Wednesday, April 27, 2016

My Analysis on ITC Limited and its Dairy Development Initiative

 “Corporates are often viewed through a very narrow lens that concentrates only on their ability to extend financial support to socially relevant projects. This approach ignores the immense transformational capacity of business in innovating business models that can synergistically deliver economic and social value simultaneously.” —ITC Chairman Y C Deveshwar [1]       
The case study written by Vidhi Chaudhri and Asha Kaul on ITC Limited, India’s foremost multi-business enterprise with a market capitalization of US $40 billion and a market turnover of $8 billion starts with a deep focus on the unedited vision which the organization has carried forward over its last century of operations. The study hovers around all the factors which have brought ITC Limited to what it has transformed into today. Its unique business models have always centered on the principle of creating shared value rather than simply being socially responsible. How does this differ? How does it matter? How different is CSR from CSV? We shall find out below:

According to Harvard University’s legendary professor, Michael Porter and FSG’s Mark Kramer, the concept of shared value can simply be defined as “policies and operating practices that enhance the competitiveness of a company, while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress.”

ITC’s Agro-Business Division is a prime exemplifier of creating Shared Value (CSV). A division which was once weighing down the entire organization, its work on e-Choupal has transformed the principles of ITC itself and it alone drives almost 17% of the overall revenue generation. The ‘triple bottom-line offering’, a concept first coined by John Elkington in 1994, is the framework which ITC Limited adopted since the beginning. This divides their business into three aims of achievement: social, environment and financial. On another level, within the same geography; Hindustan Unilever’s approach towards home distribution systems in the form of Project Shakti, at the same time, providing training to almost 40,000 entrepreneurs across 100,000 villages is not a small but significant fraction of their overall revenues.

Another example of CSV is Nestle’s Nescafe Plan, an alliance between the Rainforest Alliance and Nescafe in order to teach coffee farmers on how to improve productivity, efficiency and long-term sustainability. This was a $331 million investment where Nestle planted 4 million coffee trees in Columbia and at the same time, started to mentor almost 10,000 farmers in the Far East.

Coming back to e-Choupal, ITC had taken this up to be an ambitious plan having dual outcomes. On one hand, there was this immense requirement of empowering Indian farmers to stand for themselves and on the other hand, the need to create a unique source of advantage in the agriculture-related standing of the company. In the traditional world, the farmers would directly sell their produce in the regulated markets. In terms of product value, the farmers are really in a blind spot due to lack of information on the market conditions prior to the sale. On the other hand, the traders trading this produce from the farmers into the hands of the consumers are well informed about various crop prices. It is for this exact reason that these middlemen traders are successful in exploiting the poor farmers. When e-Choupal was introduced, it gave these farmers the gateway they needed to learn more information about the outside world. With its hub-and –spoke model, it provided the farmers with an internet kiosk which would allow them to study the wholesale prices of various crops daily, both at the market and at the ITC ABD. The other part of this system was the provision of warehouses and farmer training centers which could support at least 40-60 e-Choupals. The inclusion of ITC ABD to be a buyer of this produce at a slightly higher rate for its own ITC Foods Division was a prime success factor in this regard. Today, e-Choupal has expanded in a revolutionary manner. Not only has it won many honors, one of them being the UNIDO Award in 2008; but it has most importantly been successful in generating societal as well as shareholder value.

Answering the first question provided for the case study, ITC’s ABD has now become India’s second-largest exporter of agri-products. This has solely been possible because of the e-Choupal initiative. Because of this, ABD currently focuses on exports and domestic trading of :
         ·         Feed Ingredients like Soyameal
         ·         Food Grains such as Wheat, Rice, Pulses, Barley and Maize
         ·         Marine Products such as Shrimps and Prawns
         ·         Processed Fruits like Fruit Concentrates, Frozen Fruits and Organic Products
         ·         Lastly and most importantly, Coffee

