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Business Environment is the external forces that influence the company business decision. It is the force that organizations find themselves operating in. These forces could either be general forces or specific forces. Specific forces such as the organization customer, investors, customers and competitors. General forces are political, social, technology or economical. It is the sum total of all the factors or things external to the organization. These forces have direct or indirect impact on the business. Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market and largely uncertain as it is very difficult to predict future changes. The business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the UK, for instance, differ from those in Russia or Indian. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.
2 What is a conglomerate?
A conglomerate is a corporation consisting of several companies in different businesses. Such a structure allows for diversification of business risks, but the lack of focus can make managing the diverse businesses more difficult. Conglomerate is a combination of two or more corporations engaged in entirely different businesses together into one corporate structure, usually involving a parent company and several (or many) subsidiaries. Often, a conglomerate is a multi-industry company. Conglomerates are often large and often multinational. (http://www.investorwords.com/1034/conglomerate.html accessed 4th of March 2010)
Young and Young (2004): Conglomerates dominate the private sectors of most of the emerging economies. They abound in many countries such as Belgium, India, Indonesia, France, Hong Kong, Japan, Korea, Nicaragua, Pakistan, Philippines, Russia, Taiwan, Thailand, and so on.2 Pankaj and Khanna (1998) reviewed the literature on the reasons for the existence of conglomerates in terms of (1) multimarket power, (2) related resources, (3) informational imperfections and entrepreneurial scarcity, and (4) policy distortions. They claimed that their case studies of the responses of two leading Indian conglomerates to the country's competitive shocks are in general consistent with a policy distortion view for the existence of business groups.
A conglomerate can show earnings growth, by acquiring companies whose shares are more discounted than its own. In fact, Teledyne, GE, and Berkshire Hathaway have delivered high earnings growth for a time
(http://mises.org/journals/qjae/pdf/qjae7_1_5.pdf accessed 4th of March 2010)
History of General Electric Company and its business strategy
General Electric the General Electric Company, commonly abbreviated simply to GE, is a major technology conglomerate based in the United States. General Electric was founded in Menlo Park New Jersey in 1878 by Thomas Edison, the inventor of the light bulb. It has gone on to become one of the most powerful and a dynamic corporations in the world and as of 2008 was the tenth-largest company on Earth in terms of market capitalization. It is viewed by many as being the single most successful conglomerate, and was a conglomerate long before the practice became commonplace in the 1960s.
Thomas Edison started a company to bring together his various businesses all under one roof, and called it the Edison General Electric Company. Two years later Edison merged with his primary competitor, the Thomas-Houston Company, and they called the new company the General Electric Company. Over the years, General Electric continued to grow and produce different products for a wide range of applications. Many of Edison's early inventions formed the backbone of various General Electric lines through the 19th century, the 20th century, and down to the present day. Electric lighting, Power Transmission, Medical Equipment, and Transportation were all areas in which Edison held patents and had formed small companies, and are all areas in which General Electric today has large holdings.
(http://www.wisegeek.com/what-is-the-history-of-general-electric.htm accessed 15th of March 2010)
Over the years, business have sought conglomerate as a growth strategy. Conglomerate has served as a mean of increasing the business expansion rate. Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm's growth rate. Conglomerate growth may be effective if the new area has growth opportunities greater than those available in the existing line of business. Due to the Conglomerate strategy the company has it ups and downs. A good and brilliant side. According to United Press International (1992): In 1992, General Electric Co., the conglomerate with financial, media and electronics holdings, decided to sell Kidder, Peabody & Co., its brokerage firm, the Wall Street Journal said Executives close to GE told the Journal that the company recently decided to sell the struggling securities firm. ''GE appears to have given up hope of incorporating the securities firm into the more staid culture of its big finance subsidiary, GE Financial Services,'' the Journal said, quoting the unidentified executives.
The company pointed out that ''over the past several years, Kidder, Peabody has grown more rapidly than most of its competitors and has improved its market share and its financial performance.'' GE, which bought Kidder, Peabody in 1986, noted that the brokerage firm's net income for the first quarter was a record and exceeded results for all of 1991. GE stock was down 87.5 cents to $76.75 a share at midday on the New York Stock Exchange.
