International Business for British American Tobacco Finance Essay

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First and foremost, globalization is an enormously multifaceted fact and its area is very wide and random. It may be the interactive co-evolution of multiple technological, cultural, economic, institutional, social and environmental trends at all conceivable spatiotemporal scales. Globalization is also the system of communication among the countries of the world in order to develop the global economy. Actually, Globalization refers to the combination of economics and societies all over the world. It is not necessary there is just negatives views or points in the word globalization, it may be positive too, and it is no right or wrong when comes to globalization.

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“International Business for British American Tobacco Finance Essay”

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"Globalization is not a phenomenon. It is not just some passing trend. Today it is an overarching international system shaping the domestic politics and foreign relations of virtually every country, and we need to understand it as such" Thomas Friedman says that in his book "The Lexus and the Olive Tree"

Negatives integration

Negative integration, in fact is the breaking down of trade barriers, or maybe protective barriers such as tariffs and quotas.

Positive integration

On the other hand, globalization has brought some of the benefits to the whole world. It is easy to identify the changes that brought by globalization. For an example, improvement of international trade, technological progress, increasing influence of multinational companies, these are all the benefits that globalization carries out.

BAT as a multinational company

British American Tobacco Company (BAT) is established in the early 1902 through a joint venture between the UK Imperial Tobacco Company and the US American Tobacco Company, which the host country now is based on UK. BAT is considered multinational company because of the expanding of their business over 180 countries includes Asia pacific, Americas, Western and Eastern Europe, Africa, and Middle East. BAT is the second largest tobacco company in the world and the groups generates more than £2.9 million profits after tax and their current value is up to £80 billion USD.

Actual, potential impact of globalization that deal on BAT and the strategy to address the impact on BAT.

Pestle Analysis

Political factor

Illicit trade (impact on growth)

There is some of the factor may deal a great impact on BAT, such as the illicit trade. Because of the sudden and unequal excise increases and widening excise differentials between markets will lead to illicit trade. Ineffective regulatory environment, lack of law enforcement, and weak border controls will deal a great impact on BAT brand equity, and the Group investment in trade marketing and distribution will undermined. And illicit trade will make the groups have lower volumes and reduced profits. What Bat can do was to offer the Anti-Illicit Trade (AIT) teams. This team will be operating at global, regional, area and key market levels. Then, the group may have an active engagement with the key stakeholders. The group may have a global AIT strategy development that is supported by a research program to further the understanding of the problem in size and scope perspective. BAT will also have to form the AIT intelligence unit which includes a dedicated diagnostic laboratory, cooperates with law enforcement agencies in pursuit of priority targets and capacity of building. BAT would also need to carry out strong internal business and to have the customer approval policies.

Excise and tax (impact on growth)

BAT’s products which are the tobaccos are subject to heavy excise and sales taxes in most countries in which the Group operates. Most of these countries, taxes are generally increasing but the rate of increase varies between countries and between different types of tobacco products.

The UK government initiatives to heave revenues and increases advocated within the context of national health policies has deal a great impact for BAT. This action will leads to the consumers of the group reject the groups legitimate tax-paid products from illicit sources, and this will lower the sales volume or changes of sales mix. So, the excise and taxes will give confidence the illicit trade to be more happening. How do BAT address the risk is by formal pricing, excise strategies and emergency plans is required for the group companies in case of any significant changes of the excise and taxes. Annual review of the brand collection, brand health and equity would be needed too.

Economical factor

Liquidity risks, including capital structure and leverage (impact on productivity)

The slump in macroeconomic climate and the failure in financial system in global markets will deal an impact on the liquidity, access to cash and source of finance of the group. The fluctuation in interest rates due to the movements in international capital markets is also a cause in dealing an impact on BAT. The first impact is the increased in funding costs and BAT need to have the requirement to raise, issue equity or seek new sources of capital. Besides that, the causes will affect BAT inability to fund strategic opportunities and respond to the threats. Hence, it will affect the underperforming share price and erosion of shareholder values of BAT and this will deal a bad reputation on BAT. BAT might try to consider establishing and try to conservative the financing principles, which the group will target a minimum level of liquidity, a minimum average maturity for the total debt portfolio and a maximum allowable proportion of total debt maturing in any one year with the regular of reporting against those principles. BAT also targeted investment grade rating and keeps the cash flow spread across a wide banking group.

Economic crisis impact on secondary supply chain (impact on growth)

The collapse of economic environment in key geographic area and the trading partners in secondary supply chain lack of capital is one of the great impact will deal to BAT company. Such as, suffer from one-time loss of revenue led by the reduction in inventories within the secondary supply chain. Hence, it will also significantly increase the group’s bad debts and write-offs, and it will cause BAT to have supply disruptions which will cause the material consumer is out-of-stock. So, there is some strategy that BAT would took in place to resolve this phenomena. First of all, BAT will establish a route-to-market strategy, which is involving direct distribution to retails where can have an appropriate, and effective relationships among the distributors or wholesalers. BAT will also monitors the retail stocks, distributor’s inventories and re-ordering patterns, which is to identify the potential adverse trends. Strict adherence is required to trading terms and conditions.

