ITC: Diversification

Strategies for Market

Leadership
 ITC's diversified portfolio comprises:

Types of Corporate Diversification

Cigarettes & cigars

At a general level…
Product Diversification:
• operating in multiple industries

Geographic Market Diversification:

• operating in multiple geographic markets

Product-Market Diversification
• operating in multiple industries in multiple
geographic markets
 ITC Timeline
August 24,1910 ITC was incorporated under the name of
‘Imperial Tobacco Company of India Ltd.’

1925 ITC’s Packaging and Printing Business was

setup as a strategic backward integration for
ITC’ cigarettes business

August 24, 1926 Expansion by purchasing the plot of land

situated at Kolkatta

1975 ITC launched Hotels business with the

acquisition of a hotel in Chennai which was
rechristened ‘ITC – Welcomgroup Hotel
Chola
 Contd…
1979 ITC entered the paperboard,s
business by promoting ITC
Bhadrachalam paperboards Limited
which today has become market
leader in India.

1985 ITC setup Surya Tobacco Co. in Nepal

as an Indo- Nepal British joint
venture.
1990 ITC acquired Tribeni Tissues Ltd, a
specially paper manufacturing
company and a major supplier of
tissue paper too cigarette industry.
The merged entity was named the
Tribeni Tissues Division (TTD)
 Contd…
1990 ITC leveraging its agri- sourcing
competency, ITC setup the Agri-
Business Division for export of agri-
commodities. The division is today
one of the India’s largest exporters.

2000 ITC launched the line of high quality

greeting cards under the brand
name “EXPRESSIONS”. ITC also
entered the lifestyle retailing
business with “WILLS”.
 Contd…
2000 ITC separated its IT business
into a wholly owned subsidiary
“ITC INFOTECH INDIA
LIMITED” to more aggressively
pursue emerging opportunities
in this area.
2001 ITC forayed into food business
and began with “Kitchens of
India” ready to eat Indian
Gourmet dishes.
 Contd…
2002 Safety Matches initiative

2003 Marketing of aggarbattis

(Incense sticks)
2005 ITC introduced “Essenza Di
Wills” exclusive range of fine
fragrance and bath body care
products for men and women.
 The Strategic Management Process
External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Internal
Analysis Implementing
Corporate
Diversification
 Segment Results 2005/06
Rs. crores
Actuals Actuals

2005-06 2004-05 Goly (%)

Segment Results

a) FMCG - Cigarettes 2709 2289 18.3

- Others (172) (195) 12.0
Total FMCG 2537 2094 21.2
b) Hotels 258 141 83.1
c) Agri Business 91 96 (5.8)
d) Paperboards, Paper & Packaging 351 280 25.5

Total 3237 2611 24.0

Less : i) Interest (Net) 12 42 (71.9)

ii) Other un-allocable expenditure
net of un-allocable income (44) (105) 58.1

PBT (Before Exceptional Items) 3269 2673 22.3

 Per Capita Adult Cigarette Consumption
(Sticks)

1753
1662

1190

561
488

141

USA China Pakistan Nepal India World Avg.

Luxury hotel rooms - East Asia

80000
70000
60000
50000
40000
30000
20000
10000
0

India
Bangkok

Singapore
HongKong

Malaysia
Integration and Diversification

Integration

Backward Forward

Diversification
Other Current Other
Businesses Businesses Businesses

No Unrelated Related Many

Links Links
 ITC Corporate Strategy
Sustain multiple drivers of growth,
matching internal capabilities with
emerging market opportunities.
Pursue world class competitiveness in all
businesses and across the entire value
chain.
Best in class in terms of
Internal Vitality
Market standing
Profitability
Strategy of organization and governance
processes geared to manage multiple
businesses.
Blend core strategies and leverage ITC
umbrella strengths to create new avenues
of growth
Ansoff matrix:Ansoff pointed out that a diversification strategy stands apart from
the other three strategies. The first three strategies are usually pursued with the
same technical, financial, and merchandising resources used for the original
product line, whereas diversification usually requires a company to acquire new

skills, new techniques and new facilities

Competitive Advantage

If a diversification strategy meets the

VRIO criteria…
Is it Valuable?

Is it Rare?
Is it costly to Imitate?

