Strategic Analysis of British American Tobacco - Essay Example

ANALYZING THE STRATEGIC SITUATION OF THE BRITISH AMERICAN TOBACCO COMPANY of Executive Summary BAT is the second largest tobacco manufacturer in the world. Due to its large market niche, the company is good company to assess its strategic situation to understand the factors that have led to its impressive performance. In this paper analyzing the strategic situation of BAT, an overview of the industry in which it operates has been carried out. In addition, macro-environmental and competitive environment analysis of the company has been presented. In addition, business and corporate strategies employed by BAT have been evaluated and main strategic issues facing the company identified to allow for proposing of recommendations that can enhance its performance. The main strengths of the company are strong management, loyal customers, acquisitions and financial position. The analysis has identified lack of diversification and failure to embrace technology in management as some of the weaknesses of BAT. The company faces threats from competitors. The corporate strategies adopted by BAT include acquisitions, manufacturing of products that meet the purchasing power of diverse customers and taking initiative to develop voluntary standards. The main strategic issues BAT are on forecasting demand as this varies greatly and restrictive legislations. The recommended actions include adaption of technology in the supply chain and invest more resources in research and development. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Tobacco Industry Overview 4 Overview of British American Tobacco 6 Macro Environmental Analysis 7 Introduction 7 Political Factors 7 Economic Factors 8 Socio-Cultural Factors 8 8 Technological factors 9 Environmental Factors 10 Legal Factors 10 SWOT Analysis 10 Strengths 11 Weakness 11 Opportunities 11 Threats 12 Business and Corporate Strategies Employed By BAT 12 Strategic Issues Facing the Company 13 Conclusion 13 Recommendations 14 Bibliography 15 Introduction In almost all parts of the world, tobacco is consumed and cigarettes are the most iconic of tobacco consumption (Moerman and Van, 2005, p. 375). According to Moerman and Van (2005, p. 375), cigarette smokers always strive to satisfy their craving for them as they do in case of hunger. This makes the industry post high annual revenues. Cigarette is a simple object made from shredded tobacco rolled on a paper and it was invented in the nineteenth century. Cigarettes emerged in first half of the nineteenth century in France and Spain. By 1830s, France was producing hand rolled cigarettes but this was later overtaken by pipe tobacco and snuffs that was being consumed US (Thompson, 2004, p. 21). This was followed by various developments in the industry that eventually led to the formation of a well-organized tobacco industry with several players. One of the major companies in the tobacco industry is the British American Tobacco (BAT). Tobacco industry contributes significantly to the economic development of countries globally through employment and tax. However, the industry faces huge opposition from health organization given that smoking causes various health conditions such as lung and throat cancer (Thompson, 2004, p. 21). These organizations have pushed for implementation of various legislations restricting consumption, sale and advertisement of cigarettes. Tobacco Industry Overview Every year, more than five trillion cigarettes are produced. China is the largest manufacturer of cigarettes followed by USA. Production of cigarettes has been rising tremendously over time as witnessed in the increased that occurred in China. Between 1960 and 1995, cigarette manufacture in China rose from 225 billion to 1.7 trillion annually. The revenue from the tobacco industry is enormous totaling to hundred billion Euros annually (Research and Markets Offers Report: Analyzing the Tobacco Industry in United Kingdom, 2012) However, only a small portion of this money is spent on tobacco, as most of the costs are spent on filters, paper and packaging. The industry employs approximately 2 million workers although two thirds of this figure is working in China, Indonesia and India (Sohal, Burcher, Millen and Lee, 2009, p. 310). During the manufacture of cigarettes, hundreds chemical are added in the tobacco. These additives into tobacco make it easier to inhale smoke in the lungs and facilitate use of less tobacco in manufacturing each cigarette (Sohal, Burcher, Millen and Lee, 2009, p. 310). In addition to use of less tobacco for each cigarette, the components in cigarettes are also varying. Manufacturers are currently relying on reconstituted tobacco that makes it easier to add chemicals and use leaf stem that was previously discarded (Gilmore and McKee, 2005, p. 15). There have been changes in the tobacco industry over the recent years. Large tobacco companies have been acquiring smaller companies to enhance their competitiveness and market niche (Godsell, Birtwistle and Remko, 2010, p. 11). For instance, Imperial Tobacco acquired Altadis that was a large player in the tobacco industry. Internationally, the largest tobacco companies include Philip Morris International with a market share