Swimming through Blue Ocean – The ITC eChoupal Story

Over the years, ITC eChoupal story has been told from many perspectives. On the occasion of the launch of India Blue Ocean Strategy Research Centre by TAPMI, I was requested to share the story using the Blue Ocean Strategy framework. Following is a summary of that talk. The ppt I used is here.

If you are unfamiliar with the Blue Ocean Strategy (BOS), or would like to refresh, this presentation by the BOS authors provides a quick overview.

In essence, the aim of BOS is not to out-perform the competition in the existing industry (a bloody battle akin to a red ocean), but to create new market space (a blue ocean), thereby making the competition irrelevant. BOS framework includes ‘formulation’ & ‘execution’ principles to minimise risks and maximise opportunities while creating blue oceans. A ‘visual strategy canvas’ frames the context, and a ‘new value curve’ with ‘four actions framework’ offers the tool kit to craft the strategy. ‘Six paths’ to BOS pull you out of a mindset of “competing within” to “creating across” the dimensions of industry, offering, orientation, time etc

The eChoupal story is written in normal font and the references to BOS framework are in italics.

Am using rural marketing as the scene of my story today. Feature stripped products at low prices, or single serve packs at unit prices, are the most common strategies adopted by companies, while targeting rural consumers in India. These efforts did succeed to some extent, but growth & profitability are limited, because everyone is competing for a larger share of the same small wallet. The outcome is a bloody red ocean! Many companies, in fact, started wondering if there indeed is a fortune at the bottom of the pyramid, or just some small change…

Comes along ITC eChoupal, and says “why not raise the incomes of rural people and then get a larger share of their expanding wallets?” “And if we can raise their incomes profitably, that becomes a unique business opportunity in itself, and will also create a virtuous cycle; more profits to ITC –> higher incomes to rural producers –> more spends by the rural consumers –> more profits to ITC –>” In other words, fortune “for” the bottom of the pyramid as a route to discover fortune “at” the bottom of the pyramid!

Thus, instead of following the conventional logic of outpacing the competition on the same counts by offering a better solution (lower prices) to the given problem (low incomes), ITC eChoupal redefined the problem itself and offered a blue ocean solution that made the competition irrelevant. This ‘reconstructed’ the market boundaries and eliminated the ‘search risk’.

BOS recommends a sequence in which the strategy must be created to ensure a win-win in the new market terrain, viz. ‘utility’ of the offering to the customer, ‘price’ that is relevant to the customer, a target ‘cost’ that leaves sufficient profit for the company at the relevant price, and finally make certain that the customer ‘adopts’ the offering… In fact, ITC eChoupal can be called a “deep blue ocean strategy” because this sequence itself was made redundant by “raising incomes, at no charge to the customer; the questions on pricing and adoption didn’t even arise”!

In the language we use internally, “raising incomes” was only an “opportunity insight”. We still needed a “solution insight” that could actually seize that opportunity…

In fact, our solution insight actually killed five birds with one stroke, much like the Hungarian Bus Company (NABI) example cited in the BOS book. So, I fancied the title “Five Birds with One Stroke” for my next section 🙂

Before coming to that, let me describe another red ocean in the context of rural producers. I illustrate this by using the example of farmers. Most of you know that farmers receive only a small share of the consumer price; this is because of an institution called “mandi” (an auction centre) in the value chain between a farmer and a consumer. Farmers take their produce to a “mandi”, typically some thirty kilometres away from their village, to sell. Representatives of Agri Business Companies or their agents look at the produce to assess the quality and bid a price. At the end of such a bidding, the farmer is under pressure to sell the produce even if he is not happy with the price because of the sunk cost of transportation. Taking the produce back and bringing it again would mean twice the cost, with no guarantee of a better price the next time around. The total transaction costs also multiply because the produce is first taken from the village to the mandi from where it is brought to the Buyer’s warehouse. Since mandis became monopolies, cartelisation to bid lower prices, higher commission charges and malpractices (eg under-weighment of the produce) etc became common. But there was no better option than a mandi, because the farmers were small, the quality of their produce was heterogeneous and they lived in dispersed geographies.

If we figured a way to “discover the price in the village” despite these constraints, we could eliminate substantial part of these non-value-adding transaction costs and split that saving between the farmer and ITC. That was our “solution insight” to raise farmers’ incomes. We did this by using the Internet for disseminating the generic price, and a lead farmer (Choupal Sanchalak) to assess the quality in the village itself. Once the price was discovered, the farmer could decide – with no pressure of sunk cost on him – when and where to sell his produce for best price realisation. If he decided to sell his produce to ITC, he brought it to ITC’s factory or warehouse (typically at a similar distance as a mandi) to realise a higher net revenue, because he paid no commissions nor incurred any labour charges. Electronic weighing ensured correct weighment. Since the material is delivered at ITC’s warehouse, ITC saved on transport costs. The savings are different for different commodities and geographies, depending on the levels of non-value-adding costs in those chains.

