GROWTH STRATEGIES OF INDIAN FIRMS
A CONTEMPORARY CONCERN STUDY REPORT
In Corporate Strategy and Policy
Submitted to
Prof. J. Ramachandran
on
August 28, 2007
By
Alka Bhagat
0611216
Ganesh Balakrishnan
0611229
PGP 2006-08
Indian Institute of Management, Bangalore
Contemporary Concern Study
Growth Strategies of Indian Firms
TABLE OF CONTENTS
Executive Summary ........................................................................................................... 6
Objective of Study............................................................................................................... 7
Profit from the Core Framework....................................................................................... 8
Sustainable Growth Criteria .................................................................................................... 8
Defining the Core ...................................................................................................................... 9
Elements of A Successful Growth Strategy........................................................................... 10
Adjacency Expansion .............................................................................................................. 11
Adjacency Evaluation ............................................................................................................. 12
Redefining the Core ................................................................................................................ 12
Profit from the Core – An Analysis of Indian Firms...................................................... 13
Methodology ............................................................................................................................ 13
Sustainable Growth Criteria in the Indian Context ............................................................ 13
Defining the Core .................................................................................................................... 15
Adjacency Expansion and Evaluation................................................................................... 15
Growth Strategies of Indian Sustained Value Creators ...................................................... 16
Wipro Ltd.1,10 .......................................................................................................................................16
Core Definition................................................................................................................................16
Adjacency Expansion ......................................................................................................................18
Evaluation of Adjacencies ...............................................................................................................19
Growth Strategy ..............................................................................................................................20
Reliance Industries Ltd.2,10 ...................................................................................................................20
Core Definition................................................................................................................................21
Adjacency Expansion ......................................................................................................................22
Evaluation of Adjacencies ...............................................................................................................23
Growth Strategy ..............................................................................................................................24
Cipla Ltd.3,10 .........................................................................................................................................24
Core Definition................................................................................................................................25
Adjacency Expansion ......................................................................................................................27
Adjacency Evaluation .....................................................................................................................28
Growth Strategy ..............................................................................................................................28
Hero Honda Motors Ltd.4,10 .................................................................................................................29
Core Definition................................................................................................................................29
Adjacency Expansion ......................................................................................................................30
Adjacency Evaluation .....................................................................................................................31
Growth Strategy ..............................................................................................................................32
Ruchi Soya Ltd.5,10 ...............................................................................................................................32
Core Definition................................................................................................................................32
Adjacency Expansion ......................................................................................................................33
Adjacencies Evaluation ...................................................................................................................33
Growth Strategy ..............................................................................................................................34
Hongkong Shanghai Banking Corporation6,10......................................................................................34
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Core Definition................................................................................................................................35
Adjacency Expansion ......................................................................................................................35
Adjacency Evaluation .....................................................................................................................36
Based on the framework, the above table shows the evaluation of adjacencies on five parameters:
Customers, costs, channels, competition and capabilities/technologies. HSBC has expanded in
Step-1 adjacencies. ..........................................................................................................................36
Growth Strategy ..............................................................................................................................36
Hindalco7,10 ..........................................................................................................................................36
Core Definition................................................................................................................................37
Adjacency Expansion ......................................................................................................................38
Adjacency Evaluation .....................................................................................................................39
Growth Strategy ..............................................................................................................................39
Key Findings .................................................................................................................... 40
Observations in the Indian Context....................................................................................... 40
Critique of the Profit from the Core Framework ................................................................ 42
Appendix ........................................................................................................................... 44
Exhibit I ................................................................................................................................... 44
Sensitivity Analysis of Indian Firms ....................................................................................................44
5 year horizon (2002-2006) .............................................................................................................44
10 year horizon (1997-2006) ...........................................................................................................45
Exhibit II .................................................................................................................................. 47
Wipro Timeline ....................................................................................................................................47
Reliance Timeline ................................................................................................................................47
Cipla Timeline .....................................................................................................................................48
Munjal Group Timeline (Hero Honda Motors) ....................................................................................48
Ruchi Soya Timeline ............................................................................................................................49
HSBC Timeline ....................................................................................................................................49
Hindalco Timeline ...............................................................................................................................49
References ........................................................................................................................ 50
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LIST OF FIGURES
Figure 1: Sustained Value Creators in the Global Context ______________________________________ 9
Figure 2 Elements of a Successful Growth Strategy __________________________________________ 10
Figure 3 Adjacency Expansion Mapping __________________________________________________ 11
Figure 4: Adjacency Evaluation Chart ____________________________________________________ 12
Figure 5: Wipro segment-wise breakup ___________________________________________________ 17
The others segment include Hydraulics engineering and other businesses. ________________________ 17
Figure 6: Wipro core identification _______________________________________________________ 17
Figure 7: Wipro adjacency map _________________________________________________________ 18
Figure 8: Wipro adjacency evaluation ____________________________________________________ 19
Figure 9: Reliance segment-wise breakup _________________________________________________ 21
Figure 10: Reliance business mix in 1996 __________________________________________________ 21
Figure 11: Reliance adjacency map ______________________________________________________ 23
Figure 12: Reliance adjacency evaluation _________________________________________________ 23
Figure 13: Cipla segment-wise breakup ___________________________________________________ 25
Figure 14: Cipla geographic base and product mix __________________________________________ 26
Figure 15: Cipla exports growth _________________________________________________________ 26
Figure 16: Cipla core definition _________________________________________________________ 27
Figure 17: Cipla adjacency map _________________________________________________________ 27
Figure 18: Cipla adjacency evaluation ____________________________________________________ 28
Figure 19: Hero Honda market share _____________________________________________________ 30
Figure 20: Hero Honda core identification _________________________________________________ 30
Figure 21: Hero Honda adjacency map ___________________________________________________ 31
Figure 22: Hero Honda adjacency evaluation ______________________________________________ 31
Figure 23: Ruchi Soya adjacency map ____________________________________________________ 33
Figure 24: Ruchi Soya adjacency evaluation _______________________________________________ 34
Figure 25: HSBC adjacency map ________________________________________________________ 35
Figure 26: HSBC adjacency evaluation ___________________________________________________ 36
Figure 27: Hindalco core identification ___________________________________________________ 37
Figure 28: Hindalco adjacency map ______________________________________________________ 38
Figure 29: Hindalco adjacency evaluation _________________________________________________ 39
Figure 30: Profit from the Core Framework ________________________________________________ 42
Figure 31: BCG Growth-Share Matrix ____________________________________________________ 43
LIST OF TABLES
Table 1: Sustained Value Creators in the Indian Context ______________________________________ 14
Table 2: Sustained Value Creators Chosen for Further Analysis ________________________________ 15
Table 3: Snapshot of Sustained Value Creators in 1996 _______________________________________ 40
Table 4: Snapshot of Sustained Value Creators in 2006 _______________________________________ 40
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ACKNOWLEDGMENTS
We would like to extend our heartfelt gratitude to Prof. J. Ramachandran who guided us
throughout the duration of project with his constant feedback and encouragement. His
guidance and valuable insights at every step of the study helped us to move in the right
direction.
