DIVERSIFICATIONDIVERSIFICATION

‘‘DI-WORSE-IFICATION’DI-WORSE-IFICATION’

““Companies should not Companies should not Diversify as that eats away Diversify as that eats away Resources and can destroy Resources and can destroy

Shareholder’s value.Shareholder’s value.Therefore, Companies should Therefore, Companies should

have a Core focus”have a Core focus”

THE KEYWORDSTHE KEYWORDS

• Eats Away ResourcesEats Away Resources

• Destroys Shareholder’s ValueDestroys Shareholder’s Value

• Core FocusCore Focus

“Diversification is only required when investors do not understand what they

are doing.”

- - WARREN BUFFETTWARREN BUFFETT

““Diversification does not Diversification does not always lead aalways lead a

business to build on business to build on success.success.

All too often it converts a All too often it converts a highlyhighly

successful business into a successful business into a mediocre large business.” mediocre large business.”

- - RICHARD RICHARD BRANSONBRANSON

““The corporate strategies ofThe corporate strategies of diversification of most diversification of most

companies have dissipated companies have dissipated instead of created instead of created

shareholder value.”shareholder value.”

- - MICHAEL PORTERMICHAEL PORTER

DIVERSIFICATIONDIVERSIFICATION

• "to give variety to, or to vary." "to give variety to, or to vary."

• "to extend business activities into disparate "to extend business activities into disparate fields" fields"

• "to distribute investments in order to "to distribute investments in order to average the risk of loss." average the risk of loss."

* NO TALK ABOUT SHAREHOLDERS** NO TALK ABOUT SHAREHOLDERS*

ANSOFF MATRIXANSOFF MATRIX

What Ansoff Says….What Ansoff Says….

• The first three strategies are usually The first three strategies are usually pursued with the same technical, financial, pursued with the same technical, financial, and merchandising resources used for the and merchandising resources used for the original product lineoriginal product line

• Diversification usually requires a company Diversification usually requires a company to acquire new skills, new techniques and to acquire new skills, new techniques and new facilities.new facilities.

• Diversification is meant to be the riskiest Diversification is meant to be the riskiest of the four strategies to pursue for a firm. of the four strategies to pursue for a firm.

DISADVANTAGESDISADVANTAGES

• Slowing growth in Core business.Slowing growth in Core business.

• Addition to management costs.Addition to management costs.

• Bureaucratic complexities.Bureaucratic complexities.

• Losses during market consolidation Losses during market consolidation processprocess

• Negative SynergiesNegative Synergies

• Political and Legal intricacies.Political and Legal intricacies.

COMPETITIVE STRENGTHS OF COMPETITIVE STRENGTHS OF SINGLE-BUSINESS STRATEGYSINGLE-BUSINESS STRATEGY

• Less Ambiguity aboutLess Ambiguity about

‘ ‘Who we are’Who we are’

‘ ‘What we do’What we do’

‘ ‘Where we are headed’Where we are headed’

OPTIMUM UTILIZATION OF OPTIMUM UTILIZATION OF RESOURCESRESOURCES

Improving CompetitivenessImproving Competitiveness

Expansion in new geographic marketsExpansion in new geographic markets

Responding to changing market Responding to changing market conditionsconditions

Responding to evolving customer Responding to evolving customer preferencespreferences

EROSION OF SHAREHOLDER’S EROSION OF SHAREHOLDER’S WEALTHWEALTH

• COCA-COLA ACQUIRING TAYLOR WINES: COCA-COLA ACQUIRING TAYLOR WINES: 18.99%18.99%

• PACIFIC SOUTHWEST AIRLINES PACIFIC SOUTHWEST AIRLINES DIVERSIFYING INTO CAR RENTALS & DIVERSIFYING INTO CAR RENTALS & HOTELS: 21%HOTELS: 21%

• UB GROUP DIVERSIFYING INTO FORMULA 1: UB GROUP DIVERSIFYING INTO FORMULA 1: 12.50%12.50%

FOCUS ON CORE FOCUS ON CORE FUNCTIONALITIESFUNCTIONALITIES• Greatness comes from focus. Greatness comes from focus.

• Connective Tissues that hold together a portfolio of Connective Tissues that hold together a portfolio of seemingly diverse businessesseemingly diverse businesses

• Funnels people’s skills and efforts to make a greater Funnels people’s skills and efforts to make a greater effect. effect.

• Have one main core competency, or a closely Have one main core competency, or a closely related cluster of core competencies that support related cluster of core competencies that support each other. each other.

• WE DON’T PREACH THAT A COMPANY SHOULD NOT WE DON’T PREACH THAT A COMPANY SHOULD NOT DIVERSIFY AT ALL.DIVERSIFY AT ALL.

• WE ARE AGAINST MINDLESS AND RECKLESS WE ARE AGAINST MINDLESS AND RECKLESS DIVERSIFICATION.DIVERSIFICATION.

• DIVERSIFICATION IS RATIONALIZED WHEN CORE DIVERSIFICATION IS RATIONALIZED WHEN CORE COMPETENCIES ARE KEPT INTACTCOMPETENCIES ARE KEPT INTACT

CORRECT TIMING IS CORRECT TIMING IS CRITICAL.CRITICAL.

WHAT THE EXPERTS SAYWHAT THE EXPERTS SAY

• THE ATTRACTIVENESS TESTTHE ATTRACTIVENESS TEST

• THE COST OF ENTRY TESTTHE COST OF ENTRY TEST

• THE BETTER OFF TESTTHE BETTER OFF TEST

RIGHT TIMING PAYSRIGHT TIMING PAYS

• GOOGLEGOOGLE

• CATERPILLARCATERPILLAR

• VIRGIN GROUPVIRGIN GROUP

SUCCESSFUL SINGLE SUCCESSFUL SINGLE BUSINESSESBUSINESSES

• INTEL: Focus on Computer ChipsINTEL: Focus on Computer Chips

• WAL-MART: Focus on Lower Costs WAL-MART: Focus on Lower Costs teaming up with Quality Serviceteaming up with Quality Service

• MARUTI UDYOG LTD: Focus on MARUTI UDYOG LTD: Focus on Quality CarsQuality Cars

FAILED DIVERSIFICATIONSFAILED DIVERSIFICATIONS

• TATA – JAGUARTATA – JAGUAR

• KINGFISHER AIRLINES & FORCE INDIA KINGFISHER AIRLINES & FORCE INDIA F1 TEAM BY UB GROUPF1 TEAM BY UB GROUP

• HINDUSTAN UNILEVERHINDUSTAN UNILEVER

IN BUSINESS, AS IN ART, WHAT IN BUSINESS, AS IN ART, WHAT DISTINGUISHES LEADERS FROM DISTINGUISHES LEADERS FROM

LAGGARDS, AND GREATNESS LAGGARDS, AND GREATNESS FROM MEDIOCRITY, IS THE FROM MEDIOCRITY, IS THE

ABILITY TO UNIQUELY IMAGINE ABILITY TO UNIQUELY IMAGINE WHAT COULD BE AND HAVE AN WHAT COULD BE AND HAVE AN

ORIGINAL AND DISTINCTIVE ORIGINAL AND DISTINCTIVE STYLE OF FOCUS.STYLE OF FOCUS.

-C.K. PRAHALAD-C.K. PRAHALADGARY HAMELGARY HAMEL

(COMPETING FOR THE FUTURE)(COMPETING FOR THE FUTURE)

THANK YOUTHANK YOU

WE ARE NOW OPEN TO WE ARE NOW OPEN TO QUERIESQUERIES

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