CASE

STUD
Y

ITC LIMITED,
BANGALORE (A)

CASE: ISSUE AT
HAND
ITC Limited was the
first large Indian transactional firm to
undertake significant diversifications and restructuring as
part of its corporate strategy.

The strategy required to be supported by squeezing profits

from low margin high volume traditional businesses that
were close to growth saturation and maturity.
The company was required to set the rate of engagement
with its diversification strategy by determining the extent to
which the deep restructuring in its traditional businesses
was feasible and sustainable.
The case brings out hidden dimensions of power conflict
that strategy formulation and implementation involved.

CONFLICT: STRATEGY
FORMULATION
Expand by stealth: chip
Financial POV: Three
years is a long wait for a
golden opportunity to
treble contributions to
profit !
Marketing POV: market
research indicates that
demand for products in
our traditional businesses
is twice the production
levels. Expansion requires
time lag. Proposed capital
investments for the
expansion and achieve
conversion cost
reductions of sixty per

away the inefficiency

bottlenecks and negotiate
new arrangements with
workers now? Bangalore has
the least unit cost of
production. There is
something to gain if cost
can be reduced but nothing
3 to lose if production
expands even at the same
unit cost
Technical / Operations
1
POV: Limits to our
diversification strategy are
real and need about three
years time to resolve.

COMPANYS
BACKGROUND

Incorporated in 1910 by UK-based tobacco major BAT as a

subsidiary named Imperial Tobacco Company of India
Limited.

By 1970s, it was a widely held company- result of dilution

By 1980, the Company marketed more than eighty

different branded products, as a result of it Diversification
Strategy.

Product portfolio included: merchandising of sports

accessories and sports wear, marine foods, garment
exports, paperboards printing and packaging, hotels,
apart from cigarettes and smoking tobacco

VISION AND
MISSION

VISION

MISSIO
N

Sustain ITCs position as one of Indias most

valuable corporations through world class
performance, creating growing value for the
Indian economy and the Companys
stakeholders

To enhance the wealth generating capability

of the enterprise in a globalizing
environment, delivering superior and
sustainable stakeholder value.

DIVERSIFICAT
ION
Diversificationisacorporatestrategytoenterintoanewmarketorindustrywhich
thebusinessisnotcurrentlyin,alsocreatinganewproductforthatnewmarket.

DiversificationispartofthefourmaingrowthstrategiesdefinedbyIgorAnsoff's
Product/Marketmatrix:

TYPES OF
DIVERSIFICATION
RELATED
DIVERSIFICA
TION
When a business adds
or expands its existing
product lines or
markets.
For example, a phone
company that adds its
wireless products and
services by purchasing
another wireless
company is engaging in
related diversification.
A number of related
acquisitions fail to
provide the benefits or
returns originally
predicted by ITC.

UNRELATED
DIVERSIFICA
TION
When a business adds
new, or unrelated, product
lines or markets.
For example, the same
phone company might
decide to go into the
television business or into
the radio business.
Companies engage
because there may be
cost efficiencies or the
acquisition might provide
an offsetting cash flow
during a seasonal lull.
The driver for this
acquisition decision is
profit.

WHEN TO
DIVERSIFY

When the profitability of a business is in secular

decline, a new core makes sense.
Inherently inferior economics : This becomes
more apparent when a new competitor enters
with a different cost structure.
Unsustainable growth formula : The market may
be reaching saturation or competitors may have
started to replicate a once unique source of
differentiation.

PROS OF
DIVERSIFICATION

Economies of scale and

scope
Using unutilized
organizational resources
to other areas can create
value.
Operational synergies
can be realized.
Leveraging skills can
create value.
Diversifying
shareholders
portfolios

Individual
shareholders may
benefit from
investing in a
diversified portfolio.

Internal capital market

Cash from some
businesses can be used
to make profitable
investments.
External finance may be
more costly due to
transaction costs,
monitoring costs, etc.

