Description
The report is about diversification of JK tyres.
JK Industries
Diversify: To be or not to be
D I V E RS I F I CA T I O N BY J K T Y RE S Whereas horizontal integration (or related diversification) involves moving into closely aligned industries, unrelated diversification means moving into industries that share no obvious commonality. For example, think GE or United Technologies. GE’s light bulb business shares no obvious connection to its aircraft engine or finance business. So, beyond the obvious benefit of combining countercyclical businesses to smooth earnings, how does unrelated diversification create value if the different SBUs are run as basically standalone businesses? CRE A T I N G V A L U E F O R T HE CO M P A N Y : • Transferring competencies: A company like JK tires has its competency in product and marketing innovation. But these strategic assets worked for JK tires in a bundled fashion as they were quite interconnected to each other. So if JK tires wanted to transfer the strategic asset to a new unrelated industry, it needed to break up this chain of competency and create a new set of competencies which would have worked together in the new industries. But in case of JK, the management didn’t do anything of that sort, the only consideration that went into diversification seems to be: o Not putting all the “eggs” in one industry basket o Market becoming unattractive and too competitive Exploiting managerial talent: This is really a subset of the above. But, the competency being transferred is managerial skill. This is probably the skill GE exploited.
•
Two main problems arose with unrelated diversification: • Misallocation of resources: First, information distorts on its way up the chain of command. This can lead to a misallocation of resources. An unrelated diversifier is basically acting as a mutual fund, allocating capital across different businesses. This allocation can be wrong simply because management miscalculated the growth opportunities of each of the different divisions or because the management did not have accurate information. As in case of any company, JK tyres also didn’t have unlimited resources, and when it went into unrelated capital and resource intensive industries it had difficulty in allocating sufficient resources to all the industries. Loss of managerial focus: Like the proverbial clown trying to keep plates spinning, JK tires had a lot of spinning plates in air at the same time and none of the plates were in the hand. The more plates, the lower the chance of success of all the plates spinning successfully. The more divisions a manager has to keep his or her eye on, the less attention he or she will pay to any individual business and a lack of focus may result in failure.
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In case of JK tires, it would have made sense to diversify, if:
o o
Growth potential in present business of tires was less Attractiveness of opportunities to transfer existing competencies to new businesses was present Potential cost-saving opportunities to be realized by entering the different businesses Availability of adequate financial and organizational resources Managerial expertise to cope with complexity of operating a multi-business enterprise
o
o o
But we see from the above discussion, in case of JK tires was none of the advantages were present, and therefore it is a bad decision to go for diversification at this point of time when it is facing a lot of competition in its core business of tires and it is also constrained for resources. And all the industries that it is venturing into are unrelated and therefore it is difficult to transfer the accumulated competencies into these new ventures. D I V E RS I F I CA T I O N : CO RE C O M P E T E N CY O R O P P O RT U N I T Y B A S E D The most significant reason for JK tyres to be able to achieve its success is mainly because of its competency in product innovation. JK Tyres was the first company to launch steel belted and fibreglass belted tyres in the Indian markets. The company believed in its idea of radial tyres and proved through research that these tyres are superior to cross ply tyres. After establishing this fact they became the market leaders of this segment. Through their advertisements they reinforced the image of being the leaders in latest technology. JK Industries wanted to diversify into pharmaceuticals, agri-genetics and paper industry. We need to first assess the core competency required to be leaders for these industries To succeed in pharmaceuticals industry, the strategic competency required to succeed are product innovation, superior technology, good distribution channels and educated sales people. JK Tyres are good in product innovation but they lack in distribution and supply chain skills, which may make them less competent in the pharmaceuticals industry. To succeed in agri-genetics, the strategic assets needed are product innovation, high spending on research and development and customer education. JK Agri-Genetics is already doing well in many parts of the country and is also the market leader in some parts of the country.
