ITC Diversification

DIVERSIFICATION OF ITC

ByKaushik MajumdarAbhishek KhemkaSudip Kumar Das

Sudipto Ghosh

DIVERSIFICATIONDiversification is a form of corporate strategy for a

company.It seeks to increase profitability through greater sales

volume obtained from new products and new markets. Diversification can occur either at the business unit

level or at the corporate level. At the business unit level, it is most likely to expand into

a new segment of an industry which the business is already in.

At the corporate level, it is entering a promising business outside of the scope of the existing business unit.

DIVERSIFICATIONDiversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix:

Diversification usually requires a company to acquire new skills, new techniques and new facilities.

DIVERSIFICATIONJindal Steel

Power plant to support theirVijayanagar steel plant (mid 1990)

JSW Energy“We want to enter all fields of energy including wind

and solar.Our aim is to be in all segments such as

transmission, generation and trading in the next fiveyears. “ Senior Jindal Executive

DIVERSIFICATION AS A CORPORATE STRATEGYShould companies concentrate on one

business or should they be holding a portfolio of businesses?

Almost 40 years back, Peter Drucker argued that Every business needs a core – an area where it leads and along with it, every business must diversify to compete in an era of fast changing markets and technologies.

Today, the business environment has become much more volatile and dynamic. So, the key issue, is not whether to diversify, but when and how to diversify.

DIVERSITY IN DIVERSIFICATIONMicrosoft

Operating systems

Enterprise software

Web hosting

Video games

Wipro

Vegetable oils

Lighting soaps

Medical equipment

Computer software

Unrelated Diversification

Related Diversification

DIVERSITY IN DIVERSIFICATION Related diversification, occurs when a company develops beyond

its present product and market whilst remaining in the same area. For example a newspaper company expanding by acquiring a TV station remains with media sector. It will use its present strengths by using its expertise to develop new interests in same area. Backward diversification, when activities related to the inputs

in the business are developed. For example a newspaper company acquiring a printing or publishing company.

Forward diversification, refers to development into activities which are concerned with a company’s output. For example a newspaper company acquiring a distribution outlet.

Horizontal diversification, occurs when a company develops interests complementary to its current activities. For a company may integrate its activities to include all aspect of the value chain; design, manufacture, market and distribute.

Unrelated diversification is used to describe a company moving its present interests into unrelated markets or products. For example a company whose core business is media services may diversify into provision of financial services.

ADVANTAGESControl of inputs, leading to continuity and improved quality.

For instance 1984 and 1985 NewsCorp acquired Twentieth Century Fox and six television stations of the Metromedia Broadcasting Group in the US. These acquisition provided the company with a wider platform for consolidation of its related activities through access to studios for making films and television Programmes.

Control markets by guaranteeing sales and distribution. This can arise through a combination of linkages in the value chain.

Take advantage of existing expertise, knowledge and resources in the company when expanding into new activities.

Provide better risk control through no longer being reliant on a single market

Provide movement away from declining activities Spread risk by avoiding having all eggs in one basket

DISADVANTAGESMay result in slowing growth in its core businessAdding management costs. Diversification through acquisition May result in

failure where there is a mismatch between core competencies or experiences of the acquirer and acquired businesses.

While taking heart from the success of Wipro and GE, the dangers of unrelated diversification should not be underestimatedMetal Box (India) Ltd, the metal packaging

company which diversified into bearings. This move destroyed the company

Polaroid lost heavily (about $200 million) when it diversified into instant movies

WHEN TO DIVERSIFYWhen the profitability of a business is in

secular decline, a new core makes sense. Apple’s share of the market for personal computers plummeted and profitability steadily declined. So Apple moved its business toward digital music.

Inherently inferior economics. This becomes more apparent when a new competitor enters with a different cost structure. General Motors saw this in competition with Toyota

Unsustainable growth formula. The market may be reaching saturation or competitors may have started to replicate a once unique source of differentiation.

