itc : diversification

&

ITS DIVERSIFICATION STRATEGIES FOR

MARKET LEADERSHIP

Team Members

• Abhinav

• Aman

• Hemraj

• Kavish

• Amit

• Paritosh

• Col Ajay K Raina, SM

DISCLAIMER

No member of this team endorses

use of tobacco or any such

products.

Viewers’ discretion is

recommended.

2

Case Study : Vital Stats

• Vintage – Early 2005.

• Focus – Corporate Strategy

• Ingredients:-

– Need to diversify.

– Strategies adopted.

– Future possibilities.

• Our Approach:-

– An overview.

– Analysis.

– Recommendations.

– Real time benchmarking.

• Limitations.

3

Overview

• Incorporated in 1910 as Imperial Tobacco Company.

• Ownership shifted from British to Indian management team in 1974; rechristened as India Tobacco Company Limited.

• Strategic diversification started in 1970s into related as well as unrelated businesses.

• Has successfully spread its business and market risks.

4

The Start Point

• ITC‟s Vision and Mission statements.

• Corporate Strategy briefly touched upon:-

– “It is ITC‟s endeavour to continuously explore

opportunities for growth by synergising and

blending its multiple core competencies to create

new epicentres of growth”.

– YC Deveshwar, Chairman.

5

Two Datelines

1970s

2005

6

Change is Never Easy

ANALYSTS’ VIEW

- Risk of overspreading its assets.

- Fear of losing effective control over businesses.

- Survival of one may cost profit of another.

MANAGEMENT’S

STANCE

“We will either become

the market leader or

exit” 7

• Core business – cigarette & tobacco.

– Market share of 60%.

– Revenue contribution of 78%.

– Profit margins of 40%.

• Among top five private sector

companies in India; aiming to be a global entity.

• Early 2000s – India amongst economic boom.

• Anti-tobacco campaign & regulatory restrictions.

• “Everyone still refers to us as a cigarette

company….one of the largest hotel chains,

largest print shop…..” YC Deveshwar.

Changing Ambitions

8

What Did

ITC

Do?

FMCG-Cigarettes

• Focus on delivery of highest product quality.

• Leadership maintained through delivery of

value.

• Innovative marketing schemes (eg festival

packs, limited edition).

• Segmentation of

consumers/ pricing.

• Increasing costs of

the selected ones to

increase margins.

10

FMCG-Other

• Bukhara‟s popularity – Kitchens of India.

• Agro products – Aashirvaad – Sunfeast.

• Consumer quest for healthier snacks and food.

• Innovative additions (eg orange Marie).

• Exporting Mint-O-Fresh & Eclairs.

• Wills and John Players- secondary advertising.

• Lifestyle stores – international shopping

experience.

• Expressions, Regalia and Matrubhasha.

• AIM (120 hits) & Mangal Deep – the leaders.

11

Hotels

• Among top with Taj & Oberai.

• ITC Sonar Bangla Sheraton, Kolkata – one of the best by ABTA.

• Logo‟s Indian connection.

• Segmentation strategy – „Branded Accommodation‟ (hotel within the hotel).

• Restructuring of operations for better efficiency = higher occupancy+ increased revenues. 12

ANALYSIS OF STRATEGY

Broadly…. (Seen it)

• At the corporate level, ITC aims

to create multiple drivers of

growth by developing a portfolio

of such businesses that best

matches organisational

capability with opportunities in

domestic and export markets.

• As regards Business

Strategies, all three

types have been used with

varying degrees of mix.

14

15

Understanding the

PEST Analysis….

• Political Aspects.

– Crusaders.

– 2001 ban on the advertising.

– Increased excise duties.

– Economic reforms, de-licensing

and liberalisation.

– New technologies in agriculture,

manufacturing…. Tax incentives

on R&D and technology up-

gradation.

– State governments and luxury

tax.

– Focus on rural sector

development.

17

…..PEST Analysis…

• Economical Aspects

– A growing economy = A growing

portfolio of businesses… already

seen.

– Offshore businesses, especially

IT industry.

– Era of international tie-ups.

– Huge commercial spaces

available.

– Corporate culture and associated

needs.

– Rising small town aspirations.

– National imperatives.

18

…..PEST Analysis…

• Social Aspects

– Younger demographic profile.

– Increased PCI and spending power.

– Lifestyle & brand consciousness.

– Desire for high end international products.

– Changing definition of luxury and necessity.

– Health/nutrition consciousness.

– Leaning back on mother tongue.

– Yearning for Personalised products.

– Averse to smoking.

– Elite among equals.

– Less leisure time.

– Need for innovative gifting options.

– CSR prism. 19

…..PEST Analysis

• Technological Aspects

– Farming technology under revolution.

– Innovation vis-à-vis competitive

advantage.

– Acceptable substitutes to traditional

foods.

– Huge impacts on SCM started to be

felt.

– Cheap labour for high tech jobs.

20

Strengths

• Brand Image.

• Largest selling Tobacco brand in India; regulations.

• Illustrated ability to leverage traditional businesses to develop new brands (Chefs + Cigarette =FMCG; paper+ package = Greeting cards).

• Diversification profile and track record.

• Distribution network.

• Strong financial performance.

• R&D.

• CSR programmes and success therein.