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Paper industry is mainly B2B. The major customers are publications and media. With the advent of computers and technology, the use of paper has reduced in the customer segment. JK Industries has taken over Central Pulp Mills Ltd to rehabilitate and put it back on to the growth track. Since JK Industries is already well experienced in B2B business model, they might be able to perform well in this particular business. To conclude, we would say that diversification by JK Industries is purely opportunity based, as the competency required for the other industries are not present in the current company structure. D I V E RS I F I CA T I O N : BE N E F I T S A N D P I T F A L L S The basic strategy behind diversification is to identify its unique and inimitable competitive strengths and to apply them to another product/service line they are trying to go into. The company needs to know what they can do better than their competitors and apply that skill in the sectors they are diversifying into. At times, the assets of a company are best left together. The company, diversifying at that point of time may commit the mistake of diverting resources from its core business. Although JK tyres were in the business of chemicals only, (rubber), it didn’t mean that they had an edge in all kinds of chemical/manufacturing business like cement/pharmaceuticals etc. Its sales and thus net profit fell in the time span of June 1990-December 1991. Consequently the EPS also decreased. The firm was also paying an increased quantum of interest in June 1991 as compared to June 1990 leading to a speculation that the diversification may have been done through debt, which could have increased the debt burden on the firm. There are some critical questions to be asked while deciding to diversifyWhat can the company do better than its competitors? According to the facts in the case, JK was a company specialising in tyres including steel radials. It was also a fast mover in areas of marketing, manufacturing and distribution of tyres. However, there was no record of the company specialising in any other product. Hence how much successful it will in other product line, considering that its inexperience and whether it will be able to innovate enough to beat the competition. The company had sunk in a lot of capital, Rs110 lakh for power generating units only for its dedicated unit in Jaykaygram. It was facing problems in retaining quality manpower. It could have dedicated resources to develop the region to retain quality manpower and excel in its existing field rather than diversify and build plants in a different location.
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Will we be simply a player in the new market or will we emerge a winner? The critical thrust while diversifying is not just being another player in the market but excelling and being amongst the leading brands in the category. There’s no dates mentioned in the case, but if diversification was simultaneous, the risk of being just another player was always there. This would reduce its competitive advantage.
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5
doc_821265294.pdf
The report is about diversification of JK tyres.
JK Industries
Diversify: To be or not to be
D I V E RS I F I CA T I O N BY J K T Y RE S Whereas horizontal integration (or related diversification) involves moving into closely aligned industries, unrelated diversification means moving into industries that share no obvious commonality. For example, think GE or United Technologies. GE’s light bulb business shares no obvious connection to its aircraft engine or finance business. So, beyond the obvious benefit of combining countercyclical businesses to smooth earnings, how does unrelated diversification create value if the different SBUs are run as basically standalone businesses? CRE A T I N G V A L U E F O R T HE CO M P A N Y : • Transferring competencies: A company like JK tires has its competency in product and marketing innovation. But these strategic assets worked for JK tires in a bundled fashion as they were quite interconnected to each other. So if JK tires wanted to transfer the strategic asset to a new unrelated industry, it needed to break up this chain of competency and create a new set of competencies which would have worked together in the new industries. But in case of JK, the management didn’t do anything of that sort, the only consideration that went into diversification seems to be: o Not putting all the “eggs” in one industry basket o Market becoming unattractive and too competitive Exploiting managerial talent: This is really a subset of the above. But, the competency being transferred is managerial skill. This is probably the skill GE exploited.
•
Two main problems arose with unrelated diversification: • Misallocation of resources: First, information distorts on its way up the chain of command. This can lead to a misallocation of resources. An unrelated diversifier is basically acting as a mutual fund, allocating capital across different businesses. This allocation can be wrong simply because management miscalculated the growth opportunities of each of the different divisions or because the management did not have accurate information. As in case of any company, JK tyres also didn’t have unlimited resources, and when it went into unrelated capital and resource intensive industries it had difficulty in allocating sufficient resources to all the industries. Loss of managerial focus: Like the proverbial clown trying to keep plates spinning, JK tires had a lot of spinning plates in air at the same time and none of the plates were in the hand. The more plates, the lower the chance of success of all the plates spinning successfully. The more divisions a manager has to keep his or her eye on, the less attention he or she will pay to any individual business and a lack of focus may result in failure.