DEVELOPING A NEW COREWhen the core business is under severe threat,

Some companies go into denial and decide to defend the status quo

Others try to transform their companies all at once through a big merger or by leaping into a hot new market.

The most successful companies proceed more systematically.

American Can turned Primerica, Barrick,

ITC

American Can to Primerica sagaAmerican Can initially manufactured cans/containers

for the beverage industry. In an industry which used a simple technology,

intensifying competition were inevitable. Forward integration by aluminum producers and

backward integration by food companies eroded the company’s ability to raise prices.

Plastics emerged as an important substitute. American Can diversified into paper, musical records

retailing and direct mail marketing. In 1980, it started to refocus and entered the financial

services business in a big way through acquisitions. The can business was sold off.

In 1987, the company changed its name to Primerica. In 1997, it acquired Salomon for $9.2 billion. About a

year later, it merged with Citicorp.

DIVERSITY IN INDIAA good example of an Indian company attempting to

diversify and develop a new core is ITC. Though it is a subsidiary of the UK based BAT, ITC

has 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 Welcome Group hotel chain

INTRODUCTIONITC Limited which previously stood for ‘Imperial Tobacco Company’ one of India's foremost private sector companies.

The name of the Company was changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974.

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 brand-building capabilities, effective supply chain management and acknowledged service skills in hotel.

100 Inspiring years……………….Established by UK-based tobacco major BAT1910, full fledged sales organization named Imperial Tobacco Company of India LimitedJuly 1912,Indian Leaf Tobacco company(ILTC)• 1925– ITC’s Packaging & Printing Business Division was set up as a

strategic backward integration for ITC’s Cigarettes business.• Late 1960’s,GoI pressured MNC to reduce holdings. Though Imperial clearly

dominated cigarette business, decided to reduce its dependence & so diversify.

• Though Imperial clearly dominated cigarette business, decided to reduce its dependence & so diversify.

• 1971, Marine product export division• 1974 –The name of the Company was changed to ITC Limited (Indian

Tobacco company).• 1975 – The Co. launched its HOTEL BUSINESS which was named ‘ITC-

Welcome group Hotel Chola’.

• 1977- Textile industry• 1979 – ITC entered the Paperboards Business by promoting. Bhadrachalam

Paperboards Limited, which today has become the market leader in India.• 1981- Cement business• 1985 – Surya Nepal Pvt. Ltd.• 1990- ITC set up the Agri Business Division for export of agri-commodities.

The Division is today one of India's largest exporters.• 1994- Consultancy from McKinsey & Co. to study businesses of company• 2000- ITC’s Packaging & Printing- ‘Expressions’• 2000- Lifestyle Retailing business division with the Wills Sport range of

international quality relaxed wear• By 2001,undisputed leader in cigarette industry with popular brands- Gold

Flake, Scissors, Wills, India kings and Classic• 2003- “Classmate” was launched to reach a wider student population.

Contd…..

Strategy of Organization to manage diversity of Portfolio

Formal 3-tiered governance structure:

Board of Directors : Comprising executive (3) and non-executive directors (11)

Strategic supervision

Corporate Management Committee : Comprising executive directors and senior managers

Strategic management

Divisional Chief Executive & Divisional Management Committee : Executive management

 • 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.

• Mission: To enhance the wealth generating capability of the enterprise in a globalizing environment, delivering superior and sustainable stakeholder value.

VISION & MISSION

Values

• ITC's Core Values are aimed at developing a customer-focused, high-performance organization

• Customer Focus - always customer focused and deliver what the customer needs in terms of value, quality and satisfaction.

ITC. WORKING FOR YOU. WORKING FOR INDIA.

Corporate Social ResponsibilityEnvironmental1. ITC has been Carbon Positive 3 years in a row.2. Water Positive 6years in a row.3. 100% solid waste recycling

Social• ITC's businesses generate livelihoods for over 5 million people.

  • ITC's globally recognised e-Choupal initiative is  the world's largest rural digital

infrastructure benefiting over 4 million farming families.  

• ITC's Social and Farm Forestry initiative has greened over 80,000 hectares creating an estimated 35 million person days of employment among the disadvantaged. 