Against all this, in another industry but under the same organization, ITC was trying hard to keep its paperboards investment alive. It had initially made this foray by integrating Bhadrachalan Paperboards Limited in 2002. Y.C. Deveshwar, on his induction into office pushed for a strong modernization process flow for the plant in 1997. This was the birth of the social and farm forestry program in India. This would not only secure paper material for ITC but also push towards a sustainable future on a country-wide scale. The result of this was that ITC assisted the poor and tribal farmers by converting their private wastelands into productive pulpwood plantations. Not only has this created a large green cover contributing significantly to groundwater recharge and soil conservation, but most of all – the state of Andhra Pradesh now produces a “quarter of India’s total pulp yield”! By viewing this from another perspective, ITC has been successful in planting almost 1.15 lakh hectares of forest cover and has turned into a carbon positive organization. Moreover, it is growing this on a scale of 10,000 hectares annually and is expanding this idea into the neighboring states of Madhya Pradesh, Maharashtra and Tamil Nadu as well. Most importantly, this has generated 51.48 million person-days of employment. [2]

From the perspective of the farmer involved in this program, the income level has risen to almost INR 25,000 per hectare per year under rain-fed conditions and INR 40,000 per hectare per year with manual irrigation on a four-year rotation cycle.

Answering the third question for the case study, ITC has shown high levels of competency in leveraging its links among business to explore new opportunities by weaving in the concepts of ‘creating shared value” into its corporate strategy. If looked at from the definition provided by Porter and Kramer, which we briefly described above, there are numerous examples which ITC has shown.
          ·         First and foremost and without any doubt would be its e-Choupal initiative which has been very descriptively been spoken about above.
       ·     Secondly, the social and farm forestry program is another competitive source which ITC developed by incorporating the principles of CSV.
            ·         The move to segment agarbatti’s (incense sticks) from numerous small-scale and cottage units in Central, Eastern and Southern India is a notable example for the same. By doing this, ITC was able to condense all of these to create the second-largest incense sticks brand – Mangaldeep. Another major move that ITC did along with this was the alignment of its women empowerment program thus providing livelihood to over 40,000 women and this was further linked to debt alleviation and an improvement in children’s education and nutrition.
          ·         According to a report by Nielsen, ITC’s decision for Mangaldeep and a similar segmentation of its brand AIM in the safety matches industry has become one of the fastest growing consumer good companies across the country.

Can ITC’s existing model of creating shared value be applied to dairy development?  Why or why not?
Yes, ITC can definitely extend its current business model to incorporate dairy development. Though there might be a few issues with regard to the perishable nature of the product, ITC can definitely go ahead and do something like what Amul – India’s largest milk producer has done. To talk about how ITC can do this is by discussing the Amul model firstly.

Anyone in the state of Gujarat is eligible to join the Amul co-operative provided he/she owns at least one cow. By doing this, the farmer is granted a say into electing the particular village’s DCS (Dairy Co-operative Society). This is primarily a hyperlocal group which manages the milk collection at the village level and then pays the farmer at the time of collection itself. This is a three tier system, then extending onto a district and state level. Amul depends a lot on SAP’s ERP technology, given the number of farmers and their ownership of multiple cows. On a total level, more than 15 million milk producers plug their milk into 144,500 dairy co-operative societies across the country for Amul. This is then processed in over 184 District Co-operative Unions and then marketed across to the nation via 22 State marketing federations. [3]

By observing this model and studying about ITC’s foray into numerous industries, ITC has two choices so as to make this happen:
       ·         One: Continue on the model developed by Amul. This would be a non-innovative way of creating shared value amongst the masses but still be successful.
         ·         Two (My personal choice): DO WHAT ITC EARLIER DID for the “Farm and Social Forestry Program”. Here it can make the farmers capable into producing their own milk and then integrate it along with its ABD unit. This way, ITC would not only be building value on a large scale, but it would also be helping farmers earn a livelihood as well as provide them with suitable remuneration for the milk they can provide. No doubt, ITC would have to put in quite a lot of its resources into cattle development and build a strong quality and logistics framework so as to keep a check on the quality of milk and make sure it is easily distributable to the masses.


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