•
Page
2
In case of JK tires, it would have made sense to diversify, if:
o o
Growth potential in present business of tires was less Attractiveness of opportunities to transfer existing competencies to new businesses was present Potential cost-saving opportunities to be realized by entering the different businesses Availability of adequate financial and organizational resources Managerial expertise to cope with complexity of operating a multi-business enterprise
o
o o
But we see from the above discussion, in case of JK tires was none of the advantages were present, and therefore it is a bad decision to go for diversification at this point of time when it is facing a lot of competition in its core business of tires and it is also constrained for resources. And all the industries that it is venturing into are unrelated and therefore it is difficult to transfer the accumulated competencies into these new ventures. D I V E RS I F I CA T I O N : CO RE C O M P E T E N CY O R O P P O RT U N I T Y B A S E D The most significant reason for JK tyres to be able to achieve its success is mainly because of its competency in product innovation. JK Tyres was the first company to launch steel belted and fibreglass belted tyres in the Indian markets. The company believed in its idea of radial tyres and proved through research that these tyres are superior to cross ply tyres. After establishing this fact they became the market leaders of this segment. Through their advertisements they reinforced the image of being the leaders in latest technology. JK Industries wanted to diversify into pharmaceuticals, agri-genetics and paper industry. We need to first assess the core competency required to be leaders for these industries To succeed in pharmaceuticals industry, the strategic competency required to succeed are product innovation, superior technology, good distribution channels and educated sales people. JK Tyres are good in product innovation but they lack in distribution and supply chain skills, which may make them less competent in the pharmaceuticals industry. To succeed in agri-genetics, the strategic assets needed are product innovation, high spending on research and development and customer education. JK Agri-Genetics is already doing well in many parts of the country and is also the market leader in some parts of the country.
Page
3
Paper industry is mainly B2B. The major customers are publications and media. With the advent of computers and technology, the use of paper has reduced in the customer segment. JK Industries has taken over Central Pulp Mills Ltd to rehabilitate and put it back on to the growth track. Since JK Industries is already well experienced in B2B business model, they might be able to perform well in this particular business. To conclude, we would say that diversification by JK Industries is purely opportunity based, as the competency required for the other industries are not present in the current company structure. D I V E RS I F I CA T I O N : BE N E F I T S A N D P I T F A L L S The basic strategy behind diversification is to identify its unique and inimitable competitive strengths and to apply them to another product/service line they are trying to go into. The company needs to know what they can do better than their competitors and apply that skill in the sectors they are diversifying into. At times, the assets of a company are best left together. The company, diversifying at that point of time may commit the mistake of diverting resources from its core business. Although JK tyres were in the business of chemicals only, (rubber), it didn’t mean that they had an edge in all kinds of chemical/manufacturing business like cement/pharmaceuticals etc. Its sales and thus net profit fell in the time span of June 1990-December 1991. Consequently the EPS also decreased. The firm was also paying an increased quantum of interest in June 1991 as compared to June 1990 leading to a speculation that the diversification may have been done through debt, which could have increased the debt burden on the firm. There are some critical questions to be asked while deciding to diversifyWhat can the company do better than its competitors? According to the facts in the case, JK was a company specialising in tyres including steel radials. It was also a fast mover in areas of marketing, manufacturing and distribution of tyres. However, there was no record of the company specialising in any other product. Hence how much successful it will in other product line, considering that its inexperience and whether it will be able to innovate enough to beat the competition. The company had sunk in a lot of capital, Rs110 lakh for power generating units only for its dedicated unit in Jaykaygram. It was facing problems in retaining quality manpower. It could have dedicated resources to develop the region to retain quality manpower and excel in its existing field rather than diversify and build plants in a different location.
Page
4
Will we be simply a player in the new market or will we emerge a winner? The critical thrust while diversifying is not just being another player in the market but excelling and being amongst the leading brands in the category. There’s no dates mentioned in the case, but if diversification was simultaneous, the risk of being just another player was always there. This would reduce its competitive advantage.
Page
5
doc_821265294.pdf