ITC’s Diversification

Strategy

Presented By
Sonal [B-51] Kashyap [B-44]
Soniya [B-12] Nrupal [B-17]
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 2001
Disadvantages 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 Still has to

largest player in consolidate foot
Indian tobacco in cigar market;
market strongly
2. Gold Flake dominated by
tobacco brand Godfrey Phillips
largest FMCG
brand in India; 1. High
alone holds 70% Competition at
of tobacco
Moving into new & Global Level
market
emerging 2. Culture outside
markets of India
eastern Europe
and Africa.
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-
Agri Business
Cigarettes

Paperboards &
Packaging FMCG-Others

Infotech Hotels
 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.

eChoupal, Agri Exports, Leaf
Tobacco

Innovation for India Award 2006 for ITC e-Choupal in the

Social Innovations category for business organizations
 Agri Business
 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 – 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
 Packaging & Paperboards
 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.

 Infotech
ITC Infotech Ltd.

Featured amongst Top 100 Global Outsourcing Companies in

the Leaders category - International Association of
Outsourcing Professionals
 Infotech
 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.
 PROS of Diversification
Economies 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.
 PROS of Diversification
cont..
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 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
 Question 1

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?
 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 -
foods/others

•FMCG - •ITC InfoTech

Cigarettes
 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