Beat

[Strategic Audit Of BAT] [2013]

Report on

Strategic Audit of BAT

Course & Code: Strategic Management

(MGT- 4356)

Submitted To:

Mohammad Ahshanullah

Assistant Professor

School of Business and Economics

United International University

Submitted by:

Md.Shafikul Islam 111 091 390

Md.Nazmul Hassan 111082151

Jahirul Islam 111091398

Md.Ismile Hossain 111091271

Anisur Rahman 111091067

Md.Sanwar Hossain 111091742

Date of Submission

7th may 2013

[Strategic Audit] Page 1


Letter of Transmittal

7th may, 2013

Mohammad Ahshanullah

Assistant Professor

School of Business and Economics

United International University

Dhanmondi, Dhaka-1209.

Subject: Request for accepting report.

Dear Sir,

Here is the report on British American Tobacco’s strategic audit/competitive analysis which you have recommended to us as the term paper for the Strategic Management course. As you read the report, you will get clear idea about the strategic and competitive analysis of British American Tobacco.

I, therefore, pray and hope that you will encourage our work by accepting this report and if you have any

further queries about the report you can contact me.

Sincerely Yours,

Md. Nazmul Hassan

ID: 111082151

On the behalf of the group members



Acknowledgement

First we would like to thank almighty Allah for helping us all the way, who gives us the ability to

do this term paper. Especially we would like to thank our teacher, Mohammad Ahshanullah sir

who helped us a lot to do this report successfully by giving instruction and making our practical

knowledge through this term paper. Without his instruction we would not able to prepare this

report. Finally, we want to give thanks to our all the group members for their hard works. All of

their help has made us able to complete this report.



Executive Summary

British American Tobacco is a British multinational tobacco company headquartered in London,

United Kingdom. It is the world’s second-largest quoted tobacco company by market share (after

Philip Morris International), and has a leading position in over 50 countries and operations in

more than 180 countries. Its brands include Dunhill, Kent, Lucky Strike and Pall Mall. BAT has

a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index. As

of 6 July 2012 it had a market capitalization of £65.6 billion, the sixth-largest of any company

listed on the London Stock Exchange. It has a secondary listing on the Johannesburg Stock

Exchange.

From the whole management research, we come to know about the origin of British American

Tobacco, its organizational structure, management strategy, nature of management problems it

faced, relevant industry trend, opportunity and threats, and cultural influence in the business etc.


http://en.wikipedia.org/wiki/JSE_Limited

http://en.wikipedia.org/wiki/JSE_Limited

http://en.wikipedia.org/wiki/Market_capitalisation

http://en.wikipedia.org/wiki/FTSE_100_Index

http://en.wikipedia.org/wiki/London_Stock_Exchange

http://en.wikipedia.org/wiki/Pall_Mall_(cigarette)

http://en.wikipedia.org/wiki/Lucky_Strike

http://en.wikipedia.org/wiki/Kent_(cigarette)

http://en.wikipedia.org/wiki/Dunhill_(cigarette)

http://en.wikipedia.org/wiki/Philip_Morris_International

http://en.wikipedia.org/wiki/Multinational_corporation


Table of Contents1 Analysis of industry structure:...........................................................................................................10

1.1 Attractiveness of industry: (Porter 5 forces model):..................................................................10

1.1.1 Potential entrants:....................................................................................................................10

1.1.2 Industry rivalry:..................................................................................................................11

1.1.3 Bargaining power of buyers:..............................................................................................13

1.1.4 Bargaining power of suppliers:.................................................................................................13

1.1.5 Substitutes:...............................................................................................................................13

1.2 Key success factor:...........................................................................................................................14

1.2.1 Technology related KSFs:..........................................................................................................14

1.2.2 Manufacturing related KSFs:.....................................................................................................14

1.2.3 Distribution related KSFs:.........................................................................................................15

1.2.4 Marketing related KSFs:............................................................................................................15

1.2.5 Skill and capability related KSFs:...............................................................................................17

1.2.6 Other types of KSF:...................................................................................................................17

1.3 Opportunities and threats:..............................................................................................................18

1.4 Relevant industry trend with implications for firm performance and strategy:..............................18

1.4.1 Customer:.................................................................................................................................18

1.4.2 Costs:........................................................................................................................................19

1.4.5 Competitors:.............................................................................................................................19

1.4.6 Government:.............................................................................................................................20

2 Bat Business Model...........................................................................................................................21

3 Assessment of firm strategy..............................................................................................................23

2.1 Strategy diamond of British American Tobacco...............................................................................23

2.1.1 Arena.......................................................................................................................................24

2.1.2 Vehicle......................................................................................................................................24

2.1.3 Differentiator............................................................................................................................24

2.1.4 Staging......................................................................................................................................24

2.1.5 Economic logic..........................................................................................................................24



2.2 The firm’s generic strategy:.............................................................................................................25

2.2.1 The Cost Strategy:.....................................................................................................................25

2.2.2 Cost Structure analysis:.............................................................................................................26

2.2.3 Value Chain Analysis:................................................................................................................27

2.2.4 Differentiation Strategy:...........................................................................................................28

2.3 Resources and Capabilities of British American Tobacco.................................................................29

2.3.1 Tangible assets.........................................................................................................................30

2.3.2 Intangible assets......................................................................................................................30

2.4 Mc Kinsey’s 7S model for BAT..........................................................................................................31

2.4.1 Strategy.....................................................................................................................................31

2.4.2 Structure...................................................................................................................................32

2.4.3 Systems.....................................................................................................................................32

2.4.4 Shared values, skills, style and staff..........................................................................................32

2.5 Evaluation of internal resources and capabilities............................................................................33

2.5.1 VRIO framework for BAT...........................................................................................................34

2.6 Identifying growth options of BAT...................................................................................................34

2.6.1 Growth options of BAT.............................................................................................................35

2.6.2 Options for growth: diversification...........................................................................................36

2.6.3 Options for growth: partnerships, joint ventures, mergers and acquisitions............................37

2.6.4 Partnerships and joint ventures................................................................................................37

4 Analysis Of firm scope.......................................................................................................................38

3.1 Vertical Integration..........................................................................................................................38

3.1.1 Leaf supply chain......................................................................................................................39

3.1.2 Types of Vertical Integrations:..................................................................................................40

3.2 Horizontal Integration.....................................................................................................................41

3.2.1 Techniques of Horizontal Integration.......................................................................................41

3.3 Growth Option.................................................................................................................................44

3.3.1 Acquisition................................................................................................................................44

3.3.2 Merger......................................................................................................................................45

3.3.3 Alliance.....................................................................................................................................46

3.3.4 Internal expansion....................................................................................................................46



3.4 Geographic scope............................................................................................................................47

3.4.1 Classification market according to geographic scope...............................................................48

3.4.2 Route to market........................................................................................................................48

5 Recommendations for future firm strategy.......................................................................................48

6 Reference:.........................................................................................................................................50



Company Profile

BAT is the world’s second largest quoted tobacco group by global market share, with brands

sold in around 180 markets. With more than 200 brands in BAT’s portfolio, BAT makes the

cigarette chosen by one in eight of the world’s one billion adult smokers. It holds robust market

positions in each of our regions and has leadership in more than 50 markets. In 2011, BAT’s

subsidiary companies sold 705 billion cigarettes. In the same year, its subsidiaries enabled

governments worldwide to gather more than £30 billion in taxes, including excise duty on our

products, almost nine times the Group’s profit after tax. BAT has sustained a significant global

presence for over 100 years. BAT’s business was founded in 1902 and by 1912 had become one

of the world’s top dozen companies by market capitalization.

