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ITC Chairman Yogi Deveshwar: Creating a 'Future-ready' Conglomerate
India Knowledge@Wharton - 13 Jan 2011

ITC was founded in 1910 as the  Imperial Tobacco Company of India, a British-owned firm. Over the past century,  ITC has not only changed its name and ownership pattern but has also moved from  being a single-product company to one of the largest multi-business corporate  enterprises in India with a turnover of around US$6 billion. The company's  non-tobacco businesses, including foods, personal care, hotels, paper,  agriculture, information technology and others, currently account for around  40% of its revenues. Chairman Yogesh "Yogi" C. Deveshwar says ITC  wants to become the largest consumer goods conglomerate in the country. In an  interview with India Knowledge@Wharton, Deveshwar, who joined ITC in 1968 and  became its chairman in 1996 (from 1991 to 1994 he was the chairman and managing  director of national carrier Air India), talks about the company's  diversification strategy and its plans in the non-tobacco businesses. The foods  and personal care businesses, he notes, will be important growth drivers for  the company. Deveshwar maintains that ITC, with its strong business portfolio  and sustainability initiatives, is "future-ready."

An edited transcript of the  interview follows.

India  Knowledge@Wharton: ITC has completed 100 years and has changed  significantly during this period. How do you see the ITC of today?

Yogesh Chander Deveshwar: It has indeed been an inspiring  journey. A story of transformation that is manifest not only in the range,  scale and scope of our businesses, but also in the inspiration to make a larger  and meaningful contribution to national priorities. These 100 years have  witnessed a single product company evolving into one of India's most valuable  and largest multi-business corporate enterprises.

In ITC's platinum jubilee year in  1985, its turnover was around Rs. 800 crore with a profit of Rs. 8 crore  (US$160 million and US$1.6 million at the current exchange rate of around Rs.  44 = $1). By 2010, turnover stood at over US$6 billion with a profit of more  than US$900 million. [Apart from fast moving consumer goods,] ITC is today a  clear market leader in the Indian paperboard & packaging industry; [owns  the country's] second largest hotel chain, as well as [being] the country's  foremost agri-business player, pioneering rural transformation through its path  breaking e-Choupal initiative. In addition, its wholly-owned subsidiary, ITC  Infotech, is one of India's fastest-growing information technology companies in  the mid-tier segment constituting a growth-driver for the future.

What also gives me immense  satisfaction is the fact that ITC's commitment to put country before  corporation has enabled it to contribute meaningfully to building economic,  environmental and social capital for the nation. ITC has achieved the global  distinction of being the only company in the world of its size to be carbon  positive, water positive and waste recycling positive [as detailed in ITC's  sustainability report and verified by third party auditors.] The focus on  creating societal capital, in tandem with its efforts in ensuring sustainable  wealth creation, has enabled ITC to create over 5 million sustainable  livelihoods, many of them amongst the weakest sections in society.

At this defining moment in its  history, ITC is therefore an enterprise with multiple drivers of growth for the  future leveraging a host of carefully nurtured strengths honed over the  decades. I can say today, as we commemorate ITC's century, that ITC is indeed  future-ready.

India  Knowledge@Wharton: ITC has transformed itself from a single business  enterprise to a diversified, multi-business conglomerate. What was the thought  process behind this diversification strategy?

Deveshwar: In the early 1990s, India  witnessed a radical change in economic policies to make the country globally  competitive. ITC saw this turning point in the country's economic history as a  great opportunity. On assuming charge as chairman of the company in 1996, I  recall that we had to make a very difficult strategic choice. Either we could  remain in our comfort zone in an industry we had run for almost nine decades or  create multiple drivers of growth in the "businesses of tomorrow" to  leverage the opportunities of this emerging Indian economy that best matched  our proven internal capabilities. We consciously chose the latter.

A process of intense introspection  and dispassionate evaluation led us to define a core portfolio of businesses that  we chose to be in. These were chosen on the basis of our internal capabilities,  the emerging opportunities in these areas and confidence that we would be able  to achieve leadership positions in these business segments. A paradigm shift  was assiduously crafted to realign this larger and diverse organization to a  new focus, namely acquiring international competitiveness in cost and quality  in each of our businesses. Such realignment was given shape through significant  investments in technology, processes, innovation and brands; as well as  creating a strategy of organization based on the governance principle of  distributed leadership to unleash the entrepreneurial energies of ITC's high  quality human resources.

Conventional wisdom at that point  of time did not favor diversification as a prudent strategy of growth. However,  our confidence in our strategic thrust to create multiple drivers was based on  very strong beliefs. For one, we believed that in an emerging economy with huge  untapped opportunities, significant growth and success could accrue if  diversity were to be managed well through innovative business strategies.  Second, we also recognized that diversity could lend unique sources of  competitive advantage and growth that we would otherwise not be able to reap if  we were present in only one sector.

