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COVER STORY ITC's Big Bang Blending diverse skills and leveraging its distribution muscle, the tobacco giant is unleashing a welter of new businesses. An inside account of the silent revolution. By Debojyoti Chatterjee
Ashtrays are ubiquitous inside the pristine white Virginia House, ITC's imposing corporate headquarters in Chowringhee, Kolkata. That's because puffing cigarettes is de rigueur here in the heart of India's largest cigarette maker. On the second floor-where the directors of the Rs 8,816 crore company sit in their burnished wood panelled chambers-each closet in the private wash-rooms has a porcelain ashtray discreetly placed next to the WC. So it's a bit curious when you're sitting in Chairman Y.C. 'Yogi' Deveshwar's sprawling room and one of his senior colleagues hands you plastic jars filled with unmarked sachets. One of the jars is labelled 'wild banana', another, 'cinnamon mint' and a third, 'pineapple toffee'. ''Try them,'' urges Deveshwar, like a proud father as you tentatively pop a 'wild banana' into your mouth and taste the strange, but likeably flavoured boiled sweet. Confectionery, like the exotically named three, is just one of the dozen-odd projects that are in the incubation stage at ITC, where more than 80 per cent of the company's sales come from cigarettes and tobacco. But that won't last. In the next five to seven years, ITC wants to change that proportion and generate as much as 40 per cent of its sales from non-tobacco diversifications. Many of those will be brand new businesses. Like ITC's lifestyle retail business, which it recently kicked off with the Wills Sport brand of relaxed apparel, the Expressions range of greeting card and gifts business, and the upscale ready-to-eat packaged foods business, where it has just tip-toed in with a couple of soft launches like that of the canned Dal Bukhara. In consultant-speak, ITC is leveraging competencies from its existing businesses-the most notable is the tobacco business' distribution-expertise-to tap new opportunities. If all goes well, these diversifications will add Rs 2,000 crore to ITC's topline by 2006. But many others contributing to the non-tobacco revenues are old businesses-some re-purposed beyond recognition, like the group's international business and its infotech venture, and others completely turned around and revitalised like the paper and paperboards business. Yet, it's the clutch of new businesses, many of them still in the nascent stage, that Chairman Deveshwar seems excited about. He's not the only one. About 800 km away from Virginia House's throwback-to-the-Raj ambience, in sweltering Tillapudi village, 25 km from the eastern coast, Bodapati Rama Rao, a 45-year-old aqua farmer, used to think a computer at home would attract tax officials as it would lend an air of affluence that a farmer could ill-afford, especially when he would be named a pratinidhi or lead farmer by ITC in his area. Locals say it took a bit of explaining of the e-choupal concept before he saw the benefits of information flow. Today, Rama Rao refers to ITC as the talli (mother) company and is at ease with the mouse and keyboard and his fluent Telugu is meshed with words like 'market trends', 'exporters', and 'price patterns'.
Flustered? Well, aquachoupal.com is one of the three web-based initiatives (e-choupals in company-speak) that ITC's international business division has launched as part of its strategy to vertically integrate its sourcing operations. Apart from the aquachoupal, launched in February 2001, there is the soyachoupal.com launched for soya farmers in Madhya Pradesh in June 2000, and plantersnet.com for coffee growers in Karnataka in December 2000. ''The aim is to help enhance farm productivity, improve farm-gate price realisation and to cut transaction costs,'' says S. Sivakumar, chief executive, International Business Division, ITC. The choupals act as facilitators for inputs to farmers-in the aqua, soya, and coffee domains. There's more. Currently, in the three states, ITC has set up 235 internet kiosks (each managed by a pratinidhi or sanchalak like Rama Rao), which cater to 10,000 farmers and cover over 250,000 hectares of land. By 2003, it plans to set up 3,000 kiosks to cover 100,000 farmers. The idea, explains Sivakumar, is to also use this network as a distribution channel for other products. In fact, a pilot project to sell LPG cylinders using the network is already on. An Imperfect Smoke The rationale for ITC's latest burst of diversifications is simple. Although ITC has a 70 per cent share, in terms of volume, of the Rs 11,000-crore, 97 billion sticks cigarette market, volumes have been stagnant in recent years-they declined in the last three years. And although thus far, ITC has been sacrificing volumes over margins to drive profits, an inevitable shift of consumers away from the smoking habit is bound to take its toll. Plus, there is the aspect of deploying cash that the company generates. In 2000-01, gross income rose to Rs 8,816 crore from Rs 8,069 crore, and net profits jumped from Rs 792 crore to Rs 1,006 crore. Estimated cash flow for the year was over Rs 1,150 crore. That apart, the company is sitting on reserves and surplus to the tune of Rs 3,300 crore. ''We have a strong balance sheet and will very soon be debt-free,'' says Finance Director, K. Vaidyanath. Typically, cash-rich companies like ITC turn to diversification. So has ITC. In the 1970s, it diversified into hotels and the manufacture of paper and paperboards, both moves prompted by the macro-economic environment: the government's encouragement to ventures that would earn foreign exchange (hotels fitted that objective) and its stress on self-reliance and import substitution (paper and paperboards fitted that). In the 1980s, ITC added to its repertoire financial services and retailing of branded edible oils. In the 1990s, ITC's craze for diversification got even stronger. Former chairman K.L. Chugh unfurled an array of diversifications, including power and infrastructure. Of course, they never took off, partly owing to strong resistance from BAT, the UK-based tobacco major that has a 33 per cent stake in ITC. BAT insisted that ITC stick to BAT's core businesses, which were tobacco and financial services. Thus, ITC Classic set up a financial services company with Peregrine of Hong Kong and a mutual fund with Threadneedle, BAT's financial services arm. The fall-out was disastrous. In the mid-1990s, ITC's international business division (IBD) was embroiled in an unseemly scam because one of its partners, the Chitalias, fell out with the company and sued it. ITC was also accused by the enforcement department of violating FERA through IBD. On another front, its financial services business never really took off and ITC had to finally sell it off to ICICI. Meanwhile, promising businesses like hotels, and paper and paperboards (which is run by subsidiary ITC Bhadrachalam) suffered from lack of attention. This was also a period marked by a battle between the local management and BAT, with the latter ramping up efforts to get greater control of ITC.