Vision and strategy of British American Tobacco

Vision

British American Tobacco (BAT) has a vision to achieve leadership of the global tobacco

industry, not just in volume and value, but also in the quality of its business. To be industry

leader, it continues to show that it is a responsible tobacco company with excellent people,

brands and superior products.

Strategy

BAT’s reliable strategy for achieving the vision is based on growth, funded by productivity and

delivered by a winning organization that acts responsibly at all times.



Growth

BAT’s strategy to conquer its vision starts with growth and its aim to increase its global market

share, with a focus on its Global Drive Brands and its other international brands. It continues to

attain sustainable and profitable growth driven by a better use of innovations and an emphasis on

improving the execution of its strategy. Its Global Drive Brands (GDBs) and other international

brands continue to contribute strongly to its business performance. Its balanced portfolio

continues to provide a successful formula for growth.

Productivity

Productivity continues to be a vital part of its strategy, providing the capabilities and resources it

needs to support investment in its brands to grow share in its key markets. Its globally-integrated

supply chain is evolving as efficiency and effectiveness improve, and it is focused on making its

operations flexible, agile and truly consumer-centric. This is a key aspect of its strategy and it

will continue to control its supply chain to further support the growth of the business.

Winning organization

By being a winning organization, BAT can ensure that it attracts, develops and retains the best

people it needs to deliver its strategy for growth. It can only maintain a strong workforce if it

nurtures and develops its people. It values its employees’ diverse perspectives and encourages

them to perform to their best.

Responsibility

BAT and its people are required to act responsibly at all times and it seeks to reduce the harm

caused by its products and its environmental footprint. Responsibility is integral to everything it

does and is especially important to a business like it where the products pose real risks to health.

Its determination to act responsibly spans the whole business, from its commitment to addressing

the issues of child labour and working with farmers, to looking at how it can help to reduce the

harm from its products and lessen its environmental impact. It also supports guidelines that

maintain a balance between consumer preferences and the interests of society, while also

enabling its business to continue to compete commercially.



1 ANALYSIS OF INDUSTRY STRUCTURE:

1.1 Attractiveness of industry: (Porter 5 forces model):

1.1.1 POTENTIAL ENTRANTS:

Threats of New Entrants=LOW

Economics of scale: Through mass production BAT want to decrease cost of

product and increase market share.

Brand loyalty: British American Tobacco has been in business for more than

100 years. The business was formed in 1902. It is very old brand. So it has brand

loyalty compare to others competitors. Here customers are more loyal because it



is already a establish band. It also creates difficulties for new entrants. It has huge

market share.

Absolute cost advantage: through is an old and establish brand BAT don’t need

to think about cost. It has more loyal customer all over the world. It is a threat for

new entrants. Bats have more expertise in production unit, where they try to

reduce cost. Bat charge average price compare to Marlboro.

Government regulation: BAT has to maintain certain rules and regulation to

enter into a country, because it is a tobacco industry, which is harmful for people

health. And it is not environment friendly product.

Current players try to build high entry barrier to prohibit new comes from

entering.

1.1.2 INDUSTRY RIVALRY:

Competitive rivalry in the Industry=HIGH

Industry competitive structure: BATs final products are distributed to more than

135,300 retailers throughout the entire Central American and Caribbean Region; of these,

91 thousand outlets are visited by their own sales force and the remainder by their

company’s distributors. The mission of the Trade Marketing and Distribution Department

is to reach their target consumer efficiently and effectively, making them the trade’s

preferred supplier within the strategic channels in each country where BAT operate.

Tobacco China National Corporation is by sales the largest single manufacturer of

tobacco products in the world. It boasts a virtual monopoly in the People's Republic of

China, which accounts for roughly 30% of the world’s total consumption of cigarettes.

Price competition continues all competitors and advertisement for cigarettes is now

prohibited in many countries.

Demand condition: Now demand of BAT cigarette is growing. People consumes more

than before. BUT exchange rate movements are exogenous to the Company's

performance. Moreover, the Company's operations in emerging economies makes it is


http://en.wikipedia.org/wiki/Cigarettes

http://en.wikipedia.org/wiki/People's_Republic_of_China

http://en.wikipedia.org/wiki/People's_Republic_of_China

http://en.wikipedia.org/wiki/Monopoly

http://en.wikipedia.org/wiki/World

http://en.wikipedia.org/wiki/Tobacco

http://en.wikipedia.org/wiki/Manufacturer


susceptible to sudden stops that lead to rapid devaluation of a country's currency and

reduces demand.

Manufacturing premium tobacco products begins with high quality tobacco. Philip

Morris Production System (PM-PS) focuses on continuous improvement for maximum

productivity. PM-PS guides the way we work across our manufacturing operations. PM

achieving consistency and quality are central to exceeding the expectations of our adult

tobacco consumers. PMs Demand is growing.

Cost conditions: The international nature of British American Tobacco and its presence

in over 180 markets, the company is forced to conduct its operations in many different

currencies. British American Tobacco benefited from these movements over the past two

fiscal years.

BRITISH American Tobacco company has raised cigarette prices for most of its brands by

between 53 and 85 percent after the increase in excise duty. Increased the excise duty on locally

produced cigarettes from US$7 to US$10 per 1 000 sticks. The excise duty on imported cigarettes

was also increased from 40 percent plus US$5 per 1 000 sticks to 40 percent plus US$7 per 1 000

sticks. BAT's Newbury Extra Mild and King-size now cost US$1,50 a pack of 20 cigarettes from

US$1 and US$1,20 for Berkeley Extra Mild from US65c.

Prices for Madison Toasted, Kingsgate king-size and Everest menthol have been increased to

US$1 from US65c pack of 20 cigarettes. Prices for Dunhill Full Flavor and Lights remain

unchanged. Usually BAT don’t change their price strategy without any valid reason.

Raises prices of Philip Morris USA's cigarette and suns tobacco brands. The Henrico County-

based company is raising the list price by 6 cents per pack on all of its cigarette brands. Philip

Morris USA makes the nation's top selling cigarette brand, Marlboro. The average convenience

store price per pack for Marlboro is $5.71 nationally, while the lowest effective average cigarette

price in stores is $4.23.The company also is raising the list price on Marlboro Snus by 5 cents.

Snus is a type of smokeless, pouch tobacco.


http://www.wikinvest.com/wiki/Currency_Trading


1.1.3 BARGAINING POWER OF BUYERS:

Bargaining Power of Buyers=LOW

Now BAT has large number of customer. But only some buyers have little bargaining power.

Who purchase a large amount of product from them, they can claim for some discount or cash

reduction. Who purchase average or little amount of product they don’t have bargaining power.

