Diversification

Cases of Wipro & Bajaj

Scope of presentation

Why diversification When to Diversify Selecting the industry: Related Diversification Strategies Unrelated Diversification Strategies Case study-Wipro Ltd Case Study-Bajaj ltd

Why diversification

Identify When and Make moves to enter new businesses Initiate actions to boost combined performance of businesses Find ways to capture synergy among related business units Establish investment priorities, steering resources into most attractive business units

When to Diversify?

When it makes sense to diversify depends on Growth potential in present business Attractiveness of opportunities to transfer existing competencies to new businesses Potential cost-saving opportunities to be realized by entering related businesses Availability of adequate financial and organizational resources Managerial expertise to cope with complexity of operating a multi-business enterprise

What Is Related Diversification?

Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with the value chain(s) of the present business(es) Capturing the strategic fits makes related diversification better phenomenon to increase shareholder value

Common Approaches to Related Diversification

Sharing of sales force, advertising, or distribution activities Exploiting closely related technologies Transferring know-how and expertise from one business to another Transferring brand name and reputation to a new product/service Acquiring new businesses to uniquely help firms position in existing businesses

What Is Unrelated Diversification?

Involves diversifying into businesses with

No strategic fit

Approach is to venture into any business in which we think we can make a profit Firms pursuing unrelated diversification are often referred to as conglomerates

Appeal of Unrelated Diversification

Business risk scattered over different industries Capital resources can be directed to those industries offering best profit prospects Stability of profits -- Hard times in one industry may be offset by good times in another industry If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

Diversification and Shareholder Value

RELATED DIVERSIFICATION

A strategy-driven approach to creating shareholder value

UNRELATED DIVERSIFICATION

A finance-driven approach to creating shareholder value

Case study Wipro Ltd (Unrelated Diversification)

Wipro Ltd
The Company was Incorporated on 29th December 1945, at Mumbai. The Company Manufacture vegetable ghee, vanaspati, refined oils including salad oil, soap, waxs and tin containers for packing, crushing and oil milling trading in oils and oilseeds and manufacture of fluid power products. The Products trade names were "Kisan", "Sunflower" and "Camel

Wipro @ 1967
Azim premji took over the control of Wipro 70 million cooking and baking fats Company Called Western India Vegetable product Limited Wipro Fluid Power was Wipros first diversification in 1975, to address the hydraulic equipment requirements of mobile original equipment manufacturers in India

A Product Comparison
Wipro in 1967
Cooking fat Soap Wax Tin container for packing Trading I n oil Trading in oilseed

Wipro in 1994
Vanaspati Toilet soaps Toiletries Hydraulic cylinders Computer hardware Computer software Lightening Financial servics Medical systems Diagnostic systems Leather exports

Wipro @ 1994
Called WIPRO Limited 7.24 billion diversified Wipro Limited One of the top 100 publicly held companies in India Market leader in traditional cooking fats business, No:2 in information technology and medical system Over the preceding ten years,sales(Cagr rate 26%),PAT(cagr rate 25%) All the companies under one name-WIPRO Ltd

Wipro consumer products( WIPRO LTD)

Government policy of 9% advantage to a a new entrant in a 4%margin business Tax evasion is rampant in the case of unorganized player Decline in margin of vanaspati operation Entered into toilet soap market through bubbleand Wipro shikakai(1985) Followed by santoor when Mysore Sales International was facing a mgmt.trobule(1986) Baby soft range(J &J competitors-highly priced)-1990 Santoor talcum powder and Wipro Baby Soft Talcum Powder introduced(1993)

Wipro InfoTech(WIPRO LTD )

Absence of any computer industry(exit of IBM)in 1977 Develop its own minicomputers Unveiled the Wipro Series 86 in 1981 Importing PC in knocked down form and marketing them under Genius Range of PC(1982) 1988,alliance with Sun Microsystems,USA for manufacture and marketing of Sun workstation Tie up with Seiko-Epson of Japan for manufacture of dot matrix printer(1993) End of 1993, strategic alliance with apple to market Macintosh range of computers 1994-tie up with Nokia for installation,service and maintenance of cellular network

1945 Wipro incorporated

1967 No diversification

2002 Related diversification

1994 Unrelated diversification

External environment @1994

WIPRO Vs unorganized player in consumer product Change in Govts economic policies &resulting large scale entry of MNC Intense competitive environment totally different from past support needed for each of its business with financial and managerial investment

A new approach for balanced future

Revising the company's basic management approach Split into eight separate mini companies each with its own separate equity International tie-up in business where partner brought technology Access to global market

Organisational structure(1994)
Azim premji chairman

Group Companies
Wipro fluid Power 1975 M.S.Rao President Wipro Infotech 1981 Wipro Systems 1983 Wipro Biomed 1989 wiproGE 1990 VIvek Paul President Wipro Lightening 1991 Wipro Financial Services 1992

Wipro Consumer prd. 1947 P.S.Pai President

Ashok Soota Ashok Soota VInod Wahi Vice Chairman Vice Chairman Chief Executive

Varun Nijhawan S.R.Gopalan president Chief Executive

products

Edible oils soaps, toiletries

Hydraulic systems

Comps, Commu. IT sol.

