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Indian Business Groups: evolution and transformation

Article in Asia Pacific Journal of Management · February 2006

DOI: 10.1007/s10490-006-9020-5 · Source: RePEc

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Asia Pacific J Manage (2006) 23:559–577
DOI 10.1007/s10490-006-9020-5

REVIEWS

Indian business groups: Evolution and transformation

Ben L. Kedia & Debmalya Mukherjee & Somnath Lahiri

Published online: 12 December 2006

# Springer Science + Business Media, LLC 2006

Abstract Business groups are an important constituent of many emerging economies. In

this paper, we focus on the evolution and transformation of Indian business groups (IBGs)
over two economic eras — pre-reform era (pre 1991) and reform era (post 1991). To this
end, we analyze IBG behavior during these periods, and explain the implications of such
behavior on IBG value creation. Our conceptualization of IBG dynamics utilizes the
perspectives of product relatedness and institutional relatedness, and undertakes a broad
review of the extant literature.

Keywords Indian business groups . Behavior . Relatedness . Value creation

Business groups (BGs) constitute a central feature of the competitive landscape in most
emerging economies. A BG is “a set of firms which, though legally independent, are bound
together by a constellation of formal and informal ties and are accustomed to taking
coordinated action” (Khanna & Rivkin, 2001: 47). Given the ubiquitous nature of BGs,
scholars have presented various theoretical perspectives in attempting to explain the
evolution and persistence of such groups (e.g., Ghemawat & Khanna, 1998; Granovetter,
1994; Guillen, 2000; Khanna & Palepu, 1997, 1999a). Collectively, these works suggest
that BGs tend to fill up the institutional voids created by imperfect capital, labor, and

We are grateful to the two anonymous reviewers for their helpful comments. Our sincere thanks are due to
Andrew Delios, Ajai Gaur, Mike Carney, and especially Mike Peng for their valuable suggestions. We also
thank the Asia Academy of Management, NUS Business School, and Memphis CIBER for providing
financial support to attend APJM special issue conference.
B. L. Kedia (*) : D. Mukherjee : S. Lahiri
Robert Wang Center for International Business Education and Research,
The University of Memphis, Memphis, TN 38152, USA
e-mail: bkedia@memphis.edu
D. Mukherjee
e-mail: dmukhrj1@memphis.edu
S. Lahiri
e-mail: slahiri@memphis.edu
560 B.L. Kedia et al.

product markets. Scholars also observe that group ties enable the affiliated members to reap
distinct benefits that are normally not possible by similar non-group firms (Bertrand,
Mehta, & Mullainathan, 2002; Kali & Sarkar, 2005; Khanna & Palepu, 2000a, 2000b).
Two notable features that characterize most emerging economies are (1) speedy
development facilitated by government policies favoring liberalization and (2) movement
towards free-market system (Arnold & Quelch, 1998). India provides an ardent example of
an economy that has traditionally been associated with inefficient markets. But more
recently, India has been known to pursue rapid development and economic transformation
in favor of a free-market system (Kedia, Dibrell, & Harveston, 1998). A substantial number
of BGs have continued to exist and contribute to Indian economic growth for decades. Not
surprisingly, behavioral and performance patterns exhibited by these groups have been
influenced by the changes in the national institutional framework.
From a research slant, the Indian business group (IBG) setting is noteworthy for several
reasons. First, since IBGs play a dominant role in the country’s economic growth, their
behavior vis-à-vis institutional changes in India provide an intriguing context to examine.
Second, India is the second largest emerging economy with its growth rate second only to
China (World Bank Report, 2005), and, therefore, any focus on the India experience may
help throw light on the competitive dynamics of BGs in other economies. Third, because of
India’s increasing significance in the world economy, an improved understanding of IBGs
can prove fruitful for Western firms that aim to compete against or establish alliances with
Indian groups (Kim, Kandemir, & Cavusgil, 2004). Finally, group membership in India is
clearly defined, which makes it relatively easy to identify group firms for further research
(Khanna & Palepu, 1999a, 1999b).
A growing body of research published in the past four decades (ranging from Hazari
(1966) to Chacar & Vissa (2005)) has attempted to shed light on IBGs’ strategy, structure,
and performance. Notably, two broad issues have featured in these works: (1) IBGs mostly
pursuing unrelated diversification in one period of time (till almost the early 1990s), and (2)
IBGs adopting corporate focusing and related diversification as major strategic response in
a subsequent period (beginning from the early 1990s) (Ghemawat & Khanna, 1998;
Khandwalla, 2002). While the central purpose of this paper is to comprehend evolution and
transformation of IBGs over a broad time span of more than five decades, our aim will be to
integrate the above two issues as major themes of our conceptualization.
Building on the tenets of institutional theory, scholars have forwarded an ‘institution-
based view’ of business strategy (Hoskisson, Eden, Lau, & Wright, 2000; Peng, 2002,
2003, 2006; Peng & Heath, 1996; Scott, 1995) that suggests that firms are embedded in
their institutional frameworks1 and that these frameworks influence firm strategy. Business
groups in India, like other business organizations, have been coping with economic and
institutional changes ushered through policy reforms since the onset of 1990s (Bhattacharyya
& Rahman, 2003; Khandwalla, 2002; Khanna & Palepu, 1997). Thus while focusing on the
conceptual understanding of IBG evolution and transformation, it becomes imperative to
understand the impact of these changes on business groups and subsequent performance
implications.
The concepts of product relatedness and institutional relatedness (Peng, Lee, & Wang,
2005; Peng, 2006) provide relatively new but novel perspectives to understand institution-

