MSc. International Business Management with Internship : British American Tobacco

This is a report on British American Tobacco (BAT) submitted by Aminul Islam to Dr. Yehia Nawar on 19/12/2022. The report discusses BAT's current strategic positioning, PESTEL analysis, Porter's Five Forces Model, and internal analysis using Porter's Value Chain Analysis and SWOT analysis. It also discusses BAT's innovation strategy, future expansion, and recommendations for growth and development. The report concludes with a strategy selection and a CANVAS business model for strategy implementation.  

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London south Bank University
International Strategic Management and Innovation
MMP_7_ISM_22/23
MSc. International Business Management with Internship (JAN)
Report Title: British American Tobacco
Submitted by
Aminul Islam
Id: 4036813
Submitted to
Dr Yehia Nawar
Date: 19/12/2022
Contents

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British American Tobacco................................................................................................3
Introduction........................................................................................................................3
Findings..............................................................................................................................4
BAT’s Current Strategic Positioning...............................................................................4
PESTEL Analysis........................................................................................................5
The External Micro Environment....................................................................................7
Porter’s Five Forces Model.........................................................................................8
Internal Analysis............................................................................................................10
Porter’s Value Chain Analysis...................................................................................10
Strengths and Weaknesses Analysis..............................................................................14
SWOT Analysis.........................................................................................................14
Innovation Strategy........................................................................................................15
BAT’s Strategic Situation..............................................................................................16
Cost Leadership.........................................................................................................17
Differentiation............................................................................................................17
Focus Strategy...........................................................................................................17
Future Expansion.......................................................................................................17
Recommendations for Growth and Development.............................................................18
Strategy Selection..........................................................................................................20
CANVAS Business Model for Strategy Implementation..............................................21

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Conclusions........................................................................................................................22
British American Tobacco
Introduction
British American Tobacco (BAT) is a global tobacco company dealing in tobacco
products, mainly cigarettes. The company was formed in 1902 after two companies, UK’s
Imperial Tobacco Company and US’s American Tobacco Company merged to form a joint
venture, the British American Tobacco. The new company set out to produce a superior product
at the lowest possible price. This was to be achieved through hiring the best people and
mechanizing production. As a global company, BAT operates in different markets with different
dynamics. Global competitors include Philip Morris and Malboro whereas at country level the
company faces market resistance from established local brands in different countries. Legislation
and civil activity against tobacco consumption pose a great challenge to tobacco marketing.
Lastly, technology such as vaping and nicotine pouches are some of the evolutions in the tobacco
industry to which BAT has to adopt and adapt.
This report aims to find out and explain the strategic trajectory that BAT has taken which
can explain its success. It uses PESTEL and SWOT to analyze the market for: potential new
entrants and substitutes-threats; bargaining power of suppliers and buyers-strengths and/or
weaknesses. The report will evaluate the effectiveness of the company’s adaptation strategies to
an evolving market, legal, technological, and political environment. The final report should

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enable the reader understand what BAT does, why it does it, and how it does it to achieve
success.
The study will use secondary data to compile a report on the company’s operations.
Multiple-source secondary data will be used to get an objective perspective of the company.
From the company’s website, first-hand information is available from its own reports. Consumer
index reports will be used to analyze tobacco consumption trends. Other longitudinal reports
about tobacco industry will be helpful in understanding evolution in tobacco industry and what it
means for its future.
Findings
BAT’s Current Strategic Positioning
BAT operates in the international tobacco market. The tobacco market is dynamic in
terms of changing legislation and campaigns which seek to curb tobacco trade (National Center
for Biotechnology Information, 2012), new scientific discoveries which associate tobacco
consumption with multiple health risks, new innovations seeking to replace tobacco
consumption; and climate change affecting tobacco farming (WHO, 2022). BAT has to contend
with these challenges for it to continue with tobacco business as a going concern. The internal
coping mechanisms adopted by BAT should be effective enough to enable the business to thrive
in a hostile environment. Put differently, BAT should strategically align its operations with the
external environment for optimal performance. To achieve such optimality, the company should
first assess the external environment within which it operates or seeks to operate. To perform an
external environment assessment, we use PESTEL analysis tool.

