ITC Strategic M ITC-anagement Term Paper PDF

Department of Business Administration – University of Lucknow

Term End Paper on Strategic Management of

Submitted To:

Prof. J. K. Sharma Submitted By: Soumya Thakur| MBA-eBusiness | Sem- 4 |

Table of Contents Company Overview ................................................................................................................................ 3 External Environment ............................................................................................................................. 3 Political/Legal Factors ........................................................................................................................ 3 Economic Factors................................................................................................................................ 3 Social Factors ...................................................................................................................................... 3 Technological Factors ......................................................................................................................... 4 Environmental Factors ........................................................................................................................ 4 Legal Factors....................................................................................................................................... 4 Internal Environment .............................................................................................................................. 4 Resources ............................................................................................................................................ 4 Capabilities ......................................................................................................................................... 4 Core Competencies ............................................................................................................................. 4 ITC’s Corporate Strategy ........................................................................................................................ 5 ITC’s Product Line ................................................................................................................................. 7 Fast Moving Consumer Goods(FMCG) ................................................................................................. 8 ITC’s CIGARETTE ............................................................................................................................ 8 Pricing Strategy of ITC Cigarettes .................................................................................................. 8 COST CONTROL STRATEGY in the food division......................................................................... 8 Differentiation Strategy for Sunfeast biscuits ................................................................................. 9 Hybrid Strategy for Bingo............................................................................................................... 9 Retail Activation Strategy ................................................................................................................... 9 ITC e-Choupal: ..................................................................................................................................... 10 ITC’s Paperboards And Speciality Paper Business .............................................................................. 11 ITC’s Diversification Strategy .............................................................................................................. 13 Diversification of ITC’s business ..................................................................................................... 14 Economies of scope ...................................................................................................................... 14 Corporate Managerial Capabilities ............................................................................................... 14 Increased Market Power................................................................................................................ 14 Bibliography ......................................................................................................................................... 16

Company Overview ITC Ltd, which had originally started in 1910 under the name of ― Imperial Tobacco Company of India Limited‖ with humble beginnings, is a leading FMCG Cigarette major is one of the most valuable companies of India. It has been rated among the World's Best Big Companies by Forbes magazine. (http://www.itcportal.com, 2007) Although the company is most famous for its tobacco business consisting of cigarette, now the company has ventured into a number of new businesses providing a variety of products and services. These include the hospitality industry with their hotels, their products such as paperboards, paper and packaging, their agricultural exports business and some other fast moving consumer goods(FMCG) such as branded packaged foods, safety matches and incense sticks. Mission: To enhance the wealth generating capability of the enterprise in a globalizing environment, developing superior and sustainable stakeholder value (http://www.itcportal.com) Vision: Sustain ITC’s position as one of India’s most valuable corporations through world class performance, creating growing value for the Indian economy and the Company’s stakeholders (http://www.itcportal.com)

External Environment Political/Legal Factors

The increase in the tax policies such as increase in excise duty and the VAT from 12.5% to 20% in three major cigarettes consumption states of Maharashtra, Rajasthan and Delhi have resulted in the increase in the overall selling price of the cigarettes which deters the potential customers and results in lower sales. On the other hand, the political policies have had a positive impact on the hotel business.

Economic Factors

With non filter cigarettes being levied the same tax as compared to the filter cigarettes, there was a sharp decline in the volume of the non –filter cigarettes for FY10. ITC’s volume declined by only 3% even though it discontinued the production of non –filter cigarettes. ITC’s volume was supported by filter cigarettes which grew by almost 15% in FY09 despite the price hike. This shows that ITC is gaining at the expense of competitors. This shows that ITC is gaining at the expense of competitors. On the hotel front, ITC

Social Factors

The aspirations of the tobacco consumers to upgrade the consumption can multiply the shares of cigarettes. However, growing public concern with regard to the consumption of tobacco has led the government to ban all sorts of advertisements like the commercials, print media and pamphlets. This may act as a setback for the company. For the hospitality business, the society is now turning more towards an individual oriented culture which means that people spend only for themselves. The rise in the per capita income and the working population in the country is also a good sign for the company because the number of people willing to spend more on leisure increases.

