In Papua New Guinea, industry diversification is often used as a way to grow, as David James observes.
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.
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.’
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.
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.
Many PNG businesses diversify into different industry sectors.