Overview
The International Business Division (IBD) of ITC, whose main focus is agricultural commodities, was faced with the challenge of underperformance in sales when compared to other divisions, to include tobacco, paperboard, retail, hospitality and foods, within the company. The chief executive of the IBD was aware of the dilemma and was exploring his options to bring about a change to the current conditions. He was considering the concept of the present Choupal system wherein farmers gather at a meeting place at the end of each day to discuss daily happenings. Seeing that soybeans and its derivatives account for two-thirds of ITC’s agricultural export business, his focus was placed on that area. ITC’s supply chain for soybean was from local farmers to mandis to ITC’s factory and this process was significantly hampering the IBD’s performance. The supply chain was suffering from the lack of resources and a reliable channel for information flow, which resulted in a very unproductive cycle. In order to meet the company’s target, it had to identify ways in which a new method could be introduced so that the issues would be corrected.
Technology was at the forefront but going that route also had its challenges. It would have been introduced in an environment that was underdeveloped and the general population was not exposed to computer technology. In India where ITC’s corporate offices are located, there is a rich culture and also the industry is governed by politics hence determining a method to effect changes, these factors have to be considered. Historically, the farmers would know happenings in the market place via the Choupals and ITC saw this culture as a good model for introducing the technology they had in mind. ITC introduced its new initiative termed eChoupal. Its main purpose was to gather and share information for the benefit of the farmers and other key players in the industry just like the traditional Choupals. It placed high on its list of values to remain transparent whilst avoiding corruption. In order to get the initiative going, ITC must make a huge investment in computer systems and also training villagers how to use the systems. The start cost would be significant; however, ITC predicted huge returns within three years. Additionally, the company had considered the potential benefits that this new system would bring to the farmers who are currently losing 60-70 percent of the potential value of their crop. The company also went further to develop processing hubs that featured agriscience, precise scales and farming supplies.
ITC’s Business Model
A business model forms the foundation for how executives make decisions about opportunities to pursue, businesses to launch or buy and activities to perform. It also defines how an organization interacts with its environment to define a unique strategy, attract the resources and build the capabilities require to execute the strategy and create value for all stakeholders (Applegate, Austin, Soule 2009 page 43). The business model framework has three parts essentially, strategy, capabilities and value.
ITC’s strategy was to re-engineer the supply chain to fix market inefficiencies through information sharing whilst differentiating its business from its competitors’. This strategy was executed by the introduction of the eChoupal which enabled farmers to do more in their trade. The eChoupal and by extension the computer systems, now created the capabilities and resources needed by farmers to have an integrated system for their market place. A local farmer, also known as the sanchalak, was used to manage the each eChoupal which is usually set up in his dwelling place. It was linked to the internet via phone lines and served an average of 600 farmers in the villages. The cost to ITC to set up eChoupals was on average US$6000 and cost the farmers nothing to use. Daily closing prices at the local mandis along with global market prices were now accessible to the farmers. They were also able to learn about new farming techniques and order the requisite seed, fertilizer and consumer products at lower prices. ITC also identified new capabilities as the company was now able to predict farmers demand for these products. Instead of farmers having to travel miles to the nearest mandi and waiting sometimes for days to sell their product, they now had the option of selling ITC their produce under more equitable and mutually beneficial conditions. The farmer now receives his payment at the time of sale rather than having to wait in the old system.
The values gained by both farmers and ITC were immeasurable and this contributed to the success of the eChoupal. Farmers benefited from prompt payments, accurate weighing, quicker processing and accessibility to information which allowed them to make more informed decisions and ultimately got the farmers better prices for their produce. With more control over their trade, farmers now felt a sense empowerment. The sanchalaks gained pride from having been entrusted with such a prestigious role and a commission paid to him by ITC for his facilitation of the eChoupal. The initiative had huge impacts on the farmers as more of them were now planting soy. The commission agent, now called samoyjaks, were also integrated into the new system and paid a commission on each transaction. ITC benefited from having more control of the quality of produce chosen resulting in them producing better end products and demanding higher prices. The company was also able to use the eChoupal as a distribution channel for its products and to improve its profitability.
Case Analysis
An important goal to any organization is profit maximization and this was an obstacle that was affecting the International Business Division of ITC. Its biggest challenge was to figure out how to increase its sales revenue which was lagging behind all other ITC divisions. The problems in the supply chain were major contributors to IBD’s inability to remain competitive both locally and internationally. As such, these issues needed to be addressed so as to increase sales and market share. Farmers were losing 60-70 percent of their crop which was due to them not having accurate and timely information. Information received by the farmers was often outdated and irrelevant at the time which they received it. ITC’s dependence on commission agents (CA) was reducing their profit margins. Farmers were suffering from unfair practices, often by the CA, who were able to manipulate the system and get farmers to sell at lower prices. Farmers were never given an incentive to produce quality crops, they were more focused on quantity and not quality, which would essentially yield more sales proceeds. The farmers were also risk averse as there was no way of accessing the unknowns such as weather, soil quality and market share. They were losing crop to bad weather and pest infestation so, in order to mitigate against this, they were planting in small quantities. Their risk aversion also prevented them from experimenting with new farming techniques. ITC realized that farmers didn’t have access to the quality inputs such as herbicides, pesticides and sowing seeds which would yield quality crops and consequently quality end products.
