Model Answer
0 min readIntroduction
Diversification, in its essence, is a growth strategy where a company enters into a new market or industry, one which is different from its current business. This isn’t merely expanding an existing product line; it’s a substantial alteration of the business definition, moving beyond core competencies. In recent years, Indian corporates have increasingly embraced diversification, moving beyond traditional sectors like textiles or commodities into areas like financial services, technology, and healthcare. This trend is driven by factors like slowing growth in core sectors, the pursuit of higher profitability, and the desire to mitigate risk in a volatile global economy. The statement accurately reflects this fundamental change in business strategy.
Understanding Diversification: A Change in Business Definition
Diversification fundamentally alters a company’s identity. It moves a firm away from relying on a single industry or product line, impacting its resource allocation, organizational structure, and competitive positioning. Anil K. Gupta and Vijay Govindarajan, in their work on strategy, emphasize that diversification requires building new capabilities and often involves entering markets where the firm lacks prior experience.
Types of Diversification Strategies Adopted by Indian Corporates
Indian corporates have adopted various diversification strategies, broadly categorized as follows:
1. Related Diversification (Concentric Diversification)
This involves entering industries that are related to the company’s existing business in terms of technology, markets, or production processes. This allows for synergy and leveraging of existing capabilities.
- Example: Reliance Industries’ foray into Telecom (Jio). Reliance, traditionally an energy company, leveraged its existing infrastructure and financial resources to enter the telecom sector, creating significant synergies in data and digital services.
- Example: Tata Group’s expansion into various sectors like automobiles (Tata Motors), steel (Tata Steel), and hospitality (Indian Hotels). The Tata Group benefits from a strong brand reputation and shared values across its diverse businesses.
2. Unrelated Diversification (Conglomerate Diversification)
This involves entering industries that have no apparent connection to the company’s existing business. The primary motivation is often financial – seeking higher returns or reducing overall risk.
- Example: Aditya Birla Group’s presence in sectors like cement (Grasim), telecom (Vodafone Idea), and fashion retail (Pantaloons). These businesses operate independently with limited synergy.
- Example: Mahindra Group’s diverse portfolio including automobiles, IT services (Tech Mahindra), and real estate. This demonstrates a strategy of spreading risk across multiple sectors.
3. Horizontal Diversification
This involves acquiring or establishing businesses in the same industry but with different products or services. This aims to increase market share and reduce competition.
- Example: ITC’s expansion from cigarettes to hotels, paperboards, and packaged foods. While seemingly diverse, these businesses cater to consumer markets and leverage ITC’s distribution network.
4. Vertical Diversification
This involves expanding into different stages of the supply chain, either backward (towards suppliers) or forward (towards customers). This aims to gain greater control over costs and distribution.
- Example: Tata Steel acquiring coal mines (backward integration) to secure raw material supply. This reduces reliance on external suppliers and stabilizes costs.
Reasons for Diversification by Indian Corporates
Several factors have driven the diversification strategies of Indian corporates:
- Slowing Growth in Core Sectors: Many traditional industries in India have experienced slower growth rates, prompting companies to seek new avenues for expansion.
- Risk Mitigation: Diversification reduces a company’s dependence on a single industry, mitigating the impact of economic downturns or industry-specific challenges.
- Synergy and Economies of Scale: Related diversification allows companies to leverage existing resources and capabilities, achieving cost savings and competitive advantages.
- Financial Opportunities: Unrelated diversification can provide access to higher-growth industries and potentially higher returns on investment.
- Globalization and Competition: Increased global competition has forced Indian companies to diversify to remain competitive and expand their market reach.
- Government Policies: Policies promoting liberalization and deregulation have created opportunities for companies to enter new sectors.
| Diversification Type | Risk Level | Synergy Potential | Capital Requirement |
|---|---|---|---|
| Related | Moderate | High | Moderate |
| Unrelated | High | Low | High |
| Horizontal | Moderate | Moderate | Moderate |
| Vertical | Low-Moderate | Moderate | Moderate-High |
Conclusion
In conclusion, diversification represents a significant strategic shift for businesses, fundamentally altering their definition and scope. Indian corporates have actively pursued diverse strategies – related, unrelated, horizontal, and vertical – driven by factors like slowing growth, risk mitigation, and the pursuit of synergy. While diversification offers potential benefits, it also presents challenges related to managing complexity and building new capabilities. Successful diversification requires careful planning, effective execution, and a clear understanding of the target market and competitive landscape. The future will likely see continued diversification as Indian companies strive for sustainable growth and global competitiveness.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.