Foreseeable Major Risks in Future for British American Tobacco Plc - Essay Example

British American Tobacco Plc Table of Contents Table of Contents 2 Introduction 3 Risk Management in Business 4 Foreseeable Major Risks in Future forBritish American Tobacco Plc 6 Risk Management Methods and Classifications 10 10 Impact of the Risks on the Organisation: Risk Matrix 14 Formulating Strategies to Tackle Risks 17 Corporate Governance 18 Conclusion 21 References 23 Bibliography 27 Introduction British American Tobacco plc (BAT) is a British based global tobacco organisation. The company has been a major company in the tobacco industry for over 100 years. In terms of global market share, they are the ‘second largest quoted tobacco group’ of the world (British American Tobacco, n.d.). The various brands of the company are sold in over 180 markets and they have around 250 brands within their portfolio. They are the leading brand in over 50 global markets as the statistics shows that one out of eight adult smokers of the world prefers their brand of cigarette (British American Tobacco, n.d.). In the year 2009, the subsidiaries of the company enabled global governments to earn over £26 billion in a financial year from taxes together with excise duty on their product. The subsidiary companies of BAT operate in 41 countries producing through 50 cigarette factories around 724 billion amounts of cigarettes. The company employs around 60,000 people globally. The organisational decisions are made keeping in view certain policies, strategies, standards, and delegated authorities. The benefit of local stakeholders to a business is the pivotal point in any organisational decision. The management of BAT is also conscious about their operating responsibilities as they produce products which pose risk related to the health aspects. The company works coherently with thousands of global tobacco farmers. These attributes have made the company a leading global giant in the tobacco industry. In this report, the inherent risks associated with any organisation will be analysed. Stakeholders’ benefit is a significant part of any business. They are generally concerned about their losses and gains from any business before investing in it. Therefore, the manager of any business has to try and mitigate any risks related to any business for shareholders to keep faith in the organisational business policies and initiatives and thus enabling them to consider making further investments into the business. The corporate governance process also is an integral part of any business organisation, as they have to carry out their financial activities as well as their organisational activities keeping in view the regulations of corporate governance (British American Tobacco, n.d.). Risk Management in Business Risk is an integral part of any business venture. Therefore, there is a need to properly manage risk in order to maximise the benefits from a business and reduce the damage which may be caused due to the risk associated with it. Risk management is a very important business related driver. Stakeholders related to a business activity have increasingly become conscious about the risk associated with the business. Risk has started to become a strategic business decision driver. A risk approach which is based on an enterprise wide analysis of a potential risk helps an organisation to prepare preventive measures. A risk management system prepared beforehand can become an ‘upside of risk’ as it can benefit an organisation to prepare against threats and also helps them to be more aware of the opportunities. Financial crisis in the year 2008 that occurred globally affected several business organisations. This event brought forward the importance of risk management programs to any business entity. Risk management tries to achieve success by keeping in mind the organisational objectives and strategies. Organisations require recognising and prioritising the main risks and the impact of those risks on their business beforehand to devise a successful risk prevention plan (The Institute of Risk Management, 2010). Risk management process (The Institute of Risk Management, 2002). Risk can bring in different aspects with it. It can cause hazards and difficulties to a business. It can also bring in uncertainty about the future for a business. Risk also brings with it opportunities for business growth, development and earning profits and revenues (The Institute of Risk Management, 2002). Foreseeable Major Risks in Future for British American Tobacco Plc British American Tobacco Plc has achieved a global recognition from their business of over 100 years. They have over the years placed the shareholders interest on the forefront of their business. The company at present is pursuing a strategy which is consistent and is aimed towards building shareholder value on a long term basis. The building block for the strategic path followed by the company lies in the factors such as productivity, growth and responsibility. These factors have helped them to build a winning organisation. These factors are all interdependent to each other and are extremely essential for bringing in profit growth and also long term sustainability in business. (British American Tobacco, n.d.). The sustainable strategy would help British American Tobacco to grow in future. The industry which the company operates and the products that they prepare pose a health