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CASE AGAINST UNRELATED DIVERSIFICATION
Many people would have been surprised about the recent news that Reliance Industries is planning to enter into herbal sector in a big way. Earlier, this textile and petrochemical oriented organisation has made an entry into Life Science/Biotech sector.
It is not uncommon to find several of the organisations, both big and small, announcing new projects for diversification in totally unrelated areas, which appear to be largely motivated by the press reports and the so called market trends.
In recent times,several organisations in the chemical and pharmaceuticals sector have got into software industry, without much of success. We have also seen textile units getting into real estate business and alcohol producer getting into shipping industry.
One wonders as to whether such diversification in totally unrelated areas, where the project promoters have no particular experience, is appropriate. It appears that many project promoters think that the job is one of merely assembling a few specialists and making the investment and right noise in appropriate forum. The job cannot be as simple as this .
Very well established group like Aditya Birla could not successfully set up the Seawater Magnesia Project near Visakhapatnam, where more than Rs.3000 million went into drain. DSQ Software, a Chennai based organisation acquired starch based unit at Cuddalore in Tamil Nadu and the entire project has virtually collapsed. Even Dr.Reddy's Laboratories have gone into non pharma area where their experience have been bitter. Highly organised consumer product oriented company Hindustan Lever now wants to move away from hybrid seeds business. As a matter of fact, the spokesmen of Hindustan Lever said that they would like to move away from the seed business immediately but are waiting since the buyers could make the necessary payment only in 2005.
Unrelated diversification is not the ideal option available for the industries. In today's context where enormous amount of specialisation and inbuilt strength and deep knowledge are required to become successful, industries should give themselves enough time to learn and understand the issues involved .
As a matter of fact, it is found that most of the organisations going into unrelated diversification often learn at the cost of project.
Several entrepreneurs going into unrelated diversification may even be due to the fact that they lack confidence to expand their operations in the existing areas.
In today's scenario, almost every area of chemical industry offers opportunities for growth by way of product development, process and cost optimisation and technology improvement practices.It may really be unnecessary to jump in unrelated areas and unknown territory
In the international context, most of the products are adequately supplied.There are cases for setting up new projects and creation of additional capacities only based on projected growth in the demand for the products. Substitution possibilities also point to the need for more capacity creation in certain areas.
While there are certainly a number of new project opportunities arising due to changing consumer preferences and living conditions, implementing facility for manufacture and operating the project at optimum standard needs considerable expertise, which cannot acquired in short period of time. Given the fact that most of the projects have to operate in the global context, such requirement of specialisation is becoming all the more important.
Diversification into new areas have to be necessarily very gradual and one should step in with great caution. Amongst multi national companies, one rarely finds this phenomenon of one company jumping into another unrelated area, to the extent that is done in India today.
What is needed is that every organisation has to work out long term strategy and corporate plan, atleast for the period of next 10 to 15 years, which would provide clarity with regard to purpose and direction.
In the case of such organisations capable of long term planning, such unrelated diversification would only like anachronistic concept.
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News and Views 
May 2004
