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Go Back       IAR Journal of Business Management | IAR J Bus Mng, 2021; 2(1): | Volume:2 Issue:1 ( Feb. 10, 2021 ) : 143-152
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DOI : 10.47310/iarjbm.2021.v02i01.022       Download PDF       HTML       XML

Identifying the Strategic Options for Corporate Managers of the MNCs


Article History

Received: 03.01.2021, Revision:14. 01.2021, Accepted: 31. 01.2021, Published: 10. 02.2021

Author Details

Tawhid Ahmed Chowdhury

Authors Affiliations

Senior Lecturer, Department of Business Administration, Royal University of Dhaka, Bangladesh

Abstract: This paper aims to analyze the strategic decision taken by the organization and to develop the strategic options and provide some recommendations for managerial decision-making. For this analysis, an MNC has been chosen, named as British American Tobacco who has the operation in more than fifty-five countries. The strategic analysis has been performed in three separate stages. This study reveals that despite the overall decline in traditional cigarette sales, the company has managed to remain profitable and with positive cash flows in recent years. So far, focusing its investments and strategy on the development of next-generation products is adequately rewarding and promising, as BAT remains the leader in this new growing market with total revenue of approximately £400m. These achievements were made possible thanks to the company’s ability to attract-retain skillful employees from all around the world and the implementation of a strong and global Information System (“Tao”). This study is mainly based on the UK market although BAT has the operation in over 55 countries. Moreover, data has been drawn from the published sources. In the future, there is a scope to produce and use various primary data. Before providing the recommendations for the future strategic choices and direction of the company, it is important to have an integrative understanding of the BAT’s external and internal environment, the role of the stakeholders, identifying the SWOT, and to explore the core competencies, which can generate competitive advantages for British American Tobacco


Keywords: Strategic options, MNC, BAT, Strategic analysis, Stakeholders, Competitive advantages, Recommendations.

Introduction

In today’s fast-moving competitive business environment, strategic analysis is the imperative concept to analyze the present strategies for identifying various strategic options to improve organizational strength. With a market capitalization of 87 billion, leading presence all over the world and a strong brand name, British American Tobacco (BAT) appears to have solidified its place in the industry, ensuring its survival and future growth. BAT was founded in 1902 and is now among the leading tobacco manufacturers around the world, operating in more than 55 countries, selling its brands in over 200 markets and employing 55,000 people globally. Headquartered in London and much of the company’s early success should be attributed to James Buchanan Duke, whose entrepreneurial visions led to profitable investments, reduced cost of production and successful acquisitions. [ CITATION Bri18 \l 1033 ].

The company has set its vision to be “The world’s best at satisfying consumer moments in tobacco and beyond”. As with every statement of this nature, it immediately becomes apparent that despite portraying some of the values and purposes of the company, it remains severely vague.

For the mission to be successful, a series of more detailed objectives need to be developed that will provide more specific targets to monitor and review. For BAT, these objectives revolve around four fundamental pillars: Growth, Productivity, Winning Organization and Sustainability.

Setting, monitoring and reviewing these objectives can maximize the chances that the mission of the company is being met, and can also act as a guide for the development and implementation of future strategies.

BAT is producing both cigarettes and potentially reduced-risk products to meet the demand and preferences of its customers. Steadily, the key part of BAT’s strategic portfolio shifts towards investing in potentially reduced risk products due to the growing concern of consumers regarding health issues. Before providing the recommendations for the future strategic choices and direction of the company, it is important to have an integrative understanding of the BAT’s external and internal environment, role of the stakeholders, identifying the SWOT, and to explore the core competencies, which can generate competitive advantages for British American Tobacco.

