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W13249

ITC LIMITED’S DAIRY DEVELOPMENT INITIATIVE: CORPORATE

SOCIAL RESPONSIBILITY OR SHARED VALUE?

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Vidhi Chaudhri and Asha Kaul wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

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This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.

Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-06-20

The years to come will be a continuing journey of embracing national imperatives as business goals; of
creating superior value for all stakeholders; of meeting societal expectations; of pursuing the triple bottom
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line; of becoming a global player with cutting-edge technology, contemporary products & processes and
world-class human capital.1
—ITC Limited
On June 20, 2012, at the Rio+20 United Nations Conference on Sustainable Development, Y. C.
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Deveshwar, chairman of ITC Limited (ITC), accepted yet another global award for ITC’s rural initiatives
in social and farm forestry in India. ITC was one of five global companies and the only Indian company
to win the World Business and Development Award, 2012, for creating shared value. Around the same
time, Deveshwar was mulling over ITC’s new initiative in dairy development. Encouraged by past
successes, the leadership team was deliberating whether and how the dairy initiative could be developed
in line with the company’s mission of creating societal and business value. The question was simple:
could the company exploit its knowledge and expertise to transform what was currently a corporate social
responsibility initiative in livestock development to create yet another model of shared value?
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ITC created innovative business models to deliver shared value for both societies and shareholders, by
leveraging synergies across businesses to create new differentiated products and superior value
propositions. Diversification and expansion into dairy development would extend the company’s business
portfolio. Moreover, ITC’s contribution to sustainable livelihoods and the creation of natural capital,
exemplified in the e-Choupal2, social and farm forestry, and watershed development, were recognized in
India and globally (see Exhibit 1). The leadership team wondered, however, whether past predictors of
success would be sufficient to see the new initiative through to fruition. The challenges were multifold:
dairy development was an unorganized industry, the perishable nature of the product posed logistical
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problems and, as yet, limited clarity was available on whether and how well the new opportunity would
integrate with other ITC businesses.

1
ITC Limited, Transforming Lives and Landscapes, September 2012, p. 4, www.itcportal.com/sustainability/images/ITC-
CSR-Booklet-PDF.pdf, accessed December 12, 2012.
2
E-Choupal is a virtual meeting space. It is a rural digital infrastructure initiative to improve agricultural productivity.

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ABOUT ITC

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ITC was an Indian conglomerate with diversified presence in multiple sectors, such as Fast-Moving
Consumer Goods, Hotels, Agri-business, Paperboards and Packaging, and Information Technology (see
Exhibit 2). In 2012, the company employed 29,000 people across its businesses. ITC was headquartered
in the eastern Indian city of Kolkata, with business offices in several Indian cities. Its research and
development (R&D) centre in Bengaluru, India, supported product innovation across businesses.

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Incorporated on August 24, 1910, ITC had witnessed several identity shifts in its 100-year history, from
the Imperial Tobacco Company of India Limited in 1910 to the India Tobacco Company Limited in 1970.
The final shift from I.T.C. Limited in 1974 to its current identity as ITC Limited (ITC), in 2001 was
explained, in symbolic terms, as having “pulled out all the stops,” an expression of the changing character
of the company.3

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Most notably known for its cigarettes and leaf tobacco business in the early years of its operations, ITC’s
initial diversifications took place in the 1970s. The introduction of the Foreign Exchange Regulation Act,
which required corporations to reduce their foreign ownership, coupled with the vision of the first Indian
chairman, Shri Ajit Narain Haksar, triggered ITC’s first major diversification into the hotels business,
followed by its entry into the paperboards business. ITC management had envisioned that the hotel
industry would open new avenues for foreign-exchange earnings by boosting tourism, while the
engagement with the paperboard industry would mark ITC’s entry into the core sector with an
opportunity to create rural livelihoods. Almost 20 years later, with Deveshwar assuming office as
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chairman in 1996 (see Exhibit 3), the company made a strategic decision to enter new businesses by
leveraging internal competencies that best matched emerging market opportunities. The intent was to
create multiple drivers of growth and contribute to national wealth creation.
With a market capitalization of US$42 billion — a 35-fold increase since 1996 — and a turnover of US$7
billion in 2012, ITC featured among India’s largest and most valuable enterprises (see Exhibit 4). ITC
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delivered a 25.7 per cent compound annual growth rate (CAGR) in total shareholder returns in the period
1996 to 2012, which it attributed to the company’s robust strategy to pursue multiple drivers of growth.
ITC’s share price on the Bombay Stock Exchange had registered an impressive growth, from INR32.82 in
2003 to INR271.9 in 2012.4 Of ITC’s total net segment revenue, 57 per cent now came from non-tobacco-
based businesses, “significantly enlarging ITC’s capacity to create additional avenues for value
creation.”5
In 2004, ITC was the first Indian company and among the first 10 companies globally to publish its
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Sustainability Report, in accordance with the Global Reporting Initiative guidelines. ITC was featured
among Asia’s “Fab 50,” the World’s Most Reputable Companies by Forbes magazine and India’s Most
Valuable Companies by Business Today. A 2010 Boston Consulting Group study of 4,000 companies
ranked ITC as the world’s sixth largest “sustainable value creator” in the global consumer goods
industry.6
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3
ITC Limited, “About ITC: History and Evolution,” www.itcportal.com/about-itc/profile/history-and-evolution.aspx#ITC,
accessed February 21, 2013.
4
INR = Indian rupees; Share prices are effective December 31, 2003 and September 28, 2012, from ITC Limited, “Key
Financials: Stock Prices,” www.itcportal.com/shareholder/stock-prices.aspx, accessed December 12, 2012.
5
Excerpt from ITC chairman’s speech at the 101st annual general meeting, 2012, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=1231&type=B&news=Chairman-2012, accessed February 23, 2013.
6
ITC Limited, “ITC Is World’s 6th Largest Value Creator: BCG Report,” September 22, 2010, http://itcportal.com/media-
centre/press-reports-content.aspx?id=1022&type=C&news=ITC-is-world’s-6th-largest-value-creator-BCG-report, accessed
February 23, 2013.