This is the first bird, and in a sense, is like “Eliminate”, one of the four actions to design a new value curve under BOS; eliminate some of the factors that the industry takes for granted!

But, ‘inefficiency elimination’ as a source of value becomes obsolescent with the passage of time, as the market efficiency improves once many competitors imitate the model. So we needed to discover more sources of value. And, we did not need to go far! The same price discovery solution became the source of another value, the second bird 🙂

The case study of ITC’s Aashirvaad Atta is the best illustration of this idea. Indian consumer living in different parts of the country seeks different traits in Atta (wheat flour) based on the cooking habits in those geographies, viz. colour, texture, water absorption capacity etc. But the traditional mandi system did not allow this value to be offered to the consumer! The different varieties of wheat that could deliver these traits got mixed up at the mandi before moving to the wheat mill. As a result, the consumer did not see value in buying packaged atta and preferred buying select wheat and getting it ground in a neighbourhood chakki, however inconvenient it was. With farmers bringing their produce to ITC eChoupal hubs themselves without any comingling of varieties as happened at mandis, ITC could preserve the identity of the varieties & grades through its supply chain and produce discrete blends of atta for different markets of India based on consumer demand. And, Aashirvaad became a market leader with over 50% share in under two years of its launch. And the market itself has doubled since then, as the consumer is now finding the traits she wanted in atta itself! The farmer now received a larger share of a higher value delivered to the consumer; and ITC built a premium brand…

This is another idea described in the four action framework, as “raising” a factor of the value curve well above the industry standard!

The third bird was a revelation for us when we went to the farmers for feedback during our first season. The higher price and the lower costs were only second and third benefits on the farmers list. To our surprise, the first was the restoration of their pride through dignity of choice! Many farmers said that they felt humiliated by the system of “auctioning” their produce at mandis, as they had no way to set their own price for their months of toil & risk as any other business person did. Nilaami of someone’s property was a disgrace in villages, as this happened only to the insolvent… But, in farm produce there was no other choice.

It occurred to us that the traditional functional orientation of the industry (a strictly price based transaction), suddenly got transformed into an emotional orientation. This is one of the six conventional boundaries of competition described in the book, when broken through would lay a new path to Blue Ocean Strategy. And this revelation also reinforced our tagline “Kisanon ke Hith mein, Kisanon ka Apna”. A simple and compelling tagline is a key attribute of a sound BOS, along with two other complementing characteristics viz. must have an undiffused focus on some key competitive factors, and the shape of the value curve must diverge from that of other players in the industry.

This re-orientation of the relationship helped with the fourth bird! The trust reposed by the farmers in the ITC eChoupal brand enabled us to create a rural marketing platform that could endorse products & services on offer to rural consumers helping deeper penetration. In turn these products & services filtered by ITC through its knowledge and bargaining power raised the quality of life in rural India finding better destination for the higher incomes. The same digital (access to Internet), human (Sanchalaks & Samyojaks – more on this later) and physical infrastructure of eChoupal was leveraged for the reverse flow, reducing the effective cost of reach into rural India. Today more than 160 organisations ride on this platform creating an “increasing returns model”. More partner companies bring more customers, and more customers attract more partner companies!

This fourth bird is like another method of the four actions framework i.e. “create” some factors that the industry has never offered before, to craft a new value curve.

Using this rural marketing platform to deliver agri inputs together with agri extension, raised farm productivity and quality of the farm produce. This was the one more way of raising the farm incomes, while creating another new business opportunity for ITC!

The shot not only delivered the fifth bird, but also broke another of the conventional boundaries of the competition by expanding the scope of offering through a complementary service (extension bundled with input) to chart another BOS!

Before I close, let me illustrate a couple of “execution principles” of BOS by sharing what I consider the real breakthrough innovations of ITC eChoupal. Both of these are similar to having your cake and eating it too, the hallmark of value innovation under BOS!

First of these is the co-option of the traditional middlemen into the eChoupal model as Samyojaks. These middlemen added value to the agri chains by making up for the lack of infrastructure; especially in the areas of physical transmission of goods, handling cash and managing counterparty risk. But they spun exploitative cycles of dependency around farmers and extracted value for themselves, by blocking information flow and market signals. ITC eChoupal co-opted them as service providers to handle physical jobs, yet bypassed them in the information chain by using Internet. In this manner, who could have been potential detractors of the new strategy were converted into friends. The devil is silenced, per BOS language!

Even more interesting is the creation of a new institution called Sanchalaks, lead farmers from within the village. Through a “fair process” of selection and work practices, the Sanchalaks were evolved into nano-enterprises who are equi-distant from the farmers as well as the companies riding on the platform at the same time. Both of them considered a Sanchalak a reliable trustee of their interests. The angel is leveraged, per BOS language!

With these execution risks managed effectively, ITC eChoupal initiative is now scaled to serve 5 million farmers (or 20 million consumers) spread across 50,000 villages of rural India.

Thank you…

PS: ITC eChoupal story is narrated using the BOS framework with a hope to trigger more innovation for the benefit of society, but the initiative itself precedes the BOS book by five years!