Introduction
The tobacco industry is witnessing a shift from traditional products to smokeless and healthy products. Such a development has compelled global firms to engage in innovative practices as they respond to dynamic shifts in customer preferences. The changes in demand and the impact of external environmental factors require that tobacco companies actively monitor their competitive environment to align their internal processes towards the shifts in market needs. Therefore, this report provides an external environment examination of Altria Group Incorporated and its immediate competitors in the tobacco industry using competitive analysis, partial SWOT, and external factor evaluation analysis.
Industry Analysis: Porter’s Five Forces
Porter’s Five Forces provide a market analysis of the tobacco industry, as shown below.
Threat of New Entrants
The global tobacco industry is prohibitive to new entrants. Arguably, the tobacco industry is a highly regulated sector (Levy et al., 2019, p.160), impeding the entry of new firms that could alter market prices by delivering low-cost products. For Altria Group, the threat of new entrants is low since industry consolidation and product concentration blocks the entry and operational viability of new firms (Team, 2015, para. 3). Consequently, the threat of new entrants’ proliferation does not affect Altria’s pricing power, allowing it to enjoy its current profit margins while offering premium dividends on shares.
Bargaining Power of Suppliers
The companies in the tobacco industry rely on farmers to supply dried tobacco leaves. Such reliance on farmers could imply that they may have high bargaining power as significant industry players. However, as reported by Team (2015, para. 5), the tobacco suppliers chain is a free market with many players, substantially reducing the farmers’ bargaining power. For Altria, the bargaining power of suppliers is low to moderate. However, contracting farmers and farmers other leaf merchants will become an invaluable company resource that could become rare and non-substitutable (Priem & Butler, 2001, p.25). The initiative will offer the company some degree of competitive advantage, though they are not entirely inimitable.
Bargaining Power of Buyers
The industry buyers do not have control over tobacco purchasing power. Ideally, tobacco products are addictive, making their demand inelastic (Team, 2015, para. 7). The lack of elasticity in product demands implies that Altria’s buyers have a low bargaining power, allowing the company to charge premium or supra-premium product prices without necessarily noticing a downward demand trend. As a result, market price calculations are determined by Altria and other dominant market players.
Threats of Substitutes
Substitutes usually arise when the market has many players, and market dynamics embody elastic demand. Levy et al. (2019) claim that the tobacco industry has limited players that compete through consolidation and concentration (pp. 163-166). However, given that tobacco has nicotine, users can still satisfy their nicotine needs through over-the-counter products that contain nicotine (Team, 2015, para. 9). This construct means that Altria experiences a low to moderate threat of substitutes that can be traded off by consolidation and product concentration.
Competitive Rivalry
The tobacco industry is highly competitive as firms struggle for market share. Such a competition is manageable through consolidation and product concentration. Levy et al. (2019, p. 165) acknowledge that firms in the tobacco industry have relatively homogenous products with price-insensitive customers that show significant brand loyalty meaning that firms use their resources and capabilities to make products or otherwise add value and exchange products for money differentiates competition (Valentine, 2001, p. 56), leading to market competitiveness. Therefore, Altria experiences a moderate to high competitive rivalry in the industry.
Competitive Analysis
Competitors
British American Tobacco, Altria Group, Japan Tobacco Inc., and Philip Morris International are some of the industry’s global competitors. Fior Markets (2020, par. 2) explains that these companies produce and market tobacco, cigarettes, and related products globally, making them Altria’s immediate competitors.
Altria Group Incorporated
Altria Group has “Marlboro” as its leading cigarette brand, with other brands being “Parliament,” “Nat Sherman,” and “Black & Mild. Its smokeless products are “Copenhagen,” “Skoal,” “Red Seal,” “Husky,” and “On!” oral nicotine pouches. The company’s innovative tobacco products include the electronically heated “IQOS” and the e-vapor “JUUL,” among other assortments. The company derives its value from consolidation and product concentration that targets high-end, middle-income segments, youths, and health-conscious consumers.
British American Tobacco
Like Altria Group Incorporated, British American Tobacco (BAT) increases its market share through consolidation, affording the company some value in the industry. Some of the company’s best-known brands are “Dunhill,” “Newport,” “Vogue,” “Kent,” and “Lucky Strike”. Smokeless products offered by the BAT range from “Vype” to “Glo.” The company targets are diverse, ranging from high economy consumers to low-end users and health-conscious users.
Philip Morris International
Philip Morris was the principal maker of “Marlboro” before splitting from Philip Morris USA that is currently under Altria. The company’s products include “Fortune,” Sampoerna, and Dji Sam Soe, with “IQOS,” “TEEPS,” and “STEEM,” being the company’s innovator smokeless product marketed by Altria in the US. Philip Morris targets high and low-end users through its premium and discounted pricing. However, its philosophy of a smoke-free future aligns with health-conscious targets that desire smoking cessation.
Japan Tobacco Incorporated
Japan Tobacco Incorporated follows the operational portfolio of Altria and British American Tobacco that grow through consolidation and product concentration as a strategic survival in the industry. The company’s top brand is “Winston”. Other global brands include “Sobranie,” “Camel,” “Mevius,” and “LD”. Notably, “Ploom” and “Logic” are some of the company’s smokeless products. The firm targets are high-end and middle-income cigarette smokers, with its smokeless products focusing on health-conscious segments.
