8/13/2019 Case Study Focus or Diversify

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FOCUSOR

DIVERSIFY?The toughest test forleaders is to determine whento move forward with a

diversification and when

to pull back. Some lessons

from the experiences ofHCLand PVR

 ABH ILA SHA OJH A 

Search, Google+, Android, Google

Glass, self-driving cars — the com-

pany 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 (mea-

sured by revenues) Microsoft has taken aheadlong plunge into a series of new busi-

nesses — 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 competen-

cies 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 for-

ward and when to pull back. No manage-

ment textbook or theory can tell you that.

Of course, there are real-life exam-

ples to learn from. Here The Strategistlooks at two recent examples —of com-

panies from two very different indus-

tries 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 home-

grown 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 strength-

ening the services and distribution ver-

ticals. HCL Infosystems CEO and man-aging 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 diver-

sified, 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.

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 unre-

lated? 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 effec-

tively forces companies to assess their

true competitive advantages.

A recent study by Booz & Co covering

more than 6,000 companies in 65 indus-

tries 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’tavailable in their core business. Such

efforts often prove futile because compa-

nies 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 busi-

ness 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 costsfor 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 com-

pletely 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,”

says Gianchandani. Also, the nature of the

business is such that you can’t be hands-

off. 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 dispropor-

tionate amount of management time. On

the other hand, the exhibition business,

our mainstay, threw up new opportuni-

ties,” says Gianchandani.

 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 diver-

sification? What do you want tochase through diversification;

scale, profitability, viewers

/clients/consumers? Will the

diversification be through acquisi-

tions or will it be a start-up? Can the

diversification add profitability?

Understand howto do it

Once you have the clear understand-

ing of why the diversification is hap-

pening, do it right by having a lead-

ership team that is completely in sync

with what it aspires to do. This is

important because if the diversifica-

tion 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, prepareyourself 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.

Failing is not a crime

Not all diversification plans are suc-

cessful despite the best strategies but

it doesn’t mean you cannot do dam-

age control. Apart from infusing new

leadership team (this should be part

of the planning strategy), you can

also look at partial exits by roping in

investors or partners who under-

stand the business well. If nothing

works, it’s alright.

Keep the focus

Keep reassessing your core compe-tency business strength even as you

expand and diversify for opportu-

nities (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 momen-

tum in other related businesses,

which are now its core strength

areas. Eventually, it is the focus that

is important.

Pulling theright lever

E X P E R T T A K E

ILLUSTRATION: AJAY MOHANTY

> CONTINUED ON PAGE 4

AMANDEEP KALSI

DIRECTOR, PROTIVITI CONSULTING

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