Political -. European Union and world trade union had contributed massively in the globalisation that had promoted globalisation but due to recession especially in US and European market the governments of the countries have started pursuing protectionism policies. In UK and USA the government is promoting the policy of giving job opportunities to their citizens first then the outsiders. Such policies would bring a big change in strategy formulation of many companies.
Economic – the GDP growth of the developed countries have been falling in the last five years. Moreover the year 2009 would experience more big fall in GDP whereas the BRIC countries have shown good growth of more than 7% in last five years but due to recession in the world market there will be fall in their growth also due to global impact
Social- due to globalization in last two decades a convergence approach has been observed the world over of accepting global brand irrespective of their culture. Purchasing power in developing countries have increased which had made them spending more on luxuries products. Similarly women and children segment has also become an active segment in the last one decade.
Technological -globalization had given rise to tough competition among the MNC, they are investing huge amount on research and development to bring new improved products to attract customers. Providing differentiated products from the competitors is generally the aim of giant companies.
BAT is engaged in the manufacture, marketing and sale of cigarettes and other tobacco products. The group’s brand portfolio includes over 300 global and regional brands. Strong brands provide the group with the flexibility to frequently launch new products as brand extensions. strong brands provide a competitive advantage to the group in the market place. However, increasing advertisement restrictions may negatively impact the group sales, as advertising is important in driving tobacco sales.
The group’s brand portfolio includes over 300 global and regional brands. The group’s Global Drive Brands (GDB) including Kent, Dunhill, Lucky Strike and Pall Mall, account for more than 26% of the group global volumes.
Strong brands provide the group with the flexibility to frequently launch new products as brand extensions. More importantly, strong brands provide a competitive advantage to the group in the market place.
BAT has a wide geographic presence. It operates in 180 markets in Europe, Asia Pacific, Latin America, Africa, the Middle East and the American Pacific region through a large number of subsidiaries and associate companies.
The group has been continuously strengthening its research and development (R&D) activities in recent past. The group devotes significant resources and attention to product development, process technology and consumer insight research to develop consumer-preferred products with innovative and distinctive features. This is evident from the fact that the group incurred £105.1 million in the R&D activities in FY2008.
The R&D provides support for the group’s current range of products . It also provides guidance on the use of ingredients in products to help to improve the quality and standard of the products as well as comply with national legislative requirements.
R&D initiative helps BAT to innovate and introduce new products in line with changing consumer preferences.
BAT’s revenue per employee is lower than that of its closest competitor.The group recorded revenues of £12,122 million in FY2008, with a total number of 56,170 employees. The group’s revenue per employee stood at $400,365.0 in FY2008, significantly lower than that of its closest competitor, Imperial Tobacco.
In FY2008, the revenue per employee of Imperial Tobacco stood at $952,078.4,
The group lacks scale when compared to its competitors in the market. Many of its competitors, such as Philip Morris International and Imperial Tobacco are much larger in size and in terms of revenues.
Philip Morris $63,640.0,
Imperial Tobacco £20,528
BAT, £12,122 million in FY2008.
The group’s small scale of operations could turn out to be a disadvantage in the fiercely competitive market. Lack of scale also reduces the bargaining power of the group.
The group has entered into some strategic acquisitions in the recent past. As a result of these acquisitions, the company now has a much stronger market position in Turkey, Denmark, Sweden, Norway and Poland and both acquisitions have performed in line with expectations, while contributing positively to earnings. These strategic acquisitions would continue to benefit the group in future as well.
The global tobacco industry is forecasted to witness growth through 2013. Volume declines are evident in developed markets. However, some developing markets in Eastern Europe and East Asia are recording growth.
The performance of the industry is forecast to accelerate, with an anticipated CAGR of 4.1% for the five-year period 2008-13, . This would give a positive boost to the revenues of group’s overall business.
The oil prices have been declining in the international markets. declining oil prices is likely to positively affect the group’s operations. Declining oil prices would reduce its cost, thus enabling it to increase its operating margins.
Advertising, promotion and brand building, which are critical to the tobacco industry, are facing increasing regulatory obstacles across the globe.
