Can Fauji pull off a diversification strategy successfully?

It is no secret that ever since Engro Corporation had its successful IPO of Engro Foods, the two Faujis – Fauji Fertilizer and Fauji Fertilizer Bin Qasim – have been trying to diversify into the food business. With their proposed acquisition of Noon Pakistan, a small dairy products manufacturer, they may well get a head start. But how successful can this strategy be?

For Fauji, the challenge is not just executing a business strategy that works, but creating a culture that is very different from the current working environment at the company.

To understand what it will take for Fauji to succeed, it is important to understand how Engro, which was then the smaller fertiliser and petrochemical manufacturer in Pakistan, was able to build a leading consumer goods company that successfully competes against Nestle in products and against all multinationals for talent.

When Asad Umar first announced Engro’s decision to create a food subsidiary in 2004 at his alma mater, IBA Karachi, his statement was met with incredulity. How could a fertiliser manufacturer, with its heart and soul in its engineering operations in Daharki, create a food business?

Umar’s answer was: hiring the right people. He chose Sarfaraz Rehman, a man with decades of experience in the consumer foods space, including at Unilever Pakistan and PepsiCo Pakistan. Umar made his fair share of mistakes as the CEO of Engro, but hiring Rehman was one big thing that he got right. Because what Rehman did next should become the next textbook case study on how to build a world-beating business in the consumer goods space.

Rehman’s strategy for building out Engro Foods was simple: hire some of the most talented young people in the consumer goods space and then give them the freedom to run the business as they see fit, backing them up fully. And so he built a working environment that, in its early days, was more like a Silicon Valley tech start up rather than a division within what was then a stodgy petrochemical business. Twenty-somethings working late nights, bean bag chairs and all, and being excited about building a new business from the ground up: no rules, no limits on their imagination, with Rehman acting as the cool uncle or elder cousin, who was their champion in front of the board of directors and senior management.

It was in that whirlpool of creativity and energy that helped propel Engro Foods into becoming the food giant (by Pakistani standards) that it is today. Not everything they tried worked. But much of it did. And their management and board had enough faith in them to trust that there would be more successes than failures, and kept backing them, even if some things did not work.

Of course, having the Engro money helped. Ideas are meaningless without the resources to back them. But money alone cannot build a great business, particularly one in the consumer goods space that needs creativity and an almost Bohemian corporate culture to be successful. Engro Foods has run into quite a few problems recently, but there is no denying that they got off to a great start and built the kind of corporate culture that set them up for success. The multi-billion rupee question for Fauji, then, is whether or not they can replicate this kind of corporate culture. Like Engro of the 1990s, Fauji is also a stodgy petrochemical manufacturer. It has the added disadvantage of being run by military men, who are used to valuing discipline above all other virtues. Will they be able to create the kind of open culture and environment where new ideas can thrive and where failure is not punished but instead simply seen as just another building block towards success?

Based on my observations of Fauji, my initial guess is that the organisation is not ready for this. They have yet to hire the right people, let alone create the right culture. They may yet prove us all wrong. But for the moment, Fauji’s management and board of directors are about to throw a lot of good money after a flailing food company with no real plan to create a winning subsidiary.

Originally published in The Express Tribune, March  30th,  2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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