WorldAcademics

World Academics Journal of Management

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World Acad. J. Manag. 01 1013 (2013) ISSN: 2321905X

Management Horizons in a Changing Economic Environment: Visions and Challenges - An Example of ITC
Pralay Kumar Ghosh
Suryadatta Institute of Management and Mass Communication, Pune Email: pralaykghosh@hotmail.com
Abstract: Environment, be it Business or Economics is changing at a rapid pace creating new challenges, thereby forcing organizations to relook at its strategy. The success or otherwise of the organization today and its existence in the years to come greatly depends on the strategy. In the backdrop of a changing economic environment with different companies responding to the emerging challenges, the story of ITC Ltd., a blue chip multinational company, existing in India for over 100 years, is worth emulating.ITC has entered its second century keeping its vision unchanged to sustain the position as one of Indias most admired and valuable companies. This paper attempts to examine the strategies adopted by the company over the years to survive against many odds and how it has identified a basket of businesses for tomorrow. ITC has evolved from a single product company to a multi-business corporate enterprise today. The current business portfolio includes Fast Moving Consumer Goods (FMCG) (Inclusive), Hotels (Exclusive), Paper & Paper Boards (Environment Exemplar), Packaging (Contemporary and Innovative), Agri-business (Pioneer) and Information Technology (Fast Growing). The analysis shows how the ambitious diversified business model has aligned to compete competitively to take on existing rival market leaders. The end result is that the company, which was once perceived to be a Tobacco major, has today, in 2013, emerged as a major player in the FMCG business sector. Keywords: Environment, Vision, Strategy, Challenges.

Introduction
Keeping in mind the theme of this conference, an attempt has been made here to analyze the story of ITC Ltd., a blue chip multinational company, existing in India for over 100 years, which is worth emulating by many other corporations. This paper attempts to examine the strategies adopted by ITC to make a conscious move from the cigarette to non-cigarette business due to the growing global awareness on the severe ill effects of tobacco consumption. Over the years it has consciously worked to surviving by identifying a basket of businesses for its future. As a strategy, ITC has evolved to a multi-business corporate enterprise from a single controversial product company. The current business portfolio includes FMCG (Inclusive), Hotels (Exclusive), Paper & Paper Boards (Environment Exemplar), Packaging (Contemporary and Innovative), Agri-business

(Pioneer) and Growing).

Information

Technology

(Fast

BACKGROUND OF ITC (www.itcportal.com) [2] The first six decades of ITCs existence were primarily devoted to the growth and consolidation of the Cigarettes and Leaf Tobacco businesses. The Seventies witnessed the beginnings of a corporate transformation that would usher in momentous changes in the life of the Company right from the change of its name to diversifying into Packaging and Printing in 1925, the hospitality businesses in 1975, Paperboards in 1979, Agri business in 1990, and lifestyle and retailing in the 2000s.

Brief literature review

A study of the Annual Reports of ITC (ITC, Annual Report 2013) [3] and for past years reveal that it has entered its second century keeping its vision

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unchanged to sustain the position as one of Indias most admired and valuable companies. The Directors Report every year concludes with Inspired by this Vision, driven by Values and powered by internal Vitality, your Directors look forward to the future with confidence. The reports and related statements further reflect the recognition of the Cigarette business as a sunset industry, a somewhat ethical challenge (Gallagher and Andrew, 2007) [4], something which they cannot strive on any further for growth, development and sustenance. There are several laws today governing the advertising of the ill effects of tobacco causing cancer and death, which goes against the business of the company. Once in the year 2007, Chairman of ITC, Mr Y.C. Deveshwar once said in 2007 "We Want to be FMCG's No.1 (Business Today, December 2007) [5]. Its becoming a reality. ITC is the market leader of cigarettes in India. The cigarette industry has a unique position in India thereby making it a losing proposition for any manufacturers. With greater punitive taxation and increasing awareness on the terrible side effects of this consumption, demand has reduced from all ends and the net result is stifled cigarette consumption as reflected in ITCs increased contribution from NonCigarette business (ITC, Annual Reports 2008-13) [1] : Table 1: Increasing Contribution from ITCs Non-cigarette Business During 2008-13
Year Gross Turnover (Rs. Crores) Net Turnover (Rs.Crores) Non-cigarette business percentage contribution to the total business Turnover 20% 20.9% 23.1% 23.6% 26.4%

