India's Business Families: The quest for focus
Team BT January 4, 1998The core of the mega-dilemma confronting the Indian business house on the eve of the new millennium couldn't be in sharper focus. Should this typically multi-business conglomerate continue to remain as diversified as it has been in the past? Or should it conform to the concept-first articulated by management gurus C.K. Prahalad and Gary Hamel in 1989, and increasingly being embraced by the world's best corporations, big or small-of core competence? The choice is stark. Either grope for growth in as many different sectors as possible, relying on demand-supply mismatches for survival.
Or concentrate on a handful of core businesses, constantly honing the group's skills in these areas in order to be clear leaders. Despite the obvious appeal of the latter, however, the business house has been hampered by a combination of historical factors and the compulsion for pursuing growth. First, the licence raj forced it to seek opportunities only where the controlled economy permitted, not where its capabilities or inclinations suggested, leading to the creation of chance-erected, chance-directed conglomerates like the 80-company, 25-business Tata Group, or the 48-company, 31-business B.K.-K.M. Birla Group. Next, the plethora of openings thrown up by liberalisation- with its attendant delicensing and dereservation- offered new trajectories of diversification, involving business lines where the private sector could not have mastered competencies, having been barred hitherto from entering these areas. Thus it was that the Rs 2,481.49-crore Videocon Group moved from consumer electronics into power, petroleum, construction, and real estate while the Rs 3,300-crore Essar Group set its sights on oil refining, telecom, and power in addition to steel and shipping.
Providing auxiliary power for this continuous journey towards diversification was the constant need to accommodate the personal ambitions of different members of the family, compelling the Rs 3,984.45-crore L.M. Thapar Group, for instance, to branch out into leather, chemicals, and AAC bricks, from paper, tractors, and engineering.
Echoes Sushil Khanna, 43, professor, Indian Institute of Management-Calcutta: ''Indian companies are so under-diversified that focus at this stage could be suicidal.'' Seized upon immediately by many business houses as vindication of their practice of not sticking to the knitting, this assertion has actually revived the controversy.
That the survival of the business house in the face of cut-throat competition from younger, smarter, nimbler, and globally-oriented companies operating at the cutting edge of technology can only be ensured by being top-class is no longer in doubt. In these demanding circumstances, the critical questions that the diversified group-a.k.a. the typical Indian business house-must be prepared to answer challenge the core of their earlier assumptions:
THE CORE OF GROWTH
Like every industrialist around the world, the classic Indian business house, too, used diversification as the engine for working up a growth momentum far in excess of what its current resources and capabilities could generate. And branching out into different businesses was the simplest option in this quest for disproportionate growth. Indeed, that adhering to a single business could possibly crank up mega-growth, doubling and re-doubling turnover and size year after year, was unthinkable. After all, virtually every group that expanded at an inflationary rate, from the Rs 15,000-crore K.M. Birla Group to the Videocon Group, from the Rs 5,641-crore R.P. Goenka Group to the Rs 2,347-crore Arvind Mafatlal Group, did so by furiously cramming new businesses-greenfield ventures as well as acquisitions-into its portfolio. Says Walter Vieira, 59, CEO, Marketing Advisory Services: ''The reasoning was that a diversified portfolio can equip a business house with enormous strategic advantages which can be used for achieving high growth. Small may, sometimes, be insignificant.''
In stark, uncompromising contrast, the tenet of core competence holds that the only route to growth is the leveraging of unique capabilities to develop new products and markets, seeking out opportunities-or white spaces-whose existence competitors are not yet aware of. Or, as Prahalad and Hamel contend: ''Any company that wants to capture a disproportionate share of profits from tomorrow's markets must build competencies that will make a disproportionate contribution to future customer value.'' Adds S.K. Shelgikar, 42, director (finance) to the Videocon Group: ''It all boils down to customer value. Core competence must contribute significantly to what the customer perceives as value.'' And as business in general, and the Indian business house in particular, is beginning to realise, it is in delivering more value than competitors that the chances of salvation are strongest. But a diversified basket of businesses, built on the bedrock of lobbied-for licences and haphazard acquisitions, have not provided the vehicles for maximising customer value. ''That's why,'' concludes Hrishikesh Mafatlal, 43, CEO, Arvind Mafatlal Group: ''the Indian business group will be better off pursuing growth through focused businesses.''
