TERM PAPER ON

ITC LIMITED (TOBACCO DIVISION)

FOR

STRATEGIC MANAGEMENT

AND

SUPPLY CHAIN MANAGEMENT

UNDER THE GUIDANCE OF

PROF. ASOKUMARVIT BUSINESS SCHOOL

VIT UNIVERSITY

COMPLETED BY

AYYAPPAN (07 MBA 000) M. KARTHIK (07 MBA 050)

K.A. GOPINATH (07 MBA 039)J. KARUNANITHI (07 MBA 053)

S. MAHENDRAN (07 MBA 058)MOHAMMAD NAUFAL (07 MBA 063)

INTRODUCTION-COMPANY PROFILE

ITC is one of India's foremost private sector companies with a

market capitalization of nearly US $ 18 billion and a turnover of over US $

5.1 Billion. ITC is rated among the World's Best Big Companies, Asia's

'Fab 50' and the World's Most Reputable Companies by Forbes magazine,

among India's Most Respected Companies by BusinessWorld and among

India's Most Valuable Companies by Business Today.ITC ranks among

India's `10 Most Valuable (Company) Brands', in a study conducted by

Brand Finance and published by the Economic Times.ITC also ranks

among Asia's 50 best performing companies compiled by Business Week.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards &

Specialty Papers, Packaging, Agri-Business, Packaged Foods &

Confectionery, Information Technology, Branded Apparel, Personal Care,

Stationery, Safety Matches and other FMCG products.

ITC's diversified status originates from its corporate strategy

aimed at creating multiple drivers of growth anchored on its time-tested

core competencies: unmatched distribution reach, superior brand-building

capabilities, effective supply chain management and acknowledged service

skills.Over time, the strategic forays into new businesses are expected to

garner a significant share of these emerging high-growth markets in

India.ITC is one of the country's biggest foreign exchange earners (US $

3.2 billion in the last decade). The Company's 'e-Choupal' initiative is

enabling Indian agriculture significantly enhance its competitiveness by

empowering Indian farmers through the power of the Internet. This

transformational strategy, which has already become the subject matter of

a case study at Harvard Business School, is expected to progressively

create for ITC a huge rural distribution infrastructure, significantly

enhancing the Company's marketing reach.

ITC was the first company in India to voluntarily seek a

corporate governance rating.ITC employs over 24,000 people at more than

60 locations across India. The Company continuously endeavors to

enhance its wealth generating capabilities in a globalizing environment to

consistently reward more than 3,75,000 shareholders, fulfill the aspirations

of its stakeholders and meet societal expectations.

ITC’s VISION

Sustain ITC's position as one of India's most valuable corporations through

world class performance, creating growing value for the Indian economy

and the Company’s stakeholders

ITC’s MISSION

To enhance the wealth generating capability of the enterprise in a

globalizing environment, delivering superior and sustainable stakeholder

value

THE ITC LEADERSHIP

Flowing from the concept and principles of Corporate

Governance adopted by the Company, leadership within ITC is exercised

at three levels. The Board of Directors at the apex, as trustee of

shareholders, carries the responsibility for strategic supervision of the

Company. The strategic management of the Company rests with the

Corporate Management Committee comprising the whole time Directors

and members drawn from senior management. The executive management

of each business division is vested with the Divisional Management

Committee (DMC), headed by the Chief Executive. Each DMC is

responsible for and totally focused on the management of its assigned

business.

As already stated earlier we will be studying the ITC’s Tobacco products

only.

Historical Overview of Tobacco in India

Tobacco cultivation has a history of about 8000 years.

Europeans were introduced to tobacco when Columbus landed in America

in 1492. Portuguese traders introduced tobacco in India during 1600.

Tobacco’s easy assimilation into the cultural rituals of many societies was

facilitated by the medicinal (and perhaps intoxicating) properties attributed

to it. Tobacco became a valuable commodity in barter trade and its use

spread rapidly. Introduced initially in India as a product to be smoked,

tobacco gradually began to be used in several other forms. Paan(betel

quid) chewing became a widely prevalent form of smokeless tobacco use.

