Much as I detest sermonising, let’s start with a few sentences on how to win that would do Von Clausewitz proud. To start with, you need exceptional strategy-skills; your soldiers must be brave and highly motivated; your firepower, superior to your enemy’s; you must be able to quickly make good your reverses; and you must leverage the advantage of stealth. There is at least one man we know who agrees with all that. Y.C. "Yogi" Deveshwar, Chairman of ITC Ltd. Part of the reason could be that when Deveshwar returned to the cigarette company in 1994, after a short stint at Air India, the 84-year old company was neck deep in crises. The mid-90s were when ITC’s international business division was embroiled in a foreign exchange scam. The liberalisation-induced-diversifications into financial services and power came a cropper. But nothing would test the young CEO’s mettle as the messy battle with BAT – the single-largest shareholder in ITC – for control of the company. How Deveshwar went about consolidating his own position and that of the company is well documented. But how he simultaneously scripted – and is now leading – a "silent revolution" within ITC is not.

Some whispers of ITC’s new businesses reached the outside world, but determined to give our readers a first-hand account of the amazing transformation apace at ITC, we pursued Deveshwar for an exclusive interview. By the middle of May, the man was ready to talk (despite his imposing looks and stentorian voice, Yogi is actually very down to earth and friendly). Better still, he agreed not only to spend almost half-a-day with BT, but also to get his business chiefs in other parts of the country to give us a low-down on the goings-on. Losing no time, we pressed an army of correspondents, Debojyoti Chatterjee in Kolkata, E. Kumar Sharma in Hyderabad, Nitya Varadarajan in Chennai, and Venkatesha Babu in Bangalore, into action. What they came out with is a fascinating story that you now find on the cover. ITC’s New Clothes, as we decided to headline the story, is not about Deveshwar going out on a diversification spree. Rather, it is about how the CEO of the largest cigarette company in India, realising that he operates in what is probably the most persecuted industry in the world, is setting about leveraging competencies of his existing businesses to spawn an entire new set that in another six years or so could fetch 40 per cent of ITC’s revenues. As Special Correspondent Chatterjee, who put together the story says : "The energy surging through ITC today is awesome."

That’s a word I would use to describe another phenomenon : the emergence of Sachin Tendulkar, the brand from Sachin Tendulkar, the cricketer. But like our other story on consumer marketing tells you, spending top dollar on brand ambassadors is one thing; convincing consumers to pay for it, quite another.

Sanjoy Narayan

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.

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 a 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.1,1150 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 launced. 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.

LIGHTING UP AGAIN

Everyone has a favourite story about those tough times, ITC Bhadrachalam CEO Pradeep Dhobale’s preferred anecdote about the expansion – modernisation – restructuring exercise his company undertook in 1998 to improve efficiencies – its results are best seen in the company’s latest results, a profit of Rs.34.89 crore – has to do with the installation of what was then the largest paper drum (diameter : 6.5 metres) in the world. It took all of three months to transport the drum from Vishakapatnam port to Bhadrachalam, a mere 150 kms away. The convoy travelled in isolated splendour. When it moved, all other traffic was brought to a halt. Along the way, bridges had to be strengthened and power lines removed and then reinstalled. So, the drum moved at the stately pace of just around a kilometre or two a day.

Today, ITC Bhadrachalam boasts the only integrated paper board plants in the country. In the future, Dhobale hopes to aggressively increase the proportion of value-added board sold. This category, typically used in the packaging of FMCGs accounts for 30 per cent of the company’s sales; the reminder is what ITC Bhadrachalam calls "recycled-grade" board. Dhobale’s logic is straightforward : value added board sells at Rs.75,000 a tonne; recycled-grade, at Rs.25,000. And the former is the fastest growing segment of the market (15 per cent).

Having successfully turned the company around, Dhobale has now been given a mandate by the board to acquire an existing plant or set up a green field paper board project. "I’ve been told that I can spend up to Rs.1,000 crore on this." This next-big-leap, should see ITC Bhadrachalam increasing its capacity from the existing 204,000 tonnes per annum (120,000 of this is value-added board) to 400,000 tonnes per annum (the entire incremental capacity will be value-board). In terms of marketshare Dhobale sees this translating into a jump in marketshare from 20 per cent to 40 per cent.

Another of ITC’s businesses – hotels – also languished during the 1990s. Today, with the new leadership in place there is a refocus on products and markets, says S.S.H. Rehman, Managing Director, ITC Hotels. The most recent initiative has been a segmentation of its business into four categories – the luxury end (ITC hotels), the more broad-based five-star segment (WelcomHotels), the budget category (WelcomFortune) and the heritage hotels (WelcomHeritage) – with which ITC Hotels plans to straddle the market. From the current 41 hotels (owned or managed), ITC will be expanding its chain to 80 properties by 2005 and is projecting a growth in sales from Rs.250 crore last year to Rs.1,500 crore in 2006.

