ITC eChoupal HBS BSAP Full Paper-SivaKumar

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ITC’s e-Choupal: A Platform Strategy for Rural Transformation Ravi Anupindi Stephen M. Ross School of Business University of Michigan Ann Arbor, MI 48105 USA S. Sivakumar CEO - International Business Division ITC Limited Secunderabad, AP INDIA October 28, 2005 To be presented at Business Solutions for Alleviating Poverty (BSAP) Conference Social Enterprise Initiative, Harvard Business School, December 1-3, 2005.

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The ITC e-Choupal logic and framework.

Transcript of ITC eChoupal HBS BSAP Full Paper-SivaKumar

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ITC’s e-Choupal: A Platform Strategy for Rural Transformation

Ravi Anupindi Stephen M. Ross School of Business

University of Michigan Ann Arbor, MI 48105

USA

S. Sivakumar CEO - International Business Division

ITC Limited Secunderabad, AP

INDIA

October 28, 2005

To be presented at Business Solutions for Alleviating Poverty (BSAP) Conference

Social Enterprise Initiative, Harvard Business School, December 1-3, 2005.

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1. Introduction

India is the world’s seventh largest economy. National GDP (based on PPP1) stood at $2.664 trillion in 2002. With a population of about 1.03 billion, and growing, living in an area of 3.2 million square kilometers, India is the second most populous nation after China, the seventh largest country by land mass and the largest democracy in the world. A sector-wise break up of India’s economy illustrates that services (inclusive of government services) contribute about 52% of the GDP; the rest is equally divided between agriculture and industry. Thus, at 24% of GDP, agriculture is a significant component of India’s economy. India’s agriculture economy, measured in terms of arable land, diverse agro-ecological zones, and as one of the top three producers of several major crops, also occupies a significant position in world agriculture and is potentially food factory to the world.

The strong aggregate agricultural statistics, however, belie the plight of the rural Indian farmer, approximately 25% of who live below the poverty line. While agriculture comprises a quarter of the overall national economy, close to 700 million people or 70% of the population, who live in rural areas, depend on it. The three fundamental features that characterize Indian agriculture include fragmentation, dispersion, and heterogeneity. Fragmentation is implied by the size of land holdings that average 1.5 hectares. This lack of scale adversely impacts the production efficiency, productivity and quality of their produce. It also decreases their bargaining power. Dispersion is implied by the number of habitations – more than 600,000 villages constitute rural India – and low population density at an average of 300 persons per square kilometer. The geographical dispersion adversely impacts the connectivity – both physical and informational – between farms and markets. Finally, there is significant heterogeneity in Indian farming, relating to both types of farmers and types of crops. Farmer heterogeneity exists in terms of their investment and risk taking ability, knowledge levels, size of holdings, soil and rainfall conditions, cash-flow needs, etc. While heterogeneity perhaps is an asset, it also poses significant challenges in delivering customized solutions for productivity improvement, especially when they are fragmented and geographically dispersed.

The implications of these characteristics on farm productivity are further exacerbated by the lack of adequate infrastructure in the rural areas. Table 1 gives a selected snapshot of the state of the rural infrastructure including physical (e.g., road connectivity, teledensity), social (e.g., health, education), and institutional (e.g. access to credit and banking). The poor state of the physical infrastructure increases the cost of the physical and information flows between the farmer and the market. For example, the lack of roads means that an estimated 20-30 percent of produce gets wasted because of inability to reach marketing and processing centers2. The lack of adequate social infrastructure, particularly in education and social security, limits the ability of the farmer

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to implement best practices and invest in productivity improvements. Lack of proper health infrastructure sucks away whatever little earning he has towards meeting basic healthcare expenses. Finally, the weak institutional infrastructure shifts the risk inherent in agri-business to the party – the small and marginal farmer – that has the least capacity to bear it. The gaps in physical and institutional infrastructure are partially compensated by the existence of multiple intermediaries in the farm-to-market supply chain. These intermediaries, while delivering critical value at low cost, also extract a significant share of the profits from the supply chain leaving little for the small farmer since he has no other alternative method of accessing markets. Weak infrastructure combined with the characteristics of fragmentation, heterogeneity, and dispersion exacerbates the asymmetry of interaction between the farmer and the intermediaries leading to a vicious circle of low equilibrium (Figure 1). Small holdings, and dependence on monsoon rains, reduce the risk taking ability of the farmer leading to lower than required investment which translates to low productivity. Coupled with a weak “market orientation” of these supply chains the resulting value added is low, ultimately leaving very low margins for the farmer and the cycle continues.

Past governmental efforts have focused on building unbundled institutions (e.g., auction yards, agricultural extension services, agri-inputs, credit, etc.) as alternatives to the exploitative cycle of dependency spun by the traditional intermediary. The effectiveness of these institutions has been hampered by the challenges of rural reality outlined above. The situation has not improved much in the last decade since India started on the path of liberalization. In fact, the government expenditure on rural infrastructure as a percentage of GDP has been declining.3 It was hoped that the private sector would step in to fill the gaps which, unfortunately, was not realized. It is finally dawning on the policy makers that a sustained high growth rate for the country is unachievable without including the rural poor. While the government definitely has a critical role to play, we believe that private companies can build a profitable business model out of streamlining the broken value chains and bringing the poor closer to the markets. Profits can be captured from the very process of streamlining the value chains which in turn resource the creation of market infrastructure. Better market infrastructure can then be leveraged by the company to provide a host of products and services to the rural consumers increasing shareholder value through serving society. In this paper we describe an experiment in such an endeavor by an Indian Company.

The ITC Group (www.itcportal.com) is one of India’s largest private sector companies with a market capitalization of approximately US $ 11 billion and annual sales of US $ 2.6 billion. ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Branded Apparel, Packaged Foods & Confectionery, Greeting Cards, and other Fast Moving Consumer Goods (FMCG)

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products. The International Business Division (IBD) of ITC, started in 1990, exports agricultural commodities such as soybean meal, rice, wheat and wheat products, lentils, shrimp, fruit pulps, and coffee. As a buyer of the agricultural commodities, ITC-IBD faced the consequences of inefficient farm-to-market supply chain. Increased competition in commodities as India liberalized its economy, coupled with low margins made it imperative for ITC-IBD to rethink how it could create a sustainable competitive advantage in the farm-to-market supply chain of which it was only a part. With a mandate to grow its agri-business, in the year 2000 ITC-IBD (hereafter referred to as ITC) embarked on an initiative to deploy information and communication technology (ICT) to reengineer the procurement of soybeans from rural India. ICT kiosks (called e-Choupals) consisting of a personal computer with internet access were setup at the villages. Soybean farmers could access this kiosk for information on prices, but had a choice to sell their produce either at the local market (called a Mandi) or directly to ITC at their hub locations. A hub location would service a cluster of e-Choupals. By purchasing directly from the farmers, ITC significantly improved the efficiency of the channel and created value for both the farmer and itself. The e-Choupal experiment for soybeans procurement has been well documented in Prahalad (2005) and Upton (2003). The experiment has been extremely successful for ITC, and by 2004 the network consisted of more than 5000 e-Choupals and 127 hubs operating in six states of India for procurement of soybeans, wheat, shrimp, coffee, and spices. Figure 2 shows the various regions of present e-Choupal operations.

