2015
Re-inventing the Tobacco Industry:
Sadiku; Oladayo Oladimeji
Hamburg School of Business Administration MBA
Corporate Management 2445
12/7/2015
i
Table of Contents
1.
2.
3.
Introduction ................................................................................................................................. 1
1.1
Background .......................................................................................................................... 1
1.2
Methodology and problem definition ................................................................................. 2
Global Tobacco Industry .............................................................................................................. 3
2.1
Historical Timeline and Evolution ........................................................................................ 3
2.2
Recent years of the Tobacco industry ................................................................................ 4
2.3
Global Tobacco Market Today ............................................................................................. 7
2.3.1
China National Tobacco ............................................................................................... 8
2.3.2
Philip Morris International (PMI) ................................................................................. 8
2.3.3
British American Tobacco (BAT) .................................................................................. 8
2.3.4
Japan Tobacco International (JTI) ................................................................................ 8
2.3.5
Imperial Tobacco Group .............................................................................................. 8
External Analysis of the Tobacco Industry................................................................................... 9
3.1
3.1.1
Threat of new entrants – Variable............................................................................. 10
3.1.2
Bargaining power of suppliers- Moderate................................................................. 10
3.1.3
Threat of substitutes - High ....................................................................................... 11
3.1.4
Bargaining power of buyers- low............................................................................... 11
3.1.5
Rivalry among existing competitors - High ................................................................ 11
3.2
4.
Five Forces Analysis:- ........................................................................................................... 9
PESTEL Analysis .................................................................................................................. 12
3.2.1
Political / legal factors ............................................................................................... 12
3.2.2
Economic Factors:...................................................................................................... 13
3.2.3
Sociocultural Factors ................................................................................................. 13
3.2.5
Ecological factors ....................................................................................................... 14
Strategic recommendation using SWOT.................................................................................... 15
4.1
S-O/ W-O Strategies .......................................................................................................... 16
4.2
S-T / W-O Strategies .......................................................................................................... 17
5.
Summary and Conclusion .......................................................................................................... 19
6.
Annexes ..................................................................................................................................... 20
ii
7.
Bibliography ............................................................................................................................... 21
Table of figures:
Table 1 Largest Tobacco companies (Tobaccoatlas, 2013) ................................................................. 5
Table 2 SWOT Analysis of the Tobacco Industry ............................................................................... 15
Figure 1 Chart showing the Tobacco companies by global market share ........................................... 5
Figure 2 Biggest Tobacco Companies outside China (Forbes, 2015) ................................................... 6
Figure 3 Tobacco Global Market Share Leaders (Tobaccoatlas, 2013) ............................................... 7
Figure 4 Rise in Global Cigarette Consumption from 1880 to 2014 (in billion cigarettes) (Statista,
2014) .................................................................................................................................................... 9
Figure 5 Tobacco Industry Evolution Timeline .................................................................................. 20
Figure 6 Adult cigarettes consumption per Capita 1900- 2011......................................................... 20
Dec 2015
Declaration of Authenticity
I declare that all material presented in this project is my own work, or fully and specifically
acknowledged wherever adapted from other sources. I understand that if I have
misrepresented material presented in this project, any degree or credits awarded to me on
the basis of that material may be revoked.
07.12.2015
Date
Student’s Signature
iii
ABSTRACT
This global Tobacco industry is more than 150 years old and worth over €700 billion as of
today. Growing health awareness over the dangers of cigarette smoking in recent years
has seen sales figures and profits plummet in developed countries and the focus of the
industry is now on the promising sales figures from developing countries.
While the industry continues to grow, regulatory sales ban, excessive taxation, illegal
trading and advertisement restrictions are just some of the threats that could bring down
the industry like “a Russian military jet out of the sky”. The plain packaging regulations in
Australia or the Tobacco control Act of Bhutan 2010 are just some biggest nightmares of
the tobacco industry at the moment should they cause a global precedent. How can an
industry with so much financial muzzle, market penetration and economics of scale be
facing such an uncertain future? The methods used by the industry to survive a century of
growing profits are becoming obsolete by the day since the period of the Tobacco Master
Settlement agreement of 1998. How long can the industry hold on and what must it do to
survive?
