Phân tích ngành công nghiệp thuốc lá tại việt nam và lợi thế cạnh tranh của công ty thuốc lá anh mỹ tại việt nam

vietnam national university, HANOI
hanoi school of business








Ngo Thi Ngoc Anh





A STUDY ON TOBACCO INDUSTRY IN VIETNAM
AND COMPETITIVE ADVANTAGES OF BRITISH
AMERICAN TOBACCO VIETNAM






Master of business administration thesis

vietnam national university, HANOI
hanoi school of business





Ngo Thi Ngoc Anh





A STUDY ON TOBACCO INDUSTRY IN VIETNAM
AND COMPETITIVE ADVANTAGES OF BRITISH
AMERICAN TOBACCO VIETNAM





Major: Business Administration
Code: 60 34 05

Master of business administration thesis




Supervisors:
1. Vu Xuan quang
2. Ha nguyen





Hanoi 2007
v

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i
ABSTRACT iii
TÓM TẮT iv
TABLE OF CONTENTS v
LIST OF FIGURES ix
LIST OF TABLES x
LIST OF ABBREVIATIONS xi
INTRODUCTION 1
1 THE PROBLEM 1

2 THE OBJECTIVES AND AIM 2
3 RESEARCH QUESTIONS 3
4 SCOPE OF WORK 3
5 DATA SOURCES AND PROCESSING 4
6 METHODS/ APPROACHES 4
7 SIGNIFICANCE 4
8 LIMITATIONS 5
9 EXPECTED FINDINGS 5
10 SHORT INTRODUCTION 5
CHAPTER 1 THEORETICAL FOUNDATION 7
1.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS 8
1.1.1 Political factors 9
1.1.2 Economic factors 9
1.1.3 Social factors 10
1.1.4 Technological factors 10
vi

1.2 INDUSTRY STRUCTURAL DETERMINANTS 10
1.2.1 Threat of entry 13
1.2.2 Intensity of rivalry among existing competitors 21
1.2.3 Pressure from substitute products 27
1.2.4 Bargaining power of buyers 28
1.2.5 Bargaining power of suppliers 31
1.3 SWOT ANALYSIS 33
1.3.1 Strengths 34
1.3.2 Weaknesses 34
1.3.3 Opportunities 34
1.3.4 Threats 34
1.4 COMPETITIVE ADVANTAGES 35
1.4.1 Resources 36

1.4.2 Capabilities 37
1.5 GENERIC COMPETITIVE STRATEGIES 37
1.5.1 Overall cost leadership 38
1.5.2 Differentiation 40
1.5.3 Focus 42
CHAPTER 2 INDUSTRY STRUCTURAL ANALYSIS OF BRITISH
AMERICAN TOBACCO VIETNAM 44
2.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS OF TOBACCO
INDUSTRY IN VIETNAM 44
2.1.1 Political factors 44
2.1.2 Economic factors 47
vii

2.1.3 Social factors 48
2.1.4 Technological factors 49
2.2 INDUSTRY STRUCTURAL ANALYSIS OF BRITISH AMERICAN
TOBACCO VIETNAM 50
2.2.1 Overview on tobacco industry in Vietnam 50
2.2.2 Rivalry among competitors 57
2.3.3 Bargaining power of buyers 67
2.3.4 Bargaining power of suppliers 70
2.3.5 Substitute products 71
2.3.6 Threat of entry 72
CHAPTER 3 MARKET TRENDS OF TOBACCO MARKET IN VIETNAM AND
COMPETITIVE ADVANTAGES OF BRITISH AMERICAN TOBACCO
VIETNAM 77
3.1 MARKET TRENDS IN VIETNAM 77
3.1.1 Stricter regulations from the government on tobacco industry 77
3.1.2 People will be more health conscious 79
3.1.3 Increasing social pressure from health organizations and from the society