1
Institutions are “humanly devised constraints that shape human interaction” e.g., banks, regulatory bodies,
courts, political parties, marketing research organizations etc. (Khanna & Palepu, 1997; North, 1990:3).
Institutional frameworks refer to “the set of fundamental political, social and legal ground rules that
establishes the basis for production, exchange, and distribution” (Davis & North, 1971:6).
Indian business groups: Evolution and transformation 561

influenced IBG behavior and performance. In simple terms, product relatedness (PR) is the
extent to which a group’s different lines of business or industries are linked. When PR is
high, a BG is likely to benefit from using the core competencies of firms tied to its group
and can, thereby, increase its business scope. Institutional relatedness (IR) suggests that a
dense network of ties with dominant institutions will provide BGs to leverage three non-
market forms of capital — social, political, and reputational. In this paper, we delineate IBG
behavior and performance implications utilizing the PR and IR perspectives and attempt to
transcend the earlier conceptualizations relying on institution-based view of firms. The
paper is organized to address two related questions: (1) How did IBGs evolve? (2) How did
they transform over time? Figure 1 encapsulates the overall framework of this paper.

IBG: Theoretical antecedents

Existing research has noted two plausible explanations for IBG development. The first
posits that BGs are responses to market imperfections that exist in the economic structure of
a nation (Khanna & Palepu, 2000a; Khanna & Rivkin, 2001). Building on Leff ’s (1976,
1978) seminal works, scholars contend that BGs in India emerged and flourished due to
policy distortions, informational imperfections, and entrepreneurial scarcity (Ghemawat &
Khanna, 1998; Khanna & Palepu, 2004a, 2004b). In the absence of specialized intermediaries
in the capital markets, these groups generated capital and managerial talent by creating parallel
internal markets. As a result, IBGs could maintain fairly easy access to business capital even
when the external markets remained inefficient (Khanna & Palepu, 2004a, 2004b).
The second explanation (e.g., Ghemawat & Khanna, 1998) recognizes that there are
entrepreneurs within emerging economies who possess unique capabilities and general
management expertise. In the absence of a well-functioning business market, these
entrepreneurs are capable of using political nexus to their benefit and engage in different
lines of business. After World War I, the task of promoting new industries in India was
carried out mainly by traditional merchant groups who managed to accumulate substantial
wealth reaping on wartime speculation (Singhal & Tagore, 2002). These wealth creators
participated in modern industrial and manufacturing activities shortly after the war. Var-
ious entrepreneurial groups that formed out of business families like Birla, Tata, Godrej,
Dalmia, Juggilal Kamlapat, Sarupchand Hukumchand, Surajmull Nagarmull, Jaipuria,
Bangur, Goenka and so on gradually transformed into powerful business groups (Singhal
& Tagore, 2002). These conglomerates continued to grow and flourish over the years, more
so after India’s independence in 1947.

Main drivers of IBG behavior (pre-reform era)

For the most part, pre-reform era in India is associated with the existence of a centrally
planned economy, general skepticism about entry of foreign firms or investments in
domestic markets, and a high level of government interference in the corporate sector
(Khandwalla, 2002). These features coupled with an already existing inefficient market
system gave rise to a highly protected economy.

Regulatory mechanisms

The major government regulations and regulatory bodies that were in vogue between 1947
and 1991 are Industrial Policy Resolution (1956), Monopolies Inquiry Commission (1965),
562 B.L. Kedia et al.

Drivers of IBG
Behavior and Performance

Pre-reform (Pre 1991) Reform (Post 1991)

Regulatory Mechanisms
Liberalization
Market Deficiencies
Deregulation
Weak Contract
Globalization
Enforcement

IBG Behavior IBG Behavior

Mostly Unrelated Corporate Focusing and

Diversification Related Diversification

Performance implications Performance implications

Value creation mainly

Value created mainly through Hi -PR & low-
through low -PR but IR, but also through
Hi-IR low -PR and Hi- IR
during transition

Figure 1 Main drivers of IBG behavior, adopted behavior and performance implications
Indian business groups: Evolution and transformation 563

Monopolies and Restrictive Trade Practices (MRTP, 1969), Industrial Licensing Policy
Inquiry Committee (1969), and Foreign Exchange Regulation Act (1973) (for details see
Majumdar, 2004). These regulatory mechanisms increased governmental intervention,
control, and supervision in the private sector, and heightened entry barriers for the foreign
investors. For example, the industrial policy resolution exactly specified the nature of
public ownership of business establishments. This meant that although the state sector
could easily enter into industries where private firms were the leading players, the latter
were not allowed to manufacture products that were reserved for the former. Entrepreneurial
firms, to cite another example, were required to go through a series of regulatory
procedures and obtain a host of clearances before it could actually begin operations (Mohan
& Aggarwal, 1990). Collectively this entire period of stringent licensing requirements is
referred to as ‘License Raj’ meaning the license regime (Majumdar, 2004).
Strict regulatory requirements not only tended to stifle business growth in respective
sectors but also discouraged foreign competition through excessive import licensing and
high tariffs. Thus markets belonged to the sellers and consumers had very little choice, even
in terms of product quality (Das, 2004).