of 24 percent, BAT having market share of 19 percent and Japan Tobacco International that has 17 percent market share (Godsell, Birtwistle and Remko, 2010, p. 11). The other companies that makes in the top five tobacco companies are Imperial Tobacco and Altria that have nine and 5 percent market share respectively. The top five companies in the industry make up 74 percent of all cigarettes in the market. Tobacco industry in UK is dominated by two companies, Gallaher and Imperial Tobacco. The two companies account for eighty five percent of the market share. However, BAT manufactures its cigarettes in UK but sells them in different countries (Research and Markets Offers Report: Analyzing the Tobacco Industry in United Kingdom, 2012). Overview of British American Tobacco BAT was formed in 1902 through a joint venture between the American Tobacco Company and Imperial Tobacco Company. The international company has its headquarters in London, UK. The company operates in over one hundred and eighty countries globally but it is a market leader in more than fifty countries (Research and Markets Offers Report: Analyzing the Tobacco Industry in United Kingdom, 2012). Globally, BAT is the second biggest tobacco company after Philip Morris International based on market share. Under its name, BAT has several globally renowned brands such as Kent, Dunhill, Kent, Pall Mall and Lucky Strike. Most of the international tobacco activities conducted by BAT are controlled from London except those in Brazil, USA and Germany. In 2008, BAT manufactured 715 billion cigarettes and posted a profit of £3, 572 million (Godsell, Birtwistle and Remko, 2010, p. 12). The company has been subject to various product liability suits. According to Sohal, Burcher, Millen and Lee (2009, p. 310), by the end of 2008, BAT has three thousand, two hundred and fifty pending cases filed against it. The company has been able to achieve growth through acquisitions, for instance, in 2008 BAT took over Tekel Company tobacco that was one of the major Turkish companies. BAT also acquired Skandinavisk Tobakskompagniin that accounts for more than 60 percent of tobacco sales in Scandinavia in 2008 (Sohal, Burcher, Millen and Lee, 2009, p. 313). Macro Environmental Analysis Introduction To effective conduct business, companies are required to carry out an evaluation of the external environment in which it operates. The factors that are considered in the macro-environmental analysis are those factors that can influence the firms demand and supply levels and the costs (Hagos and Pal, 2010, p. 438). One of the critical frameworks used in analyzing the macro-environment is the PEST analysis. PEST analysis categorizes the environmental factors of a firm into political, social, economic and technological factors (Hagos and Pal, 2010, p. 439). However, in some cases, two more factors, environmental and legal influences are included in the analysis. PESTLE analysis helps a firm develop plans to deal with the threats in the industry and to take advantage of the changes in the industry (Godsell, Birtwistle and Remko, 2010, p. 12). Political Factors One of the major influences of the business activities is the prevailing political environment in which the organization operates. The political environment of a company influence the regulations imposed and the purchasing power of consumers. Generally, BAT operates in a stable political environment (Godsell, Birtwistle and Remko, 2010, p. 12). In UK where most of the operations of BAT are undertaken, the country is politically stable allowing the company to carry out its activities without interference. Political stability also helps assure the security of the company. Despite the political stability, the operations of BAT in UK are influenced by laws legislated by the government to protect consumers (Wheeler, Marakas and Brickley, 2002, p. 47). Additionally, the company operations and profitability may be affected by the taxation imposed on its products. This is because the government imposes higher taxes on tobacco products to discourage smoking, support the economy and compensate the health effects of smoking. The involvement of UK government in the European Union makes its easy for BAT to market its products throughout the region and beyond given that EU standards are acknowledged globally (Wheeler, Marakas and Brickley, 2002, p. 47). In addition to operations in UK, BAT is an international company operating in many countries. However, the company has benefited from the political stability being experienced in most of these countries. Economic Factors The other critical factor considered in macro-environment business analysis is the economic factors. Economic factors determine the availability of capital needed for expansion and influence the purchasing the consumers (Hagos and Pal, 2010, p. 440). BAT operates in UK where the interests rates are relatively stable meaning that the company is able to remain profitable. Moreover, the levels of inflation are low which means that the purchasing power of the customers remains high. In the global market however, interest rates and levels of interests vary and in some cases, they are high (Godsell, Birtwistle and Remko, 2010, p. 11). However, the purchasing power of the