The purpose of the study is to bring an in-depth understanding of how personalization and customer

engagement mediate the relationship

The study specifically demonstrate the empirical support to substantiate the hypothesis formulatedin
in the study

The study offer valuable recommendation for additional research

REVIEW OF LITERATURE

2.1 Theoretical Foundation

INTRODUCTION In February 2001, the Government of India (Gol) announced a ban on advertising by
cigarette companies and restrictions on the sale and consumption of tobacco products. The
proposed Tobacco Products (Prohibition of Advertisement and Regulation) Bill 2001 prohibits
smoking in public places and the sale of tobacco products to people under the age of 18.
According to the Bill, no tobacco related business would be allowed to advertise in any type
of media. Even surrogate advertising, like sponsoring sports and cultural events, by such
companies was to be banned. International brands, however continued to advertise on
satellite TV channels Naturally, this put the domestic players at a disadvantage. To make
matters worse, tobacco companies had already been badly affected by rising excise duties
and competition from smuggled products. In fact, the number of cigarettes sold declined
between 1997 and 2002, and ‘major cigarefte companies saw a decline in sales volumes. The
declining sales of cigarettes, the proposed ban on advertising, the increasing anti- tobacco
campaigns and the experience in developed countries seemed to suggest that tobacco would
no longer be a profitable business in the future. Consequently, ITC decided to diversify into
non tobacco businesses. ITC made its first foray into a non- tobacco business long back in the
1970s, when it entered the hotel industry. Since then the company has diversified into a
variety of other businesses- sportswear, greeting cards, ready to serve packaged foods,
confectionery and branded staples- to reduce its dependence on its cigarette business. ITC
diversified into retailing and merchandising of sports goods and premium apparel under its
cigarette brand, 'Wills' and ran holiday packages under another cigarette brand, 'Gold Flake'.
These businesses helped keep alive the existing brands. However, so far ITC hasn't been able
to earn significant profits through any of its non-tobacco businesses. ITC's core business,
cigarettes, contributes almost 85 per cent to its revenues, while almost all the other
diversified businesses put together contribute only 15 percent. Analysts feel that ITC's ability
to grab a sizable share of the markets it has entered and progressively make profits is
doubtful, because it has diversified into areas where there is intense competition. A NOTE
ON CIGARETTE INDUSTRY In the late 1990s, the cigarette industry in India was facing many
challenges. The share of cigarettes in the total consumption of tobacco was declining
steadily. The demand for cigarettes, which was at its peak at 104.2 billion sticks in end-March
* 1998, had declined marginally each year to settle at 97.8 billion sticks in March 2001. In
March 2002, volumes fell to 87.8 billion sticks (Refer Table I) Table I: Sales of Cigarettes (In
Billion Sticks) [Year ales 1996-97 102.2 1997-98 104.2 1998-99 | 1999-00 [ 2000-01 | 2001-
02 102.2 98.43 978 87.8 Source: The Hindu Business Line, September 29, 2002 While the
volume of filter cigarette sales increased between 1998 and 2001, non-filter cigartte sales
saw a significant decline of 30%. The increase in excise duties over the years (Refer Table II),
which got reflected in higher prices, croded the competitiveness of non-filter cigarettes vis-a-
vis beedis." Higher excise duties made the lower end (non-filter) cigarettes manufactured by
the organized sector much more expensive than the beedis manufactured by the
unorganized sector. The organized sector also had to cope with stiff competition from the
grey market. According to industry sources, the growth rate of smuggled cigarettes was at
over 25 percent annually. Table II: Excise Duties on Cigarettes Non — filter cigarettes in
length » o » Not exceeding 60 mm Between 60 and 70 mm Filter cigarettes in length Not
exceeding 70 mm « o o Between 70 and 75mm Above 75mm Inexcess of 85 mm (Rupees per
thousand cigarettes) 1998 90| 350{ 500| 820| 1100| 1350| Note: Rates were left unchanged
for February 2002. Source: The Hindu Business Line, September 29, 2002. Major Players 1999
100} 370{ 550{ 900| 1200f 1470| 200 110 370 550 900 1200 1470 2001 115 390 580 945
1260 1545 ITC was the market leader in the cigarette business with a share of over 78% in
2001 (Refer Table IIT). The three major players, ITC, Godfrey Phillips India Ltd (GPIL), and