risk. It can pose a reputational risk for the company in future. Despite this threat or hazard in business, the products prepared by the company are legal, any call related to prohibition of the product is very rare, and approximately a billion adults willingly smoke all across the world. Therefore, there is a great consumer demand for their products. The market place risks also come into the reckoning in future. The responsible selling of their products is a major strength of the organisation which would help them to grow in future and avoid the risks related to marketplace. It is important for BAT as a world leading cigarette manufacturer to not only think of their profit but also to look after the need of the present consumer base. Due to the changing nature of consumers and also many consumers trying to avoid smoking, therefore BAT has to keep up with the modern trend and manufacture and also sell more responsible cigarette related products (British American Tobacco, 2007). Over a period of more than 100 years, the company has built up an international reputation for producing high quality tobacco related products. This has made them a preferred brand for consumers. Loosing this hard earned reputation is a considerable risk for BAT. The aspects of financial risk are also a burning issue for any organisation. The shareholders perspective has also been considered by the company, as in the past decade the total return to shareholders was around 26 percent annually (British American Tobacco, n.d.). British American Tobacco plc has grown over the years due to strong strategy formulation and looking after the shareholders side of things with earnest care. Over the recent years, the company has successfully prospered in terms of performance and business growth. According to the past analysis of the business the future prospects of the company seems to be quite bright, as the adult population worldwide is likely to increase. This will help the company to keep their industry volume at over 5,000 billion amounts of cigarettes per year over the period of the next decade. The figures are relevant assuming that the regulations related to cigarette smoking don’t take its toll and people continue to smoke. The opportunity for the company arises from their wide geographic presence and also their focused as well as innovative brand portfolio. A risk against the growing business of the company arises from tougher regulations. These scenarios have been induced by smoking related health issues. Various governments around the world have banned any display of tobacco related products in all the shops. There are also plans with regards to making packs of cigarettes unbranded or plain. These plans if implemented would certainly pose a risk to a company involved in smoking business. The validity and impact of these plans though are yet untested. BAT certainly has to keep an eye on these regulations which are almost regularly changing to avoid falling in the trap of unwanted loss of revenue as well as consumer base. Despite these obvious threats to the organisation, the management sees a prosperous future for the company. They recognise that the amount of cigarette smokers is set to remain at around one billion (Hot-Clouds, 2010). It will provide them an opportunity to increase the company’s profit share. To reduce the risk of the business prospects in future the company is trying to work with the regulation makers around the world to prepare a realistic way out which would benefit both. A constructive view can also provide opportunities to the company from this apparent risk scenario as if the company looks to prepare a coherent plan with the policy regulator they can find a way to devise a plan which would prevent such scenarios. Other realistic risk areas for BAT in future are illicit trade and global economic recession (British American Tobacco, n.d.). Another major risk area for BAT would the initiatives taken by World Health Organisation (WHO) to reduce smoking throughout the world. The target area for WHO is to reduce adult smoking considerably in the coming years. In many of the Islamic countries even ‘Fatwa’ has been issued against Cigarette smoking. The common memorandum against cigarette smoking is definitely a huge obstacle which BAT has to face and would have to manage strategically in the coming years to maintain their success (Gavlak, 2008). Risk Management Methods and Classifications Risk in these various forms has to be assessed by using different techniques such as brainstorming and workshops, questionnaires and checklists, audits and inspections, flowcharts and dependency analysis, FMEA and HAZOP approaches, and SWOT and PESTLE analysis. A risk analysis by using these factors would provide the organisation an opportunity to assess the business environment and other related factors to the business. In the risk management process, there are certain drivers which have to be looked at in order to trace future threats and opportunities. These drivers are either internally or externally driven. These include financial risks, infrastructure risks, marketplace risks, reputation risks. In the risk identification and management process the activities which have to be performed are planning and designing, implementation and benchmarking, measuring and monitoring, learning and reporting (The Institute of Risk Management, 2002). Different Risk Drivers: Financial Risk Infrastructure Risks