Market deficiencies and weak contract enforcement

Market deficiency refers to lack of well-functioning financial-, product-, and labor markets.
Like other emerging economies, Indian economic structure was characterized by near-
absence of efficient markets. Moreover, strict enforcement of contracts was a problem
owing to lack of necessary laws and regulations (Khanna & Palepu, 1997).
During this era, financial intermediaries like financial analysts, investment bankers,
active financial press, and well functioning stock exchanges (features common in advanced
capital markets) were absent in India. Moreover, the national capital market was
characterized by shortage of equity capital, lack of liquidity and weak corporate governance
(Khanna & Palepu, 1999a, 1999b). This underdeveloped capital market constrained firms’
ability to access risk capital from potential investors. Also, an inefficient product market
meant prices of the products were controlled by government regulations and there were
limits to capacity expansion (Bhattacharyya & Rahman, 2003). A rigid labor market
implied that hiring qualified talents and firing of employees was difficult (Khanna &
Palepu, 1997). Further, dearth of intermediaries in product and labor markets made business
transactions costly.
The above imperfections posed substantial problems for firms to prosper. A well-
diversified group structure, however, could create more value than a stand-alone firm in
such conditions (Carney & Gedajlovic, 2003; Li, Ramaswamy, & Pettit, 2006). For
example, group affiliation meant access to internal capital market created by the group
itself, thereby mitigating the need to enter equity markets to raise funds. Likewise, a
diversified group structure could allow creation of an internally mobile labor market where
employees could be trained and moved between firms tied to that group (Li et al., 2006).
Although group structure was advantageous in several respects, these groups faced the
same market related problems as any other firm did. Overall, the attributes of market
deficiency and weak contract enforcement made it difficult for BGs to remain focused in
particular business segments, and so they chose to follow growth avenues mainly through
unrelated diversification (Khanna & Palepu, 1997).
564 B.L. Kedia et al.

IBG behavior and performance implications

IBG behavior

What were the effects of the above drivers on IBG behavior? The resultant complexity
arising from administrative impediments and inefficient market mechanisms greatly
reduced the needed flexibility of IBGs in initiating new ventures. In addition, procedural
delays increased costs. Intending to prosper but unable to cope with administrative
obstacles and market deficiencies, most IBGs embarked on the path of unrelated
diversification by foraying into multiple industries. For example, Birla group operated in
industries like jute, textiles, sanitary ware, cement, steel, plastics, dairy, newspaper,
shipping, automobiles, electrical, tea, and sugar, and Goenka group had businesses as
diverse as carbon black, cable, radio companies, tire, electric supply, agribusiness, fiber
glass, tea, engineering, financial services, music, and typewriters (Ghemawat & Khanna,
1998).
In sum, IBGs used product diversification strategy as a means to create internal
markets and to deal with the challenges posed by an evolving institutional environment
(Hill, 1988; Khanna & Palepu, 1999b; Whitley, 1999). Interestingly, IBGs managed to
create value despite following businesses that were hardly related to one another when
viewed from a PR lens (Bhattacharyya & Rahman, 2003). However, their seemingly
unrelated activities might actually have a high degree of IR (Peng et al., 2005). One
reason attributed to this effect is that these groups efficiently exploited the existing
institutional voids and various forms of market failures to their advantage (Khanna &
Palepu, 2004a, 2004b).

IBG performance implications

Extant literature on BGs has used the notion of value creation as a means to understand
group performance. Despite the fact that conclusions from empirical works on
diversification–performance linkage have been mixed (Khanna & Yafeh, 2005; Lee, Peng,
& Lee, 2007), scholars have observed that in the pre-reform era, BGs have been successful
in adding business value. To be in line with earlier works (as in Khanna & Palepu,
2004a, 2004b), we utilize data provided by Goyal (1988) and Piramal (2003) to further our
understanding of value creation by business groups in India. Table 1 depicts the top twenty
IBGs and their accumulated assets over three different time periods (1964, 1980, and 1990)
and market capitalization for 1999.
As can be seen in Table 1, there is a considerable difference in assets and asset growth
(i.e., value creation) for the different groups over a 26-year time frame. For example, Tata
group and Birla group show high value creation during this period, followed by Mafatlal
group and Bajaj group that show moderate value addition. Further, Walchand group and
Goenka group can be considered to be in a third group of modest value addition. Finally,
groups such as TVS and Khaitan can be categorized in a fourth low value addition group.
As one of our purposes in this paper is to understand how IBG behavior and performance
can be analyzed using the perspectives of product relatedness (PR) and institutional
relatedness (IR), we choose one example from each of the above categories to support our
explanation. A matrix of IBG performance is shown in Figure 2. The matrix shows four
cells, each providing example of a group that exhibited a particular type of value creation.
Each cell represents a general pattern and we acknowledge that there could be subtle
variations within each form.
Indian business groups: Evolution and transformation 565

Table 1 Top twenty Indian business groups, 1964a–1999 (Assets & Mkt. Cap.: Indian Rupees in Crores,
1 Crore = 10 million).

Rank 1964 1980b 1990 1999

Group Assets Group Assets Group Assets Group Mkt.

