Birla #1:

The
Unknown
Global
Indian
Conglomer
ate
Hitesh Takhtani 14S716

Meghana Chore 14S721

Jagannath Akella 14705

Group AO-2

Avinash T. 14S752
Raunak Rao 14S732

1. In which industries should the Birla Group Focus?

Identify by sector, geography and growth/income.
The Birla group should focus on the financial services sector. The group
should lay focus on the insurance and the mutual fund industry. Birla
Group being a global conglomerate, earns more revenues from overseas
than compared to domestic operations. In India, the Insurance and the
mutual fund industry is untapped, also the working population is
increasing where in there is huge portion of the middle class segment
which is working. With a growing net disposable income in the hands of
the young professionals, they are very particular about their finances and
need accountability for the same. In the coming the years the cost of
living would increase be it in realty, healthcare, education. In India people
invest in multiple portfolios because of which the earn income from
multiple sources.
In view of the scenario it is imperative the group brings about
diversification in its insurance and the mutual fund portfolios so as to cater
to different class of consumers in India. With population estimated to
grow to 600 million by 2015, and with the young earning demographic
people, this opportunity should not be missed. The group should enter in
Joint venture with an organisation which has the best of the technical
knowhow of the financial services industry and the Birla group knowing
the market.
This way the Group could save cost
on setting up the infrastructure and focus on the companys strategy to
become one of the top financial services in the country.

2. Describe the methods the Birla group could use to

unlock possible "conglomerate discount"?
A Conglomerate discount is defined as a condition to the tendency of the stock
market to undervalue the stocks of conglomerate businesses. Conglomerate
discount is calculated by adding an estimation of the intrinsic value of each of
the subsidiary companies in a conglomerate and subtracting the conglomerates
market capitalization from that value. This is the definition from investopedia. A
conglomerate discount arises from the sum-of-parts valuation, and it is
the reason

why many

conglomerates

are

deprived

of

subsidiary

possessions. Conglomerate discount in layman terms means that the market

value of the company is less than the estimated market value of each of its
parts. The discount depends on the country and the state of its stock market.
The Birla group has incurred losses in the recent past in the conglomerates of
retail as well as AB Nuvo. Birla group could have taken the following actions to
unlock the Conglomerate Discount- Restructuring the parent companies with
much more efficient objectives and a more dedicated management. Breaching
the child company from the parent company has been a key to preserve
investors as they grossed quite a lot of money and hence, the Birla group should
take care about the demergers unlike General electric. The buying and selling
decisions with respect to AB Nuvo have to be under strict consideration. Finally
more emphasis should be laid on the financial aspects so as to reduce the costs
incurred. Kumara Mangalam Birla has time and then constantly proved his mettle
and has been highly functional in terms of keeping the firm on the move even
though some ups and downs were faced. The above methods could positively
unlock the possible conglomerate discount.

3. Is it possible for a conglomerate to become too

diversified?
Diversification can be defined as a strategic initiative taken by any company in
order to grow or expand its operations enters into new industry or business
category; it is generally done in order to reduce reliability on existing income

sources. It is often riskier for any company in particular product or industry to

tackle completely new industry.
Conglomerate is a grouping of two or more than two companies which are
involved in different business sectors under a common corporate group.
Conglomerate constitutes of multi industry companies. E.g.: The Tata group, The
Reliance group, The Bajaj and Godrej Group.
Advantages

of

diversification:

Any

conglomerate

would

be

doing

diversification in order
a) To reduce risk of relying on only one or few income sources.
b) Attain higher growth rate by generating profits
c) Earn/achieve higher profits and capture the market, become market leader.
d) Birla group AB Nuvo diversified in to high growth company which included
regulated and stagnant growth industries, it was diversified into growth
businesses such as garments, telecom, IT & IT enabled services as well as value
businesses sector such as Insulators, fertilisers and textiles.
e) Diversification reduces the investor's risk; hence it attracts more no. of
investors which will lead to source of capital.
Disadvantages of too much diversification in any conglomerate leads to:
a) Diversification results in slower growth rate of core business.
b) It might lead to high bureaucratic complexity i.e. need to control and
coordinate activities in addition with the regular activities.
c) Too much of diversification leads to dealing of intricacies of the political and
legal requirements of various countries in which the organisation has controlling
interests.
d) It might also lead to failure as a consequence of mismatch between the core
competencies of the acquirer or acquired business.
e) Too much diversification also leads to dilution of earnings highly growing
companies.

