BRITISH AMERICAN TOBACCO PLC

British American Tobacco Internal Analysis and Strategy Evaluation

2014

Hardik B Bendbar

Student Id: 21242444

5/18/2014

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Content

TITLE Page No

1 Company Profile 3

2 Resources 4

Human Resources

Physical Resources

3 Financial Analysis 5

ROCE

Gearing Ratio

Current Ratio

4 Value chain 6

Inbound Logistics

Operation

Outbound Logistics

Marketing, Sales and Services

Technological Development

5 Core Competencies 7

Technology and Product Innovation

Nicoventures

6 Strengths 8

7 Weaknesses 9

8 SWOT Matrix 9

9 TOWS Matrix 10

10 Strategy 11

11 Managing Change 14

12 Appendix 15

13 Bibliography 20

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COMPANY PROFILE

(British American Tobacco Plc in Tobacco (WORLD), 2012)

British American Tobacco Company is the second largest tobacco company in the

world with operation over 200 countries (excluding the Chinese Market). It has leading

position in over 62 countries which includes brands like Pall-mall and Kent, 5th and 6th largest

brands by volume globally. The success and strength of BATS is mainly due to improved

product mix and geographical positioning. (Bat.com, 2013)

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Resources

Human Resources

BAT employs 57,730 people with 43,875 male and 13,855 female from

different countries having different cultures. It also employs 32,090 people through its

associates thus employing 89,820 in total. In 2013, there were 142 nationalities working

in management globally which show the diversity in working atmosphere. It helps to

make working atmosphere more social, collaborative. Since 2006, Prince 2 and MSP are

widely used for project management purpose which is one of the core skills of general

managers in BAT. (Bat.com, 2013)

According to the companies report around 80% of the employees were satisfies with

BAT as a place to work and 72% felt that their jobs makes good use of their talents

which indicates that BAT is able to utilise their human resource to a great extent which

can lead to better outcome in the form creativity and pro-activeness. BAT uses

Performance Management and Career Enhance System (PACE) to improve the

performance and enhance the development. PACE is based on competencies which

help to develop superior work force worldwide.

Physical Resources

BAT has 46 cigarette factories in 42 countries producing 919 billion cigarettes through

their subsidiaries. It also operates 4 factories and 2 separate plants for the production of

cigar, RYO, and pipe tobacco. Bayreuth (Germany) factory is the biggest factory of

British American Tobacco with production capacity of 50 billion sticks per year. (Batgraduatecareers.com, n.d.)

BAT Factory Footprints

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BAT is planning to increase the production capacity of factory located in

St.petersburg,Russia to 125 billion cigarette per year by 2014 which in-turn will make it

the biggest factory of BAT. There has been considerable reduction in the number of

plants as in 2008; there were 49 factories in 41 countries which show that BAT is

downsizing to increase its cost saving capacity. BAT recently shut down all its plant in

UK to avoid high taxes and high labour cost. (Financial Times, 2014)

Financial Analysis

British American Tobacco has market capitalization of £ 64120.36 million and has a

primary listing on London stock exchange. It is the sixth largest of any company listed in

LSE.

Return on Capital Employed (ROCE)

ROCE of British American Tobacco in 2012 was 28% which increased to 29.95% in 2013

which indicates that the performance of the company has been improved and the

investment made by BAT is delivering growth. ROCE of 29.95% can be considered as

good performance which determines that profit making ability of BAT is increased than

compared to last year. The increase in ROCE was mainly due to the decrease in capital

employed and increase in profits from operations.

Imperial Tobacco is the biggest rival of BAT and the leader in UK tobacco Industry. The

ROCE of Imperial Tobacco for 2013 was 11.29% whereas BAT’s ROCE was 29.95%

(+18.66) which indicates that it is far behind the BAT. Thus the performance of BAT to

make sound investment and the ability of make profits is better than Imperial tobacco.

Other factors responsible for higher ROCE of BAT is due to the fact that BAT is more

geographically well positioned and generates huge profits from developing countries like

Latin America, India and Pakistan where as Imperial tobacco is more compact when it

comes to geographical positioning with revenues generated mainly through UK and

European countries which are recovering from economic downturn.