Foreign exchange rate exposures (impact on productivity)

Another impact that will deal a heavy damage to the BAT, the exposures of foreign exchange rate for earning from the group’s global business, that from exchange rate movements against sterling, the group’s reporting currency, and the transactional foreign exchange rate exposures generated from underlying operations that is across the group’s global business due to the receipts and payments in the non-domestic currencies. This will cause a fluctuation in the translational foreign exchange rates of key currencies against the volatility in sterling, and the costs of operations, with a potential adverse impact on the financial performance. The activities of BAT to resolve the risk is all the debt and interest are matched to assets, and the cash flows to cut-down the volatility where possible. On the other hand, the transactional foreign exchange rate exposures from the group’s underlying operation will be hedged and monitored under the Bat defined policies, procedures and limits where by the hedging is not possible to review. While the translational foreign exchange exposure is not being hedged, the impact of it is identified in the results of presentations, and the disclosures of financial and earnings are restated at the constant rates for further comparability.

Management of cost base (impact on productivity)

Another economical factor which is the macroeconomic condition that lead to high inflation of key commodities such as the leaf, and wood, or a wage inflation, seriously deal great impact to the Group’s financial condition. The entire productivity program and on top of the market projects will not achieve the objective, because lack of arrangement and deficient resources. Unfinished, incompetent or uneven organizational changes will be the impact on the group. These factors will directly affect the product costs and salary costs increased, with the impact on the group profit and cash flows, inability to manage the cost savings will carry the company to lower profits and reduced funds for investment in the long-term growth. The ineffective structural changes confine the future growth potential and the increase of short-term cost base and the loss of business focus, hence, the investor will loss of confidence towards the group. BAT would to carry out some solutions like to have numerous sources of key commodities and development of new sources in low-cost countries, balancing the product stipulation and the production efficiencies in order to cut down the variable costs. In the high inflation areas, the increase of salary are staggered to mitigate impact, so BAT created a strategy, that is a program in place to achieve their costs savings of £800 million by 2012, and regular tracking of actual productivity savings and forecast improvements in operating margin and supply chain, overhead, indirect, and above market projects has been carried out. For 2009, their costs have been one of the performance measures for payments under the International administrative Incentive system.

Social Factor

Trading environment (impact on growth)

Due to the downturn in macroeconomic climate may reduce the consumer’s disposable incomes and lead to consumer down-trading. Thus, their competitors seek volume growth by price discount will also a cause to deal an impact on the group. The first potential impact on the groups is the price increases to cover the cost rises are not achieved as they targeted. The profit growth in short term will also falls below their shareholder’s expectations and the funds for investment in long-term growth will also reduce dramatically. Usual regional and organization reviews of budgeted pricing scenarios is also one of the strategy that can bring down on the impact, such as monitoring of the sales to see the changes in consumer purchasing decision, the develop a strong brand portfolios and the price war simulations also can be used by BAT for addressing the risk.

Trading performance in key markets (impact on growth)

In the social community, there are some causes such as the unpredicted behavior of consumer’s decision due to the lack of market insights, or the insufficient internal resources committed to develop, begin and sustain pioneering products. Incapability to detain development opportunities in individual markets and synergistic repayment from strong brand portfolio is one of the causes that affect the BAT trading performance in the key market. BAT will suffer from the decrease in market share and volume, revenue growth in the short term fails to meet shareholders’ hope, lessening in funds for venture in long-term growth and this will diminish the shareholder confidence in the aspect of the group’s growth thus will weaken the brand portfolio of BAT. BAT had established the innovations process and the strategy, by using standard tactic to address consumer surveys and brand value segmentation. Ordinary reviews of key markets, levels of investment, brand focal point; industry viewpoint and opponent movement will also help BAT to sustain their growth.

Technological factor

Disruption to the Group’s information technology systems (impact on productivity)

The global technology may be positive or negative to BAT, in the positive way, BAT may stay updated of latest news information of company’s that operates in different countries and the exchange of data from countries to countries. But on the other hand, technology might deal impact on BAT too, such as the losses of communications between countries cause of the internet line problem, or losses of operations in a major data centre in other country, or the exposure of the group’s privacy data due to hacking of information, or corrupted. The data corruption will directly manipulate in failure or delay in sales, the goods will unable to be shipped, and losses of email systems from all over the global, and the delays in meeting constitutional and internal reporting from other countries. This will strongly affect the reputation and legal accountability of BAT. In order not to have these problems again, information technology structural design based on recognized solutions from top suppliers is needed, with emergency plans in the event of counterparty malfunction. BAT would make sure that all critical financial and planning systems haves extra backup system and disaster recovery plans. An entrusted anti-virus protection is needed to place in BAT companies around the world, and a backup links is needed to in order for data centre and major sites to stay connected between each other with stern security and firewall defenses.

