Diversified Indian companies: a study of strategies and financial performance

Abstract

In the second half of the twentieth century the corporate profile in advanced countries like USA and UK had undergone significant changes as a result of diversification strategies by their business corporations. Diversification is now becoming a major corporate strategy in India too and hence it would be useful for corporate managements, shareholders, public financial institutions to know the effectiveness of diversification in improving profitability and growth, and reducing risk. Though theoretical and empirical studies done abroad by financial, economic and business policy researchers suggest that only certain categories of diversification would result in higher performances, a systematic study of this subject is yet to be carried out in India. This study attempts to accomplish this.

The hypothesis of the study address to the following issues: 1) Did the diversified companies outer form non-diversified companies? 2) Did the performance differ among different types of diversification strategies, for example, between related and unrelated diversification? And hence 3) Is there any optimum strategy of diversification? With these objectives, This study categorized diversified companies into four strategic groups, namely (i) Related Diversifiers, (ii) Dominant-Unrelated Diversifiers, (ii) Restricted Unrelated Diversifier’s, and (iv)Un restricted Unrelated Diversifiers. A multi—industry, multi—company approach involving a sample size of 50 large Indian companies in the manufacturing sector was used for establishing generalizability of the findings. Adjustment for factors such as size, industry, age and WRTP status were also incorporated in the design of the study. The performance measures used are in the dimensions of growth, profitability, risk reduction, and capital market based (overall) performance indices. While analyzing the data, appropriate statistical tests were used for testing statistical significance of differences in performance, The findings of‘ the study suggest that in general diversification is useful For improving growth and profitability. However, where diversification shows significant improvement over single business strategy is in the areas of reduction of risk and improving overall capital market performance. Among diversified companies, the Related Diversifiers performed better than the substantially unrelated diversifiers. When the Unrestricted Unrelated Diversifiers turned out to be the lowest performing strategic category, the Dominant Unrelated group was found as the best per formers. An indication that small sized diversifiers are likely to experience poor performance was also found. Finally this study discusses the implications of the findings for corporations, investors, public policy makers and researchers and also suggests areas for further research.