Measuring market orientation of Muscle Pharm Corp. (MSLP:US) British American Tobacco South Africa | Page 5

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

1.1.

Understanding the tobacco business & value creation channel in South Africa

Before starting the critical strategic analysis of BATSA, it is crucial to understand the nature of the
tobacco business and the market structure within South Africa. The key points are as follows
(Euromonitor, 2012; Steyn, 2012; Sanit, 2002; Vontobel, 2013): (1) Tobacco products are the most
heavily taxed consumer good in the world, with an exercise tax of 52% in South Africa, exceeding half of
the retail price. (2) Taxes aim to reduce consumption and internalizing the negative externalities.
However, smoking is very addictive and therefore every 10% increase in price will only result in a
reduction of 2.5% to 5% of smokers (inelastic demand). (3) BATSA is the market leader and first mover
through market share and controlling factors of production and therefore the market structure in SA can
best be described as a Stackelberg oligopoly. (4) Government income from tobacco in 2012 was R12
billion representing an increase of more than 900% over the last 20 years. (5) 7.7 million adult smokers
in SA, which consume 11.4 cigarettes a day. (6) Total demand from SA smokers is 87 million cigarettes
a day, 29 billion cigarettes a year respectively resulting in an annual revenue of over R22 billion for
BATSA. (7) BATSA’s production factory in Heidelberg is the only production factory in SA and produces
around 26 billion cigarettes each year including some for export. (8) In SA, 29% of the consumed
cigarettes are from illicit trading (counterfeit, smuggling and undeclared or taxes evaded). (9) BAT
produces 245 billion cigarettes in Europe, Middle-East and Africa (EMEA) region while allocating 9% or
19 billion sticks for the South African market. (10) Competitors in SA are Japan International Tobacco
(2%) and Philip Morris International (2%) importing or producing their supply over BATSA owned
Heidelberg production facility. (11) According to the BAT annual report 2012, the costs to produce one
cigarette is 4.96 British pennies or 8.9 ZAR which implies a gross margin of over 78% per unit.
As this assignment will focus on how strategic management is performed within BATSA, the analysis of
the external environment & changes within external environment will be minimized to factors that have a
significant relevance in the execution of BATSA’s strategy and might have significant impact on its future
performance.