Capitalization

1 Tata (including 369.11 Tata 1,538.97 Tata 7,546 Tata 22,345

ACC
2 Birla 290.24 Birla 1,431.99 Birla 7,235 Wipro 18,439
3 Martin Burn 108.72 Mafatlal 427.54 Reliance 3,241 Reliance 16,060
4 Thapar 70.61 JK 412 J K Singhania 1,829 Ranbaxy 7,970
Singhania
5 Bangur 65.29 Thapar 348.06 Thapar 1,763 Bajaj 7,667
6 Sahu Jain 61.06 ICI 343.01 Mafatlal 1,297 AV Birla 7,204
7 Shriram 59.85 Sarabhai 317.94 Bajaj 1,228 Satyamc 4,220
8 Bird Heilgers 58.20 ACC 274.51 Modi 1,192 Hero 3,715
9 JK Singhania 54.43 Bangur 264.33 MA 1,032 Punjab 3,173
Chidambaram Tractors
10 Sarabhai 54.29 Shriram 241 TVS 909 Wadia 2,985
11 Walchand 54.02 Kirloskar 220.37 Shriram 800 Mahindra 2,910
12 Surajmul 44.83 Hindustan 219.30 UB 716 Hamied 2,824
Nagarmul Lever
13 Goenka 43.56 Larsen & 216.03 Bangur 674 Pentafour 2,742
Toubro
14 Mafatlal 43.11 Modi 198.82 Kirloskar 633 Dr. 2,723
Reddy’s
15 Andrew Yule 34.30 TVS 188.64 Walchand 626 Sekhsharia 2,719
16 Amalgamations 33.43 Mahindra 186.03 Mahindra 620 Subhas 2,258
Chandra
17 Jardine 31.42 Bajaj 179.26 Goenka 570 TVS 1,986
Henderson
18 Bajaj 29.25 Reliance 166.33 Nanda 537 Vinai Rai 1,876
(Escorts)
19 BIC 29.05 ITC 156.29 Lalbhai 479 Burman 1,859
20 McNeill and 26.98 Walchand 150.36 Ruia (Essar) 437 Wockhardt 1,315
Barry

Source:
a
1964, 1990 and 1999 data obtained from Piramal (2003).
b
1980 data obtained from Goyal (1988).
c
Obtained from Satyam Computers Annual Report, 1999. http://www.satyam.com/investors/documents/ar99-
00/arsatglo.pdf.

As mentioned at the outset, PR represents the extent of linkage between a group’s

different lines of business. Thus high PR will mean high relatedness (and less diversity)
among the portfolios pursued by the member firms of a particular group. Likewise, low PR
will indicate increased unrelatedness i.e., lesser synergy among a group’s businesses.
IR, on the other hand, denotes the degree of a group’s informal embeddedness with
dominant institutions in its environment. This relatedness is held to be instrumental in
conferring resources (i.e., various forms of capital) and legitimacy to a group especially in
case of emerging economies (Carney, 2004; Peng et al., 2005). Thus higher the extent of IR,
higher will be embeddedness and accrued resources available to the group, and vice versa.
566 B.L. Kedia et al.

Figure 2 Business group perfor-

mance matrix — Pre-Reform era
High
4 2
Low value-added Moderate value-added
groups groups

Example: Examples:

Product Relatedness
TVS Mafatlal

3 1
Modest value-added High value-added
groups groups

Example: Example:
Walchand Tata

Low
Low Institutional Relatedness High

Source: Adapted from Peng et al. (2005).

Tata Group Founded in 1905, Tata group was the most dominant IBG in the pre-reform
era. By 1914 the group had already ventured into diversified sectors like hotels, cotton
manufacture, iron and steel, and hydroelectricity. The group further diversified its
businesses into industrial banking, insurance, construction, soap and cement by the end
of First World War. In the thirties, it entered into the airlines industry. After World War II,
this group added further portfolio through Tata Chemicals, Tata Tube, Investa Machine
Tools, and Tata Locomotives. Thus Tata group represented high level of unrelated
diversification i.e., low PR.
As reward for the group’s consistent support in India’s freedom movement, the Nehru
government awarded (after 1947) several projects to the Tatas as part of nation building
effort. This forced the group to further diversify into unrelated businesses. For example,
Telco collaborated with Hindalco (a Birla group of company) with Government of India to
set up Hindustan Aeronautics Limited aiming to develop India’s aviation sector. In
exchange, the Tata group financially supported the congress government by donating huge
sums of money during elections (Das, 2004). Although the relationship between BGs and
the government soured during Licence raj, the Tatas had already established strong
connections with other institutions, and a well-built brand value enabled them to capitalize
on all three non-market forms of capital — political, social, and reputational. Thus little
competition in domestic market and high IR helped major groups like Tatas and Birlas to
create high value and, thereby, dominate the Indian corporate sector during the pre-reform
era despite having low PR.

Mafatlal Group Mafatlal Group (founded in 1905) had entered into insurance, retail,
financial services, textile, jute, and shipping businesses by 1930. In 1963, the group
diversified into the petrochemical sector. However, for the most part of pre-reform
period, the group’s focus remained on textiles in trying to establish a strong brand
Indian business groups: Evolution and transformation 567

value all over India. The group dominated this period mainly because there was little
domestic competition, and thus it could gradually set up good reputational- and social
capital with relatively little effort. Government policies that restricted foreign companies to
enter into the textile sector helped them. In other words, Mafatlal group was high on PR
(textiles) and also high on IR. The group managed to achieve moderate value creation.