81
3.2 SWOT ANALYSIS OF BRITISH AMERICAN TOBACCO VIETNAM 83
3.2.1 Strengths 84
3.2.2 Weaknesses 85
3.2.3 Threats 86
3.2.4 Opportunities 87
3.3 COMPETITIVE ADVANTAGES OF BRITISH AMERICAN TOBACCO
VIETNAM 88
viii

3.3.1 Resources 88
3.3.2 Capabilities 91
CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS 93
4.1 CONCLUSIONS 93
4.1.1 External environment of tobacco industry in Vietnam 93
4.1.2 Tobacco industry in Vietnam and structural industry analysis of British
American Tobacco 93
4.1.3 Market trends and competitive advantages of British American Tobacco
Vietnam 95
4.2 RECOMMENDATIONS 96
4.2.1 Competitive strategy of British American Tobacco 96
4.2.2 Recommendations to Vietnamese government control on tobacco industry
in Vietnam 105
CONCLUSIONS 107
REFERENCES 108
APPENDIX 109
GLOBAL TOBACCO MARKET OVERVIEW 109

ix

LIST OF FIGURES
Figure 1.1 Strategy formulation process 8
Figure 1.2 External macro environment factors affecting companies 8
Figure 1.3 The Five Competitive forces that determine Industry profitability 11
Figure 1.4 Barriers and Profitability 25
Figure 1.5 SWOT Analysis 35
Figure 1.6 Competitive advantages 36
Figure 1.7 Three Generic Strategies 38
Figure 2.1 GDP growth rate bi-annually of Vietnam from 2002 to 2008 (estimation)
47
Figure 2.2 Vietnam tobacco market price segment – 2005 51
Figure 2.3 Vietnam tobacco market by corporations – 2005 53
Figure 2.4 Absolute cigarette volumes in 36 cities of Vietnam by tobacco
companies. 56
Figure 2.5 Key contributors in tobacco product quality 61
Figure 2.6 Distribution channels of tobacco companies in Vietnam 67
Figure 2.7 Tobacco manufacturing process 70
Figure 3.1 Graphic health warning 78
Figure 4.1 Snus and snus user 103
Figure A.1 Tobacco global Retail Value Sales % Growth 1999/2004 110
Figure A.2 Tobacco Retail Volume Sales % Growth by Major Market 1999/2004
111
Figure A.3 Global Company Shares of Cigarettes by Retail Volume 2003 112

Figure A.4 Forecast on Cigarettes Retail Volume Sales % Growth by Region -
2004/2009 115



x

LIST OF TABLES
Table 1.1 External macro environment factors with examples 9
Table 2.1 Brands and Tobacco companies by price segment – 2006 58
Table 2.2 Blending types of tobacco 62
Table 3.1 SWOT Analysis of British American Tobacco Vietnam 83
Table A.1 Global Company Shares of Cigarettes by Volume 2001-2003 114

xi

LIST OF ABBREVIATIONS
BATV British American Tobacco Vietnam
PMI Philip Morris International
JTI Japan Tobacco Incorporation
SWOT Strengths, Weaknesses, Opportunities, Threats
HORECA Hotels – Restaurants – Cafés
R&D Research and Development
VND Vietnam Dong
GDP Gross Domestic Product
VFM Value for Money
DNP Duty Not Paid

1

INTRODUCTION
1 THE PROBLEM
Firstly, tobacco industry is a social controversial yet highly profitable industry. The
product nature of tobacco is harmful for health. Since this fact is already proven by
researches and statistics data of tobacco related diseases, tobacco industry in the
world is facing increasing opposition from health and social organizations and
governments. However, this industry is getting high profit margin compared to
many other industries. In short, this industry is a distinctive industry with high
profitability but is facing with increasing social pressure, leading to declined

market.
Secondly, tobacco market in Vietnam is expanding, but in the future tobacco
demand tends to decrease. Tobacco market in Vietnam is currently expanding with
high smoking incidence of 55% (Smoking incidence is the ratio of smokers per
people at the smoking age from eighteen to sixty five years old. In Vietnam, this
ratio is calculated among men only because the number of women smokers is too
small to measure) [Euromonitor, tobacco industry, 2005]. According to General
Consumer Survey carried out by AC Nielson, this smoking incidence is higher than
60%. The market volume grows at 3% annually for the past five years, according to
statistics from Retail Audit in tobacco market. However, rising income and higher
health awareness among Vietnamese people, together with government control and
pressure from social organizations will change this current increasing trend into a
downtrend future.
2