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PESTEL Analysis
The acronym PESTEL stands for- Political, Economic, Social, Technological,
Environmental, and Legal factors impacting a business’s macro environment.
Political Factors
The tobacco industry faces multiple challenges in the political economy. Spatial smoking
restrictions limit tobacco consumption by restraining smoking to within designated smoking
zones. Restrictions on public smoking has a significant impact on smoking prevalence among the
youth (Wakefield, 2000). Political regimes impose taxes on consumption of cigarettes to
discourage smoking. Studies by Ross and Chaloupka, (2003) found a negative correlation
between cigarette prices and smoking prevalence among youth. Increase in cigarette prices led to
declined smoking among youth population. Government policies that aim to discourage smoking
include levying excise duty on tobacco products which increases their cost thus discouraging
consumption. Other political factors include protectionist policies such as high tariffs on
imported tobacco and subsidies on tobacco farming which makes local tobacco products in such
countries cheaper. In China, for example, BAT has to rely on state-owned China National
Tobacco Corporation for distribution.
Economic Factors
Rising incomes have provided a growth trajectory for BAT. With income growth,
consumers have more disposable income with residual income to spend on luxuries like tobacco.
Developing countries like China and Brazil have a high growth rate which implies a growing
number of people who can afford to spend on cigarettes. Unlike developing or emerging
economies, developed countries have a static income and therefore offer little potential for
growth in cigarette-consumption (Burton et al., 2015). BAT should therefore seek to penetrate

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new emerging markets with an in to tapping into the growing middle-class consumers of
cigarettes.
Social Factors
Negative social attitudes towards tobacco smoking pose a barrier to BAT and other
tobacco products manufacturers. Traditionally conservative societies discourage tobacco
consumption habits such as smoking. Additionally, there is a growing awareness about the
negative health effects of tobacco consumption (Milcarz et al., 2018). Societies around the world
are discouraging smoking in public spaces to prevent the harmful effects of second-hand smoke.
The impact of these social moves is discouraging tobacco consumption which, in turn, impacts
negatively on tobacco sales. On the other hand, tobacco contains nicotine which has an addictive
effect on consumers. Even though a negative attribute, addiction provides a stable market for
cigarette manufacturers like BAT.
Technological Factors
Technological innovation is a multi-pronged element impacting tobacco industry. On the
one hand, development of improved seed varieties that are resistant to diseases and harsh
climatic conditions has improved tobacco yields (Miller, 2015). Innovative arming techniques,
such as the floating bed technique, are helping lower cost of production. On the other hand,
technological innovations such as vaping are acting as cigarette substitutes. BAT has to adapt to
these developments in the tobacco market. In this endeavor, the company has to invest in
research on new manufacturing techniques, new production line, and marketing its brands in the
new vaping market.

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Environmental Factors
Tobacco production and consumption has a negative impact on the environment (WHO,
2022). In production, tobacco farming uses chemicals which may be harmful to the environment.
As a stakeholder in tobacco farming, BAT is tasked with the responsibility to enforcing strict
environmental safety standards on the farming practices of its contracted farmers. In
manufacturing, the company has to adhere to low levels of carbon emissions from its production
lines. Cigarette packaging should be environment friendly for example, by avoiding plastic
packaging. In consumption, cigarette smoking releases smoke to the environment which has a
negative impact. Post consumption, disposal of cigarette butt contains toxic chemicals and,
without proper disposal, such chemicals are released to the environment.
Legal Factors
Tobacco consumption is strictly regulated in most countries. Banning of smoking in
public spaces is an example of legal barriers to tobacco consumption. In some countries, tobacco
consumption is limited to a specified minimum age of majority. In other cases, governments
have banned tobacco products such as vaping. In marketing, tobacco promotion through sports
sponsorship is banned (Capella, Taylor and Webster, 2008). An aggregate of all these factors
contribute to making smoking and other forms of tobacco consumption unattractive. The upshot
of all these factors is encumbrances to tobacco trade. BAT has to navigate through all the above
barriers to succeed in the tobacco market.
The External Micro Environment
In assessing the micro environment, this paper will apply Porter’s five forces model
(Gartner and Porter, 1985).