Software Dev.& services

Medical Analytical Instrument

GE Medical Systems

Lamps & Luminaries

Corporate Financial services

Balancing the portfolio

Each business define its key result objective Right balance between financial joint venture and those without financial partnership Joint venture partner only when products where product success dependent on technological edge Related diversification rather than unrelated diversification-homogeneous portfolio

Balancing the growth

Ten year vision-to be among the top ten industrial group in India Related diversification More importance on profit after tax and cash flow Setting up high targets

Balancing management
Values are common though the eight companies are different Greater integration between the companies Independent operation except financial assistance Balanced compensation of employees in different organisation

Wipro @2002
First software company to get SEI Level 5 & also implemented Six Sigma TQM practices Appointment of T K Kurien as President of Wipro Health Science Sales gone up to 34,667 crore with a net profit of 8,661crore ISO 9002 certification for Network Management, Service Implementation and Customer Relationship Management Wipro Ltd has acquired a 45 per cent stake in the Internet service provider Wipro Net Ltd, from Dutch telecommunications operator KPN Telecom at Rs 108.8 crore Wipro Net has entering into a strategic tie up with the US-based Speedera Networks Inc.

A Comparison
Wipro in 1967
Cooking fat Soap Wax Tin container for packing Trading I n oil Trading in oilseed

Wipro in 1994
Vanaspati Toilet soaps Toiletries Hydraulic cylinders Computer hardware Computer software Lightening Financial servics Medical systems Diagnostic systems Leather exports

Wipro in 2002
Vanaspati Toilet soaps Toiletries Hydraulic cylinders Computer hardware Computer software Lightening Financial servics Medical systems Diagnostic systems Leather exports Software Consulting Business Process outsourcing Internet service provider Healthserices Enterprise Solution Six Sigma Consulting

milestones
1980: 1990: 1992: 1993: 1995: 1997: 1998: 1999: 2000: 2001: 2001: 2001: 2002: 2002: Diversification into Information Technology Incorporation of Wipro-GE medical systems Going global with global IT services division Business innovation award for offshore development Wipro gets ISO 9001 quality certification, re-certified twice for mature processes Wipro gets SEI CMM level 3 certification, enterprise wide processes defined Wipro first software services company in the world to get SEI CMM Wipro's market capitalization is the highest in India Start of the Six Sigma initiative, defects prevention practices initiated at project level First Indian company to achieve the "TL9000 certification" for industry quality standards World's first PCMM Level 5 company Ranked 87 among 100 best performing technology companies globally (Business Week, June 2001) Worlds first CMMi ver 1.1 Level 5 company Ranked the 7th software services company in the world by Business Week (InfoTech 100, November 2002) specific level 5

Case study Bajaj Group of Companies (Unrelated Diversification)

Bajaj group of Companies

Bajaj Auto is the flagship of the Bajaj Group of Companies. The Group comprises of 26 companies and was founded in the year 1926. The important listed companies in the group are: Bajaj Auto Ltd. 2&3 wheelers

Maharashtra Scooters
Bajaj Auto Finance Ltd. Mukand Ltd. Bajaj Hindustan Ltd. alcohol Bajaj Electrical Ltd. Fans

2 wheelers
Finance company Steel Sugar, Industrial Magnetos, Lamps,

Policies

They approach their responsibilities with ambition and resourcefulness. They organizes themselves for a transparent and harmonious flow of work. They respect sound theory and encourage creative experimentation. And they make their workplace a source of pride.

SWOT Analysis:
Strength: Technical expertise, in collaboration with Kawasaki Heavy Industries, Japan. Self reliance Worlds lowest cost manufactures in the market Extensive service and dealer networks Higher labour productivity and greater automation Global-scale production Lined up a range of 17 twowheelers covering the entire spectrum from motorcycles to scooters to stepthrus & scooterettes

Weaknesses: In the late seventies there was skid in production due to intermittent labour problems. Underutilization of capacity Not considered living with times

Opportunities:
Launching of new products and variants of existing models backed up by appropriate marketing efforts. Fuel efficiency which is much higher than competitors Virtual zero maintenance among the products Bajaj plans to offer CNG models with euro-II compliant Focusing more on motorcycles to capture the urban market.

Threats: Hero Honda's switch start automatic transmission 100cc scooter Competition from MNC's Government regulations Dealers not adjusted with changing realities Change in tastes of consumers Increase of secondary or resale market for twowheelers