Last but not least, competition in tobacco market in Vietnam is becoming fiercer.
Because tobacco markets in developed countries are declining, international tobacco
companies must seek growth from developing countries markets like in Vietnam.
Currently, there are four foreign tobacco companies and one local tobacco
corporation operating in Vietnam market. Illegally imported products are one
participant in the market as well. It is not to mention that new entrants could find
their way into the market. All are trying to enlarge their pieces in this market,
making the industry more competitive.
All these above mentioned reasons necessitate a study on tobacco industry in
Vietnam and recommend the appropriate competitive strategy for British American
Tobacco Vietnam.
2 THE OBJECTIVES AND AIM
This thesis aims at:
 Analyzing the external macro environment of tobacco industry in Vietnam
 Analyzing the impact of Vietnam tobacco industry structure on British

American Tobacco Vietnam (BATV)
 Analyzing BATV competitive advantages in Vietnam market
 Recommending competitive strategy for BATV
The study will revise the theoretical foundation of external macro environment
analysis, industry structural analysis and competitive strategy, thus applying into
Vietnam tobacco industry and the competitive advantages of British American
3

Tobacco Vietnam. From that, the study could recommend on how the company
could enhance and build its competitive strategy effectively.
3 RESEARCH QUESTIONS
The research has the following questions to answer:
 How are the factors of the external macro environment in Vietnam tobacco
industry and their influence on BATV?
 How are the impacts of tobacco industry structure on BATV?
 What are the current competitive advantages of British American Tobacco
Vietnam in Vietnam tobacco market?
 How to better define BATV competitive strategy in Vietnam tobacco
market?
4 SCOPE OF WORK
The thesis studies tobacco industry in Vietnam in the past three years, including
analyzing external macro environment of the industry at present, industry structural
impact on the company, Vietnam tobacco market trends and the competitive
advantages of BATV. Michael E. Porter‟s Five Forces and the Generic Competitive
Strategy are theoretical foundations for the study.
4

5 DATA SOURCES AND PROCESSING
This thesis focuses on using secondary data to analyze the tobacco industry in
Vietnam based on theoretical foundation. Data and information on Vietnam tobacco

market could be found in General Consumer Survey in tobacco market and retail
audit by AC Nielson in 2005.
Besides, other international tobacco sources of information are referred to forecast
the trend of tobacco industry in Vietnam. These sources are Tobacco reports
website; social organizations‟ reports on tobacco industry, Euromonitor report on
tobacco industry in the world.
Other inputs are from consulting with people working in the tobacco industry and
non-profit organizations.
6 METHODS/ APPROACHES
The method used in this thesis is empirical, using theoretical foundation of External
Macro Environment analysis, Industry Structure analysis and Generic Competitive
Strategy to apply in Vietnam tobacco industry and British American Tobacco
Vietnam analysis.
7 SIGNIFICANCE
This study benefits the company (British American Tobacco Vietnam) in reviewing
and better understanding the impact of external environment factors and industry
5

structure on the company, its competitive advantages, thus paving the way for its
sharpening of competitive strategy.
In addition, this thesis could serve as reference to the theory on external
environment analysis, industry structural analysis and competitive strategy theory
with theoretical application on a specific industry and a specific company in
Vietnam market.
8 LIMITATIONS
Due to the distinctive characteristic of tobacco product, data and information about
this industry is hard to get for better illustrating the analysis. The thesis focuses on
the case of BATV only but could not analyze its competitors with detailed
information and data since information on competitors is either hard to get or has
low level of accuracy.