We would also like to express our sincere thanks to Anirvan Pant for his valuable inputs
to our project.
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EXECUTIVE SUMMARY
The project scope focuses on benchmarking the Chris Zook’s ‘Profit from the Core’
framework in the Indian context. ‘Profit from the Core’ outlines the sustainable growth
strategies in the global context. It argues that sustainable growth is achieved by defining
and focusing on a firm’s core, and expanding through adjacencies around the core.
In the Indian context, the criteria for selecting companies that are Sustained Value
Creators (SVCs) are defined as:
a. Revenue > Rs. 400 cr.
b. Revenue growth > 8%
c. Profit growth > 8%
d. Shareholder value creation over a time period of ten years from 1997 to 2006
On the basis of the above criteria, twenty firms are classified as SVCs. Further analysis of
seven firms out of these twenty SVCs (shortlist from diverse sectors of economy)
following the methodology of core identification, adjacency expansions and adjacency
evaluation offers following key insights:

Sustained value creators have a strong single core

Most firms have expanded around core in adjacencies to reinforce their cores

Innovator firms such as Reliance and Hindalco moved into related cores by
leveraging on their capabilities/technologies

Core redefinition as explained in Zook's framework has not been observed in the
time span considered
Our conclusion states that Chris Zook’s framework is quite robust and is applicable in the
Indian context.
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OBJECTIVE OF STUDY
Our study primarily stems from “Profit from the Core”8, a book by Chris Zook (Bain and
Company) defining sustainable growth strategies for businesses. In his book, Zook
argued that sustainable growth is achieved by defining and focusing on a firm’s core, and
expanding through adjacencies around the core. Zook authenticated his hypothesis by
analyzing US firms over a 10 year horizon for sustained sales and profit growth, and
shareholder value creation. He found that the firms that qualify as sustained value
creators predominantly exploit full potential from a single core and expand into related
adjacencies.
We intended to test the “Profit from the Core” framework in the Indian context. We
identified Indian firms that were sustained value creators. We also analyzed growth
strategies of firms that have achieved sustainable growth in the last decade.
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PROFIT FROM THE CORE FRAMEWORK
Chris Zook from Bain and Company, in his book “Profit from the Core”8, defined a
framework for sustained value creation in firms.
SUSTAINABLE GROWTH CRITERIA
Sustainable growth is defined as growth in both revenues and profits over an extended
period of time while creating shareholder value.
Zook adopted the following criteria to define sustainable growth among firms:
1. Time Horizon: An average of ten years (1995-2005)
2. Revenue Criterion: Sales revenue exceeding US$ 500 Mn
3. Revenue Growth Criterion: Achieving 5.5% real (inflation adjusted) revenue
growth, ie. at twice the GDP growth rate
4. Profit Growth Criterion: Achieving 5.5% real (inflation adjusted) profit growth,
ie. at twice the GDP growth rate
5. Shareholder Value Creation: Company returns exceeding industry average
The rationale for 5.5% real revenue and profit growth was that these figures were the bare
minimum growth targets for companies in developed markets. He analyzed companies
from seven countries (US, Australia, UK, France, Italy, Germany and Japan) using the
above screens and found that only 17% of the firms with revenue above US$ 500 Mn
meet all criteria to be sustained value creators. The graph below shows the screening
process to arrive at the sustained value creators.
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Percent meeting successive
criterion
100
100%
80
60
41
40
31
17
20
0
> $500M
> 5.5%
revenue
growth
> 5.5%
profit
growth
Earned cost
of capital
113
46
35
19
Figure 1: Sustained Value Creators in the Global Context
DEFINING THE CORE
A company’s core is defined inside-out, from the point of view of those inside the
company. To identify a company’s core business, the following assets of the company are
identified:
1. Most potentially profitable, franchise customers
2. Most differentiated and strategic capabilities
3. Most critical product offerings
4. Most important channels
5. Any other critical strategic assets that reinforce the above assets
In other words, the core is defined by the set of products, customers, channels,
technologies and capabilities that enable the company to build a sustainable competitive
advantage.