Illicit trade in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes are evaded, represents a significant and growing threat to the legitimate tobacco industry. The illicit trade constitutes a larger portion of the total tobacco industry across the world.
BAT derives major portion of its revenues from the European market Representing 39.1% of the total revenue.
A weak economic outlook for the Euro zone is likely to depress the demand for the group’s products, impacting the revenues of the group in the immediate future.
The main retail outlets for the US tobacco market include independent retailers, service stations, and supermarkets/hypermarkets. The concentration of retail outlets selling tobacco products is relatively low here, as there are number of outlets where the products can be sold. In the US, independent retailers are the most predominant distribution channel, with 27.6% share of total distribution Furthermore, tobacco products are not the only products sold by most retailers and in most cases retailers are not reliant upon tobacco sales thus boosting buyer power. Customers are likely to be susceptible to brands, so potential pull-through of end-consumer demand on retailers exists, weakening buyer power somewhat. Overall, buyer power is moderate.
Tobacco is an agricultural product and therefore key suppliers to the tobacco market include tobacco leaf farmers. These farmers lack power in the supply chain due to their smaller size, with many farms being family run businesses, particularly those in developing countries. Further inputs to the market include processing aids, humectants (which keep the tobacco moist and pliable), preservatives and brandspecific flavors. Other key inputs include packaging materials, such as paper/card, plastic, and foil to protect and preserve the products of this market. More specifically, packaging manufacturers supply the market with in-line rotogravure printed hinge-lid blanks and soft packs, RYO (Roll Your Own) tobacco booklet covers, as well as printed OPP film (Oriented Polypropylene film), bundle wraps and tobacco pouches. Due to the relative size of such suppliers, their respective influence over the market is increased. There are limited alternative raw materials in this market, so players are unlikely to switch between suppliers boosting their power somewhat. Overall, supplier power is moderate.
The dominance of existing brands is notable within the US tobacco market, with leading players such as Altria Group or Reynolds American benefiting from scale economies. Legislation and Government regulation with regards to smoking also continues to get more and more stringent within this market, i.e. a complete ban for smoking in public places has been implemented in a number of states. Current tobacco control strategies seek primarily to decrease the demand for cigarettes through measures that encourage individuals to adopt healthier behaviors, raising entry barriers. Such regulations could effectively deter the threat of new entrants.
Furthermore, shelf-space in retail outlets is finite and retailers may be unwilling to substitute other established brands in order to stock those of an entirely new, unproved brand. Overall, there is a moderate from new entrants to the US tobacco market.
Tobacco products are non-durable goods, and substitutes for tobacco products may include various other non-durable consumer goods, for example nicotine gum, nicotine patches, and herbal cigarettes. However, there are inter-segmental substitutes apparent within this market, alternatives to cigarettes and fine cut tobacco products include: smokeless tobaccos, cigars and pipe tobacco. Players and consumers alike may substitute one tobacco product for another, with players who specialize in the manufacture of cigarettes diversifying into cigars as an example.
However, inter-segmental substitution still involves essentially the same product. The benefits of substituting tobacco products for alternate non-durable consumer goods are especially notable in concern to consumer health, largely due to the health risks associated with smoking (e.g. increased risk of lung cancer, heart disease etc.). These alternative products fulfill consumer’s need for nicotine, without the harmful effects of inhaling smoke. Unlike tobacco products that face restrictions on advertising in many markets, nicotine replacement products are highly promoted through a variety of media. Overall, there is a strong threat from substitutes to the US tobacco market.
The US tobacco market is concentrated, with Altria Group and Reynolds American collectively holding over 76% share of the market’s value. Product differentiation is essentially limited between the core tobacco products, which include: chewing tobacco, cigars and cigarillos, cigarettes and loose tobacco, which increases rivalry. Illicit tobacco supplies have a negative impact upon players’ revenues and it is estimated that over 10% of tobacco consumption (around 600 billion cigarettes) a year, globally, is supplied by smuggled or counterfeit trade, which will serve to boost rivalry. Overall, there is a moderate degree of rivalry in the US market.