They have to pay fixed rate what BAT charges. Because BAT have to face tax policies, Govt.

regulation and rules in different country. So if they give bargain power to buyer they can make

their average level of profit. BAT always tries to give less price compare to competitors. BAT is

a price sensitive company they are not usually change or raising their price without any

declaration and relevant cause. Low switching costs in terms of price

1.1.4 BARGAINING POWER OF SUPPLIERS:

Bargaining Power of Suppliers=LOW

Here product supply is vital. Always cigarette has few substitutes, so it is an opportunity for

BAT. BAT have number of suppliers for same product, they can easily capture the global market

and easily reach to customers destination. They charge average price for supply the product. If

customer wants quick service they have to pay more. Suppliers don’t have much control over

smokers. Cigarette companies are big and have direct access to distribution channel and addicted

buyers.

1.1.5 SUBSTITUTES:

Threat of Substitute Product=LOW

Herbal Cigarettes were launched, but did not become popular (no emotional value) Nicotine

patch is another substitute – but again no comparison with cigarettes in terms of popularity and

usage. Artificial cigarette were also launched but customer don’t like to adopt it. There are no

threats of substitute product.



1.2 Key success factor:

1.2.1 TECHNOLOGY RELATED KSFS:

British American Tobacco installs technology to ensure BlackBerry availability Lotus

applications. They have installed technology from Never fail to protect its communications and

critical headquarters applications from unexpected downtime. The tobacco giant, which has more

than 55,000 employees worldwide, uses RIM’s BlackBerry devices to ensure its executives have

round the clock access to key corporate information and communications, wherever they are in

the world.

1.2.2 MANUFACTURING RELATED KSFS:

Manufacturing tobacco products is a large-scale global operation and we have 46 cigarette

factories in 39 countries. Eight of this plus one separate plant also make either cigarillo, roll their

own or pipe tobacco. They also have a factory making smokeless snus. As well as tobacco leaf,

BAT purchases a wide variety of other goods and services from suppliers all over the world.

THEY promote continuous improvements amongst our suppliers in business practices,



efficiency, quality, innovation and corporate responsibility. To learn more about how we engage

with our suppliers visit Working with our suppliers.

As a multinational business, BAT work to ensure that their costs are globally competitive and

that we use our resources as effectively as possible. To improve productivity and to continue

building a sustainable business, they companies have had to take some significant and difficult

decisions to reduce manufacturing overcapacity by closing some factories and downsizing

others. They fully recognize the impacts of these decisions and work hard to mitigate the

outcomes for employees and the wider community. These changes are also enabling us to

rationalize our machine technology to establish a more cost-effective operational base for the

future. Most machinery in factories being closed or downsized is transferred elsewhere and we

aim to standardize machinery at each location

1.2.3 DISTRIBUTION RELATED KSFS:

BATs final products are distributed to more than 135,300 retailers throughout the entire Central

American and Caribbean Region; of these, 91 thousand outlets are visited by their own sales

force and the remainder by their company’s distributors. The mission of the Trade Marketing and

Distribution Department is to reach their target consumer efficiently and effectively, making

them the trade’s preferred supplier within the strategic channels in each country where we

operate. BAT have strong distribution channel globally.

1.2.4 MARKETING RELATED KSFS:

Successful marketing is the bedrock of growth for any fast moving consumer goods (FMCG)

business and we are no exception.

But when BAT talk about growth, there’s a big point to make clear. By growth, BAT don’t

mean ‘selling smoking’ to boost the number of people in the world who smoke or the amount

they smoke. They mean growing their share – more specifically, the value of their share – of the

large number of adults who choose to be tobacco consumers. It is a well known brand name.

They use clever advertising because their product is not environment friendly.



BAT has a mature market – one where everyone already knows what tobacco is. There would be

no commercial sense in trying to promote tobacco products to people who know what they are

and have decided they don’t want them.

BAT invests in positioning our high quality brands competitively for the adults who’ve decided

they do want to buy tobacco. And BAT have shown that through focus, intelligence,

responsiveness and a high priority on responsibility, BAT can successfully build the brand

loyalty of adults who have chosen to be tobacco consumers and win consumers away from

competitor brands.

A billion adults worldwide choose to consume tobacco. BAT aim is not just to maximize our

share of sales – value and quality are high on our agenda. They aim to keep adding value for our

consumers, trade customers and shareholders through an approach we call ‘win-win-win’. This

means giving our consumers premium value through premium quality and unique, differentiated

brands, enabling our trade customers to benefit from premium margins and, by satisfying both

consumers and trade customers, delivering long term sustainable value for our shareholders.

BAT estimate that sales by our subsidiary companies account for 13 per cent of the global

cigarette market.

British American Tobacco is one of the five largest tobacco companies in the world. Although it

manages and sells over 300 brands, the Company considers Dunhill, Kent, Lucky Strike, and Pall

Mall to be its four Global Drive Brands.

Major Brand

Dunhill - 41 billion cigarettes sold

Kent - 61 billion cigarettes sold

Lucky Strike - 26 billion cigarettes sold

Pall Mall - 68 billion cigarettes sold



Geographic Regions

Asia-Pacific - 23% of net sales

Americas - 22% of net sales

Western Europe - 27% of net sales

Eastern Europe - 11% of net sales

Africa and Middle East - 16% of net sales

1.2.5 SKILL AND CAPABILITY RELATED KSFS:

BAT takes only skill and knowledgeable worker. Who have better knowledge about new

technology, product innovation and knowledge about all over the world. And who can adopt

changing new technology and environment easily. It has global distribution capability.

1.2.6 OTHER TYPES OF KSF:

Superior strategy.

Success through responsibility.

Success through diversification.

Controlling Prices to enhance performance: While official imports were

subject to import quotas and tariffs, offering relative poor corporate profitability, BAT

stood to earn huge profits by careful pricing of contraband cigarettes. An important

consideration was how price could be used to establish brand status within the market.

These efforts were apparent for the premium brand State Express 555, which enjoyed

intrinsic exclusivity and prestige. The company was keen to build market share, in

competition with other international brand, but wanted to avoid the threat of oversupply

of SEFK [State Express Filter Kings] to erode price/image. BAT was especially aware of

Philip Morris (PM).

There is evidence that BAT tried to “enhance performance” by controlling the prices of illegal

imports. BAT thus sought to price its leading brand at a carefully judged premium over those of



its competitors, notably PM, intending that State Express 555 should “maintain a 50 cent

premium over Marlboro in both the official (CNTC) and Free Market, the precise differential

varying by channel and region.

The ability to influence pricing of both legal and illegal imports was predicated on control of

supply. The challenge was to ensure sufficient supply of BAT brands to compete with domestic

and other international brands, without exerting downward pressure on prices. Indeed, the

company was aware of the ability of free market to significantly undercut retail pricing of

official duty paid outlets.

1.3 Opportunities and threats:

Opportunities Threats

Acquisitions. Competition.Financial markets (raise money

through debt, etc).Cheaper technology.

Online. External changes (government, politics, taxes, etc).

Product and services expansion. Exchange rate fluctuations.Takeovers. Variety customer’s expectation in

different country/culture.Maturing categories, products, or

services.

1.4 Relevant industry trend with implications for firm performance and

strategy:

1.4.1 CUSTOMER:

BAT always tries to meet customer’s expectation. Although they have to increase their price for

some reason. But customers are satisfied with that. They have no problem about these. Bat



always try follow the trend because operate their business all over the world. BATS earn huge

profits by careful pricing of contraband cigarettes. An important consideration was how price

could be used to establish brand status within the market. They already have goodwill and

reputation all over the world. Customer gives value to this brand and likes to stay with these.

