Tyre Asia April/May 2018 39
subsidization of activities across businesses is indeed value-
creating and if they are not, there should be little hesitation
in taming the diversified portfolio through selective
divestment. The three crucial steps that he outlined should
be incorporated in the diversification plans that are put into
operation.
Commenting on the key findings of his study on
diversification following economic liberalisation in India, Dr
Ramaswamy said that he had done a series of studies set in
India that have yielded a rich set of insights into the process
of economic liberalization, institution building, and the
process of rejuvenating an economy that had been dormant
for far too long. “I will share with you three findings that
succinctly capture what we found.”
The series of economic reforms that India undertook
starting in 1990 was unprecedented. Thus, while some
business groups changed their strategies and portfolios
to reflect the newly emerging market context, others did
not. “Interestingly, we found that those groups that did not
change their portfolios actually benefited much more than
others that did.”
He attributed this to the fact that the outcomes of the
reforms process were far from evident during the early
years and thus the environment continued to provide
opportunities to groups that had already mastered their
ways of dealing with uncertainty through diversification.
“However, with the passage of time, the groups that
trimmed their portfolios around a more focused core set of
related businesses such as TVS Group, MRF etc started to
outperform their unrelated diversified peers.”
Well over a decade after the initial reforms were enacted,
the diversified groups were beginning to see performance
declines that were noticeable compared to their focused
peers. This underscores the fact that the market context
was a lot more vibrant that it was in the early 1990s and
India’s institutions such as its capital markets, labour
markets, and product markets have been far more efficient
than they used to be.
Unrelated diversification
This does not however suggest that unrelated diversification
does not occur or that it is always detrimental. In today’s
India, such moves are more likely the product of deliberate
strategic thinking where they can benefit from group level
synergies in a concerted fashion.
When asked what would be his advice to CEOs when
they enter untested waters deviating from the firm’s
core competencies, Dr Ramaswamy has some insightful
comments to offer.“Much of the low hanging fruits of diversification have
faded away as the country has improved market efficiency
and institutional strengths. Thus, any CEO undertaking
unrelated diversification without clear demonstration of
value premiums and a path to sustain such premiums is
clearly inviting trouble. Markets today are less likely to
continue their indulgent attitude that used to prevail before
economic reforms were initiated.Dr Ramaswamy noted that in contemporary India,
business group CEOs are under pressure to actively tame
undiversified portfolios. Several studies have clearly
demonstrated that the sources of abnormal returns that
used to accrue to unrelated diversified business groups by
virtue of advantages such as access to licences, cheaper
capital, brand name and reputation, and legislative lobbying
have started to attenuate.The only tangible benefits that remain from strategies
are associated with internal advantages from unique
organizational structures that promote cross-business
synergies, sharing technological benefits arising from
positive blowbacks of innovations from one business to
another, or the ability to capture unique value by training
talent in ways that the external market may not be capable
of doing.Referring to major management challenges that CEOs are
likely to face when the board compels them to diversify
based on perceived market developments, Dr Ramaswamy
has this to say: “The challenges of managing a diversified
company, especially in the long term, are indeed quite
immense.”
Witness the anguish in boardrooms across the world where
conglomerates have been challenged to change their ways.
The shining stars of years gone by such as Siemens and GE
are but two examples of firms that have been facing the
wrath of the market for their inability to manage value-
adding growth.The management challenges typically focus on the ability
of the senior leadership to clearly articulate the rationale
behind the diversified portfolio and their ability to
demonstrate value over the long haul. GE lost its lustre
largely because of questionable bets it placed on its oil
business that was headed down when GE acquired Baker
Hughes, an oilfield services company. Siemens and GE both
made very large bets in their turbines businesses when the
energy landscape started to change.These examples reflect how difficult it is to read markets
correctly in a consistent fashion and place more wining
bets than losing ones. In India, perhaps the Aditya Birla
Group and Mahindra & Mahindra are examples of groups
that have shown resilience in the long term with an ability
to weather some of the setbacks they have been dealt with.
Despite challenges, they seem to have identified specific
ways in which they can seize value premiums in tough
businesses.It appears that their resilience and consistency in adding
value originates in the way they are structured, the systems
and processes that they religiously follow in order to drive
cross-business synergies, and their zealous pursuit of a
common culture that permeates all their group companies.
CEOs of groups that are not up for this long slog would
perhaps be better off running a focused set of businesses or
even a stand-alone one, Dr Ramaswamy said.V
alue enhancing diversification in
the true sense is getting to be quite
rare. Although relatively more common
in countries like India, contextual factors
such as poor infrastructure or weak
institutions do not drive firms to diversify
as much as they used to in the past. Thus,
diversification is more of a deliberate
choice in contemporary times