Let me congratulate Outlook Business on its new tagline — “Think Beyond. Stay Ahead.” It’s inspired and I must say, in many ways, also reflects the spirit of ITC’s transformation. Thinking beyond and staying ahead for any organisation depends on three factors: the ambition of its leadership, the aspiration of its stakeholders and the expectations of society. And the impact of leadership can be seen in the vision, values and the vitality of an organisation. When I took office as chairman of ITC, I was confronted with a mix of challenges. Just a day before I took charge, our cigarette business received a retrospective excise duty demand of Rs 803 crore. The company’s earlier diversification into hotels and paper was faltering. Before that could be put on a firm footing, a slew of new businesses were launched in edible oils, financial services and international trading, which turned out to be disasters. Obviously, there was criticism given the weak diversification performance. Add to that, a battle for control of the company had ensued amidst a huge public smear campaign. Also, the competitive landscape of the country changed with the advent of economic liberalisation.
So, I had in front of me a challenging context of old burden and new opportunities. My own ambition was to create a company that would be an engine of growth for the Indian economy, an institution with values and vitality that would create wealth for the Indian society. And it could only be done by creating drivers of growth that are aligned with national priorities. But then conventional wisdom, imported from mature markets of the West, advocated against diversification. Even our overseas shareholder thought that it was not a smart idea to diversify and we should stick to being only a cigarette company. However, our strong belief in creating an organisation to serve national priorities led us to reaffirm our strategy in creating multiple drivers of growth that could leverage the opportunities of an emerging economy by matching it with the strengths and core capabilities of the organisation.
I have not taken as big a risk as people think because we have thought through where the sources of competitive advantage would come from. In our foods business, we had insights into the Indian palette, thanks to the chefs of our hotels. That’s why the first director in charge of the foods business was the person who was running the hotels business. We did this deliberately. So in foods, we have competencies in sourcing and product formulation which add value to enterprise strengths in branding, trade, marketing and distribution to deliver a unique source of competitive advantage. In addition to our existing strategic advantages, we have also built strengths through vertical integration. That’s not a conventional approach but it’s a long-term one. For example, given the strategic role of packaging in our FMCG businesses, we have invested in state-of-the-art facilities that give us complete control over packaging quality, which is vital for product appeal, be it foods or personal care. Financially, you may argue that packaging will not deliver the returns that we should be chasing, but there are other equally important considerations. When you are a newcomer, the incumbents can get to know what you are coming out with, thanks to their relationships with suppliers. So, we thought it was important to have our own set-up to ensure both confidentiality and quality. The last thing you want is for competition to do something you are thinking, ahead of you.
It is this long-term agenda that has played out favourably for us now. One key consideration, when you develop strategies to ensure the longevity of the organisation, is to see the life cycle of your products. A couple of decades ago, cigarettes were a lifestyle product but it has since become a demerit good. Today, cigarette’s share in total tobacco has declined to 15% in India, though it contributes 75% of the taxes from this sector. While there is still demand for cigarettes, this sector is threatened significantly by the huge incidence of smuggling as a result of the high tax arbitrage provided by contraband products. Therefore, there is a role for ITC to play as a responsible corporation because our presence in this category through popular Indian brands provide protection against such malpractices. However, staying hooked on to the cigarette business alone may end up threatening our survival in future.
Therefore, our decision to diversify was very important. Now, 50% of our net turnover comes from non-cigarette businesses. Over the past 15 years our non-cigarette Ebitda has grown faster than cigarette Ebitda by at least 500 basis points. And we are still mid-stream. There is no parallel example in the world of so many businesses created organically in such a short time.
Diversity creates a large pool of skills and competencies lending unique sources of competitive advantage for longer term value creation and also strengthens an organisation’s adapative capacity in a fast changing world. Diversification requires a clear comprehension of the dynamics of that business. If you then craft a competitive strategy that, apart from mobilising financial capital and human talent, also leverages some institutional capabilities of your organisation and if you can enmesh within your strategy superordinate goals that can excite the passion of people, there is no reason that one should not succeed sooner or later.
I was fortunate that I got recognition at a very early age at ITC. I became the head of a factory at 28, head of a division at 31 and a director on the board at 37. I had the experience of running multiple businesses — packaging, hotels and tobacco. I also got an opportunity to lead Air India as its chairman. Incidentally by 1993, Air India was the most profitable carrier amongst the IATA carriers on a return on capital basis. You need early- success experience. It is extremely important to get early-success experience because it fuels growth and, in turn, helps personal growth. So, creating success experience is the first step in a virtuous cycle.
The issue with long-term thinking is that it’s generally not rewarded by markets. The tragedy is that markets do not reward value created beyond the numbers and even there, they focus narrowly on the next quarter. Business institutions, however, have to begin to recognise the larger interests of society. So, at ITC, we measure our performance by our contribution to the triple bottom line — how do we innovate business models to create economic, ecological and social value. ITC is today the only company in the world to be carbon positive, water positive and solid waste recycling positive and the businesses have created five million livelihoods.
There is one hitch in following this approach though: if your competitors do not take this approach and you allocate resources towards such endeavours, you may end up with a competitive disadvantage and your very survival may be threatened. Therefore, it is necessary to be a good juggler. In the present structure of markets, that means doing what the market requires of you in the short run as well as your competitors, if not better, and in addition, doing other things that are good for the society in the long run. It is then that long-term competitive advantage is more sustainable and secure. The challenge for those who think long term is to have the ability to live through the short term as well. Sometimes, not taking a risk may be the biggest risk. In the case of ITC, not taking those calculated risks would have been the biggest danger to our survival as well as our growth. Leadership is about making these choices to build competitive advantage for the long term and to create enduring value for all its stakeholders and society.
As told to N Mahalakshmi
Since Y.C. Deveshwar took over, he has focused on making ITC a brand to be admired and followed for its diversification, integration and commitment to the betterment of society (‘Sometimes, not taking a risk is the biggest risk’, Dec 17). The success story vindicates the company’s strategy and innovation in transforming itself from being known for cigarettes to an FMCG hub. All credit to the chairman.
The Indian Multinational Company !!!!!
Since the day Mr. Y. C. Deveshwar took over ITC , he has been focussed of making the organisation a truly Brand to be admired, followed and respected for its diversification, integration and commitment for the betterment of the society. The company have many feathers in its cap, they introduced e-choupal focussed on agrarian economy and therby creating a strong societal value. The success story truely outlines the innovation, strategy and the commitment towards complete transformantion from a company known for cigarettes to a hub of FMCG and other diversified businesses. The credit should go to Chairman for his relentless and complete dedication in acheived the towering feat. I have been closely observing the company for last 25 yrs, it has been a complete turnaround form the day of disputes between BAT & the Indian Shareholders, to successful entity, which infuses a sense of pride in the Indian populace. What has been the remarkable thing is that it has reached out to lowest level of society, by creating a mechanism in which the society is the biggest beneficiary. Hope that the other Indian Companies also follow the same path and reap the benefits.
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