1.4.2 COSTS:

BAT always try to maintain their cost, they follow their pricing strategy strictly. And try to give

better performance. Now BAT has to give more tax, and have to follow many additional rules. In

these years BAT paid highest taxes in Bangladesh.BAT perform in same way though there are

many barriers in all over the world.

BRITISH American Tobacco company has raised cigarette prices for most of its brands by

between 53 and 85 percent after the increase in excise duty. Increased the excise duty on locally

produced cigarettes from US$7 to US$10 per 1 000 sticks. The excise duty on imported cigarettes

was also increased from 40 percent plus US$5 per 1 000 sticks to 40 percent plus US$7 per 1 000

sticks. BAT's Newbury Extra Mild and King-size now cost US$1,50 a pack of 20 cigarettes from

US$1 and US$1,20 for Berkeley Extra Mild from US65c.

Prices for Madison Toasted, Kingsgate king-size and Everest menthol have been increased to

US$1 from US65c pack of 20 cigarettes. Prices for Dunhill Full Flavor and Lights remain

unchanged.

1.4.5 COMPETITORS:

Compare to competitors BAT charges average or low price. And always try to give better

performance than competitors. In case of skill employee, technology, working environment BAT

plays vital role and give better service than competitors. Although it has well brand name it has

more loyal customer. BAT always perform in better way and satisfying their customer with

better service.

British American Tobacco has five major competitors in the tobacco industry, they are:

China National Tobacco Company: The largest cigarette company in the world, China

National Tobacco Company is owned and managed by the Chinese government, and sells

1.5 trillion cigarettes annually, all in China.



Philip Morris International (PM) : Philip Morris is best known for its Marlboro brand

and is the best selling cigarette brand in the world.

Japan Tobacco International (JAPAF) : This Company owns and manages three of the

top five intentional cigarette brands, Winston, Camel, and Mild Seven, as well as other

cigarette brands and tobacco products.

Altria Group (MO) : Altria sells brands such as Marlboro, Copenhagen, Skoal and Black

& Mild, through its four operating companies, Philip Morris USA, U.S. Smokeless

Tobacco Company, and John Middleton. In addition to cigarettes and tobacco products,

Altria sells premium wines through Ste. Michelle Wine Estates and has a 25.8%

ownership stake in SABMiller.

Imperial Tobacco Group (IMT-LN) : The Company has sales in over 160 countries and

a portfolio of brands, led by Davidoff.

1.4.6 GOVERNMENT:

Now government changes different policies, rules, regulation and method of paying tax. BAT

adopts all new rules and regulation to sustain the business and apply it.. Tax rate are increased all

most all over the world.BAT pay tax with changes rate. For increasing payment tax rate and

other things BAT have to increase their price rate. Customer accepts it. They have willingness to

pay. Although GOVT raising tax rate BAT also raise their price but customer have positive

impact on BAT. GOVT include new barriers to entry and other sector but BAT has no problem

on that, they face the challenges and try to overcome those.


http://www.wikinvest.com/wiki/Imperial_Tobacco_Group_(IMT-LN)

http://www.wikinvest.com/wiki/Altria_Group_(MO)

http://www.wikinvest.com/wiki/Japan_Tobacco_International_(JAPAF)

http://www.wikinvest.com/wiki/Philip_Morris_International_(PM)


2 BAT BUSINESS MODEL

Our business model is designed to deliver sustainable growth in earnings. It is consumer-led and

science-based.

How our business works

Consumers

BAT success depends on really understanding the different profiles and preferences of

consumers. BAT invests in gathering comprehensive insights into smokers’ preferences and

buying behavior. This drives their marketing and allows them to promote products to adult

tobacco consumers in ways that satisfy their preferences, while responding to stakeholder

expectations about how BAT should market their products.

Sourcing



BAT has a significant interest in tobacco growing and it work directly with around 70 per cent of

the farmers who supply our leaf. BAT manages whole supply chain responsibly and works with

suppliers to create a shared understanding of our social, environmental and economic impacts.

This enables and our suppliers to manage risks better, while ensuring that are agile and flexible,

so that can use resources as effectively as possible

Production

Manufacturing tobacco products is a large-scale operation and we have factories all over the

world. BAT work to ensure that our costs are globally competitive and that we use our resources

as effectively as possible. Companies have closed or downsized some factories and consolidated

production elsewhere in recent years. These changes enable to rationalize our machinery and

technology to establish a more cost-effective operational base for the future.

Science-based R&D

For over 50 years, we have had an extensive scientific research programme. More recently, BAT

have been focusing research on modified cigarettes and low-toxicant smokeless tobacco

products. BAT are committed to helping develop the scientific and regulatory framework we

need to deliver a varied portfolio of products in the future, including alternative regulatory-

approved nicotine products, to meet the evolving needs of adult smokers.

Brands

BAT has a successful brand marketing strategy based on innovation, responsibility and consumer

choice. We recognize that business starts with consumers and brand portfolio is designed to meet

key consumer needs, especially in strategic consumer segments. BAT four Global Drive Brands

– Dunhill, Kent, Lucky Strike and Pall Mall – and other international brands account for more

than 50 per cent of total cigarette volumes.

Innovative products

BAT make significant investment in brands and the development of superior, differentiated

products to drive growth. BAT product and packaging innovations, such as Convertibles and

Reloc, vary across brands, brand variants and markets and approach enables companies to adapt

their offers flexibly to local preferences. BAT focus when designing these innovations is on

relevance to the consumer and potential speed to market.



3 ASSESSMENT OF FIRM STRATEGY

2.1 Strategy diamond of British American Tobacco


Arenas

Consumer- centric innovative products

Young and adult customers

Worldwide market

Vehicles

Internal organic expansion

Acquisitions

Differentiators

Reliable product

Quality product

Low toxicant product

Modified product

Strong distribution channels

Staging

Rapid international expansion by region

Early footholds in each country and fill in later

Economic logic

Economies of scale for standardized product

Economies of scope for expertise knowledge

Premium price for low toxicant innovative products

Figure - Strategy diamond of British American Tobacco


British American Tobacco is remarkably successful global tobacco company. Its strategy over the past 50 years has been highly coherent, with all five elements (arena, vehicle, differentiator, staging and economic logic) reinforcing each other.

2.1.1 ARENAThe arenas in which BAT operates are well defined: the company sells consumer-centric innovative products. Its target market is young and adult - primarily white-collar customers. The geographic scope is worldwide, or at least all countries where socioeconomic and infrastructure conditions support the concept. Currently, it is operating in more than 180 countries and is a leader in more than 50 countries. It maintains control of product design to ensure the integrity of its unique image and to accumulate unrivalled expertise in designing for efficient manufacturing.

2.1.2 VEHICLE

As its primary vehicle for getting to its chosen arenas, BAT engages in organic expansion, building its wholly owned subsidiaries. It has chosen to make organic internal expansion through subsidiaries such as Tekel, Bentoel Group, Souza Cruz, and Niemeyer and to make the acquisitions of few tobacco companies such as acquisition of cigarette business of Protabaco, the second largest tobacco company in Colombia. This reflects top management’s belief that the company needs to fully control global execution of its highly innovative product concept. However, the company also has investments in few associates and joint ventures such as Reynolds American Inc and ITC Ltd to extract benefits from these companies.