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BRAVING CHALLENGES

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The journey of ITC in the 1990s was not entirely smooth as the company faced a mix of challenges.
External forces such as globalization, the opening up of the Indian economy in 1991 and lower tariff
barriers, left several ITC businesses vulnerable to escalating international competition.

ITC’s pulp and paper manufacturing unit in Bhadrachalam was a struggling entity in the early 1990s.

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International demand for high-quality coated paperboards and the need for cost-effective raw materials
and wood pulp left ITC Bhadrachalam on the verge of defaulting in 1995/96. By 1998/99, ITC’s then
International Business Division (IBD) was lagging behind both other ITC business divisions and the
global commodities export market. The challenges for this business were further compounded by low
agricultural productivity, unpredictable weather conditions, an inefficient supply chain, fragmented land
holdings, dependence on the mandi (market) and multiple intermediaries, and lack of infrastructure.

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In 1996, the company reached a turning point. ITC’s profits before tax were INR261 crores7 (US$52
million) with INR1500 crores (US$300 million) 8 in liabilities. Also in 1996, Deveshwar became
chairman of this shaky Indian conglomerate.9
Recognizing that building the international competitiveness of the company’s businesses required a
paradigmatic shift in corporate strategy, Deveshwar spelled out his agenda to boost competitiveness:
restructuring ITC’s core businesses and exiting businesses (e.g., edible oils and financial services) that
were unprofitable and outside the company’s capabilities to grow and create value. Specifically, the most
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urgent need was identified as “catalyzing and channelizing investments towards upgrading of human
capital, expansion and modernization of infrastructure, and productivity enhancement in the agri-
sector.”10
Deveshwar also redefined the company’s approach to creating shared value in terms of “a commitment
beyond the market.” This commitment combined the twin goals of national development and societal
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value creation and was integral to ITC’s sustainability strategy, to the Company’s vision. Deveshwar
explained:
ITC believes that its aspiration to create enduring value for the nation provides the motive force
to sustain growing shareholder value. Your Company practices this philosophy by not only
driving each of its businesses towards international competitiveness, but by also consciously
contributing to enhancing the competitiveness of the larger value chain of which it is a part.11
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For Ashesh Ambasta, vice-president and head, Social Investments, businesses could not overlook the twin
problems of India — economic inequity and depleting natural resources. India had 17 per cent of the
global population, yet of total world natural resources, only 2.4 per cent of landmass, 4 per cent of water
resources and 1 per cent of forest resources.12 ITC’s social investments were designed in consideration of
the company’s two biggest stakeholders — farmers in rural India, where the company had agri-
businesses, and households in the vicinity of ITC’s factories and plants.

7
1 crore = 10 million.
8
Approximate figures calculated at the rate of US$1 = INR50.
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9
Y. C. Deveshwar started his career with ITC in 1968, was inducted to the board at the age of 37 and became chairman of
the board in 1996. In 2011, Deveshwar was conferred the Padma Bhushan, the country’s third highest civilian honor, for his
contribution to the field of trade and industry.
10
Excerpt from ITC chairman’s speech at the 87th annual general meeting, 1998, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=794&type=B&news=chairman-1998, accessed January 10, 2013.
11
Excerpt from ITC chairman’s speech at the 90th annual general meeting, 2001, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=751&type=B&news=chairman-2001, accessed January 10, 2013.
12
ITC Limited, “Sustainability Updates: For All Our Tomorrows,” www.itcportal.com/shareholder/annual-reports/itc-annual-
report-2012/sustainability-updates-developmental-challenges-for-India.aspx#protect, accessed January 10, 2013.

