ITC's Diversification Strategy


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Case Details:

Case Code : BSTR040
Case Length : 18 Pages
Period : 1994 - 2002
Organization : ITC
Pub Date : 2002
Teaching Note :Not Available
Countries : India
Industry : Varied

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Our long-term vision is to be in retailing, including super stores. In the medium term, we aim to be in lifestyle retailing and in the short-term, we will be into relaxed wear retailing."

- Y.C. Deveshwar, Chairman, ITC.

"We do not have a competitor in the real sense. We are an Indian company offering international styling at Indian prices."

- Sanjiv Keshava, CEO, Lifestyle Retailing Business Division (LRBD), ITC.

Introduction

In February 2001, the Government of India (GoI) announced a ban on advertising by cigarette companies and restrictions on the sale and consumption of tobacco products.

The proposed Tobacco Products (Prohibition of Advertisement and Regulation) Bill 2001 prohibits smoking in public places and the sale of tobacco products to people under the age of 18. According to the Bill, no tobacco related business would be allowed to advertise in any type of media. Even surrogate advertising, like sponsoring sports and cultural events, by such companies was to be banned. International brands, however continued to advertise on satellite TV channels. Naturally, this put the domestic players at a disadvantage. To make matters worse, tobacco companies had already been badly affected by rising excise duties and competition from smuggled products. In fact, the number of cigarettes sold declined between 1997 and 2002, and major cigarette companies saw a decline in sales volumes.

The declining sales of cigarettes, the proposed ban on advertising, the increasing anti-tobacco campaigns and the experience in developed countries seemed to suggest that tobacco would no longer be a profitable business in the future. Consequently, ITC decided to diversify into non tobacco businesses. ITC made its first foray into a non-tobacco business long back in the 1970s, when it entered the hotel industry.

Since then the company has diversified into a variety of other businesses- sportswear, greeting cards, ready to serve packaged foods, confectionery and branded staples- to reduce its dependence on its cigarette business. ITC diversified into retailing and merchandising of sports goods and premium apparel under its cigarette brand, 'Wills' and ran holiday packages under another cigarette brand, 'Gold Flake'. These businesses helped keep alive the existing brands. However, so far ITC hasn't been able to earn significant profits through any of its non-tobacco businesses. ITC's core business, cigarettes, contributes almost 85 per cent to its revenues, while almost all the other diversified businesses put together contribute only 15 percent. Analysts feel that ITC's ability to grab a sizable share of the markets it has entered and progressively make profits is doubtful, because it has diversified into areas where there is intense competition.

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