Market Place Risks Reputational Risks Accounting standards, Interest rates, Foreign exchange, Funds and credit, Liquidity and cash flow risk, investments, Frauds, Internal control. Communications, Transport links, supply chain, terrorism, natural disasters, Pandemic, IT systems, recruitment, People skills, health and safety, premises. M&A activities, R&D activities, contracts, intellectual properties, regulatory requirements, customer demand, technological developments, competition, economic environment. Competitor behaviour, CSR, product recall, public perception, regulator enforcement, board composition, brand extension, control environment. (The Institute of Risk Management, 2002). Risk classification is also another crucial aspect in the analysis of risk. It helps to identify the nature, type and source of impact of any risk like scenario. Risk classification will help to evaluate any risk. It also helps to accumulate and identify similar kind of risks. This process also helps to point out the most vulnerable areas related to their strategies, operations and tactics. Risk classification is mainly prepared in relation to operational efficiency, commercial activities, reputation exposure, and financial control. In case of a large company like British American Tobacco Plc, the risk architecture consists of different aspects like the boards, audit committee, group risk management committee, disclosure committee, business units (The Institute of Risk Management, 2002). The risks that can occur in future also include illicit trade, excise and tax, financial, marketplace, regulations, litigations, and also data risks. The global economic recession can be a risk in future also. The impact of the recent recession was although minimal for the company. The company was able to increase their profit by around 20 percent in that period. The factors which helped in tackling the recession are clear strategy, premium covering brand portfolio, geographic diversity, mid-price, and also value for the spent money (British American Tobacco, 2010). These factors help to mitigate the risk associated with the shareholders. The factors which can help tackle any risk related to the business include higher prices, adult population increment, and increase in the market share. The global brands of the company can leverage these prospects in future. Innovation in format and packaging can also help in growth prospect. These future prospects can come in other forms such as preparing re-sealable packs for keeping cigarettes fresh in future, using capsule technology for letting consumers manage flavour. These processes can help in increasing consumer base further in future (British American Tobacco, n.d.). The illicit trade is of significant risk to BAT. It relates to counterfeiters, smugglers, and also local tax evaders. It can have an effect on economic environment i.e. market place risk as well as on the financial aspect of the company. In the illicit trade front, it accounts for hundreds of billions in quantity of cigarettes per year on a global basis. This scenario has forced governments to lose around GBP 25.69 billion in a year in terms of taxes. The contributing factors for this scenario include weak criminal related penalties, poor border area controls, and also huge increase in the tobacco taxes. The organisation has to look to tackle this menace successfully in order to avoid losing out on a major revenue and consumer base in future. Governments and the law enforcement related agencies have to be made a part of this movement (British American Tobacco, n.d.). The other risks that can arise for the company in future include excise and tax segment, regulations along with increase in health consciousness, data risks, competitors’ strategies and litigation. Illicit trade can pose risks in some other aspects also like erosion of the brand equity, reduced profit amount and lowering of the sales volume. Excise and tax scenario can impact highly on organisational growth. The tobacco based products induce major excise and also sales tax. Increase in tax globally can pose a risk in easy prospects of growth. The financial aspects like cash flow, capital structure, liquidity risks, and leverage can impact on shareholders value. It can destabilise the organisational capability to fund for strategic opportunities and also tackle smoothly any threats. This makes an impact on corporate reputation. The company runs global business therefore foreign exchange rates can pose a risk in the productivity. The volatility in financial segment can be mitigated by using interest, debt and also by cash flows (Matsukawa & Habeck, 2007). Mergers and acquisitions can also pose a risk to the company if the value of acquisition and opportunities are not measured properly. This can pose a risk of losing on valuable increase opportunity of market share, increasing opportunity of profit volume. The human resources risks also have to be properly thought of because the people leaving an organisation i.e. attrition rate can also impact the company in future. Therefore, the human resources have to be taken much care of in order to avoid loosing valuable growth vehicle. The litigation aspect is also crucial for BAT as they are involved in various legal proceedings in different parts of the world. A health issue or an injury caused to any person due to cigarette smoking can make a scenario for court cases and litigations. In