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E-CHOUPAL: A CASE OF SUSTAINABLE AGRICULTURE

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Deveshwar argued that, both from a business standpoint (ITC’s businesses were predominantly
agriculture based) and a societal perspective (more than 70 per cent of India’s population lived in
villages), “enhancing the competitiveness of the Indian farmer and effectively linking him to
remunerative opportunities in the world market” would be key for the Indian economy to achieve and
sustain economic growth.13 Agriculture was the primary means of livelihood for more than 58.4 per cent

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of India’s population and contributed about one-fifth of India’s total gross domestic product (GDP).
Encouraged by Deveshwar’s suggestion to incorporate digital technologies to improve productivity in the
agricultural sector, in 1999, S. Sivakumar, the chief executive of Agri-business and architect of e-
Choupal, and his team, conceptualized e-Choupal. As a business concept embedded with social goals, e-
Choupal was designed to empower farmers and trigger a virtuous cycle of higher productivity, higher
incomes, enlarged capacity for future investments and a higher risk appetite.

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Two factors were critical in the initiative, recounted Sivakumar, “adopting a customer-centric approach to
what has traditionally been a commodity business, and virtual integration of the supply chain.”
Digitization of the agricultural sector was seen as a way to enhance the competitiveness of the agri value
chain by empowering farmers through access to information and markets.
Real-time information and customized knowledge provided by e-Choupal enhanced farmers’ ability to
make decisions and align their farm output with market and consumer demand.
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Farmers using the services of e-Choupal were not obligated to sell their product to ITC; they could, if
they chose, still go to the mandi. Under the mandi system, the price of soybeans was marked up 7 to 8 per
cent from the farmer to the factory, of which 5 per cent was borne by ITC and the rest by the farmer. By
bypassing mandis and selling directly to ITC, farmers received a better price for their crops, on average
about 2.5 per cent higher than the mandi.14 It was estimated that e-Choupal resulted in savings of
approximately US$6 per metric ton of produce for both the farmers and ITC.15
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To supplement and extend the digital infrastructure of e-Choupal, ITC created physical infrastructure in
the form of Integrated Rural Service Hubs called “Choupal Saagars” to offer additional services,
including soil testing and storage facilities. In addition, a new initiative — the “Choupal Pradarshan
Khet” — was launched in 2007 to offer customized training and provide agri-extension services, such as
insurance and credit to help small and marginal farmers.
By 2012, ITC e-Choupal was the world’s largest rural digital infrastructure, empowering more than four
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million farmers through price discovery, knowledge, information and extension services. Four million
farmers producing soybean, coffee, wheat, rice, pulses and shrimp across 40,000 villages were benefitting
from ITC’s web-based intervention in agri-business. Since inception, e-Choupal had set up 6,500 kiosks
across 10 states in India16 and positioned ITC as a leader in agri-business. Among the honours for e-
Choupal were the United Nations Industrial Development Organization (UNIDO) Award (2008), the
Innovation for India Award (2006), the Development Gateway Award (2005) and the World Business
Award (2004).
Sivakumar explained how the initiative created societal as well as shareholder value:
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13
Excerpt from ITC chairman’s speech at the 90th annual general meeting, 2001
14
Kuttayan Annamalai and Sachin Rao, “What Works: ITC’s e-Choupal and Profitable Rural Transformation,” World
Resources Institute, 2003, http://pdf.wri.org/dd_echoupal.pdf, accessed November 15, 2012.
15
Ibid.
16
The 10 states were Madhya Pradesh, Haryana, Uttarakhand, Karnataka, Andhra Pradesh, Uttar Pradesh, Rajasthan,
Maharashtra, Kerala and Tamil Nadu.

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One, it is a platform that connects rural India to the rest of the world. It’s a two-way transaction

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flow — whether you are sourcing agricultural commodities, or connecting employable youth to
markets — between rural and urban. The second dimension is focused on delivering a triple
bottom line outcome.
ITC had built a system of trust with the farmer “as a reliable supplier of goods and services on the one
hand, and as a buyer of high quality, cost effective farm output on the other,”17 which allowed the

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Company to enhance its own competitiveness. ITC’s agri-business was one of India’s largest exporters of
agricultural products.
Higher farm incomes resulting from e-Choupal interventions also created a vibrant market in rural areas.
As a result, more than 150 companies rode the ITC e-Choupal infrastructure to service rural markets.18
The relationship with farmers gave ITC an edge in taking products and services — fast-moving consumer
goods (FMCG), durables, banking — back to the villages. ITC had also partnered with Monster.com to

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increase opportunities for rural employment.19

SOCIAL AND FARM FORESTRY: CREATING LIVELIHOODS FOR TRIBAL COMMUNITIES AND
MARGINAL FARMERS

ITC entered the paperboards business in 1979 by promoting Bhadrachalam Paperboards Limited, which
officially became part of ITC in 2002. ITC’s survival and success in the paperboards and packaging
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business hinged on the company’s ability to secure large quantities of cost-effective wood pulp. Although
the manufacturing facility at Bhadrachalam in Andhra Pradesh was India’s largest integrated pulping and
paperboard manufacturing unit, it had not always been a success story.

