It helps to
increase the customer base and reduces the risks of competititive firms.
Conglomerate
The Conglomerate formation is the natural progression of business growth and expansion, it
is formed by the merger and acquisition by one company to a few others as the results of the
management of the business corporation intend to diversify their businesses to improve
financial performance and gained financial advantages through a reorganisation of other
companies. (Britannica, 1997) McArthur et al. (1982) formulated the three stages of the
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corporate development model. In Stage 1, a firm is an independent unit with single product or
service. In Stage 2, the firm is functionally organised and integrated to expand the single
product into products family. In Stage 3, the firm is diversified and multi divisional business
entity. The progression of business growth and mature tend to move from Stage 1 through 2
and into 3.
What is Conglomerate?
There is no standard way to define conglomerates, as researchers look at this aspect from
different views. Generally, researchers’ linked conglomerate to diversification in industries,
products and markets. For instance, conglomerate is a firm that is a market- diversified firm
which operates in two or more separate products and or geographic market (Narver,1969); it
owns a number of companies in different industries (Turow (2009), and the ownership
involves unrelated diversification which is not related to their core business. (Andersen &
Gray, 2008). While researchers look at the conglomerates linked the family-owned, defined
Conglomerate is a group of companies under the influence of a prominent businessman or a
group of businessmen who are either founders or owners of these companies (Jilberto, and
Hogenboom, 2008, Kang, 1996). For this research aspect, we apply the definition as in the
first statement.
As the firm grown up from the seed to be the big tree, it needs more resources and space to
foothold the growth, therefore diversification is one of the ways for the firm to stay ahead.
Ansoff (1988) identified three kinds of diversification: horizontal, concentric, and
conglomerate, especially concentric diversification is the concept of middle ground between
adding related and unrelated activities.
The formation of Conglomerate was continuous of the American Industrial Evolution since
early 1900 and growth significantly became part of American Industrial Structure
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(Didrichsen, 1972). It became popular in US post-World War II era in the late 1950s and
1960s, the companies adopted conglomerate strategies to avoid antitrust legal actions while
acquiring more other businesses to maintain growth by expanding into different industries
and markets. (Encyclopaedia, 2003). Despite progressing well for decades, conglomerates in
the US and Europe were moved into bottlenecks in the 1980s and only small number
survived, eventually the businesses model and direction turned to focused enterprises were
more effective at creating shareholder values. Thus, more conglomerate split into smaller and
specialised entities. (Ramachandran et.al, 2013)
Conglomerate - worldwide
The ideologies of conglomerate started from the US, but it is no longer unique to the US.
Ramachandran et.al (2013) identified a different name for such ideology in different region
worldwide, namely qiye jituan (Group of Enterprise) in China, business houses in
India, Grupo económicos in Latin America, chaebol in South Korea, Keiretsu in Japan
and holdings in Turkey.
Even some researchers suggested that conglomerates were moving away from US and Europe
(Reingold, 1998, Ramachandran et.al 2013, Bhandari, 2013), However, for those leftovers
remained strong and progressing well. Forbes listed 36 conglomerates in 2017 Global 2000
for biggest public companies, 9 from US and 13 from Europe, that still hold the biggest
number. The rest were 9 from Asia, 4 from Latin America and 1 from Africa. Sime Darby
was the only conglomerate from Malaysia on the list.
Mckinsey (2013) found out that 35 largest conglomerates in China, India and South Korea
make 271 businesses entries between the year 2000 and 2010, able to expand their revenues
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between 10 to 20 percent a year in the said period. These conglomerates also played the roles
as revenues grow locomotive as they accounted for a large amount of percentage for largest
50 companies by revenues, ie: South Korea for 80 percent, India for about 90 percent and
China for about 40 percent. The common approaches for the business expansion were
through merger and acquisition, joint ventures and technology partnership.
Conglomerates in Malaysia and surrounding countries: - Thailand, Vietnam, Singapore,
Indonesia and the Philippines were doing well, Vestring, and Cigala, (2014) found that 49
conglomerates in the region delivered total shareholder returns in 18 percent higher than
those in developed markets between the year 2003 and 2012.
