=BAT’s business structure and operations Essay Sample
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Introduction of TOPIC
BAT is the second most leading tobacco producer. It functions through 50 factories across 41 countries, producing 724 billion cigarettes per year. By having more than 250 brands, it posses strong market stance in respective regions and maintaining leadership in more than 50 markets amongst 180. About more than 5,500 billion cigarettes are being produced globally by the tobacco industries, 45% of the global market. According 2009, BAT has 13.0% of market share in comparison to China National Tobacco Co., Philip Morris International, Japan Tobacco International, Imperial Tobacco and others of 41.4%, 15.5%, 10.8%, 5.8% and 13.7% respectively. Due to advantage in multiple tasted brands, products’ demand is high and hence, key strength for BAT. Geographically Diversified
BAT has expanded its business geographically and hence established growth opportunities in global market by 50 factories scattered across 41 countries and have no operability dependencies between the regions. According 2010 figures, Eastern and Western Europe have 27.3% and 11.6% revenue respectively; Americas have 22.1%, Asia-Pacific of 23% and Africa & Middle East has 16% of revenue. Nevertheless, BAT does not refrain from developing its business opportunities into rising markets, like, China where number of smokers presents opportunity for its profit. Control over Tobacco Leaf
BAT, only international tobacco industry showing considerable interest in tobacco leaf processing and ensure adequate supply by covering about 254, 400 hectares under cultivation. The subsidiaries countries also have leaf-processing programmes including social responsibilities and agronomical support to the farmers. BAT works with about more than 250,000 of farmers across the world and most of them are directly contracted to supply two-thirds of leaf. They purchase only from reliable and sustainable sources and in 2009, they bought about 400,000 tons of tobacco leaf of which 80% was from sources in emerging countries. Weaknesses
Declining Operating Profitability
Over last 6 years, operating profit has declined from £3,763 million in 2004 to £2,624 million in 2005; however, there was a steady rise through next consecutives years of £3,572 million till 2008. Even though the profit from Asia-Pacific was £224 million from £1148 million, the market share and volumes has lowered because of illicit trade and sheer increment of excise. In America, profit has increased by £134 million to £1186 million while volumes were lowered by 6% at 151 billion. In Western Europe, profit rose by £234 million to £994 million, however, Poland, Switzerland, Netherlands, Scandinavia, Italy and Hungary were offset by turn down otherwise it would have been increased more by £119 million or 16% whereas, the volumes rose 6% to 130 billion. Profit in Eastern Europe has fallen by £59 million to £409 million due to lower volumes by 4% than previous year. Russi
a, Uzbekistan, Ukraine and Romania were mainly had lower performance. In Africa and Middle East, the
Revenue excluding duty, excise and various taxes, was £10,768 million during 2004 and has declined to £9,325 million in 2005, however, again rose to £9,762, £10,018 and £12,122 million in 2006, 2007 and 2008 respectively. In 2004, among 5 operating regions 3 has declined in revenues. America has a fall of 35.6%, Latin America 2.5% and Asia-Pacific by 4.6%. Falling of revenues has caused due to illicit trade, declining of volumes and deteriorating sales mix and hence huge losses in market share. Decreasing Operating Cash Flows
Cash flow has declined from operations of 14% from last year, i.e. £2677 million; this is an indication of poor cash management. The free cash flow was less by 10.4%, £2412 million, than last year. Due to loss, there is necessity in inclination of capital requirements. Opportunities
More educated people are aware of health risks and so products with less nicotine are in demand, which caused women smoking population to increase. BAT has established a strong market stance with light cigarettes under some of their popular brand and increased its sales volumes. Market Potential in China
Globally the production of cigarettes by the tobacco industries is more than 5,500 billion annually. About 40% of total are consumed by the Chinese smokers, i.e. around 2,200 billion of cigarettes. China has its state-owned industry, China National Tobacco, but still there is an increasing demand for other countries brands and for which BAT has a huge market opportunity. The Central Government of China permitted to invest for the production since 2004. BAT along with China Eastern Investments Corporation founded a factory where 100 billion of cigarettes are being manufactured annually. The business also distributes and sells its own products across China.
Rising Popularity of Smokeless Tobacco
BAT was first to introduce smokeless Swedish-style Snus, comparatively less harmful than cigarettes. Snus is such kind of innovations that facilitate to lessen influence of tobacco on community and has began its journey since 2005. Profit from snus in the global market is estimated around £2 billion in where America itself accounts for 65% then comes Sweden with £480 million. Other markets in South Africa, Pakistan, India, Algeria, Norway and European regions have tradition of strong smokeless tobacco and hence BAT growing opportunity.
Increasing Health Concerns
Due to smoking people face heart and respiratory problems and therefore the consumption of tobacco products are declining in huge numbers as people are getting conscious about their health. Even passive smokers often have certain ailments. Tobacco companies are often taken to court by people for disciplinary or compensation. BAT also encountered with such kind of incidences, which might be a major cause for declination of revenues. Competitor Strategies
Most leading tobacco producers are subject to pending legal actions, valued billions of dollars, whereas small producers are there as competitors as they are not entitled to any lawsuits. Such huge companies are required to reserve a considerable amount of their profits that they might need to pay in future for the damages by their products. On the other hand, small companies in together are taking advantages by offering quality products at lower price and hence getting hold of market share from conventional producers who, in order to keep company’s premium recognition, cannot make their product’s price lower a certain level. Contraband and Counterfeit Cigarettes
BAT also encountered with illicit trade and has undertaken some actions along with governments, The Group Business Leaders Alliance Against Counterfeiting, to raise political alertness and consequences of counterfeit. With such planned action BAT has encountered declination in growth volumes due to confine in the supply of duty-free items. About 15% of all the products in the market are likely to be contraband. During 2003, 19% of Benson & Hedges brand account of as illicit cigarettes in which 90% were faked. Also such counterfeit of the products can be seen in Eastern Europe and in Asia region. As these cigarettes are not being taxed, they are economical; hence, such contraband may drive away BAT’s potential consumers.