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1. In which industries should the Birla Group Focus?

Identify the sector, geography and


growth/income?
For Grasim Ultra Tech Cement is the best area for expansion as it the major revenue contributor
for Grasim. Similarly Idea Cellular, Telecom is best area for ABN as it is the best revenue
contributor and no other subsidiary under ABN comes close to it. And lastly aluminium is the
best industry for building a comparison as it is the largest revenue contributor, has a
competitive advantage of cheap import (down to 5.3% from 33%) and is in the top 3 aluminium
companies around the world.
To decide on the best course, we have tabulated the data
GRASIM

ABN

HINDALCO

Focus

Cement

Telecom

Aluminium

Location

India

India

India

Growth %

209

17500

300

Type

Growth

Top 3

% Stake

75 (present date)

27

~100

Competitive Advantage

Promises
continuous
growth

Promises
return and
growth

Total Revenue (mil INR)

407,882

4,763

29,265

Revenue Stake

305,911

1952

29,259

180.75

20

19.36

5.52

ROA
(%)
(public 18.62
financial statements)
ROE (%)
INDUSTRY
RECOMMENDED

2.37

good Very low import


major prices

2. Describe the methods the Birla Group could use to unlock possible conglomerate
discount?

It could spin-off Telecom industry as a way to tackle conglomerate discount as it is the


highest performing subsidiary of the conglomerate under ABN bringing in the maximum
revenue. Therefore by giving it the advantage of flexibility in decision making (as it is
growth firm) and not letting its performance get affected by poor or average performance
of the conglomerate would benefit it much better.

It could sell subsidiaries (like BPO-gives negative profit after initial profit, and software)
that have little contribution to the conglomerates output thus bringing down the value of
conglomerate in process.

It could spin-off its biggest loss making subsidiary BSLI to reduce the discount value.
Since it is creating the largest losses, this would be reflected in its share prices (earnings get
reflected in the share price), which would affect the entire conglomerates price. Therefore
a spin-off would help reduce conglomerate discount.

It could acquire companies that help reduce the discount by raising the combined value of
the firm, like say acquiring more stake in Idea Cellular or acquiring companies like L&T.

3. Is it possible for a conglomerate to become too diversified?


A conglomerate can certainly become too diversified by acquiring and merging with
companies that have no strategic connection with the owned subsidiaries in areas that the
conglomerate has no history/ background in.
By acquiring textiles and garment industries ABN diversifying in a segment that is alien to it.
By selling private equity in firms like Pantaloons and super markets for ventures; ventures in
arenas it has no history in.
This may or may not work out in their favor resulting them in selling some of the subsidiaries
(like BPO Minac) or a part of their stake in it (Birla Financial Distribution Ltd., Birla Power
Solutions, Birla Gold and precious Metals Ltd., etc.) later on.
The pros and cons of the same have been listed below

Advantages

Disadvantages

It saves money by operating in more than one business Being too much diversified can be a trouble for the
under the parent company.
parent company i.e. Birla Group as it was an
enormous task for Kumar Manglam Birla to focus on
The resources such as Land, R&D facilities,
several business at the same time.
Distribution centers could be shared between the
companies which would reduce the overall cost as in the K M Birla needed to have knowledge about every
case of Grasim Industries.
business as each was different from another for
effective decision making.
Helps to reduce the risks by diversifying in several
companies which means even if one of the company for It was a challenging task for K M Birla to manage the
e.g. Copper in Grasim industry is in loss it could be
subsidiaries and the companies along with other top
compensated by the other company e.g. Aluminium.
executives.
Birla Group seized the growth opportunity in foreign K M Birla thus admitted that he could not have
market by diversifying in several industries like Indocomplete domain knowledge of everything,
Gulf in over 13 countries.
understanding the key issues involved was critical
hence the focus has been placing a larger bets on

It helped Birla Group to expand geographically in


several Asian countries, Latin America, South-East
Asia, Brazil, Indonesia and many more.

fewer businesses which resulted into a portfolio


cleanup.

