Organizational Direction of British American Tobacco Nigeria limited

Organizational Direction of British American Tobacco Nigeria limited The purpose of this report is to discuss current organisational direction of British American Tobacco Nigeria Limited (BATNL) and explore competitive business plan for BAT Nigeria with strategic dimensions ranging from 2009 to 2012. The body of the document offers an analysis of the external, transactional and the internal environment of the company. Subsequently, the report considers the companys core competencies and its key competitors, in order to deliberate courses of action that will enable BAT Nigeria to achieve a sustainable competitive advantage. The recommendations aim to enhance BAT Nigerias existing competencies, this will add value to all the stakeholders. Disclaimer: This report only considers British American Tobacco Nigeria Limited as a legal business entity and does not intend to endorse consumption of tobacco products in any form. 2. Executive summary This report aims to critically analyze the option that will ensure that British American Tobacco Nigeria Limited (BATNL) remain market leader by sustaining its competitive advantage in a highly competitive industry. Becoming no.1 in the market is hard work, but maintaining that position is far more difficult. In the light of this, I have critically examined the plausible scenarios and arrived at an option which will strengthen BATNLs current market position. The company today is facing the uphill task of dealing with threats from new market entrants, operational limitations caused by limited international suppliers, lack of availability of locally sourced sun cured tobacco, stricter legislative restrictions and challenges to further increase market share. This report suggests to management an option of forming a system of consistent market dominance and build sustainable competitive advantage. The option consists of an action plan which includes forward and backward integration of supply chain, capacity utilization and development of Nigerian production facilities as an export Hub to West and Central African countries. The backward integration of supply chain involves sourcing the Virginia tobacco from a wider international supplier base in order to prevent raw material out of stock (OOS) situation of super premium, premium and international VFM (Value For Money) brands. Similarly, local sourcing of sun cured Tobacco for VFM production should be expanded by involving larger numbers of small rural farmers in BATNLs business sphere in order to meet raw material requirements for the continuously growing demand of the VFM segment. The forward integration includes developing a wider and more efficient distribution network by means of integrating identified front end strategic customers into electronic distribution system and by providing financial assistance. The strategic location of the country can be exploited so as to establish it as an export hub to other West and Central African countries. It would ensure cost saving advantages to the group, especially in terms of cheaper labour, freight and import taxes. Securing forward and backward integration along with both the manufacturing factories in Nigeria acting as export centres, would make it feasible to proceed with capacity utilization, thus reaping the benefits of economies of scale. In the current scenario, it is going to be very hard to increase share of the existing pie, so the endeavour should be to augment the size of the whole pie rather than poach on the share of competitors. Migration from other brands seems a largely uphill task considering the large market size BATNL enjoys now. To enhance sales, the modus operandi should be concentrated towards capturing the increment in the market as a whole. The incorporation of the above discussed ideas would ensure a sustained competitive advantage, with the aim of increasing rent. 1. Organisational Strategic Aims and Objectives: 1.1 Current Strategic Aims and Objectives: In the early 1990s, BAT decided to grow our business by focusing solely on tobacco a decision which regularized and transformed the Group. In 1995, BAT set itself the credible vision of regaining leadership of the global tobacco industry and established a strategy to get there. In this section summarises the key elements of BATNLs strategy which group believes can enable it to continually build a sustainable business in tobacco industry. Ultimate Strategic Aim Achieve Leadership of the Tobacco Industry BATNLs vision is to achieve leadership of the tobacco industry in order to create long term shareholder value. Leadership is not an end in itself, but a company that leads its industry, is the preferred partner for key stakeholders and is seen to have a sustainable business, should be valued more highly. Company defines leadership in both a quantitative and qualitative sense. Punitively, it seeks volume leadership among our international competitors and in the longer term, value leadership. BATNL recognises that its success will depend on adult consumers and that, therefore, we must be consumer driven.   