Look Before You Sell
The all-important FIIs endorsed the view by discounting diversified conglomerates, even in cases where for a given business, the financials were comparable. So for now, focus is the buzzword.
Not everyone agrees. The $500-million US-based Bain Consulting doesnt think its as black and white as some would like to believe. We dont say you go and diversify mindlessly. All we are saying is if you have a diversified portfolio, then you dont have to go out and sell everything, says Ranjan Pant, vice-president and partner with the firm.
There are opportunities either way. As John S Clarkeson, president and CEO of Boston Consulting Group had remarked sometime back: There are more ways to get it wrong if you diversify, as well as a wider range of opportunities to get it right.
Then why do FIIs tend to have such strong reservations about the idea? Many firms have accumulated a diversified portfolio for historical reasons. They could grow only so much in a given business. It wasnt about what is the right or the wrong thing to do. It just happened.
Infact, at one time, it was believed that a diversified firms management can be more professional, better able to evaluate alternatives because they can be more dispassionate. Their survival does not depend on a particular business. Hence they can be expected to think more like a rational investor when it comes to deciding where to allocate their scarce resources.
This inter-company competition within the group led to the creation of elaborate structures at the corporate level who passed judgment on who should get what during the budgeting exercise. This corporate judiciary dissipated energy and led to the emergence of rival power centers within organisations.
It blurred the corporates ability to professionally and rationally allocate resources. Divisions divide, as Sumantra Ghoshal and Christopher Bartlett write in Individualised Corporation. Hence, the FIIs, finicky as they are about return on investments, looked away while management theorists like Michael Porter defined strategy in terms of making choices.
But Paul DiPaolo, vice-president and partner, Bain Consulting dismisses this as the tyranny of either/or. He proposes expanding into closely related areas. The second, the more difficult part, is finding avenues for growth. You can look at adjacencies[sic]. Extend into new businesses that are interlinked.
The example he cites is of Motorola and Zenith. Both the companies began around the same time. Motorola exited consumer radio and television business and moved into mobile radio, and then, military radio. Then it moved into pocket radio, a business it later moved out of. But this foray into pocket radio took it into the transistors business and later integrated circuits business. Upon these businesses, it built its cellular radios and public safety business. Then they moved into satellite communication, into one-way/two-way paging and then microprocessors and semi conductors.
Two interesting things are noticeable here. One, as it moved from one business to another, it never lost track of it core competence. The second is their willingness to exit businesses where it felt that it may not be able to sustain its advantage.
The important thing to remember while exploring new avenues is that it shouldnt be so complicated so as to distract you from what you are doing otherwise. Zenith, on the other hand, remained glued to its original business. While Motorola has been a very profitable firm, Zenith continues to be in red.
But before that, a diversified conglomerate needs to take hard look at the ROI of its portfolio. Figure out where it needs to trim the flab. The toughest question to ask in this context is, Am I the best guy to run the company, or someone else, with their capabilities can manage it better? A diversified company has the advantage that it can at least ask this question which a single business firm will almost never ask.
It is in the context of such questions that the role of corporate center becomes paramount. In pre-liberalised India, the center could add great value simply by the clout that it enjoyed with the establishment. That helped it win everything, from licenses to contracts.
All that has changed though. Bains Pant feels that India has still a long way to go before the institutional structures become strong enough for private enterprise to discount government contacts. Even today, something as simple as getting loans becomes easier if you know the right people. Or, a well-known business house has a better chance of negotiating lower interest rates for itself, he points out.
But beyond this, Pant feel that the role of corporate center should change. And he offers two examples to highlight what that role could be. One is from a similar eco-political environment of Mexico, Mexican Steel. This $2 billion firm was in both, the highly capital intensive business like steel and also a low investment business like food processing.
The Mexican market was opening up. The analysis of competitive scenario revealed that the firm will have a tough time in steel business but can compete strongly in food processing business. That meant taking out some resources from steel and transferring them to foods. Later on, when the foods business took off, some resources were transferred back to create a range of value-added products in the steel business.
Pant feels that corporate center has to an honest referee while allocating resources. In the Mexican Steel case, food processing did not have a chance unless the owner family played it fairly because while foods was managed by an outside CEO, the steel business was run by family members.
Pant also believes that there is more to allocating resources than just making funds available. Today, the people are far more important. The first and foremost role is to raise the management standards of the company. Managerial talent is perhaps the most scarce resource. The more successful diversified companies put a very high premium on attracting and retaining talent in its purest form, by moving talent around, so that the high-performers see opportunities and are not allowed to get bored.
One company that has mastered this art is GE. Pant, himself an ex-GE employee (strategic planning), recounts how a vibration expert from aircraft engines division was flown in to help a small motor division to cut vibrations in its motors.
Right now, this $ 80 billion conglomerate, which is into 23 diverse businesses, is in the middle of a major quality initiative. The corporate center has set similar targets for all of its groups firms. It has made available 2,000 black belts (in quality), drawn from all over the group, to help each firm reach the set goals.
What the owners of these diversified groups need to ensure that each individual business is headed by a very competent person. Quite obvious? But how do you get them? To get them, you have to be open to the idea of sharing
ownership with them at some future date. Are Indian firms listening? n
The Man: Paul DiPaola
Position: Vice-president and partner, Bain & Company
Educational qualification: MA in history from UCLA. BA in comparative literature with honours from the State University of New York at Stony Brook.
Current assignment: Worked in variety of industries including industrial products, technology, retailing and healthcare. Presently involved with developing Bain's operational excellence capabilities area.
Previous experience: Northrop Aircraft as a System Analyst and later as a manager of Customer Computer Integrated Manufacturing Systems at GE.
The Man :
Position: Vice-president and partner, Bain & Company
Educational qualification: MBA from The Wharton School and BE from Birla Institute of Technology and Science.
Current assignment: Corporate and business unit level strategy development, and targeted implementation to achieve operational excellence. Key assignments include portfolio investment strategy in a deregulating environment (Mexican Steel), growth strategy (US auto supplier) and market entry strategy (India satellite).
Previous experience: General Electric, as a leader of corporate strategy and change management group, where he focused on mergers and acquisitions and implementation of operational best practices in GE's manufacturing business across the world.