India  Knowledge@Wharton: Can you give us an example of how these synergies and  competencies have helped ITC in its diversification strategy?

Deveshwar: For example, look at the  synergies that enhance the competitiveness of our foods business. One of the  primary products in its portfolio -- Aashirvaad atta [wheat flour] -- is today  a leader in its segment within a very short time since its launch. Its success  is an example of the synergies that ITC derives from the diversity of its  businesses. ITC's pioneering rural initiative, the e-Choupal network, enables  cost effective sourcing of wheat but, more importantly, lends a competitive  strength given the traceability of the commodity through identity-preserved procurement.  This enables customized blending, which again is a strength honed from the  practice of tobacco blending over the years, to support local tastes and  preferences. ITC's hotels business and its master chefs interact with millions  of consumers throughout the year and are able to understand the nuances of  regional and local tastes that delight the consumer palette. This knowledge is  utilized by the foods business to deliver a superior and differentiated  product. ITC's packaging business provides unique solutions and it also draws  upon the synergies of the group company in areas such as consumer insights,  branding and efficient trade marketing and distribution. All of these not only  add to the competitiveness of the foods business but the entire value chain of  which they are a part. This is only possible given the synergies arising out of  ITC's diversity of business.

Similarly, ITC's Wills Lifestyle  outlets provide us with an opportunity to engage with consumers in the premium  space and we have leveraged this valuable experience for our personal care  products business.

India  Knowledge@Wharton: What has been the rationale behind ITC's increasing  presence in the fast-moving consumer goods (FMCG) sector? How would you rate  the success of this foray and do you see personal care and foods as one of the  major drivers of your FMCG business in the future?

Deveshwar: The FMCG sector in India is  expected to triple in size to over US$80 billion by 2018. Foods, personal care,  education and scholastic products, apparel and lifestyle products, tobacco, and  others dominate this space. The company's investments in FMCG are targeted to  serve these growing markets.

Our foray into the new FMCG  segments is based on a defined approach that blends internal competencies with  these emerging opportunities. I have earlier referred to strengths that exist  within the organization -- whether it is in sourcing, branding, trade marketing  and distribution or in our world-class manufacturing capabilities. These  strengths have enabled the creation of synergies that have enabled us to build  the competitiveness of the FMCG businesses.

Today, each of the FMCG businesses  is in different stages of evolution and maturity. Our goal is to be the largest  consumer goods conglomerate in the country. While we have gained considerable  market standing in each of our non-cigarette FMCG businesses, we aspire to be  market leaders in each segment that we are present in. Foods and personal care  will be important drivers. In addition, some of our businesses like education  and stationery products, lifestyle apparel, incense sticks, and matches are  also gaining traction and reaching out to all segments of consumers.

India  Knowledge@Wharton: What are the challenges for you in this space?

Deveshwar: Challenges are dynamic and also  evolving over time. We have scaled up rapidly in the FMCG space, including  personal care and foods, in a very short span of time. This expansion of the  FMCG portfolio not only requires establishment of new manufacturing operations  but also efficient multiple distribution channels across multiple locations.  The creation of an efficient supply chain [and] enhancement of logistics  infrastructure are imperative to grow new businesses. The challenge has not  only been that of optimizing the supply chain, but also customizing the supply  chain to every type of product that we are in. This in itself is a challenge  for ITC as we are engaged in a large number of products and categories. We are  also making every effort to augment our capabilities in manufacturing and  distribution as businesses expand. There is always the continuing need to  develop new products and services for our valued customers. We have invested  significantly in brand building and capacity expansion to meet the growing  requirements for our products. Innovation and R&D will continue to be key  drivers in such a competitive scenario.

India  Knowledge@Wharton: Which are the major businesses you are looking at  investing in, in the near future?

Deveshwar: Our aspiration is to be the No 1  FMCG company. Towards this, we are constantly evaluating new categories in our  existing businesses. On the one hand, we are looking at market opportunities in  terms of both size and growth that would make for a meaningful engagement for  ITC. On the other hand, we are also looking for opportunities where we can  leverage our institutional strengths. At the current moment, we see an  opportunity to invest significantly in our existing portfolio of businesses  that include paper & paperboards, hotels, agri-business and information  technology.

India  Knowledge@Wharton: ITC has not gone in for any big ticket acquisitions. Is  that the strategy going forward or are you also looking at acquisitions?

Deveshwar: Yes, I indeed take pride that we  have created homegrown brands in an intensely competitive and crowded market  place. A brand is an outcome of consistent consumer delight over a period of  time. You cannot succeed unless you give consumers a superior and  differentiated product. While our deep consumer insights and relentless focus  on quality help in creation and development of unique homegrown brands, going  forward we will also be open to acquisitions in areas that are synergistic to  our business plans....

