Japan Tobacco is a Japanese group that was formed in 1945 as a government entity. Since its inception in nearly 75 years, it has grown and expanded its footprint. In 1985, Japan Tobacco Inc. was established as a public entity (Japan Tobacco, 2020). It has expanded its international business by acquiring RJR Nabisco’s non-U.S. business in 1999 and Gallaher in 2007 (Japan Tobacco, 2020). Japan Tobacco sells many famous brands including Camel, Benson & Hedges (in collaboration with other brands), Winston, and Salem. The company is investing in finding Reduced-Risk Products (RRP). Between 2018 and 2020 JT has invested 100 million Yen in RRP research and development. The tobacco industry is highly regulated. Other than the tobacco division Japan Tobacco operates through processed food and pharmaceutical divisions (Japan Tobacco, 2020). Porter’s five forces model is used to analyze the operational risks it faced and all threats it is exposed too.
Competitive Rivalry in the Market
The Japanese tobacco market was tightly controlled by the government. The Japanese government still holds one-third control of Japan Tobacco (MacKenzie et al. 2017). Japan Tobacco competes in the international market and it faces intense competition there. Global brands are fighting for their market share. Cigarette sales are facing downward pressure due to public awareness campaigns. Global tobacco product’s revenue stood at $828.5 billion in 2020 and it is expected to grow annually by 2.1% (Statista, 2020). Japan Tobacco competes with giants like British American Tobacco, Phillip Morris International, and Imperial Brands. Japan Tobacco has annual revenue of $19.9 billion in 2019 (Nikkei Asian Review, 2020). British American Tobacco was the global market leader in 2019 in terms of revenue with $ 32.7 billion. In comparison, Phillip Morris International and Imperial Brands earned revenue $ 29.5 billion and $ 20.7 billion respectively (Statista, 2020). The global tobacco market is highly competitive.
Threat of Substitutes
The threat of substitutes is high when there are better alternatives available. These alternatives can be in the same industry in any other industry. There are many alternatives available for the main tobacco product that is a cigarette. These substitutes are available in the form of nicotine patches. Gums, vapes, and nasal sprays. All these products are readily available and are marketed as safe products in comparison with tobacco products. All of these products are tobacco-free or contains an insignificant amount of tobacco. These products threaten the status of cigarettes. Tobacco companies spend heavily o advertisement to cultivate a brand image. They try to portray cigarettes as semi-safe products. Tobacco companies spend a hefty amount to lobby and safeguard their interests. Considering all the above-mentioned facts, the tobacco industry faces a high threat of substitutes.
Threat of New Entrants
The new entrants force the incumbents into price wars. These price wars will put downward pressure on the bottom line. The threat of new entrants is moderate in the tobacco industry. But for any new entrant to enter the market and then sustain a business is quite difficult. The incumbent companies have a tremendous benefit over the newcomer. These companies have economies of scale that help reduce costs. They have brand recognition, also they have established marketing and distribution channels. It is tough to budge an established incumbent especially in the Japanese tobacco industry, which is highly influenced by the state. The newcomer has to create brand awareness but stricter advertising bans can make its life difficult. Internationally companies make a global alliance to capture market share and drive sales. There is intense competition for market share. The threat of new entrants remains low.
Bargaining Power of Buyers
Buyers exercise higher bargaining power when there are better alternatives available and they have options to select from. The market is highly competitive and buyers exercise higher buying power. But there is another important factor at play, especially in tobacco products brand loyalty. This is driven by the addictive nature of tobacco products. If the customer is satisfied with the brand, he or she is going to stay with it. According to Poranki (2015), customer satisfaction is directly related to brand awareness. Brands like Japan tobacco can dictate terms on price if they can keep customers satisfied. The customer is usually insensitive to price change.
Bargaining Power of Suppliers
The competition can be assessed by gauging the bargaining power of suppliers. It further depends upon factors such as raw material, quality, and quantity. The most important supply in the tobacco industry is tobacco; the companies are completely reliant upon it. Tobacco is usually grown by the farmers that are growing it from generations. Quality of tobacco determines the quality of finished product i.e. cigarette. The large companies control the farmers as they are the sole buyer of their finished goods. They bargain terns in their favor. Farmers hold no or little power; they are at the disposal of large conglomerates. The supplier holds no or low bargaining power.
References
Japan Tobacco. (2020). About. Division. Available at: https://www.jt.com/about/division/index.html
Japan Tobacco. (2020). About. History. Available at: https://www.jt.com/about/history/index.html
MacKenzie, R., Eckhardt, J., & Widyati Prastyani, A. (2017). Japan Tobacco International: To ‘be the most successful and respected tobacco company in the world’. Global Public Health, 12(3), 281-299.\
Nikkei Asian review. 2020. Japan Tobacco Inc. Available at. https://asia.nikkei.com/Companies/Japan-Tobacco-Inc
Poranki, K. R. (2015). The Impact of Brand Awareness on Customer Satisfaction: A Case Study of Godfrey Phillips India Limited, India. The International Journal Research Publication’s Research Journal of Social Science & Management, 5(1).
Statista. (2020). Leading tobacco companies worldwide in 2019, based on net sales. Available at: https://www.statista.com/statistics/259204/leading-10-tobacco-companies-worldwide-based-on-net-sales/
Statista. (2020). Tobacco Products. Available at: https://www.statista.com/outlook/50000000/100/tobacco-products/worldwide#market-arpu