Is the firm Organized to exploit it?

…it may create competitive advantage.

Value of Diversification

Two Criteria

1) There must be some economy of scope

2) The focal firm must have a cost advantage over

outside equity holders in exploiting any
economies of scope
 When do we diversify?
When a company runs out of growth
opportunities in the core business and not
before!
When diversification results in creation of
value
ITC diversified status originates from its
corporate strategy aimed at creating
multiple drivers of growth anchored in its
time-tested core competencies, unmatched
distribution reach, superior brand building
capabilities, effective supply chain
management and acknowledged service
skills in hotelier
 Value of Diversification

Business X + Business Y + Business Z Value

Independent: equity holder could buy shares of each firm

Focal Firm

Business X
Economies
Of Business Y Value
Scope
Business Z

Combined: equity holder buys shares in one firm

Economies of Scope
Operational Economies of Scope
Sharing Activities
• exploiting efficiencies of sharing business
activities

Spreading Core Competencies

• exploiting core competencies in other businesses
• competency must be strategically relevant
Economies of Scope

Financial Economies of Scope

Internal Capital Market
• premise: insiders can allocate capital across
divisions more efficiently than the external capital
market
• works only if managers have better information
• may protect proprietary information
• may suffer from escalating commitment
Economies of Scope

Financial Economies of Scope

Tax Advantages

• transfer pricing policy allows profits in one

division to be offset by losses in another division
• this is especially true internationally

• can be used to ‘smooth’ income

Economies of Scope
Anticompetitive Economies of Scope
Multipoint Competition
• mutual forbearance
• a firm chooses not to compete aggressively
in one market to avoid competition in another
market

Market Power
• using profits from one business to compete in
another business
• using buying power in one business
to obtain advantage in another business
 WHEN DOES DIVERSIFICATION
START TO MAKE SENSE?
Attractiveness Test-The industry must be
attractive
Cost of Entry Test - Cost has to be
reasonable ( Catch 22)
Better off Test - Diversification results in a
competitive advantage and creation of
value.
How to Diversify
Find ways to enter new industries
Decide whether the businesses related to
each other or not?
Strengthen the performance of the
businesses you’ve got
Get rid of the bad ones that can’t be fixed
Fix the bad ones that can be fixed
STRATEGIES FOR ENTERING
NEW BUSINESSES
• 1. Acquire existing firm in
target industry
• 2. Start new company internally
• 3. Form joint venture
Imitability of Diversification
Duplication of Economies of Scope

Less Costly-to-Duplicate Costly-to-Duplicate

Employee Compensation Core Competencies

Tax Advantages Internal Capital Allocation

Risk Reduction Multipoint Competition

Shared Activities* Exploiting Market Power
(codified/tangible) (tacit/intangible)

