CORPORATE STRATEGY
Corporate Philanthropy as a New Business Model : A Case Study on ITC
There is a cycle of relationship between the society and business, in which the society sustains the business and business should sustain the society. Business owners have vehemently pushed aside philanthropy to the margin to such an extent that philanthropy and business are viewed as two different activities pursuing two discrete goals. Capitalism leaves no space for social spend and it propounds that the rat race for surplus in business, guides the society for its ultimate good and anything contrary would harm the society. This case study analyzes whether corporate philanthropy can be a new business model for ITC.
The society through its political organs gives business the privilege of limited liability and business, in turn, has to look beyond the interests of the investors to contribute to the society and help sustain itself.
- Micklethwait and Woolridge
in their book,
The Company: A Short History of a Revolutionary Idea.
in their book,
The Company: A Short History of a Revolutionary Idea.
The Rationale of Current Corporate Philanthropic Practices and Thinking
The important direct benefits of philanthropic activities that accrue to a business are goodwill in the neighborhood, good human resources (literacy and health programs), good ecosystem capable of bestowing renewable resources, building the source for raw material (like in social forestry), partnership (networking of farmers), data support for planning and management, etc. Indirect benefits to business are satisfaction for the owners and executives, goodwill with government and society, resource and synergy building for distant future, staying connected with the outside environment, dispelling a feeling of guilt accumulating out of prosperity, etc. While some philanthropic activities give direct benefits, others give indirect benefits. Social forestry for paper companies, health and literacy programs for labor-intensive manufacturing companies, craft training for craft companies, awareness building and information sharing for trading companies, watershed and resource conservation programs for agri-business companies, etc., are the activities that give direct benefits. Healthcare for the aged and disabled and tribes, literacy programs for women in tribal areas, donations for rare surgeries for the poor, donations for calamity-stricken communities, etc., are activities that give indirect benefits. Philanthropic activities can be classified into two categories, i.e., those with strategic importance (building network of producers and buyers) and the others without strategic importance (health programs for the old). The companies choose a mix of philanthropic activities, both of strategic and non-strategic nature, and those that give direct and indirect benefits. The sharp-headed management of companies that spend on philanthropy as a strategy for their future can be appreciated, since this approach is a win-win mode with high pay-offs. Those who spend without strategic orientation are actually in the lose-win mode. In the lose-win mode, the company loses and community benefits, that too to a moderate level. Corporate punchlines worldwide in a few of the following handpicked examples reflect the current orientation towards philanthropy. (Refer Exhibit I)
About the Study
This is a study of the moorings and dimensions of philanthropic approach chosen by ITC and how it aligned and harnessed the synergies of philanthropy and business strategy while the rest of corporate world either shuns it or practices it in a marginal and half-hearted way.
The case analyzes the approach of ITC's philanthropy, its range of philanthropic activities, its contribution to promotion of ITC's long-term business and to suggest how ITC's philanthropy model which embeds business strategy can be worth emulation by the rest of the corporate world. The present study is analytical in nature and is predominantly based on secondary data. The objectives of the study are:
The study is predominantly based on secondary data, literature and information published by ITC. These have been sourced from: extracts of various articles, books and research papers, qualitative and descriptive information from the company's annual reports and websites, and quantitative information from databases and companies reports and publications.
Broad areas in which philanthropic activities have been undertaken by ITC Limited are:
Many promoters of the industry gave very large sums from their personal fortunes. Still some of the individuals and households giving donations generate the highest percentage of total philanthropic activity in the US as well as in India to a variety of causes, including promotion of religious institutions, protection of the environment, to provide good healthcare facilities, education, homes for the homeless and promotion of arts, etc. As a practical matter, while corporate donations rose steadily during the 1980s, they did not really make up for central and state cuts in social spending. Despite the recession of the early 1990s, companies continued to donate.
Emerging Trends in Indian Corporate Philanthropy
In India, Tatas, Birlas, Jains, Hindujas and many more corporate houses are actively discharging their self-enjoined social responsibility/philanthropy in equitable social development. This is reflected in the following developments.