Literature Review

Due to the dynamic business environment, strategy and strategic management have become the crucial topics in the management of the organization (Athapaththu, 2016). Since the resources are limited, strategic analysis is very important for future decision making. This ‘Strategy’ comes from the Greek word “strategos”, the meaning comes from the roots of “army”. Strategy can be defined as analyzing the current situations and altering if it is necessary (Drucker, 1954). This strategy also works as the guideline for managerial decision making (Ansoff, 1969). Alfred D. Chandler (1962) defined the strategy as the tool of formulating basic long term goals and objectives of an organization and the implementation of course of actions and the allocation of necessary resources for carrying out these goals. Kenneth Andrews (1980) supported this definition in the Harvard Business Review and explain the strategy as the pattern for decision making which helps the organization to prepare its goals, objectives and principle policies and the ways to achieve those goals and policies. Moreover, strategies also exhibit the economic and non-economic contribution it going to make to the stakeholders of the company. After considering all definitions, it can be said that a strategy is the blueprint of the actions that can be used to frame the organizational goals and objectives and the way of attaining those goals and objectives.

Strategic Analysis used as the broader term of the strategy and define as the process of environmental analysis for the strategy formulation, implementation and control by the top managers. The Strategic analysis supports to organize the resources in align with the vision, mission and organizational strategies. Although it does not help to predict the future but assist the managers to understand the exact steps of implementing the strategic plan (Athapaththu, 2016). Clark (1997) emphasizes that strategic management tools and techniques can be included in every stage of the strategic management process such as situation assessment, strategic analysis of options and strategic implementation.

Gunn and Williams (2007) have identified the three reasons to understand the importance of using strategic tools. Primarily, it reveals the drives of managers when using strategic tools. Secondly, strategic tools will be suggestive of the spreading procedures and support the utilization of tools and finally, it contributes scholastics and experts in moving away from a normative and rational approach to deal with increasingly humanistic, practice-based ways to understand the usage of the tools.

Different tools and techniques can be used to analyze the strategies of a company. Hitt, Ireland and Hoskisson (2012) mentioned the PEST analysis as a tool to analyze the different elements of the company’s general environment, which is created by political and legal segment, economic segment, socio-cultural segment, technological segment. Jinjin (2013) found in her study that political and legal elements strongly influence the opportunity and threat of the company. The PEST(EL) analysis is a very useful tool for managers, as it allows them to get a better understanding of their company’s environment and prepare several positive or negative eventualities. Nonetheless, it is a simple model with some very distinct drawbacks, such as a high degree of subjectivity, bounded rationality and the fact that accurate and complete identification of all future impacts within a dynamic environment is not possible.

Moreover, the five forces competitive model can be used to analyze the industry environment analysis which involves the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, the threat of substitute products, and intensity of rivalry among competing firms (Hitt, Ireland and Hoskisson, 2012). Porter’s Five Forces is a very powerful tool in analyzing the competitive environment of each company, but it is a rather time-consuming process, it ignores powers that are outside the market (e.g. Government) and it is open to bias. Therefore, all the information that is being drawn from this analysis should be evaluated by bearing these drawbacks in mind.

Conducting the resource audit helps the management and investors to analyze the internal present scenario of the organization. This audit identifies the tangible and intangible resources and detects the resource gap of the organization (Jinjin, 2013). When a company tries to identify potential strategies that can be adopted, considering the stakeholders and their respective power level can prove instrumental in making the right decision. Freeman (1983) defined stakeholders as “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. Classifying them into internal, external or connected stakeholders would be beneficial in accurately identifying their claims.

Results and Discussions

Strategy development involves the use of major key elements, such as objectives, resources and environment to achieve its long-term success. The main models that companies use in developing their strategies are: The Rational Model, the Emergent Model and the Freewheeling Opportunism. The Rational model is a step by step approach where formal strategic planning is required while the other two require that organizations react and deal with events as they occur. BAT is using the Rational model, which is divided into three main stages: Strategic Analysis, Strategic Choice and Strategic Implementation. These stages will be the basis of the report that will help form a better understanding of BAT’s current position and its strategies.

Maintaining an accurate and continuously adapting view on the company’s current position is crucial for making the right strategic choices at the right time. Revenues, profits, financial ratios, financial statements and share performance are a few key elements for this approach, for which a more extensive analysis will be required. Apart from all the figures and relative numbers, BAT should also consider how it is currently seen by consumers and how it is dealing with competition. Allegations, investigations, scandals can seriously damage the reputation of the company, while underestimating competition can create otherwise avoidable problems. These are issues that involve the relation of the company with its external environment, and the two most commonly used models that look at this relation are the PEST(EL)1 model and Porter’s Five Forces.