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Porter’s Five Forces Model
Under this model the external environment is defined by five elements: bargaining power
of suppliers, bargaining power of buyers, threat of new entrants, threat of substitute products, and
rivalry between existing competitors. The tobacco industry is primarily oligopolistic with few
major players who dominate the international market, and several small players whose impact
may be at country level but have little market significance at the international level. Below is an
analysis of the external micro environment affecting the international market within which BAT
operates.
Bargaining Power of Suppliers
Suppliers of green tobacco leaves have little bargaining power. BAT contracts tobacco
farmers from the many countries in which it operates factories. The buyers dictate prices since
sellers have no alternative markets for green leaf. The relationship between tobacco firms, like
BAT, and farmers is one that give tobacco farms control over prices. The import of this
arrangement is that tobacco manufacturers are able to buy green leaf at low prices and, therefore,
have substantive profit margins. From this end, there is little bargaining power of suppliers and
BAT faces no risk of increased cost of raw materials. The business has a potential of continued
profitability into the foreseeable future.
Bargaining Power of Buyers
Buyers’ bargaining power determines the level of profitability in an industry. Where
buyers have a high bargaining power, such as by switching to substitutes, sellers are forced to
sell at little economic profit. The cigarette industry operates in an oligopolistic market. The few
players in the industry have the ability to collude in setting prices. Even without such collusion,
market players normally operate at optimal profitability by self-regulating the levels of output.

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Since BAT is operating in such a market, it faces no threat of buyers switching to cheaper
substitutes. All cigarette manufacturers sell cigarettes that fall in similar categories at almost
equal prices. There is no risk of market loss to substitutes.
Threat of New Entrants
The ease with which new firms enter a market determine how safe players in the industry
or market are. Where firms can easily enter a given industry, existing players are forced to offer
their products at low prices so as to maintain their existing customer base. The tobacco industry
has few formal barriers to entry. However, industry dynamics makes it difficult for new firms to
outdo the existing players. New players who enter the market would need to create brand
awareness in the market. However, advertising of tobacco products is highly regulated with total
bans in countries that are members of the World Health Organization (WHO). Tobacco
companies are banned from advertising through sports sponsorship. It would, therefore, prove
difficult for new entrants to create brand awareness in the tobacco market. Additionally, small
players may not be price competitive against established large manufacturers who enjoy
economies of scale. BAT faces little threat from new entrants who may desire to take some of its
current market share.
Threat of Substitutes
Substitutes offer alternatives to current products and therefore pose a risk to existing
firms. Existing buyers may switch to substitute products therefore lowering market revenues for
current market players. In the case of tobacco products, alternatives to cigarettes includes
nicotine pouches and lozenges. These alternative products are easily to adopt and therefore pose
a big threat to cigarette manufacturers. Youthful cigarette smokers can easily switch to these new

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sources of leisure which would mean declining cigarette sales. BAT faces the threat of nicotine
pouch manufacturers taking over some of its current market. The company has resorted to
diversifying to manufacturing its own nicotine pouches to counter the competition. This aspect of
the tobacco industry poses a significant threat of loss of market share to cigarette substitutes.
Rivalry among Firms in the Tobacco Industry
The global tobacco market is marked with high competition among participants. It is
comprised of a few multinational players. Research by Statista (2022) placed BAT as the leading
tobacco company with the highest sales volume. However, the same website ranks Philip Morris
above BAT in terms of net-worth. Other bigger players are: Altria, Japan Tobacco, Imperial
Brands, and Vector Group. The three leading tobacco companies, BAT, Philip Morris, and
Altria; compete in both European markets and the Americas. Due to similarity of products
offered by competing firms, all firms operate in a highly competitive environment and therefore
must keep innovating to avoid loss of market share to competition.
Internal Analysis
In analyzing BAT’s internal competences, we use Porter’s Value Chain Analysis tool.
Porter’s Value Chain Analysis
The tool incorporates five primary activities from which a company derives its
competitive advantage. These are: inbound logistics, operations, outbound logistics, marketing
and sales, and services. How well and efficiently a company executes the five primary activities
impacts on its profitability.

