Q1. How successful have AGCs diversifications been?

Having started with the manufacture of flat glass, AGC had diversified into a large
number of mostly related businesses. The company had adopted the strategies of
product, industry and geographical diversification. In some of the businesses the
company has been successful while in others it has not been able to meet the
targets.
The successful diversification attempts were mostly in the traditional glass and
chemicals industries. For eg. : fabricated glass (56% domestic market share & 20%
global market share), Glass bulbs for CRT (50% domestic market share & 30% global
market share), chemicals (40% market share in soda-ash, 46% market share in
caustic soda). On the other hand, the Ceramics division had not grown remarkably.
Similarly, the Electronics Division had not been able to meet the companys targets
and the growth rate was slower than expected.
The diversification policy that AGC had aggressively followed had definitely related
in the expansion of the business into a $10.5bn company. However Exhibit 1
indicates that the growth in sales was not accompanied by a proportionate increase
in profitability. The Return on Sales, Return on Assets and Return on Equity, the 3
key financial measures of the success of any company, have steadily declined for
AGC from 1970 1992. The returns is 1992 are almost half of those of 1990. Such a
dramatic decline in two years is an alarming situation in the opinion of the group.
Also Asahis ROS, ROA and ROE, though higher than its competitors in Japan (Nippon
Sheet Glass, Central Glass, Nippon Electric Glass), were significantly lower than its
international competitors -PPG and St. Gobain (Exhibits 8 and 9).
From this analysis the group feels that AGCs diversification strategy was successful
in expanding the global reach of the business (from a Japanese business to a truly
global firm) and increasing the revenue of the company (10.82% CAGR in the period
1970 -1992). But the strategy was unsuccessful in reserving the profitability of the
company (decline in profitability from 7.3% in 1970 to 1.8% in 1992). So it seems
that the expansion came at the cost of profits.

Q2. Did the company need to diversify?

AGC needed to diversify due to the advantages of diversification as detailed below:

Asahi started its diversification by backward integrating through production of

key raw materials for glass manufacture like refractory bricks, caustic soda etc.
This helped the company to actually avoid depending on imported inputs and
achieve economies of scope and consolidate its market position. The company
also developed the technology and expertise in chemicals, opening up a new
area of doing business.
The glass industry in Japan was a mature industry in 1992 and demand had
almost remained constant since 1980s. So to maintain the growth trajectory of
any business in such situations, it is essential for a company to diversify into new
markets and/or products.

Q3. Did it choose appropriate businesses and mode of diversification?

AGC diversified into a very wide variety of products chemicals ranging from inputs
to glass production like soda-ash, caustic soda etc to specialized chemicals like
foam urethane, fluoropolymer resins etc, specialized glass products like glass bulbs
for CRT TV tubes, LCD displays, ophthalmic lenses and frames, construction
materials, electronics, ceramics and speciality hoem, health and medical products
including hot bath water purifier, egg timer etc. The businesses were a mix of
related and unrelated businesses. However, in spite of such extensive diversification
glass still contributed 56% of the sales and also the biggest generator of profits. The
Electronics business could not meet the internal growth targets but involved
significant expenditure, especially on R&D. In the ceramics business the company
had initially focused on structural ceramics which failed to create a sufficient market
and though the company later shifted to functional ceramics, Kyocera outperformed
AGC. Similarly after making significant investments in the disk head manufacturing
business, the company realized it was an assembly business, not a material
business which was their forte.
So as a group we feel that the company should be more prudent in the choice of
new businesses and may even explore the option of divesting certain businesses
that do not contribute significantly to the topline and/or bottomline and also lack
potential for future growth. The company should diversify more into related areas
where it can leverage its existing resources and capabilities because as research
shows related diversification produces the highest returns. However the companys
choice of method of diversification was commendable. It built businesses from
inside and the company fostered development of a pioneer and entrepreneurial
culture. It also actively engaged in mergers and acquisitions to grow fast and get
access to better technology and wider markets.