Cigarette sales constitute the largest share of the US tobacco market, accounting for 93% of the total revenues. In comparison, sales of chewing tobacco generate 3.3% of the market’s value.
MARKET SEGMENTATION II
The United States accounts for 21.8% of the global tobacco market’s value. In comparison, Europe generates 41.2% of the market’s revenues.
A statement by Jan du Plessis, Chairman at BAT is given below.
“company strategy: growth, productivity, responsibility and building a winning organization.
company continued focus on our 4 Global Drive Brands (GDBs) has played a major role in these
achievements. Last year, our 4 GDBs grew by 16 per cent, with about a quarter of the increase
attributable to successful brand migrations.
Kent rose by 18 per cent and
Pall Mall by 22 per cent
Lucky Strike increased by 9 per cent and
Dunhill by 7 per cent.
GDB volume now represents over 26 per cent of our total volume, providing us with a significant
opportunity to add scale to our key competitive innovations.
We have also made further progress with our productivity savings and we are very much on track
towards our target of reducing our costs by £800 million by 2012,
In 2008, for the seventh year running, we were included in the Dow Jones Sustainability Indexes and we published our first Sustainability Report.
Employee opinion at British American Tobacco compared favorably with other FMCG companies in the comparator group.
Adjusted diluted earnings per share grew by 19 per cent to 128.8p. the benefit from the share buy-back programme were partially offset by higher net finance costs, a higher tax rate and an increase in minority interests.
Arguably the most satisfying feature of our results last year was the high level of cash generation.
Free cash flow rose 52 per cent. they continue to maintain investment grade credit ratings.
We remain alert to the possibility of down trading. However, our well balanced portfolio of brands covers all major price points, while our geographic diversity further mitigates the risks for shareholders. We are very much aware of the potential challenges but the inherent strength of our businesses, our brands and our people should make us more resilient than most.
ACQUISITIONS AND MERGERS
It is one the most popular strategies which are being used by the modern corporate for the purpose of diversification. In this most of the tobacco industry it is becoming increasingly popular strategies for the purpose of acquiring market leadership
In this BAT are tried to acquire many companies globly for its core competencies, market shares, brands well known R and D and their special technologies
The main reasons for acquisition and mergers are the following:
It is the strategy by which the BAT is trying to get market leadership and as an edge over its rivals especially in the tobacco industry . BAT is operating in the tobacco industry is attempting mergers and acquisitions as strategy for expanding operations in the world.
By using the strategy the corporate are trying to increase their geographical coverage which is a most crucial strategy or technique by which it is a able to target its final consumers thus it is an effective strategy by which the customers are being targeted in a short span for its main benefit is the integration which helps the firms to increase their outlets.
Acquisitions and mergers helps in expanding of the output that leads to achievement of economies of scope which in turn increases the earning capacity or the profit margins of the firms using such a strategy.
This helps in the using of the brand name of BAT by the acquiring firm which helps in providing benefits to BAT, by using strong brand name for increasing their customer force.
ACQUISITIONS AND MERGERS – PROBLEMS
Problems of integration- if the subsidiary organization is not able effectively integrate with the parent organizations operation then the whole exercise of acquisitions and mergers can be into a big problem. In case of BAT has always maintained its independence and culture.
Problems concerning the human resources-If the resources especially its human resources are not being utilized properly in accordance then in such cases the usage of such strategies for the purpose of acquiring company can be futile
Problems concerning the conversion of the subsidiary company into the parent companies culture- The acquiring company has to ensure that the subsidiary company should not have much problem in converting in accordance to the BAT framework.
There are many ways to enter the foreign market as explained in the diagram above
Probably the most important reason for this method of market expansion is that associated with the particular assets of the company: brands, market share, core competencies and special technologies may all represent reasons for purchase Mergers.
Mergers are similar to acquisitions in the sense of two companies combining. However, mergers usually arise because neither company has the scale to acquire the other on its own.