Vazir Sultan Tobacco (VST), together accounted for over 95% of the cigarette market. VST was
an affiliate of British American Tobacco (BAT), which held 30% equity in VST. In 2001, VST had
9.41% share of the cigarette market. The company's products, which were targeted at the
low end of the market, dominated the small sized (< 60mm) segment. Table ITI: Market Share
(In Percentage) 1995 - 96 | 1996 — 97 [ 1997 — 98 | 1998-99 VST GPIL ITC Source: CMIE !
10.44 12.74 71.96 82 12.27 7523 3.08 12.07 75.38 7.42 11.46 76.62 1999-00 | 7.31 11.07
76.83 2000-01 7.27 9.41 78.53 Beedis are made of tobacco hand rolled into Tendu leaves.
According to Tobacco Institute of India, beedis have 2545 mg tar and 2.4-3.5 mg nicotine
content, which is much more than cigarettes’ 13-21 mg tar and 0.7-1.8 mg, nicotine. 76 GPIL
was the third largest producer of cigarettes in India. Philip Morris (US), the largest
shareholder in GPIL, had a 36 per cent stake in the company. The K.K. Modi Group, the Indian
promoter of GPIL, increased its stake in the company from 32 per cent in 1998 to 36 per cent
in 2002. GPIL was the dominant player in the northern and western parts of the country. The
company was planning to increase its presence in the western and southern markets.
Cigarettes constituted more than 90% of GPIL’s turnover. Table IV: Volume of Cigarette Sales
(In Million Sticks) Company VST GPIL ITC 1997-9 | 1998-99] 13942 13100 68137 12873 12797
67753 1999-00| 11884 12114 66145 2000-0 | 2001-02| 11636 | 9040 10611 NA 66478 |
60865 Source: The Hindu, Business Line, September 29, 2002. Table V: Value of Cigarette
Sales (In Rs Billion) Company VST GPIL ITC Source: 1997-98] 6.19 4.55 57.78 1998-99 6.32
4.91 65.36 1999-0 | 6.61 5.11 694 The Hindu Business Line, September 29, 2002.
BACKGROUND NOTE was ITC Peninsular 2000-01 7.11 548 .| 76.77 2001-02| 6.5 4.74 |80.14
established by UK-based tobacco major BAT. It initially set up the Tobacco Company
(Peninsular), a cigarette manufacturing, tobacco procurement and processing unit. In 1910, it
set up a full-fledged sales organization named the Imperial Tobacco Company of India
Limited (Imperial). To cope with increasing demand, BAT set up another cigarette
manufacturing unit (in Bangalore) in 1912. To procure the necessary raw material (tobacco
leaf), a new company, called the Indian Leaf Tobacco Company (ILTC), was incorporated in
July 1912. By 1919, BAT had transferred its holdings in the Peninsular and ILTC to Imperial.
Following the late this, Imperial replaced Peninsular as BAT s main subsidiary in India. By
1960s, the Gol began putting pressure on multinational companies to reduce their holdings.
Imperial divested its equity in 1969 through a public offer, which raised the shareholdings of
Indian individual and institutional investors from 6.6% to 26%. After this, the holdings of
Indian financial institutions were 38% and the foreign in excise duty on collaborator held
36%. Though Imperial clearly dominated the cigarette business, it soon realized that making
only a single product, especially one that was considered injurious to health, could become a
problem. In addition, regular increases cigarettes started having a negative impact on the
company’s profitability. To reduce its dependence on the cigarette and tobacco business,
Imperial decided to diversify into new businesses. It set up a marine products export division
in 1971. The company changed its name to ITC Ltd. (ITC) in 1974, and reorganized itself along
product lines. In 1975, ILTC was made a division of ITC. The company diversified into the
textile industry in 1977 with Tribeni Handlooms. In 1977, ITC also set up Bhadrachalam
Paperboards. In 1981, ITC diversified into the cement business and bought a 33% stake in
India Cements from IDBL. This investment, however, did not 77 generate the synergies that
ITC had hoped for, and two years later the company divested its stake. In 1986, ITC
established ITC Hotels as a separate division. It also entered the financial services business by
setting up its subsidiary, ITC Classic In Finance. 1994, ITC commissioned consultants McKinsey
& Co. to study the businesses of the company and make suitable recommendations.
McKinsey advised ITC to concentrate on its core strengths and withdraw from- agri-business,
where it was incurring losses. During the late 1990s, ITC decided to retain its interests in
tobacco, hospitality and paper, and cither sold off or gave up its controlling stake in scveral
non-core businesses. ITC divested its 51% stake in ITC Agrotech to ConAgra of the US In and
merged Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal
paper) with ITC. 2000, ITC's Packaging & Printing business launched a line of high quality
greeting cards under the brand name ‘Expressions’. It had gifts, stationery and accessories.
Following the recommendations of consultants McKinsey & Co, in 2000, ITC started a
Lifestyle Retailing Business Division to retail its Wills Sport range of relaxed wear through its
Wills Lifestyle stores. ITC Limited spun off its information technology business in India, the US
and UK, and merged them into a separate wholly-owned subsidiary, ITC Infotech India
Limited. By 2001, ITC had emerged as the undisputed leader in the cigarette industry, with
over 70% share of the market. ITC’s popular cigarette brands included Gold Flake, Scissors,
Wills, India Kings and Classic. ITC’s revenues for fiscal 2002 amounted to Rs. 99.82 billion
(Refer Exhibit IT). ITC’s RECENT DIVERSIFICATIONS ITC has been : ' constantly making efforts
to de-emphasize its tobacco business. Its corporate strategy aimed at creating multiple
avenucs of growth based on its core competencies. In line with this strategy, ITC's diverse
strengths were being leveraged across three product groups - Lifestyle Retailing, Greeting
Cards & Gifts and Branded Packaged Foods. The company aimed at generating 40 percent of
its total revenues from such diversified businesses. To achieve this, it planned to invest
around Rs. 26 billion to Rs. 28 billion in various ventures by 2006. Analysts felt that ITC's
diversification, especially into areas such as branded garments, aimed at improving its brand
image, which, in turn, may help it grow its core busincss. Wills Lifestyle In The 2000, ITC
extended one of its most valuable cigarette brands, Wills, to fashion retailing. product was
called Wills Sport” (Refer Exhibit IV). The company wanted Wills Sport to be a Rs.2 billion
brand by 2005. On being asked why the company chose the “Wills” brand name, better
known for cigarettes, for its retailing leisure wear, ITC chairman, Y.C. Deveshwar (Deveshwar)
said, “We wanted to build on the brand which is already well-known.” ITC, which had
established itself in cigarettes and hotels, diversified into the retailing business after a
McKinsey report 2 The ‘Wills Sport’ label was first test-marketed at the Golf’ pro-shop at the
Royal Calcutta Golf Course (RCGC) in 1997. With a good response from customers, the
product was thereafter expanded to eight other golf courses in India, covering all key golfing
destinations. The label’s success prompted ITC to move into branded apparel segment with
the relaxed wear brand of “Wills Sport’. Besides apparel, the brand also offers customers
accessories such as bags, belts, socks, caps, briefcases and wallets. ® 78 Financial Express,
July 14, 2000. showed that food and clothing were the fastest growing industries in India.
Market research suggested two things: first, the market lacked strong branding and most
brands were being mass distributed due to limited speciality outlets; second, most brands
were category specific or catered to a single use. Considering these facts, ITC set up the
Lifestyle Retailing Business Division (LRBD) with an investment of Rs.2.5 billion and opened
the first Wills Lifestyle store in December 2000 in New Delhi to retail the Wills Sport brand.
LRBD tied up with the American Design Intclligence Group (ADIG), a San Francisco-based
consultancy in both store design and merchandising. ITC's leisurewear as well as its exclusive
showrooms were designed by ADIG. ADIG designed the Wills Lifestyle stores to look airy and
spacious. It also provided the style and colors for Wills Sport apparel. The manufacturing of
the apparel was outsourced {0 vendors across the country. To ensure that Wills Sport was in
sync with the latest trends in the fashion industry, the company's Lifestyle Retailing Business
Division, which owned the Wills Sport range of apparel, set up the country's first design,
production and technology center at a_cost of an estimated Rs 60 million. ITC followed a
dual branding strategy, with Wills Sport as its premium apparel brand and Wills Lifestyle as
its retail brand. For the formal segment, the company also launched Wills Classic. In order to
bring in volumes and expand business, the LRBD planned to tap In the mass market by
launching a mid-priced brand in the range of Rs. 400 to Rs.1000 plus by 2003. 2002, there
were 50 Lifestyle stores across India, and the company planned to double the number to 100
stores by July 2003. The LRBD is expected to make a turnover of Rs.450 million for the
financial year endinig March 31, 2003. Sanjiv Keshava, CEO, LRBD, feels that the division has
no competitors “in the real sense.” However, analysts feel that Wills Sport will face