future, this scenario can pose risks such as loss of reputation due to unfavourable settlement in legal cases, material impact of losing revenue due to pending cases. Data risks associated with loss of confidential data also has to be tackled to avoid loosing consumer database and other very important databases like financial data (British American Tobacco, 2010). Impact of the Risks on the Organisation: Risk Matrix The risks discussed above can pose to be serious threats as well as hidden opportunities for growth and development for a business. Risk matrix is a very useful tool in risk assessment process. Risk assessment can help in determining effective measures for reducing any risks. (Renaissance Risk, n.d.). The matrix helps in developing a structured view of the prevalent risks and the mitigating methods which could help in avoiding and tackling any risks. The various risk factors related to BAT can be assessed by using the risk matrix factors. BAT as a global brand has various risks which are likely to have a major or severe impact. Increase in health related concerns and related reduction of business is a major concern. The world is changing its view against smoking. In several countries, government has banned public smoking. The ill effect of smoking is highlighted greatly in recent times by using advertisements. The cigarette packets, labelling the message that cigarette smoking can cause harm, has to be displayed. This scenario is likely to even increase in future. Many health organisations are likely to increase their stand against smoking. Therefore, it can pose a severe as well as major threat for BAT. The strategies followed by competitors can also pose almost certain threats. BAT’s major competitor has been the illicit trade and the counterfeit cigarette products. It can destroy a major consumer demand segment for their business. The consumers will be misguided in purchasing counterfeit product in lieu of BAT’s original products. It can make them lose a major market share. Currency variations like changes in taxes and exchange rates are also almost certain to fluctuate in future. The tobacco industry generally has to pay additional taxes and excise duties throughout the world. This scenario is likely to remain unaltered. Financial area risks like credit risks, interest rates variations, and economic downturn like recession are moderate risks for the company (British American Tobacco, 2010). The impact of the financial segment can be devastating, but BAT had successfully tackled the recession scenario in 2009 with an increase in profit amounting to 20 percent has caused for optimism that they would be able to do so in future also (British American Tobacco, n.d.). The variation is assets and liabilities can have an impact of organisational liquidity and also on their cash flow. This probability of such occurrence is quite possible and can have a major impact. It can cause the organisation to loose growth opportunities as well as significant amount of productivity. The regulatory related new invention does have a possibility of occurrence in future. The new health regulations globally can force the company to reduce their production, loose consumer base in future. It can have a major impact on their performance and can force them to indulge in cost cutting by means of lay-off. This can severely impact their reputation and market image. The personnel of an organisation are their backbone and internal asset. Therefore the organisation in future has to tackle the scenario of employee retention. Employee retention can have a major consequence on a company and their future prospects. Brand value and brand equity are significant areas for a company which can have a medium impact on an organisational growth. The security risks i.e. information security, fraud, misrepresentation and misplacement of crucial organisation data can have make the company loose out on crucial financial and customer database. The likely impact of this risk is medium. The modern organisations are lately become highly cautious against such risks. Formulating Strategies to Tackle Risks Risk mitigation is a major task to successfully progress in global business environment. Risks in business are ever changing and evolving. A risk scenario presently immaterial can turn out to be devastating in future. In the present scenario, a major threat to a tobacco company is health related rules and regulations and that of illicit trade. In order to tackle such risks and also to take adequate opportunities from such scenario, a strategy has to be formulated. Illicit trade can be tackled by using Anti-Illicit Trade (AIT) teams. This team operates on a global basis and searches key market areas to find counterfeit products. A proper cooperation along with law enforcement authorities can help to tackle this menace for BAT. Illicit trade has made an impact on increasing market competition. The illicit trade companies are able to produce low cost products under similar name. They are able to deceive buyers into purchasing their products. A strong internal level business conduct has to be prepared along with consumer approval based policies to tackle this problem. The customer demand reduction problem can be tackled by making strategies to manufacture smokeless tobacco items and also light cigarettes. This will help in increasing the demand and attracting additional consumer base. These strategies will ensure that