Although some Chinese and European systems of medicine supported the

use of tobacco, Ayurveda—the Indian system of medicine—never

supported the use of tobacco as medication. The ill effects of tobacco use

on human health were recognized even in the sixteenth century, which led

to restrictions on its use. Tobacco thrived everywhere in the world despite

social (and some religious) disapproval.

Indian tobacco industry:

A view Chewing tobacco has been a tradition in India for

centuries. Of the total amount of tobacco produced in the country, around

48% is in the form of chewing tobacco, 38% as bidis, and only 14% as

cigarettes. Thus, bidis, snuff and chewing tobacco (such as gutka, khaini

and zarda) form the bulk (86%) of India's total tobacco production. In the

rest of the world, production of cigarettes is 90% of total production of

tobacco related products.

The per capita consumption of cigarettes in India is merely a tenth of the

world average. This unique tobacco consumption pattern is a combination

of tradition and more importantly the tax imposed on cigarettes over the

last 2 decades. Cigarette smokers pay almost 85% of the total tax revenues

generated from tobacco.

The Indian tobacco industry

India is the second largest producer of tobacco in the world

after China. It produced 572 m kgs of tobacco in FY03. However, India

holds a meager 0.7% share of the US$ 30 bn global trade in tobacco, with

cigarettes accounting for 85% of the country's total tobacco exports.

Despite being the second largest producer, India is only the

ninth largest exporter of tobacco and tobacco products in the world. Out of

the total tobacco produced in India, only one-third is flue-cured tobacco

suitable for cigarette manufacturing. Most of the tobacco produce is

suitable for the manufacture of chewing tobacco, bidis and other cheap

tobacco products, which have no demand outside the country.

CIGARETTES:

ITC is the market leader in cigarettes in India. With its wide

range of invaluable brands, it has a leadership position in every segment of

the market. It's highly popular portfolio of brands includes Insignia, India

Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan,

Berkeley, Bristol and Flake. ITD (Indian Tobacco division) also sells two

luxury filter brands of its parent company Benson & Hedges and 555.

The Company has been able to build on its leadership position

because of its single minded focus on value creation for the consumer

through significant investments in product design, innovation,

manufacturing technology, quality, marketing and distribution. This

strategic focus on the consumer has paid ITC handsome dividends. ITC's

pursuit of international competitiveness is reflected in its initiatives in the

overseas markets. In the extremely competitive US market, ITC offers

high-quality, value-priced cigarettes and Roll-your-own solutions. In West

Asia, ITC has become a key player in the GCC markets through growing

volumes of its brands.

ITC's cigarettes are produced in its state-of-the-art factories at

Bengaluru, Munger, Saharanpur and Kolkata. These factories are known

for their high levels of quality, contemporary technology and work

environment.

LEAF TOBACCO

ITC pioneered the cultivation and development of Leaf

Tobaccos in India. The Leaf Tobacco business' partnership with the farmer

is also almost 100 years old. ITC is the largest buyer, processor and

exporter of leaf tobaccos in India - creating a global benchmark as the

single largest integrated source of quality tobaccos. Serving customers in

48 countries across more than 69 destinations, ITC co-creates and delivers

value at every stage of the leaf tobacco value chain. ITC buys nearly 50

per cent of all tobacco types grown in India. It has a team of experienced,

highly skilled and professional buyers and classifiers who source and

segregate tobaccos to exacting customer specifications.

A large inventory base of quality tobaccos provides an edge in

serving customers through product customization, portfolio rationalization,

product bundling and value added services. This strategic direction

insulates customers from crop fluctuations, a key 'winning proposition'

acknowledged worldwide. ITC's comprehensive and sophisticated R&D

facilities cover all aspects of cultivation, product development and

processing through fundamental and applied research.

Thus, ITC's value proposition to its customers is "On Time In

Full" delivery of quality tobaccos spanning across all tobacco types at

competitive prices. ITC's Green Leaf Processing plants at Chirala and

Anaparti in Andhra Pradesh, the tobacco hub of India, are benchmarked

with the best in the world. State-of-the-art technology, shared product

knowledge base, sophisticated process and quality controls enable ITC to

process and deliver 120 million Kgs of high quality tobaccos annually.