Gearing Ratio

Gearing ratio of BAT in 2012 was 47.34% which can be considered as low, indicating

that the borrowings of the BAT is been under control but in 2013, it increased to 52.67%

(+5.33) which shows that the borrowing of the company from the total capital employed

has been increased.

Gearing Ratio of Imperial Tobacco in 2013 was 45.32 %( low) whereas of BAT was

52.67 %( high) which indicates that the borrowing of Imperial tobacco is properly

controlled than compared to BAT. One of the reasons of Imperial tobacco’s low

borrowings is due to the fact that it is smaller in size, has fewer subsidiaries than

compared to BAT and it operates mainly in Europe and UK. Increase in borrowing is a

concerning issue for BAT but it can be well justified that due to recent acquisition and is

a global company operating numerous subsidiaries under them.

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Current Ratio

Current Ratio of BAT in 2012 as well as in 2013 was 1.13 which indicates that the ability

of BAT to repay its debt remained constant. Current ratio of 1.13 can be considered to be

average as the company can repay its loan 1.13 times in the next forthcoming business

cycle.

Current Ratio of Imperial tobacco in 2013 was 2.56 whereas BAT’s was 1.13 which

indicates that the ability of Imperial tobacco to repay its debt is more than compared to

BAT. Current Ratio of Imperial Tobacco can be considered as ideal as it is higher than 2

whereas in the case of BAT its little volatile but it can still be considered to have a safe

liquidity. Imperial Tobacco has higher number current assets under them than compared

to BAT which allows them to have better ability to repay their debt. Although the current

liabilities are also higher than compared to BAT but the difference is not huge as

compared to their difference in current assets.

Calculation are shown in Appendix 3

Value Chain

Inbound Logistics

According to the reports in 2011, BAT purchased 440,000 tonnes of leaf through 200,000

farmers. British American Tobacco group doesn’t own any tobacco farms but it deals

directly with farmers through Global leaf pool (GLP). (Essay.uk.com, n.d.)

Operations

All the cigarettes and OTP’s (other tobacco product) are manufactured in fully automated

system. The cut tobacco, cigarette papers, filters are continuously fed into cigarette

machines. Each cigarette is automatically quality controlled to ensure that it meets every

aspect of its specification. BAT had only one manufacturing plant in UK which was

recently closed due high manufacturing cost, high taxes and labour costs. Manufacturing

plants and supply chain operation of BAT in Western and Eastern Europe are

consolidated then before and are more centrally managed which in-turns helps to reduce

cost. (Bat.com, 2013)

Outbound Logistics

The outbound logistics of BAT mainly comprises of distribution of its cigarettes and

OTP’s. They mostly follow a B2B relationship which helps them to improve the price,

quality and quantity. Among all the business associates, BAT has 9 key associates

which are 7-Eleven, BP, Carrefour, Chevron Texaco, Couchetard, Exxon Mobil, Shell,

Tesco and Walmart. All this companies are in groceries, petrol station which is the most

convenient channel for sales of cigarettes and tobacco. (Essay.uk.com, n.d.)

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Marketing, Sales and Services

There has been lots of restriction on marketing and sales for tobacco companies in UK. They are not allowed to advertise on television or neither allowed to sponsor any events. Moreover there is a ban to smoke in public zones in UK. Thus BAT has very little option for marketing their brand. One of the major reasons with collaborating with BP, Tesco, Shell and Wall-mart is that the advantage of point of selling. For Kent Convertible, LCD screens were supplied so that a reflective logo on the pack to change colour can be seen which gives the impression that the pack had its own light source.