In the old system, farmers were required to transport soybeans to the mandis by means of tractors and bullock carts and waited an average of two days to get into the market for them to be auctioned. Bidding prices were usually set by the government and bidding conducted by government-licensed buyers known as commission agents (CA). An agent contracted by ITC usually bids on its behalf. Produce won by a CA is usually weighed at his shop using a manually operated balance scale that was often times manipulated and resulted in farmers losing 0.5% of his sale. The farmers suffered further losses due to lack of storage facilities and to avoid spoilage, were forced to reduce their prices and sometimes had to wait days before being paid. Once the transaction was completed the CA took the soybeans to ITC’s facility where he was reimbursed for the sale. At this point, the CA was able to once again manipulate prices as ITC had already established a purchase price for the soybeans which was usually higher than the amount actually paid by CA’s. Like the flow of the physical produce so too was the flow of information, backward and lacking. The farmers were isolated from each other and had no means of communication which translated into them not having a set guideline for their pricing strategy. The day’s sale price was usually discovered at the end of the day which was now irrelevant. They also suffered from the lack of access to weather information and farming techniques which resulted in low yields. ITC being aware of the situation realized that in order to reduce the inefficiencies along the supply chain, it had to break the cycle and ultimately led to the birth of the e-Choupal.
The new supply chain was aimed at re-directing both the flow of information and flow for the sale of produce. ITC sought to re-engineering the process for the farmer; a process that both the farmers and ITC will benefit from. Web technology introduced by ITC to establish a two-way communication between farmers and effectively change the way in which information flows. The eChoupal kiosks were set up throughout the soybeans supply chain and essentially changed the way the farmers conducted their sales. Farmers would convene at the Sanchalak where soybean prices and market would be discussed before making a decision whether they will sell to ITC or travel to the mandi. ITC had issues with the quality of soybeans that the CA took back from the mandi and this was addressed in the new system by tasking the Sanchalak to inspect the quality of the soybeans and advise farmers of the prospective value. ITC built hubs or ‘one-stop shops’ to act as an alternative channel for farmers to sell their produce; they had the choice of selling to one of the 44 new ITC hubs or at the mandis.
Information was now accessible and transparent. Farmers were kept informed of weather conditions, best practices, market price and global crop standards. These tools were considered vital as they provided useful information, such as, the weather information which enabled the farmers to plan planting and harvesting activities and best practices updates which enabled the continuous improvement of farming procedures. They also benefited from a news page and a FAQ section on the eChoupal webpage which highlighted issues that may affect the industry. ITC differentiated its service by offering better conditions for farmers while they wait, pay back to farmers for travel time and the option to buy end products at discounted prices This overall of system allowed for all parties involved to be empowered and make a contribution to the process. The implementation of the eChoupal was successful as all parties benefited from the soybean supply chain. Even though the Commission Agents were acting as middlemen, they were not left out of the new system and the sanchalaks were given an esteemed role which made them have a sense of pride and importance. The overall culture was not disregarded; it was taken into consideration when developing the initiative so as to lessen the impact of a culture shock. At no time were the farmers obligated to use the services of the eChoupal however, through differentiation ITC created a concept that was hard to refuse.
Before the initiative, restrictions were placed on trading outside the mandi. Under the Agricultural Produce Marketing Act, transactions outside the madi were illegal. ITC had to identify ways to overcome this obstacle by highlighting to the government the benefits to farmers and the ecomony at large. eChoupal’s transparency was the driving force behind the amendment of the Act. Technological infrastructure was non-existent in the villages and as such, ITC would have absorbed this cost for implementation. Given that the technology was new, the company also faced the challenge of training the farmers many of whom were illiterate. The company also had to build trust with the farmers and employing the sanchalaks was a way of leveraging this as they were already well-respected. Additionally, the model was an expansion of the existing Choupal system so, farmers being given the technology and the know-how, were expected to have a smooth transition.
The kiosks placed within the villages allowed ITC to be directly connected to its suppliers. This fostered a better relationship between the company and farmers and was evident in the advances being made by the farmers and the savings by ITC. ITC may want to consider employing the concept to some of the other goods which it produces. The future of the agricultural sector will be propelled by consumer needs which may vary. The physical location of the eChoupal should be strategically place making it easier to respond to the varying needs of the consumers. Using data from past purchases, ITC should be able to predict the needs of its customers. The business platform used by ITC was a solid one and should be maintained for sustainability.
ITC must consider the future of its eChoupal system as it’s a significant investment. A feasibility study should be conducted to determine how it will be funded, if the company can continue to fund the venture. ITC stands to benefit from continuing its funding activities for the eChoupal; relationship with farmers will strengthen as a result. Given that farmers are not obligated to use the system, ITC should try and lock farmers into the eChoupal systems to guarantee return business and a strong market share. Another alternative is to start a pool where the farmers contribute to the equipment cost whilst ITC continues the maintenance.
This strategy was innovative and should be sustained by providing beneficial information and keeping the technology current. The company should also ensure that it remains resilient and able to respond to unforeseen happenings. The model can be sustained if market inefficiencies remain and a better alternative is not introduced. ITC wants to developed other business ventures; they should continue to explore the underserved consumers in developing these ventures whilst maintaining their transparency and trusting relations. ITC has differentiated itself by provided value-added services to the farmers that should only be improved upon.
Bibliography
Applegate,L.M., Austin, D.A. & Soule, D.L. (2009) “Corporate Information Strategy and Management” Eighth Edition, McGraw-Hill Irwin