4. Does diversification create value for the Birla group in India? How different is
diversification likely to be valued globally?
Diversification created a major value for the Birla Conglomerate in India as it acquired L&T
and renamed it as Ultra Tech, becoming the second largest cement giant in India and fourth in
the world. With the annual cement consumption rising world and India playing an important
role this acquisition has played in their favor.
Acquisition of viscose staple fiber industries has helped them again as they faced a monopoly
in the Indian market, making it the second largest revenue contributor of Grasim. This VSF
can further be used for textile/garment industries as well, thus making room for vertical
integration.
By buying a stake in the telecom industries ABN has ensured its forever growing revenues,
profits and market penetration
Internationally, an aluminium manufacturing unit acquisition in Canada has benefited them as
well ensuring them a spot in the top three aluminium industries around the globe following
their top 3 rule. Not to mention the fact that with L&T acquisition they became worlds 4th
biggest cement brand.
Indian Context

Grasim, one of the three main companies of Birla Group was started as a textile
manufacturing company and later it diversified into cement, chemical and Viscose Staple
Fiber.

In 1958, Rayon which had cotton and jute fiber was added in the Grasim production list
which attracted large number of customers as the rayon fiber could be engineered in variety
of ways according to the demands of the customers.

Birla textile & Grasim could share resources like - plant, R&D facilities, distribution
centers, etc. thereby saved cost.

Birla Group diversified further by establishing Hindal Co An aluminium facility at


Renukoot in eastern Uttar Pradesh.

Acquisitions and mergers, with Indal, Birla Copper and the Nifty and Mt. Gordon copper
mines in Australia, were done which added more value to the Birla Group.

This strengthened the position of Hindalco in Aluminium and Copper industry thus
reducing the risk by diversifing.

This diversification was Growth motivated.

Acquisition of Noveilis in 2007 gave Birla Group a well-diversified geographical market


base.

The diversification strategy of Birla group was not only vertical or horizontal but it also
did a forward integration by forming Indo Gulf for the production of fertilizer, in 1988.

Seizing the opportunity of expansion in cellular industry, Birla Group invested in


telecommunication industry forming a joint venture with AT&T group and created Idea
Cellular.

As insurance market in Indian had low entry barriers, the cost of entry was less Birla Group
formed joint venture with Sun Life Financial Inc., one of the leading international financial
services organizations from Canada, and formed Birla Sun Life Insurance Company
Limited (BSLI).

Global Level

Birla Group stepped into the international market by forming Indo Thai Synthetics, a
supplier of raw material to the worlds leading fabric manufactures in Thailand.

70% of its product is exported to more than 30 countries including USA, Canada, Brazil,
Argentina, Chile, Turkey, Greece, Belgium, France, Israel, Italy, Spain, Portugal,
Germany, South Korea, Bangladesh, Hongkong and Taiwan.

In 1978, Carbon Black which is used a pigment and reinforcing phase in automobile tires
was introduced by Birla Group in Thailand which helped Birla Group to diversify in other
business.

Birla Group enjoyed several benefits in the form of cheap land and resources, incentives
on tax and acquisition of Public Assets and with liberalization taking placing post 1991 era
gave many more advantages for Birla Group to trade internationally.

In Thailand, for instance, the Birlas got eight years of tax holidays, an eight year holiday
for business tax (sales tax), eight year holiday for all remittances of royalties and technical
know-how fees which normally attract a 20% tax. The Thai government was not to promote
any industry for carbon black in the next five years in which the Birlas were to invest and
an assurance that import duties on carbon black would be enhanced from 10% to 30%
before the Birlas start the production of carbon black.

Thus, this diversification help Birla Group to reduce its risk by creating a strong portfolio and
adding value to their business.
5. Are the groups recent organizational changes appropriate?
Introduction of retirement policy:
Earlier employees used to stay in the organization till they pass away.

When Mr. K.M. Birla introduced a retirement policy in 1995, on the basis of which
around 350 senior personal had to leave.

Pros: New talent was recruited from B-schools and they gave new ideas

Con: There was a disparity in salary between new hires and old timers

K.M. Birlas Management style:

He involved himself in the strategies issues of the individual business

Pros: He was personally involved in all the business

Cons: He could become overload

Emphasizing on analytical aspects of management:

He emphasized on communication, gut feel and intuitiveness.

Focused on personal issues by bringing professional into the organization who are
highly committed ,independent and dont mind voicing their opinion

He wants to bring people much brighter than him and not just people who have more
experience

Changes in decision Making Style


K. M. Birla established Aditya Birla Management Corporation limited, the strategic
decision making for ensuring the best practices across the group companies