2.1.3 DIFFERENTIATOR

BAT attracts customers and beats competitors by offering several important differentiators. The company is strengthening its brand image by delivering differentiated and superior tobacco products. First, its products are of very reliable quality. Second, it is offering lower toxicant tobacco products according to tobacco consumers’ needs and wants. And third, the company strives to make customer fulfilment by modified cigarettes. Specifically, BAT helps to carry an extensive inventory at each store by its strong distribution channels, which allows a customer to have products delivered immediately.

2.1.4 STAGING As for staging, or BAT’s speed and sequence of moves, once management realized that its approach would work in a variety of countries and cultures, the company committed itself to rapid international expansion, but only one region at a time. In general, the company’s approach has been to use its limited resources to establish an early foothold by opening a single branch in each targeted country. Each such entry is supported with aggressive public relations and advertising, in order to lay claim to the radically new product concept in that market. Later, it comes back into each country and fills in with more branches.



2.1.5 ECONOMIC LOGIC

The economic logic of BAT rests primarily on scale economies and efficiencies of replication. Although the company doesn’t sell absolutely identical products in all its geographic markets, BAT has enough standardization that it can take great advantage of being the world’s largest tobacco product manufacturer. Its costs from long-term suppliers are exceedingly low, and made even lower by BAT’s proprietary, easy-to-manufacture product designs. In each region, BAT has enough scale to achieve substantial distribution and promotional efficiencies. And each individual subsidiary is set up as a high volume operation, allowing further economies in inventories, advertising, and staffing. BAT is securing premium prices from its customers, by offering low toxicant innovative tobacco products. BAT’s phased international expansion has allowed executives to benefit, in country after country, from what they have learned about site selection, subsidiary design, subsidiary openings, and ongoing operations. They are vigilant, astute learners, and they put that learning to great economic use.

2.2 The firm’s generic strategy: There are a lot of variation in the generic strategies that the firms use, mainly because each

company’s strategic approach entails customer-designed actions to fit its own circumstances and

business environment. The British American Tobacco is using the differentiation strategy for

their product. The differentiation of the product refers to produce product and the process of the

producing the product in a unique way that could lead in a competitive advantage over the rivals

of the brand.

The differentiation strategy has two types one is the Broad Differentiation strategy and the other

is the Focus Differentiation strategy. Here the British American Company uses both the

strategies to their product.



2.2.1 THE COST STRATEGY: The British American Tobacco achieved cost advantage through approaches such as strong

pursuit of cost reductions and overhead control, cost minimization in areas such as sales and

advertising.

2.2.2 COST STRUCTURE ANALYSIS: The expenses that British American Tobacco must take into account when manufacturing the

product is given below, here is the 5 years summery of the income statement, balance sheet,

earnings per share mentioned.

Income statement

For the years ended 31 December

Earnings Per share

Balance Sheet


http://www.investorwords.com/42/account.html

http://www.investorwords.com/7230/take.html

http://www.investorwords.com/1842/expense.html


2.2.3 VALUE CHAIN ANALYSIS:The British American tobacco’s overall value chain is a combination of the support activities and

the primary activities of the firm. Where the Support activities contains firms infrastructure,

human resource management, technology and procurement. And the primary activities contain

the inbound logistics, operation of firm, outbound logistics, marketing and sales and service of

the firm.

Support activities: Support activities contain firms infrastructure, human resource management,

technology and procurement.

Firm’s infrastructure: This activity of British American Tobacco includes and is driven by

corporate or strategic planning. It includes the Administrative, Finance infrastructure,

Management Information System (MIS), Legal, and other mechanisms for planning and control

such as the accounting department.

Human Resource Management: Employees are an expensive and vital resource so the British

American Tobacco emphasized strongly in this sector of value chain. The organization manages

recruitment and selection, training and development, and rewards and remuneration. The mission

and objectives of the organization would be driving force behind the HRM strategy. The firm is

really concerned about the personnel they have in their firm weather blue collar or white collar

they are.



Technology: Technology is an important source of competitive advantage. British American

Tobacco innovated strategy to reduce costs and to protect and sustain competitive advantage.

This could include production technology, lean manufacturing, Customer Relationship

Management (CRM), and many other technological developments. They are using advanced

technology to produce tobacco in a innovative way that will reduce the side effects of the

surrounding environment that may cause for tobacco production.

Procurement: This function is responsible for all purchasing of goods, services and materials

made by the British American Tobacco. The aim is to secure the lowest possible price for

purchases of the highest possible quality.

Primary Activities: Primary activities contain the inbound logistics, operation of firm, outbound

logistics, marketing and sales and service of the firm.

Inbound Logistics: Here raw materials are received by British American Tobacco from a

company's suppliers. They are stored until they are needed on the production. Products are

moved around the British American Tobacco.

Operations: This is where products are manufactured. Packaging, production, control of the

inventory, quality control is done here.

Outbound Logistics: The products are now finished, and they need to be sent along the supply

chain to wholesalers, retailers or the final consumer.

Marketing and Sales: In true customer orientated fashion, at this stage the British American

Tobacco prepares the offering to meet the needs of targeted customers. This area focuses

strongly upon marketing communications and the promotions mix.

2.2.4 DIFFERENTIATION STRATEGY:As the company has lot of products like Pall Mall, Marlboro, Benson and Hedges, Dunhill etc.

For these different products the British American Tobacco uses broad differentiation strategy and

some time focused differentiation strategy.

Broad Differentiation strategy:



The Broad Differentiation strategy a type of differentiation strategy where the company could be

able to charge a premium price for there product, it will increase the sale of the product (because

of gaining additional buyers by using differentiating features then others), It could gain brand

loyalty as for the differentiating factors it has. The broad differentiation helped the British

American Tobacco’s products like Pall Mall and Marlboro to gain buyers over its competitors.

As the following products uses the differentiation strategy it will result in

Incorporates features that raise products outcomes to the buyers

It will enhance buyer’s satisfaction in noneconomic or intangible way

Delivers value to customers by differentiating on the competencies and competitive

capabilities that rivals don’t have.

Focused Differentiation:

A focused strategy keyed to differentiation aims at securing a competitive advantage with a

product offering carefully designed to appeal to the unique preference and needs of a narrow,

well defined group of buyers. Successful use of focused differentiation strategy depends on the

existence of a buyer segment that is looking for special product attributes. Where the consumers

are willing to pay a premium price for products which is serving a niche segment of market and

had distinctive features from others. As this paper is all about British American Tobacco it also

has some of his niche or focused differentiated products like Benson and Hedges, Dunhill etc.

2.3 Resources and Capabilities of British American Tobacco

It is very difficult and probably impossible to obtain a true and fair picture of the company’s

internal resources and capabilities without insider knowledge. The internal strategic analysis is

therefore limited in its scope and will only be a minor part of the overall strategic analysis. For

the presentation and analysis, two models are chosen. The first divides the internal resources into

two groups: intangible resources and tangible resources. The second, Mc Kinsey’s 7S model,

will try to catch the more difficult accessible areas, as for instance strategy and systems. Finally,

the resources and capabilities will be evaluated against the VRIO framework, which indicates the

factors which are most likely to be competitive resources or capabilities for BAT.



The resources that BAT has can be classified into two groups – tangible and intangible.