consumers is not highly affected by levels of interest or inflation given that cigarettes lead to addiction and therefore a smoker will have to buy cigarettes despite their price. Socio-Cultural Factors Socio-cultural influences are also analyzed when carrying out macro-environmental analysis. Socio-cultural factors vary across countries and they determine the consumption trends of some products. For instance, the Muslim religion does not allow smoking. In other cultures, some people are restricted from consuming various products (Moerman and Van, 2005, p. 375). BAT has most of its activities conducted in UK where the culture of the people does not restrict smoking. In the country, the government is not affiliated to any religion that can influence consumption of tobacco products. In addition, cigarettes’ smoking is legal although sale of cigarettes is restrictive to persons beyond the age of 18 (Hagos and Pal, 2010, p. 440). Currently, BAT and other cigarette companies face stiff opposition from anti-smoking organizations that hold strong opinion against smoking for its health effects. Furthermore, the organizations are opposed to smoking in public due to what is referred as environmental smoking and therefore smokers are prohibited to smoke in public or at home. The penetration of BAT in some markets may be affected negatively by cultural and social factors in those countries especially those having affiliation with Muslim (Sohal, Burcher, Millen and Lee, 2009, p. 310). Technological factors Technology is critical in business operations as it gives companies a competitive edge and may be used in penetrating a global market. The current technology available to tobacco manufacturers enhances efficiency in cigarette manufacture. Technology also gives the manufacturers a chance to produce cigarettes more cheaply and in adherence to the quality standards (Sohal, Burcher, Millen and Lee, 2009, p. 313). Cigarette manufacturers use technology to shred tobacco leaves and add chemicals used in the production. The available technology is also critical in streamlining the supply chain used by the company thereby ensuing that the products are available to a large market. By use of technology, BAT subsidiaries are able to communicate effective and the head office in London can monitor the operations in different regions of the world (Research and Markets Offers Report: Analyzing the Tobacco Industry in United Kingdom, 2012). Environmental Factors Environmental factors are critical factors that must be carried out when carrying out environmental scanning of the business macro-environment. Environmental factors influence the strategies used in management of waste and the way raw materials are sourced. The major environmental concerns affecting BAT like all other companies are the issue of sourcing papers and prevention of environmental smoking (Moerman and Van, 2005, p. 375). The issue of the paper used in cigarette manufacture arises given that paper is a product of trees and therefore continued used leads to deforestation. In addition, some organisations are opposed to cigarettes since they cause impacts even to those people who do not smoke through secondary smoking (Moerman and Van, 2005, p. 376). Legal Factors The prevailing legal framework may affect the way a company carries its business operations. Presently, various legislation have been implemented which restrict advertisement of cigarettes and their sale (Moerman and Van, 2005, p. 377). More these laws dictate the type of packaging used when selling cigarettes to ensure that information on their health effects is displayed. SWOT Analysis When companies are carrying out strategic planning, it is critical for these companies to undertake an assessment of their internal environment that is referred as SWOT analysis. SWOT analysis helps a company helps a company evaluate its competitiveness in comparison to other firms in the industry. SWOT as an acronym refers to strengths, weakness, opportunities and threats. Strengths One of the greatest strengths of BAT is its strong financial power given that it is the second largest manufacturer of cigarettes. The other strength of the company is that it has loyal customers who continue to buy its products (Research and Markets: British American Tobacco plc: Company Profile and SWOT Analysis, 2011). A strong brand perception and recognition in the market is the other strength of the company. The company has a large poll of employees and an effective management team that ensures growth of the company. In addition, the use differential pricing ensures that different customers are able to purchase its products. Weakness The weaknesses of the company are that it carries out low research and development that means that innovation remains low. Another weakness of BAT is that it does not deal with diversified products given that the company only manufactures cigarettes. The other weakness that may affect the operations of BAT is that of diseconomies of scale (Research and Markets: British American Tobacco plc: Company Profile and SWOT Analysis, 2011). Opportunities There are various opportunities that can enhance the profitability of BAT. One of these opportunities is to make acquisitions that will ensure that the company