Magoosh GRE

Order winners and qualifiers: A case study of British American Tobacco plc.

| April 6, 2015

1. Introduction

The concept of order winners and qualifiers

In the current market climate and competition, companies are continuously challenged on how to serve its customers better in terms of achieving lower cost to serve which leads to lower price, improving quality, product design, delivery speed, reliability and on-time delivery – while continuing to innovate. Competing on all dimensions simultaneously will be very tough and requires a lot of investment from the companies; hence they need a sense of direction and focus in deriving their competitive advantage in the marketplace.

Order qualifiers are the minimum criteria that have to be included in the product or service in order to be considered in the marketplace. Order winners are any additional feature that sets the product or service apart and influences the customer’s final decision to purchase (Aitken, Childerhouse, Christopher, & Towill, 2005). Order winners and qualifiers change over time, they are dynamic in nature. As competitor catches up, the current order winner moves into order qualifier. This can also occur when customer expectation or taste change.

A research brought to light the importance of understanding order winning strategies. It emphasizes that a fit between marketing and manufacturing – i.e. alignment between order winning strategies and integration – are crucial for any company to be and stay competitive (Quesada, Rachamadugu, Gonzalez, & Martinez, 2008).

Report objectives

Using the example of British American Tobacco (BAT), this report aims to apply the theory of order winners and qualifiers to identify the key candidate of BAT’s order winners and qualifiers. In addition, recommendations of ways for BAT to improve its order winners/qualifiers and deliver the improvements will also be discussed, together with the potential implications of delivering the improved level of order winners/qualifiers to BAT’s supply chain.

Research methods and sources

The main research is conducted through secondary research, with information gathered from databases such as EBSCO and ProQuest, and also news and articles available on the web. EBSCO covers journals such as Academy of Management Journal, British Journal of Management and Journal of Business & Management. ProQuest covers business journals, trade magazines and news sources, such as International Journal of Management, MIT Sloan Management Review and Risk Management. Key business magazines and news titles are also covered in ProQuest. Some information is also gathered through the primary source, i.e. British American Tobacco’s websites and publications.

There are no ethical issues that arose during the information gathering.

2. Case study: British American Tobacco

Company background

In 1902, British American Tobacco was created, merging Imperial Tobacco and American Tobacco. BAT continued its geographical expansions until the 1960s and BAT acquired non-tobacco businesses such as Saks and Argos, due to increasing fear that the health concerns over smoking will restrict the cigarette industry, and renamed itself as BAT Industries. However it sold its retail operations in 1989, keeping only its tobacco and financial services. BAT Industries strengthen its premium brands segment by acquiring Rothmans International, owner of the brands Rothmans and Dunhill. In 1998 BAT Industries spun off the tobacco operations as British American Tobacco and merged the financial services operations with Zurich Insurance (Zerio, Benitez, Areas, Dokianos, & Satpute, 2004).

There are c. 5,400 billion cigarettes produced globally, with China as the biggest single market. The tobacco industry in China is state-owned, with close to 40% of its population smokes which represents more than 40% of the global total. The top for international tobacco companies, Philip Morris International, British American Tobacco, Japan Tobacco and Imperial Tobacco, hold c. 45% of the global tobacco industry, approximately 3/4 of the market, excluding China (British American Tobacco, 2010).

In 2010, British America Tobacco plc. has a gross turnover of £43.8 billion with revenue of £14.9 billion and operational profit of £4.3 billion. The company is listed in the London Stock Exchange (ticker: BATS), trading at £28.99 a share, with £57.24 billion market capitalization (Google, 2011).

What is the current BAT’s order winner and qualifiers?

Order winners – cost and speed

It is important to achieve high and efficient utilisation of resources and short delivery times. To achieve these, various methods of operations can be employed, such as MTS (make to stock) manufacturing, mass production and multiple lines of operations with shared resources (van der Vaart & van Donk, 2006). To achieve high speed and low cost, economies of scale oriented technologies is employed, to be able to produce large batches at a high speed.

The management of lead time can be a competitive advantage (Villareal & Salido, 2009). An improved lead time means faster time to market, gaining the first mover advantage on new products and innovations. Lead time reduction strategies are responses to logistical problems in the areas of procurement, manufacturing and distribution.

BAT did away with locally managed procurement and distribution, moving the functions into the regional level. To minimize complexity of its management structures, the company recently reduced its regions from five to four. This move has also helped BAT in achieving a more balanced scale of its regions. With regional management of materials and transport, BAT gains advantage in volume consolidation and better management of inventories. Through the above market procurement model, BAT is benefited from supplier-led innovation. It has also improved internal service level and led to improved quality products.