• ITC's Watershed Development  Initiative brings precious water to nearly 35,000 hectares of dry lands and moisture-stressed areas. 

• ITC's Sustainable Community Development initiatives include women empowerment, supplementary education, integrated animal husbandry programmes.

• The first ITC Sangeet Sammelan showcasing the best in Indian classical music was held in Delhi in 1971

ITC Business Portfolio FMCG

,

Paper & PackagingHotels Agri Business Information

Technology

Cigarettes Personal CareFoods Lifestyle Retailing

Education & Stationery Matches Incense Sticks

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.

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

eChoupal, Agri Exports, Leaf Tobacco

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

ITC’s Cigarettes Business

Market leadership Powerful brands across segments Leadership in all segments - geographic & price Extensive FMCG distribution network

Direct servicing of 1,00,000 markets & 2 million retail outlets

World-class state-of-the-art technology and products Investment - Rs.10 billion in six years

Exciting long term growth potential

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Cigarettes: Growth potential Cigarettes account for less than 15% of tobacco consumed in India.

• Cigarettes (15% of tobacco consumption) contribute nearly 85% of

Revenue to the Exchequer from tobacco sector

48% of adult Indian males consume tobacco. Only 10.3% of adult

Indian males smoke cigarettes as compared to 16% who smoke biris

and 33% who use smokeless tobacco (Source: Global Adult Tobacco

Survey India 2010)

Biri : Cigarettes ratio = 10 : 1

Annual per capita adult cigarette consumption in India is appx. one

tenth world average.

Future growth depends on relative rates of growth of per capita

income and moderation in taxes.

31 Per Capita consumption in India ~ 10% of World average

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Cigarettes: Challenges

Competitive context

• Competition including international majors becoming more active.

• Domestic illegal volumes still very strong. Along with smuggled

contraband, has emerged as substantive segment.

Regulatory & Taxation

• Pictorial Graphic warnings in place w.e.f. June 09.

• VAT hikes in Maharashtra, Delhi, Rajasthan, Punjab, Haryana,

Gujarat - threatening the concept of the ‘Indian Common Market’

Cost table increasing with increase in leaf costs

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Hotels & Tourism

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Hotels & Tourism industry Foreign arrivals into India: 5 million appx. Vs. 35 million in China

• The two nations were on par 2 decades ago at 750,000 arrivals

Today, Beijing alone has as many hotel rooms as the whole of India

India’s luxury rooms availability lower than even smaller East Asian

countries

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Source: Compendium of Tourism statistics, WTO

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Indian Hotel Industry

Current supply – appx. 110,000 rooms of which 5 Star category

accounts for appx. 30%

India needs an additional 50,000 rooms in the next 2/3 years to

service projected tourist arrivals

Present mismatch between supply and demand expected to

persist over the short term

As infrastructure for trade & commerce improves - growing

potential for leisure tourism

ITC’s Hotel Business

• ITC-Welcome Group:

• Welcome Hotels• Fortune Hotels• Welcome Heritage

Fastest growing hotel chain with highest operating efficiency

(PBDIT/Net Income @ 40%) amongst the 3 leading chains

Leverages unique service proposition and international alliance with

Starwood Hotels & Resorts - ‘Luxury Collection’ / ‘Sheraton’

Capacity expansion underway at Chennai & Kolkata; plans for other

locations also being progressed.

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Paperboards, Paper&

Packaging

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ITC’s Paperboards Business

Market leader in growth segment - value added coated boards

World-class contemporary technology

Internationally competitive quality and cost

Social farm forestry in mill command area to improve access to cost

effective fibre & to attain self-sufficiency

• Biotech research based high yielding Clones – effectiveness tested in >

1,00,000 hectares

Fully integrated operations with in-house pulping capacity at appx.

2.80 lac MT.

It is the largest exporter of coated boards from India.