increases its market niche (Valentin, 2001, p. 54). The other opportunity is to use the stock market to raise capital through sale of shares. Technology is another factor that BAT can rely upon to enhance its globalization trend. The company can also expand and diversify the services offered to enhance growth. Threats The main threats to the growth and profitability of BAT include competition. BAT faces stiff competition from different companies thereby limiting its market niche. The other threat facing the company is strict legislations on smoking and the harsh taxation policy (Valentin, 2001, p. 54). Given that BAT operates in a global market, fluctuations in the exchange rates may affect its revenue. Moreover, the company operates in a globally market where different customers have different cultures and expectations and failure to fulfill these expectations may affect customers (Valentin, 2001, p. 54). Business and Corporate Strategies Employed By BAT To achieve its current growth, BAT has relied upon various strategies. One of these strategies is formation of mergers and acquisitions. BAT was formed through a merger of two companies and in subsequent years, the company has acquired several tobacco companies to penetrate in other markets and enhance its competitiveness (Sohal, Burcher, Millen and Lee, 2009, p. 313). In 2008, BAT acquired two companies, Tekel and Skandinavisk Tobakskompagni that saw it penetrate into new markets. The other business strategy used by BAT is to diversify the cigarettes to meet the needs of all consumers. The cigarettes produced are marketed under different brands and are sold on different prices to cater for the high and low-end market. BAT also relies on streamlining its supply chain to ensure that its products get to all its market. In the supply chain, BAT uses its subsidiaries distributed in several regions. BAT relies on effective leadership that is monitored from its headquarters to ensure growth. The strategic decisions of the company are made by the management and then they trickle down to it subsidiaries companies distributed globally (Sohal, Burcher, Millen and Lee, 2009, p. 313). This ensures that the strategies implemented by the company are common and harmonized for effective administration. The company together with other tobacco companies has come up with standards to manage the industry and ensure companies with health standards. One of these initiatives is the International Tobacco Products Marketing Standards that ensures that the company takes a proactive measure to regulate itself and comply with the legislations (Godsell, Birtwistle and Remko, 2010, p. 15). This strategy demonstrates the commitment of the company to comply with all set standards and therefore it reduces government interference. Strategic Issues Facing the Company One of the challenges of facing BAT is that the company has difficulties in forecasting the demand. This is because the sales, pricing and distribution are affected by various factors. The other concern faced by BAT is that it faces more regulation from the governments making its operations difficult. Conclusion BAT Company has grown tremendous since its formation in 1902. The company operates in an industry that has various other companies and currently it is the second largest tobacco company globally. For effective strategic planning, it is critical to carry out analysis of both the external and internal environment in which it operates. Assessment of the external environment involves analysis of political, economic, socio-cultural and the technological factors that may affect the operation of a company. Moreover, external assessment involves assessment of the legal and environmental factors that affect the company. In carrying out assessment of the internal environment, the strengths, weakness, opportunities and threats are analyzed. The strengths of the company include strong financial position, effective management and strong brand name. The weakness of BAT includes low research and development (R&D) and failure to diversify products. BAT can take advantage of the opportunities emerging from availability of technology and financial market to raise capital. Some of the major threats facing the company include competition and strict legislation. The strategic concerns facing BAT include challenges in forecasting of the demand and strict legislation from governments. Recommendations BAT should implement the recommended actions to enhance its growth and profitability. The company should adopt the use of technology to enhance its process of monitoring its sales. BAT should implement more research activities to enhance innovation BAT should strive to diversify its products to ensure higher profitability BAT should create more awareness among tobacco users on the impacts of smoking Bibliography Asare, B., Cairney, P. & Studlar, D.T 2009, "Federalism and Multilevel Governance in Tobacco Policy: the European Union, the United Kingdom, and Devolved UK Institutions", Journal of Public Policy, vol. 29, no. 1, pp. 79-102. Gilmore, A. & McKee, M 2005, "How the East Was Won: BAT and Big Tobaccos Conquest of the Former Soviet Union", Multinational Monitor, vol. 26, no. 5, pp. 9-15. 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