But the hard, quantitative measures do not in themselves address all the things it must do as a company. Taking a long term view, focusing on the quality of its business and how it work. As a result, qualitatively, company seeks to be recognised as industry leaders and to be the partner of first choice for governments, NGOs, investors and potential employees. BATNL pledges to do this by continuing to demonstrate that it is a responsible tobacco Group, with a sustainable business, outstanding people and superior products.  Ã‚   In order to deliver company vision, BATNLs strategy for creating shareholder value has four elements Growth, Productivity, Responsibility and Winning Organisation. 1.2 Component Parts to achieve Ultimate Strategic Aim 1.2.1- Winning Organisation: To deliver company vision it must have the right people and the right working environment. That is the essence of BATNLs Winning Organisation strategy. By the right people, group mean outstanding people those with the ability and desire to drive and deliver competitive advantage and superior performance. Company endeavour to attract, develop and retain high calibre talent. BATNL also puts emphasis on making it an organisation that is constantly learning. This learning culture shares knowledge quickly, learns from its mistakes and replicates success formulas quickly. To be a winning organisation British American Tobacco must also be a great place to work. This requires an open, confident culture that encourages change and innovation, is shaped by companys Guiding Principles, inspiring its people to perform to their best and importantly, enjoy their work. Finally, Winning Organisation strategy requires that company develops leaders, at all levels in the organisation, with a clear vision for the business, who foster innovation, and can align, energise and enable their teams to contribute to the building of our global enterprise (B) Growth: BATNL seek to increase its volume and value share of the West African tobacco market through both organic growth and mergers and acquisitions. For organic growth, company is concentrating on the key strategic segments of the market that offer the best prospects for long term growth, including Premium and International Brands. BATNL continues to focus on the growth of its Global Drive Brands as well as being prepared to exploit opportunities for profitable volume growth in Value for Money and Low Price Segments.   Company also wish to sustain or develop strong positions in priority markets simply defined as the largest and most profitable ones. BATNL believes that it is important to continue to develop and utilise innovative, differentiated products and to offer its consumers added value from its brands. (C) Productivity: BATs overall approach to productivity is about using its global resources to increase profits and generate funds for reinvesting in its business. Today, all companies are trying to cut costs. BATs approach is integrated aiming to establish a lower cost base while improving the quality of products and the speed they get to the market, as well as our effectiveness in terms of how it can deploy its people and capital. As a Group BATNL is focused on its consumers, marketing is a large part of what it does and company is working to ensure it effectively and efficiently deploy its marketing resources.  Ã‚  Ã‚   In order to maintain a strong balance sheet, capital effectiveness is an important part of its productivity strategy and includes a focus on inventory levels, utilising its assets, financing and other uses of capital. (D) Responsibility: BATNL continues to balance its commercial objectives with the expectations of a broad range of stakeholders, thus ensuring a sustainable business. Company communicating with all stakeholders about its Business Principles, which explain the way we expect its businesses to be run in terms of responsibility, and demonstrating how group is following them. Companys three Business Principles, Mutual Benefit, Responsible Product Stewardship and Good Corporate Conduct are each underpinned by a number of Core Beliefs. In the regulatory arena, BAT continues to promote sensible tobacco regulation that: balances the preferences of consumers with the interests of society establishes an open minded and objective approach to harm reduction as a policy Ensures that its businesses can compete and prosper. BAT manufactures products that can be harmful to the health of its consumers and have publicly stated its aim to reduce this harm to meet both consumer needs and societal expectations. Company proposes to do this by: the progressive reduction in the tar and toxins in its products the successful launch of a new generation of tobacco products with critical mass appeal that are recognised by scientific and regulatory authorities as posing substantially reduced risks to health. 