2.3.1 TANGIBLE ASSETS

BAT’s tangible assets consist of freehold property, leasehold property, plant and equipment and

assets in the course of construction. BAT currently operates about 250 production facilities in

180 countries. More than half of the production facilities are located in Europe. These

manufacturing plants are mostly owned. It has some manufacturing plants that are leased but has

option to buy them within twenty years. However, a valuable asset for BAT is its financial

department, which helps to finance its activities.


BAT

Resources

Tangible Resources

Plant

Equipment

Leasehold property

Freehold property

Assets in the course of construction

Financial department

Intangible Resources

Brand name

Goodwill

Trademark

Patents

Managerial know-how

Talented key employees

High-tech knowledge


2.3.2 INTANGIBLE ASSETS

The brand portfolio of BAT has been extended several times, thereby always keeping in mind

how the brands are perceived by customers. It has always been in BAT’s spirit to have brands of

high value with premium status in their respective markets. Besides, along with the brand

goodwill and trademark are important intangible assets for the company.

One of the cornerstones of BAT’s success is its ability to create the new and unexpected. They

have acquired their skills in research and development over several years, now making them able

to drag on valuable knowledge for future developments. Valuable is also BAT’s acquired

knowledge about customers and their preferences, which makes BAT able to anticipate and

respond to the market.

Other intangible resources are the highly skilled employees working in the R&D departments.

They have been able to establish a close connection among BAT brand, design and technological

inventions.

2.4 Mc Kinsey’s 7S model for BAT

Mc Kinsey’s 7S (strategy, structure and system, shared values, skills, style and staff) model is

used to highlight the different areas impacting the internal strategic options and decisions.



2.4.1 STRATEGY

The overall strategy of BAT is called strategy number one. To be a leader in the tobacco market,

it has set a grand strategy. Its strategy is to increase market share by productivity, winning

organization and responsibility. It has also strategy to reduce costs through the use of standard

components, benefitting from the economies of scale.

2.4.2 STRUCTURE

BAT has a typical corporate structure and is comparable to its competitors in many ways. It has

several boards and of those the most important is the management and the advisory board. The

management board takes care of the daily operations and the strategic development of the

organization. The advisory board is there to support the decision making in the management

board. It shows that corporate governance is a major issue for BAT. Due to BAT’s focus on the

structure of the organization its company structure must be regarded as an advantage compared

to companies.

2.4.3 SYSTEMS

The systems of an organization can be divided into three: technical-, social- and administrative

system. The division makes it easier to grasp all aspects and infer how the systems are

interconnected. The technical system deals with production processes and production facilities.

This enables the company to produce with a very small amount of defects. The results are

satisfied customers and few costly call-backs of tobacco products. The social system composes

the attitudes and norms established between employees, departments and geographical distinct

subsidiaries. The administrative system ensures that the technical- and social systems are

working fine and living up to the targets set by the organization.

2.4.4 SHARED VALUES, SKILLS, STYLE AND STAFF

The shared values, which should be part of every employees consciousness within BAT are:

high quality standards, customer focus, continuous improvements and sustainability. The

skills of employees were under the intangible resources identified as valuable. The condition of

staff and style is assumingly good, with competent, motivated and committed employees

coaching and motivating newly arrived employees. This assumption builds on the outline given

by the BAT, stating in their strategy number one that the employees are their most valuable



asset and therefore a major priority. Moreover, the employees, which are working at BAT

are highly skilled and some of the best in their respective areas. The high motivation and

satisfaction of employees is ensured through continuous employee satisfaction surveys. For

quality manpower, BAT appoints students graduated from the renowned universities of the

world.

2.5 Evaluation of internal resources and capabilities

Internal resources and capabilities of BAT are evaluated by the VRIO Framework. The resources

which were found throughout the internal analysis are now evaluated in order to see whether

they are capable of providing BAT with a sustainable competitive advantage. A resource or

capability is placed in one out of four categories, ranging from a competitive parity to a

sustainable competitive advantage.

BAT’s access to highly educated persons is evaluated to be a temporary competitive advantage.

It is both valuable and rare to rank at the top, when university students are asked about their

preference for future employment. If BAT is able to retain this resource they will have an

advantage to some of their competitors.

Further BAT’s acquisition of Protabaco does create a temporary competitive advantage. The

acquisition is valuable, because BAT can obtain some of the benefits from being a volume

producer. It is rare because Protabaco will not be acquired by other company. This acquisition

could even be classified as a sustainable competitive advantage, because the acquisition one

could argue is so difficult to imitate. Only few tobacco producers are so specialized in the

production of tobacco products as Protobaco is. Finding an adequate company with as much

market knowledge and where the same economies of scale are created would be almost

impossible. It would hence be costly for a competitor to create a similar acquisition where the

benefits would be comparable.

Sustainable competitive advantages are found in the areas of: Branding, innovative capabilities

and the focus on sustainable solutions. BAT with its possession of many premium brands is of

course in a unique position with respect to its image. This position can hardly be imitated; it is at

least not possible for competitors to totally imitate the brand. Competitors may however want to

approach it, if BAT’s brand remains as profitable as it has been until now. To create brands with



the same wide spread premium reputation would however be extremely costly for

competitors, so BAT’s brands are definitely core resources.

BAT’s good reputation is created through several things, but one thing, which is prominently

mentioned, is their ability to be innovative. Possessing a workforce and a work environment,

which creates so many innovative solutions, is not only valuable, it is also rare and costly for

competitors to imitate. Lastly, BAT’s focus on sustainable solutions must be highlighted. This

point can be seen as an extension to both their brand and their innovative capabilities, because

the sustainable solutions are created through the excellent innovative capabilities in order to

shape the brand for the future.

2.5.1 VRIO FRAMEWORK FOR BAT

Valuable Rare Costly/difficult to imitate

Exploitable by the firm

Competitive implication

Expectedcompetitiveeconomic

performance

Resources / capabilities

- - - - CompetitiveDisadvantage

Below normal

___

Yes No No Yes CompetitiveParity

Normal Headquarter in London Strong distribution

channel Market knowledge Partly decentralized

company structure Close contact with

qualified suppliers Worldwide production

facilities In house financial

departmentYes Yes No Yes Temporary

CompetitiveAdvantage

Above normal

Accessible to highly educated employees

Acquisition of ProtabacoYes Yes Yes Yes Sustainable

CompetitiveAdvantage

Above normal

Brand portfolio Strong brand Innovative capabilities Focus on sustainable

solution

2.6 Identifying growth options of BATCommon ways to expand a business include making a strategic acquisition or merging with

another business. An acquisition is when we buy another business and end up controlling it. A



merger is when we integrate our business with another and share control of the combined

businesses with the other owners. BAT has scope in strategic acquisition to expand the business.

BAT also is appropriate for vertical alliance to expand the business.

2.6.1 GROWTH OPTIONS OF BATBAT focus changes as it moves beyond the start-up phase. Identifying opportunities for growth

becomes a priority to ensure the BAT sustainability.

We can measure growth by looking at key statistics such as:

turnover

market share

profits

sales

staff numbers

However, determining which measure delivers the most accurate picture of the business'

performance depends on both the type of business and what stage it has reached.



Where to begin

Even if BAT is happy with your current performance, it's important to keep looking for ways to

develop. Going for growth may therefore begin by vertical integration of the company. This will

help ensure BAT is properly structured and resourced to make the growth strategy viable.