Practices of Indian Corporate Firms
Hindustan Unilever Ltd. (HUL): It has been conferred with the prestigious Good Corporate Citizen Award for the year 2000-01, by the Bombay Chamber of Commerce and Industry (BCCI) for its commitment in social investment, environmental protection, safety, employee welfare, etc. Some philanthropic projects of HUL are:
Besides the aforesaid, one very important income-generation project is Project Shakti through which HUL helps about 6,000 self-help groups in Andhra Pradesh, Karnataka and Gujarat to market the HUL brands and earn supplementary income.
Coke India: It has lined up substantial investments into environment-related projects like rainwater harvesting, solid waste management, etc., as recommended by the Environmental Council headed by the former Chief Justice of India.
Tata Chemicals: It has set up 421 Tata Kisan Sansar centers, which are comprehensive one-stop agricultural resource centers in North India to provide end-to-end farm extension services, etc., using sophisticated technology such as satellite mapping and geographical information services.
Ashok Leyland: It has won the prestigious "Social Responsibility Award- Impresa 98" from the Indo-Italian Chamber of Commerce and Industry for displaying a high-level of social responsibility and service to the community.
The Mahindra Foundation: This foundation has invested about $8 mn in establishing the Mahindra United World College (MUWC) to promote peace and understanding among youth through education. Besides this, Mahindra Trust through its project called `Nanhi Kali' supports the education and welfare of over 1,700 girl children through 18 Non-Governmental Organizations.
A few trends in corporate contributions to society that merit mention here are as follows. First, corporations no longer tie their donations to pretax earnings. Even though pretax earnings have fallen since 1989, companies have continued to make donations. Experienced observers think corporations have a philosophical commitment to philanthropy that leads them to give donations even as profits decline.
Second, more corporations are funneling their money into their own foundations. The number of corporate foundations grew markedly through the 1980s, and, in many cases, they have been managed better than the parent companies. While corporate profits have declined, foundations have enjoyed very healthy annual earnings. Much of the corporate foundation grants remain in the local communities; thus, it directly enhances the business-community relationship.
Third, corporations are keenly aware of the problems they will face if the workforce is inadequately prepared for the future. Contributions to education have become the socially responsible corporations' self-espoused mandate from the 1990s.
Fourth, if the economy slides into a new recession, corporations are likely to give less money but will donate more in terms of volunteer's time, energy and expertise. They will also donate more in equipment and even low interest loans. Most experts believe that today corporate giving is a part of the fabric of society and that companies will not back away because of hard economic times.
Some Statistics on Corporate Social Responsibility/Philanthropy
A Survey by SRI/IMRB
A survey conducted in 1997 by the Social and Rural Research Institute/Indian Market Research Bureau (SRI/IMRB) on the status of Corporate Social Responsibility (CSR) reported: about 36% of the companies surveyed had some sort of a policy supporting social development. Only old and large companies are practicing social development initiatives. Only 16% of the companies were working with non-governmental organizations. Only 7% of the companies had a written policy.
A Survey by IndianNGOs.Com
A survey conducted in 2001-02 and published by IndianNGOs.Com in April 2003 with a sample of 196 Indian companies about their understanding of social development by one-on-one interviews revealed the following: Fifty-eight percent of Indian corporate surveyed are involved in social development initiatives. Only 36% of companies that responded to the survey had set up separate departments for CSR in the last five years; 12% of the corporates had separate foundations for CSR and 5% had separate departments; 52% of companies support health programs. Other issues supported by the corporate polled include education (50%), environment (30%), and children and rural development (27%). Eighty-five percent of corporates work with NGOs and about 42% extend support to specific events and 22% support entire projects.
Partner in Change (PiC) survey conducted during 2002 has revealed that corporate governance is the predominant trend and it is viewed as a business tool. The other important findings of the survey are: Sixty-nine percent of the corporates were actually involved in some ongoing community projects and over 97% had a policy on CSR. Post-liberalization, more Indian companies are following MNCs in practising CSR and are setting aside about 0-15% of their profit after tax towards CSR, which is not only cost-effective but also a good business tool.
Observations on Current Thinking and Practices of CSR
Carrol, Archie B, (in July-August 2001 issue of Business Horizons under the title, "The Pyramid of Corporate Social Responsibility: Towards the Moral Management of Organizational Stakeholders) has propounded and discussed the three dimensional conceptual model of CSR. This model helps the managers to understand the level of their social performance and develop socially responsible stakeholder policies. The first dimension is about economic, legal, ethical and discretionary responsibilities. The second dimension is about social issues encompassing consumerism, environmental issues, product and occupational safety, etc. The third dimension is about social responsiveness strategies such as reaction, defense, accommodation and proaction.