While the e-choupal network was initiated to facilitate more efficient and effective procurement, the connectivity – both physical and informational – between the farmer and the market that it facilitated has allowed ITC to use it for (reverse flow) distribution of goods and services from the market to the farmer. In this paper we will argue that the e-Choupal infrastructure can be thought of as a business platform using which a host of products and services can be provided linking the local farmer to global markets. The same platform can also be leveraged for capability building at the village level thus enabling a process to break the vicious cycle of low equilibrium identified in Figure 1.

We first articulate the key elements of the platform. Subsequently, we illustrate the power of the platform using examples from procurement, distribution and retail of products and services, as well as capability building initiatives identifying economic and social benefits for various stakeholders. We conclude with a discussion on how the platform fits within the overall business strategy of the ITC Group.

2. e-Choupal as a platform

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We argue that e-Choupal is a business platform consisting of a set of organizational subsystems and interfaces connecting farmers to global markets. This common structure can then be leveraged to procure / provide a host of product and services for the farmer as a producer as well as a consumer. The e-Choupal business platform consists of three layers each at a different level of geographic aggregation. Furthermore each of the three layers is characterized by three key elements. The three elements at each layer correspond to (a) the infrastructure (physical or organizational) through which transactions take place, (b) the entity (person or organization) orchestrating the transaction(s), and (c) the geographical coverage of the layer.

Together the three layers and the three elements constitute a 3x3 infrastructure for the platform. In building such a platform, several decisions need to be made pertaining to technology, density, geography, and choice of the orchestrator, especially at lower layers. ITC has structured the three layers as follows. The first layer consists of the village level ICT kiosks with internet access (or e-Choupal), managed by an ITC trained local farmer (called a Sanchalak) and within walking distance (1-5 kilometers) of each target farmer. The relatively sparse population density in rural India justified the location of one e-Choupal per cluster of five villages. Instead of building a separate infrastructure to host the kiosk, ITC decided to place in the home of the Sanchalak. The second layer consists of a bricks-and-mortar infrastructure (called hubs) managed by the traditional intermediary who has local knowledge/skills (called a Samyojak in his new role) and within tractorable distance (25-30 kilometers) of the target farmer. Since the infrastructure was initiated to facilitate procurement, it was decided that the location of the hub should be at a distance similar to those for other channels available to the farmer. That is, every effort was made to design the new platform within the confines of the current social structure including the daily activities of the farmer. Finally, the third layer consists of a network of companies (consumers of farmers’ products and providers of products and services to the farmers) orchestrated by ITC providing a pan-Indian presence. Together this three-layered infrastructure allows ITC to provide a complete end-to-end solution to satisfy the needs of both the farmers and the consumers at village as well as global level.

To operationalize the above 3x3 infrastructure there are several key decisions that need to be made regarding information, knowledge, and transactions. For example, decisions regarding information and knowledge include access charges, choice of whether or not to bundle it with transaction, level of customization necessary, and whether it needs to be provisioned in real-time. Decisions on physical flows include the location – village or hub – where transactions, quality checks, etc. should be performed. While the specific solutions will be context-dependent, it was essential to identify a few

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broad guidelines that will govern how the platform operated. ITC chose to operate the platform on the following three business principles.

1. Information and knowledge are free: Any villager can walk up to the e-Choupal

operated by the Sanchalak and seek information (e.g., regarding market prices for commodities) and knowledge (e.g., of best practices in agriculture) without having to pay for it. There is no subscription or membership fee either. By making it free, ITC ensured a much wider participation by the farmers4.

2. Freedom of choice in transactions: ITC decided to de-link transactions from the provision of information or knowledge. Farmers, after accessing information at the e-Choupal, are free to transact their own way. ITC only provides one of the channels for transactions which the farmer may or may not choose. From the perspective of the farmer, freedom to transact is liberating and provides dignity. From ITC’s perspective, a farmer’s freedom entails that it needs to create a compelling value proposition – better pricing and service – for the farmer so that they will indeed transact with ITC, thus ensuring the pressure to maintain “competitiveness” on an ongoing basis.

3. Transaction-based income stream for the Sanchalak: It is important to note that the first layer is managed by a Sanchalak – a local farmer – selected by ITC and is not an employee of the company. The appointment of a local farmer with good standing in the community ensures that the villagers are comfortable in interacting with a person who is “one of us” and understands the village dynamics, issues, and problems much better that any external company employee will. The challenge though is how to motivate the Sanchalak. Since information and knowledge are provided free of cost, its provision via the e-Choupal located at the Sanchalak’s house is not a guarantor of his financial well-being. By tying his revenue stream to transactions (on a commission basis), ITC ensures that the Sanchalak will exert effort to generate a steady revenue stream for himself as well as the company. The Sanchalak is also motivated by non-pecuniary benefits that enhance his status within the community. We will see later how the company can leverage this to facilitate certain activities.

3. Procurement Value Chain

We first illustrate the power of the e-Choupal platform using the procurement value chain for soybean and wheat. The farm-to-market supply chain for soybean and wheat – both pre- and post-echoupal intervention – are very similar. Therefore, we illustrate the reengineering of the procurement value chain using soybean first.

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Subsequently, we will discuss some unique issues and challenges in the wheat value chain.

3.1 Soybean value-chain

The market size of soybean in India, popularly known as 'miracle bean', is over $1.2 billion. Production of soybean in the country has been growing at the rate of 5.57% (over the last ten years). While aggregate production has been increasing, the yield rate averaging at 870 kg/hectare is still only one-third of the yield rates in United States and Brazil.

Traditional Model

While an Indian farmer typically has several channels to sell soybeans, today close to 80% of the beans are sold through mandis or regulated (spot) markets. While the physical infrastructure of a mandi is provided by the government, the actual trading is done by private parties. The mandi prices also serve as a guide to other channels of trade.

Post-harvest, a farmer typically likes to sell his crop quickly to pay off his debts and prepare for the next season. With little reliable information regarding prevailing prices the farmer transports the produce in bulk, covering the average distance of 20-25 kilometers to the mandi. Once at the mandi he engages a commission agent (CA)5 who displays the produce in a heap in the mandi yard. The produce is then visually inspected and auctioned, typically using a straight auction monitored by a government appointed agent. Post-auction, the beans are manually bagged, weighed, and loaded on the buyer's vehicle. In an ideal situation, the farmer should get full payment for his produce. In reality, at many small mandis the CA often spreads the full payment over multiple days forcing the poor farmer to make multiple trips to the town.

ITC, as a buyer, engages its own CA at a mandi. Typically, each day ITC would authorize its CA to buy a certain quantity at a price not to exceed a maximum limit. The produce is then transported to a processing plant or a warehouse.