Competitiveness in the paperboards and packaging industry depended on access to cost-effective raw
material, and, by law, businesses could not directly buy plantations. Indeed, the cost of importing pulp
was significantly lower than investing in wood plantations in India. Undeterred, Deveshwar urged a
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modernization of ITC Bhadrachalam Paperboards Ltd. to make it globally competitive. An investment of

INR675 crores (US$135 million) was approved in 1997 to modernize and expand the business. The social
and farm forestry program was introduced as an innovative solution to not only secure fibre for the
company but also as an expression of the company’s commitment toward a sustainable future for India.

The turnaround strategy commenced in 1999 as part of ITC’s Social and Farm Forestry program, which
involved developing wasteland20 by identifying farmers and tribal communities with wastelands and
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organizing them into self-supporting user groups. In partnership with non-governmental organizations
(NGOs) and the Andhra Pradesh government, ITC Bhadrachalam provided to these groups high-yielding,
disease-resistant clonal saplings along with training and extension services. Propelled by ITC R&D, the
conversion of degraded wastelands and clonal propagation to promote plantations helped marginal
farmers overcome the challenges of long gestation cycles, unused and fragmented land holdings, and

17
Excerpt from ITC chairman’s speech at 92nd annual general meeting, 2003, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=732&type=B&news=chairman-2003, accessed January 10, 2013.
18
Writankar Mukherjee, “ITC’s e-Choupal Boosting Company’s FMCG Business,” The Economic Times,
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http://articles.economictimes.indiatimes.com/2012-07-25/news/32848625_1_fmcg-business-e-choupal-network-fiama-di-
wills, accessed November 8, 2012.
19
ITC Limited, “Monster.com and ITC e-Choupal Collaborate to Launch Rozgarduniya.com,” August 12, 2009,
www.itcportal.com//media-centre/press-reports-content.aspx?id=294&type=C&news=e-choupal-launch-rozgarduniya,
accessed January 31, 2013.
20
The planning commission estimated that India had 60 million hectares of degraded wastelands, of which 33 million
constituted degraded forest land. ITC Chairman’s speech at the 97th annual general meeting, 2008,
www.itcportal.com/about-itc/ChairmanSpeakContent.aspx?id=103&type=B&news=chairman-2008, accessed January 10,
2013.

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climatic volatility. Landed farmers in the vicinity of Bhadrachalam were also trained to practise

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intercropping as a way to supplement their income, and many had converted their wastelands to pulpwood
plantations.

For ITC, the success of the paperboards and paper business affirmed its philosophy of shared value.
Deveshwar reiterated, “Only a company with a commitment beyond the market could have dared to

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commit so passionately to adding value to native wood fibre, when conventional wisdom was calling out
for quitting this business in the absence of cost effective fibre.”21

According to Sanjay K. Singh, divisional chief executive, Paperboards and Specialty Papers Division
(PSPD), the best demonstration of the program’s success was that instead of growing only one crop per
year, farmers were able to grow three crops. Singh reported that the model encouraged rural development
and community ownership by mandating that user groups contribute a part of their earnings from each
harvest toward a village fund that could be used to develop community assets such as watershed

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structures and assets such as land, irrigation facilities and draught cattle.

By 2012, the wood-fibre value chain had provided more than 62 million person-days of employment to
marginal farmers. The clonal propagation program, together with wasteland development, had resulted in
the greening of more than 140,000 hectares of land, which provided a competitive source of wood pulp to
ITC’s paperboards and paper business, while replenishing natural resources. Clonal propagation had led
to a rise in farmer incomes, going up to INR25,000 (US$500) per hectare per year under rain-fed
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conditions and INR40,000 (US$800) per hectare per year with irrigation on a four-year rotation cycle.
Inter-cropping helped replenish and improve soil fertility, minimizing the need for fertilizer and pesticide,
thereby reducing pollution of groundwater sources.22

Together with being a sustainable source of raw material for the paperboards business, the social and farm
forestry initiatives had helped sequester carbon dioxide (CO2) emissions and mitigate environmental
damage. By the end of 2012, the estimated monetary value of CO2 mitigation amounted to INR345 crores
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(US$69 million).23 ITC was the only enterprise of its kind, globally, to be water positive (since 2003),
carbon positive (since 2006) and solid waste recycling positive (since 2007) — an achievement attributed
to the company’s commitment to a triple-bottom-line approach.

INTEGRATION, SYNERGY AND GROWTH: CREATING VALUE CHAINS

ITC’s ability to leverage internal synergies and links among businesses allowed the company to explore
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and pursue new business opportunities.

Farm to Food Products Value Chain

The foods business was a good example of ITC’s approach to blending multiple capabilities to create a
new driver for growth. Through its e-Choupal networks, ITC sourced cost-effective and identity-
preserved raw materials, including wheat and potatoes. Coupled with the insights of chefs at ITC hotels,
ITC Foods was able to enhance its value proposition by introducing customized blends of wheat flour and
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potato snacks suited to local tastes. The company’s packaging business provided innovative packing
solutions to ensure product quality remained consistent and uncompromised across the supply chain while

21
Excerpt from ITC chairman’s speech at the 93rd annual general meeting, 2004, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=728&type=B&news=chairman-2004, accessed January 10, 2013.
22
ITC Limited, “Paper Boards and Specialty Papers Division: Farm Forestry,” www.itcpspd.com/farm_forrestry.aspx,
accessed February 23, 2013.
23
Ibid.

