Fea­ture: Strat­egy

In Pa­pua New Guinea, in­dus­try di­ver­si­fi­ca­tion is of­ten used as a way to grow, as David James ob­serves.

Business Advantage Papua New Guinea - - Contents -

Di­ver­si­fy­ing across dif­fer­ent in­dus­try sec­tors is a pop­u­lar ap­proach in PNG.

In de­vel­oped economies, con­glom­er­ates have be­come a rare breed. The strat­egy of di­ver­si­fy­ing across dif­fer­ent in­dus­try sec­tors tends to be pun­ished by in­vestors who pre­fer spe­cialised play­ers.

Not so in PNG. The con­glom­er­ate strat­egy, some­times de­scribed as the pur­suit of ‘economies of scope,’ is com­mon, partly in re­sponse to the rel­a­tively small size of PNG’S econ­omy. When com­pa­nies achieve a size­able mar­ket share in one mar­ket sec­tor, they of­ten find it dif­fi­cult to grow fur­ther, so they look fur­ther afield.

An­other rea­son is that PNG’S for­mal econ­omy re­mains com­par­a­tively small. But, as it ex­pands, new con­sumers come into the mar­ket. Com­pa­nies that are po­si­tioned as con­glom­er­ates are more able to tap into that new growth.

Dif­fer­ent ap­proaches

There are sev­eral ways to di­ver­sify a com­pany’s op­er­a­tions. Some­times the new sec­tors cho­sen ap­pear to be close to the com­pany’s ex­ist­ing ac­tiv­i­ties, at other times less so.

K K Kingston, a man­u­fac­turer, has di­ver­si­fied in part be­cause it is pur­su­ing ver­ti­cal in­te­gra­tion (com­bin­ing two or more stages of pro­duc­tion). The com­pany re­tails man­u­fac­tured house­hold con­sumer prod­ucts as well, sup­ply­ing spe­cialty chem­i­cals to com­mer­cial cus­tomers.

K K Kingston has di­ver­si­fied into ser­vices. The com­pany has a hire ser­vice arm for in­dus­trial and con­struc­tion equip­ment, and it sup­plies in­dus­trial equip­ment. There is also prod­uct di­ver­si­fi­ca­tion: the com­pany sells wa­ter tanks and other ro­to­moulded prod­ucts.

Chief Ex­ec­u­tive Michael Kingston be­lieves the di­ver­si­fi­ca­tion cre­ates a par­tial hedge when eco­nomic con­di­tions are dif­fi­cult. For ex­am­ple, when the min­ing sec­tor be­comes weak, the com­pany’s ac­tiv­i­ties in the con­sumer mar­ket and com­mer­cial and in­dus­trial mar­kets may mit­i­gate against the worst ef­fects.

Ravi Singh, Chief Ex­ec­u­tive of CPL Group, says di­ver­si­fi­ca­tion al­lows the com­pany to be ex­posed to dif­fer­ent parts of the econ­omy. ‘Be­cause we are op­er­at­ing in sec­tors which are core, like health, food, shel­ter and cloth­ing, we have not ex­pe­ri­enced de­clines of 35–40 per cent,’ he says. ‘One of the ad­van­tages you have in a di­ver­si­fied busi­ness is that if one part of the econ­omy is do­ing well—in this case it is the cof­fee and co­coa in outer re­gions—we get this ben­e­fit.’

Cycli­cal

Len Pianta, Gen­eral Man­ager of the re­tailer Bish­ops, says the com­pany’s op­er­a­tions are split be­tween the re­sources sec­tor and the rest of the econ­omy. The firm set up an in­di­vid­ual of­fice to han­dle the LNG side of the busi­ness, keep­ing it sep­a­rate from the ‘day-to­day busi­ness’. That en­abled the com­pany to keep good

re­la­tion­ships with its gen­eral cus­tomers.

Bish­ops di­ver­si­fies by com­bin­ing high qual­ity in­ter­na­tional brands and do­ing its own direct sourc­ing. House brands ac­count for half Bish­ops’ prod­uct mix, which has helped the com­pany main­tain profit lev­els.

Op­por­tunis­tic

Some di­ver­si­fi­ca­tion is op­por­tunis­tic. Ex­ec­u­tive Di­rec­tor of the Brian Bell Group, Ian Clough, says the com­pany started out as a ‘gun shop on Ela Beach 58 years ago’ but has tran­si­tioned into a true con­glom­er­ate.

‘[ We went from] mov­ing into white goods and kitchen ap­pli­ances to where we are now. We are the Nike agent in PNG, and we pro­duce our own bed cov­er­ings on-site in PNG and buy raw ma­te­ri­als and pro­duce qual­ity linen. We also iden­ti­fied an op­por­tu­nity with com­mer­cial clean­ing which led to our Bell­tech chem­i­cals di­vi­sion.’

Clough says the strat­egy is to as­sess whether there is an op­por­tu­nity in the mar­ket and de­ter­mine whether or not the com­pany has the ca­pac­ity, or can source the ca­pac­ity, to take the busi­ness in that di­rec­tion.

He says he ex­pects the com­pany to con­tinue look­ing for dif­fer­ent ar­eas of op­por­tu­nity.

The Bell Group has home cen­tre, trade and elec­tri­cal and chem­i­cals di­vi­sions. It has pur­sued some ver­ti­cal in­te­gra­tion by es­tab­lish­ing ‘a fairly ex­ten­sive dealer net­work’ in some smaller lo­ca­tions.

Com­pa­nies may move into dif­fer­ent in­dus­tries as they evolve. For ex­am­ple, Main­land Hold­ings, which breeds chick­ens and farms croc­o­diles, used to be a cof­fee grower and man­u­fac­turer, with a mill in Lae. To trans­port the cof­fee it even at one point owned air­craft.

Steel fab­ri­ca­tion com­pany Horni­brook NGI has be­come a di­ver­si­fied man­u­fac­turer, mov­ing into con­struc­tion, mo­tor trans­port en­gi­neer­ing, bridg­ing and even a ho­tel. Man­ag­ing Di­rec­tor Matthew Lewis says the strat­egy is to avoid be­ing over­ex­posed to the cy­cles that oc­cur in the re­sources sec­tor.

Man­ag­ing con­glom­er­ates can be tricky, which is one rea­son why they have be­come rare in de­vel­oped economies. But with so many es­tab­lished PNG com­pa­nies pur­su­ing the strat­egy, it seems cer­tain di­ver­si­fi­ca­tion will re­main a pop­u­lar op­tion.

Pic­tures: Steamships

Many PNG busi­nesses di­ver­sify into dif­fer­ent in­dus­try sec­tors.

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