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ITC’s Paperboards & Packaging businesses

Capacity expansion projects installed – at optimum capacity utilization

• 120000 TPA Pulp Mill – Machine stabilised

• 100000 TPA paper machine (to support Education & Stationery business

growth plans) Machine stabilized

• Investment in 100,000 TPA paperboards machine underway

ITC’s packaging SBU -India’s largest converter of paperboard into high

quality printed packaging

• Leading supplier to Indian FMCG and Consumer Electronic segments

• Provides superior packaging solutions to the cigarettes and new FMCG

businesses

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Agri Businesses- Leaf Tobacco

- Agri Commodities

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Indian Leaf Tobacco industry

India – the third largest producer of tobacco

However, India’s share is only 7% in world tobacco trade

Upgradation of tobacco consumption from other formats to cigarettes

will enable:• growing domestic base & larger opportunities for value added exports

ITC – India’s largest buyer, processor, consumer & exporter of cigarette

tobaccos

6th largest leaf tobacco exporter in the world

Pioneering cultivation of flavourful Flue-cured, superior Burley and

Oriental tobaccos in India

Export business - robust growth in export volumes with improvement in

realization over the last 2 years

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ITC’s Agri Commodity Business

Farm linkages in 14 states covering Soya, Wheat, Marine

products, Coffee etc. Focus on value added agri commodities

Unique CRM programme in commodity exports

Leveraging IT for the transformational ‘e-Choupal’ initiative

• Rural India’s largest Internet-based intervention

• Over 40000 villages linked through around 6500 e-Choupals

servicing over 3.5 million farmers

Distinctive sourcing capability for ITC’s Foods business .

ITC's Agri Business Division, one of India's largest exporters of

agricultural commodities.

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Future Growth & Value Capture

New FMCG Initiatives

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Branded Packaged Foods

Leverages: • Unique Agri sourcing skills• ITC Welcomgroup’s specialist cuisine & bakery knowledge • FMCG distribution synergies• ITC R&D Centre, Bangalore

6 chosen categories:• Staples

– Aashirvaad Atta, Salt, Spices• Biscuits

– Sunfeast• Salty Snacks

– Potato chips, Bridge products : Bingo!• Confectionery

– Candyman, mint-o• Noodles: Launched ‘Sunfeast Yippee’ Noodles in Sept ’10 in Karnataka and

Tamil Nadu markets• Ready to Eat

– Kitchens of India (Ready to Eat, Conserves & Chutneys and Frozen Foods), Aashirvaad (Instant Mixes & Cooking Pastes), Sunfeast Pasta

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Branded Packaged Foods

• Aashirvaad Atta:

– Current market leader amongst national branded players; leverages the e-

choupal network for cost-quality optimisation and region specific

offerings

• Sunfeast Biscuits:

– Differentiated & innovative products; continues to build consumer

franchise; distributed & outsourced supply chain being ramped up

– Targeted cost management actions shore up margins

• Number of innovative products in the pipeline leveraging the capabilities

of the ITC R&D Centre

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Lifestyle Retailing

Leverages trade mark and services expertise of hotels

Relaxed wear market growth > 20% p.a

Up market product range available in exclusive Wills Lifestyle stores (67)

and multi-branded outlets/ large format retail stores across the country

• Premium segment comprising the ‘Classic’ range of formal wear, ‘Wills

Sport’ relaxed wear and ‘Wills Clublife’ evening wear

• Designer association with leading Indian designers – ‘Wills Signature’ line

• Strong distribution network in place for the mid-market brand ‘John Players’

• availability in 225 Exclusive Branded outlets, 200 multi branded outlets and

departmental stores

• Wills Lifestyle rated amongst the top 5 Luxury brands in the country (Global

Luxury Survey conducted by TIME Magazine)

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Education & Stationery Products Business

Leverages print and paper know-how. Forward linkages with new paper

capacity (already commissioned).

An emerging (currently Rs 9000 cr stationery) market in India - growth

driven by increasing cross-cultural exposure, govt. spending on

education

• Mostly commoditized. Offers opportunity for branding

Robust distribution network in place to scale up the Stationery business

significantly

• ‘Classmate’ brand already the most widely distributed brand in India. Scholastic

products launched

• Branded Copier Paper ‘Paperkraft’ footprint being enhanced. Enthusiastic

customer response based on green credentials.