competition from Indigo Nation, Scullers and ColorPlus (Refer Exhibit V), which offer similar
prices, quality and styling. LRBD hopes to stay ahcad by constantly introducing new designs
and focusing on customer service. ITC also plans to take the Wills Sport brand overscas by
setting up Wills Lifestyle stores in several countrics. Said Deveshwar, “We are aiming at a
market share of close to ten per cent of the projected Rs. 50 billion branded leisure wear
market”. He added that in the future, apparel retailing would be expanded to cover the
entire range of lifestyle products, including personal care products and accessories. Greeting
Cards and Gifts In 2000, ITC's printing and packaging division entered the Rs. 2.5 billion
greeting cards (Refer market with the launch of its own line, 'Expressions’. The printing and
packaging division offered a complete range of international quality greeting cards in India
Exhibit VI). The ITC Greeting Cards Business leveraged ITC's distribution network to launch its
greeting cards in 600 cities and towns and over 11,000 multibrand retail outlets across India.
“Expressions’ cards were designed by Indian and international designers to suit the Indian
consumer. The company had over 10,000 designs and a collection of masterpieces by well-
known Indian artists. A web- enabled e-commerce model was implemented to facilitate the
placement of orders for customized cards by distributors directly through the net. The site
also featured e- greetings. range ITC also added gifting and corporate stationery to its
portfolio. The Expressions Paperkrafts aimed at meeting the demand for stationery products
in the domestic market, It also launched the premium bond paper range under the name
“White Gold,” thereby leveraging its expertise in the manufacture of paper. Supported *
Financial Express, July 14, 2000. ol by a quality backend process and armed with a
distinguished front-end distribution network, ITC's medium term plan was to establish itself
in the gifting and stationery business. In January 2002, ITC launched its second range of
greeting cards in association with SOS Children's Villages of India. These cards (about 195
designs priced between Rs.4 and Rs. 11) were made available in 1,500 retail outlets across
100 cities in India. In June 2002, in order to strengthen its presence in the greeting cards
industry, ITC entered into a strategic alliance with Maple Leaf, the country’s leading pop-up’
card manufacturer. Under the terms of this alliance, Maple Leaf made exclusive pop-up cards
for ITC. These cards were launched under the Expressions brand. Announcing the alliance,
“Manufacture Chand of Das pop-up (Das), cards CEO, entails ITC intricate Greetings designing
Cards and Business hence said, requires specialized skills. The alliance will leverage the
manufacturing skills of Maple Leaf and the marketing organization of ITC to help tap the
latent demand for such cards in the country. Maple leaf being the market leader in this
category, this move helps us to leverage our respective strengths (Distribution Vs
technology).”® ITC planned to go national with its stationery products, notebooks and
notepads priced between Rs 15 and Rs 100 by January 2003. According to Das, stationery
and cards were the two pillars Expressions would rest on. Its portfolio would also include
autograph books, and gift-wrapping paper. Foods In 2001, ITC formed the foods division. This
division offered four categories of food: ready-to-serve gourmet (under the Kitchens of India
brand), confectionery and chocolates, biscuits and cookies, and branded staples. The
company entered the Rs 1.1 billion organized confectionery market by introducing two
confectionery products, Minto and Candyman. Minto was acquired from the Delhi-based
Candico.” Candyman was sold at a price of 50 paise per unit and was available in two
variants, Wild Banana and Mango Delight. The idea behind launching these confectionery
products was to leverage ITC’s extensive distribution network. With two brands in its
portfolio, ITC’s confectionery division could be a serious contender to established players
such as Perfetti Van Melle, Nestle India, Hindustan Lever and Joyco (Refer Exhibit VIII)
Analysts feel that it would take a minimum of two years for ITC's confectionery business to
break even because confectionery is a large- volume, low-margin business. In August 2001,
ITC launched ready-to-serve (RTS) packaged foods under the Kitchens of India brand (Refer
Exhibit IX). The company offered both vegetarian and non-vegetarian dishes. ITC also
announced its plan to launch the Kitchens of India brand abroad. According to analysts, the