In this report, the historical timeline of the Tobacco industry is reviewed, the big 5 tobacco
companies are introduced and an in-depth strategic analysis of the industry is conducted
using the Five Forces Analysis and PESTEL. A strategic fit is then recommended by
analyzing the internal and external factors against the current / future challenges using the
SWOT method. The outcome suggests that the industry desperate needs to reinvent itself
by adopting radical change strategies with a fresh wave of innovative ideas otherwise it
risks getting smoked.
iv
1. Introduction
1.1
Background
The most controversial industry in the stock exchange market, yet paying one of the best
dividends is the Tobacco industry. It is one of the very few industries whereby despite its
investment appeal, many investors are turning down the opportunity for ethical reasons
and government and regulatory agencies are becoming more hostile by the day. According
to Mitch Zeller of the Centre for Tobacco products, Tobacco is the only consumer product
on the market today which when used as intended and recommended would kill up to half
of its long term customers (Zeller & Hatsukami, 2009). A claim supported by the WHO
which goes on to suggest than more than 10 people die every second as a result of direct
tobacco use (WHO, 2008).
Despite the heart wrenching statistics and global campaign against it, the global tobacco
industry has managed to weather the storm from its humble beginnings about 150 years
ago to emerge as an industry worth more than 1% of the world’s total GDP at €700 billion
and churning out over 5 trillion cigarettes a year (BAT, 2011). However, the question of
how long the honeymoon would last is one of the motivations for this report as recent
trends shows that the rate of smoking is dropping drastically and consumers are giving up
the habit like never before. Fueled by strict government regulations and increased health
awareness, cigarette sales and consumption in developed countries is at its lowest rate in
more than 50 years and there happens to be no sign that the trend would change anytime
soon (Thomson & Wilson, 2015). As a result, the attention of the industry has been
focused more of late to the emerging markets in the developing world as rising income,
urbanization, improved transport network and changes in consumer behavior have
provided renewed hope for a sustainable sales growth.
Nevertheless, the renewed growth being enjoyed in the “poorer nations” might be coming
to an abrupt unexpected end as even these nations are now introducing stricter
regulations against tobacco operations and the continued awareness through the global
social media on the health risk of smoking i.e. new strict regulations imposed on public
smoking in China which is the world’s single biggest tobacco market and accounting for
40% of global consumption would drastically affect sales of its state owned tobacco
company (Xiao, Bai, Chen, & Wang, 2015).
1
For several years, the tobacco industry has survived by devising programs such as the
Tobacco Institute to misinform the public and withstand battering by regulators. In this new
age where corporate social responsibility is at the very core of company strategy and
public expectation, the old tricks employed are fast losing steam. History has showed how
several inventions that became locked-in some years back are now obsolete. Less than 30
years ago, most tobacco consumers thought that the smoking pipe would last forever but
today, it is close to extinction. The much matured and still powerful tobacco industry might
be confident of being strong forever, but history that keeps repeating itself points
otherwise. The industry cannot afford to lie to consumers any longer and there have not
been any major innovation in the structure and composition of an everyday cigarette in
recent years.
For the tobacco industry to survive another 150 years of continued growth, it has to
transform and reinvent itself through innovation and renewed concepts. This report
analyses the industry and proffer strategic recommendations.
1.2
Methodology and problem definition
This report tells the story of the strategic dilemma faced by the tobacco industry. The
challenges of the industry are laid bare and studied with a reference from a historical view
point up to the present decision point. This project aims to further provide answers and
suggestions where necessary to the following key questions:
a) What impact does and “could” the increased and stricter global regulation of
Tobacco have on the industry?
b)
Can the industry survive another century of growth or is it “going up in smoke?” If
yes, how soon?
c)
Are there any hopes of finding blue oceans in a red ocean world nearing its
apocalypse?
d) How cataclysmic can the next disruptive innovation be for the industry?
e)
Are the “Next-generation products” the future of the industry? What opportunities
exist?
2
f)
How ethical are the activities of the industry in terms of Corporate Social
responsibility?
To address these strategic issues, the Analysis, Formulation and Implementation (AFI)
Framework would be would be adopted.
The first step would involve carefully
understanding and exploring the identified challenges and opportunities.
