I have always wondered why a big group diversifies its businesses – especially in Indian conditions. Large companies like Colgate, Toyota, Citibank (oops touchy area, but for this article we will accept it as a non diversified entity). In the Indian context companies like Gujarat Ambuja, Bajaj Auto, Hero Honda (Hero Group), did not go into unrelated diversification. Of course if you are a steel manufacturer going into power generation seems to be the most logical move (remember Hindalco makes profit the minute Renusagar the power plant generates power at a much lower rate than the grid), and for a steel manufacturer it seems to be logical to go into cement – to handle the fly ash. However is it not more sensible for a Jindal Steel to call an Ultratech and ask them to set up a cement plant? Why do they think that they have to get into every business – even if it is remotely related?

The worst was perhaps Larsen&Toubro which got into all and sundry business – diworsification is what it was called!

For example a big group can just outsource its transport to Ola, hotels stay to Staymatrix, travel to makemytrip, salaries and expenses administration to some salaries.com …and concentrate on the main business. Instead we think we should do everything. Surprising.

Anyone running a business or does serious fundamental analysis knows that competition matters and that strategy is important – let us say it is crucial. However most experienced business people recognize that these two critical elements of business are associated, not many appreciate their essential natures or the relationship between them.

To say that a company has some strategic advantages it should understand that the starting point of any strategic analysis is a careful assessment of those economic (locational, political, access to water..or whatever) advantageous aspects of a firm’s market situation. It should be such that it cannot be replicated by its competitors. If some competitor were to replicate it should cost him a bomb in terms of money, time and human resources.

The existence / absence of competitive advantages forms a kind of divide when it comes to strategy. On one side are the markets in which no firms benefit from significant competitive advantages.  Clear case of a saturated markets – see the Indian banking industry especially the psu banks. In these markets, strategy is not much of an issue. Lots of competitors have essentially equal access to customers, to technologies, and to other cost advantages. All PSU banks are the same! Anything that one does to improve its position CAN be immediately copied. However today Bank of Baroda with a new manager may be able to try new things which some of the other banks will not try – out of sheer laziness. Without any firm enjoying a competitive advantage, this process of innovation and copying repeats itself.

In these markets, where you cannot try to outmaneuver the competitors, but rather to simply outrun them by operating as efficiently as possible. 

In 1981 Kodak did a survey of the ‘electronic camera without film’ by Sony. They ended up saying ‘there is good news and bad news’. This new technology has the potential of wiping out Kodak, but the good news is that ‘we have a lot of time to catch up with that technology’. In 2011 (thirty years later) they filed for bankruptcy. Question is ‘what did Sony do with that technology?’. Seeing their cash flows one needs to ask ‘When will Sony…..’ . Strategy may have been fine, but execution was bad. Today the largest selling phone in the world, is also the largest selling camera!! So move over Sony, now Samsung is the largest selling camera.

How will a good cement manufacturer do this? Simply by conserving cash. How will a steel manufacturer do it? by getting more and more efficient, by keeping cash and waiting to pick up (like a vulture) on the remains of JSPL, Essar, Bhushan….the list is endless.

What else can they do? Strategically increase the size and number of lenders. This will give them to a greater number of people looking at their balance sheet. So go and get some factoring, bill discounting, non convertible debentures, convertible debentures, foreign lenders,…and use the money to reduce the dependence on the banker – a single source!!

 

 

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  1. So, is the whole gist of article is,

    1. Many companies are moving towards the idea of operating as efficiently as possible?
    2. Too much diversification is not good and nowadays businesses are kind-of stepping on each other’s fields.

  2. The analysis is not so simple. Look at GE of the world. It is a conglomerate having its pie in almost every field. Or look at Tata Steel acquiring ‘Corus’ (now British Steel) – a complete flop, bad timed and costly acquisition.
    Analysis of ‘core competence’ is also a fragile one.
    The problem is that the world is changing so fast now a days that it is increasingly becoming difficult to lead a competitive edge and to retain it for a longer period of time.

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