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ELEMENTS OF A SUCCESSFUL GROWTH STRATEGY
Sustained value creators have adopted a consistent approach to formulating and
implementing growth strategy. The four steps involved are:
1. Focus around well defined cores: Identifying and focusing on the core to drive
growth
2. Achieve full potential in the core: Strengthening and defending the core by
divesting non-core businesses and establishing increased scale in the core
business
3. Expand into adjacencies: Moving into related growth opportunities that
reinforce the core
4. Redefine or shift cores: Move first into new business areas in response to
industry turbulence by leveraging hidden assets and capabilities
Figure 2 Elements of a Successful Growth Strategy
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ADJACENCY EXPANSION
Adjacency expansion is a company’s moves into related segments or businesses that
utilize the strength and reinforce the core business. The core business is continually
redefined by the adjacency expansion as the company adds new capabilities.
Adjacency expansion can occur in three ways:
1. A direct move into an immediate opportunity through various means: new
channels, customer segments, geographies and products.
2. A move into a business related to the core as hedging against future uncertainties
3. Entering into new businesses and new steps along the value chain
This can be shown on an adjacency expansion map as below:
Figure 3 Adjacency Expansion Mapping
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ADJACENCY EVALUATION
Adjacency expansions of a company can be evaluated using five parameters that are
shared with
the
core, namely customers, costs, channels,
competitors and
capabilities/technology. By creating an adjacency evaluation chart as shown below,
adjacencies can be ranked with respect to their relative distance from the core. Further the
distance from the core, lesser is the contribution of the adjacency to reinforcing the core.
Shared
Customers
Shared
Costs
Shared
Channels
Shared
Competitors
Shared
Capabilities/
Technology
Core
1 Step
Adjacencies
2-3 Step
Adjacencies
Multi-Step
Adjacencies
Diversification
Full Share
Partial Share
No Share
Figure 4: Adjacency Evaluation Chart
REDEFINING THE CORE9
New environmental conditions force firms to redefine themselves in order to survive.
There are five main causes of industry turbulence:
1. Disruptive technologies
2. Emergence of a new and low cost business model
3. Government regulations that suddenly increase or decrease competition
4. Sharp change in customer needs
5. Internet
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PROFIT FROM THE CORE – AN ANALYSIS OF INDIAN FIRMS
METHODOLOGY
Indian firms were analyzed using the Profit from the Core framework to identify
sustained value creators. Financial data for 9,630 listed companies was obtained from
Prowess for a ten year period from 1997 to 2006. Real sales and profit growth were
calculated using CPI inflation data from the RBI website.
A sensitivity analysis was carried out to obtain optimum figures for sustainable growth
criteria in the Indian context (as shown in the Exhibit I).
Zook’s criteria of 5.5% real revenue and profit growth stem from the fact that these
figures are at or below most of the strategic planning targets for companies in developed
markets. In the Indian context, given that the GDP grew at a healthy 5.5% over the time
horizon from 1997-2006, a target of 1.5 times the GDP growth, ie. 8% was assumed
realistic as a bare minimum growth target for Indian firms.
SUSTAINABLE GROWTH CRITERIA IN THE INDIAN CONTEXT
For Indian firms, sustainable growth was defined using the following criteria, adapted to
a high growth, developing market:
1. Time Horizon: An average of ten years (1997-2006)
2. Revenue Criterion: Sales revenue exceeding Rs. 400 cr. (US$ 100 Mn)
3. Revenue Growth Criterion: Achieving 8% real (inflation adjusted) revenue
growth, ie. at 1.5 times the GDP growth rate
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4. Profit Growth Criterion: Achieving 8% real (inflation adjusted) profit growth,
ie. at 1.5 times the GDP growth rate
5. Shareholder Value Creation: Company returns exceeding industry average
We obtained a sample of 20 sustained value creators using the above screens. The list of
companies with the industry in which they operate is given below inTable 1.
Table 1: Sustained Value Creators in the Indian Context
Company
Chennai Petroleum Corpn. Ltd.
Cipla Ltd.
Container Corpn. Of India Ltd.
G A I L (India) Ltd.
Hero Honda Motors Ltd.
Hindalco Industries Ltd.
Hindustan Zinc Ltd.
Hongkong & Shanghai Banking Corpn. Ltd.
Jammu & Kashmir Bank Ltd.
M M T C Ltd.
Oil & Natural Gas Corpn. Ltd.
Power Finance Corpn. Ltd.
Reliance Industries Ltd.
Ruchi Soya Inds. Ltd.
State Bank Of Indore
Sterlite Industries (India) Ltd.
Tata Power Co. Ltd.
Vardhman Textiles Ltd.
Vishal Exports Overseas Ltd.
Wipro Ltd.
Industry
Petroleum products (Refineries)
Drug formulations
Transport services support systems
Trade in minerals & energy sources
Motorcycles
Aluminium, unwrought
Zinc
Banking services
Banking services
Trade in minerals & energy sources
Petroleum oil
Financial institutions
Petroleum products (Refineries)
Soyabean oil
Banking services
Copper
Electricity energy
Cotton yarn
Trade in manufactured products
Computer software
Out of above twenty firms we have chosen seven firms for deep analysis and benchmark
‘Profit from the core’ concept in Indian context. We have excluded public sector
companies dealing with natural resources like mining, petroleum, metals, energy etc. We
have selected firms to cover most of the sectors: pharmaceuticals, auto, banking, refining,
FMCG, IT etc.
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The final chosen seven firms are as follows:
Table 2: Sustained Value Creators Chosen for Further Analysis
Company
Cipla Ltd.
Hero Honda Motors Ltd.
Hindalco Industries Ltd.
Hongkong & Shanghai Banking Corpn. Ltd.
Reliance Industries Ltd.
Ruchi Soya Inds. Ltd.
