ITC’s Diversification Strategy

Presented BySonal [B-51] Kashyap [B-44]

Soniya [B-12] Nrupal [B-17] Janki [B-21] Dhaval [B-14]

Introduction

• In Feb 2001, GOI announced ban on advertising by cigarette companies and restriction on sales & consumption of tobacco products.

• Prohibition of Advertisement and regulation Bill 2001Disadvantages faced by domestic players-

International brands continued advertising, Rising excise duties and; Competition from smuggled products (Growth rate of

smuggled cigarettes- over 25% annually).

Sales Of Cigarettes (In Billion Sticks)

Major Players• ITC was the market leader in cigarette business• Followed by GPIL, VST and GTC

ITC Cigarette

1. Biggest and largest player in Indian tobacco market

2. Gold Flake tobacco brand largest FMCG brand in India; alone holds 70% of tobacco market

Moving into new & emerging markets of eastern Europe and Africa.

Still has to consolidate foot in cigar market; strongly dominated by Godfrey Phillips

1. High Competition at Global Level

2. Culture outside India

ITC Background

• Established by UK-based tobacco major BAT• 1910, full fledged sales organization named Imperial

Tobacco Company of India Limited• July 1912,Indian Leaf Tobacco company(ILTC)• Late 1960’s,GoI pressured MNC to reduce holdings• Though Imperial clearly dominated cigarette

business, decided to reduce its dependence & so diversify.

Brief History

• 1971, Marine product export division• 1974, company changed its name to ITC Ltd.• 1977,textile industry• 1977, Bhadrachalam Paperboards• 1981, cement business• 1986, ITC Hotels• 1994, Consultancy from McKinsey & Co. to study

businesses of company {Retained interest in tobacco, hospitality and paper and

sold off stakes in non core businesses}

Brief History (Cont…)

• 2000, ITC’s Packaging & Printing- ‘Expressions’• 2000, Lifestyle Retailing business division• By 2001,undisputed leader in cigarette industry with

popular brands- Gold Flake, Scissors, Wills, India kings and Classic

• Cigarette contributes- 85% revenue & all other businesses together – 15%

Corporate Governance Structure

ITC Ltd.

FMCG-Cigarettes

FMCG-Others

Hotels

Agri Business

Paperboards & Packaging

Infotech

FMCG-Cigarettes

Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan, Berkeley, Bristol and Flake

'Best Manufacturer of Cigarettes for the year 2007'

FMCG-Others

Ashirvad Atta, Kitchens Of India, Mint-o, Sunfeast, Candyman, Bingo,Superia, Wills LifeStyle, Fiama Di Wills, Expressions, Classmate

‘Superbrand 2006‘ - Superbrand Council.

FMCG-Others Ashirvad Atta is now #1 selling.

Sunfeast Biscuits is ranked #3.

Bingo, launched in August 2007, now enjoys 16% market share.

November 2007 Mint-o overtakes its competitor Chlormint

‘Classmate’ brand already the most widely distributed stationary brand in India

Kitchens of India has about 48% market share in India and a huge export potential. Ready to Eat food Market is estimated to be Rs.700m.

Safety Matches market at Rs. 1250 crores p.a. for 24 billion match boxes which is targeted by ITC’s iKno, Aim, Aim Mega, Aim Metro.

Successful acquisition of 94% of WIMCO Ltd. i.e. Homelites, Ship.

‘Mangaldeep’ the only National brand in the country serves the nation’s 900cr incense sticks market.

Hotels

ITC Maurya (Delhi), ITC Maratha (Mumbai), ITC Grand Central (Mumbai), ITC Sonar (Kolkatta), ITC Windsor (Bengaluru), ITC Kakatiya (Hyderabad), ITC Mughal (Agra).

‘Bukhara’ Restaurant named as Best Indian Restaurant in the World.

Hotels Hotel Brands: ITC-WelcomGroup, WelcomHeritage & Fortune.

Totally 90 Hotels, 77 Destinations and 5500 Rooms under management.

Destinations include most of India as well as Singapore and Dubai.

Hosted a galaxy of world dignitaries like Bill Gates to Bill Clinton, Condoleezza Rice to Benazir Bhutto.

Restaurant Brands: Bukhara, Dum Pukht and Dakshin.

Innovation for India Award 2006 for ITC e-Choupal in the Social Innovations category for business organizations

eChoupal, Agri Exports, Leaf Tobacco

ITC Agri Business is one of India’s largest exporter of agricultural commodities.

June 2000, eChoupal – strategic and cost effective sourcing support to the Foods business (support creation of verticals in wheat, soya, corn, potato etc.)

eChoupal - Services reaches to 4 million Farmers who are growing Wheat, Rice, Pulses, Soyabean, Coffee in over 40,000 villages thru nearly 6,500 kiosks across nine states.

Diverse range of goods/services : FMCG, consumer durables, agri-inputs.

Farmer Financial Services - insurance (focus: weather), credit (focus: Kisan credit card scheme)

Rural Retail – 18 Choupal Sagars

Agenda 2012 is to cover 15 states with 1,00,000 Villages with about 20,000 eChoupal Kiosks servicing about 10 million farmers.

Agri Business

Agri Business – Leaf Tobacco (ILTD)

Largest Buyer, Processor and Exporter of leaf tobacco in India. Exports to about 48 countries.

ITC processes about 120 million kgs of high quality tobacco yearly. Overall 550m Kg of tobacco is produced in India.

Factories have integrated warehousing complexes.

Enabled successful venture into spices business.