While the mandi is a fair price discovery mechanism in the context of fragmentation, dispersion and heterogeneity, there are several inefficiencies in this traditional supply chain. From the farmer’s perspective: (a) price discovery is bundled with transaction and occurs too late for him to backtrack, (b) significant delays in the process due to peak-season congestion, (c) unscientific quality assessment and consequently payment rarely commensurate with quality, (d) handling losses, and (e) no guarantee of immediate full payment. In addition, the process also extracts a psychological toll on the farmer as he depends on the traders and CAs for (financial) assistance in other activities and cannot risk alienating him. Further, given the relative levels of education of the farmer, there is asymmetry in social standing between the

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farmer and the traders / CAs. ITC, as a buyer, also faced several challenges including (a) higher ultimate cost of procurement due to inefficiency of flows, (b) inability to capture intra-day price differences due to lack of visibility to real-time transactions, (c) no guarantee of quality produce, and (d) inability to have any impact on the production cycle. The agent, by placing himself right in the middle of the flow between the farmer and ITC, extracted rents from both parties.

e-Choupal Platform

Using the e-Choupal platform the reengineered process works as follows. First ITC provides up-to-date information regarding mandi prices on the e-Choupal web-portal. It also announces a procurement price for direct purchase at its hub. Now a farmer obtains price information before leaving his village. Should he choose to sell to ITC directly, the Sanchalak provides the farmer with a parchi (note) including his name, village, quality of produce, and the conditional price quote, authorizing the farmer to go to the e-Choupal procurement hub. At the hub, the farmer’s produce undergoes a scientific inspection for quality and weighed electronically. At each of these stages the farmer is provided with appropriate documentation. Once the transaction is complete the farmer is paid cash in full. Figure 3 illustrates the reengineered soybean procurement chain.

Overall, the reengineered supply chain reduces several non-value added tasks thereby improving the efficiency of the procurement. The contrast between the traditional channel as well as the e-Choupal platform is highlighted in Table 2.

Benefits

Procurement via the e-Choupal platform offered several economic benefits to the farmer, ITC as well as the CA.

(a) Farmer: The farmer benefits from reduced transaction costs, better service, and superior decision making through choice. For soybeans procurement, for example, a farmer’s cost has decreased on average by 50-60% primarily through cost-avoidance in terms of elimination of commissions, costs of handling and other losses. Better service is a measure of quality; for example the “sale-to-cash” cycle for the farmer, measured as the time taken to complete the sale (from the time of arrival to the location of sales – hub or Mandi) till the time the farmer gets 100% cash for his produce, has significantly reduced. This reduces the farmer’s selling expenses (avoided costs of board and lodge at the mandi location). The third aspect is superior decision making due to the choice inherent in the e-Choupal model. Since price-discovery now occurs in the village, the farmer has a choice regarding where to sell – hub or Mandi – as well as when to sell – now or later. Monetarily, the value of this choice is already captured by the previous two

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metrics of reduced transaction costs as well as superior service. Furthermore, the availability of a competitive e-Choupal channel puts the farmer in a position to sell at a better price in other channels as well.6

(b) ITC: The immediate benefit to ITC is the improvement in procurement efficiency for soybeans. ITC has, on average, reduced its costs by 25-30%. Table 3 shows the cost savings for both the farmer as well as ITC. Further, having a direct and cheaper source of commodities has allowed ITC to increase its revenue base by offering commodity services like customer-specific structured offers based on lot size, delivery point, storage, pricing, quality segregation, credit, etc., which were not possible when procurement was restricted to the mandis. In the last three years ITC’s turnover from soybeans has increased by approximately 60%. Finally, by buying from a farmer, ITC is the first company to put money in the farmer’s pocket – more money than he ever got before and treated with dignity.7 The power of “buying with dignity” for brand building is enormous. As we will see later ITC is able to leverage the power of the brand in other transactions.

(c) CA: Obviously the role of a CA in the procurement of commodities for ITC through the mandis has diminished. Given his local knowledge and resourcefulness, however, the CA was co-opted by ITC – as a Samyojak – to provide several logistics services needed at the hubs in the e-Choupal network. The Samjoyak (collaborator) played a critical role in activities like management of facilities, providing labor resources, buying and selling some of the goods for distribution (see Section 4) earning commissions. Thus ITC provided the CAs an opportunity to expand their role from a ‘trader’ to a ‘service provider’ in the e-Choupal platform.

The web-portal, in addition, also acted as a knowledge delivery mechanism. It provided information on best-practices, localized weather information, general statistics on commodity production and consumption, links to commodity markets, discussion groups, etc. Such knowledge increases the awareness of the farmer allowing him to be a more productive citizen.

3.2 The Wheat Supply Chain Wheat is the most widely grown and consumed grain cereal in the world. With an annual production of 65-75 million tones, India is the second largest producer of wheat in the world after China, accounting for 12% of world production in 1999-2001.8 Wheat production in India has increased almost ten-fold in the last five decades and accounts for approximately 35% of India’s total food grain production. This remarkable achievement

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was made possible by “green revolution”9. In parallel, the government of India developed a system of institutions with the objective of supporting, controlling and stabilizing food grain prices and seeking to assure basic food availability at reasonable prices to the consumers.

Traditional Model

Given the importance of wheat in the Indian diet, about 70% of wheat is either consumed locally or sold to the government for public distribution. The rest is available for private trade which either goes to retail trade as grains or is sold to the flour mill industry. The flour mill industry supplies to bakeries, agro-industries, restaurants, as well as retail.

A large fraction of the grains for private trade move through the mandi system – a channel whose inefficiencies for the farmer as well as ITC we have already identified. An additional important issue is that of ‘quality loss’ in the traditional wheat supply chain. There are several varieties of wheat, each at a different quality level, produced in India The traditional mandi infrastructure, however, neither allows for scientific analysis of the various quality levels nor permits proper segregated storage. Consequently, the grains released in the market are of one “aggregate” fair average quality (FAQ) variety. Often the traders would blend high quality wheat with a lower quality and sell the mix at the price of FAQ quality wheat pocketing the differential. Furthermore, the compensation a farmer receives is rarely commensurate with the quality of wheat he supplies.

e-Choupal Platform

In addition to efficiency gains of the type described earlier for soybean procurement, in wheat ITC saw opportunities to leverage the e-Choupal to compete on variety. On the demand side, domestically there was sufficient evidence that lack of high quality wheat had stunted the growth of many wheat-based agro-industries like bakeries, biscuit manufacturers, etc. ITC’s internal research as well as independent research confirmed the potential for variety in wheat production and distribution to increase revenues significantly. Consequently, ITC invested in segregation and identity preservation infrastructure at its hubs, which included storage systems and testing equipment as well as manpower training and variety-based pricing mechanisms. Now when the farmer came to sell wheat directly to ITC at its hub, the produce is segregated into lots depending on the quality and variety of wheat determined after scientific analysis and compensated accordingly.

Benefits

Economic benefits similar to the one described for soybeans also accrue in wheat procurement. There are several additional benefits.

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a) Farmer: The farmer now gets payment commensurate with the quality of wheat he produces. In the longer run, farmers will respond to the incentives and increase production of higher quality grains improving the overall quality of the produce in India.

b) ITC: Wheat procurement via e-Choupal platform has allowed ITC to differentiate itself by competing on variety increasing its market share to about 10% of the volume available for private trade. The segregation capability benefits both its external as well as internal customers. For its external customers, ITC becomes the supplier of choice. Internally, ITC’s Foods Division10, which entered into branded and packaged foods in 2002, is able to leverage the e-Choupal procurement network to source high quality wheat and produce higher quality products without sacrificing efficiency. This capability has allowed the division to compete effectively in the branded foods market. In particular, ITC’s Aashirvaad brand of wheat flour became a market leader within a short span of two years since its launch. In March 2005, ITC launched a ready-to-cook instant pasta, produced from the identity preserved Durum wheat, at a price point of Rs. 15 for an 83 gm packet when the only other similar product in the market was imported and priced at Rs. 85.11

Over time ITC has expanded the network for procurement of coffee, shrimp, spices, etc., adapting the hub infrastructure appropriately and deriving similar benefits for all stakeholders. The e-Choupal platform has also allowed ITC to change the dimensions of competition in agri-business – which has traditionally been treated as a commodity business – to include quality, variety and commodity-based services; see Anupindi and Sivakumar (2005) for a detailed discussion of the agri-business value chain reengineering using e-Choupal.