Walchand Group Entrepreneur Walchand Hirachand accumulated capital as a contractor in

buildings, railway works and other construction works during the First World War. The
Walchand group, founded by Walchand Hirachand, started Scindia Steam Navigation
Company in 1919 and set up Ravalgon Sugar Farm Limited in 1933. With a much-
diversified portfolio, this group played a pioneering role in sugar manufacture, shipping,
shipbuilding, aircraft manufacture, automobile manufacture, engineering and machine tools,
and building and bridge construction. Thus this group was low in terms of PR.
Walchand group was also low on IR. Although they actively participated in various
projects during India’s struggle for independence, they did not benefit from governmental
awards of development projects like the Tatas. In fact, after the erstwhile (Nehru)
government nationalized the core business sectors like aircraft making and shipyards,
Walchand group could no longer retain its dominant position in these sectors. Thus this
group did not benefit much from relational embeddedness. As evident from Table 1, the
group managed to add modest value, relative to other groups.

TVS Group TVS Group, founded in 1911 as a small transportation company, mainly
adopted related diversification strategy. The group created a wide range of independent
subsidiaries that manufactured automotive components and provided automotive services
(Li et al., 2006). From our perspective, this group was high on PR as it could foster synergy
among the core competencies of its subsidiaries leveraging economies of scope. However,
this group exploited market inefficiencies that existed then (like inability to source spare
parts and supplies, presence of distribution bottlenecks), depended heavily on the domestic
market (Li et al., 2006) and need not require being in close connection with major
institutions to enhance business interests (i.e., the group represented low IR). TVS group
managed to add low value to its business relative to other groups.
In sum, the above analysis indicates that although PR and IR were both important for IBG
value addition during the pre-reform era, on a relative measure, the latter was more crucial.
This is because the general business environment and regulatory mechanisms forced most
groups to be relatively low on PR, and value addition was possible mainly through increased
IR and a diversified group structure.

Main drivers of IBG behavior (reform era)

Around 1990 and thereafter (the period we call reform era), several economic reforms were
initiated by the central government of India that heralded changes in the institutional
frameworks of many a business. IBGs were no exception. Market conditions, among other
things, changed appreciably for these groups. Collectively these changes are referred to as
the competitive shock of the 1990s (Khanna & Palepu, 1999a, 1999b). The major reforms
included liberalization and deregulation of the Indian economy. Besides, increasing
globalization of business activities was also a key feature that affected the Indian business
landscape during this period (Khandwalla, 2002; Ray, 2004).
568 B.L. Kedia et al.

Liberalization and deregulation

In the wake of balance of payments crisis in 1991, the government of India led by Prime
Minister P.V. Narsimha Rao and the then minister of finance (and current Prime Minister)
Dr. Manmohan Singh, initiated a series of rapid structural changes in the economy.
Deregulation, a type of economic reform involving full or partial elimination of regulation
in a sector of economy (OECD, 1999: 16), gave a sharp boost to Indian economic growth.
It resulted in substantial abolition of licensing for setting up industries and expanding
capacity, abolition of the office of Controller of Capital Issues, liberalization of corporate
access to foreign technology, phased elimination of import and export controls, and gradual
reduction in excise and import duties (from an average of around 100 percent in 1991 to
about a third of this by 2000–2001).
Following these new policy changes, Reserve Bank of India liberalized its credit control
regime, and MRTP Act was abolished. Host of other changes were put into effect. For
example, ceilings on debenture coupon rates and other interest rates were abolished.
Restrictions, previously imposed on the size of firms, were lifted and areas reserved for the
public sectors were reduced. Businesses were given freedom to raise capital from overseas
markets and were allowed to set premium on their share issues. Import tariffs, corporate
income taxes were significantly reduced.

Globalization

Increasing globalization affected business practices in India, as it did for other nations
round the globe (Kedia & Perez, 2004). The process of globalization has generally been
known to result in broad economic, political and socio-cultural changes within nations, and
increased flow of capital, information, and global best practices across nations (Echeverri-
Gent, 2004). For IBGs, globalization brought increased foreign competition as increasing
number of overseas firms began investing in Indian markets. Likewise, globalization also
opened up new opportunities for groups as Ranbaxy and Wipro as they could now cater
to the growing global demand for generic drugs and software services. A significant
outcome of globalization has also been the enhancement of corporate governance
standards of the business groups. But on the whole, India’s participation in globalization
offered level playing ground to its BGs and new foreign entrants alike (Chhibber &
Majumdar, 2005).
A notable result in the reform era was the opening up of Indian economy to foreign
private investors. Another significant outcome was the liberalization of outbound foreign
investment that Indian firms could undertake (Khandwalla, 2002). As a result, Indian
capital market, labor market, and product market made steady improvements (Khanna &
Palepu, 1999a). These liberalization and deregulatory measures introduced over the last
decade and the remarkable changes that have taken place in the international business
environment had far-reaching impact on IBGs.

