Key to Successful Diversification: Focus on Your Assumptions

Abstract

In its April-June issue, Vikalpa featured an article by George Paul entitled “Does Diversification Always Improve Financial Performance?” Paul identified four diversification strategies among 28 MRTP companies. Comparing the four strategies on 11 long-term measures of financial performance, he found that the strategy of having many unrelated businesses had produced the poorest performance. He suggested that management should ensure that the company's central skill or competence is strengthened rather than diffused by diversification. Paul's article has evoked considerable response from practising managers. In view of the importance of the subject, we feature two responses—one fromB VBhatt, former Executive Vice-Chairman and Managing Director of Calico, who comments on Calico Mills, one of the companies included by Paul as a case of a company with many unrelated businesses and poor financial performance, and the other by N Vittal, Managing Director of Gujarat Narmada Valley Fertilizers Company (GNFC), a government-controlled company, which was not one of the companies that Paul studied. Vikalpa hopes that these two responses are useful to managers in evaluating their diversification strategies.