External
opportunities (O) and threats (T) in the industry would be analyzed using PESTEL and
Porter’s five forces analyses. SWOT analyses combining external and internal analysis
would be conducted. The second step involves proffering and proposing sustainable
solution / options after careful scenario planning. The third step involves developing a plan
for implementation to help the industry reinvent itself.
2. Global Tobacco Industry
2.1
Historical Timeline and Evolution
Before the cigarette was invented was the one of mankind’s earliest invention which is the
hybrid Nicotiana tabacum otherwise now known as cultivated tobacco (Belliard, Vedel, &
Pelletier, 1979). The tobacco plant is native to the Northern and Southern American
continent and growing is believed to have begun around as early as 6000 BC. The native
Mayan civilization used tobacco for religious and medicinal purposes and was consumed
by smoking, chewing, snuffing and drinking. Anthropologists have even speculated that
‘snuffing’ – which involved inhaling trough the nostrils probably pre-dated smoking as the
earliest tobacco artifacts discovered were snuffing tubes (Brandt, 2007) (Proctor, 2011).
“It is important that we know where we come from, because if you do not know where you
come from, then you don't know where you are, and if you don't know where you are, you
don't know where you're going. And if you don't know where you're going, you're probably
going wrong.” (Pratchett, 2011)
In the 1500s, tobacco use spread to Europe and became popular for its supposed
medicinal benefits. Early globetrotters from Spain and Portugal were among the first
outside the Americas to smoke the tobacco leaf (Shaw, 1960). The leaves were wrapped
3
in the protective leafy outer covering of maize and smoked, an invention preceding the
cigarette.
In 1612, tobacco was grown as a cash crop by colonists in Virginia and in the 1800s, the
use of Tobacco was spreading and people either chewed it or hand rolled it to smoke
(Herndon, 1957). In 1881, a man named James Bonsack dropped out of school to invent a
machine capable of rolling cigarettes. His machines were able to produce 200 cigarettes
per minute which led to a major revolution of the tobacco industry. He ventured into
business with a partner named James Duke and together, they successfully built a factory
that was able to produce 10 million cigarettes in the first year and about one billion
cigarettes five years later. The pioneer brands of cigarettes were packaged in a “baseball
card box” with and were named the “Duke of Durham”. James Duke and his father are
credited with founding the first tobacco company called American Tobacco Company. The
American Tobacco Company was the largest and most powerful tobacco company until
the early 1900's and in 1902 Philip Morris company came out with its Marlboro brand
(Porter, 1969) (Figure 5 Tobacco Industry Evolution Timeline).
2.2
Recent years of the Tobacco industry
Since the first commercial cigarettes were sold in the 1860s, the market had enjoyed a
trajectory growth with an initial peak after the Second World War with production reaching
300 billion units a year in 1944 with the major tobacco companies witnessing a boom in
business. The “days of war” offered good sales for the tobacco industry except in Nazi
Germany where the government promoted the first modern era anti-smoking campaign
(Bachinger, McKee, & Gilmore, 2008). The National Socialist government condemned
tobacco consumption by promoting research against it, increasing taxes, public places ban
and restrictions on its trading of which the Jews were accused.
In the 1950s and 1960s, the industry was faced with several threats to its future. In 1964,
the Surgeon General of the United States (U.S) wrote a report about the dangers of
cigarette smoking. He linked the nicotine and tar in cigarettes to lung cancer and a year
after, the Congress of the U.S. passed the Cigarette Labeling and Advertising Act which
set a stipulating precedent that every cigarette pack must have a warning label on its side
stating "Cigarettes may be hazardous to your health" (Hamilton, 1972). By the 1980's, the
4
tobacco companies had come out with new brands of cigarettes with lower amounts of tar
and nicotine and improved filters to keep their customers buying and to help alleviate their
fears. This period of time was called the "tar wars" because tobacco companies competed
aggressively to produce low tar cigarettes with respective companies making and selling
many different brands of cigarettes (Warner, 1985).
In 1998, Tobacco Master settlement agreement was signed in the United states between
the major Tobacco companies and the state in which the companies agreed to cut back on
certain marketing malpractices and pay $206 billion dollars over the first 25 years of the
agreement as recovery settlement (King III & Siegel, 2001). The 1990s and 2000s
witnessed a series of heavy mergers and acquisitions with the eventual emergence of 5
heavy players that control more that 80% of the market share today.