IBG behavior (during reform process)

Owing to the above changes in the economic and business landscape, IBGs were exposed
to significantly different business environment and increased competitive pressure.
However, the changes presented the groups with increased opportunities for relatively
unregulated growth and increased diversification. In the western world, especially in the
Indian business groups: Evolution and transformation 569

US, there was increasing evidence that although unrelated diversification added value in the
earlier decades, it did not help firms to create value in the later decades (Berger & Ofek,
1995; Schleifer & Vishny, 1991). Thus corporations took recourse to massive restructuring
through increased levels of refocusing in the 1980s and 1990s. In a similar move, IBGs re-
examined their earlier strategies, and responded to institutional changes through restructur-
ing activities (Khandwalla, 2002). This behavior endorses the observation made by Kim
and Prescott (2005) that economic deregulation is associated with competitive landscape
becoming more market based, requiring firms to amend their existing strategies and
structures.
Interestingly, while some firms began focusing on their core competences, others
embarked on ‘aggressive diversification’ (Khandwalla, 2002: 428) to build on their areas of
strength. Mergers and acquisitions by IBGs seeking business consolidation were also
witnessed. Additionally few businesses started venturing overseas. Overall, there were a
variety of moves by the IBGs following regulatory and market reforms that were ushered in
the early 1990s, but the general movement was towards increased product relatedness.

Refocusing

In 1998, Tata group restructured their Tata Empire in consultation with McKinsey & Co.
and reduced the number of group-affiliated firms from 80 to 30. This meant trimming their
lines of businesses from 25 to 12 (Naik, 2001). C. K. Birla group also sought the assistance
of McKinsey & Co. in streamlining group functioning. The century old Godrej group, in a
similar move, spun off businesses from non-core areas. Dabur India Ltd. increased its focus
on food products and fast moving consumer goods (Khandwalla, 2002). Similar narrowing
of business portfolios were witnessed for Duncan Goenka Group, Ballarpur industries (of
Thapar group), RPG (Goenka Group) etc.

Consolidation through mergers and acquisitions (M&As)

The reform era has witnessed a series of M&A activities by the IBGs. Specifically, many
bigger and more aggressive firms bought out smaller ones to assume market leadership
(Asia Times, 2004). Most M&As were undertaken to build on areas of strength. For
example, BPL Communications merged with the Birla–Tata–AT&T alliance in 1994.
Leading software player, Wipro group took over Nerve Wire, a US-based software
consulting company (Asia Times, 2004). IBGs also engaged in strategic alliances when
M&As were not deemed suitable. For example, pharmaceutical group Ranbaxy formed
strategic alliance with US-based multinational Elli-Lilly.

Diversification through international expansion

The post-1991 era saw a few IBGs venturing overseas in search of larger business domains.
For example, Tata Tea Ltd. (a member of the Tata group) bought UK’s Tetley Tea in 2000
for $435 million and gained association with an international brand name. Tata group also
purchased Daewoo’s (a Korean group) commercial truck operation in 2004 for getting
access to improved technology, and to enhance business operations in Asia. Reliance
Infocomm, a member firm of Reliance group, acquired Flag International (of France) for
$ 211 million and gained access to 50,000 kilometers of optic fiber around the globe (Asia
Times, 2004).
570 B.L. Kedia et al.

In short, these activities reveal that in the reform period IBGs are attempting to modify
their business practices and organizational structure in manners that fit the new institutional
environment. Next, we will briefly discuss the performance implications of such behavioral
change.

IBG performance implications

Empirical studies pertaining to IBG diversification–performance relationship has rendered

mixed results. Khanna and Palepu (2000a, 2000b) examined the performance differential
between the group-affiliated firms and non-group affiliated firms. Using data from 1993
they found that group affiliated firms outperform stand alone firms. They noted that firm
performance initially declines with group diversification but subsequently improves once
group diversification exceeds a certain threshold. Again, Khanna and Rivkin (2001)
explored the group affiliation and profitability relationship with data from 14 emerging
markets including India and found diversified groups affiliation provided significantly
higher profitability (in case of India).
Petitt, Ramaswamy, and Li (2005) examined the performance impact of group affiliation
and diversification during two different time periods. In the pre-reform era model (1988), it
was found that both group affiliation and diversification posture had a significant influence
on performance. They noticed that diversification itself seemed to exert a statistically
significant negative influence on firm performance but, consistent with the traditional
literature, group affiliation mitigated the negative effect. In other words, diversification did
not add value per se. With regard to the 1999 model they concluded group affiliation and
diversification level did not appear to have any impact on firm performance. Similarly, Kali
and Sarkar (2005) and Chacar and Vissa (2005) studying with more recent datasets found
no evidence of superior performance by business group affiliates.
In short, studies using datasets from the pre-reform period and the early 1990s found that
diversified group structures added value. More recent studies (Chacar & Vissa, 2005; Kali
& Sarkar, 2005) found no evidence of more value addition by the group affiliated firms.2
We argue that this performance differential of the diversified group-affiliated firms in two
different time periods can be explained and is in line with our central argument. In the pre-
reform era, following a product unrelated but highly institutionally related strategy
generated highest value. But with the liberalization, deregulation and globalization efforts
in place, the broad institutional environment of India has changed. BGs following a product
related but institutionally unrelated diversification strategy may generate maximum value in
the long run. However, some older groups which possessed high institutional relatedness
will continue to create value during the reform period, till the institutions are fully
developed.
Accordingly, fast growth was witnessed for BGs like Wipro and Hero. Old giants like
Tata and Birla managed to retain their dominance after a few initial setbacks. Older groups
like Mafatlal, Shriram, Kirloskar, Walchand, and Lalbhai declined, owing to their failure to
keep up with the environmental changes. For example, growth of the power loom sector
had sapped Mafatlal group’s textile business by the 1990s. Mafatlal’s petrochemical project,

2
Lee, Peng, and Lee (2007) reviewed the BG literature on South Korea, and reported a similar pattern:
Studies using datasets from an earlier era (until the early 1990s) tend to report a diversification premium,
whereas more recent studies often find a diversification discount.
Indian business groups: Evolution and transformation 571

Figure 3 Business group perfor-

mance matrix—Reform era High
1 3
High value-added Modest value-added
groups groups

Example: Example:
Wipro Hero

Product Relatedness
4 2
Low value-added Moderate value-added
groups groups

Example: Example:
Thapar Tata

Low
Low Institutional Relatedness High

Source: Adapted from Peng et al. (2005).

