British American Tobacco: ailgnment between operating and business models
British American Tobacco’s alignment in its business and operating models have resulted in value creation for both its shareholders as well as for its customers.
TOM Challenge:
British American Tobacco
1. Did you choose the company as an example of effectiveness or ineffectiveness? Why?
I have selected British American Tobacco for being a company with great effectiveness in aligning its business and operating models. Though this is generally true, there are still caveats in the internal Marketing and Operations’ processes that could have an increase in both alignment, as well as greater speed-to-market activities.
2. Describe the company’s business and operating models. What is interesting about them?
Though a highly controversial industry, tobacco companies have a comprehensive supply chain that begins with a broad set of tobacco farmers and ends with the largest retailers in the different geographies they operate. Carrying a large burden of excise and ad valorem taxes (i.e. 60-70% across the European Union1), tobacco companies inherently possess the pressure to increase efficiency in their operating models in order to satisfy the markets they cater through their business models.
Business Model: British American Tobacco’s business model is to offer the highest quality cigarettes to adult smokers through a variety of products that cater the different consumer needs.
Operating Model: is to supply the legal and current demand of cigarettes with high-quality products in a responsive manner to consumer needs.
For the purpose of this analysis, I have selected three main items that are derived from both the business and operating model:
- Geographical consolidation of production facilities to decrease manufacturing costs while maintaining high-quality
- Responsiveness in the supply chain according to consumer demand
- Marketing insights for new product introductions in accordance to regulatory affairs
3. Do the models align and support each other? How? What specific features of the operating model are designed to create and sustain competitive advantage? What features of the business model leverage unique capabilities of its operating model? What are the implications for performance?
Both the operating and business model support each other across all departments of the company in the following key ideas:
- Geographical consolidation of production facilities to decrease manufacturing costs while maintaining high-quality
- Regional large facilities have begun to consolidate in larger more efficient production plants
- The Porto Alegre facility located in Brazil supplies over 15 markets in the South Hemisphere: this production plant has historically demonstrated highest rates of efficiency, machine utilization and speed, hence it is being utilized to produce the high-volume brands
- Likewise the production plant in Monterrey, Mexico supplies over 15 markets: this production plant has increased its CapEx and OpEx over the years, carrying state-of-the-art machinery and hence manufacturing more complex and premium products
- Machine manufacturers are included in the overall process of design of these manufacturing facilities: the timelines of product launches and specifications of the products are inputs that suppliers utilize when designing these machines
- Once a machine is ready for installation, the ramp-up process is carried out between the selected engineers of the supplier and of British American Tobacco
- The quality assurance process is a supply chain end-to-end analysis
- Quality at suppliers: given the context of strict government regulations and requirements for material approvals (equivalents of FDA), British American Tobacco has an extensive team of quality analysts that not only carry out statistical analysis in-house, but are also rotating to suppliers’ facilities to revise materials as they are being produced
- Quality at plant: heavy investments in quality machinery has been done across all the facilities. These quality detection instruments have been paired up with a statistical control system to stop production when product is outside of specification
- Quality at retailers: British American Tobacco’s sales force teams not only carry out selling routes, but they also revise that all product located in the point of sale follows quality specifications
- Regional large facilities have begun to consolidate in larger more efficient production plants
- Responsiveness in the supply chain according to consumer demand
- Large systems of inventory management, production planning, safety stocks, etc. have been implemented globally in a roll-out starting 2012: these processes follow carefully the movements of demand and have editable metrics of supply to ensure that production, material and quality planning are aligned to consumer demands, as well as cyclical movements, “shelf life” (time that tobacco products keep freshness once at retailers), etc.
- Quarter KPIs regarding out-of-stocks of products as well as materials are reported and monitored by the company’s local leadership team (also comprising of the Director of Operations and the Director of Marketing)
- Large systems of inventory management, production planning, safety stocks, etc. have been implemented globally in a roll-out starting 2012: these processes follow carefully the movements of demand and have editable metrics of supply to ensure that production, material and quality planning are aligned to consumer demands, as well as cyclical movements, “shelf life” (time that tobacco products keep freshness once at retailers), etc.
- Marketing insights for new product introductions in accordance to regulatory affairs
- In-house customer insights team carries out consumer understanding and preferences
- Quarterly meetings between Operations and Marketing are carried out to share these findings and what potential products could these insights lead to
- It is significantly important that the Operations team is present in these meetings, as their manufacturing and supplying skills help shape Marketing’s final decision
- Quarterly meetings between Operations and Marketing are carried out to share these findings and what potential products could these insights lead to
- Regulatory Affairs department remains present throughout ideation, production and launch processes to approve or disapprove products that could jeopardize regulation
- In-house customer insights team carries out consumer understanding and preferences
This alignment has increased British American Tobacco’s ability to effectively utilize internal tools and human capital to quickly respond to stricter regulation, faster consumer needs, greater responsiveness in a globalized scenario and one of the largest SKU offering across tobacco companies.
In terms of performance, British American Tobacco has consistently delivered value to its shareholders with an increase in stock price and a categorization of low-risk assessment by the US government2.
4. References
1. http://ec.europa.eu/taxation_customs/resources/documents/taxation/excise_duties/tobacco_products/rates/excise_duties-part_iii_tobacco_en.pdf
2. http://www.nasdaq.com/symbol/bti
Interesting post, Yendi! It’s a particularly unique industry because of all the constantly-evolving regulation and the common belief in the US that cigarettes will soon be a thing of the past. As a consumer, I wonder how responsive British-American and other tobacco companies will be in the future given that the 20 cigarette packet doesn’t seem to be evolving into anything new (except for the e-cigarette perhaps, but that’s not being produced by the big tobacco companies). I’d also be interested to see what parts of the supply chain that you described are most directly hurt by each additional regulation (e.g. the tobacco farmers, the factories, management, etc). And finally I wonder if these companies are in a prime position to start thinking of manufacturing and distributing Marijuana cigarettes now that those are gradually becoming legalized in many parts of the US and the world.