Table 1 Largest Tobacco companies (Tobaccoatlas, 2013)
Company
1
2
3
China National
Tobacco Co.
Philip Morris
International Inc
(Altria Group Inc)
Japan Tobacco
International
Profit
Revenue
Global Market
Share
$16.0 billion
$91.7 billion
44%
$7.5 billion
$67.7 billion
15%
$1.5 billion
$65.9 billion
9%
4
British American
Tobacco
$4.2 billion
$58.1 billion
11%
5
Imperial Tobacco
Group
$2.0 billion
$38.4 billion
5%
Figure 1 Chart showing the Tobacco companies by global market share
Derived from (Tobaccoatlas, 2013)
5
Figure 2 Biggest Tobacco Companies outside China (Forbes, 2015)
6
Figure 3 Tobacco Global Market Share Leaders (Tobaccoatlas, 2013)
2.3
Global Tobacco Market Today
The global tobacco market is valued at over €700 billion as of today and sales exceed 5
billion cigarettes sold per day. The four biggest international tobacco companies – British
American Tobacco, Imperial Tobacco, Japan Tobacco and Philip Morris International –
account for around three-quarters of the market outside China (BAT, 2011). At the turn of
the millennium, around half of global market sales were controlled by transnational
tobacco companies (TTC) and as of today, more than 80% of the market is controlled by
TTCs. Over the last decade, the international cigarette market has been dominated by
these 5 major players (Ross et al., 2015).
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2.3.1
China National Tobacco Corporation (CNTC) is the powerful state owned
enterprise of the Chinese government and is the world’s single largest producer of
cigarettes with 44% of the global market. CNTC sells the majority of its product in China
where it enjoys a monopoly and just over 1% of cigarettes produced are exported abroad
(Dan, Yuankai, & Chen, 2014).
2.3.2
Philip Morris International (PMI) is the most profitable tobacco company owning
the world’s best selling cigarette brand the Marlboro. Its foundation can be traced back to
1847 and it’s today a publicly traded American company with headquarters in Lausanne,
Switzerland. After separating from its parent company, Altria, in 2008, PMI only sells its
tobacco products outside of the United States where it has more than 15% market share.
The company products and brands are in more than 180 countries including China where
CNTC has the Marlboro license (Pratt, 2015) (PMI, 2014).
2.3.3
British American Tobacco (BAT) describes itself as “a global tobacco company
with more than 200 brands in more than 200 markets”. The company is listed on the
London Stock Exchange and has a market cap in excess of €90 billion. It has the third
largest tobacco market share with 11% total. Its iconic brands include Pall Mall, Kent,
Lucky Strike and Dunhill with a majority of the sales volume focused on emerging markets
such as Nigeria and Indonesia. (BAT, 2011)
2.3.4
Japan Tobacco International (JTI)
The international division of parent company Japan Tobacco (JT) and is headquartered in
Geneva, Switzerland. The Japanese government holds a one third stake in the company.
It has the fourth largest tobacco market share with 9% of the global cigarette market with
iconic brands Winston, MEVIUS, and camel sold across 120 countries and operations in
70 countries. The company has an eye for emerging markets and an active player in the
pharmaceutical, beverage and processed food industry. (JTI, 2014)
2.3.5
Imperial Tobacco Group is the fifth largest tobacco company with 5% of the
global cigarette market with iconic brands such as Davidoff and Gauloises. The company
is listed on the London Stock Exchange and has a market cap in excess of €35 billion. The
multinational British company sells its products in more than 160 countries, with a majority
volume being sold in emerging markets across Africa, the Middle East, and Asia. In 2003,
Imperial Tobacco acquired Reemtsma Cigarettenfabriken GmbH of Germany which was at
8
the time in the top five of the world’s largest tobacco companies (SAS, 2015)(Zaman,
2014).
Figure 4 Rise in Global Cigarette Consumption from 1880 to 2014 (in billion cigarettes) (Statista, 2014)
3. External Analysis of the Tobacco Industry
The methodological framework adopted and problems to be analyzed are clearly defined
in section 1.2 of this report. By analyzing external environmental forces, companies can be
in a better position to mitigate threats and leverage on opportunities.
