Tried And Tested

Reliance Industries has been in the limelight recently for its open tender offer for 20 per cent of BSES's equity, as well as for its broad-based plans to enter the ICE sector. It is perhaps too early to say whether the expansions will materialise as planned, but the proposals themselves are entirely consistent with the company's historical strategy of full integration.

Reliance started off as a manufacturer of synthetic textiles. Every phase of its subsequent expansion was based on a strategy of backward integration; from textiles to fibres and yarn, PTA, petrochemicals, petroleum refining and finally crude oil itself. It has been suggested that this was an important reason for the success of the company. Every expansion had to be executed and operated with high efficiency because the profitability of the downstream activity depended on it. The success that the company has had with backward integration in the petrochemical chain would lead one to expect a similar strategy to be executed in other lines of business as well.

 

The two major forays the company has made outside petrochemicals are in power and telecom. In view of the large sums needed to set up generation capacity, a company would feel a lot more comfortable if it could simultaneously control the supply of fuel on the one hand and the

sales and receivables on the other. The backward integration into oil and gas provides the upstream linkage; now, BSES provides the downstream linkage with none of the problems associated with selling power to SEBs.

Reports suggest that a similar integration strategy is underway in ICE as well. The first step into cellular and basic telephony is expected to be followed by a fibre-optic network. This means a huge

expansion in the range of services that can be provided. Service provision needs content, which the company can control by taking over a production house. Content can also be disseminated through cinema theatres, which are experiencing an upswing in their market. Just as in petrochemicals, so also in power and ICE: growth through integration.

Two questions arise. First, is the decision by Reliance to spread itself over such a range of activities likely to erode shareholder value? Second, within each of its new lines of business, is backward integration likely to provide the same benefits as it did in the textiles - petrochemicals linkage? The first question hinges on the debate on core competence; one side says that it is a generally superior strategy, while the other argues that a variety of market imperfections in developing countries provide a diversified firm distinct advantages in that environment. Essentially, the answer depends on these new lines of business being able to leverage the "Reliance" tag, even as they are managed by people who have the necessary experience and knowledge. Given this, the second question may have an easier answer. Fully integrated power suppliers are certainly a viable model globally, while ICE is witnessing some huge mergers between content and service. When faced with competitive challenges and uncertainties, one could do worse than go with the tried and tested.