RTS foods market in India was worth Rs 500-600 million, and was expected to touch Rs 2.5
billion by 2006. In 2002, ITC forayed into the highly fragmented branded staples segment
with its ‘Aashirwaad’ brand of (atta)®. ITC entered this segment at a time when all other
major brands in this segment, such as HLL’s ‘Annapurna,’ Cargil’s ‘Naturefresh,” Godrej
Pillsbury’s “Pillsbury’ and Agro Tech’s ‘Healthy World,” were making losses. (Refer Exhibit X).
And in November 2002, ITC entered the Rs.30 billion snack foods market * © 7 ® 80 Pop-up
cards ocoupy a niche segment in the overall cards market with approximately a 5% market
share in the metros. However, in value terms, pop-up cards are estimated to have a larger
share because their price is higher than that of normal cards. ITC’s press release, dated June
7, 2002. Its Candico India Ltd, the confectionery division of the erstwhile Bakeman's
Industries, was established as a separate confectionery company in April 1997. Mint-O was
Candico's largest brand. other brands included Candy King, Americano, Mint-O Fresh, After
Smoke, etc Wheat flour is known as afa in India with a snack called ‘bischips’ under the brand
‘I’. The product targeted teenagers and was positioned as a nutritious food. Branded Safety
Matches As part of its diversification plan, in November 2002, ITC entered the safety match
business with five brands. One of the brands, ‘Mangaldeep’, targeted housewives, while the
other four, ‘Aim,” D’lite,” *Vaxlite’ and ‘iKno,” targeted smokers. Analysts felt that ITC’s
diversification into safety matches was an excellent move. This venture added another
product to its portfolio, but with no extra distribution cost. The safety matches could use the
same distribution channels as ITC’s cigarette brands and be sold through the same outlets
that sold ITC’s cigarettes. By entering the safety matches business, ITC could leverage not
only its existing distribution network but also its paperboards, packaging and printing
businesses. 1TC Bhadrachalam Paperboards® was already exporting matchboxes to some
 African countries. So it could now introduce a new product using its existing knowledge base
and at no extra marketing cost. But according to analysts, this segment has limited growth.
Even though safety matches are one of the most commonly used products in the country,
they are a low value item. THE CHALLENGES AHEAD In 2001, Rs. ITC invested around Rs. 5
billion in its non-tobacco businesses. This investment was expected to increase to Rs 20
billion in the next five years. By May 2002, there were 44 Lifestyle stores in India. The gross
turnover from these stores was over 200 million, but due to their heavy start up costs, they
were still not considered profitable. Expressions greeting cards, which were sold through
10,000 outlets in 180 Indian cities, were yet to bring in revenues. According to company
reports, losses are on the rise in its branded garments, greeting cards and packaged foods
ventures. Losses in businesses such as ‘Aashirvad” wheat flour, Expressions greeting cards
and Wills Lifestyle accounted for five per cent of pre-tax profits in 2002 and continue to be
higher than the revenue generated by them. If losses continue {0 rise over the next few
quarters, it may adversely effect the overall profit growth. By 2005, ITC hopes to generate
around Rs. 2.5 billion in revenues from both greeting cards and foods. ITC’s foods division
alone was aiming at contributing Rs. 5 billion to ITCs’ revenues by 2007, Said Ravi Naware,
CEO, ITC’s packaged foods division, “Currently. we have a very modest contribution to ITC’s
topline. This is bound to grow over the years by expanding our product range.”' In the long
run, ITC expects its non-tobacco businesses to contribute 40 percent of its revenues. With
competition intensifying in each of the segments that ITC has diversified into, it will be a
challenging task for the company to create a market for its products in all its non-tobacco
segments. Kurush Grant, divisional chief executive, tobacco division, sounded a word of
caution, “If the new product category does not do well or has quality problems, then these
problems can get transferred back onto the original category.”'! It remains to be seen
whether ITC's diversified businesses will be profitable in the long run. 2 . In 1979, ITC entered
the paperboards business with ITC Bhadrachalam Paperboards Limited. Bhadrachalam
Paperboards was amalgamated with the company in March 13, 2002, and is now a division of
the company, Bhadrachalam Paperboards Division. 1% "' The Economic Times, December 14,
2002. Business Standard, December 12, 2000