In addition BAT also practices postponement in its production. The concept of late configuration or postponement is not new – it involves personalisation at the very last moment possible. Postponement allows companies to be flexible and act as a buffer to any changes in demand. It also enables companies to optimise its production runs and shorten lead time. BAT looks at both internal and external postponement, continuously working closely with its key strategic suppliers to jointly improve processes.

Order qualifiers – availability

In the harsh and competitive marketplace, there is little brand loyalty. Due to this product availability is crucial in capturing market share. Improvement in visibility of demand along the supply chain help BAT in ensuring its products are available at the right place on the right time and in the right quantity. In addition to getting real time demand from its end markets, BAT also shares this information with its suppliers and continues to build a close and trusting relationships with the key entities in its supply chain. Internally, BAT established common processes and systems and now have global transparency of demand and supply. This has enabled faster decision-making on innovations, as well as more productive investment and sourcing decisions.

How can BAT improve and deliver its order winners/qualifiers?

Market trend study indicates that there will be fewer cigarettes consumed by smokers and there will also be a smaller percentage of smokers compared to the population size. However, this decline in the percentage of smokers will be offset by the increase in the number of adults in the world over the age of 20 (British American Tobacco, 2011). The growth in population of adults over the age of 20 is forecasted to grow by c. 11% over the next ten years. This is also supported by the forecast released by World Health Organisation, which indicates that there will be an increase in the number of smokers in 2050 as compared to today.

The key word in capturing the market is innovation. This applies to both operational, product and marketing.

Operational innovation

Taxes will continue to rise, making cost to produce even more crucial in the future. In order to keep cost down, BAT will need to segment its products and put more focus on strategic products. The segmentation can be done based on market share, product total sales value or profit margins, and can use methods such as ABC or Pareto 80/20 rule. In its Annual Report 2010, BAT is on the right track in reducing costs, reporting productivity savings in the supply chain, general overheads and indirect costs of £327 million in 2010 and achieved an overall operating margin increase from 31.4 to 33.5 per cent (British American Tobacco, 2010).

BAT will also need to continue optimising their cigarette production footprint. Over the last 10 years they have been focusing on this and they have reduced the number of factories from 87 to 45, including acquisitions. In 2010, BAT ceased production in five locations around the globe, and they have to continue to assess excess capacity and ensure that the factories are serving an optimised number of markets (British American Tobacco, 2010).

Recently the company reconfigured its European supply chain and it has helped the company saved €500 million across the region. The supply chain reconfiguration also helped BAT to increase its service levels and reduce its working capital (Godsell, Birtwistle, & van Hoek, 2010). The company needs to move into planning on a global level and one crucial improvement to enhance its ability to do this is a single ERP instance. This will enable visibility across all markets and standardise the way the regions work across the globe.

Product innovation

The focus on making products that meet customer taste and preferences needs to be enhanced. Understanding the different profiles of its consumers is crucial. BAT needs to continue its efforts in gathering insights to their customers’ wants and needs. In addition, the company also needs to understand their customers’ buying behaviour. Based on this information, invest in product developments that will meet customers’ preferences and purchasing patterns. BAT’s current product innovations such as menthol capsules contained in filters have been well received by the market (e.g. Click & Roll helped to deliver 2% total organic volume growth for Lucky Strike globally and its share reached record levels in a number of key markets), and such innovations have to continue in the future.

Marketing innovation

Graphic health warning on cigarette packs will continue to be enforced. Due to this, BAT has to improve its marketing effort to ensure that even though the space left on packs diminishes due to the size increase of graphic health warning, the company still can distinguish their products from those of its competitors.

Continued investment in packaging and product innovations is important to generate consumer interest and meet their preferences. Current packaging innovations include Dunhill Reloc (the re-sealable pack that keeps the contents fresher) and waterproof packs

Clearer product differentiation through marketing is also crucial, to make customers aware of the differences between various BAT brands, e.g. Dunhill is its most prestigious brand, Kent is its innovative brand, while Lucky Strike aimed towards the under-30 market and Pall Mall is its value-for-money brand.

What is the potential implication on BAT’s supply chain?

In the tough economic situation, the key to be competitive and improve business performance is supply chain integration. This integration encompasses various elements, such as customer, manufacturing, distribution and purchasing (Quesada, Rachamadugu, Gonzalez, & Martinez, 2008).