PEST(EL) Model

PEST(EL) analysis focuses on broader issues of the company’s macro-environment that cannot be fully controlled. The objective of BAT can therefore be affected positively or adversely by a series of Political, Economic, Social, Technological, Environmental and Legal influences.

  • POLITICAL-LEGAL:

All companies within the tobacco industry face strict regulations and restrictions. Regulations impose heavy taxation and duty charges, while restrictions on marketing and advertising tobacco products pose another challenge for the managers. For example, laws and regulations may also change for companies operating in the UK due to the imminent Brexit, but no one can be certain of their exact nature and implications.

Tobacco industry was also badly affected by the smoking ban in all enclosed public places 10 years ago, as sales dropped in the process. Naturally, a decrease in sales is an important result to consider, but what this law achieved was to change the attitude towards smoking [ CITATION Rus17 \l 1033 ]

When it comes to political considerations, there has been a backlash against BAT and other companies of the industry for their alleged exploitation of weak governments with no strict tobacco laws. Although mainly a political issue, these allegations have economic and social implications for BAT to consider as well.

Political influences and laws can also change within the country over the years, preventing or allowing the trade of a specific product. It is under these circumstances that BAT is ready to return to Myanmar after fifteen years. The company had withdrawn from the market in July 2003, after being heavily criticized for having commercial links with the country’s military regime [CITATION Mac \l 1033 ]. However, recent social, economic and political reforms, seem to present BAT, and other Western companies, with the opportunity to enter a promising market. BAT can benefit greatly from this investment by further diversifying its geographic operations and creating an extra source of revenue.

  • ECONOMIC

When trying to assess the impact of economic influences on their company, managers tend to emphasize on macro-economic variables, such as disposable income, inflation, exchange rates and interest rates. According to the latest statistics, the GDP per capita and the household disposable income in the UK are on the rise (Figure 1) (Office for National Statistics, 2018)

Figure is Available in PDF Format

Figure 1: GDP and household disposable income in UK

The growth of the disposable income suggests that individuals earn more money than they used to. This information can be vital to companies as it can aid them in their pricing policies. For BAT, it is a sign that consumers are able to spend more on tobacco products, and a further increase in prices might be an option to consider.

The importance of the exchange rates for BAT has already been addressed, as the company is now also operating in the US, the depreciation of sterling could actually be beneficial for its total earnings.

However, the value of sterling is recovering faster than anticipated after the Brexit referendum, which can also be seen in the sharp fall of the inflation rate. Inflation rate dropped to 2.5% in May and Mike Hardie, Head of inflation at the Office for National Statistics stated that “Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget not appearing this March, thanks to its new autumn billing” [ CITATION Jac18 \l 1033 ]. Regarding the interest rate, it is currently at 0.75% [ CITATION Bri182 \l 1033 ], which makes the repayment of BAT’s debt harder.

  • SOCIAL-ENVIRONMENTAL

The decreasing number of adults who report smoking indicates that cigarette consumers have become more concerned about health associated risks. As people quit smoking and became more aware of passive smoking, health organizations reported that there was a significant decline in people being hospitalized for heart attacks, asthma or lung infection[ CITATION Off17 \l 1033 ].

E-cigarettes appear to be the next “trend” of tobacco products, with BAT being the leading company in the sales of these products as part of its strategic portfolio management.

Developing products that are less harmful is an essential social issue that BAT’s management is already working on, as it is their belief that prioritizing on risk-reduced products is going to improve their customers’ health, while also keeping the company profitable. Dealing with social influences is very much linked with the ethics of the company and one of the crucial issues that BAT is currently dealing with is the rampant of child labour in tobacco farms. Even though BAT and the other large tobacco companies claim to be taking preventive measures, there are plenty of surveys that show otherwise. Evidence provided by Sarah Boseley in the Guardian, suggests that children in many countries are still being taken out of school to work under the sun for long hours and expose themselves to toxic fertilizers and exhausting physical labour [ CITATION Kol18 \l 1033 ],[ CITATION Bos18 \l 1033 ].