THE CORE OF COMPETITION
Snug in the shelter afforded by high tariffs and entry barriers for world-class companies, business families were under no pressure to be globally competitive, in terms of either price or quality. Nor were they attracted by global markets, which demanded different standards. Why, indeed, should they have been? Analyses Arvind Mahajan, 44, director, A.F. Ferguson & Co.: ''Diversification was the best growth option available to Indian firms, for which it was more profitable to operate in local markets rather than international markets.'' In fact, the choice was between leveraging their expertise to enter new markets, and entering unrelated businesses but staying in familiar markets. Adds Mahajan: ''Once their primary businesses were deeply entrenched in the domestic market, most Indian family businesses chose the latter option, since the risks of doing business in unknown markets tended to nullify any other competitive advantage.''
Naturally, that made diversification an easy choice, undeterred as the business family was by the spectre of strong competition in any field. However, the very circumstances in which this form of expansion became a vehicle for quick growth are today hanging like millstones around the necks of diversified groups. For, in each of their businesses, they are under attack from focused companies operating on global standards of quality and costcompetitiveness. And, unaccustomed to competing with the Best-In-Class in every sector, the family business is labouring to hold its own in even one of them. For the business family, therefore, it's a Hobson's choice between a focused portfolio of enterprises and a diffused assortment of unconnected ventures. Observes a business historian: ''In an open economy, to be wildly diversified and yet world class in every business is virtually a contradiction in terms.'' And since competitiveness will be the one essential ingredient of survival in the 21st Century India, core competence will offer a simpler route to endurance for the business family.
THE CORE OF BRANDING
Supporting the case for unrelated diversifications in the past was the temptation to leverage the power of a brand built up through decades of success in a business. From Godrej to Tata, family business houses used the first part of their existence to create well-recognised brands that stood for assurance and solidity, and promptly went on to yoke those labels to every new business, hoping to mow down entry barriers. Explains S.R. Ganesh, 51, advisor (corporate development), Essar Group: ''In an era when the reputation of the manufacturer counted for more than the intrinsic quality of products, the strategy paid off.'' Thus, a Godrej Group could transfer the core associations of its brand from locks to detergents as well as refrigerators, and still find acceptance from consumers.
Unfortunately, that strategy is now a minefield rather than a goldmine. For, today's value-hungry customer has learnt to associate specific brands with specific attributes, and is suspicious of umbrella brands that offer no definitive unique selling proposition, except an undifferentiated one of quality, no matter what the product. Indeed, as the Indian market opens up further to the world's brands, business families are likely to increasingly taste failure with their one-brand-fits-all-products strategy. That, in turn, will weaken the rationale for diversifying as a means to leveraging brands, forcing the groups to pare down their businesses to those where their brands are strong and offer meaningful benefits.
THE CORE OF FINANCING
But that line of thinking no longer holds water in the post-liberalisation economy. For, using one line of business as a milch-cow to finance unrelated diversifications is leading many a group to starve their core enterprises of resources. The victim? What else but the competitive strengths they had tried to build with their first-mover advantages and historical relationships with their markets and customers.
The Essar Group, for instance, has been paid back for its inter-company channelling of funds with skyscraping debts of Rs 6,600 crore, translating into an annual interest cost amounting to 20.5 per cent of turnover. The lesson from the cash-strapped group's survival strategy-exiting from several non-core businesses-is obvious: while the powerful businesses wilt under the pressure of financing unrelated new ventures, even the latter collapse. That's not all.