4. Distribution and Retail Value Chain

Even though the per capita income of rural India is low, with a consumer base of 700 million individuals (more than the population of United States and EU combined) the potential for retailing in rural India is still enormous and remains untapped. The size of the rural market including consumer goods, agricultural inputs, and durables (inclusive of vehicles) exceeds $20 billion per year. The distribution channels of most of the Fast Moving Consumer Goods (FMCG) companies stop at towns with populations of 10,000; some may reach villages of population of 5000. Contrast this to the fact that a large fraction of the rural population lives in villages of less than 1000 with an average village population of 2000. Consider the density and distance to reach the rural consumer it entails; for example, at the village level there is one shop per 500 people as compared to one shop per 236 people in a city like Mumbai. Furthermore, average delivery distance

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from the lowest stocking echelon of a distribution network is approximately 15-25 kilometers in rural India as compared to 1-2 kilometers in Mumbai.12 Consequently there is neither any direct delivery to a village by a company’s distribution channel nor is there any effective marketing communication to the consumer group. Most villagers either buy their needs from the local village shopkeeper or go to the town 15-25 kilometers away.

The reality of rural India outlined at the beginning of this paper – viz., fragmentation, dispersion, heterogeneity coupled with weak infrastructure – has stunted the growth of any realistic retail at the village level. For the farmer as a consumer this has meant getting the raw end on pricing, convenience, availability, assortment, and quality. Prahalad and Hammond (2002) have documented the “poverty premium” paid by the urban poor in India. Anecdotal evidence suggests that even a rural consumer is subjected to the same; for example, the prices of several consumer goods at the village shop are often 10% above maximum suggested retail prices. Further, available goods are of lower (often spurious) quality.

The e-Choupal platform provides connectivity – both physical as well as informational – all the way to the village and can be leveraged for the reverse flow of goods from markets to the farmers as consumers. Using the platform there are two broad ways to address the needs of the farmer as a consumer. At the village level the Sanchalak can (i) be a delivery point for on-demand goods and (ii) act both as a stock-keeper for the consumer as well as be a supplier to the local village shopkeeper. We call this the distribution value chain. At the hub level, the needs of the farmer can be served using a retail format. This is the retail value chain. In this section we illustrate these value chains using the example of agri-inputs.

4.1 Agri-Inputs Value Chain

While Indian agriculture occupies a significant position in the world, the average yield per hectare across several crops is still far below – by a factor of two to three – the world average.13 Yield of a farmer is tied to adoption of better farm practices (including sowing, irrigation, etc.), effective use of fertilizers/chemicals, and use of better quality seeds. Together these activities involve effective information, knowledge, and product flow to the farmer which for reasons outlined earlier has been a challenge. Let us consider the example of agri-inputs.

Traditional Model

Fertilizers, chemicals, and seeds constitute agri-inputs. The demand for agri-inputs occurs in a very short window – typically during the planting and growing seasons and is subject to environmental shocks (e.g., rainfall, temperatures, etc.). The production cycle of these inputs, however, is long. Thus mismatch between supply and demand is quite common.

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Retail formats in towns far away from the village have the lion’s share of the agri-inputs market. The consequences of mismatch between supply and demand, and the poor literacy levels of the farmers, motivate some of the retail format players to sell spurious and unbranded agri-inputs and / or increase prices inputs that are often in short supply. While the local cooperatives sell agri-inputs, they only do so at a fixed price, do not carry all brands, and availability is sporadic. Furthermore, a farmer’s purchase of these inputs is tied to other outstanding credit with the cooperative. Finally several agri-inputs require knowledge regarding its application. Ideally the knowledge should be customized – for example, based on the soil properties of the farmer’s land. The retail formats that sell these inputs, however, are not reliable sources of knowledge. The retailer carries multiple brands with differing margins and often, in his self-interest, pushes a higher margin product. Any information that he will provide the farmer will either be biased or very generic as he does not know the specific conditions of the farmer’s land. The farmer either has to seek the needed information from an agricultural extension service station14 which is not conveniently located or rely on his own judgment for the use of the input. Thus, in this traditional model, product and knowledge are unbundled. In absence of any customized knowledge that could increase the efficacy of the input and improve productivity, and to compensate for the lack of efficacy, often farmers increase their usage which not only increases costs but, unfortunately, contributes to soil degradation.15

e-Choupal Platform

The e-Choupal portal is leveraged to provide customized knowledge on the appropriate agri-input to use, how and when to use it. This is facilitated as follows. First, soil testing services are provided under the e-Choupal platform. A farmer can get his soil tested at a laboratory located at the hub; techniques for appropriate soil sampling are video-streamed to the e-Choupal kiosk that a farmer can watch and learn from. Second, using the discussion-forum feature of the e-Choupal portal, farmers’ queries are aggregated (at the state level) and responded to by an agricultural scientist16 within 24 hours with recommendations on what agri-input to use and when. Finally, the e-Choupal portal provides local weather forecast information so a farmer can determine the appropriate time to apply the chemical or the fertilizer. Thus the e-Choupal platform is able to provide customized knowledge to the farmer. Knowledge is also disseminated through special farmer meetings and demonstrations organized by ITC with the help of partner companies and agricultural scientists. The farmer, however, has a choice in terms of what input to buy and from where.

The provision of agri-inputs via the e-Choupal platform has evolved over the years. In the early days of the e-Choupal platform the infrastructure at the hub was simply a warehouse to store the commodities procured as well as a stocking point for distribution. In this setting, a farmer indicates his need to the Sanchalak, who then

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conveys the information to the hub where the Samjoyak arranges for delivery of the product directly to the village. Both the Sanchalak as well as the Samjoyak earn commissions on product sales and delivery. Thus while the Sanchalak provides information and knowledge free of cost, it is in his pecuniary interest to convert the farmer to a customer. In 2004, the hub operations were expanded to include a retail front called Choupal Sagar. The first retail front was launched in August 2004 in the town of Sehore in Madhya Pradesh. This 7000 sq. ft. retail space provides consumer goods as well as agri-inputs. Armed with the knowledge on the appropriate agri-input, a farmer can now buy his product at Choupal Sagar. By avoiding home delivery of the product, ITC increases its margins. The farmer also gets to touch and feel the product before buying it, as well as talk to an agricultural specialist who staffs the agri-inputs section of the Choupal Sagar store. Since provision of information and knowledge is no guarantee for eventual sale of the product, ITC has to ensure that its sourcing and logistics costs for these products are optimized. Further, ITC is able to aggregate demand across several villages and deal directly with the manufacturer giving it economies of scale. Consequently, it is able to offer the product at competitive prices.

Benefits

The agri-inputs value chain under the e-Choupal platform benefits farmers, ITC, Samyojak, and the provider of the products. Specifically,

• Farmer: The farmer benefits from customized knowledge and appropriate branded and high quality product at competitive prices. Better use of chemicals and fertilizers will ultimately increase the farmer’s yield and increase his income.