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the marketing and distribution network ensured that these products efficiently reached millions of

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consumers.

Tree to Textbook Value Chain

The renewable plantations under the social and farm forestry program provided a competitive source of

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wood pulp to ITC’s paperboards and paper business. These plantations enabled ITC to offer green
products such as notebooks and copy paper, which provided synergy and value to farmers through a tree-
to-textbook agriculture value chain. Further, the introduction of an innovative agro-forestry model led to
synergizing tree growing with crop production, addressing issues of food and wood security
simultaneously, and the conservation of precious natural resources.

Agarbatti Value Chain

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ITC’s agarbatti (incense sticks) business was another notable example of creating competitive value
chains. In 2003, ITC vendors began sourcing agarbattis (incense sticks used in homes, offices and for
prayer) from small-scale and cottage units in Karnataka, Orissa, Tamil Nadu, Tripura, Assam, Bihar and
Andhra Pradesh. The initiative led to the creation of Mangaldeep, India’s second largest incense sticks
brand. Scope and scale were also important; thus, unlike smaller organizations that were sourcing limited
quantities of agarbattis, ITC’s market and brand presence meant that more than 500 million agarbattis
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were sold every month across ITC’s retail outlets. By aligning its women’s empowerment program with
the agarbatti business, ITC created livelihood opportunities for 40,000 women. The economic
empowerment of women was demonstrably linked to debt alleviation and an improvement in children’s
education and nutrition.

However, not every initiative evolved into a model for shared value. ITC’s primary education initiative
benefitted more than 300,000 students and provided infrastructure support to more than 1,000 government
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schools. Although the initiative created societal value, it was not linked to or integrated with ITC’s
education and stationery business.

ORGANIZING FOR SHARED VALUE

A key component in ITC’s social initiatives was to ensure that farmer/user groups could independently
manage and sustain the programs. The lack of ownership was, according to Ashesh Ambasta, vice-
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president and head, Social Investments, the biggest deterrent to program sustainability. He outlined the
measures ITC took to address the issue of community ownership:

It is part of our philosophy that whatever we do should be sustainable. People should take
accountability for themselves otherwise anything that we do would fall by the wayside, as often
happens with government programs. . . . The rural initiatives of the size and scale of ITC require
substantial commitment and resources so we have to encourage people to participate and develop
village institutions and user groups, train them in keeping books and in the techniques and
technologies of watershed development, budgeting, awareness on relevant government programs
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and the judicious and efficient use of water. We are doing micro-enterprises. We give technical
guidance and develop plans with them, based on priorities, thus ensuring a bottom-up process of
planning, and then negotiate on the quantum of their contribution and how much they can
leverage from the gram panchayats [local governing bodies elected by the villagers]. It is
important to unleash the power of the people.

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As part of its watershed development program, for example, ITC organized farming communities into

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user groups and trained them to build and maintain water-harvesting structures (e.g., by checking dams
and irrigation tanks), create budgets, formulate rules and regulations for water sharing, fix water user
charges, and tap government development schemes around e-Choupal locations. Farmers were trained in
efficient irrigation methods to enable them to extend the cultivation cycle instead of abandoning their land
in the face of unpredictable rainfall.

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Group members contributed land, labour and up to 25 per cent of the construction costs, and ITC
contributed the balance. Water user charges were levied to build a corpus fund for maintaining current
structures, constructing new structures and investing in community assets. Altogether, 3,845 water-
harvesting structures had been set up, and ITC’s water-harvesting initiative was replenishing twice the net
consumption.

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COMMITMENT TO INDIA AND BEYOND THE MARKET: REALIZING ITC’S VISION

ITC identified itself, in no uncertain terms, as an Indian enterprise. Indeed, Deveshwar opined that the
difference between an Indian company and a company operating in India “lies in the depth of
commitment to the Indian economy.” ITC’s vision was to be one of India’s most admired and valuable
companies.
The impetus to put the nation before the company manifested across business and social initiatives.
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Deveshwar explained the rationale:
It is, however, my belief that the innovative energies of business can also be much better
harnessed to deliver meaningful solutions in co-creating societal value . . . effective corporate
participation in the delivery of social projects can lead to a far more optimum utilization of scarce
national resources.24
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Inclusive growth was a clearly defined focus for ITC. A business proposition of inclusive growth ensured
no dispute would occur regarding budget allocation. Sivakumar, the architect of e-Choupal, recounted a
conversation with the Corporate Management Committee (CMC) regarding conducting a small
experiment using digital infrastructure in the agricultural value chain as a pilot for e-Choupal:

I asked for 50 lakh rupees [US$0.1 million], which was a big sum in 1999, and I did not even
have a business plan. I said I only want to experiment and all we have at this time is questions.
No

The interesting thing is that we got 10 crores [US$2 million] primarily because Chairman Mr.
Deveshwar could envision the transformational impact of the idea. I was hesitant — 50 lakhs was
a big sum and 10 crores was even bigger. But that is what enabled us to look at the big picture
and to envision this idea as a full-blown initiative reaching out to 100,000 villages and potentially
contributing ‘x’ percentage to India’s GDP.