Hence any conglomerate before diversification needs to take consideration into

various aspects such as core competencies, synchronization of business,
coordination and control parameters, costs incurred and profitability estimation.

4. Does diversification create value for the Birla group in

India?
It all began in the year 1919 when Ghnashyamdas Birla started a jute mill in
Calcutta. Soon, in the year 1947, Grasim weaving plant was started. The year
1958 saw Rayon being added to list of Grasim Industries. It boosted the customer
base as the rayon fibre was capable of being engineered to have a range of
properties so as to create various products for different sets of customers. Even
though Grasim began as a textile manufacturing giant, it diversified itself into an
assortment

of

other

industries

like Viscose Staple

Fibber

(VSF), cement,

chemicals and sponge iron.

No sooner, Birlas diversified and expanded in textile industry. This could be
called as the strategy of Growth Diversification. In the year 1958, Hindalco was
established to spread risk of the business. To add value, a lot of acquisition and
mergers with various entities happened. This was done to strengthen the
position of Hindalco in Copper and Aluminium industry. 2007 saw acquisition of
Noveilis Inc. that made Hindalco climb to fifth largest position in aluminium
producer in the world which gave them well-diversified geographical market
coverage.
The Birla group further strengthened in international arena when in 1969, Indo
Thai Synthetics was formed in Thailand which supplies raw material to the
world's leading fabric manufacturers. 1978, Carbon black launched a production
facility in Thailand which further diversified the risk. The conglomerate followed
not only vertical or horizontal diversification but also forward integration by
forming of Indo Gulf fertilizer production in 1988.
After 1995, KM Birla took the reins of the Conglomerate and did major
restructurings. The telecom market was at a nascent stage of development when
KM Birla signed a joint venture with AT&T group which formed Idea Cellular. No
wonder, this was one of the most successful decision of the Chairman KM Birla.
This industry has also acted as catalyst in propelling the growth of the countrys

economy and thus has been a vital element in development. It was indeed a
right decision of entering an attractive market.
In 1995, the diversification spree continued; this time a joint venture with
Canadas Sun Life Financial Inc. which formed Birla Sun life insurance.

The

insurance market didnt have many barriers and therefore Birla successfully
entered and gave reliable insurance schemes that are justified by the more than
2 million insurance holders.
In a nutshell, Birlas have proved that diversification is one of the best ways to
grow. Some salient points that are as follows:

Operational relatedness when they formed Grasim industry sharing of

resources to save cost.

Spreading risk: Diversification into metal business and formation of

Hindalco, geographic diversification

Diversification into cellular & insurance business gave Birla group entry
into markets which were attractive and had low cost of entry

And hence, the diversification has definitely created value for Birla group in India
which is justified by the fact that it remains 3 rd largest Indian conglomerate.
Outside India, the numbers (profits) speak for itself thereby making Birla a
Fortune 500 company.

5)

Are

the

groups

recent

organizational

changes

appropriate?
We feel the groups recent organizational changes were appropriate. Aditya Birla
group, under the leadership of Kumar Mangalam Birla, had a vision to move from
a Value Business to a High Growth Business.
He looked forward to penetrating the international waters. He wanted to
employ cost effective expansion strategies. His vision was also to be one of the
Fortune 500.
Given the cultural differences and difference in work ethics, some changes in the
organization structure were necessary steps. The group vertically integrated
its various subsidiaries. This required comprehensive knowledge of all the sectors
where the units were functioning. Also, vertical integration made management

much more effective. This was essential since the group needed to concentrate
on globalization more than managing different groups in the home ground.
The Birlas also employed a horizontal and moved towards a divisional
structure. A decentralized, flat structure made communication smooth and
quick. This was essential to facilitate the rapid changes, quicker decision making,
Function specific units helped narrow down the divisional focus and increase the
industry specific expertise.
Under the direction of Kumar Birla, policies like retirement age were
implemented. He believed that the organization needs younger blood to keep in
pace with the changing technological changes in the industry. The group also
finalised a logo which again distinguishes from its competitors.
Liberalization and de-regularisation was one of the key fundamentals during
this organizational change. It was Value additions through talent acquisitions
strategy that they followed in the change regime. Acquiring L&T ultra tech was
one such instance. Entry into growth sectors like Finance, Apparels, Software,
and BPO was seen at large. ABG also strengthen its base in sectors where it was
already a dominant player and faced little competition. He also entrusted
individuals with more responsibility and autonomy.
To conclude, we feel that the organizational changes support the changed vision
of the company which is to globalize the Indian brand, and focus on the long
term achievements. Be business oriented more than people oriented.