Building Blocks – Reliance Capital

Reliance Capital, one of India’s leading Non Banking Financial Companies, is in news for chalking out a profitable growth path and de-leveraging its balance sheet. Reliance Capital is a portfolio company with different lines of businesses such as asset management, life insurance, general insurance, broking and commercial finance. All these lines of businesses are individually headed by their respective CEOs, who in turn report to the Corporate CEO.

In a recent news statement in the Business Standard, Sam Ghosh, CEO – Reliance Capital has said that his objective is to make each line of business profitable by using different strategies for different business. This statement leads to a very basic question. If each of the individual LOB is to become a profitable entity, what then would be the requirement for having a corporate portfolio company over these LOBs? Initially the corporate office served the purpose of capital infusion to the individual LOBs. However when these LOBs become profitable and self sustainable, capital infusion from corporate office may no longer be needed. One could wonder what purpose the corporate office will then serve. Will the corporate office simply be an overhead, with no revenues, removed from the individual businesses? Is this corporate structure created only to play the role of a ‘Big Brother’ for imposing corporate reporting restrictions and/ or bringing about cost savings by the way of shared services? Or does it add some value to the LOBs other than compliance and the shared services?

The answer lies in the notion of corporate parenting. Among the different types of corporate parenting activities, some are geared towards core compliance purposes while some activities are classified as shared services – i.e. providing services to multiple units in order to gain savings by obviating the need to replicate the service within each unit. Other activities fall under purview of ‘Value Added Parenting’.

Corporate advantage is created if the combined portfolio structure results in improvements in profits greater than the sum of the profits of the businesses operating individually. This draws on the idea of “synergies” that is closely linked to the idea of related diversification. In diversified business, corporate advantage is created if synergies can ensue by applying resources or combining capabilities across businesses to either reduce costs or enhance revenues.


As in the case of Reliance Capital, we see that beyond compliance and the shared services, synergies within an organization may be derived by applying common management capabilities at the corporate level to different businesses units, thus helping the businesses to pick on appropriate strategies, unlock value and promote self-sustainable and profitable growth.

5 thoughts on “Building Blocks – Reliance Capital

  1. Somali,Good thoughts on the corporate body or parent company presence and influence over the subsidiaries or individual companies.This holds for most of the conglomerates who look at providing synergies to the individual companies, but most importantly these companies are looked as part of the overall portfolio. Foremost, though,the corporate group is responsible for providing vision to the overall group based on the short,medium and long term.


  2. Yes the companies are looked as part of overall portfolio and Corporate HQ provides the vision. But whether Corporate HQ is indeed creating or destroying value over and above the sum of the individual businesses is typically hard to tell. The value add (or value destruction) by Corporate HQ is mainly observable during periods of change such as. Diversification, Re-orgs, Alliances M&A etcthan during steady state. No wonder the R Cap stock has jumped substantially after the two deals by selling their stakes in life insurance and asset management company.


  3. Value Added Parenting is the key word here. A lot of times people tend to see corporate as a burden but don't realize the intent for the individual entity set-up. I think the several reasons Somali has mentioned in the blog above are true for different kind of businesses not necessarily true for all types. A lot of times the corporate support helps in getting more business for the LOB which otherwise would be a bit difficult to get even after the LOB has established itself as self-supporting entity. This can be debated endlessly but more often the corporate ends up selling off stake in the LOB once its established itself which might be its motive from day one.


  4. The road to Corporate Advantage is not paved with roses. It is easier said than done. That is the reason why so few companies actually have been able to create it – & why it is still remains more of a theory. Sorry, Somali – your blog (or do I call it article?) seems too novice & didactic. If you are trying to clarify a concept, then you have done a fantastic job, but if you truly believe that Corporate Advantage will be successfully adopted by corporations all across, then I beg to differ.Normally a parent organization has no external customers and generates no revenues of its own. So, corporate parent organizations, including Sam Ghose, can justify themself economically only if their influence on their portfolio of businesses creates value, or synergy, as we prefer to call it. For example, the ‘parent’ headquarters can provide competent management, central functions and services, or promote better linkages between the businesses they own. The best corporations create more synergy, than any of their rivals would if they owned the same businesses. Those corporations have what is called ‘Parenting Advantage’ (Campbell), or ‘Corporate Advantage’ (Collins and Montgomery). This was accompanied by an emphasis on strategy formulation at the business unit level facilitated by the introduction of tools such as Porter’s Competitive Strategy framework.Reliance Capital or any other company really has no choice, but try to craft Corporate Advantage. In today’s dynamic and turbulent markets traditional strategic positions are quickly eroding and the duration of competitive advantage is unpredictable. In that business reality, the traditional concept of corporate strategy that emphasizes strategic positioning and building valuable resources as the basis for obtaining sustained competitive advantage has become insufficient for better corporate performance. Therefore, it is more important to build corporate-level strategic processes that enable dynamic strategic repositioning of enterprise and reconfiguration of corporate resources. These corporate strategic processes are directed toward changes for creating added economic value and sustaining obtained competitive advantages through more successful mobilization and reallocation of corporate resources. In the heart of the corporate-level strategy is this concept of parenting advantage, which provides better performance of aggregated businesses than they would achieve if they were independent, stand-alone entities.From the 1980s, many firms preferred to trade off corporate synergy in order to give their business units greater independence. But today, faced with an increasingly competitive environment, pressures from capital markets and the possibilities of information and communication technology, many firms are going through a consolidation process amongst Marketing, Production, R&D etc. As part of this process, a number of firms have resorted to using corporate lead-buyers or commodity teams to represent the supply needs of multiple businesses within the firm. Also, an increasing number of firms stimulate the sharing of purchasing information and ‘best-practices’ across their business units. I will be interested to see how much Corporate Advantage Reliance Capital actually creates – particularly when this process is not an exact science, but wrought with too many assumptions, & management embellishment. Please remember, each LOB has to give up some independence. That’s where the squabbling begin, especially if each LOB has to create their own financial statements, prove their individual profitability & can potentially be more lucrative doing business with other firms instead of amongst siblings. So, the road to Corporate Advantage is not all sanguine.Well….seems like I rehashed a few things that you have said already – trying to preach like a big brother myself, huh! So, it’s time for me to stop this Sunday morning monologue.


  5. Thanks for the comment. I would like to offer a few points. The blog is indeed intended to present a concept in a simplistic manner while throwing up some insights.You are right that Corporate Advantage cannot be successfully adopted by corporations all across. However, this very concept is used to justify the existence of a diversified organization. Please refer to my previous comment. Though, theoretically, in absence of capital market/regulatory imperfections, corporate advantage resulting from creating a portfolio of businesses should arise due to some form of synergy. However in reality, during a steady state it is not easy to tell whether corporate advantage is really created or not; the corporate advantage becomes observable only at times of change, as is the case now with Reliance Capital. That is precisely the reason why I have cited this example to highlight this concept at this point of time.Your comments do make the discussion interesting. So please keep sharing your views.


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