Srivatsava and Paul, in the Spring 1995 issue of Journal of Socio-Economics, titled "Industrial and Environmental Crises and Corporate Social Responsibility" opine that while occidental concept of CSR is based on enlightened self-interest, the oriental concept of CSR has emanated from the divine mandate accompanying bestowal of industrial wealth on the business and hence business in turn has to be the custodian of it and so should work like a servant. According to them, this oriental concept will endure longer and would result in high value for all.
Gopal Krishna C (1992) in his book titled, Corporate Social Responsibility in India - A Study of Management Attitudes, studied and discussed the perceptions and practices of middle and top level executives of Indian companies about CSR and social auditing. The important findings of his work are as follows:
Creating Enduring Value for the Shareholder, as well as to the Nation: The Philanthropic Business Model of ITC
ITC is one of the top most Indian companies with a market capitalization of Rs. 70,543 cr (as on May 21, 2009 in Bombay Stock Exchange) and is recognized as one of the world's leading Fast Moving Consumer Goods (FMCG) companies in terms of turnover, profit before tax and after tax. ITC has a wide product-mix, doing business in cigarettes, hospitality, paperboards and specialty papers, packaging material, agri-product business, branded apparel, packaged fast foods, confectionery items, greeting cards and other FMCG products. It is planning to enter new and innovative businesses as and when the situation demands. ITC has been a market leader in its traditional business of cigarettes, hotels, paperboards, packaging and agri-exports.
In a period of 11 years, the turnover has gone up by more than four times, market capitalization went up by 12.7 times, profit after tax and EPS (basic) up by more than 11 times and net-worth and book value per share has gone up by more than 10 times and capital employed by 6.8 times. This reveals that the growth has been huge for ITC. (Refer Exhibit II)
Exhibit III shows the milestones of ITC in regard to the rural development, listing their achievements and targets for the next five years. The factors focused by the company are: e-choupal, social and farm forestry, watershed development, women's empowerment, livestock development and primary education.
The performance of the company and its targets to achieve for the next five years are both outstanding.
The Indian rural market is large, highly diverse and scattered. The major part of their income is from agriculture. Diverse socioeconomic backgrounds and low infrastructure facilities, fragmented farms, numerous and exploitative intermediaries, and lack of irrigation facility, and wide variations between different agro-climatic zones are the other important features. Hence, the consequence is low quality crops, uncompetitive and no support prices, posing challenges to the farmers.
The agri-business at ITC is efficiently managed and is one of the largest exporters of agricultural products from India. ITC is also one of the top foreign exchange earners. Through e-Choupal, the company has been leveraging further. Indian farmers are able to access market information for their grown crops on one hand and on the other hand, they are able to get information on weather conditions (chances of rainfall, etc.), to plan and decide the type of crop they should go for it to earn maximum profits. In terms of employment, more than 21,000 people are working with ITC spreading across India. ITC has been rated very well among the world's best and large businesses.
ITC's e-Choupal Movement: Traditional Farmers to New-Age Marketers
The value of ITC's unique initiatives, such as e-choupal, choupal sagar and ITC social farm forestry program that have been contributing to the betterment of rural India, was recognized internationally in 2004 when the company won the inaugural World Business Award for business-driven initiatives that make a difference to society at the national level, instituted by the United Nations Development Program (UNDP), the International Leaders Forum and the International Chamber of Commerce. Exhibit IV provides information on prestigous awards won by ITC for its e-choupal initiative, which was recognized worldwide.
The `e-Choupal' initiative was aimed to provide expert knowledge on each and every individual farmer to enable them to be competitive in the global market space. This has been transforming the Indian farmer into a progressive knowledge-seeking netizen and e-farmers whereby the farmers are enriched and empowered to do agri-business with the use of e-choupal platform. The farmers are able to get cost-effective high quality agri inputs and sell their output for better prices through this platform as the company has provided 6,500 e-choupal facilities and covering four million farmers and is aiming to cover 10 million farmers by installing another 13,500 facilities in the coming five years. This online system of marketing helps farmers in reducing the cost and attains a better market price for their produce bringing down the cost of supply chain.
