An analysis of corporate strategy of India Tobacco Ltd (ITC) and its diversification...... Era Business School (PGDM 2012-14 batch students)

1. &
ITS DIVERSIFICATION STRATEGIES FOR
MARKET LEADERSHIP

2. Team Members
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Abhinav
DISCLAIMER
Aman
Hemraj
No member of this team endorses
use
Kavish of tobacco or any such
products.
Amit
Paritosh
Viewers’ discretion is
Col Ajay K Raina, SM
recommended.
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3. Case Study : Vital Stats
• Vintage – Early 2005.
• Focus – Corporate Strategy
• Ingredients:– Need to diversify.
– Strategies adopted.
– Future possibilities.
• Our Approach:–
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An overview.
Analysis.
Recommendations.
Real time benchmarking.
• Limitations.
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4. 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.
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5. 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.
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6. Two Datelines
1970s
2005
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7. 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”
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8. Changing Ambitions
• 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.
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9. What Did
ITC
Do?

10. 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.
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11. FMCG-Other
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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.
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12. 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.
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13. ANALYSIS OF STRATEGY

14. 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.
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15. Understanding the
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17. PEST Analysis….
• Political Aspects.
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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 upgradation.
– State governments and luxury
tax.
– Focus on rural sector
development.
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18. …..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.
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19. …..PEST Analysis…
• Social Aspects
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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.
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20. …..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.
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22. 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.
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23. 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.
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24. 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.
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25. ……Opportunities
• The enviable reach and distribution
network of e-choupal.
• Taking IT business to USA; 60% in
Europe.
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26. Threats
• Competition – domestic+
international.
• Increasingly hostile attitude
towards smoking in general.
• Government policies towards
tobacco= tax, regulations.
• Systematic threats.
• IT bubble (assumed).
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27. Focus : Cigarettes
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28. Porter’s 5 Forces:
Cigarettes…
• Bargaining Power of
Buyers=LOW
– Addicted customers .
– Symbolic and emotional
values.
– Product quality not much
important to smokers.
– Low switching costs.
– Brand loyalty insignificant.
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29. ….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.
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30. ….Porter’s 5 Forces…
• 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.
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31. ….Porter’s 5 Forces…
• Threat of Substitute Product=MEDIUM
– Two aspects.
– Sin vs Sin:• Pan.
• Beedi and Gutkha
– Buyers‟ propensity
driven by health &
costs
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e-cigarettes
Herbal Cigarettes.
Nicotine patch.
Pills.
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32. ….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.
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34. Assumed Data
G
R
O
W
T
H
•Agro Business
•Hotels
•Paperboards
& Packaging
•FMCG-others
•Hotels
•FMCG•Cigarettes
•ITC Infotech
MARKET SHARE
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35. The Net Outcome
YoY Growth : 2001
80.00%
72%
AWARDS :
2004
• Forbes –World‟s
Leading
companies list.
70.00%
60.00%
50.00%
37%
40.00%
35.60%
30.00%
20.00%
10.00%
8.30% 10.60%
14.20%
• World Business
Award.
• Enterprise
Business
15.90%
Transformation
Award
0.00%
Gross Net
Opg Opg FMCG Hotel EBT
Sales Sales Margin Profit
Margin
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38. 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.
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39. 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).
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40. 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.
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41. 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.
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42. Reality Check : Beyond CS
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43. 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.
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