Key Success Factors for the Tobacco Industry
Financial Positioning
Financial resources are vital in consolidation and product concentration because the company acquires a larger market share by capturing a competitor’s customer’s rate of usage (Pierce II, 1982, p. 24). Therefore, finance is a critical organizational resource that allows firms to make products or otherwise add value to facilitate exchanging products for money (Valentine, 2001, p. 56).
Innovation Positioning
Tobacco products are mostly homogenous, which necessitates innovator brands that meet dynamic customer needs. The shift from smokeable to smokeless and health-conscious innovator brands represents the miniaturization of cigarettes as the initial attached value to smoking diminishes (Valentine, 2001, p. 59). The innovator brands consent that value, rarity, and non-substitutability create a competitive advantage in the market (Priem & Butler, 2001, p. 25), as competitor rivalry intensifies.
Broad Range of Product Portfolio
Customers in the tobacco industry have diverse and dynamic demands, necessitating consolidation, and product concentration. Firms undertake these initiatives as they move away from their product-saturated markets into less saturated markets to offer variety to their customers (Pearce II & Harvey, 1990, p. 63).
Diversified Supplier Portfolio
Tobacco companies rely on farmers for the supply of dried leaves. Given that all the tobacco firms rely on farmers for raw material supplies contracting specific farmers or groups create value, rarity, and non-substitutability in the contractual period’s product supplies (Priem & Butler, 2001, p. 25). Diversifying the suppliers to include leaf merchants reduces supplier bargaining power and increases profitability.
Distribution Channels
The tobacco industry sells its product through wholesalers and retailers. However, these third parties can raise distribution and wholesaling costs making the tobacco products marginally expensive compared to what customers can afford because of homogeneity (Levy et al., 2019, p. 165). Since distribution channels are crucial resources, having a degree of control lowers product costs.
Brand Loyalty
The tobacco industry appears to place some undue weight on certain tobacco brands. Team (2015, par. 7) highlights that the tobacco market is inelastic and pervaded by brand loyalty, meaning that customers trust old brands than new ones, ideating the notion of a brand as a rare, non-substitutable and inimitable (Priem & Butler, 2001, p. 25), and affording market competitiveness.
Brand Consolidation
Firms in the tobacco industry survive and obtain value through consolidation. Arguably, the industry has tight regulations, an occurrence that requires continuous diversification for business success occasioned by the need to attract competitor customers and minimize risks (Pearce II, 1982, p. 24). Ideally, firms with the most consolidation have a vast market share that translates to a more competitive advantage over other players.
Customer Service Management
The tobacco industry, like other markets, thrives on adequate customer management. Responding to customer needs through product innovation and liberal supply chains helps firms to become competitive. The development of health-conscious innovator products is a response to customer needs by tobacco companies.
Competitive Profile Matrix
Table 1. A Competitive Profile Matrix for the Tobacco Industry.
Colum on Critical Success Factors adapted from Team (2015) and Individual Company Websites online.
Columns on Weighting and Rating Adapted from Team (2015), Levy et al. (2019) and Individual company websites online.
An explanation for the Competitive Profile Matrix
Given the current environment where tobacco industry customers are demanding health-conscious and innovative products, Philip Morris International has a better chance of succeeding than the other three competitors. Arguably, Altria needs to shift its product portfolio towards futuristic smokeless products to remain competitive.
Partial SWOT Analysis
Table 2. A Partial SWOT Analysis of the Tobacco Industry.
Information on Industry partial SWOT (OT) adapted from Levy et al. (2019), Team (2015), Individual company websites online and Fior Markets (2020).
OT Analysis
The opportunities available for the tobacco industry allow Altria and its immediate competitors to anchor their mission and vision statements towards recognizing and exploiting those opportunities for competitiveness, growth, and survival. The need for health-conscious tobacco products miniaturizes traditional cigarettes and cigars (Valentine, 2001, p. 59). With technology, Altria can leverage innovation to overcome aggressive consolidation and product concentration from competitors and a volatile economic environment.
External Factor Evaluation Analysis
Table 3. External Factor Evaluation Matrix for the Tobacco Industry.
Column on Weighting and Ranking adapted from Team (2015), Levy et al. (2019), Valentine (2001), and individual company websites online
Discussion of External Factor Evaluation
Since the tobacco industry firms operate internationally, they encounter political, economic, and practical factors that affect their trade. The economic factors rank topmost because they directly affect client purchasing power and create significant threats (Dubvraska & Sira, 2015, p. 1211). New technology ranks second on the opportunity list because it helps create rare, non-substitutable, and inimitable brands of value (Priem &Butler, 2001, p. 25). Nonetheless, the weighted score of 2.38 means that the company is relatively above average in responding to external factors.
Conclusion
The external environment is crucial in the performance of a business. An external environment analysis helps establish whether the company can adequately handle the dynamic changes in its external environment for survival, growth, and competitive advantage. The global tobacco industry faces significant shifts in demand from traditional offerings to health-conscious products as the market responds to public health campaigns on healthy living. Therefore, tobacco firms must look for a new product portfolio that resonates with future demands of smokeless and healthy products if they need to maintain their profit margins.
References
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Fior Markets. (2020). Global tobacco market is expected to reach USD 934.5 billion by 2026: Fior Markets. Web.
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Valentin, E. K. (2001). Swot analysis from a resource-based view. Journal of Marketing Theory and Practice, 9(2), 54-69. Web.