Different
companies diversify for an array of reasons. In some cases, it’s a survival
strategy, for instance, if one company makes the bulk of its sales at a
particular time of year, it makes sense to consider diversification at a
different time of year. By extending the portfolio of products or services one
can ensure a regular revenue stream from January through to December. In other
words, a vendor selling ice cream can diversify into a hot soup joint during
winter. However, there are plenty of other good reasons for diversification,
not least by extending one’s range of goods or services one can either sell
more products to the existing customers or reach out to new markets. This can
supercharge the growth prospects. And perhaps the biggest reason for doing it
is to extend a brand reputation into other markets, with the knowledge that one
‘winner’ could be the drop of rain that starts the heavy downpour, making your
business bigger than you ever imagined.
Something
similar to this has been observed in the diversification of Aditya Birla Group.
In fact they over diversified, leading to a conglomerate diversification. Conglomerate
diversification is a growth strategy in which a company tends to grow by
accruing entirely unrelated products and markets to its existing business. A
company that consists of a grouping of businesses from unrelated streams is
called a conglomerate. In conglomerate diversification, a firm generally
introduces new products using different technologies in new markets.
Conglomerates diversify their business risk through profit gained from profit
centres in various lines of business.
The
Aditya Birla group is one of the fastest growing industrial houses in the
country. Grasim, a group company, was incorporated as Gwalior Rayon Silk
Manufacturing (Weaving) Co Ltd in 1947. The Aditya Birla Group’s strategy has
been to diversify into capital-intensive businesses and become a cost-leader by
leveraging on its various strengths. Apart from Grasim, major companies in the
group include Hindalco Industries Ltd (aluminium), Indian Rayon (Cement, VFY,
carbon black, insulators etc), Indo-Gulf Fertilizer (Fertilizer - Urea), Tanfac
Industries (Chemicals for aluminum), Bihar Caustic & Chemicals Ltd (Caustic
Soda/ chlorine), Hindustan Gas Industries (gas producer), Birla Growth Fund
(financial services), Mangalore Refinery (oil refinery). Grasim holds a 58.6%
stake in Kerala Spinners Ltd, which manufactures synthetic/ blended yarn.
Grasim’s fully owned subsidiaries, Sun God Trading and Investments Ltd and
SamruddhiSwastik Trading and Investments Ltd, are into asset based financing.
The group also owns several companies in Thailand, Indonesia and Malaysia
manufacturing textiles, synthetic/ acrylic yarn, rayon, carbon black and other
chemicals. Furthermore, they also have entered into the Business of Education
through their reputed Birla High Schools and Engineering & Management
schools.
Companies
diversify because of several reasons: for economies of scale and scope, to
widen the market base and enhance market power, to stabilize their profit by
scalability, to gain a better percentage of market share, to counter competitive
threats etc. For Birla it is one of the motives to diversify into an unrelated
sector to hedge its bets against the risks of economic or cyclical downturns
that impact certain industries. Birla also enjoyed the advantage of operating
multiple business types within one corporate umbrella by allocating company
resources strategically to address the needs of each company. The Birla
Corporate employees shared responsibilities for roles such as human resources,
buying, and information technology across the corporation.
Like
two sides of a single coin, over diversification can also be pernicious to a company. One of the most significant and typical
drawbacks of branching out into unrelated business arenas is that one can
spread their collective talents too thin. Leaders in a company usually have
expertise, strategic planning abilities, and leadership qualities specific to
the given industry or business sector. The chances that a leadership group can
provide consistent high-quality direction of drastically different companies
are limited. Even with leaders who have diverse abilities, the time and energy
requirements to optimize results in unrelated companies are significant. Also,
many companies avoid unrelated diversification as a general business rule
because of the lack of synergy that exists. When one has related diversity, one
can more easily integrate into company brand, philosophies, resources and
partnerships to take full advantage. With unrelated diversification, many
companies intentionally have to keep each diverse enterprise segregated to
avoid diluting the respective brand images of each business.
Diversification
can put any company on the fast track to growth but if the strategy fails it
can also burn up money. Now, it is an indeed prudent choice to differentiate
between whether to diversify or to focus. It is not at all a sagacious decision
to diversify into unrelated business unless and until the company has become
stable as well as profitable.
Contributed by:-
Bitan Banerjee
Section A
Strategic Management
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