PROS

Identifying
undervalued firms

Shareholders may benefit

from diversification if its
managers are able to
identify firms that are
undervalued by the stock
market.

CONS OF
DIVERSIFICATION

Combining two businesses in a single firm is likely to

result in substantial influence costs.
Resource allocation can be influenced by
lobbying
Costly control systems may be needed that reward
managers based on division profits and discipline
managers by tying their careers to business unit
objectives.
Internal capital markets may not work well in
practice.
Shareholders can diversify their own personal
portfolios. Corporate managers are not really
needed to do this.

VALUE
CHAIN

SWOT
ANALYSIS

STRENGTH

1. Biggest and largest

player in Indian
tobacco market
2. Gold Flake tobacco
brand largest FMCG
brand in India; alone
holds 70% of
tobacco market
OPPORTUNITY
1. Moving into new &
emerging markets
of eastern Europe
and Africa.

WEAKNESS

1. Still
has
to
consolidate foot in
cigar
market;
strongly dominated
by Godfrey Phillips

THREAT
1. High Competition at
Global Level
2. Culture outside
India

BCG MATRIX ITC PORTFOLIO

ANALYSIS

Paperboards
Packaging

Hotels

Cigarettes Garment exports

Smoking Tobacco Marine food

BANGALORE FACTORY :
EFFICIENCY

Highest units
produced in a day
High efficiency in
production
Least conversion
cost per unit
Highest no. of
employees

BANGALORE FACTORY :
EFFICIENCY

The
Bangalore
factory,
established
since 1912
had the
widest
product mix,
the latest
machines.

The Company stored

three years of green leaf
stock as inventory in the
22 godowns inside the
Bangalore factory
premises

Blending
experimentation was
housed in nearby
Peenya the
Companys in-house
Research Centre
R&D

SCM

The green leaf

threshing plant
was in the process
of being moved to
Hosur.

INVENTO
RY

SUPERIO
R LOGISTIC
S

Rail connectivity

TECHNICAL REQUIREMENTS/
AnCONSTRAINTS
increase of 50 % in output on present norms - require 9
more high speed packaging units, order from abroad vs.
domestic manufacturer

Each HSM needed a crew of one operator and three semiskilled persons called attendant.
Other machine -slow speed machine (SSM)required a crew
of one operator and one attendant.
Further, a Mechanic was allocated for every 3 SSMs/2
HSMs, and a Technician was provided per 4 HSMs/6 SSMs.
There were 12 slow speed machines and 6 high speed
machines installed .
Speciality preservative foils for packaging additional output
were not immediately available in India but the companys
purchase department had identified sources of supply and
vendors could be developed in India or abroad. Setting up a

McKINSEY 7-S
FRAMEWORK
Ensuring That All Parts of Your
Organization Work in Harmony

Hard
Elements

Soft Elements

SHARE
D
VISION

STRATE
GY

McKINSEY 7-S
FRAMEWORK
Sustain ITCs position as one of Indias most valuable
corporations through world class performance, creating
growing value for the Indian economy and the Companys
stakeholders.
Expansion through diversification VS. Internal capacity
expansion

STRUCTU
RE

Alignment of functional goals through coordination among

departments; technical, marketing and financial, horizontal
structure of functional departments

SYSTEM

Policies governing day to day functioning, Promotion and

job rotation systems in place in this case, collective
bargaining of employees through unions

McKINSEY 7-S
FRAMEWORK
SKILLS

STAFF

STYLE

Competencies of employees, Technical erosion through

hiring policies and promotion policies, need for
upgradation, Conversion cost already least, very difficult to
improve efficiency without significant skill development
Pool of current employees nad their capabilities, good
mix of technical HR, administrative and clerical
employees, Inadequacy of fitters in technical
department.
Leadership style, need for visionary leadership that aligns
all stakeholders towards one common goal of the company
through effective communication

Who will lead? How?

HR Specialist industrial relations in collaboration wi
th welfare officer.
Cooperation among departments
Management credibility need to be communicated th
at everbody is going to gain from the change.