You are on page 1of 1

FOCUS OR DIVERSIFY?

The toughest test for leaders is to determine when to move forward with a diversification and when to pull back. Some lessons from the experiences of HCL and PVR

ILLUSTRATION: AJAY MOHANTY

ABHILASHA OJHA

S

earch, Google+, Android, Google Glass, self-driving cars — the company synonymous with online search, Google, appears to be in a hurry to grow in almost every direction at once. The world’s largest software maker (measured by revenues) Microsoft has taken a headlong plunge into a series of new businesses — search engine, game consoles, internet access, touch-screen kiosks… Almost every company struggles with a diversification at some point. When times are good diversification makes unused cash work hard; when times are bad companies enter new territories to re-invent themselves. Such efforts could represent new growth areas or they could prove to be costly distractions. Inevitably, there will be some bad moves, especially with acquisitions that divert resources from a core mission. The big question therefore: Should a company stay focused on the competencies that made it the leader or help it be counted among the great, or should it diversify to keep up with, or try and over-

take, competitors? Experts say that’s one of the trickier questions facing a whole host of companies irrespective of their industry. Indeed, the toughest test for leaders is to determine when to move forward and when to pull back. No management textbook or theory can tell you that. Of course, there are real-life examples to learn from. Here The Strategist looks at two recent examples — of companies from two very different industries that went through the whole grind of diversification and have now decided to exit a few businesses and concentrate on others where they can claim to have competitive advantage. The first one is a leader in the movie exhibition business, namely PVR, while the second is homegrown PC maker HCL Infosystems. PVR began its innings in the movie exhibition business by introducing world-class multiplexes in India and went for a ‘related’ diversification into the high-risk high-return business of film production. It decided to get out of the movie making business post the 2012 release of Hindi movie Shanghai because it doesn’t see this as a viable

business opportunity for the long term. HCL Infosystems, our second example, said recently that it will phase out its manufacturing business over the next few years to improve margins and increase organisational efficiency. The company will instead focus on strengthening the services and distribution verticals. HCL Infosystems CEO and managing director Harsh Chitale has been quoted in the media saying HCL “will be in PC distribution and in after sales services but will not manufacture HCL branded products in the future”. Though both these companies diversified, both understood the need to pause even as one went back to where it started and the other moved away from it. What’s pertinent is that both paused at the right time, mulled over what to do next and acted without delay to avoid any distress to their businesses or people.

says Gianchandani. Also, the nature of the business is such that you can’t be handsoff. It demands that the leadership team is clued into the process from start to finish — go through scripts, meet film directors and sit with them on story sessions, get into the nitty-gritty of production, attend shoots et al. In other words, understand

the rules of a completely new ballgame. “The business was taking up a disproportionate amount of management time. On the other hand, the exhibition business, our mainstay, threw up new opportunities,” says Gianchandani.
> CONTINUED

ON PAGE 4

Back to basics
The latest initiatives of PVR and HCL, or for that matter, Google and Microsoft, raise some interesting questions. What kinds of expansions are synergistic with the core business, and which are unrelated? Can a company remain nimble enough and defend its current turf? Does it risk a backlash as it moves into new markets? Answering that question effectively forces companies to assess their true competitive advantages. A recent study by Booz & Co covering more than 6,000 companies in 65 industries finds that the best performance improvement and growth opportunity for a company comes when it rises to the top of the industry that it operates in. According to Evan Hirsh, partner, Booz & Co, also the co-author of The Grass isn’t Greener, leaders often try to expand into hot new growth industries looking for accelerated performance they think isn’t available in their core business. Such efforts often prove futile because companies fail to leverage existing expertise or assets into new businesses to generate returns. “Companies perform better and produce better shareholder returns when they strengthen the key capabilities that help them win in their core industry. Companies that try to grow into new industries are likely to fail,” says the study. Consider PVR against this backdrop. According to Kamal Gianchandani, group president, PVR, the company spotted a viable business opportunity in the business of film production around the year 2007. Moving into film production meant allocating a fair amount of capital to back good cinema. What the company failed to note was that while the production costs for films had sky-rocketed, returns were tougher to come by. Since the company was looking at a new revenue stream it went whole hog and made huge investments in its film making business — like hiring a completely new team with the mandate to nurture the production arm. The problem, in hindsight, was that it is tough to achieve scale in the business of film production. “The business of film production can be a margin game but not one of scale,”

EXPERT TAKE

Pulling the right lever
Here are a few things to keep in mind before you take the plunge:

Question yourself
Do you want to diversify because everyone else is doing it? Do you sense a profitable business in diversification? What do you want to chase through diversification; scale, profitability, viewers /clients/consumers? Will the diversification be through acquisitions or will it be a start-up? Can the diversification add profitability?

Understand how to do it
Once you have the clear understanding of why the diversification is happening, do it right by having a leadership team that is completely in sync with what it aspires to do. This is important because if the diversification fails, the leaders (who lead from the front) are well equipped and in sync with the understanding of why it is crucial to come back to the core competency area. Second, prepare yourself with a diversification plan so that the entire organisation is aware of the growth strategies. Only a good, sound and a well-intentioned plan can be executed deliberately for diversifying.

AMANDEEP KALSI
DIRECTOR, PROTIVITI CONSULTING leadership team (this should be part of the planning strategy), you can also look at partial exits by roping in investors or partners who understand the business well. If nothing works, it’s alright.

Keep the focus
Keep reassessing your core competency business strength even as you expand and diversify for opportunities (PVR was sharp in noting opportunity in its core business despite being the leader already). However, HCL was equally prudent in noting the failure in its core business and kept up the momentum in other related businesses, which are now its core strength areas. Eventually, it is the focus that is important.

Failing is not a crime
Not all diversification plans are successful despite the best strategies but it doesn’t mean you cannot do damage control. Apart from infusing new