3.1
Five Forces Analysis:-
This model provides an insight that analyses a company’s ability to generate gap between
the value of its product and the cost to produce. The five key competitive forces that would
be analyzed are:
1. The threat of new entrants
9
2. The bargaining power of suppliers
3. The bargaining power of buyers
4. The threat of substitute products
5. Rivalry among existing competitors.
3.1.1
Threat of new entrants – Variable
Ceteris Paribus, new entrants would exert very little pressure on the dominant existing
players who already control more than 75% of the global market share. The Tobacco big
five dominate with their strong brand name, financial muzzle and superior distribution
channels.
These factors that have made the locked-in big players to almost completely ignore the
threat of new entrants would hold no value, if the new regulation such as the plain tobacco
packaging being introduced in Australia sets a global precedent. Should such legislation
be adopted worldwide, brand owners would lose the power to communicate quality and
innovation to customers and the sales and profits of the big players would drop like “a
Russian military jet out of the sky”. That is because the economic market dynamics for
competition and price would be altered and consumers would instead opt for cheapest
available option which would most likely come from outside the big five circle. Considering
that the capital for running on a small scale is not out of bounds, the entry barrier is would
be low regardless of economics of scale
3.1.2
Bargaining power of suppliers- Moderate
This is a very important parameter because a higher supplier bargaining power by
Tobacco growers could drastically reduce profitability. Ceteris Paribus, the big five players
have the edge over plant growers because there are many suppliers. Since the
introduction of free markets globally, the volume of tobacco leave supply outweighs the
demand especially since most countries have regulations mandating Tobacco producers
to source majority of their raw materials locally. However, should governments introduce
new quota system on as its currently being proposed in some countries and should the
local farmers form stronger unions, their supplier power would increase. A massive risk to
the industry could also come unexpectedly from parasites and diseases such as the
Tobacco Mosaic Virus which would drastically reduce productivity and supply volume
thereby increasing price.
10
3.1.3
Threat of substitutes - High
The big Tobacco companies have been slow to respond in ways necessary to the
declining consumer opinion and global awareness of the health risks of smoking. Many
smokers are opting for substitutes in an attempt to quit smoking. Products such as Nasal
sprays, Nicotine patches and Lozenges are becoming more popular as substitutes offering
a better price-performance trade-off. With increasing government regulations on the
industry, a disproportional tax increase for which the tobacco companies would normally
shift to the consumers could finally make the consumers shift to substitute products. The
e- cigarettes has witnessed unprecedented growth of late as a substitute but it is still too
early to judge whether it would take over the industry as a mainstay.
3.1.4
Bargaining power of buyers- low
In certain scenarios, more powerful buyers can have the tendency to pressurize the
industry to reduce price thereby reducing profitability. In reality, the bargaining power of
buyers is low based on the highly addictive nature of nicotine in the cigarette which makes
the demand, price inelastic. On this criterion, the industry has a greater bargaining power
because many consumers that are willing to buy despite it’s highly health damaging
prospects would be willing to buy irrespective of price. This factor however varies on the
market because countries such as Ghana, whose inhabitants still view tobacco smoking as
a taboo and whose consumption volume is still relatively low might force the industry to
reduce price to entice buyers. Another factor that can destroy the leverage the industry
has over the buyers is the plain packaging regulation as explained earlier in section 3.1.1
3.1.5
Rivalry among existing competitors - High
Despite the very high level of mergers and acquisitions taken place in the highly
consolidated industry, the big four tobacco (with the exception of china) are constantly
involved in a battle of supremacy and brand innovation as they are roughly of equal size.
The $27.4 billion dollar acquisition of arc rival Lorillard by Reynolds American Inc would
provide it with a synergized diverse portfolio of iconic brands and economics of scale to
compete against the dominant Altria- Group (formerly named Philip Morris USA) in the
United States. Philip Morris aggressive style of advertising as currently seen across
billboards all over Germany coupled with their high sense of innovation could drive
competitors out of the market. Although price competition is currently low amongst the big
11
players, a new government regulation or free market introduction could change that
overnight.
