Diversification strategies: A study in the Indian context

Abstract

Global business landscape, being very dynamic in nature, is constantly being shaped and redefined by the growing forces of new market realities influenced by globalization, liberalization and privatisation. Indian firms, enjoying the benefits of second fastest growing economy in the world, are no longer an exception to these market realities. Therefore, as the markets are growing more globalized and competitive in nature, firms can either try to expand their management capabilities or adopt a more focused strategy. Expansion into new products, markets or industries also known as diversification, being the riskiest among all forms of corporate strategies has always been a lucrative option for corporate houses. Therefore, this study aims at understanding the nature and extent of diversification strategies in the context of Indian firms. Firms in the developed markets especially in U.S. and U.K. diversified into new products, markets and new industries aggressively in during 70s and 80s. Diversification through internationalization into related or unrelated businesses appeared as one of the most preferred strategies for these firms. However, as the market dynamics shifted to more competitive and saturated markets, these firms migrated to more focused strategies. The extent of this migration in diversification strategy can be estimated by the fact that U.S. firms today are the most focused firms globally. On the other hand, the diversification strategies of Indian firms were hugely influenced by the policies of license raj, restrictions on foreign investment and fear of nationalization in the pre-liberalization era. Opening of economy opened a plethora of opportunities for the firms and hence unrelated diversification emerged as the most preferred strategy for Indian firm immediately after liberalization. However, by the millennium diversification into related businesses became the most preferred strategic choice for Indian business houses. Ownermangers of family-run companies enjoyed superior autonomy in firm-resources and hence diverted the capital from cash cows into high growth businesses like retail, telecom etc. however, there appeared a higher tendency to diversify in MNCs than Indian firms. Another observation came out of the study was that private sector firms preferred diversification into unrelated businesses than the public sector firms. Case study analysis of leading business houses shows that each of them followed a different diversification philosophy. Reliance started with heavy vertical integration by moving back and forth in the value chain and then moved on to conglomerate diversification by leveraging on its huge assets side. Tata Group after some major unsuccessful bids to diversification followed the philosophy of ?Enter, Exit & Build? while assessing the targeted businesses on the criteria of synergy and core competencies of the group. Finally, it adopted its diversification strategy around seven core sectors providing synergies through horizontal diversification to its businesses in each sector. In case of ITC the first driver behind its diversification strategies happened to be the sheer controversial nature of its core businessCigarettes. Tata‘s entry and then exit from cosmetics, paint, oil, soaps, pharma and cements and ITC‘s unsuccessful entry into financing again highlights the importance of synergies of target business with the core competencies of the firm in a diversification strategy.