Joint ventures and alliances-A joint venture is the formation of a company whose shares are owned jointly by two parent companies. It usually shares some of the assets and skills of both parents. Cereal Partners Inc. is a 50/50 joint venture between Nestle and General Mills (US) whose purpose is to attack Kellogg’s breakfast cereals
Franchise-A franchise is a form of licensing agreement in which the contractor provides the licensee with a pre-formed package of activity. It may include a brand name, technical service expertise and some advertising assistance. Payment is usually a percentage of turnover. McDonald’s Restaurants are among the best-known franchises.
The main advantages and disadvantages of the various methods of market expansion are summarised Methods of expansion: advantages and disadvantages-
• Can be relatively fast
• Premium paid: expensive
• May reduce competition from a rival, although such a move usually has to be sanctioned by government competition authorities
• High risk if wrong company targeted
• Best targets may have already been acquired
• Cost savings from economies of scale or savings in shared overheads
• Not always easy to dispose of unwanted parts of company
• Maintenance of company exclusivity in technical expertise
• Human relations problems that can arise after the acquisition: probably the cause of more failures than any other
• Extend to new geographical area
• Problems of clash of national cultures, particularly where target ‘foreign’
• Buy market size and share
• Financial reasons associated with purchase of undervalued assets that may then be resold
• Builds scale quickly
Control lost to some extent
• Obtains special expertise quickly
• Works best where both parties contribute something different to the mix
• Cheaper than acquisition
• Can be difficult to manage because of need to share and because parent companies may interfere
• Can be used where outright acquisition not feasible
• Share profits with partner Control lost to some extent
• Can be used where similar product available
• Can build close contacts with partner
• Slow and plodding approach
• Uses joint expertise and commitment
• Needs constant work to keep relationship sound
• Allows potential partners to learn about
• Partners may only have a limited joint commitment to make alliance a success
each other
• Unlikely to build economies of scale
• Locks out other competitors
• Slow and plodding approach
• Lower investment than outright purchase
• Depends on quality of franchise
• Some of basic testing of business proposition undertaken by franchise holder: lower risk
• Part of profits paid over to franchise holder
• Exclusive territory usually granted
• Risk that business built and franchise withdrawn
• Lower investment than outright purchase
• Some of basic testing of business proposition
in case of direct investment and exporting the risk is very low, whereas
in case of licensing and joint venture risk is medium)
has less resources it should go for licensing and exporting,
if it has medium resources it should go for joint venture and
if has high resources then direct investment
to have full control it should go for direct investment or export with own staff,
if medium control then joint venture and
licensing and low control then exporting with middlemen
it would give the company full control on the brands of the acquired company. thus freedom to take their own decisions.
Secondly the risk of losing proprietory information would be very less as acquired company would not copy such information
Thirdly the company has enough resources to go for such move
BAT would be mainly has to decide about the Problem relating to standardization or adaption-Standardising or adapting the international marketing mix
Product – as BAT has to enter in the new market they have to take decision relating to product positioning and formulation. The company has to analyse the culture of the country and then take appropriate decision whether to use same brand names or to lanch changed brands or products in the market. the changes if required might be done in many areas like – design, service offering, brand name, pack design
Promotion- BAT has to decide whether advertising proposition, creative presentation, sales promotion, personal selling style needs changes or not. Generally if the products are changed that definitely requires changes in promotion strategy according to the culture
Price – especially in case of developing countries prices pay major role on the decision of the customers purchase. Therefore appropriate decision have to be taken by BAT for price, discount structure, credit terms
distribution channels- distribution channels have to used which are more famous in the new market to reach the products to customers in time. Therefore the company need to make changes in such direction.
In market penetration, a firm seeks to expand the sales of its present products in its present markets through more intensive distribution, aggressive promotion, and competitive pricing.
In market development, a firm seeks greater sales of present products from new markets or new product uses. It can enter new markets, appeal to segments it is not yet satisfying, reposition products, and use new distribution methods.
In product development, a firm develops new or modified products to appeal to present markets. It emphasizes new models, better quality, and other minor innovations and markets them to loyal consumers.
In diversification, a firm becomes involved with new products aimed at new markets. The products may be new to the industry or to the company. Distribution and promotion orientations are different from those traditionally used by the firm.