SMOKING ON THE SLY

ITC has kept much of its flurry of new activities – be it the roll-out of Wills Sport stores or Expressions greeting cards and gifts – under wraps and away from the glare of the media. Considering the scorching its image took in the mid-1990s, that’s not surprising. Yet, on the second floor of Virginia House the signs of the silent revolution are palpable. Anup Singh, Director, explains how the change in culture at the company flowed from the structural changes after Deveshwar took over and how the flagship businesses are now incubating talent for the new businesses. "We’re getting better at identifying which core competencies are lying in which areas and how they can be leveraged in an apparently disparate new opportunity."

Just behind the 73-year-old Virginia House is a new glass and steel high-rise, ITC Centre, and fittingly, on one its modern floors is where ITC Infotech’s headquarters are housed. Infotech was another of ITC’s early diversifications but again one where it missed valuable opportunities – back in 1988, ITC Infotech actually lost a chance to partner Narayana Murthy of Infosys – and is quickly trying to recover lost ground. Its chosen market : high-end solutions. Says Sanjay Verma, Managing Director, ITC Infotech, "While this has meant we had to exit areas like products and body shopping, it also meant the company has a mission." Currently, ITC Infotech is restructuring its operations by acquiring two companies promoted by ITC in UK and the US. And Verma is looking towards exploiting the superior domain knowledge within ITC to create business solutions at the top of the value chain. His target : to be a Rs.100 crore company in the next two years and to reduce dependence onn ITC. Currently, the mothership accounts for 37 per cent of ITC Infotech’s turnover, down from 95 per cent two years back, but Verma wants to reduce that further to around 10 per cent.

None of ITC’s new forays will be a cakewalk. In lifestyle retailing, Chief Executive Sanjiv Keshava expects ITC’s professional management and the big bucks it will invest – it wants to spend Rs.200-300 crore over the next five years – to make the difference. But although the Rs.20,000 crore branded apparel market is growing at more than 30 per cent annually, competition could going to be tough, especially from existing players.

However, Keshava says ITC’s strategy is different from many of the existing players. "Most of our competitors have category products, which means they specialise in certain products : either shirts or trousers. All of them have a manufacturing background and, therefore, those are the products they’ve been able to bring out in the market. We started on a different premise with no manufacturing background, but we source from the best manufacturers in the country. There is an overcapacity, and we are leveraging that overcapacity. We have got our products designed internationally, and we have come out with what is called a wardrobe brand. We are possibly the only wardrobe brand in the country. (Tops, wovens, knits, and bottoms)."

Dalal Street, however, is not particularly concerned about ITC’s new ventures. With tobacco still accounting for the lion’s share of the company’s revenues, that’s hardly surprising. Most stockmarket analysts feel despite the drop in cigarette sales volumes, ITC has the pricing power to keep margins high. Says Rajesh Mayani of Morgan Stanley Dean Witter, "ITC will show strong profit growth (around 17 per cent) and earnings growth of around 23 per cent in the next couple of years."

In fact, in cigarettes, which generated around Rs.6,000 crore of its revenues last year, ITC’s main concerns are not about the bottomline but about the government’s proposed restrictions on advertising and the sale of tobacco products. And, of course, the menace of smuggled foreign brands. Says Kurush Grant, Chief Executive, Tobacco Division : "Incredibly, cheap cigarettes already account for 60 per cent of the kingsize cigarette market in value terms." Apart from kicking off initiatives to combat contraband brands, ITC is strengthening its grip on the Indian market. Grant has been constantly upgrading the two megabrands in Wills and Gold Flake and some of the strong regional brands like Scissors. Says Grant : "We want to be present at every price point with a value-added product." In the last five years, ITC pumped in Rs.1,000 crore into its cigarettes business. Now, it plans to invest another Rs.500 crore. A recent initiative : introduction of packs of five to convert some of the estimated bidi smokers who outnumber cigarette smokers by 10:1.

It may be too early to assess how ITC fares in its new ventures, but on one thing is clear : its new initiatives will pitchfork it into markets more competitive than the near-monopoly it enjoys in cigarettes. Competitors in branded apparel are numerous; in foods, where Deveshwar says a roll-out could begin in another six months, companies like Hindustan Lever have a head start. Lever has a direct distribution through 850,000 urban outlets plus a 40 per cent cover of all villages with a population of 2,000 and more. And, it has already begun e-enabling many of its stockists and retail outlets. In greeting cards and gifts, there are well-entrenched players-like Archies and Hallmark – to connect with.

Yet, as Chairman Deveshwar points out, most of the new areas that ITC is targeting are emerging markets, where the opportunities are still emerging and, therefore, there is room to enter. "What we are leveraging is our distribution bandwidth. As for the products and services, if it is an emerging market, it makes sense for us to get in on our own; if it is an existing market, we could always think of getting a partner." What makes ITC seem more committed to its second wave of diversification is the gleam in his eyes when he says that.

Additional Reporting by Venkatesha Babu

E. Kumar Sharma & Nitya Varadarajan