Technological Factors

ITC came a long way on the technological front. With state of the art factories and cheap labor supply from the second largest tobacco producing country in the world, India, the supply chain management of the ITC follows the latest trend. ITC also has the great inventory control and logistics support. They have also been adapting other quality concepts such as quality control, total quality management and 6-sigma concepts.

Environmental Factors

The main source of raw material for cigarettes is tobacco which is found mainly in the states of Andhra Pradesh and Karnataka in India. The environment is favourable for the company because of the abundance of raw material and inexpensive and large availability of cheap labour.

Legal Factors

The developments in the environmental and consumers regulations and protection such as the ban on smoking and the ban on selling cigarettes to minors have resulted in setbacks for the company in terms of the number of sales of their product which draws them the most revenue. The legal issues related to the hospitality industry affect the international customers because of the visa and other administrative issues involved.

Internal Environment Resources

The physical resources such as the raw material are available in abundance in India. The resources of innovation such as the e-Choupal initiative are very useful intangible benefits of the company.

Capabilities The state of art factories of ITC are one of the capabilities of the company. The technological advantages of the company combined with the labor have allowed the company to develop their resources well into their capabilities.

Core Competencies ITC knows how to capitalize on its core competencies, which include unmatched distribution reach, superior brand-building capabilities, effective supply chain management and acknowledged service skills in hoteliering. This has also helped them to strategically diversify and enter into the foods division.

ITC’s Corporate Strategy ITC’s corporate strategies are aimed at matching its core capabilities with market opportunities to produce superior shareholder value. The key corporate strategies are as follows: 1. Continue to focus on the core business of cigarettes and Tobacco, Hotels, packaging and paperboard 2. Ensure that each of its businesses meets the three criteria of sustainability, namely market standing, profitability and internal vitality. Making an exit from business which does not meet these criteria within an agreed time frame. There is a classic example of this case. The decision to exit from the Financial Services and Edible Oils businesses was based on the need to focus on such businesses where the Company possessed a credible track record, and where it had the relative capacity to strengthen and nurture core capabilities over time to sustain a leadership position in the Indian global market of tomorrow. A careful analysis made it readily evident that ITC was not well positioned to add long term value in these areas. In fact, persisting with these businesses over the years had caused a substantial drain of corporate energy and shareholder value. A hard-nosed, determined and responsible exit was the only answer. During the annual general meeting in 2010, Mr. Deveshwar said clearly that It would be the endeavour of the Board to keep the portfolio of businesses under periodic review. They would not hesitate to invite a partner, or even to exit a business, if it is concluded that our capabilities cannot match competitive forces in a reasonable time span. Each of the businesses that remain in the company's portfolio, therefore, would have to subserve the abiding purpose of generating value. 3. Ensure that each business is internationally competitive in the Indian Global Market 4. Create distributed leadership within the organization by nurturing talented and focussed top management teams for each of its businesses 5. ITC’s Corporate Governance/ Organisation Structure Institute and practice a system of corporate governance appropriate to ITC’s character and constitution. Such a system of governance must achieve a wholesome balance between the need for executive freedom for management and the requirement of a framework for effective accountability Formal 3-tiered governance structure 

Board of Directors  Comprising executive (4) and non-executive directors (11)  Strategic supervision

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Corporate Management Committee  Comprising executive directors and senior managers  Strategic management

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Divisional Chief Executive & Divisional Management Committee  Executive management

Flowing from the concept and principles of Corporate Governance adopted by the Company, leadership within ITC is exercised at three levels.

