Tobacco.The SWOT analysis

Recently BAT acquired an Italian cigarette manufacturer Enter Adiabatic Italian S. P. A (ET). The Italian cigarette market is the second largest in Europe, so BAT’s position in this market is important for achieving the company’s objective – to become the world’s leading tobacco company in sales volume. We would like to investigate how the acquisition of ET influenced BAT’s position in the Italian market. In order to do it we have conducted a number of internal and external analyses. The internal analyses include brief description of the company under investigation as it is important to know the company’s background.

To analyses the internal situation of BAT we defined its core competences and how the acquisition of ET helped BAT to create competitive advantage. The financial analysis helped us to understand whether BAT had enough resources to pay ‚¬2. 32 billion and whether BAT derived any financial profit from this acquisition. When analyzing the external situation we used the Porter’s Five Forces model to evaluate the attractiveness and competitiveness of the Italian cigarette industry. In the course of our analyses we have defined that BAT’s main competitor in the Italian market is

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Philip Morris International (PM), a company that posses 62% of the Italian market. We have analyses PM in order to see how the acquisition of ET changed BAT’s position in regard to its competitor. To analyses the influence of the environmental factors we have conducted a research of government intervention and influence of EX. Policies on the Italian cigarette market. To sum up all the internal and external analyses we pointed out all company’s strengths, weaknesses, opportunities and threats in light of the acquisition in a SOOT Analysis. We also analyses how the company can turn its nakedness into opportunities and eliminate some threats.

As the result of all our analyses we came to the conclusion that BAT is a profitable company and by acquiring ET it achieved the following: increased profits in Western Europe with the market. Created competitive advantage by adding Italian cigarette brands manufactured by ET to its portfolio substantially increased its market share in the attractive though highly competitive market strengthened its position in the market with one of the least interfering Judicial systems received an opportunity to compete on more equal terms with its main competitor, PM

Introductory Chapter Motivation Our group has chosen the second largest tobacco manufacturer in the world – British American Tobacco (referred to as BAT). We would like to see what kind of activities contribute to this impressive position. Furthermore, we found the website good structured with plenty of information which gives us the opportunity to conduct analyses taught during the first semester. We have decided to investigate BAT’s position in the Italian market due to a number of reasons: 1 .

As seen from the company’s profile Europe has the weakest financial position (2003) out of five regions in which BAT operates. Italian market is the second largest in Europe, why the position on this market could have a significant influence on a company’s position in Europe. 2. In summer 2003 BAT bought an Italian tobacco manufacturer Enter Adiabatic Italian (ET)2. We would like to see the impact of this acquisition. Problem Statement market Interpretation First we will look for the factors that help the company add value to their products, also called the core competences.

When explaining the tobacco industry in Italy we shall define the market structure and the attractiveness from the point of view of new entrants. By the competitors we imply the largest companies that operate in the same market. Since Italy is a member of the European Union (ELI) it should also follow the EX. Policies for tobacco products. When analyzing the governmental influences we will explain the kind of restrictions and regulations that the Italian government is imposing on the production, marketing and distribution of tobacco Scope We have chosen to base our analysis on the Italian market.

Since the range of the tobacco products is rather broad, we have decided to focus only on cigarettes. We analyses the situation of the company within a three year period. Methodology Theories For the internal analysis we will make a brief description of the company, as it will help us to explain the main issues of BAT’s activities and its position in the market. In order to find BAT’s core competences we shall conduct the value chain analysis. For the external analysis we will do the Porter’s Five Forces Analysis to evaluate the competitiveness of the industry.

Government intervention analysis and EX. Policies will also be represented in our project as environmental factors influencing the industry. As the summary of our internal and external analysis we will make SOOT Analysis. Data Collection Our project will be based on desk research. We will use information taken from BAT’s homepage, the Remuneration website plus other sites, newspaper articles and relevant books and teaching materials. Structure We have decided to structure our project using the “the fish with many stomachs” model, since we believe that partial conclusions to each of the analyses are very important (see Chart 1).