Partly the problem lay in way the group's management was structured. The board was directly responsible for executive decisions. For instance, there was a director in charge of tobacco, one in charge of finance, another in charge of financial services, one for paper and printing, and one for IBD. This led to serious turf battles, since tobacco was the main earner the director in charge obviously wielded a fair clout. As it happened, he was also closest to BAT. Things changed in 1994, when Deveshwar, a long-time ITC veteran who had been hand-picked in 1991 by the Government of India to head Air India, returned to ITC as Chairman-designate (he assumed charge in 1996). Deveshwar not only managed to stave off BAT's takeover attempt, but also restructured the company. The number of executive directors was reduced from eight to four (one-third of the board's total size), and it became the strategic management arm of the company and not the executive one. Executive decisions were left to the various business divisions, headed by a chief executive-led divisional management committee. ''We developed a decentralised structure with distributed leadership,'' says Deveshwar. Adds Anand Nayak, Executive Vice-President (Corporate HR): ''Our new structure balances the need for separateness with that for integration.'' A Fresh New Blend
But the big change has been the way in which ITC now looks at each of its diversifications. Each of them is carefully nurtured and incubated before being launched. And more important, each one of them is based on a blend of skills that the company already has. Deveshwar likes to call the new ITC ''a holding company with a venture capitalist mindset''. And like all good VCs, ITC is a stickler for doing the right things. ''There is a bio-diversity of skills in ITC,'' says Deveshwar, ''and by blending the capabilities that exist in different parts of the group, we want to look at new opportunities.'' ITC's lifestyle retailing business division is an example of that alchemy. In that business, where ITC has kicked off with the Wills Sport brand of top-end relaxed apparel, the company has blended three of its existing strengths: the brand equity of Wills, ITC's distribution network of 2.5 million (1 million directly and 1.5 million indirectly) cigarette retailers, and services skills from the group's hotels business. Here's how: the majority of the Wills Sport outlets (35 will roll out across the country by August) will be franchised to ITC's wholesalers, with whom the company enjoys long-standing relationships; and, sales personnel at all the outlets will be trained by ITC Hotels. Likewise, the just-launched greeting cards and gifts business, which ITC expects to balloon to a Rs 250 crore business in the next five years, draws on ITC Bhadrachalam's skills of high quality paper and board manufacture as well as ITC's packaging and printing business. Says Chand Das, Chief Executive of the fledgling division, ''We don't have to struggle with issues of processing and printing. The roll-out was very quick on this account.'' Das took just six months from conception to coverage in 74 markets. ''It's possibly the fastest roll-out anywhere,'' gushes Chairman Deveshwar, whose chambers have a pride of place for a bright display rack of the new Expressions range of cards. The recent web-initiatives launched by the company's international business division too draw on existing strengths: the group's infotech subsidiary ITC Infotech structured the entire virtual vertical integration model and metamarkets for inputs like pesticides, fertilisers, etc., that the farmers in different states can use. But it has been a long haul. When Deveshwar took charge in 1994, he was faced with problems on many fronts. Although the group's core business-cigarettes and tobacco-were doing fine, morale through the ranks was low. Almost the entire board with the exception of Deveshwar and B. Mitter were taken into custody by the enforcement authorities and the non-executive directors had questioned the transparency of ITC's operations. And lack of focus on existing businesses like hotels and paperboards was taking its toll. ''We had to take these core businesses up to world-class standards and demonstrate our commitment to them,'' says Deveshwar. 1 2 |
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