Level I The Board of Directors at the apex, as trustee of shareholders, carries the responsibility for strategic supervision of the Company. Level II The strategic management of the Company rests with the Corporate Management Committee comprising the whole time Directors and members drawn from senior management. Level III The executive management of each business division is vested with the Divisional Management Committee (DMC), headed by the Chief Executive. Each DMC is responsible for and totally focused on the management of its assigned business. This three-tiered interlinked leadership process creates a wholesome balance between the need for focus and executive freedom, and the need for supervision and control. The divisional CEOs present their plans, strategies and budgets and get them approved by the board. Board of Directors acts like a venture capitalist and sets strict qualitative and quantitative milestone and end-of-the-road goals on financial, market standing, market share and other parameters that Divisional CEOs—the operational heads of ITC’s various businesses— have to deliver on. Branding, marketing, distribution and logistics are handled centrally. Each division has its own autonomous ―board‖ and CEO and is granted full freedom to drive the enterprise forward without undue restraints, but, at the same time, this freedom is exercised within a framework of effective accountability overseen by the Chairman and the Executive Directors. Terms of reference of the Board Committees shall include a. Objectives, role and responsibilities b. Authority/Power c. Membership and Quorum d. Chairmanship e. Tenure f. Frequency of meeting This strategy, of having companies within a company‖, has worked well for ITC. Over the last five years, its top and bottom lines have grown at a CAGR of 12.9 per cent and 23.7 per cent, from Rs 11,194.47 crore and Rs 1,371.35 crore, respectively, to Rs 19,841.54 crore and Rs 2,691.97 crore. Then, it has also enabled ITC to seed and grow several new business units, many of which have become market leaders or serious challengers in their segments. 6. Secure the future growth of the company by creating new businesses which leverage the strength of its core competencies residing in various businesses.

ITC’s Product Line ITC has divides its business into the following five divisions: FAST MOVING CONSUMER GOODS (FMCG)  Cigarettes, Packaged foods & Confectionary, Lifestyle Retailing, Personal Care, Education & Stationary, Safety Matches & Incense Stick HOTEL 

ITC Welcomgroup Hotels

PAPERBOARDS AND PACKAGING  Cyber XLPac, Cyber Cypak, Cyber Propac, Safire Graphik, Art Maestro, Carte Persona, Indobev, Indobarr, Ecoviron, Fusion (Paperboards) AGRI-BUSINESS  Soyameal, Rice (Basmati & Non Basmati), Wheat, Pulses, Sesame Seeds, HPS Groundnuts, Castor oil, Shrimps and Prawns, Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit Products, Fresh Fruits, Coffee, Black Pepper, Chilly, Turmeric, Ginger, Celery and other Seed Spices. (Agri Commodities), Choupal Saagar, Choupal Fresh, Choupal Pradarshan Khet (e- Choupal), Leaf tobacco, Spices INFORMATION TECHNOLOGY  ITC Infotech Revenues from each of these business units are as follows:

After having understood the corporate strategy at ITC we will now look into the strategies adopted at each of its business unit levels.

Fast Moving Consumer Goods(FMCG) ITC’s CIGARETTE ITC is the market leader in cigarettes in India. With its wide range of invaluable brands, it has a leadership position in every segment of the market. It's highly popular portfolio of brands includes Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan, Berkeley, Bristol and Flake. With three out of four cigarettes consumed in India coming from its stable, ITC is a clear leader in the business. ITC enjoys an 84% share of the cigarette by market value. Its cigarette business accounts for 83% of overall profit. Excise and other duties on cigarettes make up 58% of the selling price and thus the pricing of cigarettes is largely driven by government policies. ITC's three main competitors in the Indian cigarette industry are VST, Godfrey Phillips and Golden Tobacco. Together the four firms account 90% of the market share. ITC has been able to reach the top position because of its single minded focus on value creation for the consumers via its significant investments in product design, innovation, manufacturing technology, quality, marketing and distribution. ITC's cigarettes are produced in its state-of-the-art factories which are situated at Bangalore, Munger, Saharanpur and Kolkata. These factories are known for their extremely high levels of quality, contemporary technology and work environment.