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Inbound Logistics
Inbound logistics includes the receiving of raw materials, warehousing and control
mechanisms of raw materials acquired by a company. BAT has an elaborate inbound logistics
strategy that entails contract with farmers with whom BAT provides high yielding seed varieties,
to inbound transportation where BAT has engaged professional logistics firms such as Bollore
International, and finally warehousing of both green leaf and threshed leaf. Therefore, the
company has control over its raw material production and movement which enables effective
production and sales planning.
Operations
BAT’s operations entail conversion of green leaf to processed tobacco for consumption.
BAT has highly efficient technical capacity that it utilizes in tobacco processing. The company
has invested in modern plant and equipment which optimize on energy consumption. In 2021,
BAT Kenya won the overall award in energy management (BAT, 2021). The company’s plants
across the world have the capability to convert green leaf tobacco to standardized bales at
standard temperature after which blending is done to produce different flavors of cigarettes.
BAT’s cigarettes are produced to meet all markets from high end to low end. In 2021, BAT had
75 factories around the world which enjoyed monopolies of scale. Overall, BAT has a
competitive advantage in its manufacturing driven by investment in plant technology and
experience.
Outbound Logistics
BAT has a competitive advantage in outbound logistics. The company partners with
distributors and logistics agents to ensure product reaches the market. From the factory, logistic
companies like Bollore International deliver the cigarettes to regional warehouses. Next, tobacco

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is distributed through regional distributors. The advantage is that distributors are profit oriented
and therefore are self-driven in pushing cigarettes in their respective markets. Through electronic
stock management, BAT closely monitors stock movement through the RCS8 system. The
downside of this is lack of control on how well cigarettes are stored in distributor’s stores and
how distributors advocate for authentic BAT products. The company has an extensive
distribution network but lacks control over standards of distribution operations.
Marketing
BAT has an effective marketing structure. Though the company does not advertise, it has
successfully introduced its new brands into the market and achieved customer awareness and
loyalty. Such marketing success has been driven by a wide distribution network that doubles as
the company’s brand ambassador. Distributors push BAT’s products into the market and
customers, in turn, are responsive to the brand. BAT performs market research to identify
customer needs upon which it responds with new products. Other indirect marketing strategies
include participation in not-for-profit activities such as community service and climate change
endeavors. Additionally, the company promotes its non-cigarette products, such as Velo, through
sponsorships. Currently, BAT has a multi-year partnership with McLaren that seeks to promotes
its Velo nicotine pouches (BAT, 2022). BAT has been successful in marketing its new products
in the international market.
Besides the above primary activities, Porter’s value chain analysis identifies secondary
activities which support the discussed primary activities. These are: procurement, human
resource management, infrastructure, and technological development. BAT has an established
infrastructure of secondary activities which enable its primary activities.

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Procurement
Procurement entails acquisition of inputs. In BAT’s case, the primary input is raw
materials which is green leaf tobacco acquired from farmers. The company enforces strict
standards on tobacco quality, from seed variety to crop husbandry practices. At the plant, BAT
has strict standard adherence protocols in procurement of packaging materials. The packaging
materials are carefully selected and the suppliers have to maintain high standards. This adherence
to strict stands has ensured BAT maintains a consistent brand image throughout the global
market where it has operations.
Human Resource Management
BAT has an elaborate human resource development program. It starts with partnerships
with leading universities to develop leadership skills and acquire talent from such institutions of
higher learning. Next is the management trainee program through which BAT acquires fresh
talent and develops t to leadership roles. Continuous staff development through training
programs and global exchange programs has maintained high performing human resource.
Firm Infrastructure
BAT has an extensive procurement, production and distribution infrastructure. At
procurement level, the company has regional leadership structures that coordinate tobacco
farming and procurement activities. At the plant level, BAT operates a clear value chain network
from material entry into the factory, to threshing, grading, processing, packaging, and
warehousing. Upon completion of processing, the company has a proper storage and distribution
network channel that ensures its products reach the intended market in the intended condition
and time. The distribution structure has been discussed under primary activities.

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Technological Development
BAT continually develops its technological infrastructure. As discussed earlier, the
company has been awarded for energy efficiency in its plant operations. The company is also
working on reducing carbon emissions. In IT, BAT has a working IT department that is
independent from other departments and functions at the executive level. It has partnered with
technology companies such as Dell in acquisition, deployment and maintenance of its IT
infrastructure. The companies IT infrastructure enables it to interlink its operations across
different global territories. In plant operation, BAT has automated its operations with
computerized controls over different functions of its plants. BAT has optimized on technology
for efficiency of its operations.
Strengths and Weaknesses Analysis
SWOT Analysis
SWOT-Strengths, Weaknesses, Opportunities and Threats is a comprehensive firm
analysis tool that analyzes a firm’s competences in the context of its environment. We analyze
BAT’s strategic positions using the SWOT.
Strengths
BAT is a strong player in the tobacco market. It has a global network of factories with
established brands across the markets. With experience and foundation in the developed world,
the company has a stable established consumer market. It should use these strengths to take up
new opportunities in the tobacco industry.

