“Coffee isn’t my cup of tea,” Samuel Goldwyn once remarked. Ganesh Sharma might not agree with this. He liked having his freshly brewed filter coffee, first thing in the morning, with his business newspapers.
As Gurucharan Das points out in his book, India Unbound, “Since a businessman did not decide what he should produce and depended on what licences were available, there was a made scramble for these, and business houses ended up producing all kinds of unrelated products.” Further, as the new generations get involved, the male scions want independent businesses. This leads to an FOBE diversifying into unrelated areas to some extent as well. But the main reason for diversification, then and now, remains the addiction of Indian business with size.
As Debashis Basu points out in his book, Face Value, “So the moment they were through with planning for one project, they were ready with another. And the moment they achieved a respectable size in one business, they wanted to become big in another.”
In most cases, companies try and get into a new business when the markets are booming. This is a time when raising money for a new business is relatively easy. Thus, companies plan a big leap from the current operations, which rarely pays off. Further, companies rarely have several successful businesses under one umbrella. If one business does well, another pulls down the profits. A good example is Grasim. Grasim is into four major areas — viscose staple fibre (VSF), sponge iron, cement and chemicals. Grasim’s results for the quarter ending December 2005 were similar to the quarter ending September 2005. The bad performance of the company’s sponge iron and VSF divisions hit group profits.
Another example is the recent demerger of RIL. One reason why the stockmarket was positive about it was the fact that the demerger will bring greater focus to the residual entities.