*may be costly depending on relationships

ACQUIRING AN EXISTING
COMPANY
Most popular approach to
diversification
Advantages
Quicker entry into target market
Hurdling certain entry barriers
Technological inexperience
Gaining access to reliable suppliers
Being of a size to match rivals in
terms of efficiency & costs
Getting adequate distribution access
 DIVERSIFICATION VIA
INTERNAL STARTUP
Ample time exists
Incumbent firms slow in responding
It involves lower costs than
acquiring existing firm
Firm already has most of needed
skills
Additional capacity will not
adversely impact supply-demand
balance in industry
New start-up does not have to go
head-to-head against powerful rivals
 DIVERSIFICATION VIA
JOINT VENTURES
Uneconomical or risky to go it alone
Pooling competencies of two partners provides
more competitive strength
Foreign partners needed to surmount
Import quotas
Tariffs
Nationalistic political interests
Cultural roadblocks
DRAWBACKS OF JOINT VENTURES
Raises questions about -
Which partner will do what &
Who has effective control
Requires precise agreements
 Related Diversification
Are the businesses that we are divesting into related to one
another and if so, how?
Concept:
• Exists among different businesses when their value chains are
sufficiently similar to offer opportunities
• Offers competitive advantage potential of
Lower costs
• Efficient transfer of
Key skills
Technological expertise
Managerial know-how
• Use of a common brand name
• Presence of strategic fit in a diversified firm’s portfolio, along
with corporate management’s skill in capturing benefits of the
interrelationships makes related diversification capable of being
a 2 + 2 = 5 phenomenon
Types of Strategic Fit
Several lines of business with a strategic fit that becomes a
strategic advantage
 RELATED DIVERSIFICATION
& STRATEGIC FIT
• STRATEGIC FIT can be based on
Shared technology
Common labor skills
Common distribution channels
Common suppliers & raw materials sources
Similar operating methods
Similar kinds of managerial know-how
Ability to share common sales force
Customer overlap
Any area where meaningful sharing opportunities exist in businesses’
value chains
COMMON APPROACHES TO
RELATED DIVERSIFICATION
Entering businesses where sales force, advertising, & distribution
activities can be shared
Exploiting closely related technologies
Sharing manufacturing facilities
Transferring know-how & expertise from one business to another
Transferring firm’s brand name & reputation with customers to a new
product/service
Acquiring new businesses to uniquely help firm’s position in existing
businesses
Value of Related Diversification
CONCEPT: ECONOMIES OF
SCOPE
Utilize strategic fits to gain cost or other
competitive advantage.
Economies of scale use size to gain
advantage
• Arise from ability to eliminate costs by
operating two or more businesses under
same corporate umbrella
• Exist whenever it is less costly for two or
more businesses to operate under
centralized management than to function
independently
• Cost savings opportunities can stem from
interrelationships anywhere along
businesses’ value chains
 PEST analysis
Political:- Economic :-
Huge burden of VAT. Profit margin is high
Excise duty raised by 5%. Other forms of cheap tobacco
intake.
Ban on communication.
Smuggling.
Luxury Tax In 10 States
.

Socio-Cultural :- Technology:-
Becoming status symbol. ITC InfoTech
Changing attitude E- choupal
towards tobacco
(No Tobacco day May 31).
 Change in lifestyle.

• .
 SWOT analysis
STRENGTHS WEAKNESS
BRAND ITC
DEPENDENCE ON TOBACCO
DISTRIBUTION NETWORK NEGATIVE CONNECTION TO
MANAGEMENT TOBACCO
DIVERSIFICATION

OPPORTUNITIES THREATS
RURAL MARKETING COMPETITION FROM DOMESTIC
E-CHOUPAL AND INTERNATIONAL PLAYERS
LOW PER-CAPITA INCREASING TAX ON CIGRAETTES
CONSUMPTION, PERSONAL BAN ON CIGARETTES
CARE PRODUCTS ADVERTISEMENT
REGULATORY RESTRICTIONS ON
CIGARETTES
 Risks
• Diversification is the riskiest of the four strategies
presented in the Ansoff matrix and requires the most
careful investigation. Going into an unknown market with
an unfamiliar product offering means a lack of experience
in the new skills and techniques required. Therefore, the
company puts itself in a great uncertainty. Moreover,
diversification might necessitate significant expanding of
human and financial resources, which may detracts focus,
commitment and sustained investments in the core
industries. Therefore a firm should choose this option
only when the current product or current market
orientation does not offer further opportunities for
growth. In order to measure the chances of success,
different tests can be done:
The attractiveness test: the industry that has been
chosen has to be either attractive or capable of being
made attractive.
The cost-of-entry test: the cost of entry must not
capitalize all future profits.
The better-off test: the new unit must either gain
competitive advantage from its link with the corporation
or vice versa.
 Today after 100years
• Company portfolio of products have----50Brands
650 Stock keeping units
ITC’s product availability at 6million retail outlets in country
ITC’s factory hotel office e choupal -location ownership—6500 in India
18 0wned factories ---195 outsourced factories
100 Hotels at 80 locations
Exports-to 90 countries
HR-TEAM—26000People
E choupal 40,000villages
Social initiatives
Water harvesting –watershed development-
Supplementary education-reach200,000school children in rural areas
Woman empowerment—20000 Woman entrepreneurs
Financially YEAR 2009-10
Gross turnover-26259.60crores
Profit after tax -4061crores
 BCG Matrix
Stars:- Question
Hotels Marks:-
Paper ITC InfoTech
boards/Packagin FMCG-others
g.
Agri business
Cash Cow:- Dogs:-
FMCG-Cigarettes Branded
apparels.
Packaged
products.