• ITC: ITC is able to increase its portfolio of product offerings and generate an additional source of revenue. For example, in 2004-05, ITC generated $4.2 million dollars of revenue selling chemicals and fertilizers. Further by providing soil-testing services at its labs, ITC is building a data warehouse of the properties of the soil in the villages that it operates. In the future, this data can be used by agri-inputs companies to generate more appropriate products for the farmer.

• Agri-Inputs Provider: The agri-inputs provider is able to add another channel of distribution to its portfolio. The e-Choupal channel, however, is the only channel that allows the provider to get more detailed information about its ultimate customer with obvious implications for targeting and product development. Thus the firm is able to increase its market size, develop new markets, and optimize development cost. For example, PI Industries has increased its market share in Madhya Pradesh from 12.3% in 2003 to 33% by 2005 after partnering with ITC to sell through the e-Choupal channel. In addition to the benefits outlined above,

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their experience in participation in the e-Choupal channel suggests a strong spillover effect of their brand sales in other, more traditional, channels.

• Samyojak: Distribution and management of the hub facilities is an additional source of revenue for the Samjoyak. Recall that the CA turned Samyojak lost a revenue stream as ITC shifted more of its procurement from the mandi to the hub. By co-opting the CA as a service provider at the hub and identifying clear revenue streams for him, ITC not only ensures that his overall earnings increase but is well diversified.

While we have illustrated the distribution / retail value chain using just one example, the possibilities are enormous. At the retail level, Choupal Sagar has become the destination of choice not only for agri-inputs but for several consumer goods as well. The distribution value chain has been leveraged, for example, in the distribution of liquefied petroleum gas (LPG) as a modern cooking fuel. In addition to the economic benefits it provides, the social benefits of transitioning from traditional to modern fuels on the health of rural women has been extensively documented.17

5. Financial Services Value Chain The last two sections focused on the bi-directional product movement between the farmer and the market. We now focus on provisioning of services via the platform using an example from financial services.

The financial system in India is categorized by an organized as well as the traditional (or informal credit market) sectors. The organized sector consisting of both banking and non-banking – including finance and leasing, insurance, mutual funds, and post office banks – businesses provide financial services to the consumers. The Reserve Bank of India (RBI) acts as the main regulator of credit in country’s financial system. While the Indian financial system is large in size and depth, two institutions dominate. Together the State Bank of India (SBI) and the Life Insurance Corporation of India (LIC) hold 52% of the outstanding stock of government securities approximately in equal proportions.18 SBI dominates banking in India with its 9018 branches across the nation, boasts of the largest consumer base, and commands an 18% market share in deposits and advances. By 2000, LIC had 100 divisional offices in seven zones with 2048 branches, over 680,000 active agents across India with a total of 117,000 people employed directly by the corporation. LIC’s market share of premiums stood at 87.22% in 2003-04; the remaining 12.78% is spread across 12 private companies offering life insurance.19

Credit and insurance are two of the most important financial services relevant for the agricultural sector. Agricultural credit is critical to maintaining the national GDP growth. Agricultural activity is also subject to both life and livelihood risks. In spite of

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the rural thrust in banking as well as insurance sectors, penetration levels have been low. A little over one-third of the rural population relies on local money lenders for credit. LIC's share of new rural policies as a percentage of total policies for the period 2000-02 is only about 18.18%.20

Traditional Model

Insurance firms face several challenges to increase penetration of insurance in the rural areas. First, there is little awareness of insurance as a risk management tool. Even LIC’s life insurance is only perceived as one of the many savings instruments. Second, buying an insurance requires proper documentation including proof of age, death certificates, first information reports (FIR) in case of an event. These are seldom available or easily obtained in the village. Since the insurance companies have no local presence and penetration of bank accounts is low, there is no easy way for the villager to send the premium to the insurance company. Furthermore, incomes streams of farmers (unlike that of an urban consumer) are highly variable. Thus maintaining regular premium payments becomes difficult and lapsation ratios are close to 50%. High lapse ratios are also caused by wrong selling, overselling, forced and bogus selling, bad service, ignorance, non-receipt of notices, and lack of follow-up by agents.21

The LIC (and other private-sector insurers) have traditionally sold insurance through agents (individual or corporate).22 These agents typically are based out of semi-urban or urban areas. Since their commissions are based on the size of the policies they sell, and to maximize their productivity, the agents have often focused their attention on relatively wealthy families. Furthermore, the agent commissions are more heavily weighted towards the first month premium leaving little incentive on his part to ensure that a consumer does not let his policy lapse. Post-insurance service is very poor and fraud is prevalent. Payment of claims is delayed averaging around 30-35 days in the industry; anecdotes of non-payment of claims are not uncommon. The cost of procuring a policy under this agent network is usually high and consists of commissions for agents as well as the development officer for the regional office under whom the agent works, costs for training agents, marketing and publicity, and other miscellaneous fixed costs.

e-Choupal Platform

ITC entered the insurance delivery business in the later part of 2003. To deliver insurance services via its e-Choupal platform, ITC first became an (corporate) insurance broker. This provided it the flexibility to offer the best of products from any of the insurance companies to the rural consumer, as opposed to being an agent of one insurance company and hawking only their products. The financial officers at ITC, associated with its hubs, undergo mandated training (100 hours over three weeks) and clear an exam conducted by the Insurance Regulation and Development Authority (IRDA). Subsequently, they work

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with the Sanchalak to create awareness for and market the insurance products to the farmer.23 Unlike the non-local agent before, a farmer now gets his insurance from the Sanchalak backed by ITC – the trusted name behind the e-Choupal brand. Premium collection is done by the Sanchalak at the villager’s doorstep thus ensuring timely collections. Furthermore, a farmer can expect better post-insurance services including provision of receipt for premiums paid, documentation for the policy statement, timely, premium reminders, etc. In the event of a claim, the average settlement of claims is less than 15 days; every effort is made to settle death benefits on the thirteenth day.24 It is too early to quantify lapsation ratios but it is expected to be significantly lower than before.

Furthermore, based on its understanding of the rural markets as well as feedback from the consumers, ITC provides valuable inputs to the insurance companies to customize product offerings to rural consumers. Specific features on some of the new products, for example, include flexible premium payments to account for the cyclical nature of farmer incomes, waiver of health check-ups, pre-existence of disease not required after fourth year if there was no claim in the first three years, and additional coverage of personal accident, permanent total disability and critical illness.

Benefits

• Farmer: The farmer gets better access to and superior service on the insurance products. He now purchases products that he understands and finds useful – through the choice offered to him – from a trusted individual. He can now avail of these products to mitigate some of the life and livelihood risks he faces.

• Sanchalak: The Sanchalak increases his income through commissions earned for generating business.

• ITC: Insurance becomes an additional revenue stream for ITC. For the current financial year, ITC has introduced financial services in about 30-40% of its e-Choupal areas targeting gross commissions of $180,000. Going forward, ITC’s key focus is to increase the depth and width of e-Choupal activation in the financial services domain.

• Provider – Insurance Company: By leveraging the more efficient e-Choupal platform, the providers increase their market penetration as well as significantly reduce their cost of reach. In the Bhopal branch in Madhya Pradesh it is estimated that the cost of reach will be reduced by 50%. Customer satisfaction has also improved. Furthermore, with feedback from ITC, it is able to develop new and more relevant products for the rural markets.