Comprehensive portfolio approach with new variant/category launches

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Safety Matches

Current industry consumer spend estimated at Rs. 1250 crores p.a. for 24

billion match boxes

Mass market moving from 0.50 p price point to Re 1.00.

ITC markets its brands with value added products across each price

point

• Support SMEs with complementary marketing strengths

‘AIM’ – India’s largest selling Safety Matches brand

Successful acquisition of WIMCO Ltd. by Russell Credit

• Key brands: Homelites, Ship, Cheetah Fight etc.

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Incense sticks (Agarbattis)

Current industry consumer spend estimated at over Rs. 900 crores p.a.

ITC markets its brands with value added products across each price

point

• ‘Mangaldeep’ : second largest national brand in the country

• Support cottage sector with complementary marketing strengths

• Provides livelihood opportunities to more than 8000 under privileged

women

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Personal Care Products

Current market size estimated at over Rs. 29000 crores (growing at 12% p.a.)

ITC presence established in Body Wash (Soaps, shower gels), Hair Care (Shampoos,

conditioner).

Product portfolio enlarged with the launch of Fairness cream – Vivel Active Fair

Portfolio approach straddling all consumer segments with 4 umbrella brands:

• Essenza Di Wills (Prestige)

• Fiama Di Wills (Premium)

• Vivel Di Wills and Vivel (Mid)

• Superia (Popular)

Products well received in the market, gaining customer acceptance

Supported by investments in brands – celebrity endorsements

Investments being made in Research & Development and strategic tax incentivized

manufacturing sites

Elephant that can dance

A full spectrum added value only when the activities are joined and connected

A robust corporate strategy

• Core competencies• Distribution reach• Superior brand building• Effective supply chain management

– 6 million retail outlets– Directly services more than 2 million of these

retail outlets

• Acknowledged skills

Performance Track Record - Snapshot

Rs Crs 95-96 09-10Cagr 95-96 to 09-10

Gross Turnover 5115 26,260 12.4%Net Turnover 2536 18,153 15.1%Market Capitalisation 5571 100,475 22.9%PBDIT 584 6,677 19.0%PBIT 536 6,069 18.9%PBT 452 6,015 20.3%PAT (After Exceptional Items) 261 4,061 21.7%EPS Rs (Equalised for 95-96) 0.7 10.73 21.4%Net Worth 1121 14,064 19.8%Capital Employed 1886 14,957 15.9%ROCE% 28.4 40.6Total Shareholders Returns % 24.3%

Rs crores

Source: itcportal.com

Source: itcportal.com

Source: itcportal.com

2009/10: SegmentSegment Gross Revenue PBT Capital Employed

Cigarettes 17,283 66% 4,938 82% 2,988 24%

Others 3,642 14% (350) -6% 1,719 14%

Total FMCG 20,925 80% 4,589 76% 4,717 38%

Hotels

911 3% 217 4% 2,457 20%

Agri Business 3,862 15% 436 7% 1,580 13%

Papers

3,234 12% 684 11% 3,711 30%

Total 28,932 110% 5,926 99% 12,465 100%

Less Other Revenue, Income/Expenditure

2,672 10% (89) -1% - -

Total 26,260 100% 6,015 100% - -

Source: itcportal.com

Rs crores

BCG Matrix

Agri Business• Hotels• Paperboards & packing

FMCG - foods/others

FMCG - CigarettesITC InfoTech

Businesses for Tomorrow

• In FMCG sector expected to triple in size to over Rs 3,55,000 crores by 2018, investment opportunity upto Rs. 8,000 crores over the next 7 to 10 years.

• Paper, Paperboards & Packaging investment opportunity of upto Rs. 6,000 crores.

• investment opportunity for ITC of upto Rs. 9,000 crores in the next 7 to 10 years

THANK YOU