Wipro Ltd.
Industry
Drug formulations
Motorcycles
Aluminium, unwrought
Banking services
Petroleum products (Refineries)
Soyabean oil
Computer software
The ‘Profit from the Core’ framework has been applied over these seven firms to analyze
their core and adjacency expansion.
DEFINING THE CORE
We identified the business that satisfied most of the following criteria for the firm in the
time horizon of 1997-2006:
1. The segment that generated highest revenue share
2. The segment that generated highest profit share (EBITDA or EBIT)
3. The segment that was the most significant growth driver
ADJACENCY EXPANSION AND EVALUATION
Both the adjacency expansion mapping and evaluation charts were developed using the
framework outlined by Zook.
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GROWTH STRATEGIES OF INDIAN SUSTAINED VALUE
CREATORS
Wipro Ltd.1,10
Wipro commenced its operations in 1945 as a vanaspati manufacturer. Vanaspati product
line helped Wipro to develop its consumer care and lighting business due to its extensive
distribution reach. Wipro entered into lighting business in 1991 and today consumer care
and lighting business is among the fastest growing business in this industry segment. First
horizontal expansion was into Hydraulics engineering in 1975. Wipro is second largest
third party manufacturer of hydraulic cylinders globally. Wipro entered in IT operations
in 1980 with initial focus on domestic market.
Wipro business can be categorized in two categories:
Information Technology and
Consumer Care & Lighting. In Information Technology, Wipro Technologies addresses
Global IT Services and Wipro InfoTech addresses Indian IT Services and Products.
Wipro Consumer Care & Lighting focuses on niche profitable segments and has
historically generated cash to support the growth of other business segments.
Core Definition
The portfolio is dominated by IT services business and it has been one of the high growth
segments of Wipro’s business portfolio.
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Contribution to revenue (2006-07)
Others
Contribution to EBIT (2006-07)
Consumer care & Lighting
India & Asia Pacific
India & Asia Pacific
Others
Consumer care & Lighting
4%
5%
1%
3%
7%
17%
89%
74%
Global IT Services
Global IT Services
Figure 5: Wipro segment-wise breakup
The others segment include Hydraulics engineering and other businesses.
100%
Rs.10,610 Cr.
Rs.2,340 Cr.
100%
EBT (2006)
Sales Growth (2006-07)
Others
Consumer Care & Lighting
80
India & AsiaPacific IT
60
40
Global IT
Serivces &
products
20
0
Sales (2006)
Figure 6: Wipro core identification
The above graph explains that core of Wipro Ltd. is IT services (Global and India, Asia
Pacific). IT services contributes nearly 90% of total revenue and 96% of EBIT in 200617
Contemporary Concern Study
Growth Strategies of Indian Firms
07. The IT services business has grown by 37% over the last year and that is 100% of
overall growth of the firm.
Adjacency Expansion
Exhibit I details out the timeline of expansion of Wipro into different businesses. Based
on this, we have come up with the adjacency map of Wipro starting from 1945 to 2006 as
shown below.
New
India
New
Channels
Contract
Printers
Manufacturi
ng
Japan
Computers
Health care
Consumer
care
Europ
e
E-commerce
New Value Chain
Steps
Marketing
Geographies

La
Middle East
m.
US
Institutions
Internet
Hardware
Lighting
Personal care
Infrastructure Maintenance services
support
Hardware Co.
Software
Global
 Core
IT services
Consumer
care

Off shore
JV/ Consulting Software
Acquisitions
services Modular
icensing
services
Institutions
furniture
IT Services
R&D services
Retail
Telecom
Million $
customers BPO
Retail
Finance
Tu
soaps
gh
Switches
Body & hand wash Talcs
Retail



w-end
New consumer Segments

Honey
ce care
Health drink
Hydraulic
equipment
New
Products
Figure 7: Wipro adjacency map
The adjacency map explains how Wipro has expanded into level 1, level2 adjacencies
from the core of IT services geographically, vertically into services, consulting, BPO
services, Internet services, hardware space (PCs, printers etc.). Wipro tried to expand in
unrelated diversifications into consumer care and lighting, hydraulics, BioMed. In last ten
years (1997-2006) span Wipro has tried to focus onto IT core and develop consumer care
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Contemporary Concern Study
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and lighting as another mini core through acquisitions. Wipro has exited from BioMed in
2006 by selling it to Ranbaxy.
•
Wipro is acquiring firms across its business sectors
–
Hardware: JVs and Acquisitions
–
IT services: Acquisitions
–
Consumer care: Acquisitions
–
Hydraulic cylinders: Acquisitions
Evaluation of Adjacencies
The following table shows the evaluation of adjacencies on five parameters: Customers,
costs, channels, competition and capabilities/technologies. Depending upon the level of
sharing of above five parameters with the core the adjacency can be classified in Level 1,
2, 3 or unrelated diversification. The consulting, geographic expansion are classified as
level 1 adjacencies while IT products, hardware as level 2, BPO as level 3.
Figure 8: Wipro adjacency evaluation
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Growth Strategy
Wipro has focused on its IT business as primary core and expanded into related
adjacencies around the core though JVs and acquisitions. It has refocused on consumer
care and lighting through acquisitions to drive growth. It has divested non-core
businesses like BioMed.
Reliance Industries Ltd.2,10
Reliance Industries Limited (RIL) is the largest private sector business enterprise in
India. RIL’s operations capture value addition at every stage, from the production of
crude oil and gas to polyester, polymer and chemical products, and finally to the
production of textiles. The success of Reliance is based on the policy of vertical
integration and value addition.
