A conglomerate structure for an organization distracts company resources from the parts of the business deserving the most investment to ones that do not use money as efficiently. This leads to overall inefficiency in the organization. There are also accounting and organization demands that dilute clarity in a company, which is an additional risk factor. Companies typically overpay for acquisitions and have another expense where they need to sell parts of the business.

Long Description

Potential advantages

To modern business analysts, the best argument for conglomerate organizational form is that it may allow capital to be allocated in a more efficient way. For example, a hypothetical conglomerate consists of a candy store and an internet website. Suppose the candy store has high cash flow, but very few profitable investment opportunities. The website has low cash flow, but lots of good investment projects. By combining the businesses together, the cash from the candy store can be used to make profitable investments that would otherwise not be made in the web site. The main question associated with this strategy is why this improves upon a market-based allocation of capital. That is, if the entities were standalone, then presumably the investors in the candy store could receive dividends, and then reinvest those dividends in the startup. If this market-based mechanism works well, then all profitable internet startup investments can be made without having the two entities be under common ownership. Research suggests that financial markets may not always operate efficiently due to the presence of transaction costs and asymmetric information. If this problem is severe, then the common ownership of the assets might yield a more efficient allocation of capital.

Potential disadvantages

Lack of focus and inability to manage unrelated businesses equally well are the reasons to criticize conglomerates. As a result, conglomerates' stocks are usually penalized by the market. This phenomenon is called conglomerate discount. … This qualitative factor will lead to an increase in costs. This statement will lead to a decrease in profits. "Conglomerate Structure" is a difficult qualitative factor to overcome, so the investment will have to spend a lot of time trying to overcome this issue.