In the month of June an announcement came from Reliance Industries about company’s intention to sell its textile business along with ‘Only Vimal’ brand. The transaction is likely to be materialized in a year’s time.
The textile business’s contribution to Reliance is less than Rs 2000 crores, marginally over 2%. The group’s turnover figure stands at massive Rs 85000 crores. The group seems to be not interested in any business with an annual return less than 12%. Similar returns could be earned by keeping the money bank deposits. The brand ‘Vimal’ is included to enhance the deal’s attractiveness.
Reliance intends to increase its operating profits to one lakh crores in next five years. And this will be done by expanding the petro chemicals, telecom, retail, oils and gas business. The management wants to invest in business with returns over 25% and textile business does not fit in this strategic conceptualization of things.
Reliance is a good example of backward integration strategy. Reliance Textile was born in 1966 as a manufacturer of polyester textile. Its main raw material was polyester fiber. The company integrated backwards by making a foray in to polyester filament yarn business. Fiber and yarn come from petrochemicals accordingly the company moved further backward and entered in the petrochemical business and later into plastics. Reliance’s backward integration did not stop at the petrochemicals rather it moved back into petroleum refining. The raw material for the petroleum refining is crude oil which is to be explored. To complete the entire chain, Reliance’s backward integration did not stop here rather it went on to integrate backward by moving into oil and gas exploration. Reliance’s other businesses include retail, infrastructure and telecom.
Growth has its own lure. Growth can be achieved in a number of ways. Firm can stick to its business (concentration) or adopt integration route (vertical or horizontal) or diversify (other businesses). Concentration strategy manifests in two moves: vertical and horizontal integration. Reliance presents an excellent example of vertical backward integration. It branched into activities preceding textile production (assumption of supplier function). Among the factors guiding such a move include greater control, efficiency and quality to develop competitive advantage. On the flip side integration can reduce flexibility and raise exit barriers.
Reliance now stands as a diversified group with its fingers in different businesses. Firms diversify for competitive or returns considerations. Related diversification is instrumental in achieving economies of scope. Diversifying into related activities can enhance market muscle and block competition (strategic fit, synergies and effectiveness). Diversifying into unrelated business (conglomerate) is generally driven by the motivation of achieving higher profitability by which resources are invested in high return or high growth businesses.
In the new emerged form of Reliance, its textile business does not fit in its strategic vision (invest in businesses with returns around 25%). Developing and maintaining a healthy portfolio of businesses is the essence of management at the top. The BCG’s growth-share matrix is one of the tools (once called ‘the million dollar slide’) which is often used by planners in this regard. Reliance story is about how the team at the top needs to shift gears with changing time.