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Weaknesses
BAT lacks an anchor market form where it can form a springboard. BAT has no
dominant product or area where it is the dominant player. This poses a risk that new entrants may
take some of its market share due to lack of market consolidation. To counter this weakness,
BAT should adopt market consolidation strategies for select markets.
Opportunities
A growing middle-class population in emerging economies provides BAT with a new
market. The middle-class has more residual income to spend on luxuries like cigarettes. Other
opportunities are in form of economic integration and trade agreements which open markets
across the globe. BAT should adopt market penetration strategies for the new markets opening
up around the world.
Threats
Health awareness poses a major threat to tobacco industry. More people are becoming
aware of the health risks associated with tobacco consumption. Legislation against tobacco
advertising and promotion pose a threat to cigarette manufacturers. Emergence of new
manufacturers threatens to encroach into what has been BAT’s market share. BAT should adopt
defensive strategies to defend its current market share from shrinking due to the above threats.
Innovation Strategy
In the recent past, BAT has adopted a disruptive innovation strategy. Despite pursuing
routine improvements on its cigarette processing processes, BAT has ventured into E-cigarettes
and nicotine pouches. These two innovations fall outside the company’s usual production output
categories. E-cigarettes are smoke-free and therefore relatively less risky than conventional
cigarettes. BAT has tapped into this new innovation by producing its own brand of e-cigarettes.

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Nicotine pouches allow consumption of nicotine products without having to inhale cigarette
smoke. This innovation is disruptive in the tobacco industry which has traditionally been marked
by cigarette smoking.
Under its Velo brand, BAT has developed nicotine pouches that are a whole different
innovation distinct from traditional cigarettes. Unlike cigarettes, which contain tobacco, nicotine
pouches contain high-purity nicotine, water and other high quality-ingredients. Scientific studies
have shown nicotine pouches to produce less health harming effects that traditional cigarettes
(BAT, 2022a). The reduced health risks attributed to these oral products provides BAT with a
chance to offer healthy alternatives to cigarettes. The company can therefore expand its
consumer market on the premise that inducing new consumers poses no health risks.
BAT has developed its new Next Generation Products (NGTs) through continued
investment in research and development. The company, through its American subsidiary,
Reynolds, acquired Drift Sciences for the plant operation where it manufactures nicotine
pouches. With the acquisition, BAT targeted to have 10% of US nicotine pouches market. The
company is planning moving cigarette production out of Hungary and concentrating on nicotine
pouches for that market. BAT plans to consolidate its nicotine pouches under one brand name,
Velo.
BAT’s Strategic Situation
The dynamic market within which BAT operates necessitates development and
implementation of a workable competitive strategy. According to Michael Porter (1985), BAT
can adopt any of the three generic competitive strategies: cost leadership, differentiation, and
focus strategy.

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Cost Leadership
Under cost leadership strategy, BAT can opt to be the lowest cost producer in the markets
it operates. Cost leadership can be attained through preferential access to raw materials,
manufacturing efficiency, supply chain efficiency, and coupons and discounts.
Differentiation
BAT may decide to pursue differentiation strategy. Under this strategy, the company
should develop unique product features that differentiate its products from those of competitors.
Incorporating customer preferences, as informed by their health concerns, is one way through
which BAT may attain differentiation. Flavor variety is another element of brand differentiation.
Lastly, differentiation is achieved from sponsorship such as the McLaren deal.
Focus Strategy
This strategy entails companies concentrating their resources on selected market segment.
BAT may adopt focus strategy on both value and cost. It would offer flavors and design that best
meets customer needs at the lowest possible price. BAT executes focus strategy through
continuous product redesigning to fit market needs.
Future Expansion
BAT may need to expand in both market and product. In market expansion, BAT should
apply market penetration strategies. To achieve expansion the company should pursue intensive
growth strategies. Growth can be from new products or new markets or a combination of both
new products and new markets.
To increase its market share in the current market, BAT should pursue market penetration
strategies. Market penetration may be by cost leadership whereby the company prices its

