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British American Tobacco (BAT) is one of the leading international tobacco manufacturers around the world. Despite of several restrictions and barriers, the business is operating very passionately while producing high quality tobacco products. It is the second largest amongst other five that also dominates international markets and 8 years sustaining success as the only tobacco business in Dow Jones world index. By investing 112 million pounds on research and development, BAT produces 724 billion cigarettes per year and maintaining leadership in more than 50 markets amongst 180. By having more than 250 brands, BAT makes one out of eight adult smokers, among one billion in the world, to choose their ones. Besides cigarettes, BAT also manufactures Smokeless Snus, Cigars, Roll-your-own and Pipe tobacco. Its International Drive brands include Dunhill, Kent, Lucky Strike, Pall Mall, Vogue, Victory, Rothmans, Kool, Benson & Hedges, State Express 555, Peter Stuyvesant, Viceroy and John Player Gold Leaf. It has, a wide geographic characteristic and a well proportionate, brand range that always offer something valued to the consumers within varied price criteria.
History and Infrastructure
BAT was founded in 1902 as a joint venture between Imperial Tobacco Company of United Kingdom and American Tobacco Company of United States, with the accord that both the company will not trade in one another’s local markets and will be able to use each other’s trademarks and brands in their respective region. Then expanded in Canada, Japan, Germany, Australia, South Africa and China; West Indies in 1904, India, Ceylon and Egypt in 1905, Holland, Belgium, Sweden and Norway in 1906, Finland, Indonesia and East Africa in 1908, and Malaysia in 1911. Same year, American Tobacco Company disassociates from the joint venture. Expansion continued Argentina in 1913, Brazil in 1914, Venezuela, Chile, Mexico and Central America in 1921, North Carolina in 1927 and during this year it had its 25th anniversary; Central and East Europe and Far East in 1990; Hungary, Ukraine, Uzbekistan, the Czech Republic, Russia, Romania and Poland in 1992. The American Tobacco Company again merged in 1994. Expansion again in 2001, Turkey, Egypt, Vietnam, South Korea and Nigeria; Italy in 2003; Sweden in 2005 and stopped its UK operations in 2007.
BAT has it’s headquarter in London and is being employed by more than 60,000 people throughout the world. It maintains a strong multicultural working environment and has a structure where each local workplace has its own independency of choosing steps and responsibilities for their actions. Decisions are taken corresponding to the local situation and stakeholders within a defined principles and policies.
Macro and Micro Environmental Issues
Macro Environmental Factors
With the framework of PEST/PESTEL/PESTLE analysis, BAT’s threats and opportunities are defined, and help to visualize external aspects, which usually cannot be controlled and have potential to affect objectives.
Generally, tobacco industries are enforced regulatory control by imposing taxes and duty charges. Also restrictions on marketing, advertisement, and exhibition of the product, avoid descriptions like, light and mild, nicotine, carbon monoxide smoke yields and tobacco ingredients, prohibition of smoking in public places – BAT is aware of these aspects and employ lawyers to have legal advice on these social responsibilities, marketing and stakeholders issues.
Tobacco duty was raised in line with inflation. The impact of high taxation in the UK cigarette market resulted in high prices, which led to reduced annual industry volumes, greater price competition and trading down by consumers to lower-price cigarette brands. Imposing taxes on tobacco causes major revenue for government around the world. Such industry, like BAT contributes considerably to the financial system of more than 150 countries. About 100 million of people worldwide do have job opportunities from the industry.
Social and Culture
Due to risks to health number of smokers has decreased over the years as people are becoming educated. BAT is aware and manages operations responsibly. They are working through dialogue in advertisement objectives, alarming about health hazardousness on packets, prohibition of smoking in public places and bans on displaying at POS.
Due to advancement in technology making of cigarette is fully automated into machines, from processing of tobacco to cutting cigarette paper and filters. Packaging are also automated, cigarettes are filled into respective brand packs, wrap in protective film and placed in cartons. Factory machines at each location are contemporary and those cannot be redeployed are destroyed. BAT itself participate in technological progress by carrying their own researches either into their department or other institutions for innovating new and fresh ideas and production. They believe in testing and adapting new available technology for their production. BATB has also developed and promoted new cultivation methods that to replenish soil by using organic substance for better fertility structure as well as having environmental benefit. They work with BAT Biodiversity Partnership and Bangladesh Agriculture University.
Micro Environmental Factors
The microenvironment factors determine BAT’s internal entities that can be controlled and manipulated to collect information for marketing strategies.
