SWOT analysis of Imperial Tobacco

The existence of high exit costs, in the form of non-transferable fixed assets, such as manufacturing plants and cigarette rolling machinery means that the large players in the tobacco industry will compete fiercely to maintain their market share and would likely remain in the market, even if profit levels are low.

2. High exit-costs work in favour of Imperial Tobacco in that they deter potential new entrants from entering the market. Imperial Tobacco has grown to an extent that it now benefits from economies of scale, whereby they have been able to invest in an automated internal supply chain, thus increasing their efficiency and production rate. As is stated on their website; “our investment in product design and innovative processing techniques continues to make us one of the world’s lowest cost producers of tobacco products.” For a new entrant to be able to survive in the tobacco industry, they must be able to provide a wide range of tobacco products. Such economies of scope from the Imperial Tobacco Group make it difficult for new entrants to enter the market and compete.

3. As with all businesses, the Imperial Tobacco Group depends on suppliers to some extent. The main suppliers to Imperial Tobacco are tobacco cultivators, although the group relies on other non-tobacco supplies, including polypropylene film, aluminium foil and filter rods. On their website, the Imperial Tobacco Group states that they “source [raw tobacco] from over 40 countries, including Brazil, China, India, EU member states and Tanzania, purchasing around 140,000 tonnes in 2007”. Though no substitute exists for the product that tobacco farmers supply, the abundance of suppliers of tobacco leaves (as is indicated by the above statement) results in the relative bargaining power of individual suppliers being low. The Imperial Tobacco Group can switch easily from one supplier to another, at a low cost. Since most suppliers come from poor, agricultural lands, suppliers are in large part heavily dependent on the custom of large tobacco companies to survive, thus reducing their bargaining power.

In recent years, Imperial Tobacco has engaged in a strategy of ‘tapered vertical integration’, thereby partially integrated the company with earlier production stages; growing tobacco, providing agronomy assistance, technical support and training in places such as Morocco, Laos and Madagascar. By doing this, Imperial Tobacco is able to use the threat of growing more tobacco itself to ensure that independent suppliers do not exploit their supply position, thus further reducing their bargaining power.

 

4. Buyers of tobacco products include supermarket retailers, wholesalers and local grocers. Larger supermarket retailers such as Tesco, Asda or Sainsbury’s, which sell a large portion of total sales of tobacco products in the UK, may be able to exert more buyer power than smaller retailers. The ban on advertisements of tobacco products (which makes it harder for Imperial Tobacco to differentiate its products) makes it is easier for powerful purchasing companies to switch to a suitable alternative product from another supplier. However, since it is difficult for a purchasing company to start cultivating tobacco themselves and since the costs of setting up cigarette-rolling machines and factories are high, a buying company cannot easily perform backward integration, to become their own supplier. Therefore by definition, the buying company will always be dependent on the tobacco manufacturers.

5. The threat of substitutes to the products of Imperial Tobacco is low but includes products such as nicotine gum, denicotinized cigarettes and nicotine patches. Fortunately for the tobacco industry, purchasing companies do not promote these items as alternatives to tobacco and therefore they do not pose a threat to this industry.

Further strategic assessment of the Imperial Tobacco Group can be done via a PEST analysis.

Political factors affecting the group include the anti-smoking campaign promoted by the British government, resulting from the link between smoking-rates and lung cancer. The government, alongside the NHS, has brought forward a number of initiatives to encourage smokers to quit smoking, such as ‘the Together Program’ and ‘the NHS Stop Smoking Services.’ Following successful implementation in Scotland, the ‘Smoking Ban’ was extended into England and Wales, thus meaning that as of July 2007, “smoking [is] no longer permitted in any enclosed or substantially enclosed premises or vehicles that [is] open to the public including pubs, restaurants and all places of work.”  As a result of these initiatives to discourage smoking, it has become increasingly difficult for Imperial Tobacco to expand business activities within the UK market, leading the group to concentrate efforts on expanding into emerging markets where there is less regulation. 

Economic factors affecting the Imperial Tobacco Group include the current economic downturn. Recent GDP figures in the UK economy have shown a sixth consecutive quarter of negative growth, meaning that consumers have less disposable income. However the addictive properties of nicotine, which lead to dependence on the drug by users, results in Imperial Tobacco facing a highly inelastic demand curve for their products. Therefore it is unlikely that the current economic downturn will lead to a significant loss in sales.

Social factors affecting Imperial Tobacco have changed significantly over the course of the company’s history. In the early-half of the 20th century, it was estimated that 80% of British men were regular smokers. Habits of smoking were often glamorised and as is stated in the Britannica Encyclopaedia: “smoking was an acceptable form of social behaviour in all areas of life—at work, in the home, in bars, and at the cinema.”  Following research done by Richard Doll, in the British Medical Journal in 1950, showing evidence of correlation between smoking and lung-cancer rates, attitudes towards smoking began to change. Nowadays there is increased awareness of the adverse health-risks of smoking, including vascular stenosis, heart attacks and birth defects, leading to an overall decline in smoking rates.

  Technological innovations have also impacted Imperial Tobacco. Advancements in technology for cigarette production mean that the production of cigarettes has become a highly automated process.  Whereas once the process of rolling cigarettes, inserting filters and packaging was done with human supervision, modern advancements mean that 14,000 cigarettes can be produced per minute and the processes of rolling cigarette paper and packaging are done quickly via machines. The large scale usage of this machinery has lowered unit-costs for Imperial Tobacco.

Imperial Tobacco faces a changing business environment. Threats to the business in the immediate future include current proposals being considered by Parliament to ban the display of tobacco products in retail outlets, which would make it even more difficult for Imperial Tobacco to promote its brand. In addition, there is currently debate amongst policy-makers to extend the ban on the sale of tobacco-products from persons under 16 to persons under 18, which would further reduce Imperial Tobacco’s declining UK market.

In the short term future, Imperial Tobacco’s strategy should be to increase investment in technology, to further simplify the cigarette-production process and reduce costs to compensate for the effect of indirect taxation by government.  In order to offset the decline in market volumes amongst Western markets, in the next few years Imperial Tobacco must set out the framework to shift its resources towards expanding its business within the emerging markets of Asia and Eastern Europe, where market volumes are growing and where there are considerable opportunities to develop their brand-name ahead of their competitors.

Bibliography

Imperial Tobacco PLC,

Action on Smoking and Health, ‘The Tobacco Industry Fact Sheet,’  http://old.ash.org.uk/html/factsheets/html/fact18.html

DirectGov ‘Smoking-Health and Well Being’

NoSmokingBan.co.uk ‘English Smoking Ban’

Nic Fildes, ‘Smoking Ban Sends Imperial on Foreign Mission,’

Fiona Briggs, ‘Imperial Tobacco Slams Display Ban’ http://www.talkingretail.com/news/industry-news/9205-imperial-tobacco-slams-display-ban.html

Richard Fletcher, ‘OFT Accuses Tobacco Companies and Retailers of Colluding on Cigarette Prices,’

Britannica Online, ‘Smoking,’

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