2.6.2 OPTIONS FOR GROWTH: DIVERSIFICATION

Diversification can take several forms, including:

new, related products or services to existing customers

new markets for existing products

new products for new markets



2.6.3 OPTIONS FOR GROWTH: PARTNERSHIPS, JOINT VENTURES, MERGERS AND ACQUISITIONS

Successful co-operation can deliver:

more resources

sharing of the managerial load

larger skills and talent base

bigger pool of contacts

increase in markets

diversification and organic growth using increased resources

reduced commercial risk

2.6.4 PARTNERSHIPS AND JOINT VENTURES

Partnerships and joint ventures can offer both partners significant benefits, including sharing

experience, skills, and people, equipment and customer bases. Through a partnership or joint

venture arrangement with a complementary, non-competitive business, BAT may be able to open

new markets or improve the offer to existing ones.



4 ANALYSIS OF FIRM SCOPE

Direction

Horizontal condition

BAT is an organization who follows the two strategies vertical and horizontal at the same time

because this is a large organization who wants to enjoy the benefit of the both strategies.


Management consciousness for an integrated management system

Synergy of management actions, resources allocation, values, common beliefs & learned lessons

Integrated in operational activities through process based design.

Documentation integration

Vertical condition


3.1 Vertical Integration

In microeconomics and management, the term vertical integration describes a style of

management control. Vertically integrated companies in a supply chain are united through a

common owner.

When a company expands its business into areas that are at different points on the same

production path, such as when a manufacturer owns its supplier and/or distributor. Vertical

integration can help companies reduce costs and improve efficiency by decreasing transportation

expenses and reducing turnaround time, among other advantages. That’s why we can

say, yes the degree of vertical integration s appropriate for BAT and Bat follows the vertical

integration for their leaf supply chain.

3.1.1 LEAF SUPPLY CHAIN

The leaf supply chain is the most vertically integrated in the tobacco industry and continues to

provide a competitive advantage. Through the proven expertise in leaf BAT is in a strong

position to address new consumer needs and the effects of product-based regulation. The leaf

footprint ensures sustainability of supply and guarantees access to quality sources of leaf; it also

gives the ability to manage short-term variations in pricing driven by external commodity pricing

pressures.


http://en.wikipedia.org/wiki/Supply_chain

http://en.wikipedia.org/wiki/Management_control

http://en.wikipedia.org/wiki/Management

http://en.wikipedia.org/wiki/Microeconomics


Problems and benefits

There are internal and external (e.g. society-wide) gains and losses due to vertical integration.

They will differ according to the state of technology in the industries involved, roughly

corresponding to the stages of the industry lifecycle.

Internal gains

Lower transaction costs

Synchronization of supply and demand along the chain of products

Lower uncertainty and higher investment

Ability to monopolize market throughout the chain by market foreclosure

Strategic independence (especially if important inputs are rare or highly volatile in price,

such as REM)

Internal losses

Higher coordination costs


http://en.wikipedia.org/wiki/Rare_earth_metals

http://en.wikipedia.org/wiki/Market_foreclosure

http://en.wikipedia.org/wiki/Monopoly

http://en.wikipedia.org/wiki/Supply_and_demand

http://en.wikipedia.org/wiki/Transaction_costs


Higher monetary and organizational costs of switching to other suppliers/buyers

Weaker motivation for good performance at the start of the supply chain since sales are

guaranteed and poor quality may be blended into other inputs at later manufacturing

stages

Benefits to society

Better opportunities for investment growth through reduced uncertainty

Local companies are better positioned against foreign competition

Losses to society

Monopolization of markets

Rigid organizational structure, having much the same shortcomings as the socialist

economy (cf. John Kenneth Galbraith's works)

3.1.2 TYPES OF VERTICAL INTEGRATIONS:

There are basically 3 classifications of Vertical Integration namely:

1. Backward integration – The example discussed above where in the company tries to

own an input product company. Like a car company owning a company which makes

tires.

2. Forward integration – Where the business tries to control the post production areas,

namely the distribution network. Like a mobile company opening its own Mobile retail

chain.

3. Balanced integration – You guessed it right, a mix of the above two. A balanced

strategy to take advantages of both the worlds.


http://en.wikipedia.org/wiki/John_Kenneth_Galbraith

http://en.wikipedia.org/wiki/Socialist_economy

http://en.wikipedia.org/wiki/Socialist_economy


3.2 Horizontal Integration

Horizontal integration (also known as lateral integration) simply means a strategy to increase

your market share by taking over a similar company. These take over / merger / buyout can be

done in the same geography or probably in other countries to increase your reach.

3.2.1 TECHNIQUES OF HORIZONTAL INTEGRATION

Horizontal integration can be done either by acquiring a company or by merging with it.

Acquisition happens when one company purchases or acquires another company and becomes

the new owner, whereas merger is a strategy when two companies merge with each other without

losing their individual identities, to form a new company for a participating share.

Economies of Scale

Economies of scale provide cost advantage to the companies through expansion of their product

output. When goods are produced in larger quantities, the average cost per unit reduces, thus



increasing the profitability of the company. Manufacturing tobacco products is a large-scale

operation and we BAT has factories all over the world. They work to ensure that their costs are

globally competitive and that they use their resources as effectively as possible. Their companies

have closed or downsized some factories and consolidated production elsewhere in recent years.

These changes enable them to rationalize their machinery and technology to establish a more

cost-effective operational base for the future. Integrating horizontally provides the companies

with broader access to different unreached markets, resulting in an increase in demand of their

product. Reaching to economies of scale by horizontal integration can help a company to achieve

cost monopoly and eliminate competition from the market.

Economies of Scope

Horizontal integration helps the companies to achieve economies of scope. Economies of scope

provide cost advantage in production of two or more products. Companies can share resources

common to different products, the global drive brands of BAT are dunhill, kent lucky srike and

in pallmoll and in 2011 they provided around 35% revenue. And other international brands

include vogue, victory, Rohmans, cool, peter Stuyvesant, Benson & hedges, State express 555

and jhon player gold leaf. Our brands are sold in around 180 market worldwide. Thus removing

cost redundancy. Integrating with another company can increase the number of products

promoted at the same advertising cost and also results in reduction in per-unit distribution cost.

Horizontal integration creates synergies between the companies.

Increasing Market Power

Integrating horizontally consolidates the industry and creates monopoly. This helps the

companies to gain power in the market, as well as dominate supplies and downstream channel

members in terms of cost and quality. We have a successful brand marketing strategy based on

innovation, responsibility and consumer choice. We recognize that our business starts with our

consumers and our brand portfolio is designed to meet key consumer needs, especially in our

strategic consumer segments. Our four Global Drive Brands – Dunhill, Kent, Lucky Strike and

Pall Mall – and our other international brands account for more than 50 per cent of our total

cigarette volumes.



International Trade

Integrating horizontally helps a company to enter foreign markets directly. This reduces the cost

of international trade by allowing the company to both produce and sell the product in the

foreign market. BAT has international reach and well-developed distribution channels with

critical enablers of their growth strategy, allowing them to roll out innovations on a global scale.