Spurred on by the company’s vision and the prospect of reinvention, Sivakumar and his team spent INR3
crore (US$0.6 million) on the experiment, and mulled that if 50 lakh rupees was what they had got (and
asked for), e-Choupal would have perhaps “not seen the light of day.”
Do

ITC’s ability to operationalize its philosophical commitment was enabled by its proven expertise in
handling and harnessing the diversity of businesses to create innovative business models. Moreover, a

24
ITC Limited, “Chairman Speaks, 2011: 100th Annual General Meeting: Making Markets Work for Green GDP and
Sustainable Livelihoods,” www.itcportal.com/about-itc/ChairmanSpeakContent.aspx?id=1111&type=B&news=chairman-
2011, accessed January 10, 2013.

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rigorous five-year strategic planning process and a well-defined governance structure enabled the

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company to live by its vision and values. As a decentralized structure with distributed leadership and
clearly defined roles and responsibilities, the governance framework allowed the company to align its
individual business goals with the collective purpose of the company, to manage diversity while exploring
new growth opportunities.

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Nazeeb Arif, vice-president, Corporate Communication, weighed in:

As a corporation, we are committed to creating larger societal value. We have innovated to

conduct business in a manner that creates large scale economic, environmental and social capital
for the nation. Our credo is to put Country before Corporation and the Institution before the
Individual. And our triple bottom line performance has been spectacular and globally
acknowledged. That is what creates trust and reputation. Today, companies are completely naked
on a global stage with stakeholders shining the spotlight on every activity that you undertake. We

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take pride that we walk the talk on creating enduring value for society.

For ITC, important indicators of success included stakeholder appreciation, partnership with reputed
NGOs and the willingness of the government to replicate the company’s initiatives. Indeed, in 2004,
25,000 farmers explicitly expressed their support for the company when they stood against striking
‘mandi’ traders who were protesting the growing transactions through e-Choupal. Having experienced the
benefits of e-Choupal for four years, farmers felt empowered to not give in to the intermediaries and
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demand better prices from the mandi, or altogether bypass the mandis to directly sell to ITC.

LOOKING AHEAD

In 2012, ITC was contemplating a new social investment in the dairy sector (see Exhibit 5). Initially, the
plan seemed to be a natural extension of ITC’s livestock development program that helped rural
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households upgrade cattle quality through cross-breeding and artificial insemination to boost milk
productivity. The livestock development initiative reached out to 8,000 villages in six states. From the
perspective of creating societal value and alleviating poverty, ITC was already helping farmers increase
milk production by six to nine times, thereby increasing the opportunity to generate supplemental income
for subsistence earners. But could the company — and should the company — go beyond societal value
to create a model of shared value?

The estimated set-up cost for a dairy plant ranged between INR80 and 100 crores (US$16 million to 20
No

million). Setting up a cold chain to collect and transport milk was critical to maintaining quality because
the bacterial level in milk doubled every 15 minutes. As part of the dairy project, ITC had completed a
pilot project in Munger, Bihar, whereby it began working with farmers to form the Milk Producer’s
Group (MPG) and pool resources to make logistics more efficient and reach beyond the local market.
MPGs served as centres for milk collection, testing measurement and sales, and ensured fair returns to
cattle farmers based on the quality and quantity of milk supply. Critical considerations included
transparency, accuracy and timely payment. An additional benefit for MPG members was the cattle loan
facility available through regional rural banks to invest in more cross-bred cattle. ITC also facilitated the
Do

forward linkages of pooled milk to different dairies and was looking to scale up its investment in
establishing a robust procurement infrastructure through the creation of integrated dairy hubs that would
encompass 43 bulk milk chillers (BMCs) and 600 MPGs to provide 2 lakh litres (52,834 U.S. gallons) of
milk per day.

Although ITC’s foods business was a potential customer for the dairy initiative, the team was undecided
about the incremental value and questioned whether the internal opportunity required a full-fledged dairy

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business or whether the dairy requirement could be fulfilled by third parties. The issues being deliberated

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included whether there was a market specifically for dairy and whether ITC had the capability of serving
that market. Prior experience was instructive yet inadequate in the current scenario. In the case of foods,
for instance, ITC learned that in the absence of a successful end product (i.e., Aashirvaad atta25), e-
Choupal would be limited in its scope and impact. Likewise, without e-Choupal interventions, Aashirvaad
may well have been non-existent. The same was the case with paper, as ITC’s entry into paperboards was

