Measuring market orientation of Muscle Pharm Corp. (MSLP:US) British American Tobacco South Africa | Page 11

British American Tobacco South Africa: Evaluating the role and substance of its strategy in achieving sustainable competitive advantage

Weaknesses

According to O’Reilly (2014) more than £160mn was spent on R&D in 2013, the majority of which was
spent on new innovations within the US and European market. Consequently, there is hardly any
product innovation taking place within BATSA. BATSA faces many challenges that emerge from the
external environment. For example, the exercise tax was recently raised to 52% within South Africa; the
tax structure might negatively impact the volume of consumption of cigarettes. The reason for this is that
the price elasticity of demand in South Africa is more sensitive than in developed countries - the result is
decreasing future operating profitability. Moreover, the market share and volumes might have
decreased due to illicit trade which is growing significantly therefore impacting their profit as well
(Langeni, 2013)

2.5.1

Challenges and strategic reaction for future prospects

The SA tobacco industry is heavily regulated and faces major challenges such as increased
government legislation, high tax, and marketing restrictions. BATSA faces strong regulation issues
particularly with regards to the actual product; packaging; farming and consumer communication.
Rolling issues are display bans, health warnings, youth smoking prevention, plain packaging and leaf
growing restrictions as well as emerging issues of nicotine and toxicants reduction. Measures such as
retail display bans and sudden increases in excise rates can distort competition among tobacco
companies which creates high switching costs as consumers will opt for the cheaper illegally trafficked
cigerettes. BATSA has introduced numerous internal policies in response to external pressures to
achieve sustainable growth including Corporate Social Responsibility, Corporate Governance, Health
Care issues from governments, environment and carbon dioxide emission (BAT, 2013a). The high tax
rate was a result of the increased illicit trade to 29% if cigarettes sold in South Africa. This caused a loss
of approximately 29bn cigarettes resulting in a potential loss of R22 billion causing a shrinking demand
of the legal tobacco market of -3% (Zaldua, 2014). BATSA strategic reaction in terms of shrinking
demand is the offering of a wider range of products to a more diverse consumer base (different
segments). In terms of illicit trade, BATSA follows the strategy of the introduction of key product
characteristics and investment to create even stronger brands (BAT, 2014).