Two main competitive advantages can be achieved through supply chain integration firms. First, the integrated supply chain results in a more responsive company, enabling it to respond to volatile demand pattern. This improved ability to respond is due to the increased visibility of information and knowledge sharing among firms. Second, the integrated companies will have the possibility of reducing their net cost of doing business and eventually their total delivered cost to their end customers.

Both “lean” and “agile” supply chain has to be employed in order to improve customer service and market responsiveness. “Lean” means developing a supply chain which eliminates all waste and enabling a level production. “Agile” means flexibility in using the market knowledge to exploit opportunities in the volatile marketplace. The figure below suggests that if lead time is the order winner, the supply chain focus should be on agility, and if price is the order winner, the focus should be on lean supply chain.

price

 

Figure 2.1 Order winners and market qualifiers as determinants of supply chain focus
(Mason-Jones, Naylor, & Towill, 2000)

The challenge for BAT would be to do both lean and agile equally well, employing lean methods for stable products and agile methods for slow movers and new products. There is a sense that lean precedes agile (Christopher & Towill, 2001), as in order to be agile companies need to have a comprehensive understanding of its current processes, which is a pre-requisite of being lean. Hence it is important that BAT builds on its lean knowledge base, to exploit it further to enable performance improvements which include building the company’s agility.

BAT will need to align itself with high-quality suppliers, which can support both lean and agile focus. Upstream supply chain integration, i.e. integrating the firm with its suppliers, emphasizes effective integration with suppliers as a key factor for achieving competitive advantage. Integration with supplier will give the company the benefit of reduced time to market, reduced costs, reduced quality issues and improved customer satisfaction. These benefits are crucial in new product development.

On the other hand, BAT will also need to integrate with its customers (downstream supply chain integration). Downstream supply chain integration is emphasized by the new strategies and technologies that are focused on the customers, enabling a closer relationship between customer and supplier. Such technology is customer relationship management (CRM). A “customer-centric” supply chain is important to BAT in order to respond to different needs of different customers in a customized way. In the future, the ability to design and manage multiple operational strategies will be a requirement for all companies to compete (Aitken, Childerhouse, Christopher, & Towill, 2005). Suitable operational strategies are to be selected based on demand-based information, e.g. real time POS (point of sale) information, continuous replenishment, information received through EDI and collaborative forecasting and planning. These strategies are to be used to service specific product or market (Morash, 2001).

With increased innovation, another challenge would be to find a way to balance the effort to meet the needs of various market segments while at the same time managing its wide product portfolio. With a product portfolio ranging from standard products that have predictable / consistent demand to highly customised products with difficult to predict demand. Wide range of products normally caused an increase in complexity. The complexity will require a greater flexibility in manufacturing, with a need for more change-overs and setups. BAT would need to improve its new product development process, starting from the idea or initial concept generation all the way to the decision to launch the product. This improvement is to be made to achieve a higher level of commonality in materials and involvement of people from all relevant departments. A study which might be useful is the development of a theoretical framework of Lean Product Management (Hines, Francis, & Found, 2006).

Currently BAT has a strong position and presence, with its broad geographic base and a balance product portfolio, which they have to continue in the future. However the company has to bear in mind to not be too complacent and relying too heavily on markets with high profit margins. They have made the slow move into the ex-Soviet Union countries, which have its competitors a head start in establishing licensing arrangement (Gilmore & McKee, 2005). Expansions into new emerging markets and relentless focus on those with high growth forecasts are crucial, even though it may involve taking short-term losses.

3. Conclusion

The basic requirement that needs to be included in the product or service is considered as order qualifiers. Any additional feature that sets the product or service apart and influences the final decision to purchase is the order winners. Companies have to continue improving as order winners and qualifiers are cyclical in nature, i.e. the current order winner can become order qualifier, as competitor catches up or customer trends and expectation changes.

British American Tobacco’s key order winners are cost and speed and its order qualifier is product availability. In order to improve, capitalise the market and work around the increasingly tough regulations, BAT needs to focus on innovations in operational, product and marketing areas. In order to achieve this, there are potential impacts on BAT’s supply chain, such as increasing importance of supply chain integration (both upstream and downstream integration) and increasing need of balancing lean and agile supply chain for different type of products. In addition new product development process will also need to be enhanced, with the aim to achieve a higher level of commonality in materials and involvement of people from all relevant departments. Lastly, BAT needs to continue to strengthen and expand its geographical presence and product portfolio to capitalise future opportunities.

Bibliography

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