9 EXPECTED FINDINGS
From the pre-determined problem and objectives of this study, it is expected to
effectively apply theoretical foundations into analyzing external environment,
industry structural impact on BATV, together with the company competitive
advantages, from then to properly recommend BATV competitive strategy.
10 SHORT INTRODUCTION
The thesis consists of four chapters.
6

The introduction provides an overview of the thesis, its background, necessity,
purpose and contributions.
Chapter one reviews the theory of external macro environment analysis, Michael E.
Porter‟s industry structural analysis, company‟s competitive advantages and three
generic competitive strategies.
Chapter two analyzes external macro environment of tobacco industry in Vietnam
and Vietnam tobacco industry structure on BATV.
Chapter three analyzes the market trends of tobacco market in Vietnam, SWOT
analysis and competitive advantages of British American Tobacco Vietnam.
The last chapter gives out conclusions of the above findings and recommendations
on BAT Vietnam‟s competitive strategy.




7

CHAPTER 1 THEORETICAL FOUNDATION
To analyze the external macro environment, the PEST (Political, Economic, Social
and Technology) model is applied as it covers all the external factors impact on the
industry. To analyze the industry and competitive advantages, from then to build

competitive strategy, Michael Porter theory is reviewed and applied. These models
are most comprehensive and applicable in meeting this thesis‟ objectives and aims.
External macro environment analysis
 Political factors
 Economic factors
 Social factors
 Technology factors
Industry structure analysis
 Rivalry
 Bargaining power of buyers
 Bargaining power of suppliers
 Substiture
 Threat of entry
Company's competitive advantages
analysis
 The company's resources
 The company's capabilities to
utilize resource
Strategy formulation
Choose one of three generic strategies
 Cost leadership
 Differentiation
 Focus

8

Figure 1.1 Strategy formulation process
1.1 EXTERNAL MACRO ENVIRONMENT ANALYSIS
In order to analyze the external macro environment around the company, the PEST
analysis, covering the Political, Economic, Social and Technology factors which

affect the firm is applied. Such factors are usually beyond the company control,
which are sometimes opportunities for the company to take advantage of,
sometimes are threats that the company needs to address.
The number of external factors is actually unlimited and ever-changing. The
company should prioritize and monitor factors which have the most impact on it
and accept a certain level of accuracy in forecasting.
Political factors
Social factors
Economic factors
Environmental
factors

Figure 1.2 External macro environment factors affecting companies

9

Table 1.1 External macro environment factors with examples
Factors
Examples of factors
Political factors
Political stability
Employment laws
Environmental regulations
Trade restrictions, tariff and taxation
Pricing regulations
Industrial safety regulations
Economic factors
Economic growth
Interest rates
Exchange rates

Inflation rate
Labor cost
Discretionary income
Social factors
Demographics
Population growth rate
Class structure
Culture (social perception, gender roles…)
Attitudes (health, environmental consciousness
Leisure interest
Technological
factors
Research and Development activity
Technology impact on product offering
Technology incentives
Rate of technology change
1.1.1 Political factors
Political factors include government regulations and legal issues under which the
company is operating. These factors could be tax policy, employment laws,
environmental regulations, trade restrictions and tariffs, political stability.
1.1.2 Economic factors
Economic factors affect the purchasing power of potential customers and the firm‟s
cost of capital. Some examples of economic factors are economic growth, interest
rates, exchange rates, inflation rate.
10