RIL operates mainly in India but has business activities and customers in more than 100
countries around the world. RIL has production facilities at three major locations in India
and a further four locations in Europe. RIL also has exploration and production interests
in India, Yemen and Oman.
RIL is organized into three major business segments:

Exploration and Production of oil and gas;

Refining and Marketing of petroleum products;

Petrochemicals, including the manufacturing and marketing of polymers,
polyester, polyester intermediates and chemicals
The Refining & Marketing and Petrochemicals segment accounted for 98 per cent of
RIL’s revenues for the year 2006. The Exploration and production business is expected to
become a significant contributor in terms of revenues and profits starting from the next
couple of years.
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RIL’s strategy is to build and sustain leadership position across its product categories in
the domestic markets, pursue attractive export opportunities, implement vertical
integration, access cutting-edge technologies, achieve economies of scale, focus on
prudent financial management and invest in high growth opportunities. The primary route
for growth adopted by RIL has been through creating businesses and facilities in an
organic manner. RIL has also grown through selective acquisitions that ensure greater
synergy with its operations.
Core Definition
Figure 9: Reliance segment-wise breakup
Figure 10: Reliance business mix in 1996
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From the above graph, the core of reliance can be defined as Refining and
Petrochemicals. But the snapshot 1996, the business mix is purely petrochemicals.
Reliance entered into refining business in 1999-2000 with Jamnagar refinery complex
and since then refining has been continuously gaining share at a fast pace in its portfolio.
In 2006, refining has ~70% of share in revenue mix.
Adjacency Expansion
Reliance has been focusing on its core business through value addition (Backward and
forward integration). By backward integration, it has expanded into refining and Oil and
gas exploration. Forward integration has helped it to launch value added products under
the brand names like: Recron, Vimal, Harmony, Reliance gas etc. RIL operates in
petroleum retail markets where it can create a competitive edge from supply positions,
superior customer offers, and efficiency across the value chain.
Reliance entered into refining to offset the cyclicality in its petrochemicals business.
The recent moves of Reliance into power, telecommunication, are a part of its long term
strategy (annual report 1996) of identifying high growth potential businesses. The entry
into retail segment is also a part of same strategy.
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New Business
Retail
Finance
Hospitals, R&D
Channel
Electricity
Distributors
Pipelines
Europe (retail)
Chemicals
Wholesale
Fibre Int
Naphtha
cracker plant
Egypt
East Timor, Oman
Reliance
Fresh
Forward
Integration
Yemen
Vimal
Refining Infrastructure
pipelines
Vimal
Harmony
PP
Branded
Branded
chemicals
Petrol, Gas
LPG
Petrol pumps
HDPE, LLDPE
RueRel
Customer
Australia
LPG, Petrol
Retail
Backward O&G
exploration
Integration
Geography
Infocomm
V2, Reance
Recron
Textiles
Reliance fresh
PVC, LAB
PTA, PX
Others
Fibre Int
Chemicals
Figure 11: Reliance adjacency map
Evaluation of Adjacencies
Figure 12: Reliance adjacency evaluation
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Based on the framework, the above table shows the evaluation of adjacencies on five
parameters: Customers, costs, channels, competition and capabilities/technologies.
Reliance has been focusing on core through 1-step adjacencies including oil and gas
exploration, value added products. It has diversified into Power, telecommunication,
retail in the last 3-4 years to achieve higher levels of growth based on its project handling
capabilities.
Growth Strategy
Thus Reliance’s growth strategy is focusing on the core exploitation through backward
and forward integration. In the Petrochemicals and Refining business, RIL’s strategy is to
continuously strive for global leadership and endeavour to be amongst the lowest cost
producers worldwide. The expansion into market and products adjacencies again
reinstates the core focus. The diversification into power, telecommunication, and retail
shows the policy of expanding into high growth potential markets. Reliance has been the
leader/innovator in the private sector to expand into sectors which are considered as
public sector.
Cipla Ltd.3,10
The Chemical, Industrial and Pharmaceutical Laboratories Ltd. (CIPLA) was incepted in
1935. After that it continued expanding its manufacturing and R&D facilities. In 2006,
the Company's turnover was Rs. 3533 Cr. with a growth of 17% over the previous year.
The net profits for the year grew by nearly 10% over the previous year. The Company's
profit at Rs. 668 Cr. was 18% of its income from operations. This percentage was slightly
lower than the previous year mainly on account of higher material costs and a change in
product mix.
Exports accounted for over 50 per cent of the overall sales and exports exceeded Rs.1750
crore. Cipla exports to 180 countries across all the continents - the U.S., Latin America,
Europe, Australia, Africa and Asia.
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Cipla's continued success in its overseas business has been largely due to its strategy in
forming strategic alliances with partners all over the globe who assist with the
registration process and help market Cipla products internationally. In the U.S., Cipla has
alliances with nine generic majors including Teva Pharmaceuticals USA, Inc., Watson
Pharmaceuticals, Inc., Eon Labs, Inc. and Akorn, Inc. for over 125 projects. Similar
alliances exist in Europe, South Africa, Australia and the Middle East. In other
international markets, Cipla has exclusive marketing tie-ups with companies which are
well versant with the local market.
Core Definition
Cipla’s core business is developing and manufacturing active pharmaceutical ingredients
and generic drug formulations for Indian and export markets. The change in government
regulations and international developments in pharmaceutical industry has led Cipla to
focus on exports.