Company Profiler BAT was founded in 1902 as a Joint venture between the Auk’s Imperial Tobacco Company and the American Tobacco Company of the US. This agreement gave the many operations in Canada, Japan, Germany, Australia, South Africa and China. From the very start BAT had a single objective: to seek market leadership in all countries where a market exists! By its 25th anniversary BAT had 120 subsidiaries and more than 75,000 employees worldwide. BAT continued to succeed despite the post-war difficult trading conditions and the need to replace assets lost in the Second World War.

The company acquired such key brands as Kent, Lucky Strike, Dunghill and Pall Mall in 1970-1990, and last year BAT won auction for Italy’s former state tobacco many ET, which increased the company’s market share in the Italian tobacco market up to 30. 7%7 Today BAT is the world’s second largest quoted tobacco group with more than 300 brands in their portfolio. The company has 87 factories in 66 countries where 85,000 employees produce 792 billion cigarettes (2003)8. In more than 50 out of the 180 markets where they operate they hold leadership.

The Value Chain Analysis is important to show if a company’s activities create value for the customer, in other words satisfy customer needs and requirements. We would like to analyses BAT’s value chain to see how the acquisition of ET helped them to rate additional value for the customers in the Italian tobacco market. For a visual presentation of the Value Chain please see Chart 2. Suppliers for BAT can be divided into two major groups: leaf material and non-leaf material suppliers. Leaf material suppliers are farmers, who the company tightly cooperates with. 0% of the leaf material is purchased from the farmers that are involved into the leaf programs operated by BAT in 21 countries. These programs provide direct agronomy support to farmers helping them to plant, grow and harvest tobacco. 30% of the leaf material is purchased on the open markets. In connection with the leaf programs BAT has launched the Social Responsibility in Tobacco Production (SORT)II program. The program implies practices as integrated crop management, soil and water concentration, appropriate use of agrochemicals and keeping up with environmental standards in tobacco leaf processing.

Non-tobacco materials – packaging, cigarette paper, filter tow, plug wrap – are sourced from wood pulp. Within the SORT program forestation is a measure that enables farmers who require wood for tobacco curing to obtain it from renewable resources. The above mentioned activities within the SORT program ensure long-term sustainable supply of material, prevention of costs escalation and reduction of product costs as well as enable the manufacturer to produce high quality product.

Inbound logistics is supported by a well organized infrastructure of the company and procurement. The raw material supply is controlled by Business Enabler Survey Tool that insures quality control of the non-leaf materials which are involved into the production process. Well managed procurement allows the manufacturer to save production costs. All these contribute to the development of a high quality product at low price that leads to the satisfaction of consumer needs.

Manufacturing Production process in BAT is characterized by manufacturing rationalization. It implies that the market is serviced from more than one location. The Supplier Chain 1 program gives the company an opportunity to develop a global planning system, provides the ability to make flexible sourcing decisions, optimize inventories and lead times and demonstrate a rapid return on investment. The activities provided by the Supply Chain Planner program contribute to the production of the high quality product at low cost that creates value for the customer.

Distribution The product is distributed through specialist shops selling tobacco products, bar tobacconists, newsagents, petrol stations and tobacco vending machines. The Supply Chain Planner allows the company to improve customer service levels and reduce The Supply Chain enables BAT to minimize transportation costs, increase service level through integrated transportation procurement, planning, execution and monitoring. On the distribution level the company managed to achieve a high degree of availability of the product that creates a great value for the customer.

Marketing BAT has a strong, diversified global portfolio. The main objective of the company is to satisfy adult consumers’ demands 2. As BAT operates in a long established, mature product category, people already know what the basic product is. BAT’s marketing policy is to advertise the company’s brands to an adult consumer, who is well informed about the nature of the product. This strategy enables the company to maintain brand loyalty of its customers. The company has a consumer research community that collects and analyses data about consumers.