Nocil, could not compete in size and productivity with similar newer firms. Relatively new
groups like Modi failed to survive, as they were unable to cope with the technological and
managerial challenges thrown open by newer entrants (Piramal, 2003).
The most significant development in this era is the extraordinary growth of groups such
as Wipro, Satyam Computers, Ranbaxy, and Dr. Reddy’s Laboratories. These groups are
professionally managed, focused on their respective core competencies, and are less
dependent on domestic institutions due to the global nature of their industries. By 1999,
there appeared many new players that displaced several older groups from the top 20 list of
IBGs. Column 8 of Table 1 lists these groups. Several of these newer groups like Wipro,
Ranbaxy, Pentafour, Cipla, Dr. Reddy’s, Wockhardt, Subhas Chandra, and Satyam
Computers flourished primarily after India’s economic liberalization. Overall, these groups
followed focused strategies and concentrated on a limited number of business domains.
As in the earlier section, a matrix of IBG performance for reform era is shown in
Figure 3. Each of the four cells provides an example of a group that exhibited a particular
degree of value creation.

Wipro Group

Wipro started in 1945 with the setting up of an oil factory and remained largely unheard of
in the pre-reform era. By the early 1990s, the group had diversified into various product
lines like soaps, baby products, hydraulic cylinders, personal computers, and software
services. Post liberalization, it has gradually transformed into a Rs.58.43 billion global
group (Wipro India Press Release, 2004) and derives most of its value from information-
technology services. In a sense, synergistic market offering by Wipro (i.e., high PR) has
rendered its phenomenal growth. Relying on international business vision and policies of its
current Chairman (Ramamurti, 2001), and benefiting from state-of-the-art organizational
572 B.L. Kedia et al.

resources, Wipro is a true symbol of transformed group that has utilized the opportunities
that liberalization, deregulation and globalization has offered. For the group, internal
business development through core competencies is more important than maintaining
excellent relations with dominant institutions. Thus despite having low IR, Wipro has
exhibited high value creation.

Tata Group

Why does this group that positioned in the high value cell in earlier matrix now features in
the cell that represents moderate value addition? As mentioned earlier, Tata group went
through significant restructuring around 1998 and reduced the number of group affiliated
firms and business portfolios by more than 50 per cent. Specifically, the Tatas shifted their
focus from commodity businesses (like cement, pharmaceuticals and toiletries) to brand and
services (like software) that provided a more sustainable return (Jaipuria, 2002). The group
ventured into new business areas that were not very diversified. For example, the hotel
division of Tata expanded into luxury business hotels overseas (Kripalani, 2004). All these
were intended to enhance the group’s PR and create increased business value. However, the
group still possessed a wide array of unrelated businesses that prevented it from achieving
the required level of improved focus and synergy of resources to compete with relatively
newer groups in the reform era.
We believe that Tata group managed to generate value because reform is still taking
place in India and informal institutions are still influential. Banking on the informal
institutions, the group is continuing to leverage its already existing market presence, brand
image, and age-old business experience. Tata possessed high IR in the pre-reform period
and it remained institutionally related in the reform era.
Tata group analysis in a way shows that in the reform era, the impact of the extent of IR
and PR on value creation is different from what it was in the earlier era. Specifically, low
PR and high IR that resulted in high value addition for the group in the pre-reform era
provided moderate value creation in the reform era.

Hero Group

In 1956, Munjal brothers founded this group with Hero Cycles as its flagship company. For
the most part of the pre-reform era, the group stayed focused on manufacturing automobile
parts and other related goods. Thus the group exhibited high PR. Now Hero Group
comprises of 19 companies, 300 ancillary suppliers, and has deep market penetration with
over 5,000 outlets. However, high PR is still Hero group’s forte. Moreover, the group
exhibits high IR since its member affiliates attempt to maintain close interaction with
various dominant institutions and it was already a well-known brand in the pre-reform era.
Despite being high on both dimensions of PR and IR, the group ranked eight in the market-
capitalization lists for 1999 and has created modest value during the reform era. We think
that the reasons could be two-fold. First, Hero group could not transform itself to suit the
changed Indian business scenario in reform era when national economy opened up
considerably, thereby enhancing business competition manifold. Second, the market for
bicycles and related products did not appreciate as compared to other markets like
pharmaceuticals and software. However, increased PR is likely to help this group in the
long run.
Indian business groups: Evolution and transformation 573

Thapar Group

Founded in the 1920s by Lala Karamchand Thapar, the Thapar Group has been in existence
for over eight decades. As evident from Table 1, this group managed to remain in the top 5
bracket between 1964 and 1990. However, it does not figure in the top 20 data that we have
for 1999. We argue that the group has failed to perform well since it has tried to maintain a
much diversified portfolio with industrial interests ranging from textiles, paper, chemicals,
edible oils, manmade fibers, steel wires, glass, engineering, electronics, hydro consultancy,
shipping, etc. Outside India, over 50 different companies and over 80 manufacturing plants
represent the Thapar group. Thus, low PR has been a crucial factor in the group’s (low)
value creating capability. Moreover, it has failed to capitalize on the opportunities thrown
open by globalization, and opening up of the Indian economy in the reform era. The group
remained low on IR as it could not maintain strong relations with the dominant institutions
in India and could not leverage social, reputational and political capital in the new
economy.