1.3. Factors Affecting the Strategic Plan 1.3.1- Contextual Environment  [1]   Nigeria gained independence in 1960 but since the first military coup in 1966, Nigeria has been ruled by military for over 35 years up until 1999. Since then democratically elected civilian governments are ruling Nigeria. Under the new constitution adopted in 1999, a strong presidency appoints a federal executive council, comprising government ministers and ministers of the state from each of Nigerias 36 states. Although the 36 governments enjoy greater autonomy than under the former military administration they remain dependent on the federal government for funding. This set up creates a system of distributed power centres, with the highest authority lying with the president, making lobbying with political powers a complicated issue. Estimated GDP for 2006 is $116.7 billion whereas economic growth rate is believed to be 5.4%. This economic performance is severely offset by high rate of inflation (8.7%). Since 1999 under the rule of Peoples Democratic Party (PDP) National Economic Empowerment and Development Strategy (NEEDS) has boosted non-oil sector growth and improved macro-economy. Increased government spending on roads and ongoing efforts to reform and attract investments into the power sector could improve infrastructure modestly. Only minimal progress is likely with port reform. Both these aspects would have a positive effect on BAT Nigerias supply chain. Corporate profits except for oil companies are taxed at 30%. VAT on tobacco product is 7.5% whereas for other commodity product its charged at 5%. In governments effort to curb smoking, promotion of cigarette sales through billboards has become illegal since January 1st 2004. Federal government is under further pressure from whom and other NGOs to put a ban on tobacco products promotion through electronic and print media. In addition, various pressure groups are raising concerns against tobacco farming as it renders land unusable for cultivation of other crops. 1.3.2- Transactional environment Nigeria has a total population of 140 million and out of these only 2.9 million adults smoke, it indicates a huge growth potential for Tobacco industry. Given the scenario, though BAT Nigeria is catering to very comprehensive range of markets and consumer segments, further avenues for increasing market penetration of companys products have been identified through various analysis. The present market size of AFS is only 14% which explicitly shows growth potential. To grow and capture this segment, requirement for development of brands targeted especially to Adult Female Smokers (AFS) is identified. On the other hand, according to strategic group analysis premium brands have a need to expand their geographical reach and increase market penetration. Super premium product line should be prevented against brand dilution and their market presence should be enhanced with the help of specialized channels of HoReCa. On critically evaluating product offerings extended by the BAT Nigeria across different segments, few potential offerings for A class, B, C and D segments  [2]  were recognized like, pipe tobacco and cigar, limited editions and flavoured and VFM brand variants, respectively. Supply chain of BAT Nigeria has a weak link in procurement part of Virginia tobacco due to limited number of international suppliers (especially from Argentina and Brazil). Whereas, local procurement of sun cured tobacco has limitations of inadequacy of land conducive to tobacco farming, partial segment of farmers involved in tobacco farming and threats from pressure groups. With recent acquisition of Gallaher Group by Japan Tobacco Inc., JTI has the second largest market share in Nigeria (14.4%), after BAT Nigeria (85.1%). Still we perceive the major threat to BAT Nigeria coming from Philip Morris Inc. (PMI). Looking at the history of PMIs entry to new markets, they capture major share of the market within 3 years, like in Benin. Though, global drive brand for PMI is Marlboro Lights, PMI is expanding its roots in Nigerian market indirectly through Kraft Foods, subsidiary of its corporate parent Altria Inc. The competitor analysis  [3]  shows that key strength of BAT Nigerias products against other competitors and especially PMI, as perceived by the customers, lies in their availability. 2. Stakeholders Influence and Progress towards Strategic Aim 2.1- Core Resources  [4]   In 2009 BAT group reported  £1896m of profit, attributable to shareholders equity. This explicitly indicates financial strength of the BAT group. As operations of BAT Nigeria are directly funded by parent corporate body, access to adequate finances, as compared with other competitors, puts BAT Nigeria in the elite club of organizations with formidable financial resources. Since BAT signed Memorandum of Understanding (MoU) in November 2000 with the federal government, it has enjoyed status of most favoured company and leveraged rapport with the government in establishing local production facilities in Zaria and Ibadan. These state of the art production units are quite unique resource to BAT Nigeria, considering that no other tobacco company has cigarette factory in Nigeria. Further, BAT Nigeria has strengthened its portfolio of core resources by investing funds and efforts in developing dedicated supply chain intermediaries. 2.2- Core Competencies  [5]   Though the MoU expired in April 2007 with end of PDP presidency, strong relationship with the government has been instrumental in developing country wide distribution network and in increasing domestic tobacco farming. BAT Nigeria has improved efficiency and integration of distribution network by implementation of SAP (ERP module) and Siebel (CRM module). Integrated electronic supply chain with local access to raw material is the core competence of BAT Nigeria. Under this process and with continuous efforts to exercise CSR, BAT Nigeria has developed a sound social relationship and local knowledge. Benefits of BAT Foundation have been exploited to meet these strategic requirements. Apart from these local factors, BAT Nigeria has benefited from legacy and technological expertise of parent. Thus, process evolved quality of BAT products is been key source of competency. 