BAT manufactures Cigarettes, Smokeless Snus, Cigars, Roll-your-own and Pipe tobacco.
Products are sold at Gross Price with proper VAT. Wholesalers are allowed discounted prices for orders exceeding 6,000 outers or more of cigarettes, cigars and / or tobacco for a single delivery.
To aware target customer, advertisements are done through TV and newspapers with compliance to the legal and regulatory environments.
BAT delivers product directly to the appropriate premises or any other secure addresses as agreement, i.e. to valued consumers.
It is used to examine BAT’s business structure and operations, history and products, revenue and strategy.
Strong Market Position
BAT is the second most leading tobacco producer. It functions through 50 factories across 41 countries, producing 724 billion cigarettes per year. By having more than 250 brands, it posses strong market stance in respective regions and maintaining leadership in more than 50 markets amongst 180. About more than 5,500 billion cigarettes are being produced globally by the tobacco industries, 45% of the global market. According 2009, BAT has 13.0% of market share in comparison to China National Tobacco Co., Philip Morris International, Japan Tobacco International, Imperial Tobacco and others of 41.4%, 15.5%, 10.8%, 5.8% and 13.7% respectively. Due to advantage in multiple tasted brands, products’ demand is high and hence, key strength for BAT.
BAT has expanded its business geographically and hence established growth opportunities in global market by 50 factories scattered across 41 countries and have no operability dependencies between the regions. According 2010 figures, Eastern and Western Europe have 27.3% and 11.6% revenue respectively; Americas have 22.1%, Asia-Pacific of 23% and Africa & Middle East has 16% of revenue. Nevertheless, BAT does not refrain from developing its business opportunities into rising markets, like, China where number of smokers presents opportunity for its profit.
Control over Tobacco Leaf
BAT, only international tobacco industry showing considerable interest in tobacco leaf processing and ensure adequate supply by covering about 254, 400 hectares under cultivation. The subsidiaries countries also have leaf-processing programmes including social responsibilities and agronomical support to the farmers. BAT works with about more than 250,000 of farmers across the world and most of them are directly contracted to supply two-thirds of leaf. They purchase only from reliable and sustainable sources and in 2009, they bought about 400,000 tons of tobacco leaf of which 80% was from sources in emerging countries.
Declining Operating Profitability
Over last 6 years, operating profit has declined from £3,763 million in 2004 to £2,624 million in 2005; however, there was a steady rise through next consecutives years of £3,572 million till 2008. Even though the profit from Asia-Pacific was £224 million from £1148 million, the market share and volumes has lowered because of illicit trade and sheer increment of excise. In America, profit has increased by £134 million to £1186 million while volumes were lowered by 6% at 151 billion. In Western Europe, profit rose by £234 million to £994 million, however, Poland, Switzerland, Netherlands, Scandinavia, Italy and Hungary were offset by turn down otherwise it would have been increased more by £119 million or 16% whereas, the volumes rose 6% to 130 billion. Profit in Eastern Europe has fallen by £59 million to £409 million due to lower volumes by 4% than previous year. Russia, Uzbekistan, Ukraine and Romania were mainly had lower performance. In Africa and Middle East, the profit has increased by £211 million to £724 million where it could have been increased by 28%.
Falling Revenues from Major Operating Segments
Revenue excluding duty, excise and various taxes, was £10,768 million during 2004 and has declined to £9,325 million in 2005, however, again rose to £9,762, £10,018 and £12,122 million in 2006, 2007 and 2008 respectively. In 2004, among 5 operating regions 3 has declined in revenues. America has a fall of 35.6%, Latin America 2.5% and Asia-Pacific by 4.6%. Falling of revenues has caused due to illicit trade, declining of volumes and deteriorating sales mix and hence huge losses in market share.
Decreasing Operating Cash Flows
Cash flow has declined from operations of 14% from last year, i.e. £2677 million; this is an indication of poor cash management. The free cash flow was less by 10.4%, £2412 million, than last year. Due to loss, there is necessity in inclination of capital requirements.
More educated people are aware of health risks and so products with less nicotine are in demand, which caused women smoking population to increase. BAT has established a strong market stance with light cigarettes under some of their popular brand and increased its sales volumes.
Market Potential in China
Globally the production of cigarettes by the tobacco industries is more than 5,500 billion annually. About 40% of total are consumed by the Chinese smokers, i.e. around 2,200 billion of cigarettes. China has its state-owned industry, China National Tobacco, but still there is an increasing demand for other countries brands and for which BAT has a huge market opportunity. The Central Government of China permitted to invest for the production since 2004. BAT along with China Eastern Investments Corporation founded a factory where 100 billion of cigarettes are being manufactured annually. The business also distributes and sells its own products across China.