Technological Development

As the consequence of strong legislation over smoking in UK and throughout the world, there have been many alternative source developed by BAT to cover up the falling

volume of cigarette and tobacco. In October 2010, BAT established Nicoventures Ltd in

UK, to focus only the development and sale of regulatory-approved nicotine products. It was the first tobacco company to launch e-cigarette called Vype in UK by any traditional tobacco company. Moreover it recently acquired CN Creative Ltd which specialise in the development of e-cigarette. Pack and product innovation also played a key role in the success of BAT. (Headley, 2014)

Core Competences Technology and Product Innovation Filters having menthol capsules are not new but the juxtaposition of the menthol capsule and carbon is something relatively new in this cigarette manufacturing. The patented flavour technology incorporated in charcoal filter system which enables the filter to convert from a regular charcoal filtered light cigarette to a menthol flavoured cigarette and amount of menthol being controlled by rolling in between the finger often known as “click and roll” is the most significant innovation in filter technology which makes BAT different from its competitors. BAT is also in a process of making a device which serves as e-cigarette but would be more efficient as it would be customized by Asthma inhaler

technology. (Headley, 2014)

Nicoventures Nicoventures is a wholly owned subsidiary of BAT which mainly focuses on the development and commercialisation of innovative regulatory nicotine products and also enables to strengthen the management team for non-combustibles products. Its main aim is to develop such products which replicate the experience of smoking as closely as possible. Unlike other Tobacco companies such as Imperial Tobacco and PMI who has acquired other e-cigarette companies to enter the new market, BAT opted organic way to established Nicoventures. As the announcement made by MHRA of UK that the E-cigarette will be sold as medicine from 2016, which enables BAT to develop firm position in new market though Nicoventures. (Hedley, 2013)

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Strengths

Global Drive Brand BAT is been successful in increasing the volumes of its GDB’s by 40% and proportion of international brands by 53% to 61% since 2007 which indicates that the popularity of its Brands throughout the world. This in-turn helps to increase the revenue and profits for the company.

Strong Market Position Tobacco industry is mainly dominated by four major companies out of which BAT is the second largest tobacco company. It sells its product in more than 200 countries in which 62 they are market leaders. This indicates that BAT has strong market position. In 2009, the market share of 13% where as China National Tobacco, Phillip Morrison International, Japan Tobacco International, Imperial Tobacco has 41.4%, 15.5%, 10.8%,

5.8% respectively. (Essay.uk.com, n.d.)

Geographical Positioning BAT is one of the most geographically diversified tobacco companies. It has 46 factories in 42 countries with revenues dominating from Latin America and Australia. It is been underperforming in UK but due to good global sales around the world, its volume sales are rising. BAT doesn’t restrict itself from taking business opportunity in rising market. e:g china which has huge number of smokers can be a big opportunity of them.

Technology and Product Innovation BAT is the first traditional tobacco company who stepped in E-cigarette market. It was the first company to bring in the filter innovation technique. Through the various price and product innovation strategy it has been able to secure market lead position in various countries. Nicoventures, one of the subsidiaries of BAT totally focuses on product development of regulatory nicotine product.

Strong Financial Position BAT is well placed in financial terms and is sixth largest company listed in LSE. Its ROCE being increased than last year shows that it is making good decision which is delivering performance.

Control Over Tobacco Leaf and GLP

BAT, the only international tobacco industry is showing keen interest in tobacco leaf processing and to ensure that it covers about 254,400 hectors which is under cultivation. The GLP is responsible for purchasing tobacco leaf from all over the world with South Africa considered to be largest supplier of leaf and also provide agronomy supports to farmers. GLP enables them to maintain product quality and improve speed to market. It

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also provides visibility and reduction of global stock level thus optimising the cost for blending tobacco. (Supply Chain, 2010)

Weaknesses Volume Decline There has been a steady volume decline for BAT in the UK as well as in Western European Countries. As most of the countries are recovering from recession and due to growing health concern and strong legislation there has been 6% drop in volumes in Western Europe which exposes their profits. It is also suffering turmoil in one of its key market Brazil with volumes sales expected to decline in double digits.

Other Tobacco Products(OTP) OTP categories are a real concern for BAT. Although it has a strong presence in RYO tobacco but it is far behind its competitors PMI, JMI, IMT as BAT’s loss is becoming their gain. It has been able to settle in smokeless tobacco but Cigar still remains a problem whose shares have been halved since last five years.