3.2
PESTEL Analysis
The PESTEL model entails the forces that companies could have little influence over and
are vital in achieving and sustaining a competitive advantage. This report would analyze
the forces further by identifying critical factors that would be vital should the industry seek
to survive for another century. The forces are grouped into six categories making up the
acronym which are Political, Economic, Sociocultural, Technological, Ecological and
Legal.
3.2.1
Political / legal factors
Tobacco companies are globally regulated and controlled by either government of host
nations or by international conventions. Impositions include high taxation, duty charges,
marketing and advertising restrictions, ban on smoking in public places etc. The industry is
practically at the mercy of government hammer because an adversely introduced
regulation can bring down the industry. An example introduced earlier is the plain
packaging regulation in Australia. The Tobacco control Act of Bhutan 2010 is another
example whereby the sale or consumption of Tobacco products was out rightly banned
and termed illegal. What would happen if other countries follow suit or the tobacco-free
world by 2040 campaign bill is to be approved? (Beaglehole, Bonita, Yach, Mackay, &
Reddy, 2015)
The tobacco industry has argued and has sponsored publications in their favor to stress
the importance of their taxes to the economy of their countries. The fact that marijuana
consumption is out-rightly banned in most parts of the world despite killing less people and
having the potentials to generate more revenue is a testament that the industry could in
future be banned.
For several years, the industry has spent vast sums of money to bribe (lobby) legislators
and politicians across the world especially in the United States and Europe to sway
legislations in their favor such as the US Comprehensive tobacco legislation. There are
however, strong indications that bribery might not be successful in the future as it did when
12
the U.S. National Association of Attorneys General refused bribe which resulted in the
Tobacco Master Settlement Agreement of 1998 (Barry, Hiilamo, & Glantz, 2014)
3.2.2
Economic Factors:
Economic expansion and increase in disposable income in emerging nations have proved
to be a very good fertile ground for the industry especially companies like BAT and
Imperial. In many of these nations, consumer and business demands are increasing due to
generally lower interest rates. One interesting observation by the author of this report
which could be further studied is the direct proportionality of unemployment and tobacco
sales because many people pick up the habit of smoking out of boredom or depression.
Another global recession however, can have a drastic impact on the sale of Tobacco.
Although price is inelastic, consumers might adopt substitute products. Another stock
market crash can affect the industry and destroy market capitalization but would have little
bearing on sales. As Tobacco duty is usually also raised in line with inflation, a period of
global inflation would increase taxation which could force consumers to trade down to
cheaper and lower cigarette brands.
3.2.3
Sociocultural Factors
In recent years, consumers are becoming more conscious of the health implications and
dangers of smoking and the global campaign and protest against the industry and its sharp
practices are getting louder. There are even global efforts to protect non-smokers from
being exposed to secondhand smoke such as the ban in public places. This is a far cry
from the earlier years of the industry when smoking was the epitome of “cool and glamour.
Movie stars made smoking look “sophisticated and sensual” and even the then American
president Ronald Reagan and German Chancellor Helmut Schmidt strutted their tobacco
with reckless abandon.
There are also issue of religious constraints in certain cultures and societies today, and in
countries like Ghana, smokers are looked upon with disdain as unhealthy and
unintelligent. Should such cultural orientation continue to spread, the future of the industry
looks bleak.
13
3.2.4
Technological
The application of technology in cigarette manufacturing and packaging is indeed already
many years ahead of its time. At a particular Philip Morris facility in the USA, there are
machines that are faster than the speed of bullets in producing 20,000 cigarettes per
minute. In terms of technological innovation for producing its primary product, the industry
does that perfectly. However, the industry is still lagging behind in terms of disruptive
innovation. The industry was very slow to tap into and develop E-cigarettes and medicinal
nicotine products. Consumers have for years yearned for the development of cigarettes
that reduces the harm caused. The Marlboro Advance Blue clear sense filter technology
cigarette marketed as less harmful and recently introduced by Marlboro has made it a top
selling product at the moment across Germany.