  • TECHNOLOGICAL

The significant decrease in the sales volume of traditional cigarettes was one of the major reasons that led BAT to switch its focus into the production of next generation products. Understanding that investing on a declining market is not a sustainable approach, the company now focuses in the development of innovative and potentially reduced risk products to satisfy the preferences of its customers.

These NGPs use a heat and no burn technology that ideally will minimize the harmful effects of burning tobacco. So far, BAT has developed tobacco heating products (THPs), vapour products (e-cigarettes), oral tobacco (snus), and the tobacco free nicotine pouches, with the manufacturing process being fully automated and simple.

Porter’s Five Forces Competitive Model

Along with the PEST (EL) analysis, Porter’s Five Forces model has applied in this study as part of external analysis. The particular model will help the company develop a more accurate view on what is happening within the industry and weigh up the significance of these forces to its operations.

In order to judge the level of competition within the industry, companies need to assess the threat of potential new entrants coming into the market and taking portions of the company’s market share. However, that is not a very likely scenario for BAT, since the tobacco industry is a well-established oligopoly that comes in the form of substantial barriers to entry. These barriers include economies of scale, government legal barriers and significant investment requirements. Moreover, the incumbents already enjoy a strong brand name and since advertising is banned, new entrants will have a hard time finding a profitable part of the demand for them to operate in. Therefore, the threat of new entrants for BAT is relatively low.

It is important that, when assessing the level of threat of substitutes, managers should not include direct competitors into their analysis. Looking into the alternatives of tobacco, there are some natural herbs that can be opted for, but the stronger substitutes are mostly nicotine patches, gum and nasal sprays. The benefit of using these substitutes, apart from the fact that they are less harmful, is that they can be a major source of money saving for consumers. Bearing this in mind, the threat of substitutes could be substantial for BAT, as more people decide to quit on smoking.

Suppliers are individuals or enterprises that provide the organization with inputs such as materials (tobacco farmers), human resources (employees) or finances (bank loans). Their bargaining power is an important factor to consider, as dealing with powerful suppliers can adversely affect the costs and margins of the company. For BAT, there are a large number of tobacco farmers that it can turn to, since the resource is not scarce. In addition, farmers do not act collectively, which shifts the scale of power even more towards the company’s side. Employees of BAT are also part of its suppliers, and for their case it can be said that they have relatively small power compared to that of the company since they are not unionized, and in most situations their skill-level does not protect them from being replaced. Consequently, the level of threat of suppliers for BAT remains low.

Each consumer of tobacco products represents only a small percentage of the total sales, which indicates that customers will rarely act collectively and exhibits less powerful than BAT. Moreover, the elasticity of demand of tobacco products is highly inelastic due to the fact that consumers are addicted to its consumption, which makes them more vulnerable to price increases.

The oligopolistic market structure of the tobacco industry offers to the customers some choices among the incumbents of the industry to choose from. To counter customer migration to competitors, BAT is rapidly producing innovative products that will help retain its current customers by building customer loyalty.

Operating within an oligopolistic market means that the concentration ratio (CR) of the dominant companies is higher than 80%. For the tobacco industry the CR is now more than 85% (Sweet, 2007). The most important characteristic of an oligopoly is that every company operates in a way that will allow it to “outplay” its rivals. This characteristic is often referred to as “conjectural variation” and it is an essential part that companies take under consideration when developing their strategy.

The main competitor of BAT within the UK is Imperial Brands (IB), while globally there are also big companies like Philip Morris International and China Tobacco (CNTC) that strive for dominance. All of these companies have to face the rising t hreat of the illicit trade, which reduces their respective revenues and their country’s tax income [ CITATION Ass17 \l 1033 ].

The competitive rivalry poses the highest threat for BAT, and along with the threat of substitutes are the key points that the company’s strategy has to deal with. The actions that managers have taken so far towards that end involve: the acquisition of competitors that increased market share and the development of NGPs.

Resource Audit

Apart from the external environment, the strategic analysis also requires a well-established analysis of the internal environment of the company. A resource audit will identify BAT’S competences and how they enable managers to make more informed decisions on appropriate strategies. It involves potentially useful resources, such as money, manpower, make-up and management information systems from which the company can create value.