SWOT Matrix

Strength

1) Global Drive Brand

2) Strong Market Position

3) Geographical Positioning

4) Technology and Product Innovation

5) Strong Financial Position

6) Control over Tobacco Leaf

And GLP.

Weakness

1) Volume Decline

2) Other Tobacco Product

ne

Opportunity

1) Rise in GDP Of UK

2) Trading Blocks

3) Rise in Population of UK

4) E-cigarette

Threats

1) Illicit Trade

2) Growing Health Awareness

3)Plain Packaging

4) Ban on Smoking in Public Places

5) under Age smoking

6) Nicotine Subsidiaries/E-cigarette

SWOT Matrix

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TOWS Matrix

Strength-Opportunity

Strategy 1: Emphasizing on Global

Drive Brands and making it more popular

within the young generation through

strategic product mix & price band.

Opportunity-Weakness

Strategy 2: Acquisition of Imperial

Tobacco, the market leader of UK

tobacco industry will create opportunity

for BAT in Other Tobacco Products as

well as improve its declining volume

shares in UK. This in-turn would full-fill

the global vision of the company to

become the Market leader of the world

leaving PMI behind.

Strength-Threats

Strategy 3: Using their Core

competences and focusing on Next

Generation Products (E-cigarette, Heat

not Burn device, Nicotine Inhalation)

through Organic Development.

Threat-Weakness

Strategy 4: Focusing on Other

Tobacco Products and working on plain

packaging by introuction of alpha-

numerica codes to determine their brand

image.

TOWS

Matrix

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Strategy (Opportunity-weaknesses) “Acquisition of Imperial Tobacco, the market leader of UK tobacco industry will create opportunity for BAT in Other Tobacco Products as well as improve its declining volume shares in UK. This in-turn would full-fill the global vision of the company to become the Market leader of the world leaving PMI behind.” Development Direction: Ansoff Matrix

Suitability According to the CEO of BAT Nicandro Durante, the company’s vision is to become the global leader in the Tobacco Industry. At present it is ranked 2nd in world tobacco industry behind PMI whereas in UK it is ranked 4th in terms of cigarette and 3rd in terms of smoking tobacco. Acquiring Imperial Tobacco which is the market leader in UK and also the leader in OTP world-wide will enable BAT to obtain the world leading position in Tobacco as well as in UK. BAT which is falling behind in OTP will be benefited to large extent as Imperial Tobacco’s acquisition will help them to cover the OTP market. Acquisition will also help to speed up their process of gaining the market share.

Acceptability As the intention of BAT is quite clear that it wants the leading position in world tobacco market, stakeholders must be aware of some big mergers in futures. Looking into the past history of BAT with so many mergers and acquisition which is also been the key factor for the growth of BAT globally, it won’t be anything new for stakeholders. The gearing ratio of BAT is 52.67% which indicates that acquiring Imperial Tobacco won’t create any risk for the company in terms of taking more loans and with current ratio being stable since last two year at 1.13% indicating that it is capable enough to repay its debt any time. Imperial tobacco’s acquisition will result in

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leading position in tobacco market hence the chances of shares value of BAT would go more higher which in-turn will yield high return for share-holders.

Feasibility Strong financial position is one of the major strength of BAT and depending on that it has made numerous acquisitions earlier. Imperials acquisition would be very crucial and important for BAT as it would successfully enable them their required vision of ruling the global tobacco market which at present is lead by PMI. The ROCE of BAT is 29.95% which indicates that it is financially very sound. Gearing ratio and liquidity ratio is also in favour of them and with company’s view getting fulfilled will in-turn motivate the human resource. BAT is geographically well positions with factories in 41 countries. Acquisition of Imperial tobacco will give a strong base for Western European as Imperial is performing better in that region.