Figure 13: Cipla segment-wise breakup
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Geographical Presence (’07)
Sales by Product (’07)
Other 9%
Others
Injections
Europe 11%
Bulk Drugs
Aerosols
Creams
India 49%
Liquids
Africa 14%
Americas 17%
Tablets
Figure 14: Cipla geographic base and product mix
Cipla’s growth strategy can be classified under two heads: Geographic expansion and
product line growth. Cipla’s product mix has been consistent over the time horizon
considered. However, the company has focused on exports as its primary growth area in
the last 3-4 years. Exports have consistently grown from 10% in 1997 to 51% in 2006
and are the primary drivers of growth as shown in the graph below.
Figure 15: Cipla exports growth
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Contemporary Concern Study
Growth Strategies of Indian Firms
Figure 16: Cipla core definition
Adjacency Expansion
Figure 17: Cipla adjacency map
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Cipla has grown into various geographic markets through exports. In the domestic arena,
Cipla is focusing on consolidating its existing brands as well as introducing new products
and dosage forms. The Company aims to increase its penetration and coverage for
increasing its market share further.
Adjacency Evaluation
Figure 18: Cipla adjacency evaluation
Based on the framework, the above table shows the evaluation of adjacencies on five
parameters: Customers, costs, channels, competition and capabilities/technologies. The
company’s main focus is on core and exploiting core through level 1 and level 2
adjacencies. It has focused on few new products/services including fragrances, animal
care products and cancer education and health services.
Growth Strategy
Cipla has been focusing on APIs and generic drugs as its core. Recent years, exports are
the primary drivers of growth of Cipla. It has consolidating it position in the domestic
market and expanding in international markets through exports.
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Hero Honda Motors Ltd.4,10
Hero Honda is a joint venture between The Honda Motor Company and Munjal Group.
The JV was incepted in 984 to manufacture motorcycles. Today, over 19 million Hero
Honda bikes are on the road. Every 30 seconds, one Hero Honda Splendor is sold. The
JV has shown a consistent growth since inception. In 2005-06, sales are Rs. 8870 Cr.,
PAT Rs. 971 Cr.
Hero Honda is the world’s largest two wheeler manufacturing company. It held this
distinction for 6 consecutive years since 2001. Extensive distribution network of over
3000 sales, service and spare parts outlets.
Core Definition
Hero Honda’s core business is manufacturing motorcycles and reaching end customers
through an extensive distribution network.
Hero Honda is the largest motorcycle manufacturer in the world and India with ~50%
share in the Indian market. It has moved into deluxe segment from entry segment in 1994
with splendor and then into premium segment 1999 with CBZ, and Karizma in 2002.
Hero Honda keeps reinforcing the customer segments through launching new versions of
the product in the market. Thus the dominating segment in its product portfolio keeps on
changing from deluxe to entry and vice versa.
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Figure 19: Hero Honda market share
Figure 20: Hero Honda core identification
Adjacency Expansion
Hero Honda has benefited from adjacencies expansions of Munjal group thorough
backward integration and value added services like financing, after sales services etc.
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Figure 21: Hero Honda adjacency map
Adjacency Evaluation
Figure 22: Hero Honda adjacency evaluation
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Contemporary Concern Study
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Based on the framework, the above table shows the evaluation of adjacencies on five
parameters: Customers, costs, channels, competition and capabilities/technologies. It has
expanded mostly in level 1 and level 2 adjacencies. Recently it has ventured into
women’s scooter segment through Pleasure brand.
Growth Strategy
Hero Honda saturates different customer segment by introducing new products and new
versions of existing products at regular intervals. It is exploiting its core through a vast
distribution network. Munjal group’s backward integration into auto components and
forward integration into financing services & after sales services helped it to keep higher
margins.
Ruchi Soya Ltd.5,10
The 20-year old Ruchi Soya Industries Limited is the flagship company of Ruchi Group
of Industries. It’s recent merger with sister concerns ( Aneja Solvex Ltd, General Foods
Ltd, Ruchi Credit Corporation, Ruchi Health Foods Ltd, Param Ind. Ltd, Ruchi Private
Ltd and soya businesses of MP Glychem) has catapulted it among the top five FMCG
players in the country, with a turnover of Rs. 7537 Cr. This merger illustrates the strength
that is to be found in increased transparency, firm market position and better control of
systems.
Besides being a leading manufacturer of high quality edible oils, vanaspati, bakery fats
and soya foods, Ruchi Soya is also the highest exporter of soya meal and lecithin from
India. Nutrela (soya chunks, granules, soya flour) is the largest selling soya foods brand
in the country today.
Core Definition
The core business of Ruchi Soya Industries Ltd. as name suggests is Soya products and
oils. Ruchi Soya is the highest exporter of soya meals in India.
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Adjacency Expansion
It has clearly expanded into the 1 step adjacencies to exploit it core. It expanded into oils,
vanaspati to leverage its distribution network. It expanded into value added product
adjacencies and into dairy market.
New Business
Bakery
Channel
Geography
Dairy
Soaps
Co. Owned
stores
Retail
Edible oil
Distributors
Backward
Integration
Europe
Vanaspati
Soya
Processing Crushing
Japan
Branded
products
Middle East
Marketing
Middle class
Vanaspati
High income
South East Asia
Forward
Integration
Soybean
Groundnut
Soaps
Dairy
Customer
Bakery
Others
Flour
Mustard
Sunflower
Palmolein
Oils
Figure 23: Ruchi Soya adjacency map
Adjacencies Evaluation
Based on the framework, the above table shows the evaluation of adjacencies on five
parameters: Customers, costs, channels, competition and capabilities/technologies. Ruchi
Soya has expanded into step 1 and step 2 adjacencies. The value addition through
venturing into premium segments of food products, Dairy products and bakery has helped
to exploit its core.
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Figure 24: Ruchi Soya adjacency evaluation
Growth Strategy
Ruchi Soya has focused on single core and tried to exploit it through value addition
products and backward integration. Exports has been one of the important growth drivers
for it.