3.2.5
Ecological Factors
The true revenue of an industry shouldn’t be measured by its profit minus cost but by the
profit minus the cost and minus the cost to society. The cost of treatment for smoking
related cancer patients are some of the cost that tobacco companies do cancer patients
and cleaning thenot bear but the society. Although Tobacco companies claim that the
society and government benefit from revenue generated from their industry, the earnings
do not equate to the volume of damage done to the society. According to greenbutt.com,
the discarded butts of the 5 trillion cigarettes smoked annually creates over 1.7 billion
pounds of waste making it the most littered item staining the planet and unsustainable for
our natural environment. Unfortunately the industry players are not environmentally
conscious enough to develop and adopt technology using highly biodegradable cigarette
butts. Further destruction to the environment includes uncontrolled deforestation, heavy
pesticide and fertilizer usage. The industry has no clear cut agenda for transition into a
green economy which is the future as a result the of the climate change crisis.
14
4. Strategic recommendation using SWOT
Table 2 SWOT Analysis of the Tobacco Industry
Internal
Analysis
STRENGTHS
WEAKNESS
Very strong financial resources
Sales decline in developed
countries
Economics of scale
Operating profitability decline
Global market penetration
Products kill consumers
Strong political & legal influence
Advertisement restrictions &
Products damage environment
Iconic brand reputation
Dependent on brand names
OPPORTUNITIES
STRENGTHS-OPPORTUNITIES
STRATEGY
WEAKNESS OPPORTUNITIES
STRATEGY
Growth in emerging markets
Develop local production capacity
in underexplored territories
Invest more in developing
countries
Advancement in automation &
other R & D technology
Improve the economics of scale
beyond reach
Adopt latest technology to
reduce operating costs
Smokeless Tobacco and ECigarette
Improve sales and marketing of
less harmful tobacco
Encourage less harmful options
External
Analysis
Campaign for more
Biodegradable cigarette butts environmentally friendly Tobacco
Growth of social media
Become more transparent and
honest to the public
Implement creative disruption
and adopt biodegradable butts
Re-invent the structure and
design of unique cigarette
brands
THREATS
STRENGTHS-THREATS
STRATEGY
WEAKNESS - THREATS
STRATEGY
Regulatory sales ban / Global Invest more in R & D towards less
health awareness
harmful tobacco or substitutes
Industrial diversification and
developing foreign alliances
Excessive Taxation and
Inflation
Improve operational efficiency
Threat of substitutes & Illegal
trading of counterfeit
Improve and strengthen market
monitoring network
Expand duty free operations at
and sell more low tax products
Develop imitation proof
products & acquire the
Substitutes industry
Economic recession
Explore commodity derivatives
Adopt new channel strategy
Rival competition & litigation
Capture customer loyalty and
lifetime value
Explore the blue ocean and
implement a focus strategy
15
To recommend a strategic fit for the Tobacco industry, the internal and external factors is
analyzed against the current / future challenges or prospect and opportunities that can
affect its sustainable growth using the SWOT analysis. It is important for the industry to
exploit its strengths (S), prop up on its weaknesses (W) and look at it as prospects for
opportunities (O), and take advantage of opportunities, identify the threats (T) and act on
them. The four strategies that would be extracted are the S-O, W-O, S-T and the WT
strategy.
4.1
S-O/ W-O Strategies
The S-O / W-O (Strength-Opportunities / Weaknesses-Opportunities Strategies) focuses
on how the strengths of the industry can be used here to take advantage of opportunities
that exists and how the weaknesses of the industry that prevents taking advantages of
external opportunities can be overcome
a) As detailed in the table below, the industry has very strong financial power and
resources and can take advantage of the growth opportunities in emerging
markets by developing local production capacities in those regions and investing
more capital.
b) Technological advancements in automation technology have made it possible for
the entire production chain to be automated at speeds and volume never thought
possible. With such adoptable technology, the big 5’s can improve further their
economies of scale beyond reach of competition.
c) The innovation of the E-cigarette is fast developing as early adopters and sales
figures continue to by the day as it has the potentials to go mainstream and
outsell traditional cigarettes in future. This presents a great opportunity for the
industry to acquire smaller firms that pioneer the research and technology and to
invest further capital in them because in addition to its financial viability, it is
perceived as potentially less harmful than the traditional cigarette.
d) The amount of unsustainable waste generated daily by discarded cigarette but is
an environmental catastrophe and a burden to the society that would take
millions of years to clean up. The discovery of biodegradable cigarette butts
presents a unique opportunity that the industry should adopt and should be
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backed up by their influence to sponsor bills that require other Tobacco industries
to be more environmentally friendly across their line of products.
e) The rise of the social media presents a unique opportunity for the industry to go
viral on the media showcasing their commitment and giant strides through
innovation in manufacturing or researching products that could further reduce the
harm caused by smoking. The industry should promote campaign against
underage smoking, illicit trading and purchasing of counterfeit cigarettes. The
industry should respect advert regulations and refrain from advertising to minors.