1.1.3 Social factors
Social factors include the demographic and cultural aspects of the external macro-
environment, which impact customer needs and the size of potential markets. These
factors could be health consciousness, population growth rate, age distribution,

career attitudes, and emphasis on safety.
1.1.4 Technological factors
Technological factors can lower barriers to entry, reduce minimum efficient
production levels, and influence outsourcing decisions. Some technological factors
include Research and Development activity, automation, technology incentives, rate
of technology change.
1.2 INDUSTRY STRUCTURAL DETERMINANTS
“The essence of formulating competitive strategy is relating a company to its
environment” [Michael E.Porter (1998), "Competitive advantage - Creating and
sustaining superior performance"]. Its environment here could be understood as
economic, political, social surroundings as well as competitions and substitute
products. However, with the aim of formulating competitive strategy, environment
does not necessarily mean the total environment for the firm but focus on the
industry it operates in. Because other forces outside the industry exert their impacts
to all firms while industry factors strongly influence the competitive game among
firms in that industry.
Industry structure is not merely competitors‟ structure, whether competition is
concentrated or fragmented but involves the underlying economic structures which
include the five forces.
11


Figure 1.3 The Five Competitive forces that determine Industry profitability
(Source: Michael E. Porter, "Competitive Advantage - Creating and sustaining superior
performance", 1998, p.5)
The collective impact of their five forces results in the profitability available to
firms in the industry. Very apparently, different industries get different returns on
investment. The reason lies in the industry structure with collective strengths of the
five forces. Intense industries like industrial products (tires, paper) get small return
while relatively mild industries (cosmetics) benefit a quite high return.

12

The goal of a firm is to find a position in the industry where that firm could best
defend against the industry‟s competitive forces or can influence them in its favor.
Analyzing the sources of these five forces will help the firm evaluate strengths and
weaknesses of the firm itself, thus better understand its position in the industry.
From this clear picture of the industry and its position, the company could identify
the areas to build its strategy so that its efforts could generate the greatest payoff. In
one industry, different companies enjoy different return on investment.
The very first step of analyzing structural five forces of industry is to define what is
covered in “industry”. By definition, “industry is a group of firms producing
products that are close substitutes for each other”. The substitutes in this definition
have caused some controversies over the boundary of an industry. How close a
product to the other is defined as “substitute product”? The five forces will better
define the industry boundary as substitute products is also one of the five forces.
As mentioned earlier, competition in an industry will gradually drive down the
average rate of return in the whole industry. The limitation of this rate of return is
“the competitive floor rate” which is the adjusted free market return (yield on long
term government securities adjusted upward by the risk of capital loss). Investors
will not accept return below this rate in the long-term since they always have
alternative option to invest in low risk government securities. Industries with return
rate higher than this competitive floor rate will attract capital flow through new
entry or additional investment in existing players. In this sense, substitute could also
lead to lower profitability, creating a harder time for the company to gain its market
share. Bargaining power of suppliers, power of buyers is of no exception. They all
eat up in the firm profitability. Therefore, this five forces analysis provides a
broader sense of rivalry than the mere competition among direct competitors. All
the five competitive forces determine the intensity of industry competition and
profitability.
13

There is no evidence for which force is stronger than the other. The power of each
force depends on the industry and the company situation. For instance, a very strong
company without direct rivalry could still faces the potential threat of a superior
substitute product. Or an industry without clear substitute product, entry is blocked
by strict regulation could still earn low profit ratio due to intense rivalry from
current competitors.
1.2.1 Threat of entry
An attractive industry with rate of return higher than the competitive floor rate and
without any restriction on new entrants will bring in new players to the field. New
entrants bring in new resources: capital, human resources and others to create more
products. This will certainly impact the industry in the long term: price might be
driven down; price of input factors may be inflated. All results in profitability
reduction of the existing firms. In fact, new entrants are as “dangerous” to the
company as current powerful competitors. The new ones often start with a strong
desire to gain market share.
New entrants are not necessarily totally new firms. An acquisition could be seen as
new entrant although no new unit is created. The acquisition will probably turn the
existing firm into a more competitive one than the old company. Even if it takes
time, new blood in existing company often means new player.
To assess possibility of new entrants, barriers to entry should be analyzed. Together
with retaliation – the possible reaction from existing companies in the industry,
barriers to entry make the potential new entrant to evaluate the case before it make
up its mind to join the battlefield.
Barriers to entry
14

