CREATING VALUE AT A CONGLOMERATE: THE CASE OF THE GODREJ GROUP

Adi Godrej

Journal of Applied Corporate Finance, 2004, vol. 16, issue 1, 77-82

Abstract: This discussion with the chairman of the Godrej Group, a well‐known India‐based conglomerate, begins by exploring the issue of diversification versus a single‐industry focus, particularly in developing countries. Mr. Godrej observes that the capital and managerial talent provided by a corporate parent can be invaluable resources in a developing economy, where such commodities are likely to be in relatively short supply. On the other hand, he notes, a conglomerate must have some underlying strategic rationale in order to create value, and a diversified company will work only “when each of its businesses is run with clear and focused accountability.” To that end, the Godrej Group recently instituted the EVA performance management framework in six of its key businesses. In particular, the management teams running those businesses are rewarded according to the terms of an EVA‐based incentive plan. Each business has since seen significant improvements in capital efficiency, market share, and overall performance. The stock price of the Godrej Group's publicly held entity has more than doubled (in a flat market), and the vast majority of the employees believe that the EVA implementation has been the company's most important recent initiative. Management teams are said now to look much more carefully at options for outsourcing, contract manufacturing, eliminating bottlenecks, and even reusing old equipment at new facilities. Perhaps the most significant change, however, is that the “improved rigor and discipline of our EVA‐based capital allocation system” has permitted Godrej family members to move from operationsoriented, owner‐manager functions to a broader leadership role. The EVA system has allowed them to feel more comfortable in decentralizing day‐to‐day decision‐making because they are confident that managers and employees are all working in the shareholders' interests.

Date: 2004
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