ITCs Diversification Strategy

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 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 1960s,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, ITCs 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.

Agri Business Paperboards & Packaging Infotech

FMCG-Cigarettes

FMCG-Others

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.

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.

eChoupal, Agri Exports, Leaf Tobacco

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

Packaging & Paperboards

Packaging & Paperboards and Specialty Paper

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

Infotech
ITC Infotech Ltd.

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

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.

Question 1
ITC has been constantly making efforts to deemphasize its tobacco business and to create multiple avenues of growth based on its core competencies. What, according to you, is ITCs 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 ITCs 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
ITCs diversified business contribute little towards the companys profitability. Of the various business the company has diversified into, which business do you think has the potential to contribute to ITCs revenue? Explain.

Solution
ITCs 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 Cigarettes

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