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intimately linked to its back-end wood-fibre value chain. The integrated nature of the value chain was an
important consideration in the process of creating value chains, whether in a top-down (foods and paper)
or bottom-up (e.g., dairy development) effort.
ITC prided itself on its key competencies — deep consumer insights, international quality products,
globally contemporary business processes, excellent trade marketing and distribution, world-class human
capital and investments in cutting-edge R&D — but wondered whether the company had the
competencies to enter and compete in the dairy business. In the worst-case scenario, ITC’s dairy products

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would not take off in the market, consequently reducing the need for milk. The good news was that the
FMCG sector in India was projected to grow to INR355,000 crore (US$71 billion) by 2018, and ITC
envisioned an investment of INR8,000 crore (US$1.6 billion) to drive growth in this sector over the next
seven to 10 years.26
As ITC senior executives considered the possibilities, given that in its current form, the dairy initiative
was a corporate social responsibility project that generated societal value for subsistence farmers, they
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mapped out the possible approaches that ITC or any other company could pursue independently or in co-
existence in such a business model:
Option 1, whereby a company could conduct operations by simply adhering to the laws of the land, not
exploiting natural resources, paying due taxes and being legally compliant.
Option 2 went a step further to accept that corporations were socio-economic entities that have a social
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responsibility beyond pure economic logic. The primary mode of demonstrating this awareness was
philanthropy, specifically, donating a percentage of profit.
Option 3 was a phase of corporate social responsibility (CSR) whereby an organization went beyond
writing a cheque to leveraging a company’s resources — such as time, effort, managerial skills and
technical capabilities — to benefit the communities within its vicinity. Such a program could be
undertaken alone or in partnership with NGOs.
No

Option 4 represented the stage when the company realized that by delivering CSR in the context of its
businesses, it could enhance manifold its scale and sustainability. The focus was on leveraging the
innovative capability of the organization to create sustainable value chains with a goal to deliver business
and social benefits. At this level, ITC created shared value.
Knowing full well that not every initiative should or could generate shared value, the team considered the
possibilities. The recurring question was whether it was possible to explore a model of shared value as
opposed to a pure business model or a pure three-step CSR model and, as a corollary, what were the
capabilities needed to graduate to the next level? The team was ready for multiple rounds of discussions.
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25
ITC’s brand of packaged wheat flour. See Exhibit 2.
26
Excerpt from ITC chairman’s speech at the 100th annual general meeting, 2010, www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=101&type=B&news=chairman-2010, accessed January 10, 2013.

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EXHIBIT 1: ITC’S SOCIAL INVESTMENTS’ MILESTONES

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Milestones (as of 2012)

e-Choupal Four million farmers empowered; 6,500 e-Choupals installed, covering 10 states
and 40,000 villages
Social & Farm Forestry 140,845 hectares greened, generating 63.38 million person-days of employment;

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607.48 million saplings planted
Watershed Development 836 user groups formed; 101,309 hectares brought under soil and moisture
conservation; 3.04 million person-days of employment generated
Women’s Empowerment Created 40,005 livelihoods and 1,494 micro-credit groups
Livestock Development 994,937 artificial Insemination doses (as part of animal husbandry services); 298
Cattle Development Centers; benefitted 284,268 farmers
Primary Education Covering 303,735 children; Infrastructure support for 964 government schools

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Source: Compiled from “Sustainability: Embedding Sustainability in Business,” www.itcportal.com/sustainability/embedding-
sustainability-in-business.aspx and ITC Limited, “Sustainability: Investing in Social Development,”
www.itcportal.com/sustainability/investing-in-social-development.aspx, accessed January 31, 2013.

Exhibit 2: ITC BUSINESS DIVISIONS

Business Sub-businesses
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FMCG Cigarettes & Cigars: Market leader in cigarettes
Foods: Entered food business in 2001; #1 in branded packaged Atta (wheat flour),
confectionery, and ready-to-eat products
Lifestyle Retailing: Retailer of the Year (Fashion and Lifestyle) award, 2011
Personal Care: Entered in 2005
Education and Stationery: Entered premium segment in 2002; expanded into the popular
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segment in 2003
Safety Matches: India’s largest selling safety matches brand
Agarbattis (incense sticks): Launched 2004; India’s second largest selling Incense sticks
brand
Hotels Hotel business launched in 1975; #1 in profitability; #2 in size
Paperboard and #1 in size; # 1 in profitability; #1 in environmental performance
Packaging
Agri-business
No

Agri-commodities and rural services: India’s second exporter of agri-products

# 1 in leaf tobacco; 5th largest leaf tobacco exporter in the world
Information ITC Infotech India Limited: Spun off in 2000 as a wholly owned subsidiary
Technology

Note: FMCG = fast-moving consumer goods.