India  Knowledge@Wharton: You mentioned R&D and innovation as a key driver for  ITC's future. Can you elaborate on this?

Deveshwar: I have always believed that  innovation is the elixir of growth in a competitive global business  environment; more so in an emerging economy like India, as new opportunities  emerge from a host of growth drivers.

ITC has pursued a 360-degree  approach to encourage and enable innovation in the company. We recognize that  cutting-edge R&D can foster breakthrough innovation and create powerful  sources of sustainable competitive advantage. This vision has led to the  establishment of a state-of-the-art R&D center at Bangalore. The unique  construct of ITC in terms of its strong presence in agriculture, food and  personal care businesses is enabling a convergence of R&D capabilities that  is being leveraged to deliver future products aimed at nutrition, health and  well-being....

India  Knowledge@Wharton: Looking ahead, what are your key priorities in the  hospitality business?

Deveshwar: As is well known, India is  grossly under-roomed. International arrivals in India are only 5 million a  year, compared to around 80 million in France, 58 million in the U.S. and 55  million in China. At conservative estimates, India needs 50,000 rooms in the  next two to three years. This sector also carries significant investment  opportunity, and we will continue to nurture this segment to fuel growth. [ITC]  hotels also aim to be exemplars in green design and environmental excellence.  Already, ITC Royal Gardenia [in Bangalore] is the world's largest LEED --  Leadership in Energy & Environmental Design -- Platinum-rated hotel. ITC  Sonar [in Kolkata] is the only hotel in the world to earn carbon credits. In  the future, all [our] hotel properties will achieve the highest green standards  in their categories.

India Knowledge@Wharton: What are your plans  in the paper and packaging business?

Deveshwar: India's consumption of paper,  paperboards & packaging is one of the lowest in the world. Per capita  consumption is around 5 kg per person per year, compared to nearly 300 kg in  U.S., 200 kg in U.K., and 45 kg in China. With the spread of education and  economic growth, demand is expected to grow manifold. ITC has invested  significantly in enhancing capacity in this business. In addition, the rapid  expansion and growth of the branded consumer goods sector in India will be a  strong driver for the packaging industry. Innovations in this segment can  create superior customer delight and is therefore an integral part of the  product's value proposition.... We will continue to invest in and grow this  business as well.

India  Knowledge@Wharton: Where do you see your agri-business heading?

Deveshwar: The agri-business division, with  its deep rural linkages, is well poised as a supply chain partner to create  value for ITC's foods and tobacco businesses. Its large presence in rural  India, with the unique e-Choupal infrastructure, will be progressively  leveraged to widen ITC's FMCG distribution network.

India  Knowledge@Wharton: Do ITC's diverse businesses require a very different  strategy of governance? How do you manage this diversity?

Deveshwar: Managing diversity is critical to  the success of a multi-business enterprise. The challenge is how do you  diversify and focus on each business at the same time. That is why we fashioned  a unique strategy of organization and governance based on the principles of  distributed leadership. A three-tier governance structure was formed with the  board of directors entrusted with strategic supervision, a corporate management  committee with the responsibility of strategic management of the company, and  divisional management committees for executive management of each business.  This clarity in roles enables the top management to function with a venture  capitalist mindset to optimize shareholder value through appropriate resource  allocation across the portfolio.

India  Knowledge@Wharton: You spoke about e-Choupal earlier. Do you see  sustainability as a strategic asset for a company?

Deveshwar: ITC's sustainability vision is an  integral part of its business strategies. We believe that it is eminently  possible to create larger societal value with business innovations that foster  an inclusive and sustainable future. A much-celebrated example is that of ITC's  e-Choupal.... By providing farmers a rich repertoire of agri-based  interventions, it not only addresses the core needs of farmers in terms of  infrastructure, connectivity, price discovery and market access, but also  provides a significant boost to farm productivity through customized extension  services. This has helped in transforming villages into vibrant economic  organizations by raising incomes and co-creating markets.

Similarly, a choice of strategy to  source pulp from renewable plantations, in spite of cheaper imports, has led to  the creation of livelihood opportunities for thousands of poor tribals and  marginal farmers. In addition, we engage extensively with rural communities to  foster inclusive development. ITC's integrated watershed development initiative  has helped create freshwater potential covering over 56,000 hectares in  water-stressed areas. Integrated animal husbandry services have reached out to  more than 450,000 milch animals, creating avenues for non-farm based  livelihoods. More than 200,000 children in rural India have received  supplementary education, and nearly 30,000 women entrepreneurs have been  created through approximately 1,000 self-help groups.

It is my deep conviction that both the competitiveness and  profitability of firms in the future will increasingly depend on their relative  ability to adopt such sustainable business practices.