3.2 External analysis
3.2.2 Porter's five forces
Next tool of the external analysis is Porter's five forces model. This framework is used in order to evaluate attractiveness of the industry. It will reveal the competitive situation in the market by analyzing five forces, namely:
● Threat of intense segment rivalry
● Threat of new entrants
25 http://www.e15.cz/byznys/prumysl-a-energetika/philip-morris-investuje-300-milionu-korun-do-sve-kutnohorske-tovarny
● Threat of substitute products
● Threat of buyers' growing bargaining power
● Threat of suppliers' growing bargaining power
The model of Porter's five forces can be demonstrated by the following drawing.
Source: http://kelas.files.wordpress.com/2009/10/porters-five-forces-model.jpg 3.2.2.1 Threat of intense segment rivalry
The tobacco industry can be described as differentiated oligopoly. There are actually only few huge companies which offer similar but differentiated product. From all the available information I can assume that the type of oligopoly is non-collusive as we could recently see some price wars etc.26
Philip Morris is obviously market leader in the Czech and Slovak market. Here applies book example of the price leadership. Other companies are in position of the followers. But all the tobacco companies are more or less interdependent, meaning that each firm is affected by its rivals' decisions. Likewise its decision will affect its rivals.27
Another typical point for oligopoly is brand loyalty. However, according to Philip Morris'
26 http://ekonomika.idnes.cz/philip-morris-rozpoutal-cenovou-valku-luxusni-cigarety-kvuli-dani-nezdrazi-1wz-/
ekonomika.asp?c=A100202_134006_ekonomika_spi 27 Sloman, p. 113
survey, price is the dominant factor for more than 80% of smokers.28 Hence, if the price changes too significantly, smokers will usually try to find cheaper way how to get cigarettes, legal or illegal, but they will not stop smoking. Therefore, this point does not follow the theory assumption.
According to the theory the previous points make the market segment unattractive.
Furthermore, the industry is relatively stable and plant additions are done in large increments.
All these conditions will lead to price or advertising battles, which makes it expensive to compete.29
3.2.2.2 Threat of new entrants
It would be quite difficult for a new company to enter the tobacco industry. In the tobacco industry there are quite strong barriers to entry:
1) Entering tobacco industry is financially demanding.
2) There are many regulations and laws concerning tobacco industry.
3) Furthermore, new company would have to make new brands and persuade consumers to buy them. All the world's famous brands accompanied by Czech and Slovak local brands are already present in the market.
4) On the other hand, the tobacco industry is not vertically very integrated, which would make it easier for new companies to enter the market. However, the market is quite horizontally integrated, where there are few dominant players around the globe which merged over majority of local players. From this point it will be hard to find a space for new market participant.
5) Another point about entering the market would be retailing. Entering the retailing could be quite easy. There are few large companies which distribute goods like cigarettes etc. So for new companies it could be easy to get into their portfolio and get distributed to the retail network.
Exit barriers are high as well. The company cannot just switch into different industry, because
28 Cigarettes – Slovakia Euromonitor International: Country Sector Briefing, March 2009 29 Marketing Management, Volume 1, p. 158
the tobacco industry is quite special and the equipment and goods cannot be just used for producing of different goods.
From the points I mentioned above, it is obvious that new entrants are not very likely to enter the tobacco industry.
3.2.2.3 Threat of substitute products
Cigarette is a product which does not have a real substitute. Moreover, it is an addictive product, so the users typically cannot stop smoking whenever they would like. There are some products which try to be able to replace cigarettes like inhalator patches, gums, sprays30 or electronic cigarettes, but nothing went so far that it could completely replace cigarettes.
On the other hand, different brands of cigarettes are substitutes. Smokers can easily switch between different marks. These substitutes place a limit on prices and profits. So company has to monitor price trends closely.31 The clear evidence is when the excise tax rose in the beginning of the previous year, Philip Morris decided to keep prices at the level from last year. And because Philip Morris is a dominant company, the other tobacco producers had to follow this strategy.32
From the theory we know that a segment is unattractive when there are actual or potential substitutes. This makes the segment unattractive.
3.2.2.4 Threat of buyers' growing bargaining power
Because of the high intensity of the competition in the tobacco industry one could expect that the buyers hold some bargaining power. However, Philip Morris has a dominant position in the Czech and Slovak market. Most of the top sold brands are produced by Philip Morris.
Smokers are usually somewhat loyal to their favourite brand and switch to another brand usually only due to the huge price changes etc. But even in the case when price changes, it is quite likely that customers would switch to another Philip Morris brand, as it holds the biggest market share. Furthermore, all the cigarettes' producers often follow the same changes in
30 http://www.nicorette.co.uk/stop-smoking/products.aspx 31 Marketing Management, Volume 1, p. 158
32 http://ekonomika.idnes.cz/philip-morris-rozpoutal-cenovou-valku-luxusni-cigarety-kvuli-dani-nezdrazi-1wz-/
ekonomika.asp?c=A100202_134006_ekonomika_spi
prices. This suggests that buyers hold little bargaining power over the suppliers.
Moreover, the end-users are very fragmented and numerous, therefore cannot hold power over the suppliers. The only kind of some buyers' power is already mentioned, ability to switch to different brand. The buyers do not have enough power to force the companies but to follow their pricing strategy.
The buyers do not posses neither strong nor growing bargaining power, which makes the segment attractive.
3.2.2.5 Threat of suppliers' growing bargaining power The most important input factor is tobacco.
The suppliers are not threatened by backward vertical integration, as it is PMI's policy not to own any tobacco production plant. PMI does not own tobacco producers itself but gets the tobacco from external suppliers. This could enhance suppliers' bargaining power.
But there are not so many suppliers, which could as well enhance suppliers' bargaining power.
In the tobacco industry there are just few dominant players world wide. They have established long - term relationship with tobacco producers. On one side, cigarette producers cannot easily switch between different tobacco producers, but on the other hand, tobacco producers do not have much choice to whom sell the tobacco.
None of the parties has a strategic advantage, as these companies need each other. Both kinds of companies are in an equal relationship. As a consequence, price is set by mutual agreement in the environment, where no one has bargaining power over each other. Both suppliers and buyers do not have too big bargaining power.
Company's suppliers are not able to raise prices or reduce quantity supplied easily. This makes the segment kind of attractive. But from all the facts mentioned above, I can assume that supplier buyer relationship is well balanced and none of them hold big advantage. This makes the segment neither attractive nor unattractive.
3.2.2.6 Evaluation of Porter's five forces
When we conclude all the information from Porter's five forces, we find out that the tobacco
market segment is more unattractive than attractive. It is quite unlikely to attract more companies to enter the tobacco industry.