Here is a point-by-point summary of ITC's diversification strategy:

1. Regulatory Challenge: In 2001, the Indian government passed the Tobacco Products
(Prohibition of Advertisement and Regulation) Bill, banning tobacco advertising and
restricting sales. This, combined with rising excise duties and competition from smuggled
goods, severely impacted ITC’s core tobacco business.

2. Decline in Tobacco Revenues: The anti-tobacco environment and declining cigarette sales
pushed ITC to reduce its reliance on tobacco, which still contributed around 85% of its
revenue.

3. Diversification Strategy: To secure alternative revenue streams, ITC pursued non-tobacco

sectors, including lifestyle retail, greeting cards, branded foods, stationery, and safety
matches.

4. Expansion into Lifestyle Retail: ITC launched "Wills Sport," a premium relaxed-wear line,
expanding its well-known "Wills" cigarette brand into lifestyle apparel. The first Wills Lifestyle
store opened in 2000, focusing on quality, aesthetics, and customer experience.
5. Greeting Cards and Corporate Stationery: ITC launched the "Expressions" greeting card
brand to enter India’s growing social expressions market, followed by a corporate stationery
line called "Expressions Paperkraft" and a partnership with Maple Leaf for premium pop-up
cards.

6. Foray into Branded Foods: In 2001, ITC entered the branded staples market with its
"Aashirvaad" atta and introduced "Kitchens of India," a line of gourmet ready-to-serve meals.
It also launched confectionery brands like "Minto" and "Candyman," leveraging its
distribution network.

7. Entry into Safety Matches: ITC introduced five new match brands targeting both households
and smokers. The company used its existing cigarette distribution network, benefiting from
synergies with its paperboard and packaging divisions.

8. Initial Profitability Challenges: High start-up costs and intense competition meant that ITC's
non-tobacco segments initially struggled to turn profits. By 2002, these divisions were still
incurring losses.

9. Long-term Revenue Goal: ITC aimed to increase non-tobacco revenue to 40% of total income
by 2006, planning further investments of Rs. 20 billion over five years to achieve this.

10. Uncertain Future: Analysts questioned ITC’s ability to capture market share in highly
competitive sectors, yet the company remained committed to establishing its non-tobacco
brands, reducing reliance on cigarettes, and aligning with India’s evolving health-conscious
market.

In 2001, a new law in India banned cigarette advertising and restricted tobacco sales. This,
along with rising taxes and competition from illegal cigarette imports, hurt ITC’s main
business of selling cigarettes. Since cigarettes made up 85% of ITC’s income, the company
saw the need to reduce its dependence on tobacco by expanding into other areas.

ITC used its brand strength to branch out into lifestyle retail, hotels, greeting cards, and food.
In the lifestyle segment, ITC launched "Wills Sport," a relaxed-wear clothing brand, and
opened the first Wills Lifestyle store in 2000. By using the popular Wills brand, which was
known for cigarettes, ITC aimed to attract customers to its clothing line and gain a share of
India’s growing branded clothing market.

In greeting cards, ITC introduced the "Expressions" brand to tap into the rising market for
social expression products in India. It also launched "Expressions Paperkraft" for corporate
stationery and teamed up with Maple Leaf, a leading Indian pop-up card maker, to expand its
greeting card offerings.

The food sector was also a big focus for ITC. In 2001, it launched the "Aashirvaad" brand of
flour (atta), targeting a traditionally unorganized sector. ITC also introduced the "Kitchens of
India" line of ready-to-eat gourmet meals and entered the candy market with brands like
"Minto" and "Candyman." ITC used its existing distribution network to compete with
established food brands like Nestle and Hindustan Unilever, though analysts predicted it
would take time to see profits in this low-margin sector.

In November 2002, ITC entered the safety matches market with five brands targeting
households and smokers. Using its cigarette distribution network, ITC was able to add
 matches to its product line without much additional cost, benefiting from its paperboard and
packaging resources.

Despite these expansions, ITC's new businesses struggled to make a profit at first. The start-
up costs in retail, greeting cards, and food were high, and competition in these markets was
intense. Some analysts doubted ITC could succeed in such crowded industries. However, ITC
planned to invest Rs. 20 billion over the next five years, aiming for its non-tobacco
businesses to contribute 40% of its revenue by 2006.

Though ITC’s long-term success in these new markets was uncertain, the company remained
hopeful that its non-tobacco ventures would eventually become profitable. ITC aimed to
reduce its dependence on tobacco and align with India's shift toward health-focused
regulations.