Also in the year 2003, GE went into the Business credit services, in order for the company to meet the rapidly changing financing needs from the business. The new organisation, formerly GE Distribution Finance, will continue its role as a provider of inventory finance, but has expanded its business structure to include commercial sales finance. Services encompass open account trade receivable management, business revolving charge programs and receivables purchasing.
(Fairfield County Business Journal 2003)
General Electric Company owns everything from television to airplanes and jet. In March 2009, the company AAA credit rating which has been held since 1956. Over the past year, had its share price sunk by 75%, wiping out more than $300 billion in market value, an even bigger obliteration of wealth than Citigroup. GE's problem is fairly simple. Although best known for manufacturing everything from light bulbs to jet engines, its finance arm was its biggest source of profit during the boom years that ended in 2007. Now that the good times have emphatically ended, it appears the unit has set aside nowhere near enough reserves to cover the billions in loan losses it faces. To gather that cash in this uncertain market, GE may have no choice but to keep the finance unit and shed other declining assets, such as NBC, headquartered in Rockefeller Center's General Electric. With more than $600 billion of assets, GE Capital would rank as the nation's seventh largest bank, just behind Morgan Stanley. It is such an albatross now that investors value it at less than zero. Some say it's time for the company to follow Citigroup's playbook and break itself up. According to Edward Grebeck, chief executive of debt-strategy firm Tempus Advisors, " if GE can't carry its weight, is there any point in keeping GE together?'' (Aaron Elstein 2009)
Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses. Managers from different divisions may have different backgrounds and may be unable to work together effectively. Competition between strategic business units for resources may entail shifting resources away from one division to another. Such a move may create rivalry and administrative problems between the units.s
(http://www.referenceforbusiness.com/management/De-Ele/Diversification-Strategy.html acessed 30th of March 2010)
4 History of BERKSHIRE HATHAWAY and its business strategy
Another company that has had a success conglomerate is Berkshire Hathaway. The Hathaway Manufacturing Company was started in 1888 by Horatio Hathaway, a China trader, with profits from whaling in the Pacific. Seabury Stanton, who put much of his own money into the company to keep it going, ran it during these years. In the 1950s, Stanton decided to merge the company with Berkshire Fine Spinning Associates Inc, a milling company that had operated since the early 19th century. The merged company was huge, with 15 plants, over 12000 employees and revenue of over 120 million dollars. Its headquarters were in New Bedford.
In 1950s the company had close down seven of its plants and lay off a large number of workers due to Seabury Stanton lack of financial expertise. With Its stock price fallen, many analysis's had written it off. In 1962, Buffett bought some of the company shares and by 1963, Warren Buffet and his associates were the largest stockholders in the company with 49% of the company shares. He became Chairman of the executive committee and installed Ken Chace as President to run it. Buffett would leave the milling operations of the company to the new President; he would concern himself with the financial structure of the company.
The company deals in industry such as Insurance and Finance (Central States Indemnity Company with 100% ownership, American Express with 13.1% ownership etc), Clothing (Justin Brand with 100% ownership, Garan Children Clothing with 100% ownership etc), Food and Beverages(sea Candies with 100% ownership etc), Media, Logistics, Utilities, Business Services and so many more.
According to Shaw (2007), In 1967 Berkshire ventured into insurance with the purchase of National Indemnity and National Fire and Marine for $8.6 million. Geico was brought on board in the late 1970s. Today, Berkshire Hathaway is a major force in auto insurance and reinsurance, owns 73 companies, and Buffett is among the three richest men in the world. These performance measurements further demonstrate Buffett's management acumen. Berkshire's book value per share grew at a compounded annual rate of 21.4 percent in the period from 1965 to 2006, as compared with 10.4 percent for the S&P 500 (with dividends). Pretax earnings per share expanded at a compounded annual rate of 17.9 percent from 1965 to 2006. Investments per share went from $4 in 1965 to $80,636 in 2006, a compound growth rate of 27.5 percent.