Source: Compiled from company files and “Businesses,” http://itcportal.com/businesses/index.aspx, accessed January 12,
2013.
Do

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EXHIBIT 3: ITC CURRENT ORGANIZATIONAL STRUCTURE

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Source: Company files.
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EXHIBIT 4: ITC FINANCIAL HIGHLIGHTS, 1996—2012

1996 2001 2006 2011 2012

Gross Income 5,188 8,664 16161 30,528 36,073
Net Income 2,536 4,204 9,791 21,168 24,798
Profit before Interest and 536 1,696 3,281 7,337 8,975
No

Taxes
Profit after Taxes 261 1,006 2,235 4,988 6,162
Net assets employed 2,607 5,995 13,084 25,434 28,966
Net Worth 1,121 3,535 9,061 13,953 18,792
Market Capitalization 5,571 19,987 80,000 150,000 200,000

Note: Figures are shown in INR crores; 1 crore = 10 million.

Source: Company files.
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EXHIBIT 5: OVERVIEW OF DAIRY DEVELOPMENT IN INDIA

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India was the world’s largest producer of milk, accounting for 20 per cent of global milk production.27 Estimated
production of milk was set to increase from 123 million tons in 2011 to 190 million tons in 2015 — most of which was
consumed domestically — since dairy products were a major source of protein for the large vegetarian segment of
the Indian population. While 60 per cent of milk was consumed in liquid form, the remaining 40 per cent was
consumed in the form of butter, clarified butter (ghee), cheese, curd, paneer (cottage cheese), ice cream, dairy
whiteners and traditional sweets. Driven by urban and rural demand, the Indian dairy industry was growing 10 per

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cent annually,28 and the market for milk products was projected to exceed US$163 billion by 2017.29

Although the unorganized sector constituted 85 per cent of the dairy industry in India, several large players existed.
Amul, under the leadership of Dr. V. Kurien (father of the white revolution in India), was synonymous with the co-
operative dairy model that catapulted India to the status of the world’s leading producer of milk. Mother Dairy had,
until recently, enjoyed a virtual monopoly in the National Capital region (NCR) but was looking to expand its presence
in the face of growing competition.30 Several large Indian companies (Parag Milk Foods, Britannia, Tirumala Milk
Foods, Hindustan Unilever, Hatsun, Heritage Foods) and multinationals (Danone and Nestle) were in the race to tap
the dairy potential in India.

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The co-operative dairy model worked by eliminating intermediaries and, instead, organizing farmers that owned cattle
into collectives or co-operative societies, whereby the bulk of the sale proceeds were returned to the
farmers/producers. An estimated eight crore (80 million) rural households were engaged in dairy development in India
31
with eight states dominating milk production in India. Since co-operatives were not driven by the profit motive, the
margins in the milk business were limited; however, value-added products constituted a growing market (see Exhibit
6).

Among the key inter-related challenges facing this sector were establishing a sustainable milk production and
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sourcing system (developing potential milk clusters by identifying livestock farmers; training and capacity building;
livestock development through cross-breeding, artificial insemination, and nutrition information to promote high yield,
healthy cattle); transportation (investing in infrastructure to ensure timely collection and maintain consistency in the
quality of raw milk); and creating institutional mechanisms and market linkages with the organized sector and large
dairies to further the cause of dairy farmers.
Source: Created by authors.
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EXHIBIT 6: DAIRY POTENTIAL IN INDIA

Dairy product Estimated market size

(INR crore/US$)
Branded pouched milk 50,000 (US$10 billion)
Branded butter 1,200—1,400 (US$240 million to 280 million)
Branded cheese 400—500 (US$80 million to 100 million)
Branded ice cream 1,500 (US$300 million)
No

Branded flavoured milk 300 (US$60 million)

Source: T. V. Mahalingam and Sangeetha Kandavel, “The Milkmen Who Hope to Challenge India’s Iconic Milk Co-operative
Amul,” February 12, 2012, http://articles.economictimes.indiatimes.com/2012-02-12/news/31050324_1_parag-milk-foods-
amul-private-dairy, accessed December 4, 2012.

27
“Indian Dairy Industry to Touch Rs 5 Lakh Crore by 2015: ASSOCHAM,” The Economic Times, November 18, 2011,
http://articles.economictimes.indiatimes.com/2011-11-18/news/30415066_1_milk-production-indian-dairy-industry-milk-
prices, accessed December 4, 2012.
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28
Ibid.
29
IMARC Group, “Indian Dairy Market Report & Forecasts 2012—2017,” www.imarcgroup.com/indian-dairy-market-report-
forecasts/, accessed December 4, 2012.
30
T. V. Mahalingam & Sangeetha Kandavel, “The Milkmen Who Hope to Challenge India’s Iconic Milk Co-operative Amul,”
February 12, 2012, http://articles.economictimes.indiatimes.com/2012-02-12/news/31050324_1_parag-milk-foods-amul-
private-dairy, accessed December 4, 2012.
31
“Indian Dairy Industry to Touch Rs 5 Lakh Crore by 2015: ASSOCHAM,” The Economic Times, November 18, 2011,
http://articles.economictimes.indiatimes.com/2011-11-18/news/30415066_1_milk-production-indian-dairy-industry-milk-
prices, accessed December 4, 2012.

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[email protected] or 617.783.7860