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products below market price. Promotions and offerings may also be applied o attract customers
from competitors.
Another strategy is product development. BAT may develop new products that are
current out of market. Such products would tap into new markets that are not currently served by
the available products.
Market development strategy would be effective in expanding through entrance into new
markets. BAT may focus on competitive pricing and price differentiation between markets to
penetrate new markets. Understanding cultures and values in new geographical markets would
be paramount to cracking the markets.
Diversification can expand the company’s market reach. Related diversification would be
through acquisition of related businesses such manufacturers of nicotine pouches in different
countries. Unrelated diversification would pursue products outside current market portfolio.
Examples are BAT acquiring energy drink companies to diversify its product portfolio. The end
result would be an expanded market for the company.
Recommendations for Growth and Development
One of the greatest weaknesses identified for the company is lack of an anchor market.
BAT should seek and pursue strategies that will create an anchor market for its products. One
way to achieve this goal is by pursuing market penetration strategy. Penetration strategy would
help the organization entrench its products in target markets. The company can achieve this
endeavor through competitive pricing. In competitive pricing, the company would price its
products at below average market price for the given market segment. For example, BAT may
develop low-priced products that are affordable to low-income consumers. The company would

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then entrench its position as the lowest cost producer and therefore dominate the low-income
consumer market over its competitors.
For BAT to entrench its products in the target markets, such products must be clearly
identifiable from competitors’ products. Differentiation is key to creating brand identity. In this
case, differentiation should serve as a support strategy, supporting the primary strategy, which is
cost leadership. Unique packaging is one method of attaining differentiation. Flavoring is another
effective method of differentiating one’s products from what is offered by competitors. A market
penetration strategy, supported by effective differentiation would enable BAT establish itself as
the dominant player in target markets.
A growing health concern over the safety of tobacco products is the biggest threat to
tobacco industry. World bodies like WHO are gradually pushing tobacco consumption out of
communities through legislation by member states. A decline in tobacco consumption means
declining profitability for tobacco companies like BAT. Such companies must seek strategies to
counter these negative developments posing a threat to the industry. One way of countering this
threat is by developing new products that are free of the cited health effects. Product
development strategy is an effective route to moving away from the often-discouraged tobacco
consumption. BAT should pursue product development strategy.
BAT should pursue product development strategy. One of the ways into this strategy is
developing new products that are closely-related to the current product line. An example of such
a move would be to develop new flavors of cigarettes besides the current ones like menthol. The
new flavors would meet the needs of current consumers who are not optimally served by the
company’s current offerings. Another option would be to identify current consumption patterns
and develop new products that are aligned to such patterns. For example, the company might

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establish that current consumption rates indicate a high preference for its menthol blend. It would
then set out to develop more cigarettes with the menthol blend. Lastly, BAT may introduce
entirely different products as informed by its own assessment of market needs. This model of
product development can be said to have informed BAT’s choice to develop e-cigarettes and
nicotine pouches. The idea was to serve customer needs that were outside cigarette smoking.
Strategy Selection
As earlier observed, the tobacco industry faces the risk of a declining market due to
numerous health campaigns against tobacco consumption. For this reason, BAT should seek to
venture into new areas that pose no risk to human health. To achieve this, BAT should develop
new non-tobacco products that serve the leisure needs of tobacco consumers. Product
development strategy is the way to attain this goal. Product development would be effective in
countering the threat of long-term failure of the tobacco industry due to legislation and health
concerns. New products that reduce the health risk attributable to cigarette smoking would keep
BAT in business as opposed to continuing with the declining cigarette market.
Since every business has a primary goal to maximize shareholders’ wealth, BAT would
be better off by pursuing product development strategy as opposed to market penetration
strategy. Market penetration would confine the company to within its current product line most
of which pose risk to consumer health and therefore still remain under threat. Product
development, on the other hand, would thwart the threat of market failure. Additionally, product
development would help meet currently unmet customer needs. With proper differentiation of
the new products, BAT would entrench itself in the market. Product development would
therefore achieve both market penetration and product diversification. BAT should therefore
pursue product development strategy.

