Internationalization Strategies Adopted by Imperial Tobacco Group - Term Paper Example

Part A – International Management Report Introduction This report attempts to study and analyze Internationalization strategies adopted by Imperial Tobacco Group, UK. The report provides brief background of the organization, an overview and current status of its international endeavors, modes of internationalization adopted by Imperial and lays down the key challenges and opportunities facing Imperial with respect to its internal and external environments. Part B of this report provides a brief evaluation of the write-up in terms of writing style, reference citations and content quality of the report. About Imperial Established in 1901, Imperial Tobacco Group PLC is a British tobacco company with its headquarters in Bristol, United Kingdom. Imperial predominantly deals in manufacturing, marketing, distribution and sales of a diversified portfolio of cigarettes, tobaccos, cigars, rolling papers and filter tubes. It holds world leader position in premium, high-end cigar and fine-cut tobacco market. The corporation also delivers logistics and distribution services for tobacco and other associated products. In terms of size, it is one of the top four tobacco companies in the world earning operating revenues of £29,223m in 2011 (Imperial Annual Report, 2011). The four principal tobacco companies: Philip Morris International, British American Tobacco, Japan Tobacco and Imperial Tobacco constitute about 45% of the overall global market or 74% of the total, excluding China (Ash, 2011). Its strong market position, a diversified brand and product portfolio allow Imperial to grow sustainably. However, growing health consciousness, strict government regulations and restrictions on the industry, high excise duties and illicit trade of tobacco products are key threats to Imperial. Overview of Imperial’s Internationalization Owing to increased globalization and competition, volatile environment within nations, Internationalization strategies by corporations have become more and more relevant for their sustainability. With lowering barriers to trade, access to capital and technological innovation, progressively more organizations are exploring options for higher profit and growth by going international. Imperial became public, by listing in London Stock Exchange, in 1996. At that time, Imperial main source of revenues was UK with only 20% of its revenues coming from other parts of the globe (ScanSafe, 2007). Since 1996, the company has accelerated its global expansion plans, acquiring businesses across the world. As of today, the corporation functions in more than 160 markets with 60% of its products sold in the ‘emerging markets’ of Africa, Middle East and Eastern Europe, and 40% in the ‘mature markets’ of Western Europe and USA. Imperial boasts of a strong global footprint with around 50 factories across 160 countries and employing 38,000 people across the globe. The company divides its operations into EU and non-EU countries. Key markets in EU include France, Spain, Germany and UK while key non-EU markets for Imperial are USA, Australia, Morocco, Taiwan, Russia and Ukraine. Since past two decades, the key drivers of internationalization for the company have been declining growth rate in mature markets such as Europe and US, increase in excise duties on tobacco products, overall slump in economy and rise of anti-smoking culture in advanced countries. Non-EU and emerging markets such as North Africa and Asia have indicated favorable macro dynamics such as GDP growth, population growth and female smoking as well as other growth drivers such as consistent market growth in Asia, Africa and Middle East and margin potential in Eastern Europe. Modes of Internationalization Like most other companies, Imperial Tobacco Corporation has adopted Internationalization as a key strategy for sustainable growth and maximizing shareholder value. As learnt in the course, there are several modes by which a company enters an international market. These modes include exporting, licensing, international agents and distributors, strategic alliances or collaborations such as shared manufacturing, R&D, marketing agreements etc., joint ventures, subsidiaries, foreign direct investments, franchising and royalties. This section of the report analyzes each of these modes in context of Imperial Tobacco’s growth. 1. Exporting The company uses its manufacturing facilities in one country to export in the demand markets. In order to attain control over its brand and operations overseas, Imperial does not engage in indirect exporting. Direct exporting is relevant to Imperial for two specific reasons – one, it depends on geographic specific raw materials or supplies that are local in nature e.g. Export of cigars manufactured in Cuba and two, there is a high threat of smuggling of high-end tobacco-related goods if indirect exporting is used. Manufacturing sites in UK, France and Cuba are used to export goods to the rest of the world. 