22

Weaknesses

• Too much reliance on tobacco

revenues.

• Miles to go.

• Essentially “Desi”.

• Unrelated diversifications.

• Heavy taxation prone products.

• Brand name‟s association with

tobacco.

• Other businesses subsidized by

tobacco segment.

23

Opportunities….

• Leveraging brand equity.

• Government policies (liberalisation) and stable economy.

• Untapped Rural market.

• Lowest per capita FMCG consumption.

• Personal care & booming incomes.

• Synergies across businesses + leveraging domain expertise for growth in other sectors.

24

……Opportunities

• The enviable reach and distribution

network of e-choupal.

• Taking IT business to USA; 60% in

Europe.

25

Threats

• Competition – domestic+

international.

• Increasingly hostile attitude

towards smoking in general.

• Government policies towards

tobacco= tax, regulations.

• Systematic threats.

• IT bubble (assumed).

26

Focus : Cigarettes 27

• Bargaining Power of

Buyers=LOW

– Addicted customers .

– Symbolic and emotional

values.

– Product quality not much

important to smokers.

– Low switching costs.

– Brand loyalty insignificant.

Porter’s 5 Forces:

Cigarettes…

28

….Porter’s 5 Forces…

• Bargaining Power of Suppliers = LOW

– Many small, un-organised suppliers available.

– Direct access to growers by big companies.

– Suppliers have no influence on consumers.

– No one-stop solution provider vis-à-vis variety.

– No constitutional protection.

– Unorganised financing; prone to exploitation.

29


• Competitive Rivalry in the Industry=HIGH

– Many competing players.

– Brand loyalty in premium segments.

– Price competition through cost efficiency.

– Advertisement for cigarettes is now prohibited in India.

– Replacement for ads – event sponsorships and costs.

– New product launches.

– Cost of secondary promotion.

30

• Threat of Substitute Product=MEDIUM

– Two aspects.

– Sin vs Sin:- • Pan.

• Beedi and Gutkha

– Buyers‟ propensity driven by health & costs

• e-cigarettes

• Herbal Cigarettes.

• Nicotine patch.

• Pills.


31

….Porter’s 5 Forces

• Barriers to Entry = HIGH

– New product differentiation very difficult; huge variety available.

– Local launches can not achieve economies of scale.

– Govt regulations. • No fresh licenses for setting up new plants.

• No incentives permitted.

– Huge capital required to manufacture for an all India presence. Ban on advertisements & brand identity.

• SUMMARY – High Barriers, Stiff competition, Low powers and Medium for substitutes.

32

Assumed Data

MARKET SHARE

G

R

O

W

T

H

•FMCG-

•Cigarettes

•ITC Infotech

•FMCG-others •Agro Business

•Hotels

•Paperboards

& Packaging

34

•Agro Business

•Paperboards

& Packaging

•FMCG-others

•Hotels

The Net Outcome

8.30% 10.60%

37%

14.20%

72%

35.60%

15.90%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

GrossSales

NetSales

OpgMargin

OpgProfit

FMCG Hotel EBTMargin

YoY Growth : 2001

AWARDS :

2004

• Forbes –World‟s

Leading

companies list.

• World Business

Award.

• Enterprise

Business

Transformation

Award

35

Broad Diversification

Strategies

• Aimed at synergising both backward and forward integration.

• Convergence of multiple core competencies.

• Value derived from diversified portfolio of related businesses through efficient value chains.

• Brand management + Understanding markets + Consumer tastes.

• Selection criterions:-

– Good likely ROI.

– Potential for future expansion.

38

Analysis of Strategies

• Entering into less competitive or unexplored markets (ready to eat, staples, wafers).

• Maintaining a well-managed supply chain network.

• Innovation-Regular introduction of new products, duly supported by R & D.

• Mix of more than one business strategies.

• Extensive advertising (biscuits, confectionary, wafers)

• Multiple drivers of growth - matching internal capabilities with emerging market opportunities

• Pursue World class competitiveness in the entire value chain

• Transformational strategy (e-choupal).

39

Challenges

for Strategies

• Capability of organisation to manage multiple

businesses indefinitely.

• ITC has been trying to develop a capacity to

manage their large portfolio which will result in

a need of huge funds.

• ITC needs to maintain a proper flow of cash

and proper project budget control.

• Investing in people.

40

Recommendations

• No choice but reduce dependence on tobacco.

• Needs to continue to leverage upon its existing skills and competencies.

• Good quality needs to be maintained to back strong brand capabilities.

• Need to formulate strategies to meet new challenges like FDI.

• ITC‟s CSR must continue to offset the negativity associated with smoking.

41

Reality Check : Beyond CS

42

It pays to be Competent

– A turnover of over US $ 5 billion and a market capitalization

of over US$ 18 billion.

– Total shareholder returns grew at a compound rate of over

24% per annum over the last 5 years.

– Reputed to be one of the world‟s most successfully

diversified companies.

– Direct employment to more than 26,000people.

– e-choupal initiative is the world‟s largest rural digital

infrastructure benefiting over 4 million farmers.

– Watershed Development initiative brings water to over

46,000 hectares of dry lands and moisture-stressed areas.

– ITC‟s sustainable community development initiatives include

women‟s empowerment, supplementary education. 43