Academic journal article South Asian Journal of Management

Nature and Extent of Diversification: A Comparative Study of MNCs and Domestic Companies in India

Academic journal article South Asian Journal of Management

Nature and Extent of Diversification: A Comparative Study of MNCs and Domestic Companies in India

Article excerpt

This paper presents a comparative study of the nature and pattern of diversification of domestic and multinational companies (MNCs) in India dunng 1995-2004. Out of 252 companies selected from BT-500 "India's most valuable companies" published in Business Today, 208 companies are Indian companies while remaining 44 constitute MNCs. There exist both similarities and dissimilarities in the diversification strategies of the two groups of companies. Both the groups prefer the strategy of diversification though the extent of diversification is more in case of MNCs as compared to Indian companies. Dominant Business (DB) is the most popular strategy for both the groups and Unrelated Business (UB), the least preferred one. With respect to the pattern of diversification, MNCs move more consistently from Single Business (SB) to DB and DB to Related Business (RB) as against Indian companies that fallow a mixed pattern.

INTRODUCTION

The present era is the era or dynamism where business environment is changing rapidly. To keep pace with the changing environment, constant planning is required. The policy of liberalization, privatization and globalization has brought about drastic changes in the business environment during the past two decades and has united the world into one whole, On the one hand, it has brought latest technology, infrastructure and know how with it and on the other hand it has led to increase in competition through multinational companies and brought in challenges for the developing countries like India. Io outshine such competitive r scenario and win the race strategic planning and strategic management are required. A firm's survival is dependent upon its abilityt to adapt successfully to the changing environment and strategic planning is one tool to manage such environmental turbulence (Ringbakk, 1972; and Baum and Wally, 2003). Nonplanners today are misfits in the market, Rather corporate strategic planners not only outperform non-planners but also have a high survival rate (Capon et al, 1994). While comparing formal planners with informal planners, Thune and House (1970) found that formal planners had 44% higher Earning Per Share (EPS) , 38% more earning on common equity and 32% more earning on total capital as compared to informal planners.

Diversification is developing as an important strategic tool of growth in majority of the industrial countries that are a part of the phenomenon of globalization. The term diversification is derived from the word 'diverse' that means 'difference', 'unlike', 'distinct' and 'separate', when applied to a business enterprise. There exists a great deal of variation in the way the term 'diversification' has been defined by different authors. It is the entry of firms into new markets with new products (Ansoff, 1957 and 1965; and Gort, 1962). To Rumelt (1974), 'diversification move' is an entry into new product market activity that requires or implies an appreciable increase in the available managerial competence within the firm. It means reaching out to new areas and developing new competencies. It is in fact the ability of a firm to operate in different businesses simultaneously (Pitts and Hopkins, 1982). It incorporates multi dimensional aspects and includes an increase in number of industries in which firms operate (Berry, 1975), entering into new markets involving varying skills (Steiner, 1975) and the producing of new products or services or and manufacturing new products either from different inputs and/or selling them into new industries (McDougal and Round, 1984). In nutshell it refers to expanding the base of the businesses in activities different from the existing business, which may be achieved, by any means as internal development, acquisitions, joint ventures, licensing agreements, etc. (Booz et al., 1985; and Ramanujam and Vardarajan, 1989).

Diversification as a strategy is preferred because of many reasons. It satisfies a firm's synergetic motives and offers economies of scale in manufacturing, marketing, raw material purchases and R&D, by exploiting commonalities of the related business, through exchange of skills and resources (Rumelt, 1974; Backaitis et al. …

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