Discussion and conclusion

In this paper, we focused on how business groups in India evolved and transformed over
the years. In doing so, we relied on the insights and findings of the extant BG-related
literature and specifically based our conceptualization on IBG related publications. To
achieve this end and to understand IBG dynamics with clarity, we framed our
conceptualization in a sequential ‘drivers–behavior–performance’ path for each of the two
eras. We noted how IBG literature has drawn heavily from the central theme of the
intellectual movement based on institution-based view of strategy (Oliver, 1997; Peng &
Zhou, 2005; Peng, 2006). One of the important objectives of management research is to
understand patterns of firm behavior over time and to comprehend inter-organizational
performance differences (Bromiley, 2005). This review has taken a step further in
understanding such a pattern in the context of IBGs.
While the thrust of the paper was gaining a better understanding of evolution and
transformation of IBGs, we attempted to revisit a primary issue of interest in the IBG
literature: Why did many BGs in India pursue unrelated diversification in one era, and
what made many groups to adopt related diversification and focus on core competencies
in the later era? The notion of value creation that is intricately related with the nature
of diversification (Peng, 2001; Yiu, Bruton, & Lu, 2005) was also explained in the
paper. To augment our scope of conceptualization, we chose to look through the lens of
PR and IR as promising perspectives to understand BG behavior and performance. The
paper has, in the process, provided a broad review of extant IBG literature by bringing
together diverse insights and perspectives advanced by scholars over a time span of
almost 40 years (1966–2005). Apart from extending the conceptual domain, this paper
has provided a full picture of IBG dynamics. Our Figures 2 and 3 as well as the
discussion show that during each of the two eras, there is some diversity in terms of PR
and IR. We cannot characterize all IBGs in the pre-reform era to be pursuing a strategy
of high PR and high IR, and all IBGs in the reform era to be embarking upon a strategy
of low PR and low IR. In other words, given the complexity and evolution of the
interaction between PR and IR in different eras, crude generalization needs to be avoided
(Peng et al., 2005).
574 B.L. Kedia et al.

Overall, our discussion has depicted how institutional factors impacted the evolution and
growth of IBGs in one era. Our understanding has also sought to clarify how changed
institutional factors influenced transformed group behavior in another era when several
policy reforms were enacted that had (and still has) far reaching consequences for the
national economy and overall business environment. While published works have studied
group-affiliated firms versus non-group firms in understanding diversification–performance
linkage, this paper is probably the first to focus on between-group performance differences
among the top IBGs. This paper is first in using the two relatedness concepts (PR and IR)
in conjunction to comprehend IBG behavior and performance. We expect future works to
benefit from this paper in developing deeper insights, better concepts and sound theories.
On the empirical front, we hope to see more between-group studies using IR and PR
dimensions.
In conclusion, it needs to be clarified that our conceptualization does not prescribe
high PR or high IR (or any combination thereof) as only sources of value creation.
Indeed, there may be other organizational or economic issues that BGs need to consider.
Our aim has been to show how these perspectives can be meaningfully utilized to
understand IBG behavior or performance over two different time periods. Although India
is considered a globally competitive nation (Saran & Guo, 2005; Sheth, 2004), its capital
market, product market, labor market, contract enforcement system, and national
governance have still a long way to go before they can be considered to be at par with
those of the advanced economies. In this regard, IBGs not only need to reconsider their
strategies, structures, and processes in the face of changing environment, but they also
need to actively consider issues like India’s multiparty political structure, extremely
varied ethnic population, complex socio-cultural systems, role of formal and informal
institutions, dominance of political leaders and bureaucrats that have profound influences
on the functioning of IBGs.

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Indian business groups: Evolution and transformation 577

Ben L. Kedia holds the Wang Chair of Excellence in International Business and is Director of the Wang
Center for International Business Education and Research (CIBER) at The University of Memphis, USA. His
research interests include cross-cultural and comparative management, and international business strategy.
Dr. Kedia has served as Chair of the International Management Division of the Academy of Management and
President of the Academy of International Business–U.S. Southwest. His research has been published in
Academy of Management Review, Journal of World Business, Management International Review, etc. He
received his PhD from Case Western Reserve University.

Debmalya Mukherjee is a doctoral candidate in strategic management at The University of Memphis, USA.
His research interests include international business strategy, emerging economies and virtual organizations.
Debmalya has presented research papers at various national and international conferences. He received his
MBA from Ohio University. He has served in a team consulting project in Italy. Prior to coming to the
United States, Debmalya worked as a lawyer at the Calcutta High Court, India.

Somnath Lahiri is a doctoral candidate in management at The University of Memphis, USA. His research
interests include international outsourcing, emerging economies, and global business strategy. Somnath’s
writings have appeared in European Business Forum and he has presented research papers at various
conferences in the United States and abroad. He has also co-authored a book chapter on BRIC economies.
Prior to coming to the United States, he served as a professional engineer for several years in India, both in
the private- and government sector, where he specialized in contract handling and project monitoring.

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