The company’s 2017 Annual Report [CITATION Bri17 \l 1033 ] shows a net cash and cash equivalents that amount for £2,822m (more than the £1,651m of 2016) which indicates that the company is fairly liquid and reduces any likelihood of default. Avoiding liquidity problems is of vital importance, as it will allow BAT to meet its liabilities and ensure its short-term survivability.

The approach that BAT is taking when it comes to its employees, focuses on them being ambitious, talented, courageous and resilient. As the highly cited theorist McGregor stated, individuals can be as motivated and creative as they want, but unless they operate in an environment that allows them to manoeuvre and develop, they will never reach their maximum potential [ CITATION McG60 \l 1033 ]. By winning consecutive awards as a Top Employer, BAT appears to value the importance of having these elements in the work environment as a crucial step towards the achievement of its goals

BAT was facing a challenge of cutting down costs in order to free up cash for investments and decided to act. This was achieved by partnering with IBM for the development of a global SAP. The new program that was developed is known as “TaO”, which according to CEO Nicandro Durante is “a program of immense scale and intensity, that will make a major contribution to funding BAT’s future sustainability and growth”. Integrating systems in more than 180 markets within 4 years shows the extent of the enterprise. Managers can now access data and figures instantly; employees will be more productive since all the data will be collected by the MIS and more focus can be placed on data regarding the preferences of customers. Despite the fact that Tao has greatly benefited BAT, the company should be aware that a system of this scale also involves a high risk in case of a downtime or in case of misuse [ CITATION IBM17 \l 1033 ] [ CITATION Lin18 \l 1033 ]

Regarding the company’s make-up, BAT already enjoys customer recognition by having a strong Brand. This leads to a series of benefits like loyal customers, easier introduction of new products, enhanced credibility and the ability to gain a competitive advantage

In an effort to undermine anti-smoking laws in east Africa, BAT has allegedly bribed officials and is under investigation by the UK’s Serious Fraud Office. The official position of the company stated that it will cooperate fully and will rectify any potential dishonest behaviour in order to protect its image [ CITATION Sul17 \l 1033 ].

Stakeholder Analysis

  • Mendelow’s Matrix and Ethics

Classifying the stakeholders into internal, external or connected stakeholders would be beneficial in accurately identifying their claims, providing BAT with some input on which groups will be more influential during the decision process. Employees for example, are internal stakeholders who want high salaries, fair working conditions and opportunities for advancement, society is an external stakeholder which is concerned with human rights issues and environmental awareness while shareholders are considered to be connected with the company through contracts and want share appreciation and high dividend payments. It is immediately apparent that these claims conflict with each other, which forces BAT to decide on which stakeholders to base its strategy on. A model that is widely being used for such a purpose is Mendelow’s Matrix (Figure 2).

Although Mendelow’s Matrix is a very informative model, it has also been heavily criticized as being subjective. Also, the fact that it proposes groups with no power be ignored during the decision-making process, indicates that it is also an unethical approach to take.

Figure is Available in PDF Format

Figure 2: Mendelow’s Matrix

BAT’s directors report the company’s commitment towards their stakeholders by complying with the SoBC (Standard of Business Conduct), safeguarding Human Rights, following the health-safety regulations, battling bribery and corruption, maintaining a responsible attitude towards the environment and promoting transparency with its employees. However, social issues that have been mentioned, like health concerns over the harmful effects of the products (even the potentially risk reduced ones), bribery-corruption allegations and child labour seem to negate to some extent the overall social responsibility of the company.

  • Corporate Governance

Due to scandals that erupted during the past decades with directors and CEOs abusing their power2, companies are now more careful about developing a good corporate governance (CG). The Cadbury Code (1992, s.2.5.) defined Corporate Governance as the “system by which companies are directed and controlled”, the responsibility of which ultimately lies with the company’s Board of Directors (BoD). After the acquisition of RAI, BAT is now subject to the US compliance obligations which are based on the Sarbanes and Oxley Act and the full compliance principle (rules-based approach).3 The CG of the company has been greatly improved due to the creation of the “Delivery with Integrity” programme, which fosters and monitors the necessary changes, while also supporting the current processes of compliance.