Golden Leaf Awards 2007 in the categories ‘Most Committed to Quality’

The International Quality Rating System – IQRS Level 7, awarded by Det Norske Veritas in March 2006.

Packaging & Paperboards

Packaging & Paperboards and Specialty Paper

Indian Manufacturing Excellence Gold Award 2007 and 2006 to Unit Bollaram by Frost & Sullivan

Annual paperboard demand – appx. 1.1 million tonnes

Indian paperboard market growing at 7% p.a.

Significant export opportunities for high quality Indian manufacturers

ITC paperboards exports - Rs. 2 billion appx.

ITC’s packaging unit - India’s largest converter of paperboard into high quality printed packaging

Provides superior packaging solutions to the cigarettes and new FMCG businesses

India has low per capita usage at around 6 kgs p.a. (World average – over 50 kgs p.a.)

ITC Bought 0.5% in Ballarpur Industries in July 2008.

Packaging & Paperboards

Infotech

ITC Infotech Ltd.

Featured amongst Top 100 Global Outsourcing Companies in the Leaders category - International Association of

Outsourcing Professionals

ITC Infotech Ltd. Is a wholly owned subsidiary of ITC Ltd.

ITC Infotech is responsible for developing & maintaining the entire ITC eChoupal infrastructure.

Although a separate entity and brand, ITC Infotech’s primary job is to keep ITC as a group upto date with latest technology.

Infotech

PROS of DiversificationEconomies of scale and scope – Operational synergies can be realized.– Spreading the firm's unutilized organizational resources to other areas

can create value. – Leveraging skills across businesses can create value.

Internal capital market – Cash from some businesses can be used to make profitable investments.– External finance may be more costly due to transaction costs, monitoring

costs, etc.

Diversifying shareholders’ portfolios• Individual shareholders may benefit from investing in a diversified

portfolio.

Identifying undervalued firms• Shareholders may benefit from diversification if its managers are able to

identify firms that are undervalued by the stock market.

PROS of Diversification cont..

CONS of Diversification• Combining two businesses in a single firm is likely to result in

substantial influence costs.

• Resource allocation can be influenced by lobbying.

• Costly control systems may be needed that reward managers based on division profits and discipline managers by tying their careers to business unit objectives.

• Internal capital markets may not work well in practice.

• Shareholders can diversify their own personal portfolios. Corporate managers are not really needed to do this.

• Identifying undervalued firms may not be as easy as it sounds.

PEST ANALYSIS

Political Aspects

• In 2001 Government of India has announced ban on

the advertising by cigarettes Companies

• Increased in Excise duties

Economical Aspects

• A growing portfolio of business encompassing FMCG, Paperboards &

Packaging, Agri & Foods Business, Hotels and Information Technology.

• A turnover of over US $ 5 billion and a market capitalization of over US $ 18

billion.

• Total Shareholder Returns, measured in terms of increase in market

capitalization and dividends, grew at a compound rate of over 24% per

annum over the last 5 years.

• The new FMCG businesses support the competitiveness, technology

upgradation and market reach of over 170 Small and Medium Enterprises

(SMEs).

Social Aspects

• ITC Group provides direct employment to more than 26,000 people.

• ITC’s globally recognized E-choupal initiative is the world’s largest rural

digital infrastructure benefiting over 4 million farmers.

• ITC’s Watershed Development initiative brings precious 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.

Technological Aspects

• Wholly own subsidiary named “ITC INFOTECH”

• India’s fastest growing IT services and solution

providers

• Providing services in more than 140 countries

ITC has been constantly making efforts to de-emphasize its tobacco business and to create multiple avenues of growth based on its core competencies. What, according to you, is ITC’s core competency? How did ITC create multiple avenues of growth based on its core competencies?

Question 1

Solution

• Leverage upon its existing skills and competencies.

• Strong branding capabilities backed by good quality

• ITC’s strong distribution capabilities and a strong brand name are a useful asset.

• Using its agri sourcing network to source raw materials for its biscuits and atta businesses.

Question 2

ITC had diversified into area which were both related and unrelated to its core business. why did ITC venture into unrelated areas such as lifestyle retailing and foods?

Solution

• The government of India announced a ban on advertisement on the sell and consumption of tobacco products.

• Decrease in sales• Increase in excise duties which decrease its

profitability.• The ITC share fell by 10% on the NSE as soon as the

judgement was made. All these reasons prompted the company to take a serious look at new businesses.

• Its corporate strategy aimed at creating multiple avenues of growth based on its core competency.

Solution cont..•With this strategy it entered into lifestyle retailing, greeting cards and gifts and branded packaged foods. •A McKinsey report showed that food and clothing were the fastest growing industry in India.•The company aimed at generating 40% of its total revenue from such diversified business and improving its brand image.

Question 3

• ITC’s diversified business contribute little towards the company’s profitability. Of the various business the company has diversified into, which business do you think has the potential to contribute to ITC’s revenue? Explain.

Solution

• ITC’s diverse strengths leveraged across three product groups– Lifestyle Retailing– Greeting Cards & Gifts– Branded Packaged Foods

• Expecting 40% of its total revenue from these diversified businesses.

•Agri Business•Hotels•Paperboards & packing

•FMCG - Cigarettes

•FMCG - foods/others

•ITC InfoTech

BCG Matrix• Star – High market growth and high market share– Agri Business– Hotels– Paperboards & packing

• Cash Cow – Low growth, high market share– FMCG – Cigarettes

• Dog – low growth, low market share– ITC InfoTech

• Question marks – high growth, low market share– FMCG foods/others