For ITC, in its path-breaking and novel business model, business goals and social goals are no different and in fact are perfectly aligned with great synergy. It is, in fact, a discovery, which was stumbled upon by ITC when it was passionately working on e-Choupal. A passion for social service led it to discover a business model with no parallels anywhere else on the globe. Enthused by e-choupal program and guided by the path-glowing insights, ITC is now moving in the direction of investing Rs. 5,000 cr on e-Choupal.
A Digital Transformation
ITC started the first e-choupal in the villages of Madhya Pradesh with soya growers. Through this platform, the stereotype image of the farmer is transformed into an e-farmer. Farmers are trained to learn to log on to the website through Internet kiosks in their villages to place orders for high quality agriculture equipments, inputs, and to get information on best farming practices, prevailing market prices for their crops at home and abroad and also the weather forecast - all in their local language. This impressed the farmers as the system is reliable and more convenient. It is surprising for them that everything is being operated at their village.
Connecting farmers to remunerative markets has been successful. The advantages of grading the produce in terms of price difference, the techniques to follow and market information on the demand enables them to identify the right market segments to obtain profitable prices for their produce.
Risks through Technology
The uncertainties in the aqua farmers' life posed daunting odds. They were imparted knowledge through the platform of e-choupal to manage the soil of land and other information on controlling diseases and viruses attacking the shrimp farms. Information includes parameters for antibiotics usage, hygienic washing, sanitized dressing and airtight packing. All these factors help to neutralize the risks involved in aqua farming, making it economically much more attractive and benefiting hundreds of aqua farmers so as to maintain quality to meet national and international competition.
A Dependable Knowledge Partner
The fluctuations in the coffee market have adversely affected coffee planters in our country. ITC through its e-choupal enabled the coffee growers to understand and learn about commodity exchanges, such as Coffee, Sugar and Cocoa Exchange (CSCE) of New York and London International Financial Futures Exchange (LIFFE) in London. They were provided with the latest market trends and prices of coffee prevailing in the world market. They can access the technical chart to understand the price movements of coffee and can look for a better price to sell their commodity. There is a link on e-choupal site called www.tradersnet.in aiming to form an association of coffee planters or growers, traders and roasters, resulting in a virtual market. In a nutshell, Indian coffee growers have become more knowledgeable and the logistics of coffee distribution has become more competitive, smoothened and cost-effective to meet the global competition. The same thing is observed by renowned professor of Kellogg School of Management. (Refer Exhibit V)
Thus, ITC has reached certain milestones with its e-choupal business model. (Refer Exhibit VI)
ITC's Social and Farm Forestry - Wasteland Owners to Productive Farmers
ITC's forestation mission goes beyond regenerating wastelands and forests. It enhances farm incomes and generates sustainable employment. ITC's aforestation project is driven by the realization that India's poor forest cover - a meager 11% of the geographical area of the country against a desirable 33% has serious implications for the rural poor. ITC has effectively leveraged its need for wood fiber to provide significant opportunities to economically backward wasteland owners. Its forestry projects focus on developing grass root capacities for a virtuous cycle of sustainable development.
ITC has been successful in creating societal value under its social and farm forestry initiative. It has planted more than 77,000 hectares. Through this, the company has created 35 million person days of employment among the disadvantaged (unemployed and poor). ITC has invested in extensive R&D to develop clonal saplings which are disease resistant and can be grown in a shorter span of time in wastelands and harsh conditions. These saplings are made available to tribal people and marginal farmers, who utilize them to rear plantations on private wastelands, by providing them with sufficient means for their sustainable livelihood and supplementary incomes. This also helps ITC in ensuring that India's forest resource base is preserved and augmented with fuel wood requirements of the rural poor. ITC, working with select NGOs, identifies poor tribal areas with wastelands and organizes them into self-supporting forest user groups. The leaders are trained to understand and follow best `Silvicultural' (the study, cultivation, and management of forest trees) methods and practices to grow high quality and profitable timber as a viable cash crop on one hand and on the other hand local species or plants that can meet domestic requirements. So far 86 high-yielding, fast-growing and disease-resistant `Bhadrachalam' clones have been produced on a commercial scale with productivity that is six to nine times that of the normal seedlings.