Strategy (Strength- Threats) “Using their Core competences and focusing on Next Generation Products (E-cigarette, Heat not Burn device, Nicotine Inhalation) through Organic Development.” Development Directions: Ansoff Matrix

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Suitability UK tobacco Industry is in declining period due to the increasing health awareness and strong legislation. People are more attracted towards health friendly by-products of Nicotine. Nicoventures, the subsidiary of BAT which serves as source of development and commercialisation of innovative regulatory nicotine products can prove to be master-stroke as no other traditional tobacco company has its own e-cigarette or other nicotine delivery products company (They either own by mergers or acquisition). Nicoventures is one of the core competences of BAT as it is medium of organic growth for entering in existing market with new products. It enables them to work on their technology and product innovation internally, thus enabling their patent technology within themselves. It has been estimated that the global sales of e-cigarette would be around $4 million by 2014 and with increasing popularity of it in UK, it would be worth investing in Next Generation Products.

Acceptability According to Bloomberg E-cigarette will account for 41% of all Cigarette sales by 2050 whereas the tobacco market is currently worth with some $750 billion. Thus the figures are indicating that Next generation products are widely accepted throughout the world as well as in UK. Investing in Nicoventures and other subsidiaries which are working on Next Generation Products would be beneficial to BAT as it will set-up firm base which can result into large market share with huge profits. There is risk in entering in market with new product as it is totally new field but with increasing popularity of these products reduces the risk to some extent. Although growing organically takes time to established as it requires lots of R&D but once successful , creates huge revenues generating profit which in-turn provide good returns. As all the financial ratios are in the favour of BAT (which reduces the risk financially) the only possibility of failure in Next Generation Product would be a risk and most concerning issues for stakeholders as it will take lots of capital with time playing a crucial part.

Feasibility BAT is financially very strong and with technology and product innovation being one of their core competences which enable them to deliver on this Strategy. Being an organic growth, the company will have to invest in itself which can be more time consuming than acquisition but it enables them to create their own patent product which once successful can lead to huge market share. The Company’s operating profits has been increased since last year but cash generated from operation (£ 5366 million) has been decreased from 2012(£ 5437 million). This was mainly to due to reduction in inventories and trade/payables. BAT invested £16 million for acquisition of CN Creative Limited, an E-cigarette specialising company to work with Nicoventures.BAT has already planned to invest £100 million in smoking alternatives as bans on tobacco products and higher taxes are pursuing smokers to quit smoking.

(Financial Times, 2013)

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Managing Change The most suitable and likely strategy would be the Acquisition of Imperial tobacco as it will not only allow BAT to lead UK tobacco Industry but will also help the overall vision of BAT to become the global market leader of Tobacco. Acquisition of Imperial Tobacco can create possible problems for BAT

Over Capacity of human and physical resource. Complex, often duplicated, system and processes. Lack of Standardisation. Brand Portfolio of more than 300 with thousands of variant. Solution for this Change

Role of CEO, Nicandro Durante: By setting an example and leading and showing a proper vision to guide BAT’s employees.

Establishing Portfolio Management. There should be strategic as well as communication link with between the

employees and high level managers. There should be one support tool for strategy, portfolio, programme, project

and annual budget management. Product base planning.

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Appendix 1 Possibility of Acquisition of Imperial Tobacco

The figure shows that BAT is not dominating in those market where Imperial is largest or dominating thus it reduces the competition between those two. Imperial Tobacco acquisition will result into 17.2% market share in global tobacco industry which means it will leave behind PMI who is currently having 15.5%. (British American Tobacco Plc in Tobacco (WORLD), 2012)

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Appendix 2 Product and Filter Innovation

(British American Tobacco Plc in Tobacco (WORLD), 2012)

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Appendix 3 Accounting Ratios for British American Tobacco

Return on Capital Employed :

=

ROCE

2013

(Figures in £’m )

2012


29.95%

28%

Gearing Ratio :

=

Gearing Ratio

2013


2012


52.67%

47.34%

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Current Ratio:

Current Ratio

2013

2012

1.13 times

1.13 times

Accounting Ratios for Imperial Tobacco:

ROCE:

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Gearing Ratio:

Current Ratio

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