Pricing Strategy of ITC Cigarettes ITC is the market leader in tobacco industry with almost 85 % of market share. So it is operating in a kind of monopolistic business environment where price is not affected by external environment other than the government tax regulations. Very recently, under the union budget 2010, excise duty has been increased by 17 % on cigarettes which are longer than 60 mm. Most of the cigarettes manufactured by ITC falls in this bracket. The company eventually had to hike the cigarette price to compensate. ITC has hiked the price of its flagship cigarette brand Gold Flake Kings by 7-8.

COST CONTROL STRATEGY in the food division When ITC started its food division, its main challenge was to compete with the players who were already there. To overcome this challenge, ITC realized that they have to offer products at a price which is equal to or lesser than what is being offered. So, they planned to capitalize by leveraging the strength of its other businesses like tobacco’s distribution network and e-Choupal. ITC’s printing and packaging business provided high quality, cost effective and innovative packaging. ITC’s strong e-Choupal network covering 34,000 villages gives it unparalleled procurement and

distribution muscle. Wheat is the primary input in the atta and biscuits segments, which contribute the bulk of ITC’s revenues. It is also the commodity in which we have the strongest presence. Differentiation Strategy for Sunfeast biscuits Before entering the biscuit business, ITC did a lot of market research and concluded that there were lots of strategic gaps where ITC could benefit. New recipe and innovation was the key here. ITC took a calculated risk by launching Sunfeast with six ranges. However, ITC was still producing category favourites like Glucose, Marie and Bourbon cream. The strategy followed by ITC here was the differentiation strategy. They differentiated their biscuits from the other types of biscuits available in the market. Their aim was to achieve competitive advantage by offering better biscuits at the same price. The company follows the going rate pricing that is the price of the product depends upon the competitors’ price. The firm chooses pricing more or less same as that of the market leader. ITC’s e chaupal which is kind of centre of excellence also augurs well for the sunfeast brand. Biscuits industry had not witnessed any major product innovation in years, so ITC launched innovations such as orange-flavoured Marie, Marie light and butterscotchflavoured cream biscuits

Hybrid Strategy for Bingo In case of Bingo!, we think that it was the hybrid strategy which played the trick. ITC offered completely different kind of chips catering to the Indian taste buds (differentiation) and still is offering them at a price which is lower than that of its competitors like Frito Lays etcetera. That’s the reason why Bingo, within six months of launch captured 12-15 percent of the total market share. ITC used its core competencies (Expertise of ITC hotels chefs, E- Chaupal, the best distribution channel) in order to achieve success. This was used as an entry strategy in the chips market. As of now Indian snack industry is about 2500 crores. Frito Lays has 48%, Haldiram has 25% market share and ITC bingo has 14% share. Rest of the market is dominated by few regional players like Balaji.

Retail Activation Strategy The 'boutique store' concept, experimented at the ITC Maurya in Delhi, will now be taken national. Plans are afoot to roll out 10 boutique stores across the country in 1-2 years, mainly in ITC's Luxury Collections hotels. ITC’s garment retailing arm Wills Lifestyle is looking to synergise its operation with its hotel business. The company will set up stores at ITC-run star hotels to leverage on the ambience. The company is strengthening its position in the ramp-to-rack initiative where designer wear will be available at affordable price. The company is also focusing on women’s wear. Women’s wear is growing at 35 per cent annually. Company has offered a wider product assortment with a shorter product lifecycle of 6-8 weeks, as opposed to 3-4 months earlier. Wills has also collaborated with international design studios Alessandra Macchi Studio (Italy) for flat knits and with Ricardo Rami Studio (Italy) for fashion wear for women.