Melicher (1973) examined the performance of conglomerates as compare to traditional
businesses from the 1960s found that conglomerates in the US were not financially
performed outstanding from those non-conglomerates, the application of conglomerates
merely was "defensive diversification" or in other word is to reduce the risk of losses in
investments. Malicher's research also supported the argument by Weston and Mansinghka
(1971) that conglomerates achieved investment performance at an average level, thus they
were not better or worse off than non-conglomerates.
Importance of Conglomerate
The importance of conglomerate is that it helps the organisation in diversification. It reduces
the chances of loss and provides new and greater opportunities to business entity to expand
their business. When an organisation possesses excess cash and doesn't know where to invest,
conglomerates provide opportunities to extend their market share, which helps in growth and
development of organisations (Kamal and Annuar, 2013). Conglomerates helps in increasing
the customer base in effective and efficient ways. Providing unique and differentiated
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products at affordable price increases the attraction and retention of the customer in effective
and efficient way (Bhat, 2013Parnell, 2013). Conglomerates also help in improvement in
technology and provide benchmark that guaranteed the future success of the organisation.
Conglomerate firms aid in generating competitive advantage in the emerging economy or
market (Kantabutra, 2017). With the help of various strategies, conglomerate firms will able
to increase their capacity and efficiency. These organisation also contributes towards
development of national economy by conducting business activities nationally and
internationally. Conglomerate firms reduces the rate of unemployment by providing new
employment opportunities (Chelliah and Lee, 2016). With merger and aquisation of other
compnies eliminates the competition from the market, thus, provides better opportunites for
growth and development of conglomerate organisation.
The importance of conglomerate firms is due to their ability to create value to shareholders or
investors due to their operation across different markets, industries with different risk
profiles, business cycles and different competitors. These could benefit the companies as they
are able to minimise the risk better than individual investors due to ranges of asset classes it
holds (Zinkin, 2010).
Khanna & Palepu and Harvard University researchers (1999) found that the conglomerate
businesses added value in few ways which are as follows:
 First, by using the funds and management talents from the existing operations to
capture the new business opportunity.
 Second, a business group able to replace for labour markets through their own training
and development centre and program.
 Lastly, business groups able to develop a branding that stands for world class quality
and customer service.
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Zinkin (2010) findings also supported the claim by Khanna & Palepu that conglomerates
have the advantage over the talent management, they can hoard the talents and spreading
them across business in different markets like Singapore, Malaysia and Indonesia where the
skilled managers and directors are highly in demand, the management talents with proven
track records can help business to perform well. In another word, the workforce in
conglomerate has wider career paths if they are willing to move on.
Fund Tunnelling is the process of illegal practices done by the organisation in which the
majority shareholders direct company’s assets or future business to themselves for personal
gain (Goodman, 2017). Tunnelling occurs in many ways such as excessive executive
compensation, dilute share measures, assets sales and personal loan guarantees (François and
et.al., 2017). The conglomerate discounts are calculated by the adding assumptions from
intrinsic share values of each of the conglomerate subsidiary companies and subtracting the
market capitalisation from the estimations. The value of discount may range from 12-16% in
the developed economies.
Malaysia’s Berjaya group is a good example for values created by a conglomerate, the
company is the major player in the solid waste management sector in Malaysia by operating
the Bukit Tagar sanitary landfill which is one of the largest, fully engineered sanitary
landfills in Southeast Asia (Mohd Yunus and etal., 2013). Berjaya has successfully exported
its expertise in solid waste management abroad by secured a 28-year concession to develop
and operate a sanitary landfill in Foshan, China. Other than that, Berjaya group also transformed
Cosway, a multilevel direct selling company that it acquired in 1994 into free store concept,
whereby Cosway’s members can apply to operate the free store and the company bears the
cost for rental space, utilities, information technology, promotions and even provide an
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