Itc Diversification Case

7/29/2019 Itc Diversification Case

http://slidepdf.com/reader/full/itc-diversification-case 1/27

ITC’s 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 1960’s,GoI pressured MNC to reduce holdings

• Though Imperial clearly dominated cigarette

business, decided to reduce its dependence & sodiversify.



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, Indiakings and Classic

• Cigarette contributes- 85% revenue & all other

businesses together – 15%



ITC Ltd.

FMCG-Cigarettes

FMCG-Others

Hotels

Agri Business

Paperboards &

Packaging

Infotech



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



PROS of Diversification

Economies of scale and scope – Operational synergies can be realized.

– Spreading the firm's unutilized organizational resources to other areas cancreate 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, monitoringcosts, 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.

PROS of Diversification cont..



CONS of Diversification•

Combining two businesses in a single firm is likely to result insubstantial influence costs.

• Resource allocation can be influenced by lobbying.

•

Costly control systems may be needed that reward managers based ondivision profits and discipline managers by tying their careers tobusiness unit objectives.

• Internal capital markets may not work well in practice.

• Shareholders can diversify their own personal portfolios. Corporatemanagers are not really needed to do this.

• Identifying undervalued firms may not be as easy as it sounds.



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, isITC’s core competency? How did ITC create

multiple avenues of growth based on its core

competencies?

Question 1



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 aslifestyle retailing and foods?



Solution

• The government of India announced a ban onadvertisement on the sell and consumption of tobaccoproducts.

• Decrease in sales

• Increase in excise duties which decrease itsprofitability.

• The ITC share fell by 10% on the NSE as soon as the judgement was made. All these reasons prompted thecompany to take a serious look at new businesses.

• Its corporate strategy aimed at creating multipleavenues 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 -Cigarettes

•FMCG -foods/others

•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



Itc Diversification Case

Documents