ITC e-Choupal: A strong example of corporate strategy linking business purpose to larger societal purpose, e-Choupal leverages the Internet to empower small and marginal farmers – who constitute a majority of the 75% of the population below the poverty line in India. e-Choupal removed the constraints of rural commerce by bridging the rural differences of incomes and opportunities for the poor, while creating a new business opportunity for companies willing to tackle these inefficiencies. Their basic objective was to create a Win-Win transaction model. The success of e-Choupal should come from the condition in which both the farmer and the processor share the benefits coming out of the elimination of middle men due to timely information availability. To quote Mr. Sivakumar, CEO of ITC’s agri-business division, “While the eChoupal network was initiated to facilitate more efficient and effective procurement, the connectivity — both physical and informational — between the farmer and the market that it also facilitated and allowed ITC to use it for distribution of goods and services from the market to the farmer.” Though e-Choupal is an Innovative Product mainly aimed at the rural market but still it is very clear that Michael Porter’s Value Chain Strategy is extensively used to build the business model.

For example in the above diagram if we consider the value chain of ITC e-Choupal based on their cost they are totally saving the Inbound Logistics, Marketing & Sales, Services, Firm Infrastructure and HRM. The cost incurred for Technology is also very minimal. Hence the whole cost is revolving around the Procurement, Operations and Outbound Logistics vertical. With this Value Chain not only ITC’s revenue is increasing, the margin is also significantly higher than expected. An organization may seek the benefits of synergies by building a portfolio of businesses through related and unrelated diversification. The e-choupal business strategy is also bringing in a lot of synergies thus helping the other divisions as well with the unlimited sourcing of Raw Materials.

ITC’s Paperboards And Speciality Paper Business The unorganized players totally dominated the Paper industry, when ITC entered into it. Hence ITC had to develop a new Product in an existing Market to gain foothold.

Ansoff's Model can be easily applied here whereby with new capabilities ITC entered into a new Market by creating new Products.

The stationery products business in India was fiercely price competitive and, therefore, ITC's new products were just 5 per cent more expensive than its nearest unorganized competitors. With respect to the organized ones the products were almost similarly priced if compared to Camlin or Navneet Books. ITC used a different Strategy for expansion in this sector. They targeted Multiple Markets, i.e. they used multi-local expansionary Strategy. They targeted 2 different Market Segments by creating two Sets of products aligned to the individual needs of those segments. That was a masterstroke.  

The 2 different segments and the Product Brands are: Students – Classmates Corporate - Paperkrafts A large chunk of its stationery products revenues to come from the Classmate brand which is being aggressively promoted through school contact programmes, point-of-sale promotions, and the Classmate Young Author Contest. The Classmate products are mainly aimed at students and thus they have launched ballpoint and gel pens under this brand whereas PaperKraft products are basically targeted at corporates and executives and hence ITC uses this brand for markers and highlighters. However breaking into the market is not easy as distribution of a mass product like notebooks can be an expensive proposition, which actually explains the lack of national organized players. But ITC has a huge advantage which its competitors do not have i.e. Classmate and Paperkraft leverages

 ITC’s back-end (paper) The paper (Back-end) business of ITC, which was bleeding 12 years ago, turned around with the help of a clonal propagation programme covering 100,000 hectares. ITC's paperboards business is critically dependent on wood pulp for raw material. Another Strategy was instead of opting for imports, the company took a decision to source its fibre by mobilizing tribal to plant trees on their private wastelands and encouraging small and marginal farmers to undertake farm forestry programmes in the vicinity of the mill. This Strategy had 2 positive effects: 1. Low Cost Raw Material (no need to import) 2. Employment for the Tribal (CSR) The tribal are given saplings at break-even cost. Of the 100,000 hectares, around 3,000 is a registered clean development mechanism project. The whole initiative improved profit margins from 15 per cent to 30 per cent over a period, while mitigating external risks.  ITC’s Front-end capacities (Sales and Distribution) The vast sales and Distribution network that the Company has developed over the years by selling cigarettes can easily be leveraged for new Products that ITC intend to launch. Hence every mass product that it launches will always enjoy the above benefit. As a future goal, at a corporate level, ITC has announced close to Rs 5,000 crore (Rs 50 billion) investments in paper and paperboards business. The tie-ups with the Tribal has immensely helped the company and also increased their volumes significantly. While ITC supply the paper, the manufacturing is carried out by small scale industries. This outsourcing of production has turned out to be a great strategy. The successful entry into the Paper Industry marks the correct implementation of different Strategies applied by the Company.