In May 3, 2008 Berkshire Hathaway's Annual Shareholders Meeting was held on in Omaha, Nebraska. Thirty one thousand people appeared, to a cult like gathering, to hear the all-time greatest investor in the world share his wisdom. Warren Buffet and Charlie Munger both gave their wise word. When ask what highest amount of his net worth will he invest in one deal? Warren Buffet reply: "Several times I have invested more than 75% of my net worth in a single deal. It would be a big mistake not to have 50% of your net worth in an idea of extraordinary circumstances. Diversification is for the know-nothing investor. Load up on as much of a good idea as you possible can".
(http://flyingadventures.com/images/Aviator-Profiles/Warren-Buffet-Birkshire-Hathaway.pdf accessed 4th of April 2010)
The diversified conglomerate has significant economic advantages and disadvantages relative to the undiversified firm. According to Amar Bhide (1990), "Over time, the disadvantages have come to outweigh the advantages; and thus the reported shareholder gains from "bustups" are not simply "paper" gains, as critics of takeovers claim, but are likely to reflect real changes. It is primarily the increasing sophistication of capital markets that has eroded the advantages of the conglomerate form, making the diversified corporation a much less valuable institution than it once may have been. n Investor power, which has grown along with capital market sophistication, has reduced the ability of managers to preserve an inefficient organizational form. Therefore attacks on diversified corporations, rather than isolated instances of uneconomic behaviour (or attempts to profit in the short run at the expense of the future), are likely to prove an important step in the evolution of U.S. industrial structure".
The company has had its own bad and good news also. In its annual letter to shareholders in 2009, Berkshire Hathaway Inc. (BRK.A) reported net income of $8.1 billion and revenue of $112 billion for 2009. That's an improvement over the net income of $5.0 billion and revenue of $108 billion in 2008. However, net income in 2007 totaled $13.2 billion. While the company's underlying returns rebounded strongly, there was weakness in several economically sensitive operating units. Its utilities and energy units gained $1.1 billion in 2009, down from $2.3 billion in 2008. Earnings from manufacturing, service and retailing operations fell to $1.1 billion from $2.3 billion the previous year. Berkshire's Class A shares gained only about 3% in 2009. However, shares have gained nearly 20% since the announcement that it planned to purchase Burlington Northern Santa Fe in November
(http://www.bloggingstocks.com/2010/02/28/berkshire-hathaway-annual-letter-offers-good-news-bad-news/ accessed 10TH of April 2010)
5 Tesco Diversification
There are several leaders among companies in United Kingdom, Tesco is one of the biggest ones. The major focus of Tesco is customers in. Not like other corporations, it does not focus on the standard investor value maximization. Quite unlike them, this company places the main emphasis on its clients. Tesco own 35% of the market share in the country contrary to the regulation that stated that company are only allow 25% of the market share. Tesco image is to produce everything, sell everything to everyone. This image has seen the company going into diversification.
Tesco diversification has been of many advantages. One advantage is that it has successfully uses diversification policy that divided company strategy in sub-groups: non-food business, international, retailing services, and core UK business. The last one refers to the long-established grocery trade in the domestic market. Although Tesco introduced an original policy of convenience stores, they still serve as an supplement to supermarket group. Non-food business of Tesco includes diversification its goods by offering other types of products from consumer electronics to clothing. Concentration of Tesco on pop products showed very successfully, that sales often go above because of specialized stores. Under trade services line, the company offers individual utilities, finance, and telecom services to its customers. Tesco enters into combined ventures with the biggest companies in the divisions. In spite of the fact that other chains of stores used such policy, Tesco put into practice the strategy more successfully. As for the international plan, Tesco for the last decade managed to enlarge its global image to generate 20% of entire sales abroad. Being characterized in Far East and Central Europe, company now has plans to enter American market.
(http://www.articlesbase.com/sales-articles/success-of-tesco-in-great-britain-163894.html accessed 14th of April 2010)
Supermarkets are in favour at the moment as risk-averse investors seek defensive stocks in a falling market. So Tesco, which is currently expanding its banking empire, is up 4.75p to 400.6p while Morrisons is 3p better at 276.9p.