Rising Popularity of Smokeless Tobacco
BAT was first to introduce smokeless Swedish-style Snus, comparatively less harmful than cigarettes. Snus is such kind of innovations that facilitate to lessen influence of tobacco on community and has began its journey since 2005. Profit from snus in the global market is estimated around £2 billion in where America itself accounts for 65% then comes Sweden with £480 million. Other markets in South Africa, Pakistan, India, Algeria, Norway and European regions have tradition of strong smokeless tobacco and hence BAT growing opportunity.
Increasing Health Concerns
Due to smoking people face heart and respiratory problems and therefore the consumption of tobacco products are declining in huge numbers as people are getting conscious about their health. Even passive smokers often have certain ailments. Tobacco companies are often taken to court by people for disciplinary or compensation. BAT also encountered with such kind of incidences, which might be a major cause for declination of revenues.
Most leading tobacco producers are subject to pending legal actions, valued billions of dollars, whereas small producers are there as competitors as they are not entitled to any lawsuits. Such huge companies are required to reserve a considerable amount of their profits that they might need to pay in future for the damages by their products. On the other hand, small companies in together are taking advantages by offering quality products at lower price and hence getting hold of market share from conventional producers who, in order to keep company’s premium recognition, cannot make their product’s price lower a certain level.
Contraband and Counterfeit Cigarettes
BAT also encountered with illicit trade and has undertaken some actions along with governments, The Group Business Leaders Alliance Against Counterfeiting, to raise political alertness and consequences of counterfeit. With such planned action BAT has encountered declination in growth volumes due to confine in the supply of duty-free items. About 15% of all the products in the market are likely to be contraband. During 2003, 19% of Benson & Hedges brand account of as illicit cigarettes in which 90% were faked. Also such counterfeit of the products can be seen in Eastern Europe and in Asia region. As these cigarettes are not being taxed, they are economical; hence, such contraband may drive away BAT’s potential consumers.
Foreign Market Entry Modes of BAT
BAT expansions are discussed with four following aspects:
BAT founds exporting to be the most conventional approach of emerging into foreign markets. BAT subsidiaries use the system of trading domestically produced commodities out of country. BAT usually depends on Free Trade Zones Company for their exporting products. BAT started its cigarettes export to China at the end of the decade and over the years, the exporting has spread across its all regions, like, South Africa, Kenya, Nigeria, Middle East, Turkey, African markets etc. Apart from semi-processed to processed tobacco leaf, BAT also exports packaging products to other countries.
Licensing provides the organizations in the intended country to have access of BAT’s intangible properties in exchange of certain amount of fees; like, trademarks, manufacturing techniques and assistance, patents, logos etc. For example, BAT has trade trademarks in Cyprus, Lituania and Malta while gained £68 million as profit. Government in respective countries has approved license for joint venture with the local companies. By 1927, BAT has 120 subsidiaries and built factories worldwide, in where operations like Leaf-processing has developed; countries like China, Nigeria, Germany, Brazil and India. In 2001, BAT has acquired license and made joint venture of $40 million with Vietnam National Tobacco Corporation, Vinataba.
BAT has joint ventured with companies worldwide to take collectively on economic actions; includes possession, power, agreement, capabilities, technology, price, resource, and government policies; where the common objectives – entrance into market, profit and risk sharing, technology merging, manufacturing jointly and compliance of government rules and regulations. They ventured regardless of similarities or differences in competitive objectives. Besides, political links and supply channel activities are also beneficent if relationships exist.
In 1902, Imperial Tobacco Company in UK and American Tobacco Company in US formed joint venture as British American Tobacco Company (BAT). During 1960, BAT broadens its business into cosmetics, food, paper and pulp; in 1964, with UK Tonibell ice-cream company; During1970, UK packaging company Wiggins Teape and Mardon, Lentheric perfume company, food industries in South Africa and Australia; with retail companies, Argos of UK and Saks Fifth Avenue of US; during 1992, ventures spread in Russia, Poland, Czech Republic, Ukraine, Romania and Uzbekistan; in 1999, BAT has ventured with world’s fourth largest tobacco company, Rothmans International; in 2001, Vietnam National Tobacco Corporation (Vinataba); in 2006, Honda Motor Co. Ltd. (BARH).
Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is having possession of business in the intended country. Major associates with BAT are in USA as Reynolds America, ITC in India, Vinataba in Vietnam. BAT has invested capital, management, transferred resources, expertise and technology. Hence, this investment allows higher level of control over the business with the available of loyalty and commitment, and better understanding of customers and business environment.
In1913, BAT acquired Bozetti & Co. of Argentina; in 1914, Souza Cruz of Brazil; in 1921, Cigarrera Bigott Sucs of Venezuela; within following few years in Chile, Central America and Cigarrera La Moderna company in Mexico; in 1927, Brown & Wiiliamson of North Carolina; in 1992, Pecsi Dohanygyar of Hungary; during 2001, new investments in South Korea, Egypt, Nigeria, Vietnam and Turkey. BAT also possessed Restomat AG, Switzerland and Ente Tabacchi Italian S.p.A (ETI), Italy in 2003 and 2005 respectively. In 2008, Tekel of Turkey by winning $1.72 billion bid.
Growth Strategy of British American Tobacco
Vision: “Achieve leadership of the global tobacco industry.” (British American Tobacco 2010)
BAT strategy is comprised of growth, productivity, responsibility and to build winning organization.
Figure: Organizational Growth of BAT
BAT gives importance to the rise of global market share by evolving into new markets and wants to grow their capacity by organic growth, merger and acquisition.
For organic growth, BAT is more focused on their strategic global sectors, which offer good brand expectation for long run, especially Premium and International Brands. According to 2007 annual financial report, Global Drive brands have growth by 10% while International brands by 5%. BAT has target of optimizing the role of Global Drive Brands and are ready to utilize opportunities for their expansion in “Value for Money” and “Low Price Segments”. They also want to maintain or establish good stances in priority markets by defining itself as the leading and the greatest profitable ever. They also consider carrying on with their development, innovation and offering customers distinctive products within their brands. BAT also concentrates in trade marketing and distribution by focusing on Direct Store Sales that helps to develop excellent and profitable relationships with the potential customers.
For productivity, BAT concerns about best utilizing its worldwide resources to boost profits and raise finances for reinvesting in the industry. To be competitive, BAT has cut costs over supply chain while improving product quality and pace for emerging into the global market, also utilizing its people and capital effectively.
For Responsibility, BAT strictly follows their Business Principles with the stakeholders, which is comprised of Mutual Benefit, Excellent Corporate Conduct and Responsible Product Stewardship. BAT conducts qualitative standards of business with employees globally. They also encourage sensible tobacco regulation by balancing consumers’ choice and social interests, reducing harm and ascertain the company sustain and flourish. For harm reduction strategy, BAT will lessen the tar and toxins consistently from the products and launch a new generation product that has fewer risks to health.
Lastly, for building a Winning Organization, BAT provides good working environment and follows strategy that produce leaders who have devotion, be innovative and who can facilitate team in order to build the company worldwide.
During 1990, BAT was intended to concentrate completely on tobacco that provoked and altered the Group. Later in 1995, BAT considered to have confidence and an aim to be the leader amongst tobacco industries and hence developed a strategy. To lessen supply chain complications and accumulate expenditure, which were also part of the strategy, BAT closed some of its loss incurring companies, like, in 2005, South Hampton plant was closed down.
Shareholder business also plays significant role for BAT strategy. For more than 5 years, the net return of shareholders provided by BAT was a noteworthy fact, like, investor who kept £100 in 2004 would get return of £268 by 2009, plus share cost increment along with dividends, while FTSE100 would have provide £135 only over same investment and time span.
Being consistent in strategy, BAT has made profits of £14, 208 million by the end of 2009, 17.2% more from 2008. The operating profit and net profit was £4,101 million and £2,713 million, i.e. 14.8% and 10.4% more than 2008, respectively. All the revenues so far that BAT has made were due to proper pricing management, growth volume, outstanding employees performances, good exchange rate and nevertheless, from their responsibilities towards stakeholders and consumers.
Certainly, tobacco is harmful and can cause major health risks to the smokers. Being aware of the fact, BAT produces and sells cigarettes responsibly; by making the product legal, prohibited advertisements and displays, working through dialog, regulations on packets etc. and affirmed in public to lessen the damage while meet both public demands and communal expectations. Besides, with the cooperation of outstanding employees who have the passion and ability to service better performance, BAT aimed to be known as the leader and be the first priority for NGOs, governments, shareholders etc. It already possesses the second position in the world tobacco industry with a successful even strategy, sustainable operations and quality products, while constructing long-term shareholder value. Over more than 100 years of business, BAT has established a strong global recognition for high quality tobacco products in order to meet customers’ various preferences.
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