These factories have integrated warehousing complexes that match

international standards in hygiene, infestation control and monitoring.

ITC's quality emanates from its intimate involvement with the

tobacco farmers in India. Effective reach mechanisms help transfer 'best

practices' from the lab to the land. With an extensive presence in rural

India, ITC's Leaf Tobacco business maps critical Soil, Crop and Process

control parameters across cultivated areas. Intermediation through a

dedicated pool of trained managers in critical areas like soil testing,

varietal improvements, vermicomposting, nutrient management and post

harvest management results in a superior agri output.

These initiatives position ITC as an integral part of India's

agricultural landscape. ITC's collaboration with related Government

agencies has helped develop new varieties of tobaccos and explore new

areas for tobacco cultivation.

Components of a Cigarette

1. Filter made of 95% cellulose acetate.

2. Tipping paper to cover the filter.

3. Rolling paper to cover the tobacco.

4. Tobacco blend.

Supply Chain Management

“..Supply Chain Management is

Getting the right things to the right place at the right time, for profit”

New information and communications technologies have

revolutionized today’s supply chains, making them extraordinarily better,

faster, and cheaper

Supply Chain Evolution

Two hundred years ago, giant mechanical machines replaced labor

to complete tasks in large factories. Railroads, electricity and new

communications mediums expanded markets and also made supply

chains better, faster, and cheaper.

In the early 1900s, Henry Ford created the first moving assembly

line, utilizing scientific management methods. This reduced the time

required to build a Model T from 728 hours to 1.5 hours, and

ushered in the mass production era.

But in the 1970s, U.S. manufacturing’s superiority was challenged

by lower costs and higher quality products from foreign firms in

many industries.

Starting in the early 1970s, Japanese manufacturers like Toyota

changed the rules of production from mass to lean. Lean

manufacturing focuses on flexibility and quality more than on

efficiency and quantity.

Components of supply chain

The supply chain has basically four components:

Production: where businesses focus on how much to produce, where

to produce it, and what suppliers to use.

Inventory: where businesses decide where to store their products,

and how much to store.

Distribution: where businesses address questions about how their

products should be moved and stored.

Payments: where businesses look for the best ways to pay suppliers

and get paid by customers.

The efficiency and effectiveness of a supply chain is contingent on the

ability to gather and analyze important information through these

components.

The Indian Tobacco Division has:

3 contract manufacturers (OCMs)

1) Reliable Cigarette and Tobacco Industries Private Ltd. (RCTI)

2) Asian Tobacco Company (ATC )

3) Hyderabad Deccan Cigarette Industries (HDC)

Huge distribution network with 19 marketing branches and 33

Godowns across nation.

Also caters to the exports mainly in United States and Middle-

Eastern countries.

The Manufacturing Process

Cigarette manufacturing process involves processing of tobacco leaf

and stem to different tobacco blends, which is called cut tobacco

Cut tobacco is then converted to cigarettes using other raw materials

for making cigarettes and packing them in various forms as per the

trading requirements

ITD receives various grades of Tobacco Leaf and Stem from Indian

Leaf Tobacco Division (ILTD) based mainly in Guntur, Andhra

Pradesh

Processed to form tobacco blends at one of the three Tobacco

Processing Units at Bangalore, Saharanpur and Munger.

Tobacco Processing Unit is called PMD or Primary Manufacturing

Division.

The cut tobacco is then sent to the Secondary Manufacturing

Division (SMD) for making and packing cigarettes

Three OCMs and Kidderpore factory don’t have in-house PMD, and

are supplied with tobacco from one of the three ITD PMDs. Rest of

the raw material (WMS) required for making or packing cigarettes is

provided to all factories from various WMS suppliers, most of which

are part of ITC Ltd

At SMD, there are two processes: Making and Packing

Making process is the rolling of cigarette sticks

Packing process is packing of these cigarette sticks in the

cigarette packets of various pack styles.

Cigarettes are categorized in different segments based on filter or

non-filter type, cigarette length, circumference, pack style, filter

length and cigarette placement. Under each segment there are

various brands.