1. ITC has been constantly making efforts to de-cmphasize its tobacco business and to
create multiple avenues of growth based on its core competencies. What, according to
you, is ITC’s core competency? How did ITC create multiple avenues of growth based on
its core competencies?

ITC's core competency lies in its strong brand management, distribution network, and
understanding of consumer preferences. This has helped the company build a diverse
portfolio beyond just tobacco products.
Here's how ITC has created multiple avenues of growth based on these core
competencies:
1. Diversification into FMCG (Fast-Moving Consumer Goods): ITC leveraged its brand power
and distribution strength to enter the FMCG market. It created popular brands like
Aashirvaad (flour, spices), Sunfeast (biscuits), and Bingo! (snacks), which have become strong
players in the Indian market.
2. Hospitality: ITC used its expertise in managing high-quality services to enter the hospitality
industry, opening luxury hotels under the "ITC Hotels" brand.
3. Paperboards and Packaging: ITC applied its experience in logistics and sustainable practices
to become a leader in the paperboard and packaging industry.
4. Agri-Business: With its large network and supply chain expertise, ITC expanded into the agri-
business sector, creating a significant impact in sourcing and marketing agricultural products.
By leveraging its core strengths, ITC has reduced its dependency on tobacco and
expanded into various successful business areas.
4o mini
You said:
in little detail
ChatGPT said:
ChatGPT
ITC’s core competency lies in its strong capabilities in brand management, distribution
networks, and consumer insights. These strengths have helped ITC build a diverse and
successful portfolio beyond its tobacco business. Here’s a more detailed explanation of
how ITC created multiple avenues of growth based on these core competencies:
1. Diversification into FMCG: ITC used its deep understanding of consumer preferences and
strong brand management to enter the fast-moving consumer goods (FMCG) sector. The
 company launched successful products like Aashirvaad (flour, spices), Sunfeast (biscuits),
Bingo! (snacks), and Yippee! (noodles). ITC’s established distribution network, which was
initially built for its tobacco business, helped in rapidly scaling these FMCG products across
India. The company used its knowledge of local markets to create products that resonated
with Indian consumers.
2. Hospitality: Leveraging its expertise in premium product offerings and customer service, ITC
ventured into the hospitality industry with ITC Hotels. These luxury hotels became a part of
its diversified business model. ITC’s established reputation in the Indian market helped the
hotel chain build a loyal customer base, and the company was able to use its brand and
distribution knowledge to provide high-quality services in the hospitality sector.
3. Paperboards and Packaging: ITC utilized its expertise in logistics and sustainability to build a
strong presence in the paperboards and packaging industry. The company is a leader in
producing high-quality paper products and sustainable packaging solutions. ITC's vast
distribution network and focus on environmental responsibility gave it an edge in expanding
this segment, which also helped the company gain recognition as a responsible corporate
entity.
4. Agri-Business: ITC also tapped into its experience in supply chain management and its
extensive distribution network to create a thriving agri-business division. Through its ITC Agri
Business Division, the company sources and markets a wide range of agricultural products,
including grains, pulses, and spices. ITC's strong relationships with farmers, its commitment
to quality, and the efficient logistics network helped the company establish a significant
presence in the agri-business sector.

In summary, ITC used its core competencies—brand management, distribution

network, consumer insights, and operational expertise—to successfully diversify and grow in
sectors like FMCG, hospitality, paperboards, and agriculture. This strategy has allowed ITC to
reduce its reliance on tobacco while creating sustainable growth in other areas of business.
 Plan of Action: What is the suggested plan for solving this problem?
Declining Cigarette Business:
Government Regulations
The Indian government imposed a ban on tobacco advertising and restricted the sale of
tobacco products in public spaces in 2001. These regulations, combined with increased
excise duties, limited ITC’s ability to market its core products and significantly impacted
sales.
Health Campaigns and Social Pressure
There was an increase in anti-tobacco campaigns, mirroring trends in developed
countries where tobacco consumption faced strong opposition due to health concerns.
This made tobacco a less reliable business for future growth.
Competitive Pressures and Smuggling
ITC faced competition from both domestic players like Godfrey India Ltd. and Vazir
Sultan Tobacco, as well as from a large, unorganized sector and smuggled products.
Smuggled cigarettes, often cheaper due to lack of excise, attracted customers away from
legal brands, adding to ITC’s challenges.