The Group strives to improve its insights into the consumers with the help of research associations, academic bodies and comprehensive competitor evaluation activity. All these ensure that the Group stays in touch with ever-changing needs of the consumers. Currently BAT moves to a more integrated, permission-based model, they have updated their brand language, marketing processes, agency integration as well as their planning systems. BAT’s main achievements are that they try to cover the ways in which their customers want to engage with their brands.

They take efforts to satisfy consumers’ requirements for responsible, personalized communication by conducting consumer dialogue and studying consumer insights. All these activities give the company an opportunity to get information about their consumers, their requirements to the product and foresee changes that their consumers will undergo. It helps the Group to develop and market the product that will satisfy customer’s needs. The aim is that the above mentioned strategies allow the Group to target the right customer at the right moment with the right product.

Procurement Since BAT operates in the markets that vary in terms of the volatility of demand and range of products required, the company has implemented a program called the Supply Chain Planner 14. This enables BAT to develop a flexible and responsive supply chain and the ability to foresee and react on changing market characteristics such as market priority and potential, market constraints and stability, to optimize planning, to meet customers’ needs in a cost-effective way while taking into account the constraints and opportunities offered by the Italian tobacco market.

Italy is a region with a great potential for cost savings, and “smart shopping”15 adds value to the operation of the company in this market. “Smart shopping” is done by professional procurement people with the help of an integrated IT solution built by a lobar team. It is a new way to buy “indirect”16 – anything other than leaf, wrapping materials, cigarette making machinery or permanent labor. Procurement serves as a strong support to the manufacturing. It saves costs by making sourcing process more flexible through the Supply Chain Planner program.

All this reflects on the price of the product, which is very important for customers. BAT develops tobacco products that would be acceptable for consumers due to lower health risk. Currently they are working on producing three strands of products: very low tar cigarettes, lower tar cigarettes with certain smoke constituents (intermarries) ND novel designs that significantly change the composition of smoke. BAT initiates and funds independent researches on each product innovation.

They consult scientific forums and the International Standard Organizational on the ways of how new products can be tested, whether current tar and nicotine machines can be improved etc. Researches conducted by BAT aim to increase product quality and make risk for consumer’s health lower. The company’s activities are also directed to the development of the product that would satisfy needs and requirements of a wider range of consumers. Human resource management A strong human resource (HRS) management supports operations and technology activities.

BAT has implemented the Business Enabler Survey Tool (BEST)18 that sets certain criteria for measuring performance on different levels: A commitment to business ethics and external operations Employee working relationships that promote a stable and productive workforce The provision of suitable training for supplier’s employees An effective employee safety program BAT invests in programs for staff development. Training programs increase the employees’ working skills in using new technologies and equipment. It makes genealogical processes more successful and reduces costs on producing output.

Taking care of business ethics and working atmosphere makes work process more efficient. Training and safety employee programs help to raise the level of motivation among the employees to reflect the production process in a positive way. Positive atmosphere and high level of motivation of the staff helps the company to develop a better quality product and to provide a higher level service that will definitely satisfy customers. Infrastructure Quality control system supports manufacturing activities. BEST assesses BAT’s appliers of the materials for product packaging and for materials other than leaf, such as cigarette paper and film.

BEST has a number of criteria for the successful operating of the company: Effective control on environmental impacts Process control procedures to ensure quality production Adequate capacity and flexibility to provide the goods or services Effective cost control programs and cost information sharing International pool of trained auditors carries out a supplier evaluation. According to the results suppliers are assigned a status – Approved, Qualified or Certified. There s also a Continuous Improvement Process based on formal reviews and monitoring.

It includes such activities as quality improvement, enhanced environmental efficient operation of the whole company, practicing flexible sourcing system, production and transportation cost saving developing of high quality product, providing significant level of service, all that reaches the main purpose of the company – customer satisfaction. Conclusion Having analyses BAT from the point of view what value its activities bring to customers, one can define some competitive advantages: Large brand portfolio High quality product