While the recent efforts have been in the area of life insurance, the model can be as easily leveraged for other general insurance, savings, and financing products. The platform has

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also been leveraged to offer other non-financial services including marketing and communication services – e.g., product demonstration – for agri-equipment manufacturers increasing the efficiency and effectiveness of delivery.

6. Capability Building

Using examples from three value chains we have thus far illustrated how the e-Choupal platform allows a local farmer an empowered access to markets for products / services – both as a producer and a consumer. While creating this market infrastructure is the first step towards value capture, ultimately the potential of such streamlined value chains as a business opportunity to ITC will be limited by the local resource capabilities. For example, while more efficient procurement and availability of quality inputs help increase farm incomes, since most farming in India is monsoon dependent, scarcity of water resources has an adverse impact on the productivity and quality of crops. Therefore, in the long run, initiatives to improve the water resource capability of rural India is essential to enhance farm productivity and quality and hence incomes of farmers allowing ITC to capture increased value.

Resource capability building as a market development activity can be undertaken at two levels – individual and community. We will demonstrate that by expanding the network to include non-governmental organizations (NGO), government agencies, and other domain experts, the e-Choupal platform infrastructure can be used for resource development activities and in the process strengthen the social infrastructure of rural India. ITC’s capability building initiatives are operated under a program called Sunehra Kal.25 We now illustrate the concept using the example of water and moisture conservation.

6.1 Capability Building at the Community Level: Water and Moisture Conservation

India is one of the wettest countries of the world with 1700 mm annual rainfall26. The total water requirement is estimated to be 605 billion cubic meters (BCM) in 200427 while the country receives an annual precipitation of 4000 BCM through rainfall. Approximately 85 percent of the country’s water consumption goes towards irrigation. Yet, only about 40% of the land is under irrigation and 67% of the cultivated area in the country faces severe moisture stress for 5 to 10 months a year. These dry lands contribute as much as 45% of the nation’s food basket – where crop production is low, unstable and highly vulnerable to seasonality. Growth in agriculture through improved yields and higher quality is thus closely tied to availability of water.

Traditional Approach

Over the past fifty years, India has spent close to $50 billion on developing water resources and another $7.5 billion on drinking water with little to show for the money.28

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There are several causes for the abysmal performance but one of the key issues is the historical top-down approach to irrigation provision29 and the resulting lack of ownership and participation from the actual users in irrigation planning and execution. Fortunately, in the last decade the government has initiated a reform process with a key focus on decentralization of water management under what has often been referred to as Participatory Irrigation Management (PIM). This is facilitated by formation of local user groups to take ownership for operations and maintenance of water resources.30 Several states have passed legislations or amended their irrigation acts to facilitate community based management of water resources through formation of Water User Associations (WUA) or Groups (WUG).

Typically the projects are implemented through a partnership between the state government irrigation departments and NGOs with the involvement of the WUAs; most notable experiments have been carried out in the states of Andhra Pradesh, Gujarat, and Maharashtra. While these experiments have generated initial success in expanding the area irrigated, several studies have alluded to its limited success in achieving adequate participation from the farmers.31 One simple proxy indicator to judge the “success” of these efforts is cost recovery which is reported to be about 10% of the project cost. Several reasons have been cited including lack of involvement of user groups in initial planning, inequity in water distribution amongst members of the group, inadequate enforcement of rules, overuse of water-intensive cultivation, lack of NGO expertise, etc. While these experiments are still new and it is too soon to draw conclusions, the studies point to the difficulty in sustaining these efforts in the long run.

e-Choupal Platform

ITC orchestrates capability building activities in collaboration with NGOs, domain experts, and the government. For water and moisture conservation activities, the Sanchalak mobilizes the village community and coordinates the initiatives to identify localized problems for specific and customized solutions. This is achieved through formation of WUGs whose members make contributions towards project costs, set rules for water use and charges, supervise construction and ensure levy of user charges. The Sanchalak is part of the WUGs that cover the e-Choupal villages. The Sanchalak, through the social capital he brings to the project, is essential to its success.

Typically, ITC invests about 75% of the project cost and the rest is contributed by the users32. ITC is involved very closely at every step of the process which entails the following: (a) selection of a credible NGO as an implementing partner, (b) working with the NGO on detailed project planning including detailed cost estimations to ensure efficiency and high quality, (c) identifying the best agents (not necessarily the implementing NGOs) for training and capacity building, (d) effective project management including regular and detailed

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monitoring and feedback to the NGO and ensure course correction if required, (e) undertaking meticulous physical and financial audits, and (f) impact assessment surveys to understand the nature of impact of different kinds of impact on hydrology, agriculture and incomes.33

In the past two years, these projects have impacted more than 1000 households in 100 villages covering an irrigation area of 2700 acres. A total of 150 structures have been created generating employment equivalent of 46,000 man days and increasing water availability by 42 million cubic feet. The projects were managed by 76 WUGs and the beneficiaries have contributed about 30% towards the project costs; contrast this to an average of 10% collections in government initiated projects. Preliminary statistics suggest that irrigation costs per acre have dropped by at least 25% to less than $138 per acre with the use of the e-Choupal platform.

Benefits

• Farmer: These projects lead to higher water availability as well as increase in the irrigated area leading to higher productivity, stable and improved yields, higher quality, lower costs, and eventually higher incomes. Results documented by e-Choupals in Madhya Pradesh have shown a 25% increase in productivity and incomes. For the poorer farmers, a community well often means the ability to grow an additional crop increasing his income by 100% for the season. These projects also generate additional employment increasing incomes.

• ITC: Improvement in farmers’ agricultural activity (see above) directly benefits e-Choupal procurement; it also enhances ITC’s relationship with the villagers.

• Sanchalak: Like the other farmers, a Sanchalak gets a direct economic benefit if his land is within the command area. Even when this is not so, we have observed that Sanchalaks get fully involved in the projects. Albeit intangible, the prestige associated with playing a critical role in bringing such projects and associated irrigation benefits that his fellow villagers derive turns out to be much higher reward for the Sanchalak.

• NGOs: Working through the Sanchalak, NGOs are more effective.

• Government: Its goal of improving the social infrastructure of rural India and break the cycle of dependent development now appears plausible and that too in a more effective and efficient fashion.

6.2 Other Initiatives

Cultivators account for about fifty-five percent of rural population; the remaining earn their livelihood as laborers or working off the farm. With per capita income in rural areas

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at less that $1 per day there is a limit to the view of the bottom of the pyramid (BOP) as a market without any serious effort towards market development. As the e-Choupal platform is used for both procurement as well as provision of products and services potentially targeting all rural consumers, resource capability building needs to target improving incomes of both farmers as well as non-farmers.

Several other initiatives in capability building – individual and community – under the broad umbrella of Sunehra Kal are being implemented. These include livestock development, women self help groups for micro-credit, women micro-enterprise for village garments, improved agricultural practices including organic manure production techniques like vermicomposts, Nadeps34, use of springler irrigation, etc. While these initiatives allow ITC to ultimately capture the benefits in its procurement, distribution and retail value chains, in the process they also meet the larger societal need to improve the standards of living of rural India.