Challenges in New Businesses

High Initial Investment Costs
ITC had invested substantially in its non-tobacco businesses (hotels, greeting cards,
apparel, foods, etc.), yet these ventures had not turned profitable due to high startup
costs and operational inefficiencies.
Intense Competition in Non-Tobacco Sectors
ITC entered crowded markets where well-established competitors had strongholds, such
as greeting cards (dominated by Archies and Vintage) and branded foods (with players
like Hindustan Lever and Godrej Pillsbury). Competing in these spaces required ITC to
build new competencies and invest heavily in marketing and product development.
Lack of Immediate Profitability
While ITC’s diversification aimed to reduce dependency on tobacco, the new businesses
contributed minimally to overall revenue, with non-tobacco segments collectively
accounting for only about 15% of total earnings. Despite its investments, these segments
weren’t scaling to the profitability needed to balance out the decline in tobacco revenue.
ased on the identified high-potential markets and opportunities in ITC’s diversified
businesses, here’s a tailored plan of action to drive growth and profitability:
1. Focus on High-Potential Markets
 FMCG Expansion: Strengthen product offerings in high-growth categories like packaged
foods, personal care, and health & wellness. Focus on tier-II and tier-III cities, where demand
for branded FMCG products is growing rapidly.
 Agri-business Growth: Enhance the reach of ITC's agri-business, leveraging the e-Choupal
network to expand into underserved rural markets, especially with agro-based products like
organic foods and sustainable agricultural practices.
 Sustainability Initiatives: Focus on the emerging global demand for sustainable and eco-
friendly products in both FMCG and paperboards, aiming to capture environmentally
conscious consumers.
2. Enhance Brand Image & Customer Loyalty
 Brand Revitalization: Invest in rebranding ITC's FMCG and agri-products to appeal to health-
conscious, environment-aware consumers. This could involve packaging improvements,
launching new product variants, and emphasizing sustainable sourcing.
 Customer-Centric Approach: Implement loyalty programs and improve digital engagement
with consumers through social media, apps, and e-commerce platforms. Promote direct-to-
consumer models where feasible.
 Corporate Social Responsibility (CSR): Increase CSR initiatives that align with sustainability
and farmer welfare to build goodwill and consumer loyalty, strengthening ITC’s reputation as
a responsible brand.
3. Strategic Use of Existing Distribution Networks
 Leveraging e-Choupal: Expand the scope of the e-Choupal network to increase the sourcing
and distribution of agri-products across a larger number of farmers and rural regions. This
can boost ITC’s agribusiness while improving the lives of farmers.
 Retail Partnerships: Expand partnerships with major retailers and e-commerce platforms,
improving the visibility and accessibility of ITC’s FMCG products. Increase penetration in
modern trade channels and direct-to-home delivery models.
4. Increase Profitability through Cost Management
 Optimize Supply Chain: Streamline supply chains, especially in the FMCG and paperboards
segments, to reduce costs and improve margins. Automation, AI, and data analytics can help
predict demand and minimize waste.
 Sustainable Sourcing: Shift towards more cost-effective, sustainable sourcing methods for
raw materials (such as paper and agro-based products), which not only reduces costs but
also aligns with growing eco-conscious consumer trends.
 R&D Investment: Direct resources toward R&D to improve product formulations and reduce
production costs, particularly in food processing and personal care.
5. Timeline & Goals for Revenue Diversification
 Short-Term (1-2 Years):
o Strengthen FMCG and agri-business portfolios.
o Increase market penetration in tier II and III cities.
o Revamp branding for sustainability and consumer engagement.
 Medium-Term (3-5 Years):
o Achieve market leadership in key FMCG segments.
o Expand eco-friendly product lines and enhance the scalability of sustainable farming
through the e-Choupal network.
o Reduce operational costs by 10-15% through supply chain optimization and
automation.
 Long-Term (5+ Years):
o Establish ITC as a leading sustainable brand in both FMCG and agri-business.
o Double revenue contribution from diversified businesses (FMCG, Agri-business, and
Paperboards).
o Achieve sustainable, year-over-year growth in profits through cost management and
continuous product innovation.
This structured approach, focusing on high-potential markets and strategic use of
existing capabilities, will help ITC drive revenue diversification while enhancing
profitability across its diversified business segments.