2. Wholly owned subsidiaries Most of Imperial’s overseas revenues come from its wholly owned subsidiaries in 27 countries (Imperial Tobacco, 2011). In a wholly owned subsidiary, the firm owns 100% of the shares and in case of Imperial, is established by both acquisition and start-up strategies: a. Acquisitions: Since its public listing in 1996, international growth for Imperial is highly attributed to overseas acquisitions. In 1997, Imperial acquired Rizla, worlds leading manufacturer of rolling papers, followed by Netherlands-based tobacco business of Douwe Egberts Van Nelle hence owning its famous brands Drum and Van Nelle brands of fine cut tobacco. Similar more acquisitions were done in Belgium, Germany, Australia and New Zealand. To gain entry in Africa, Imperial acquired the second-largest cigarette manufacturer and distributor in Sub-Saharan Africa in 2001. Through its acquisition of Reemtsma Cigarettenfabriken GmbH in 2005, the company leveraged Reemtsma’s strong market positions in Germany, Central and Eastern Europe and Asia. In 2007, Imperial took over Commonwealth Brands, fourth largest cigarette manufacturer in US. Its last major acquisition was in January 2008 of Altadis, world’s fifth largest cigarette and cigar manufacturer (Imperial, 2012). There are numerous reasons why Imperial chose acquisitions as its main mode of growing globally. First and foremost is the speed of growing internationally through acquisitions is much faster than organic growth; second, Tobacco industry has high barriers to entry due to government restrictions and regulations that make acquisitions a better tool to improve market position. b. Organic growth: Other than acquisitions, Imperial has also built wholly owned ‘start-up’ subsidiaries in key markets such as Australia, Czech Republic, Finland, Greece, Italy, Hungary, Morocco, Ireland, New Zealand, Norway, Poland, Russia, Turkey, Slovak Republic, Taiwan and Ukraine. In order to strengthen its brand loyalty and centralize its operations, Imperial has been aiming at sustainable organic growth (Financial Times, 2011). Important drivers of start-up subsidiaries for Imperial are absence of acquiring targets, cultural implications and need of control over brand management. 3. Partly owned subsidiaries Imperial also has six partly owned subsidiaries in Poland, Russia, Ukraine, Macedonia, Kyrgyzstan and Ivory Coast. The key reason behind having partly owned subsidiaries is specific government regulations against foreign investments and establishments in specific countries with a part of equity stake in the company. 4. Joint Ventures Another mode of internationalization, joint ventures are equity-based partnerships where a new firm is set up with parties owning a percentage of the new business. Currently, Imperial is engaged in two joint ventures in Spain and Cuba for manufacturing and sales of Cuban cigars. The business levers behind joint ventures with local companies are getting access to local markets, core raw materials and competencies as well as strict government regulations against multi-national corporations to protect their local businesses. 5. Partnerships and Strategic Alliances Imperial Tobacco has time and again engaged itself in partnerships and strategic alliances such as distribution agreements and cross-industry channel management initiatives such as to curb smuggling and parallel trade. Some examples of strategic alliances across retailers and industry peers are licensing agreement with the South Korean tobacco manufacturer KT&G, partnership with Phillips Morris to manufacture, distribute and merchandize its brands in Morocco, supplier agreements with retailers in Australia and Netherlands. These alliances leverage partnering company’s experience and expertise in its home market. Key Challenges and Opportunities This section describes the key challenges and opportunities faced by Imperial in handling its International operations. Globalization and consolidation result in a number of quick and complicated transformations to industries and even to nation-states. Factors of global magnitude can many a times produce speculations and uncertainty, and occasionally incite hostile reactions. The Tobacco industry in particular has had a rapidly changing landscape across the globe through mergers, demergers and acquisitions and is well absorbed in the progressions of globalization and consolidation, however, unlike other industries, tobacco industry has unique challenges and are subject to widespread criticism and hostility. International operations and globalization of companies has resulted in rise in consumerism and rise in demands from market earlier inaccessible to goods such as those of Imperial. The global crisis saw a rise in consolidation practices by big tobacco companies to counter static growth of world demand of tobacco. High levels of cash generation and a need for sustainable organic growth drive company’s need for continued expansion and consolidation. Regulations such as the Framework Convention for Tobacco Control also impact local tobacco businesses. Key Challenges: Ethical issues – Owning to the health implications of their products, tobacco industry faces immense ethical issues with respect to increasing their market size in overall declining markets. Agencies such as World Health Organization strongly advocates strict policies against tobacco in countries that although are rightful with respect to health outcomes, they have an ethical clash with the right of trade for companies such as Imperial. Economic/ competitive issues – The key challenges pertaining to economic and competitive arena are high excise duty and illicit trade, and financing of internationalization deals. Tobacco commodities are subjected to excise duty, which, in many of the geographies is a significant proportion of the retail price. Further increases in excise duty and any unfavorable amendments in the tax handling of fine cut tobacco, if broadly accepted, would have a hostile impact on the demand for tobacco products with a shift towards lower-priced cigarettes and fine cut