7. Conclusion To ensure that the larger population of India – and not just the urban minority – gains access to a minimum standard of living necessary for a dignified existence, it is imperative that the country sustain a compounded growth rate of 9-10% per annum. This high rate of growth, however, is impossible without an inclusive approach that enhances the competitiveness of the Indian farmer – who constitutes two-thirds of India’s workforce – effectively linking him to remunerative opportunities in world markets. The task of poverty alleviation begins by considering the BOP as a profitable market development opportunity.

Several agencies – government and non-governmental – are serious about this enormous task. Governments, unfortunately, are hampered by their politics and bureaucracy. While several NGOs have shown some success through their dedicated work, most are fiscally dependent on aid and achievements are sporadic and often not scalable. In this chapter we have illustrated how ITC’s e-Choupal acts as a business platform to connect farmers to global markets creating a market ecosystem. Specifically, we have demonstrated the power of the platform to improve the efficiency of the farm-to-market value chain, allow for efficient and effective distribution and retail of goods and services to the villages, as well as to improve the capability of the rural population and increase their income streams.

The e-Choupal platform architecture is a 3x3 infrastructure operating on three key business principles. The resultant network organization has several important characteristics. It allows for empowerment of the community through real-time information and customized knowledge. With freedom of choice and local management with self-interest through the Sanchalak, it facilitates development of community-

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responsive grassroots organization. The system maintains efficiency through competition inherent in choice. It overcomes the challenges of rural landscape through virtual aggregation giving it the power of scale. By collaborating with appropriate providers of products and services, it delivers the benefits of specialization. Finally, with anchor business support by ITC – the network orchestrator – the platform provides an increasing returns ecosystem. Thus the 3x3 architecture, in conjunction with the three business principles, effectively deals with the three fundamental characteristics of rural India while side-stepping the three infrastructural inadequacies. In the process ITC creates a “virtuous cycle” through increased incomes and trust building and captures the latent value in the dormant markets of rural India.

The e-Choupal initiative has won several awards including the Inaugural World Business Award (2004)35, the Wharton-Infosys Enterprise Business Transformation Award 2004 for the Asia-Pacific region36, and the Development Gateway Award 2005 37. While the e-Choupal effort is central to the success of the International Business Division of ITC, it also has had a significant effect on ITC’s overall business strategy. Mr. Y.C. Deveshwar in his speech at the Annual General Body Meeting of 2003 said,

“Your Company, as a premier Indian enterprise, consciously exercises the strategic choice of contributing to, and securing the competitiveness of the entire value chain of which it is a part. This philosophy has shaped the vision for your company – the vision that I had referred to in earlier years as A Commitment beyond the Market. It is your Company’s strategic intent to leverage this unique sourcing strength in conjunction with its traditional capabilities related to branding, trade marketing and distribution to create growth opportunities in value-added branded foods.”

We have already seen how ITC’s Foods Division was able to leverage the e-Choupal sourcing network to introduce and excel in branded food products. The company envisages leveraging e-Choupal network to assist its new garments division in extending its value chain from (cotton) fiber-to-fashion. The e-Choupal platform with its retail and distributional capabilities also allows these divisions to target the vast rural markets.

ITC is also investing heavily in capability building initiatives. The company recognizes that these investments have a very long gestation but will ultimately position the e-Choupal infrastructure as a valuable instrument for transforming village populations into vibrant economic organizations. ITC’s approach on large investments in capability building finds support in the insights of Porter and Kramer (2002) on context-focused corporate philanthropy where they argue that if systematically pursued to maximize value created, such activities can offer companies a new set of competitive tools that not only

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will provide economic justification but in the process also ‘unlock a vastly more powerful way to make the world a better place’. As we have articulated in this paper, ITC’s initiatives in capability building – leading to improved agriculture as well as better incomes for farmers and non-farmers – allows them to capture benefits in procurement as well as in retail and distribution on a more sustainable basis.

Within the company and its divisions, each of the modules (e.g., various services of the e-Choupal platform) operates as a profit center. More recently, ITC has adopted the triple bottom line approach to comprehensively measure contributions along economic, social, and ecological dimensions. Effective 2004, the company has begun reporting ITC’s contribution to socio-economic and environmental priorities based on the Sustainability Reporting guidelines of the Global Reporting Initiative38. Over the next 7-10 years ITC’s vision is to create a network of 20,000 e-Choupals and over 700 Choupal Sagars entailing investments of nearly $1.15 billion, thereby extending coverage to 100,000 villages – representing one sixth of rural India.

Acknowledgements This document would not have been possible without assistance from several people at ITC. In particular, we wish to thank Rajnikant Rai, Shailendra Tyagi, M. Srinivasa Rao, C.V. Sharma, and Abhijit Roy of ITC-IBD and Ashesh Ambasta of ITC Corporate for their time and patience for numerous discussions on various initiatives and comments on earlier drafts of the paper.

References

1. Anupindi, R. and S. Sivakumar, “Supply Chain Reengineering in Agri-Business – A Case study of ITC’s e-Choupal”, To appear in Supply Chain Issues in Emerging Economies, Hau L. Lee (Editor), Kluwer Academic Publishers, 2006.

2. Porter, M. and M. Kramer, “The Competitive Advantage of Corporate Philanthropy”, Harvard Business Review, December 2002.

3. Prahalad, C.K. and A. Hammond, “Serving the World’s Poor Profitably”, Harvard Business Review, September 2002.

4. Prahalad, C.K. Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton School Publishing, 2005.

5. Upton, D., “ITC’s e-Choupal Initiative”, HBS Case N9-604-016, October 2003.

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Physical39,40

• % of villages connected by all-weather roads

40%

• % of villages with no phone

14%

• teledensity 1.5% Social41

• Illiteracy levels 60% (females) ; 40% (males) • % of population with

access to sanitation 19%

• Access to hospital beds 150 per million Institutional42

• % with bank accounts 30% • % with access to formal

credit 13%

Table 1: Status of Infrastructure in Rural India: Selected Statistics

Figure 1: Cycle of Low Equilibrium

Lowvalue addition

Lowmargins

Lowproductivity

Weak“market orientation”

Low risktaking ability

Lowinvestment in farm

Lowvalue addition

Lowmargins

Lowproductivity

Weak“market orientation”

Low risktaking ability

Lowinvestment in farm

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Figure 2: Current e-Choupal regions of Operation

Figure 3: The Reengineered Soy Procurement Supply Chain

Wheat

Soybean

Soybean& Wheat

Coffee

Aqua

Wheat

Soybean

Soybean& Wheat

Coffee

Aqua

Farmer

Mandi

ITC

Other buyers

Processing

Price discovery

Authorized price

e-choupal(Internet kiosk)

Sanchalak

Market Conditions,Weather, Best Practices,Community, etc.

Commission Agents

Farmer

Mandi

ITC

Other buyers

Processing

Price discovery

Authorized price

e-choupal(Internet kiosk)

Sanchalak

Market Conditions,Weather, Best Practices,Community, etc.

Farmer

Mandi

ITC

Other buyers

Processing

Price discovery

Authorized price

e-choupal(Internet kiosk)

Sanchalak

Market Conditions,Weather, Best Practices,Community, etc.