This is being done consciously by the Central and State Governments and is in conjunction with the world economy of the cigarette industry. An Innovative Model of a Sustained Business Strategy: Itc Limited As a strategy, ITC is making a conscious change to change its business composition by focussing more on the non-cigarette (sunrise) business. However, one needs to be mindful that the share of the cigarette business in ITC was hovering as high as around 80% of its overall revenue and making that shift would take a very long time. However, efforts have sustained and ITC has grown its other sectors today at a far higher per cent as compared to the cigarette business which has had modest inflationary growth. ITC has now just about started breaking even and earning profits from these segments of businesses. The company has put up an impressive performance track record, delivered consistently over a long period of time, leveraging its corporate strategy of creating multiple drivers of growth. This performance is even more encouraging when viewed against the backdrop of the extremely challenging business context in which it was achieved, namely, the continued economic slowdown, gestation costs relating to the new FMCG businesses and investments in the Paperboards, Paper and Packaging and Hotels businesses. On the top of it, ITC has witnessed severe taxation both in terms of Value Added tax and Central excise duty rates. These add tremendous pressure to existing businesses but also ensure that the focus shifts from the cigarette business. All profits previously ploughed in the cigarette business are now moving as investments to the new FMCG businesses, is a trend line one observes through ITCs year on year financial performance in the last decade. The result is showing: Table 1: Growth of ITCs FMCG Others Business during 2002 to 2013
Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Sales (Rs. Crores) 109 304 563 1,013 1,704 2,511 3,014 3,642 4,482 5,545 7,012

2008-09 2009-10 2010-11 2011-12 2012-13

23,143 (8.4%) 26,259 (13.5%) 30,604 (16.5%) 34,871 (14.2) 41,809 (19.9%)

15,388 (10.3%) 18,153.19 (16.3%) 21,167 (16.6) 24,793 (17.2%) 29,605 (19.4%)

Note: Figures in the brackets indicate growth over previous year. The contribution from Cigarette business has declined from 19.8% in 2009-10 to 13.4% in 201213. During 2006-07, the growth of net turnover was driven by non-cigarette Fast Moving Consumer Goods (FMCG) business which grew by 37.6% and accounted for 52.3% of the companys net turnover. The non-cigarette FMCG business further grew to 48.6% in 2007-08 and accounted for 52.4% of the companys net turnover. The forecast is that decline of contribution from cigarette business shall only continue in the near future and reduce drastically over a period of time.

Looking at yesteryears, one observes an evolving vision of Indian business houses. This has been dominated by the changing world environment and Indias dream to be a developed nation at the

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soonest. The GDP growth in India had witnessed new highs and desires to sustain. India, as a nation, is today more open to foreign direct investment thereby agreeing to compete in the world market. Inspired by a vision to serve a larger national purpose and abide with the strong value of Trust, ITC has crafted innovative business models to create larger societal capital while simultaneously delivering long term shareholder value. ITC has come a long way from being called a pure tobacco company (though major share of its profits still come from here) to becoming a welldiversified conglomerate and over the years, ITC has diversified its presence into multiple other segments: FMCG (including Foods, Personal Care, Lifestyle retailing, education stationery, etc), Hotels, Paperboards and Packaging and Agri-Business. They even have a presence in Information Technology. Most of ITCs diversification strategies are either an offshoot of backward integration in the extended value chain (such as the Agri-business) or a result of leveraging other internal strengths (manufacturing and retail channels in case of the FMCG business). Given that the Indian FMCG sector is the fourth largest sector in the economy (PricewaterhouseCoopers, 2005) [6], within a relatively short span of time, ITC has established several strong consumer brands in the Indian FMCG market. The new FMCG businesses saw a 24% growth in 2013. The new FMCG businesses comprising Branded Packaged Foods, Personal Care Products, Education and Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety Matches have grown at an impressive pace over the past several years, crossing Rs. 7000 crores mark during the year 2013. ITCs Branded Packaged Foods businesses continued on a high growth trajectory recording impressive growth in market shares and enhanced market standing across segments. ITCs new FMCG businesses have been rated to be the fastest growing among top consumer goods companies operating in India as per a recent Nielsen report.(Nielsen, 2012) [7] The Company continues to rapidly further scale up its new FMCG businesses leveraging its institutional strengths viz. deep consumer insight, proven brand building capability, a deep & wide distribution network, strong rural & agri-sourcing linkages, paper and packaging expertise and cuisine knowledge. Fortunately, India enjoys the unique advantage of having multiple forces driving its economic growth engine (Ghosh, 2013) [8] in the form of a favourable demographic profile of population, relatively high savings and investment rates, a large domestic consumption base and the oftquoted entrepreneurial spirit of its people. Raising the growth bar to the desired double-digit levels would however require, inter-alia, directing government spending to more productive areas by reducing the various forms of subsidies in a phased