the health aspect will also be monitored carefully. It will also ensure reduction in smoke related health issues among the buyers. A strategy has to be formulated to tackle the major competitor brands of BAT. The competitors are Japan Tobacco Inc, Altadis SA, UST Inc, Gallaher Group Plc, Imperial Tobacco Group Plc, and Loews Corporation. The competition can be tackled by changing according to the consumer demand and also by their taste and preferences. BAT has to prepare a strategy keeping their consumers at the forefront. They can use the information technologies benefits such as Customer Relationship Management to interact with global consumers of their products. The feedback received from the consumers has to be utilised in preparing new products. It will make certain that they remain a trusted and sought after brand by the majority of global tobacco users (British American Tobacco, 2010). To prepare a strategy for tackling excise duty and tax related issues, BAT has to create a formal pricing and also excise strategy and a contingency plan to manage changes related to excise rates. The information technology related risks and also fraudulent threats can be tackled by restricting entry of unknown people into the databases of the company and also by using anti-malware programs. In order to minimise litigation related threats, strategic litigation based team has to be set up. Brand reputation and maintenance of brand value is also a very important task. This can be done preventing the occurrence of any frauds and mishandling of revenues. BAT can thus control the impending threats and make some of the risks into opportunities in future (Data Monitor, 2005). Corporate Governance British American Tobacco Plc (BAT) is totally committed towards maintaining corporate governance in letter and spirit. Corporate governance relates to a system which controls and directs a company and also provides a basic structure for preparing corporate objectives. The main issues related to corporate governance are proper disclosure of accountability and information, providing a risk-control framework. Corporate governance codes had been voluntary, but due to certain incidents this has changed. The incidents were related to misleading and misguiding information related to accounts, lack of system for risk management, individuals maintaining position as a CEO and a chairman. New corporate governance codes were developed like Cadbury code to make certain that corporate government laws were adhered to (Coyle, 2004). BAT tries to achieve their business objectives by consistent, honest and responsible manner with transparency. Corporate governance is a part of their sustainable and also long term growth. Providing enhanced value to the shareholders is also a major task of corporate governance. In this report, standard ways have been prepared for accountability, remuneration as well as for the shareholders relationship aspects (British American Tobacco, 2010). The Financial Reporting Council’s combined code published by shareholders committee is also a major part of BAT’s corporate governance (Financing Reporting Council, 2008). The financial and operational tasks have to be prepared keeping in mind the best interest of the shareholders. Shareholders have to be kept in tune with the organisational strategies and also the financial decisions, as the shareholders always feel the impact in case of any loss of revenue. In the annual report of a company according to the corporate governance regulations the shareholders’ interest are stated at the outset. Shareholders’ value creation is one of the main organisational objectives. BAT has to ensure that the shareholders are not misguided with frauds and misrepresentation. This will make certain that the trust and belief of the investors remain intact (Financing Reporting Council, 2010). Conclusion British American Tobacco Plc has been able to structure an organisational base with trust, belief and accountability. The organisation has to protect its shareholders and other stakeholders’ interest in order to increase their growth and market share. The organisation has been able to tackle these risks with success by using a successful business model. In near future the organisation has to tackle various menaces like illicit trade, exercise duty and tax related issues, financial and reputational issues by devising a strong and stable strategy. The reduction in sales due to tobacco related health issues and government regulations also have to be tackled successfully in order to avoid the related risks. British American Tobacco Plc can maintain their position as a leading tobacco company by properly looking after the risks and mitigating the probable impacts. References British American Tobacco, No Date. Our History. About Us. [Online] Available at: http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52ADGE?opendocument&SKN=1 [Accessed August 07, 2010]. British American Tobacco, No Date. Our Strategy. About Us. [Online] Available at: http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO659KVX?opendocument&SKN=1 [Accessed August 07, 2010]. British American Tobacco, No Date. Where Are We Going. About Us. [Online] Available at: http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52ADBZ?opendocument&SKN=1 [Accessed August 07, 2010]. British American Tobacco, No Date. Chief Executive & QA. About Us. 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