Hongkong Shanghai Banking Corporation6,10
The HSBC Group is one of the largest banking and financial services organizations in the
world. The Group has around 10,000 offices in 82 countries and territories in Europe, the
Asia-Pacific region, the Americas, the Middle East and Africa and serves over 110
million customers.
HSBC provides a wide range of personal financial services. Non-Resident Indian banking
centres located in Europe, Asia-Pacific, the Middle East, and North America provide the
international Indian Diaspora access to a range of products and services.
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Core Definition
HSBC operations are classified in two major branches:
–
Treasury business
–
•
Trading, derivatives, PE, Foreign exchange
•
Revenue: Rs. 1,320 Cr. (2006-07)
•
Revenue: Rs. 971 cr. (2005-06)
•
Growth: 36%
Other banking operations
•
Personal banking: includes NRI and wealth management
•
Corporate banking
•
Revenue: Rs. 3,417 Cr. (2006-07)
•
Revenue: Rs. 2,159 Cr. (2005-06)
•
Growth: 58%
The core of HSBC is defined as banking operations (traditional banking).
Adjacency Expansion
New Business
Securities
Private Equity
Trading
Channel
Telephone
Internet
ATM
Retail
Wealth
management
Insurance
Backward
Integration
Geography
Mutual
funds
USA
UAE
Other middle
east
UK
Forward
Integration
Retail
corporate
NRI
Investors
Customer
Figure 25: HSBC adjacency map
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Contemporary Concern Study
Growth Strategies of Indian Firms
HSBC has been expanding around its core in corporate banking, wealth management
services. It has recently expanded into insurance sector: Life and general insurance.
Adjacency Evaluation
Figure 26: HSBC adjacency evaluation
Based on the framework, the above table shows the evaluation of adjacencies on five
parameters: Customers, costs, channels, competition and capabilities/technologies. HSBC
has expanded in Step-1 adjacencies.
Growth Strategy
The strategy of HSBC has been exploiting its banking core business. It has followed the
industry trend of moving into insurance sector in 1999.
Hindalco7,10
Hindalco, a flagship company of the Aditya Birla Group is an industry leader in
Aluminium and Copper. It was established in 1958 with focus on Aluminium production
business. It pursued aggressive green field expansion strategy since 1991 and entered
copper in 2002.
Hindalco today, has grown to be counted among the most cost efficient producers
globally. With the acquisition of INDAL in the year 2000, coupled with the perfect blend
of technological leadership, dependable products and strong customer base, Hindalco
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Contemporary Concern Study
Growth Strategies of Indian Firms
operates across the country as the largest integrated primary aluminium producer and a
leader in the downstream value-added segments.
Vertically integrated, Hindalco operates across the value chain from Bauxite Mining,
Alumina Refining, Aluminium Smelting to downstream Sheet and Foil Rolling,
Extrusions and Alloy Wheels. With the acquisition of Novelis in 2007, Hindalco has
become a truly global corporation and ranks among the top 5 of the world’s aluminium
major.
Core Definition
Core of Hindalco is defined as non-ferrous metal producer. Hindalco started with
Aluminium production in 1958 but ventured into copper business in 1998. The vertical
integration from mining to value added products is driver of success.
Figure 27: Hindalco core identification
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Contemporary Concern Study
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Adjacency Expansion
Expansion is perceived geographically (exports) and entering into copper segment.
Hindalco has evolved its value chain by backward integrating into mining and forward
integration by launching value added and branded products.
Figure 28: Hindalco adjacency map
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Contemporary Concern Study
Growth Strategies of Indian Firms
Adjacency Evaluation
Figure 29: Hindalco adjacency evaluation
Growth Strategy
Hindalco’s growth strategy is expanding its presence as a non-ferrous metal powerhouse.
The company has aggressively expanded capacities in aluminum and copper through
acquisitions and greenfield projects. Backward integration and value added products have
been the growth drivers in the decade of analysis.
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Contemporary Concern Study
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KEY FINDINGS
OBSERVATIONS IN THE INDIAN CONTEXT
1. Sustained value creators have a strong single core. All the 7 companies that we
analyzed focused on a single core over the time horizon considered.
2. During the ten year span from 1997-2006, firms have focused on reinforcing their
cores through adjacency expansion. This is illustrated in the snapshot of sustained
value creators in 1996 and in 2006 below.
Table 3: Snapshot of Sustained Value Creators in 1996
Table 4: Snapshot of Sustained Value Creators in 2006
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Contemporary Concern Study
Growth Strategies of Indian Firms
As seen above, companies such as Ruchi Soya, Cipla, Hero Honda and HSBC
have focused on their cores and have made 1-step and 2-step adjacency
expansions to strengthen and defend their cores. In addition, firms like Reliance,
Hindalco and Wipro have expanded stronger cores into 3-step adjacencies and
diversifications. This is consistent with the elements of a successful growth
strategy defined in Zook’s framework (Figure 2).
3. Innovator firms are those that anticipate market opportunities faster than their
industry competitors. This offers a first mover advantage to grow in these areas.
Companies such as Reliance and Hindalco moved into related cores by leveraging
on their capabilities/technologies.
4. Core redefinition as explained in Zook’s framework has not been observed in the
time span analyzed because the requisite conditions have not been met. However,
recent regulatory changes have offered opportunities for firms to diversify.
Present day diversification might lead to core redefinition at a later date.
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CRITIQUE OF THE PROFIT FROM THE CORE FRAMEWORK
The Profit from the Core framework can be mapped on the axes of relative market share
and growth rate as shown below.