According to M.E. Porter, there are six major sources of barriers to entry:
(1) Economies of Scale “refer to declines in unit costs of a product (or operation or
function that goes into producing a product) as the absolute volume per period

increases”.
Obviously, reduction in cost per unit is a result of a large scale production. This
serves as an entry barrier since it requires new entrants to come up with large
volume production in order to be competitive. They may have to invest in modern
equipment but are not certain of their success in penetrating the market yet. The
decision to invest in large scale production put new firms in a considerable risk.
This case is most relevant when existing firms are competing by cost. New entrants
could hardly invest in a big volume, unless they could come up with something
different to charge consumers higher than the very competitive price of competitors.
This situation will be discussed in more details in the Generic Strategies part.
Scale economies could be achieved in various functions such as manufacturing,
marketing, procurement, distribution. It depends on industry that scale economies in
which function play a more vital role than in other functions. For example, in
mainframe computer industry, scale economies in production are more crucial than
in other functions.
Multi-business companies could create economies of scale by sharing the cost
among various business units. Diversification in one corporation composed of
various related businesses could overcome the volume constraints of one specific
industry size. Since the demand of one product line is limited and competition
sometimes requires firms to come up with more cost saving thank to a bigger-than-
demand production.
15

Another case of cost saving is joint cost. An example of air passenger services and
air cargo could better illustrate joint cost. The technological constraints allow a
fixed certain space for passenger. Air craft designer could not exchange cargo space
for passenger space although the revenue from passenger is higher, obviously. With
the many cost in the airline industry, companies who have both services of
passenger and cargo are much more competitive than firms providing only one
service thank to the joint cost of two services. Another example is when joint cost

is shared to build and maintain an umbrella brand for several products. In this case,
business units share intangible assets and achieve scale economies by joint cost.
Vertical integration also brings about scale economies. Entrants could hardly
penetrate and survive in an industry in which established competitors are integrated.
They buy input factors in-house and/or sell products to in-house customers. It is
common sense that entrants could not get input price at the same price as existing
competitors sell to other business units in their companies. Entrants must choose to
integrate or compete in a cost disadvantage position. They sometimes have to face
the foreclosure situation when they could not get inputs for its products since no
companies in the industry would like to have more competitors.
(2) Product differentiation “means that established firms have brand identification
and customer loyalties, which stem from past advertising, customer service, product
differences, or simply being first into the industry” [Michael E.Porter (1998),
"Competitive advantage - Creating and sustaining superior performance"].
To overcome brand identification and customer loyalties is a tough and challenging
job for new comers. They have to spend quite a lot of investment and time to
persuade customers. Spending money in brand building is a risk to consider since if
new companies do not have enough money to follow till they can harvest from their
16

investment or in case they fail to build their brand, there is no salvage value to
collect back.
Product differentiation shows its significance in industries where customers trust is
crucial such as cosmetics, over the counter drugs.
(3) Capital requirement. This point is partly raised in the economies of scale and
product differentiation. To overcome these two barriers, new companies must have
sufficient capital and cash flow, especially when these investments are
unrecoverable like brand building budget as mentioned above.
For instance, when a new entrant attempts to build product differentiation, it must
spend some up-front investment in R&D to come up with a differentiated product.

A lot of companies have gone bankrupt because of cash flow issues. They do not
have enough cash to maintain inventories, to cover start up losses, to provide
customer credit.
An interesting example of Xerox is well suitable for this capital requirement entry
barrier. Xerox chose to rent copiers rather than selling them, which is more pleasant
to their customers while building a substantial barrier to entry. Since this company
has already had a firm foothold and strong working capital, it could implement that
program. New entry must rethink to enter this industry when thinking of how to
manage their working capital to rent copiers like Xerox.
Or to compete with Ikea furniture and accessories store chain, potential entrants
must plan for a strong financial backup to compete with a range of mega malls
which sell nearly everything in a house of Ikea, from bed, kitchen to small
decoration items like candle holders.