manner, investments towards augmentation of physical and social infrastructure, skill development and job creation. ITC has proven to the wider business community that Innovation drives sustainable business practices. New sustenance norms and environment regulations provokes creativity in how a business model is designed and developed. This can be done through using modernised technology and applying latest technology and science applications. Therefore, by looking beyond its current core competencies with an eye towards sustainability, a company can begin to redefine itself as a next-generation operation that may even involve expansion into new markets. Strategies such as the Blue Ocean strategy (Kim Chan, W. and Mauborgne, Renee) [9] can truly benefit this process in creating new markets with non-customers of existing markets. ITC suggests to do two things - Get the vision right and Get the execution right simultaneously to gain an advantage from the sustainability mega trend. As discussed earlier, many businesses came and went in the last seventy years and so did many organisations. One such organisation that has not only survived for so many years but has also grown with its times and taken good care of all its stakeholders is ITC Limited. Here is a great paradox. The business of ITC has forever remained a debate in the medical fraternity of the country but it is the profit of this very business that has helped many other sectors within its umbrella flourish. While it is controversial to promote the business model of ITC, it has never forced users with their products, and has in any case always been subject to media and social activists on the dire consequences of smoking towards ones health, which can cause cancer. ITC, on the other hand, has entered into new businesses, which has fierce competition from established MNCs. These MNCs are global players and can afford to compete with ITC on all groundsbrand, price, quality and service. ITC is today attempting to increase its turnover in competition with these long established players and this shall be a real test in the years to come. This years (201213) performance is a testimony to ITCs commitment to play in this industry and establish a prominent market place, given that its turnover is equating to some others in the industry for certain segments. The challenge seen here is from the FMCGothers business and Hotels. The FMCG-Others business has serious competition but also an overwhelming market in India. Profitability indicates a concern in this area and lesser returns on Assets from the Hotel segment also displays a similar pattern, The Paper business says it is at par and is a positive indicator given the revenues and profits.

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Conclusion
ITC continues to have stellar performance as a company and thrives in every business scenario of the economy. In spite of facing fierce government regulations and other economic catastrophes, ITC has continued to show promising growth. The revenues and profits have been well utilised by the company to invest in new sunrise areas enabling the organisation to diversify, grow and sustain. The key benchmarking point from ITC is that it has evolved its business model to suit the requirements of its operating economy. ITC has focussed at the bottom of the pyramid, which is indeed the need of the hour. It has channelized its strengths to cater to the demands of the economy, which shall help it move forward. Not only does it thrive in the current environment but the financial performance and business model promises many years of growth and profitability in future as well. The above analysis shows how the ambitious diversified business model has aligned to compete competitively to take the rivals some of who are market leaders. Each business within the portfolio is continuously engaged in upgrading strategic capability to effectively address the challenge of growth in an increasingly competitive market scenario. Effective management of diversity enhances a companys adaptive capability and provides the intrinsic ability to effectively manage business risk. The vision of enlarging Companys contribution to the Indian economy is manifested in the creation of unique business models that foster international competitiveness of not only its businesses but also the entire value chain. ITC is an exemplar in Sustainability and is the only company in the world of comparable

dimensions to be Carbon, Water and Solid Waste Recycling Positive. The end result, the company once perceived to be a Tobacco major emerged in the year 2013 as a major player in FMCG business.

References
[1] [2] [3] [4] ITC Annual Reports 2008-12 www.itcportal.com ITC, Annual Report 2013 Gallagher Timothy J and Andrew Joseph D, Financial Management: Principles and Practice: Factors affecting like legal and ethical challenges (Pg. 18), 4th edition, 2007 "We Want to be FMCG's No.1"; By drawing on ITC's strengths in businesses as diverse as cigarettes to hotels to agri-business, Chairman Y.C. Deveshwar has built an FMCG machine that's become the; market leader in several segments. Now, it's eyeing the #1 slot. The inside story of how he did it, Business Today, December 2, 2007 PricewaterhouseCoopers. Fast Moving Consumer Goods, New Delhi: IBEF, 2005. www.nielsen.com/us/en/reports, Reports and Insights, The Social Media Report, April 12th, 2012 Ghosh, Pralay Kumar Dr., Sustainable Strategies in Dynamic Business Environment: A case of ITC Limited, Abhinavan National conference on Sustainable Strategies in Dynamic Business Environment, Indira School of Business Studies, March 23rd, Pune, 2013.

[5]

[6] [7]

[8]

[9] Kim Chan, W and Mauborgne, Renee. Blue Ocean Strategy, How to Create Uncontested MarketSpace and Make the Competition Irrelevant, Harvard Business Press, Boston, USA, 2005

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