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Preparing to ride the third wave of diversification since 1991

It is important to see how Indian businesses felt and reacted to diversification in the 1990s because 2016 is, in some ways, an important year for diversification

analysis Updated: Oct 16, 2016 22:57 IST
Core competence,CK Prahalad,Windsor Club
The second wave of diversification happened between the late 1990s and mid-2000s. By then, the more progressive business groups had reaped the benefit of modern management techniques and information technology(Reuters file photo)

Indians love jargon and buzzwords. In the 1990s, in India and the world, the buzz-term of choice in corporate circles was core competence. It was coined by CK Prahalad and Gary Hamel in a 1990 article in the Harvard Business Review (HBR).

It caused a stir because, until then, the most successful corporations in India (and, arguably, the world) had been conglomerates.

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Prahalad was almost immediately adopted in India, especially in the southern part of the country where he started hosting an annual retreat for businessmen. He and a few others used to informally refer to this grouping as the Windsor Club — after the hotel in which the retreat was held and also a reference to the Bombay Club, businessmen from Bombay and New Delhi who were not completely in favour of liberalisation and economic reforms. Prahalad and his followers saw themselves as a more progressive grouping.

Over time, the Bombay Club came around, Prahalad became a widely sought after management guru across the country (and the world), and, while Indian businesses continued to diversify to tap opportunities that were opening up, they did so with mixed feelings about diversification.

It wasn’t until 1997 that the first real opposition to that theory would come — from Krishna G Palepu and Tarun Khanna in another article in the HBR titled ‘Why Focused Strategies May be Wrong for Emerging Markets’.

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Khanna and Palepu argued that because of the lack of public institutions and infrastructure and the kind of support these offered, many companies in emerging markets had to recreate them in-house. It was an accurate inference of why, for instance, in India, some business groups had diversified into businesses far removed from their core — such as power and transport.

In a previous life, I was a fly on the wall at a couple of meetings of the Windsor Club, and met Khanna (in New Delhi), soon after his article appeared in HBR.

The lengthy preamble on diversification and how Indian business groups felt about it in the 1990s is necessary because 2016 is, in some ways, an important year for diversification.

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The first post-liberalisation wave of diversification in India happened in the early 1990s itself. New opportunities were emerging and companies scrambled to make the most of them. We will skip this phase because this column’s focus is on two groups and what they did in the second wave of diversification. Still, the first wave merits study (and we will come back to it one day) because it resulted in the decline and eventual fall of several established business groups.

The second wave happened between the late 1990s and mid-2000s. By then, the more progressive business groups had reaped the benefit of modern management techniques (read: Benchmarking, re-engineering, lean manufacturing, assorted quality certifications) and information technology. They also had a clearer idea of what they wanted to do.

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In 1998, Analjit Singh’s Max India sold its telecom business to Hutchison Whampoa for the then staggering amount of ₹561 crore. He used some of the money to diversify into two new areas opening up around that time — insurance and healthcare. The sale made Max one of the few groups to succeed in the first wave of diversification (it entered telecom when the business opened up in 1993-94).

In 2000, the Aditya Birla Group acquired Madura Garments from Coats Viyella for ₹236 crore, entering the branded apparel market. The same year, it entered the insurance business through a joint venture with Sun Life Financial Inc. And shortly after, it entered the information technology and back office services business. It had already entered telecom in the first wave of diversification. In 2005, the conglomerate decided to rechristen Indian Rayon and Industries Ltd and make it a holding company for its new businesses in finance, apparel, telecom, and IT. The new company was called Aditya Birla Nuvo Ltd. Shortly after, the group bought out its partners in the telecom business, AT&T, and the Tata group.

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In August, around a decade-and-half after both groups got serious about their new new businesses, they saw closure. Aditya Birla Nuvo, which had sold its IT business, and spun off its apparel and telecom business into listed companies, decided to separate its financial services business too and itself merged with Grasim Industries Ltd.

Around the same time, the Max group merged its life insurance business with HDFC Standard Life for a 6.5% stake in the merged entity and a non-compete fee of ₹850 crore.

Singh, an indefatigable entrepreneur, spoke about the new businesses he is eyeing in a subsequent interview. Meanwhile, his healthcare business continues to grow.

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Both groups entered new (or relatively new) businesses. And both saw a successful closure in 2016 (and within a few days of each other) — for the Aditya Birla Group, this meant spinning off all its new businesses into independent entities. For Max, it meant a successful exit.

For me, there are three takeaways from the experience of the Aditya Birla and Max groups: Exits aren’t always bad (and are preferable in some cases); there are benefits to housing new businesses in a separate entity; and 15-20 years is the time it takes for a new business to mature in India.

The experience of the Mahindra Group, another Indian business house that has successfully diversified into new businesses, supports the third point.

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Interestingly, in the same time frame, the Indian economy has almost quadrupled in size, so, even as these new businesses enjoyed the fruits of economic growth, they also contributed to it.

Many of these groups are now evaluating new businesses for their third wave of diversification since 1991.

R Sukumar is editor, Mint