Commission Agents

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Traditional e-Choupal Platform Price Discovery Mandi Village Quality Inspection Visual Scientific Weighing Manual (w/ material loss) Automatic (no material loss) Choice Effectively none (only

Mandi) At least two (ITC hub & Mandi)

Prices Unpredictable (Mandi is a spot market)

One channel (ITC hub) with fixed price

Sell-to-cash cycle 1-2 days 3-4 hours Distance Travelled to sell 20-25 kms 20-25 kms Labor and Handling More Less Table 2: Comparison of Traditional vs. e-Choupal Platform model of Procurement

Mandi Supply Chain e-Choupal model Transaction Farmer ITC Farmer ITC Freight 120 120 120 0 Labor / Handling 50 40 0 40 Commission 150 100 0 50 Handling Loss 50 0 Bagging 75 75 Cash Disbursement Costs 50 Total (for each Stage) 370 335 120 215 Total for the Chain 705 335

Table 3: The e-Choupal Procurement Advantage (All prices are in Rupees per metric Ton)

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1 Purchasing Power Parity. 2 P. Agrawal and A. Agrawal, “Implementing a Rural Roads Project in Madhya Pradesh”, in India Infrastructure Report 2004, Oxford University Press, pages 258-265. 3 While overall growth has averaged 6-7%, agricultural growth has remained at about 3.2%. Public sector investments in agriculture have in fact registered a decline of 29% from 1985-2001. Under the ninth plan (1997-2002) only about 53% of the irrigation target was realized. As a share of total government expenditure, rural development expenditure declined from 33.23% in 1990-91 to about 12.19% in 2000-01 [Source: Muller, A. and R. Patel, “Shining India? Economic Liberalization and Rural Poverty in the 1990s”, Institute for Food and Development Policy, Policy Brief No. 10, May 2004]. 4 Even in the western world where ICT is well developed, there are very few examples of business models that have succeeded by charging for information. 5 A commission agent can either be a seller’s (farmer’s) or a buyer’s (e.g., ITC) agent. 6 Quantifying this benefit will require a detailed econometric study that ITC plans to commission shortly. 7 Several agencies – government or private – have in the past try to sell to the farmer, an act that asks a farmer to part with his money. If not done right, its power to build a trusting relationship is questionable. 8 Agricultural Statistics at a Glance, August 2004. IFFCO, New Delhi. 9 whereby increased production and yield were made possible by expansion of farm areas, double-cropping, and use of high yielding seed varieties. 10 ITC’s Foods Division is part of ITC’s FMCG (Fast Moving Consumer Goods) segment of the business which includes Cigarettes, Foods, Lifestyle Retailing and others. 11 Rupees (Rs.) is the Indian currency; 1 US dollar = Rs. 43.50 12 Discussions with S. Tyagi, V.P. of Marketing, ITC-IBD. 13 Wheat is an exception whose yield is at the world average but still below the best in the world 14 The government has an infrastructure of agricultural extension centers to disseminate information regarding agricultural practices. 15 Reidhead P W, Gupta S and Joshi D. 1996. State of India’s Environment Report; A Quantitative Analysis. New Delhi: Tata Energy Research Institute. pp. 31 [Report no. 95EE52] 16 Working for ITC-IBD on a retainer basis. 17 Susan McDade, “Fueling development: the role of LPG in poverty reduction and growth”, Energy for Sustainable Development l Volume VIII No. 3 l September 2004. 18 Tapen Sinha, “An Analysis of the Evolution of Insurance in India”, in International Insurance and Financial Institutions: Global Dynamics and Local Contingencies edited by J. David Cummins and Bertrand Venard, University of Pennsylvania Press (forthcoming). 19 Ibid. 20N.C. Sharma, Managing Director at the CII's Sixth Insurance Summit. This precipitous decline from a healthy 55.53% is a consequence of a new but more appropriate definition of the rural sector by the Insurance Regulation and Development Authority (IRDA). IRDA defines “rural sector” to mean any place as per the latest census which has: (i) a population of not more than five thousand; (ii) a density of population of not more than four hundred per square kilometer; and (iii) at least seventy five percent of the male working population is engaged in agriculture. 21 N.V. Subramanyan, “Lapsation of Life Insurance Policies – A Critical Study”, The Journal of the Insurance Institute of India, Volume XXX, July-December 2004. 22 The government’s post-office network is another channel for insurance. More recently (since 2002) insurance is being sold through banks. 23 Though the Sanchalak is the last mile creating awareness in the choupal villages, ITC obtained an exemption from IRDA to allow the Sanchalak do this task without undergoing broker’s training; this was possible as the Sanchalak was working with a trained financial agent and the model provides for an effective way to reach the rural segment 24 In Hindu death rites, the 13th day carries a special meaning and is concludes the mourning period. 25 Means “Brighter Tomorrow”. 26 In comparison, the United States has only 200 mm. 27 Yogendra Kr Modi, President, FICCI. Speech given at the Water Summit 2004 : Public - Private Partnership for Water Conservation & Management, November 18, 2004, New Delhi.

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28 Managing Water Resources – Communities and Markets, Working paper, Center for Civil Society, March 2003. 29 Traditionally, the state government would build the irrigation infrastructure and hand it over to the local government for management without any input regarding local needs. 30 The idea of community management of water resources is catching on worldwide and several countries have experimented with them. 31 See for example, (a) Keith Oblitas and J. Raymond Peter , “Transferring irrigation management to farmers in Andhra Pradesh, India” World Bank, Washington DC, 1999; (b) Jairath, J. “Participatory Irrigation Management – Experiments in A.P.”, Economic and Political Weekly, October 1999; (c) Jairath, J., “Participatory Irrigation Management in Andhra Pradesh - Contradictions of a Supply Side Approach, Paper presented at South Asia Regional Poverty Monitoring and Evaluation Workshop New Delhi, June 8-10, 2000; (d) Amita Shah, “Who Benefits from Participatory Watershed Development: Lessons from Gujarat?”, International Institute for Economic Development, Gatekeeper Series No. 97, 2001. 32 http://www.itcportal.com/sustainablity_report/page_39.htm 33 Ashesh Ambasta, Head of Corporate Social Responsibility, ITC Corporation (Personal Communication). 34 It is a method to make organic composts using plant and animal wastes efficiently. It is named after N.D. Pandharipande (also popularly known as “Nadepkaka”), a farmer in Maharashtra (India) who invented it. Also see “Nadep Method of compost manufacture: India”, The Web of Information Development (WIDE), Volume 4 (http://tcdc.undp.org/experiences/vol4/content4new.asp). 35 The award us recognizes business-driven initiatives that make a difference to society at the national level, instituted by the United Nations Development Program (UNDP), the International Business Leaders Forum and the International Chamber of Commerce. 36 The award recognizes visionaries and organizations that use technology creatively to revolutionize their industries. 37The award recognizes e-Choupal’s impact in enabling millions of farmers in India to improve their livelihoods with access to information on growing and marketing their products. The award is sponsored by T-Systems, of Germany. 39 Mahesh Uppal, “Rural telephony: the missing link”, Rediff.com, August 30, 2004 40 A. Jhunjhunwala, et. al., “Enabling Rural India with ICT Initiatives”, TeNeT Group, IIT Madras, India 41 Census of India, 2001. 42 Srivastava and Basu, “India: Scaling-up Access to Finance for the Rural Poor”, in Scaling Up Poverty Reduction: A Global Learning Process and Conference, Shanghai, May 25–27, 2004