Analyst Clive Black said: Tesco UK is in better shape than it has been for a while and should benefit from favourable comparatives. We expect positive momentum from Retailing Services (note 19th/20th November investor days) while International provides enormous growth potential but also more immediately improving news flow. We like Tesco's diversification. It is meaningful and provides income and earnings streams away from the troubled UK, a virtue to our minds. With non-food sales improving, higher margins emerging in financial services and access to stronger growth markets internationally, we believe that Tesco stock has material rating expansion potential. (Nick Fletcher 2009)
There's always a risk that too much diversity can dilute a brand, however, industry pundits don't think that is the case with Tesco. Gavin Rothwell, senior business analyst at the Institute of Grocery Distribution (IGD), comments: "Tesco has stretched its brand into many different areas, but a core principle here has been to ensure that the Tesco brand is relevant in these new parts of the market. For Tesco, value and simplicity are key, and the retailer will consider diversifying into those markets where it sees a need for these elements in the market."
And Corinne Millar, UK retail analyst at Planet Retail, thinks Tesco's ability to stretch the brand is a measure of how strong it is. "It wasn't that long ago that Tesco was known for `piling it high and selling it cheap' but now the brand means so much more to consumers. All its sub brands such as Finest and natural reinforce the brand and some are so sophisticated that they've become brands in their own right." You name it and it seems Tesco has a sub brand for it. Its Finest range of top quality foods was launched in 1997 and has been such a success that it has been extended to include health and beauty and homeware. By the end of last year Finest had become a £ 1 billion brand. Of course clothes have been big business for supermarkets, thanks to the success of George at Asda. Tesco offers several clothing ranges including Cherokee and F&F (Florence and Fred). Tesco crosses more into pharmacy territory with its health and beauty products. This range is designed to exploit the growing trend for organic products. It includes lines across the bath and shower, bodycare, haircare, skincare, relaxation and sleep-aid categories.
(Chemist & Druggist 2007)
There are several advantages of the conglomerate mergers. One of the major benefits is that conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the merging companies can also bring down the levels of their exposure to risks. In case of General Electric Company, even thou the company is having a problem with it Business Credit Services, other business are doing fine. Assuming the credit business is the only business the company is involve in, in the face of recession, the might have liquidated or been sold like Northern Rock Bank. It has normally been seen that a lot of companies that go for conglomerate mergers are able to manage a wide variety of activities in a particular market. For example, these companies can carry out research activities and applied engineering processes. They are also able to add to their production as well as strengthen the marketing area that ensures better profitability Is this to say that Conglomerate Mergers does not have its own implication? Of course it does.
There are several implications of conglomerate mergers. It has often been seen that companies are going for conglomerate mergers in order to increase their sizes. However, this also, at times, has adverse effects on the functioning of the new company. It has normally been observed that these companies are not able to perform like they used to before the merger took place. This was evident in the 1960s when the conglomerate mergers were the general trend. The term conglomerate mergers also implies that the two companies that are merging do not even have the same customer base as they are in totally different businesses. Some of the major disadvantage of conglomerate is that Synergies are illusory, The extra layers of management increase costs, Accounting disclosure is less useful information, many numbers are disclosed grouped, rather than separately for each business. The complexity of a conglomerates' accounts make them harder for investors and regulators to analyse, and makes it easier for management to hide things, Culture clashes can destroy value, Inertia prevents development of innovation and Lack of focus, and inability to manage unrelated businesses equally well are the reasons to criticize conglomerates. (http://www.economywatch.com/mergers-acquisitions/type/conglomerate.html accessed 6th of April 2010)
One major advantage of diversification is the control input which lead to continuity and improve in quality. For example Tesco is now into electronics such as Laptop, Television, Gas cooker and so many more. This helps Tesco to control its market by guaranteeing sales and distribution. This can arise through a combination of linkages in the value chain. For example where production and distribution channels ar combined, or where a company uses its well-established brands names or corporate indentify to gain benefits' in new markets. Diversificaton also provide movement away from declining activities and provider risk control no longer being reliant on a single market. As much has diversification ha sit advantage, some of its disadvantage can destroy a business if not properly monitor. Such as the fact it adds to management cost, it may result in slowing growth in the company core business. It also result in negative synergies.