ITC’s Diversification Strategy Pros & cons of Diversification Pros Economies of scale and scope Operational synergies can be realized. Spreading the firm's unutilised organizational resources to other areas can create value. Leveraging skills across businesses can create value. Transaction costs Coordination among independent firms may involve higher transaction costs. 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.

Cons -

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.

ITC gives us the best example of diversifying into new businesses. Though it is a subsidiary of the UK based BAT, ITC has always operated with considerable autonomy. Among the businesses which ITC has entered in recent years are apparel retailing and branding, ready-to-eat packaged foods, confectionery items, InfoTech, paper and boards. ITC has been the leader in the tobacco business, but it has realised from the upcoming trends that remaining with a single business is not a noble thought; moreover the company was threatened of the annti tobacoo campaign. ITC made its first foray into a non-tobacco business long back in the 1970s, when it entered the hotel industry. Since then the company has diversified into a variety of other businesses- sportswear, greeting cards, ready to serve packaged foods, confectionery, branded staples, information technology, greeting cards and stationery to reduce its dependence on its cigarette business.

ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers of growth anchored on its time-tested core competencies: unmatched distribution reach, superior brandbuilding capabilities, effective supply chain management and acknowledged service skills in hotel industry. Diversification is a strategy which takes the organisation into new markets and products or services and therefore increases the diversity that a corporate parent must oversee. Over time, the strategic forays into new businesses are expected to garner a significant share of these emerging highgrowth markets in India.

Diversification of ITC’s business Economies of scope CSR is a common activity which an organisation does. Looking closely at the processes we can easily come to know about the synergies which exists among the different businesses of ITC. It’s expertise in Distribution channel have enabled ITC to launch its other FMCG products in the most efficient manner. The hotels were used as a marketing tool for launching some of its wills lifestyle retail outlets. Again the chefs from the welcomgroup hotel individually prepared 16 different flavours of Bingo. The blending technology used in manufacturing cigarettes was widely used in other businesses as well. Paper and packaging business dramatically reduced the overall cost of packaging of FMCG goods. E-chaupal catered to the sourcing need of the foods division. Be it anything, Bingo, Aashirvaad atta, Procurement of wheat, potatoes, everywhere E-chaupal played an important role. Corporate Managerial Capabilities ITC has, over the past 80-90 years, developed appraisal and employee feedback systems that have served it well and thrown up leaders at every level. An executive working in the tobacco division can get the opportunity to work in the hotels, agri business, FMCG or paper divisions depending on his or her inclination and track record. The company also encourages employees to seek transfers across its divisions. Ravi Naware, Divisional Chief Executive of ITC Foods, for example, is a former tobacco executive, who launched the division he now heads. The attrition rate at ITC is 5-6 per cent compared to the FMCG industry average of 10-12 per cent. All these business leaders enjoy a very high degree of autonomy and run their divisions as entrepreneurs would Increased Market Power  Already Aashirvaad atta is a market leader. Bingo and sunfeast are doing well in their respective markets.  Current market for safety matches is estimated at Rs. 1250 crores per annum for 24 billion match boxes. Aim brand of safety matchbox is at present the highest selling brand.

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Current industry consumer spend estimated at over Rs. 21000 crores per annum for the beauty care market which is growing at the rate of 12 %. Mangaldeep incense stick is the only national brand in the category An emerging (currently Rs 9000 cr stationery) market in India

Bibliography

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