ITC Chairman Yogi Deveshwar: Creating a 'Future-ready' Conglomerate

  Published: January 13, 2011 in India Knowledge@Wharton 

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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