BAT would be using market development strategy to avoid many problems like illegal trading of their products in the market where they haven’t entered. The main reasons for choosing this strategy are –
BAT has good experience in entering successfully in new market, at present they are already in 113 countries.
BAT has to aggressively pursue this strategy to increase its sales where the market is showing high growth
Through this strategy the company can avoid illegal trading of their products in the market where they have not entered.
Current strategy
We begin our exploration of environment-based options by considering the generic Definition strategies first outlined by Professor Michael Porter of Harvard Business School. Generic strategies are the three basic strategies of cost leadership, differentiation and focus (sometimes called niche) open to any business.
The Porter generic strategy model identifies two key planning concepts and the alternatives available
for each:
i) Competitive scope (broad or narrow target). It is possible to target the organisation’s products as a broad target covering most of the market place or to pick a narrow target and focus on a niche within the market.
ii) Competitive advantage (lower cost or differentiation). There are fundamentally only two sources of competitive advantage. These are differentiation of products from competitors and low costs.
The following three basic strategies are identified (see Figure):
Cost leadership-broad market and low cost position.
Differentiation-large market and unique strategy.
Focus-narrow target segment and either low cost position or a unique strategy.
Cost leader ship and differentiation strategies are alternatives for large firms; a focus strategy isavailable to smaller firms.
Porter modified the concept to split the niche sector into:
niche differentiation
niche low-cost leadership.
Cost Leadership strategy: this generic strategy calls for being the low cost producer in an
industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals or below the average industry prices to gain market share. The cost leadership strategy usually targets a broad market
ii. Differentiation Strategy : This strategy calls for the development of a product or service that offers a unique attributes that are valued by the customers and customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Firms that succeed in differntiation strategy often have the following internal strengths:
Access to leading scientific research.
Highly skilled and creative product development team.
Strong sales team with the ability to successfully communicate the perceives strengths of the
iii. Focus Strategy : this strategy focus on narrow segment and within that segment attempts to
achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focussing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty and this entrenched loyalty discourages other firms from competing directly
differentiation focus – super premium ice cream segment;
cost focus – economy ice cream segment.
In the global car market, Rolls-Royce and Ferrari are clearly niche players – they have only a minute percentage of the market worldwide. Their niche is premium product and premium price.
BAT should pursue cost leadership strategy because -as the company is using its financial resources in acquiring other companies therefore the company should pursue strategy in which they can earn more profit by spending less or by reducing the cost of production. This strategy would enable the company to earn more profit.
Company current analysis
The BCG Matrix, named after the Boston Consulting Group (BCG), is perhaps the most famous 2×2 matrix. The matrix measures a company’s relative market share on the horizontal axis and its growth rate on the vertical axis.
market growth rate – for each product, the market growth rate of the product category. Market growth rate is important because markets that are growing rapidly offer more opportunities for sales than lower growth markets.
THE GROWTH SHARE MATRIX- the market growth rate on the vertical axis indicates the annual growth rate of the market in which the business operates. It ranges from 0 to 20 percent. A market growth rate above 10 percent is considered high. Relative market share, which is measured on the horizontal axis, refers to the SBU’s market share relative to that of its largest competitor in the segment.
high share
high share
low share
low share
Firm can further promote
Expand more in the service and product.
Invest in R and D Stars are high-growth, high-share businesses.
Very often, they need heavy investment for financing their rapid growth.
Eventually, their growth slows down and they turn into cash cows.
-due to high share these units are generating cash to support other sbu
They may generate enough surplus to maintain themselves.
– Question marks, are low-share business units, in a high-growth market.
-They require a lot of cash, for maintaining the market share.
-Any business has to think between building a question mark into stars or whether they have to be phased out.
-limited future
short term focus and avoid risky projects.
Dogs are low-growth and low-share businesses.
Current situation
BCG matrix –
Many of the brand of BAT are in star position in certain countries and some are in cash cow position in certain countries, some are in question mark and certain are in dogs position.
Benson and hedges, dunhill, lucky 7 and john player are in star position in many countries. These brands are having good market share and good market growth therefore the company should keep investing in such brands.
In case of 555 and Viceroy they are in cash cow position in certain developed countries where the market growth has decreased but
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