tobacco. Excise duty also instigates illicit trade across borders that lead to erosion of brand integrity, overall losses in earnings and reputation. The substantial amount of borrowings needed for entry into markets and internationalization is also a high challenge for the company. Government/Regulatory issues – The tobacco industry is conditional on a large number of increasingly restrictive regulatory practices across the world. In many of the nations with Imperial footprint, there exist regulatory restrictions impacting a wide range of issues, including locations of tobacco smoking areas and control on marketing and advertising content of Imperial’s brands. This includes their development, content, manufacture, packaging and cataloging, testing, data reporting, sale, distribution and product placement. With presence in 160 markets around the world, Imperial is subjected to a high degree of laws and regulations with respect to their local competition. Tobacco-related litigation claims are another challenge against the company in a number of countries. As more and more claims are brought in the future, incorporating claims for personal damages and claims to recuperate the supposed costs of providing healthcare services to diseases associated with smoking. Any successful claim would hugely impact the social and financial standing of the company. Bibliography Ash, 2011. The UK tobacco industry. [Online] Available at: http://ash.org.uk/files/documents/ASH_123.pdf [Accessed 11 April 2012]. Financial Times, 2011. Imperial Tobacco aims for organic growth. [Online] Available at: http://www.ft.com/intl/cms/s/0/12f6fb72-817a-11e0-9c83-00144feabdc0.html#axzz1riDqNooz [Accessed 11 April 2012]. Imperial Annual Report, 2011. Financial Highlights. Bristol: Imperial Tobacco Company. Imperial Tobacco, 2011. Annual Report - Principal Undertakings. [Online] Available at: http://www.imperial-tobacco.com/files/financial/reports/ar2011/index.asp?pageid=76 [Accessed 11 April 2012]. Imperial, 2012. History. [Online] Available at: http://www.imperial-tobacco.com/index.asp?page=43 [Accessed 11 April 2012]. ScanSafe, 2007. Case Study - Imperial Tobacco. [Online] Available at: http://www.infosec.co.uk/ExhibitorLibrary/231/case_study_imperialtobacco_070816_22.pdf [Accessed 11 April 2012]. Part B – Brief Evaluation of the Report This section self-evaluates the writing of International Management report (Part A) in terms of writing style, content and integrity of the work. What have you learned from researching and writing the report? The International Management report helped me immensely understand how to write a business report concentrating on a specific company (Imperial) in a specific business context (internationalization). I learnt researching for business information, collating and analyzing the research and writing findings in a clear, integral manner. Another key learning for me in researching and writing the report was that finding extensive information and knowledge about the international operations of Imperial Tobacco is challenging. Although the annual and financial reports of Imperial tobacco describe overseas ventures of the company and its key acquisitions, detailed information about the strategy behind entering different markets such as their timing, scope and target setting was hard to assess. Is there sufficient effort made to include mention of academic management concepts and theory? The report makes a considerable attempt to map management concepts and theories with that of the information researched about the practices of the company. Since this report was focused on internationalization concepts and modes of entry into foreign markets, the report explicitly mentions the different modes of internationalization such as exporting, wholly owned subsidiaries including “acquisition” and “start-up” strategies, partially owned subsidiaries, strategic alliances, joint ventures etc. All modes of internationalization were not mentioned, since the company in question did not engage in them or information was unavailable. Management theories regarding the motives of international business are also described in the report. Are the references/sources of information clearly cited? Yes, the references/sources of information are clearly cited using the Harvard system of referencing and citation. Adequacy of the range of sources cited (are there sufficient citations of academic sources. In a neutral outset for this report, the current citations do not provide the full range of source materials cited such as books, journals, Internet documents, reports and articles in journals or periodicals. The current reference list is skewed towards reports and Internet links. The key reason behind this is business information regarding Imperial was not easily available in academic journals or books. Aspects of the report, which could be improved on: There are few areas that can improve in the above report, subjected to availability of more information. These areas of improvement include use of a wider variety of sources such as books and journals, higher number of citations and more inclusion of academic concepts of management and management theories. Are there sections of the report that would benefit from further development? It is possible that certain sections of the report could benefit from further development. This mainly includes the Key Challenges and Opportunities section. Although the challenges are described in detail, it would have been better to also provide some thought on key opportunity areas for Imperial. Read More