3.1: Futuristic Strategic Position: Way to Sustainable Competitive Advantage  [6]   After analysing contextual transactional environment, core resources and competencies of BAT Nigeria, I propose an option which comprises of recommendations for strengthening upstream and downstream supply chain  [7]  , capacity utilisation, developing Nigeria as export hub to west African countries and exploiting BAT foundation in mutually beneficial way (to BAT Nigeria and stakeholders), in order to provide BAT Nigeria with a sustainable competitive advantage. While suggesting the options compatibility, suitability, acceptability and feasibility of recommendations with BAT Nigerias current business model and low exposure to risk has been considered. Production of international brands of Premium and VFM cigarettes is based on Virginia tobacco imported from Argentina and Brazil. Reliance of production of international Super premium, Premium and VFM brands on foreign suppliers subjects upstream supply chain to political, economical and ecological factors evolving in exporting nations. To counter power vested in international suppliers and remove raw material quantitative bottleneck, supplier base of Virginia tobacco should be increased by importing the same quality Virginia from alternative source countries like Cuba, Mexico, Puerto Rico and Venezuela. Tobacco export being major trade activity of these countries, international tobacco trade regulations are quite liberal and no major hurdle could be seen in setting up trade channels. Geographic location of alternative source nations would not impose any significant extra freight charges. For local brands of VFM cigarettes cultivation of sun cured tobacco needs to be increased. In this process, firstly, BATNL should lobby with the government to pass Land Use Decree, to facilitate farmers in gaining possession of land. Secondly, with ownership of land and providing the farming community with help in taking mortgage loans, latest farming technologies and better tobacco seeds, farmers can be driven to come in a legal two way contract with BAT Nigeria, in regard to secure local cultivation and supply of sun cured tobacco and promising buying guarantee in return. 3.2: Justifying the strategic option As analysed by competitor analysis, in consumers perception, apart from poor availability, value offered by PMIs products is at par or better than that of BATs products. Thus, to sustain BATNLs existing system of dominance, it is of paramount concern to have a wide, efficient, dedicated and controlled distribution network. Apart from strategic tie-ups with Global Brand Nigeria Ltd. (GBNL) and Global Apex Ltd., downstream members of distribution channel need to be integrated with electronic distribution platform of SAP and Siebel (CRM). Financial and technological assistant to channel intermediaries in this regard would benefit BATNL in two ways: higher channel control efficiency and financial binding of down stream channel members to BATNL. The SWOT analysis  [8]  highlighted that BATNLs current practice of cash sales is its Achilles heel. To prevent competitors from breaking logistics net of BATNL, BATNL would have to forgo privilege of cash sales and start giving credit facili ties to wholesalers and distributors. Further, and as underpinned by mobility barriers  [9]  analysis, to hold on to market share as high as 85.1%, the premium brands are the key and should be pushed deep into nation with associated promotional activities and rewards/rebates attributed to selling channel. At the same time, super premium brands should be prevented against brand dilution and their image of brand ambassadors should be continued further. For proliferation of super premium brand products, upmarket specialised HoReCa  [10]  channel showed substantial potential for growth. The current problem of low co-operation from HoReCa owners, realising the dependency of BATNL on them for promotional purposes, can be overcome by offering them half yearly or annual contract of brand association, instead of event based approach. To motivate rural small-holder Nigerian farmers interest in the tobacco farming and business with BATNL, BATN Foundation needs to concentrate on issues pertaining to lack of access to modern agricultural machineries, training on new agricultural practices and innovations, production credit, fair and transparent marketing opportunities. Currently, both local production facilities are not utilized up to their full capacities, partly due to relatively less demand in comparison with full production capacity and rest due to bottlenecks in supplies of raw tobacco. Together with improvement in the supply of raw tobacco (international and local), developing Nigeria as export hub to cater neighbouring West and Central African countries would assist BATNL in building up sustainable competitive advantage by gaining economies of scale (capacity utilization), and becoming regional power in tobacco industry. Appendix 1 EMBED PowerPoint.Slide.8 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 Appendix 10