Figure 30: Profit from the Core Framework
1. Companies with low market share and low sales and profit growth suffer from a
weak core definition. They have to define and focus on their core business.
2. Firms with low market share and high profit growth need to strengthen and
defend their core business to gain market share.
3. Companies with high market share and low sales and profit growth rate need to
expand cores into adjacencies in order to improve topline and bottomline growth.
4. Companies with a strong core enjoy high market share and high sales and profit
growth. They have to be responsive to industry turbulence and redefine or shift
their cores accordingly to sustain competitive advantage.
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Contemporary Concern Study
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This framework closely corresponds to the BCG growth-share matrix as shown below.
Figure 31: BCG Growth-Share Matrix
The Profit from the Core framework outlines best practices to achieve full potential from
the core (move from other areas of the matrix to a Star), thus enjoying high market share
and high sales and profit growth. In addition, the framework also defines criteria to
redefine the core and continue to stay in the high market share-high growth rate bracket.
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Contemporary Concern Study
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APPENDIX
EXHIBIT I
Sensitivity Analysis of Indian Firms
5 year horizon (2002-2006)
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >14% PAT CAGR>14%
EVA>0
2100
45
6
4
3
1000
117
23
16
12
700
153
33
23
19
400
233
49
35
28
0
9392
1190
638
450
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >11% PAT CAGR>11%
EVA>0
2100
45
13
7
6
1000
117
32
21
17
700
153
40
30
26
400
233
67
46
42
0
9392
1445
795
560
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Contemporary Concern Study
Growth Strategies of Indian Firms
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >8% PAT CAGR>8%
EVA>0
2100
45
21
11
10
1000
117
45
29
23
700
153
62
42
36
400
233
97
67
58
0
9392
1782
1009
722
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >5% PAT CAGR>5%
EVA>0
2100
45
25
15
14
1000
117
65
43
35
700
153
87
61
53
400
233
135
96
84
0
9392
2140
1224
889
10 year horizon (1997-2006)
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >14% PAT CAGR>14%
EVA>0
2100
40
2
1
1
1000
88
6
2
2
700
121
9
3
3
400
190
12
6
5
0
9333
466
222
146
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Contemporary Concern Study
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Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >11% PAT CAGR>11%
EVA>0
2100
40
3
2
2
1000
88
8
3
3
700
121
12
6
6
400
190
19
12
9
0
9333
615
313
199
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >8% PAT CAGR>8%
EVA>0
2100
40
10
5
5
1000
88
17
9
8
700
121
25
15
13
400
190
37
25
20
0
9333
839
448
289
Revenue
Number of companies satisfying successive criteria
Threshold X Sales >X Sales CAGR >5% PAT CAGR>5%
EVA>0
2100
40
18
11
9
1000
88
37
24
19
700
121
52
35
28
400
190
78
54
43
0
9333
1188
659
420
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Contemporary Concern Study
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EXHIBIT II
Wipro Timeline
Wipro (1945)
Diversified
Oil mill & Hydrogenated plant
(1947)
Wipro BioMed (1988)
JV with GE (1989)
Sold to Ranbaxy
(2006)
Diversified
Personal care
Wipro Fluid
Power (1975)
Face wash, Safewash,
Soaps (1985)
Honey
Talcs, Baby cream
Lighting
(2004)
(2005)
products
Business
Acquired
(1992)
(1991)
Hydrauto
Software product
(2006)
co. (1984);
discontinues
Hand wash, Body
(1990)
Modular
wash (2006)
furniture
Software
(2005)
services (1990)
Pharma, retail,
Acquired
software lights
Northwest
BPO services
switches (2005)
(2002)
Internet
services (1999)
Off shoring
services (1995)
IT Services
Domestic (1980)
Hardware co.
(1981)
Printers
(1986)
R&D Services Consulting
(1992)
services(2002)
Reliance Timeline
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Contemporary Concern Study
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Cipla Timeline
Munjal Group Timeline (Hero Honda Motors)
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Contemporary Concern Study
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Ruchi Soya Timeline
Ruchi Soya
Soaps
Ruchi Global Ltd.
Exports
Soya Meals
Vietnam, Japan,
Indonesia, Malaysia,
Korea
Dairy
(Acquired ANIKI)
Refined Oil
Vanaspati
Europe
Middle East
HSBC Timeline
HSBC India (1853)
Banking
Diversified
Corporate banking
Personal
banking
Global
products
Foreign
exchange
Cash
management
Global trade
solutions
Securities
Saving
Bank A/c Credit
cards
FD
Demat
Insurance
Loans
Property
Wealth mngt
MF IB
Education
Personal
General
Life
PE
Travel Home
Medical Education
NRI
services
Hindalco Timeline
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REFERENCES
1. Annual Report 2006-07, 2005-06, Wipro Ltd.
2. Annual Report 2006-07, 2005-06, 1996-97, Reliance Industries Ltd.
3. Annual Report 2006-07, 2005-06, Cipla
4. Annual Report 2006-07, 2005-06, Hero Honda Motors Ltd.
5. Annual Report 2005-06, Ruchi Soya Industries Ltd.
6. Annual Report 2006-07, HSBC India
7. Annual Report 2006-07, 2005-06, 2000-01, Hindalco
8. Zook, Chris, Profit from the Core: Growth Strategy in an Era of Turbulence, Harvard
Business School Press, 2001
9. Zook, Chris, Unstoppable: Finding Hidden Assests To Renew The Core And Fuel Profitable
Growth, Harvard Business School Press, 2007
10. Company websites: Wipro, RIL, Cipla, Hero Honda, Munjal group, Ruchi group,
HSBC, Hindalco
11. India Connections, www.ubs.com/investmentresearch, 21 December, 2006
50