Today's analytical institutional investor is inherently suspicious of diversified groups, and abhors the idea of weakening one business to bankroll another. Such groups are seldom on their buy lists, which is making fund-raising tougher rather than easier for diversified groups. Complains R. Ravi, 32, investment analyst, Jardine Fleming: ''Unaware of just how capital-intensive and operationally gruelling new projects can be, several groups have taken on different projects simultaneously.'' Obviously, the business family must decide whether the price of diversifying with internal cash isn't too high when compared to the benefits of staying focused.
THE CORE OF CYCLES
The one justification for diversification that business groups clung to in the closed economy was that it was the equivalent of taking out insurance policies against business cycles. A diversified portfolio, comprising industries whose crests and troughs occur alternately, was considered the perfect antidote against the all-eggs-in-one-basket potion.
Even today, that remains the rationale for many family business groups as they reach out to grasp new opportunities-real and imagined. For instance, the Rs 2,000-crore Torrent Group is trying to hedge against fluctuating fortunes in the pharmaceuticals business by entering the power sector through deftly orchestrated takeovers, as well as financial services.
Explains J.P. Jakhotiya, 36, professor, Jamnalal Bajaj Institute Of Management Studies: ''Conventional wisdom posited that the diversified group was immune to pockets of misfortune. That actually made the business family stronger than a handful of companies focused on their core business.'' But anachronism has annihilated that assumption.
In a marketplace teeming with rivals, the only successful businesses are those that can outperform competitors: in boom times, they grow faster while bucking the trend when downturns come. The alternative is extinction. Thus, no business that goes under in a recession in its industry can expect to live to fight another day without transforming itself thoroughly. Ergo, the cushion provided by another business within the group that's flowering simultaneously, till the good times return, will become redundant. Already, shakeouts are threatening every also-ran in every sector in the country, with no more than a handful of players among the scores poised to enter the new millennium. With no second chances, a mutually-hedged portfolio of businesses offers the family no protection anymore.
THE CORE OF COMPETENCIES
Re-examine their diversification doctrines they must. But can the country's business families marry their penchant for entering multiple businesses with the theory of core competence by building a conglomerate of focused companies which, nevertheless, add up to a diversified group? Actually, the very rationale of diversification among business families today is the creation of a lattice of enterprises- each of them linked to one another through flows of capital, other resources, managerial involvement of members of the family, and ambitions that transcend the maximisation of returns from each business. Thus, the very construct of a pool of watertight, independent businesses, each built around distinct core competencies, and sharing only the financial investment of the promoters, is a contradiction in terms for the country's family groups.
For a multi-business group to thrive, however, it must share certain competencies across the different businesses, extracting synergies from them. But to build such a portfolio, a business group must have distinct core competencies of its own, which can deliver inimitable competitive advantages. Or, as V.S. Krishnan, 47, president (group strategic planning) of the Rs 5,641-crore RPG Group puts it: ''It's critical that groups put on new thinking caps, determine which competencies will give them competitive advantage for the future, and then get down to growing or acquiring them.'' Only then can the question of spreading them across different businesses arise. But do Indian business families actually possess such competencies yet? Says a sceptical S. Ramadorai, 49, CEO, Tata Consultancy Services: ''Indian groups haven't adequately systematised the issue of competencebuilding.
So, if you don't have real competencies to start with, trying to pedal them for synergistic divergent growth doesn't make sense.'' The starting point for building such competencies? Identifying-and concentrating the group's resources and energies on-core businesses where it enjoys a competitive edge which can be reverse-engineered to create the competencies that created this edge in the first place.
And, rather than diversification, it is expansion and integration-forwards and backwards-that offer the ideal opportunities for focused growth by leveraging these competencies, as the Rs 8,730-crore Reliance Group is eloquently demonstrating. Is there an alternative? Sure: a bloated bundle of businesses sans the unique advantages that can command either a powerful presence in the marketplace or, failing that, a price-tag that makes divestment worthwhile. That's why the successful family business of tomorrow must necessarily sacrifice spread for depth, trading in the wide swathe that it used to cut through the business landscape for a narrow, focused beam. That, for the country's khandaani biradari, is the core of survival into the 21st Century.