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CANVAS Business Model for Strategy Implementation
Product development would involve multiple stakeholders. A careful consideration of all
elements relevant to successful strategy implementation is needed. New products may require
raw materials that are different from current ones. For example, nicotine pouches use synthetic
nicotine. BAT would have to enter into strategic partnership with suppliers of such inputs for
effective operationalization of the new product production. The current distribution partners
would push the product into the market.
Some key activities would be required to reinforce the company’s value proposition.
Under the new strategy, the company’s value proposition would be reduced health risk. To
achieve this, the company may seek validation of its claims from the relevant consumer safety
authorities such as the US’s FDA.
Value proposition would be less health risks. Producing nicotine pouches that are
tobacco-free would be effective in realizing this value proposition. The company would need to
buy customer trust that its claims are valid. Customer relationship should be one of trust and
symbiosis. The company would have to identify different market segments that the new products
would target. One such segment is the low-income consumer market. The new products should
offer affordable safe leisure products. Other segments may involve non-smokers who may now
be recruited into the new products if such products are certified as safe against harms of
smoking.
In distributing the new products, BAT would rely on its current distribution
infrastructure. Partnerships with other manufacturers in regions where BAT has no operations
would be effective in moving the new products in such markets. Manufacturing under license
would also serve to ensure wider distribution of the new products. Human resource in developing

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new products is key to success or failure of the strategy. BAT would have to invest in knowledge
and technology for successful product development. Research funding would be enhanced to
fund the new endeavor. In case of patented technology, BAT would have to spend resources to
acquire patent rights. On the hand, if BAT develops a whole new invention, it would have to
seek patent rights over the invention.
In developing new products, the company would incur research and development costs
and patent acquisition costs. New expertise knowledge may be required. Training of existing
staff may also be relevant. New plant will be required too. All the above investments should be
assessed against projected returns from the new products. One way to attain this within a three-
year period would be to acquire small companies produced the target products. BAT would thus
acquire both the production capacity and the existing market simultaneously. It would then push
the acquired products through its current distribution network. The company would successfully
venture into new products that may offer long-term success.
Conclusions
BAT operates in a complex environment. In the oligopolistic market, the company is
confined to standard market prices. Even though it makes substantive profits, it may not
influence prices. Therefore, it has to optimize under current pricing. The tobacco industry faces
the threat of legislation due to harmful health effects of smoking. Industry players like BAT have
to develop coping mechanisms that ensure they remain compliant in an unfriendly regulatory
environment while operating profitably. Legislation against advertising of cigarettes and related
activities such as sports sponsorship hinders brand visibility for BAT. Campaign against
smoking poses a threat to cigarette manufacturers. Consumer awareness of potential health risks

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of smoking may disincentivize them from smoking. Despite the above conditions, BAT
continues to thrive in the tobacco industry. However, the consumer awareness may change the
success patterns currently taking place. BAT should adopt strategies that will help it beat the
potential market decline in the tobacco industry.
One way of avoiding market failure is by developing new products. Currently, BAT
manufactures cigarettes whose consumption is likely to decline with customer awareness of the
potential health effects of cigarette smoking. BAT can counter this threat by developing new
products that serve the same purpose as cigarettes but pose lesser health risk. Product
development strategy would be effective in pursuing this endeavor. Some of the products that
BAT may pursue that provide leisure while posing lesser health risk are nicotine pouches. BAT
may develop a portfolio of other non-tobacco products besides nicotine pouches. Several options
are available for BAT in pursuit of new product development.
The company can develop new products (from scratch) through its research and
development department. This option would entail investing in research and development and
would take time. Another option would be studying the market and identifying new products that
serve the same cigarette market but pose lesser health risks. BAT would then seek to acquire
rights to use the same technology in developing its own products. Even with acquired
technology, BAT would have to train its workforce to produce the new products. Errors and
learning curve inefficiencies may slow the process down. It may take more than three years to
break through in the new arrangement. Furthermore, construction and roll out of new production
lines is costly and time consuming. Marketing of the new products may take time to create
consumer enthusiasm. These challenges lead us to the conclusion that acquiring another

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manufacturer who is already operational in producing the intended products is the optimal
strategy.
Acquisition of established manufacturers would save on time required to develop the
product and the relevant infrastructure for production. BAT would only have to finance the
acquisition and expand the operations. The company would incorporate the acquired brands
under its portfolio of products and combine the old market with the new one. Existing customers
may switch to the new product while new ones, previously excluded by the existing offerings,
would come through. BAT would therefore avoid the risk of market failure in the cigarettes
market and operate sustainably by selling the new products. A clear product development
strategy would be suitable for BAT’s long-term sustainability and success.

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Reference List
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