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Diversification pulls RIL down
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The profitability of Reliance Industries (RIL) has been steadily dropping; it posted its third consecutive drop in quarterly profit, with net profits falling over 20 per cent in the last quarter.
One of its shareholders reportedly expressed concern at the recent AGM on the company’s diversification into retail and broadband. RIL Chairman and Managing Director, Mukesh Ambani, replied that diversification was essential for RIL to grow the way it did in the last few decades under Dhirubhai Ambani’s leadership. If not for diversification, RIL would have remained a textiles company, he said.
Fair enough. But the issue relates to where the management should deploy the company’s resources.
Unrelated diversification within the same company exerts pressure on financial and human resources, forcing the company to ration resources across businesses. Respective individual businesses become less competitive, as compared with a focused competitor who allocates larger resources, building stronger competencies.
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