Finished Good (Cigarettes) are supplied from the factories to

godowns using mainly road and rail transportation. From marketing

godowns, the FG flows to wholesale distributors and from there on

to retail channel. Requirement for each warehouse is expressed

brand-wise.

ITD Supply Chain Network

Grand strategy

YEAR STRATEGY

1901 The British and American Tobacco

Company expanded their trade into

India and set up three companies,

which later together became the

Imperial Tobacco Company India,

i.e. the present Indian Tobacco

Company (ITC) Ltd.

Entry

1928 The Indian Leaf Tobacco Division

(ILTD) of ITC experimented on the

black soils of Guntur, Andhra

Pradesh and successfully cultivated

Virginia Tobacco.

A market oriented concentric

diversification.

1929 Commercial and large-scale

production of tobacco was initiated

by the ILTD. The company

established demonstration barns,

provided technical guidance to them

and encouraged local farmers to

grow tobacco by providing financial

assistance to construct barns,

A Horizontal Integration.

purchase fertilizers, wood fuel, etc.

Slowly, tobacco cultivation spread to

all the coastal districts of Andhra

Pradesh.

1933 The ILTD introduced flue-cured

Virginia (FCV) tobacco into the

international market.

International Expansion

1936 A cigarette tobacco research station

was established in Guntur to study

the effect of soil and manure on the

flavour of tobacco.

Horizontal backward

integration

1940 Cultivation of FCV tobacco was

initiated in north Bihar (1940), Uttar

Pradesh (1940) and Gujarat (1945–

1946).

Horizontal expansion

1956 The Tobacco Export Promotion

Council (TEPC) was established to

support, protect and promote the

export of tobacco

Horizontal forward integration

1998 Rs 375-crore invested for leaf-

processing plants and modern

storage facilities to "improve quality,

reduce wastage and enhance

productivity."

Horizontal backward

integratipon

1998 ITC will modernise its cigarette

plants by inducting "contemporary"

technology, involving Rs 900 crore

over the next five years.

Technological concentric

diversification

BCG Matrix

STARS

• Hotels

• Paperboards/ Packaging.

• Agri business

QUESTION MARK

• FMCG- Others

COWS

• FMCG-Cigarettes

DOGS

Maybe ITC Infotech.

SWOT ANALYSIS

ITC is one of India's biggest and best-known private sector

companies. In fact it is one of the World's most high profile consumer

operations. Its businesses and brands are focused almost entirely on the

Indian markets, and despite being most well-known for its tobacco brands

such as Gold Flake, the business is now diversifying into new FMCG (Fast

Moving Consumer Goods) brands in a number of market sectors.

Strengths

ITC leveraged it traditional businesses to develop new brands for

new segments. For example, ITC used its experience of transporting and

distributing tobacco products to remote and distant parts of India to the

advantage of its FMCG products.

Weaknesses

The company's original business was traded in tobacco. ITC stands

for Imperial Tobacco Company of India Limited. It is interesting that a

business that is now so involved in branding continues to use its original

name, despite the negative connection of tobacco with poor health and

premature death. To fund its cash guzzling FMCG start-up, the company is

still dependant upon its tobacco revenues. Cigarettes account for 47 per

cent of the company's turnover, and that in itself is responsible for 80% of

its profits. So there is an argument that ITC's move into FMCG (Fast

Moving Consumer Goods) is being subsidised by its tobacco operations.

Its Gold Flake tobacco brand is the largest FMCG brand in India - and this

single brand alone hold 70% of the tobacco market.

Opportunities

ITC is moving into new and emerging sectors including Information

Technology, supporting business solutions.

Threats

The obvious threat is from competition, both domestic and

international. The laws of economics dictate that if competitors see that

there is a solid profit to be made in an emerging consumer society that

ultimately new products and services will be made available. Western

companies will see India as an exciting opportunity for themselves to find

new market segments for their own offerings.

ITC's opportunities are likely to be opportunities for other

companies as well. Therefore the dynamic of competition will alter in the

medium-term. Then ITC will need to decide whether being a diversified

conglomerate is the most competitive strategic formation for a secure

future.

Competitors

In India, three major cigarette players dominate the market,

primarily ITC with 72% market share, Godfrey Phillips with 12% and

VST with 8% share of the market.