Industries can redesign the structure and design of their unique brand so much
so that even without package labels, loyal customers would recognize and
differentiate. The industry also needs to be more transparent and honest to the
public about the health risks and dangers of Tobacco.
4.2
S-T / W-O Strategies
The S-T / W-T (Strength-Threat / (Weaknesses-Threats Strategies) focuses on how the
strengths of the industry can be used to minimize the possibility and damage posed by
threats and how the weaknesses of the industry that could bring the threats to into
existence be destroyed.
a) With the financial strength of the industry more investment should be put into
researching less harmful tobacco or complementary substitutes. Examples include
improving better tar filter technology or “”Tarless” cigarettes.
b) Forging stronger alliances abroad with other Tobacco companies and diversifying
investment portfolio would serve as a safe haven from countries with regulatory
ban imposed.
c) Duty free zones such at airports and seaports provide unique shield from
enormous tax impositions and provides a good avenue for high sales volume.
Since not all Tobacco products are highly taxed, the industry should encourage the
market of low taxed alternatives. In regions or periods with excessive taxation on
the industry, the advantage of the economies of scale should be maximized to
improve operational efficiency.
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d) The industries that produce substitute products should be on the list of future
possible acquisitions. The smuggling of untaxed cigarettes and the trading of
counterfeits can only be defeated when the industry takes advantage of its product
penetration to strengthen the monitoring of the market network by partnering with
clients & dealers to report such illegal activity. Imitation proof cigarettes can also be
developed to assist in fake production detection
e) The industry should explore opportunities towards utilizing commodity derivatives
to hedge risks during economic recession
f)
Gone are the days when companies focused solely on their product profitability and
brand reputation (Rust, Moorman, & Bhalla, 2010), now the emphasis has shifted
to customer profitability and equity. Customers have become much more sensitive
than ever before about what they consume. For companies to ensure long term
sustainability and growth, they have to develop and adopt new innovative approach
to improving sales and retaining customers. The forward thinking companies
should turn customer knowledge into their own gain by paying more attention to
their specific needs. This attention would continue to develop in a market that is
characterized by intense competition, diminishing profit margins and more
intelligent consumers.
g) Advertising restrictions such as plain packaging is one of the single biggest
nightmares of the tobacco industry at the moment. That is because the industry
has refused to look outside the box and make use of the opportunities around: people. The solutions to the most complex issues can be solved if the industry
promotes opportunity for creativity (creative disruption) amongst its employees and
even the public. To challenge staffs or even the public to come up with innovative
concepts or blue ocean strategies that can assist the industry. This way everybody
feels like a stakeholder and it doubles as an effective advert technique.
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5. Summary and Conclusion
This study analyzed the strategic dilemma of the century old multibillion dollar global
tobacco industry and weighs up its chance for surviving another century. As sales and
consumption of cigarette is dropping at unprecedented levels in developed countries, the
industry is witnessing a boom in new markets in developing countries. The growth in the
new markets however, presents its own set of challenges which are reminiscent to those
of the old stable markets of advanced economies. There is a lot of “what ifs” that needs to
be answered to determine if the very controversial industry can actually continue to
operate sustainably into the nearer future.
After thorough analyses of the industry right from its inception to present day, the industry
has survived mainly through “improper conduct” and intense bribery (lobbying). Although
the industry has recorded positive progress in this regard in recent years, its slow pace of
progress and poor innovation at present makes it insufficient for the industries survival into
the future.
The analyses carried out using mainly the Five Forces Analysis, PESTEL and SWOT
presents a series of strategic advice for the industry to implement based on specific
scenarios. Should the industry fail to adopt radical or change strategies as recommended
by this report, then it might not be long before the industry itself gets smoked.
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6. Annexes
Figure 5 Tobacco Industry Evolution Timeline
Figure 6 Adult cigarettes consumption per Capita 1900- 2011
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