Academic journal article Academy of Strategic Management Journal

Performance in the Contemporary Conglomerate

Academic journal article Academy of Strategic Management Journal

Performance in the Contemporary Conglomerate

Article excerpt


The performance of conglomerates or multi-industry firms, corporations composed of unrelated businesses, presents a paradox to researchers in strategic management. On one hand, the preponderance of the empirical research, beginning with Richard Rumelt's ground-breaking study, Strategy, Structure and Economic Performance, and including dozens of follow-up papers, has found a negative relationship between unrelated diversification and firm performance. On the other hand, a number of multi-industry firms, perhaps General Electric and 3M first among them, are frequently held out as examples of the best-managed companies in the world. We fill a gap in our knowledge of contemporary conglomerates by assessing their performance over a twelve-year period. The burdens of size, complexity and bureaucracy in long-lived multi-industry firms were anticipated to result in below-average performance. Instead, our findings clearly identified a group of firms that out-performed performance referents like Business Week's Global 1000 medians, means, top-quartile measures, and the mean of the market-to-book ratio. Most surprisingly, nearly all of the successful firms were based either in the United States or in Great Britain, strongly suggesting that select organizations are able to meet and exceed the undeniable managerial demands of the conglomerate firm, rather than rely on protected or lax markets.


The conglomerate- a corporation composed of unrelated businesses- evokes memories of decades past, a way of managing large firms which is now largely discredited. Indeed, if the conglomerate receives any attention today, it is most often held up strictly as an example of how not to arrange the holdings of large firms. The reasons for derision are legion. They begin with the massive number of studies of the relationship between diversification and performance, beginning with Rumelt (1974) and reviewed in Ramanujam and Varadarajan (1989), Hoskisson and Hitt (1990) and Datta et. al. (1991), the preponderance of which found a negative relationship between unrelated diversification and performance. Reasons also include the limited ability of top management to generate value from the relationships among divisions; the difficulty of interested observers, such as analysts and shareholders, to understand the complex operations and performance of firms; and the often destructive empire-building that has motivated the CEO's of some conglomerates. This last complaint about multi-industry firms links well with research finding that the size of the firm is the only highly influential and significant indicator of top-management pay. A recent meta-analysis, Tosi et. al. (2000), found that firm size accounted for more than 40% of the variance in total CEO pay, while only 5% of this variance was explained by firm performance. The quickest way to build up the base of the firm, of course, is through acquisitions, often unrelated to a firm's existing operations.

Despite the opinions and efforts of detractors, a number of conglomerates continue to exist, even in the most competitive markets in the world. Intriguingly, the firms are often household names, like General Electric, Honeywell, and 3M. These are companies that also happen to be connected by many of the same observers with superior management and top performance.

How do we reconcile the contradictions presented by the modern conglomerate, or multi-industry firm, as many are now given to calling themselves? The first issue is to get a better grasp on the number of conglomerates present on the global business landscape. The second issue is to size-up the performance of multi-industry firms, by using commonly used measures and by making comparisons with companies that employ related diversification or a single-business focus.


To complete our analysis, we used a common source of business press data and rankings, the Business Week Global 1000. …

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