Diversification strategy Essay
ITC is a diversified Indian conglomerate with a market capitalization of nearly US $ 19 billion (March 2008) and a turnover of over US $ 5. 1 Billion. Quite unique among Indian companies, it has adopted a Triple bottom line strategy where the company not only looks at financial performance but also the social & ecological performance. The company started almost hundred years back as a cigarette & tobacco business company.
High incidence of taxes and discriminatory taxation on cigarette form of tobacco, severe regulations and reducing export attractiveness made it think of venturing into other businesses such as hotels, paper board & packaging, agri business, FMCG etc. In sectors like cigarette, paper board the company is the market leader while in other sectors it is dominant player or is expanding the business. ITC’s foray into Paperboards and Paper was inspired by a strong cash position and the desire to become self-reliant in its sourcing.
The Paperboards division underwent a series of changes and acquisitions before taking its present state as a market leader in the paper and paperboards segment. It has also been active in contributing to its philosophy of Triple Bottom-line and is helping in enhancing the region’s ecological and
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The company has established relationships with farmers for almost hundred years since it started procuring leaf-tobacco for its own use & export. Leveraging this opportunities it entered processed fruit export business. In 2000 they initiated the e-choupal initiative to procure agri commodity directly from the farmers – this created a win-win situation for both for them & the company. It also established Choupal Sagar, a rural hyper-mart, thus targeting an untapped potential sector.
Recently it entered the agri input business also. So overall they followed a related diversification strategy & this helped them in other business like FMCG as well. Financial performance wise this segment is below the group average but it is believed to be holding future potential. In addition, this segment is important for their triple bottom line strategy. ITC ventured into the Foods business in 2001 to reduce its dependence on its cigarettes business.
Given the synergies it could bring from other businesses and expertise in agri-procurement, distribution, packaging and printing, marketing and branding skills, packaged foods was an obvious choice. Additionally, a demographic shift towards value added products and its last mile reach for the rural areas justified the entry into the FMCG-Foods business. However, high incubation costs including rentals, marketing expenses and competition from the incumbents coupled with current downturn has delayed the break-even point.
But there is a continuous healthy revenue increase from the FMCG-Foods segment and future performance will depend a lot on product innovation, reach and organized retail revolution in India. An analysis of the various businesses revealed that some of ITC’s businesses have been cash cows and have contributed to the investments in the other segments. While the stock market performance may not be extra-ordinary, we believe that its triple bottom-line strategy would stand it in good stead in the future.