The case study on Reynolds American Incorporated (Whipple, Justice, Gainer, Johnson, and Alvidrez 342) illustrates how major players in the industry have used strategic resources to mitigate the threats to their businesses. Reynolds American Incorporated (RAI) is one such leader in the tobacco industry, manufacturing tobacco-related products such as cigarettes, smokeless tobacco, and cigars since 1875.
RAI, along with others in the tobacco industry, face many challenges most of which are environmental threats to the industry. The major environmental factors that challenge the RAI are federal regulations and ongoing litigation. Strategic resources then have to be utilized to combat these challenges.
On June 22, 2009, the US government passed the Family Smoking Prevention and Tobacco Control Act (Whipple, Justice, Gainer, Johnson, and Alvidrez 342). The Act increases taxes on the sale of tobacco products. The US Food and Drug Administration are given unprecedented control over the manufacture, sale, marketing, and packaging of tobacco products.
The Act also requires that all tobacco manufacturing companies list their ingredients and limit their use of flavor additives. This was a challenge for the manufacturers because menthol and wintergreen, the most commonly used flavors, are very popular with the consumers. Serious limitations and restrictions were also placed on advertisements. The basis for this was the claim that these advertisements encourage underage children to start smoking at a very young age.
Advertising or marketing is an important element in the growth and success of any business. As a result of the forced reduction in advertising and marketing, sales in the tobacco industry decreased significantly and manufacturers still had to pay high taxes for their slow-selling products. Furthermore, private companies also joined the government in the fight against tobacco products and its advertisements, and huge marketing platforms such as Google and Microsoft also banned tobacco advertising on their sites. A restriction was also imposed on smoking in public places, with a few designated smoking areas.
Another challenge that the RAI and other companies in the tobacco industry faced was the reduction of consumers, especially in the US (Whipple, Justice, Gainer, Johnson, and Alvidrez 343). This decline can be attributed mainly to consumer awareness of the health risks associated with smoking, and the financial strain due to the high prices of tobacco.
These factors would reduce the desire to smoke, as well as consumers’ purchasing power, which both reduce the overall demand for tobacco. Other factors may be the restrictions imposed on tobacco manufacturing plants, and the limitations on where consumers can smoke. The situation was made worse for companies such as RAI that had decided to limit themselves to the US market.
Strategic resources used to contend with these challenges
The Altria Group, which was comprised of the US Smokeless Tobacco Company, made most of its revenue from the sale of cigarettes and smokeless products (Whipple, Justice, Gainer, Johnson, and Alvidrez 343). Altria therefore focused on promoting brand equity. They also adopted the strategy of anticipating and responding to consumer preferences. They made sure to sell their products in low-priced markets, since they had to enhance their margins by reducing costs or increasing the prices for their products.
The Lorillard Tobacco Company took up the same strategy that RAI adopted. They decided to sell their major trademarks that were outside the United States. They therefore focused on producing cigarette products for the premium and discount areas in the US tobacco market. The two companies set aside primary brands that were supposed to bring in short term income. Additional brands were used for the long term existence or relevance of the company.
Establishing business ventures in other fields is a method companies in the tobacco industry use to reduce the effects of the poor economy and decline in sales. For example, the RAI Company has a services firm that provides legal and data management services (Whipple, Justice, Gainer, Johnson, and Alvidrez 344). Ventures are run independent of each other in order to minimize risk and assess needs. Profits from one venture are used to boost or fund other ventures.
Another strategy is counting on stockholders for support (Whipple, Justice, Gainer, Johnson, and Alvidrez 344). This is not easy in an industry as controversial as the tobacco industry, however; the RAI Company has been successful in using its excellent financial performance to persuade investors to invest. The fact that cigarette products are heavily taxed means that tobacco companies have to set high prices for their products. This is a guarantee to investors that they will receive high returns.
A business in the tobacco industry is faced with an array of challenges due to the many laws and legislations; restrictions and limitations to marketing, advertising, sales and manufacturing; the increase in taxation of tobacco-related products; and the growing public awareness of smoking-related illnesses and health risks due to studies and campaigns. Strong strategic initiatives and excellent management are vital to the success and sustainability of a tobacco company such as RAI. Once these elements are in place, RAI can overcome any environmental challenges.
Whipple, Corky, Justice John, Gainer Patricia, Johnson Christopher, and Alvidrez Irene. “Case
23: Reynolds American Inc”. Arizona State University (n.d.): 339-350. Print.