ITC provides a comprehensive package of support and extension services to farmers, such as loans, land development, planting of saplings, plantation maintenance, marketing and funds management to help the farmers produce quality products that attracts the best price. Additionally, it helps forest conservation by reducing pressure on public forests. With poor households having access to their own woody biomass under ITC's social forestry program they can meet most of their fuel wood requirements in-house through lopping and toppings, thus further reducing pressure on public forests. As a result of the leaf litter from multi-species plantations and the production of leguminous intercrops, depleted soil is constantly enriched. Soon this will lead to a decline in fertilizer and pesticide consumption, thus reducing the pollution of groundwater sources by such chemicals.
Integrated Watershed Development - Dry Despair to Green Hopes
Watershed development program was initiated by ITC. It was comprehensive and the merits of this are retention of soil water and the protection of land from degradation. Some of the facts are: The present average soil loss in the country is about 16.35 tons per hectare per year, which is at least three to five times worse than what is ought to be. This implies that there is a significant need of a facility to control severe moisture stress which is mostly for 5 to 10 months a year. Land productivity in rain-fed lands is low, inconsistent and highly vulnerable to seasonal changes.
The initiative of ITC on integrated watershed development aims at reversing the moisture stress in the more terribly affected and drought-prone districts of the country. Currently, 460 small and large water-harvesting structures built by ITC provide critical irrigation to nearly 7,000 hectares of land in Andhra Pradesh and Karnataka.
The two objectives of ITC's watershed development are: Water conservation and soil enrichment. ITC formed water-user groups to impart training in planning and making water-harvesting structures, like contour bunds, check dams, percolation tanks and farm ponds. The groups use their knowledge and skill of the topography to identify locations for building water structures and develop the related micro plans. ITC contributes 75% of the cost and the balance 25% being mobilized by the user groups. User groups raise regular contributions from the farmers to meet the maintenance cost of these water-harvesting structures. So far, ITC has brought nearly 7,000 hectares of degraded land under its soil and moisture conservation program, providing critical irrigation and generating employment during the lean season. Some of the achievements of the company are presented in Exhibit VII.
Women's Empowerment - Homemakers to Income Builders
India believes that women become powerful agents of social change when they are economically empowered. ITC focuses on the same aspect. The company has started micro-credit and skills training so as to look for better employability opportunities for themselves. With the increased income the rural women go for better nutrition, healthcare and education for their children.
Working with NGOs, ITC has organized rural women into micro-credit groups (Refer Exhibit VIII). Group members make monthly contributions to create a savings corpus. The corpus is used to extend soft loans to groups members, thereby eliminating the stranglehold of moneylenders. The system of mandatory contribution further strengthens the savings habit leading to capital augmentation. ITC provides training to group members to handle bank accounts and understand the nuances of government development programs. Empowered groups function autonomously and take their own decision, including sanction of loans to fellow members and collection of repayments. Well-managed micro-credit groups with no default records receive further support from ITC in the form of seed money for self-employment activities. Venture funds provided by ITC have already spawned hundreds of women entrepreneurs. Their earnings, ranging from Rs. 70 to Rs. 150 per day definitely supplements their household income and they feel proud of themselves. The skills training by ITC is geared to enhance their employability. Some of the small businesses commenced by ITC's empowered women are: pickle making, fish processing and agarbatti rolling in rural areas and garment sewing, driving and computer-aided secretarial training in semi-urban areas. ITC helps the trained women to get appropriate employment opportunities.
Conclusion
ITC has put in great efforts towards e-Choupal movement in developing the skills of farmers, imparting and updating their knowledge base through the Internet. ITC is about to invest Rs. 5,000 cr on e-Choupal, which testifies to the theory that social investment is also a strategic business investment. Business goals should be aligned with social goals to sustain business. The business model discovered by ITC is now a model to be emulated by several corporate citizens. The immediate subscribers to this model are HUL and TATA Chemicals. ITC with a human heart has put in great efforts, which are commendable in various fields. ITC, by establishing credit groups, is empowering women and developing women entrepreneurs, but it is not encouraging people in the field of sports and other related areas. If they do so, it can make India proud on the international front. If ITC gets the social audit done and publishes it in its annual report, it will be an authentication of its philanthropic activities.
-- Prof. Tapal Dulababu
ISMS, Hyderabad.
The author can be reached at
tdbabu17@rediffmail.com
ISMS, Hyderabad.
The author can be reached at
tdbabu17@rediffmail.com
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