Having different people in the position of the CEO and Chairman is of the key points to emphasize on, along with the involvement of independent Non-Executive Directors (NEDs) and the presence of a diversified Board of Directors. BAT’s Board of Directors has managed to create a good CG that was among the top 5 in the UK in 2016, signalling transparency, effective Board management and financial performance [ CITATION CNB17 \l 1033 ]. Having a good CG can be very useful from a strategic point of view as it can increase the confidence level of investors. Had the situation been any different, BAT would have found it harder to raise finance and expand its operations, making the implementation of new strategies impossible.

SWOT Analysis

Appraising the organization at an external, internal and stakeholder level will act as a base for the development of a SWOT analysis, which will aid BAT determine its strategy by summarizing some of the key issues that have been identified.

Figure is Available in PDF Format

Figure 3: SWOT Analysis

Strategic Choice and Implementation

The SWOT analysis, despite being open to bias and the possibility of missing out key issues, aids the company in the development of possible strategies that it can adopt. According to Porter, there are only 3 strategies4 that a company can choose to obtain a competitive advantage:

  • Cost Leadership

  • Differentiation

  • Focus

BAT’s CEO Nicandro Durante stated that the company is shifting towards a differentiation strategy instead of focusing on low costs (cost leadership) due to the constant decline in the sales of traditional cigarettes [ CITATION Has17 \l 1033 ]. Setting a goal to double revenues from NGPs to £1bn in 2018 and £5bn to 2022, the development of NGPs (vapour products, tobacco heating products) will allow the company to introduce products that stand out with higher quality and reduced risk.

The differentiation strategy that BAT has selected for the foreseeable future has to meet certain criteria (SAF5). Firstly, the strategy is deemed suitable, as the company can rely on its strong brand name, its geographic diversification and its significant market share to overcome the problems of declining organic sales.

Then, the key stakeholders will most likely realize the long-run benefits of investing in a growing market and will accept the proposed strategy. Lastly, BAT’S positive cash flows, profitable state and capable workforce will make this strategy a feasible project to pursue.

Concisely, the use of the SAF model suggests that the differentiation strategy that BAT has opted for is a sensible choice for managers to proceed with.

Conclusion

In order to achieve sustainable growth, BAT’s top management has decided to focus its strategy on the development of potentially less harmful next-generation products (NGPs). This decision proved to be rewarding, as the company remained profitable and with positive cash flows in 2017. The SWOT analysis that was conducted in this study identifies Brand Name as one of the key strengths of BAT. To maintain this good reputation, the company must deal with any allegations or scandals swiftly and firmly. The major current issues concern bribing of officials in governments with less strict regulations on tobacco trading and of course the rampant of child labour. Although BAT’s CEO has already condemned these actions and promised full co-operation with authorities, the company should consider making a more impactful move. Another recommendation would be for BAT’s management to develop training programmes for staff regarding its policies on bribery, lobbying and children exploitation. Such an action would be:

  • Easy to perform

  • Beneficial to the image of the company once published

  • New employees will become aware of important company policies and implications

  • Top-management will highlight the company’s ethics by setting the right example

The last recommendation for BAT’S managers would be in regard to the company’s strategy. So far, the differentiation strategy that BAT has opted for seems to be paying off. However, statistics and surveys made in 2017, revealed that British companies had a turnover loss of approximately £255bn due to failed projects and strategies [ CITATION Bus17 \l 1033 ]. Therefore, it is crucial that managers do not get complacent, and that they constantly review the strategy’s progress and perform corrective actions. According to the same surveys, the main reasons that led to the failure of projects -thus being the areas of focus for managers- had to do with the lack of appropriate resources, the bad timing of implementing the chosen strategy or project and the setting of unrealistic timeframes.

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1 Political-Economic-Social-Technological-Environmental-Legal.

2 Robert Maxwell is a perfect example of an executive who abused his power and plundered the employees’ pension fund.

3 The rules-based approach requires full compliance with the legislation (US), whereas the principles based offers a “comply or explain” option (UK).

4 Porter also stated that companies might not fall into one of these categories. Then, they are “stuck in the middle” and a rival that follows one of these strategies will force them out of business.

5 Johnson and Scholes SAF model: Suitable-Acceptable-Feasible (Dickson-Greene, B. 2018)

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