Environmental factor

Inability to obtain adequate supplies of leaf (impact on growth)

In UK itself, some of the environment factor may cause an impact on BAT’s supplies of leaf. Natural disasters, the climate changes, competition among different sector competitors for land use for other agricultural products is also a threads to BAT, which includes the government initiatives, that is to move away the farmers from plant farming tobacco. This would affect the group’s blend costs because the supply is getting lesser and lesser and because of this the quality of tobacco is getting worsen that will impact the consumers too. This situation will make the BAT lose their market shares in one, or more markets. This problem is a must to be resolve, there is strategies that can use by BAT, such as the global sourcing and global integrate management of leaf supply chain. Forecasting three years ahead of identifying and manage potential shortages with a contingency plans will help to reduce the impact too.

STRATEGY IN ACTION: INTENSIFICATION THE SUPPLY CHAIN GLOBAL LEAF POOL

One of the BAT strategy that is in the action, by increase their supply chain global leave pool, is launched during the year of 2007, and this had transformed the BAT leaf supply chain business as in it gives the global visibility of stocks from BAT, and it provide assured supply and the group has delivered significant financial benefits in 2008 and 2009 respectively. Thus, the global leaf pool is controlling the global movements of the group’s leaf supplier, which delivering stocks from 52 different ports to their factories among the global. This strategy is also benefited the group by improving their ability to choose the right quantity and quality of tobacco in the right places in order to achieve their growth requirements of their brand. Besides that, the global leaf pool strategy has focused in the efficiencies that allowed BAT to significant reduce the leaf stocks by the equivalent of 3 months saving hundreds of millions of pounds in their working capital. Besides that, the strategy has also enable them to alleviate the effect of a 30 per cent increase in the price of globally traded leaf and has helped to make sure that the overall boost in cost to their business for blended tobacco leaf have been much lower. In 2009, BAT had focused on consolidating this new business model, and enhances the way it uses the information technology, modification and more improving its organizational structure. Eventually, the global leaf pool strategy is responsible for the demand in planning and deployment of all their internationally traded tobacco leafs and for agreeing their domestic crop supplies.

Legal Factor

Loss of a smoking and health-related court case (impact on productivity)

The Group is implicated in a number of legal and regulatory court proceedings in many countries. These actions may be characterized as covering smoking, health issues and etc. New litigation is continuing to expose besides of the heavy excise and taxes has give BAT so much of trouble and the outcomes of legal and regulatory court events in a range of jurisdictions is also one of the causes that impact the group. The first impact that legal factor will deal on the BAT is the impact of material on mixing result of operations, financial ranking and the cash flows. A team, called the Strategic Litigation Team (SLT) is carrying the responsibility for directing and managing the litigation risk globally, with the cooperation of the groups companies assessing their litigation exposure to the SLT in relationship with detailed claims.

Regulation risks covering: packaging and labeling; advertising and promotion; design, contents and emissions of products; testing and measuring; public place smoking; and industry participation (impact on growth)

The adoption of differing regulatory regimes in different groups of countries and the strict regulations on the sales point and packaging is causes of giving some potential impact on the group. Such as the reduced ability to communicate brand portfolio and innovations, contributing to an increase in illicit trade and reduced consumer acceptability of new product specifications, leading to loss of volume. The group has regulatory strategies in place to identify the issues of material to their operating environment and develop plans so resolve them. Dependable with local law and Group policy, such as the commitment is required with scientific and narrow communities, and stakeholder engagement takes place globally, global monitoring of regulatory trends, developments and investigation of proposals to conclude impacts is well needed.

Conclusion

Sources: (https://www.corporateinformation.com/CompanySnapshot.aspx?cusip=C82690280)

Last but not least, as we can see the BAT earnings and dividends per share is increasing significantly year by year, despite the economical crisis that happens through the year 2008-2009, BAT managed to survive in the tobacco industry and their revenues keep on increasing is because of their amazing strategies to overcome every single situation that might impacted them with the forecast on the situation that will happen to their company so they can managed to have the emergency plans. I believe that the impact of globalization will be handling professionally by BAT and their earnings and dividends continue to increase in order to achieve the top company in the tobacco industry.

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International Business For British American Tobacco Finance Essay. (2017, Jun 26). Retrieved October 1, 2022 , from
https://studydriver.com/international-business-for-british-american-tobacco-finance-essay/

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