ITC : Diversification
description
Transcript of ITC : Diversification
&
ITS DIVERSIFICATION STRATEGIES FOR
MARKET LEADERSHIP
Team Members
• Abhinav
• Aman
• Hemraj
• Kavish
• Amit
• Paritosh
• Col Ajay K Raina, SM
DISCLAIMER
No member of this team endorses
use of tobacco or any such
products.
Viewers’ discretion is
recommended.
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Case Study : Vital Stats
• Vintage – Early 2005.
• Focus – Corporate Strategy
• Ingredients:-
– Need to diversify.
– Strategies adopted.
– Future possibilities.
• Our Approach:-
– An overview.
– Analysis.
– Recommendations.
– Real time benchmarking.
• Limitations.
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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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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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Two Datelines
1970s
2005
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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” 7
• 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.
Changing Ambitions
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What Did
ITC
Do?
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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FMCG-Other
• 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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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. 12
ANALYSIS OF STRATEGY
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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Understanding the
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PEST Analysis….
• Political Aspects.
– 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 up-
gradation.
– State governments and luxury
tax.
– Focus on rural sector
development.
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…..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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…..PEST Analysis…
• Social Aspects
– 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. 19
…..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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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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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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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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……Opportunities
• The enviable reach and distribution
network of e-choupal.
• Taking IT business to USA; 60% in
Europe.
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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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Focus : Cigarettes 27
• Bargaining Power of
Buyers=LOW
– Addicted customers .
– Symbolic and emotional
values.
– Product quality not much
important to smokers.
– Low switching costs.
– Brand loyalty insignificant.
Porter’s 5 Forces:
Cigarettes…
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….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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….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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• Threat of Substitute Product=MEDIUM
– Two aspects.
– Sin vs Sin:- • Pan.
• Beedi and Gutkha
– Buyers‟ propensity driven by health & costs
• e-cigarettes
• Herbal Cigarettes.
• Nicotine patch.
• Pills.
….Porter’s 5 Forces…
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….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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Assumed Data
MARKET SHARE
G
R
O
W
T
H
•FMCG-
•Cigarettes
•ITC Infotech
•FMCG-others •Agro Business
•Hotels
•Paperboards
& Packaging
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•Agro Business
•Paperboards
& Packaging
•FMCG-others
•Hotels
The Net Outcome
8.30% 10.60%
37%
14.20%
72%
35.60%
15.90%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
GrossSales
NetSales
OpgMargin
OpgProfit
FMCG Hotel EBTMargin
YoY Growth : 2001
AWARDS :
2004
• Forbes –World‟s
Leading
companies list.
• World Business
Award.
• Enterprise
Business
Transformation
Award
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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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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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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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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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Reality Check : Beyond CS
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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. 43
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