According to them, we continuously review our route to market to ensure we remain

competitive. This includes our relationships with wholesalers, distributors and logistics

providers, as well as our direct to store sales operation, which is often the most effective way of

serving retailers and building business partnerships

Dominate Market

Horizontal integrations consolidate the market by allowing companies to acquire or merge with

other companies, putting small companies out of business. The new company tries to dominate

the supplies, vendors and customers, in terms of price and quality of the product. Customers are

bound to purchase at higher price due to unavailability of similar products in the market.

Wrong Synergies

Synergy creation is the main objective of horizontal integration. However, sometimes companies

fail to materialize the anticipated gain because they do not focus adequately on creating

corporate synergy before integration.

Executing these strategies and key points to remembers

Vertical and Horizontal integration strategy generally can be done by businesses which have

established themselves and probably have a stable life as compared to ones which have to

address risks on a regular basis. The immediate advantage of implementing them is to

1. Have economies of scale

2. Expand your knowledge and capabilities

3. Increase market (and profits)



4. Own the whole life cycle so that you can change it the way required

5. Reduce competition (by merging with them rather than competing)

6. Provide better services

7. Many more.

The benefits of vertical integration come from the greater capacity it gives organizations to

control access to inputs (and to control the cost, quality and delivery times of those inputs).

3.3 Growth Option

3.3.1 ACQUISITION

A third way a company can achieve horizontal integration is through an acquisition, which is

another form of external expansion. British American tobacco (BAT) follows this growth option



to increase their market share. An acquisition is one company acquiring, or taking ownership of,

another company. This is achieved by purchasing the company outright and taking possession of

it or buying 51 percent or more of the shares of the company and thus achieving a controlling

interest. An acquisition is different from a merger in that a merger combines the merged

companies into one entity. An acquired company is absorbed into the existing company that took

it over.

Horizontal integration refers to expansion of business at the same point in the supply chain. This

strategy is adopted when companies have their existence in the same product line or market. The

goal of horizontal integration is to consolidate the market by acquiring or merging like

companies and exploit the market by monopolizing the industry. The phenomenon is also

referred to as horizontal expansion because it is an expansion of a firm within an industry for

increasing its market share for a particular product.

The tobacco industry remained fairly stable during 2011, with little M&A activity among the

leading industry players. On 26 May 2011, the Group announced that it had agreed to acquire

100 per cent of privately-owned Protabaco, the second largest cigarette company in Colombia.

The transaction was completed on 11 October 2011 and the deal was financed from internal

resources. Our corporate activity in 2009 has been confined to relatively small acquisitions, such

as Bentoel in Indonesia, rather than the large scale, transformational deals that have seen

Significant consolidation in our marketplace.BAT is looking to grow their business and

according to them they want to say, we believe we can meet our financial objectives through

organic growth alone. However, we continue to monitor acquisition opportunities around the

world and will participate where it makes financial and strategic sense to do so.

3.3.2 MERGER

A company also can achieve horizontal integration through external expansion. This is

accomplished by a merger with another company at the same stage of production. This can allow

the company to achieve diversification into complementary but dissimilar product markets. If the

products that the companies sell are similar, however, the merger is referred to as a merger of



competitors. A merger is referred to as a monopoly when all producers of a specific product or

service merge and an oligopoly when the majority of the producers merge.

3.3.3 ALLIANCE

An alliance is an agreement or friendship between two or more parties, made in order to advance

common goals and to secure common interests.

Businesses use strategic alliances to:

achieve advantages of scale, scope and speed

increase market penetration

enhance competitiveness in domestic and/or global markets

enhance product development

develop new business opportunities through new products and services

expand market development

increase exports

diversify

create new businesses

Reduce costs.

Strategic alliances are becoming a more and more common tool for expanding the reach of your

company without committing yourself to expensive internal expansions beyond your core

business.


http://en.wikipedia.org/wiki/Friendship

http://en.wikipedia.org/wiki/Pact


3.3.4 INTERNAL EXPANSION

A company can achieve this growth through internal expansion. This can occur when a retailer

increases the variety of products it sells in a specific category. For example, a hair salon that sells

a limited number of shampoo brands may add other brands to its shampoo offerings in order to

appeal to a wider and more diverse customer base.

3.4 Geographic scope

Geographic scope is the coverage that computers have within a certain geographic area.

It is also how far the computer along with its network can reach geographically. Local networks

use dedicated data channels and consist of private branch exchanges and local area networks.

Wide-area networks use telecommunication channels and also include value added networks.



3.4.1 CLASSIFICATION MARKET ACCORDING TO GEOGRAPHIC SCOPE

The market, according to the geographic scope, can be classified as local, regional, national and

international. Currently, the borders are increasingly permeable and competition is characterizing

by being transnational.

Although the importance of the international market grows day by day, the local market, regional

and national remain much relevance, especially for small and medium-sized.

3.4.2 ROUTE TO MARKET

The route to market of BAT is critical and allows us to roll out innovations faster on a global

scale as well as to fully meet consumer demand at the point of sale. Where appropriate, we



believe that direct to store sales (DSS) are an effective way of serving retailers and building

sustainable business partnerships. DSS gives us visibility and control over the sales and

distribution process, allowing us access to both the market and consumer information. It also

provides a direct commercial link to our most strategic retail accounts. Half of our global volume

is sold to retailers through our own distribution capability in key markets including Canada,

Brazil, South Korea, Australia, Russia, Romania, South Africa and Nigeria. In other markets, we

work with third parties to ensure our products are effectively sold and delivered to retailers.

5 RECOMMENDATIONS FOR FUTURE FIRM STRATEGY

I recommend to not change the BAT present strategy, because the present strategy is very

effective and efficient. The company is growing fast by implementing present strategy.

The organization development and market share is improving at present time. So it’s not

necessary to change the strategy of BAT at present time.

There is some opportunity for BAT to employ revolutionary strategy by considering the

demand of time. The world business environment is changing very fast so sometimes the

organization should take some step in contingency basis.

Change in strategy often involves a change in what the company is offering to consumer.

Change in strategy is sometimes changing the overall marketing mix of the company.

Changing the strategy sometimes means changing the process how to deliver value to

customer, where the company is going to compete. BAT should not change the all facets

of strategy diamond to upgrade everything rather BAT can adapt to the change of market

by implementing the contingency plan.

Yes, in our recommendation we stated about the term “strategic interaction” or you could

say the possible competitor’s response to the move of BAT. Here as it is like a game

event where the rivals of the particular firm are depends on the other firms move and both

parties are aware of the future step that their rival could take. We think it is an advantage

to BAT as if they are the market leader in their industry.

We also have demonstrated the feasibility of our recommendation in the overall paper

that we prepared which is aligning with the overall firm’s aspect.



6 REFERENCE:

http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52AD6H?opendocument&SKN=1

http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52AD7G?opendocument&SKN=1

http://en.wikipedia.org/wiki/British_American_Tobacco#Operations

http://www.bata.com.au/group/sites/BAT_7WYKG8.nsf/vwPagesWebLive/DO7WYKSQ?opendocument&SKN=1




http://en.wikipedia.org/wiki/British_American_Tobacco#Operations






http://markets.ft.com/Research/Markets/Tearsheets/Summary?s=BATS:LSE

http://www.guardian.co.uk/business/britishamericantobacco

And other pdf files from BAT’s website.


http://www.guardian.co.uk/business/britishamericantobacco

http://markets.ft.com/Research/Markets/Tearsheets/Summary?s=BATS:LSE

Date post:	05-May-2017
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