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CASE – The tobacco industry and Skandinavisk Tobakskompagni A/S

This case will deal with the tobacco industry and Skandinavisk Tobakskompani A/S. In the
following pages you will be presented for a series of clippings from different sources. These
statements contain a series of relevant information which you are supposed to relate to the relevant
strategic models according to the questions.

Clip 1.
This is where the tobacco leaves originate from
The ST-concern imports cigar tobacco from Indonesia (Sumatra and Java), Brazil and the
Caribbean, whereas the tobacco leaves for cigarettes and smoking tobacco originate from North and
South America, the Orient, Africa and the Far East. The tobacco leaves for chewing and snuff
production are bought in North America.

http://www.st.dk/sw137.asp

Clip 2.
The concern structure in Skandinavisk Tobakskompani A/S today
In 1990 ST was reorganised, and the tobacco activities were spun off in independent 100% ST-
owned subsidiaries.

• House of Prince A/S (the cigarette activities)

• ST Cigar Group Holding B.V. (the cigar activities)
• Orlik Tobacco Company A/S (smoking tobacco (twist tobacco, etc.))
• Dagrofa a/s (grocery sector)

Finally, in the summer/spring of 2000 ST and Chr. Augustinus Factories have together taken over
57% of the shares in A/S Kjøbenhavns Sommer-Tivoli (an amusement park).

http://www.skandinavisktobak.dk/graphics/st/Pdf/Aarsberetning_06_07_DK/Side38_40.pdf

Clip 3.
The ST concern
Every day in 20 countries 13,640 employees get up to work in one of Skandinavisk
Tobakskompagni’s 71 corporations. The primary business is sale of known brands within cigars,
cigarettes, twist tobacco, smoking tobacco and snuff – everything of the highest quality. Last year
the ST concern had a turnover of DKK 42 billion in 115 countries.

We have broadness
Skandinavisk Tobakskompagni (ST) is a unique tobacco company as they develop, produce and sell
all sorts of tobacco products. We are one of the few in the world that do this. During the latest 15
years, ST has developed to an international company known for many different tobacco brands and

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a broad range of tobacco. The large grocery company Dagrofa and Tivoli are also part of the ST
concern.

More first places

ST is no. 1 worldwide within smoking tobacco. ST is also no. 1 when it comes to cigars in Europe –
and no. 3 worldwide. And ST is no. 1 in Scandinavia in the market for cigarettes. ST is about
gaining foothold in the market for cigars in USA. And ST sees good initial possibilities within the
smokeless tobacco.

A growing company
ST’s business has increased significantly during the latest years. The latest five years alone, ST has
grown by DKK 6 billion in turnover. The growth is the result of a clear strategy and an engaged
effort from competent employees. The vision of ST is to continue to grow internationally. The
growth ST creates partly be developing existing and new markets, partly through geographical
expansion.

http://www.skandinavisktobak.dk/graphics/st/Pdf/Aarsberetning_06_07_DK/Side2_3.pdf

Clip 4.
The Scandinavian market
Danes, Norwegians and Swedes prefer Scandinavian cigarette brands, but also gladly enjoy other
sorts of tobacco. The Swedes traditionally choose snuff, the Danes like to smoke pipe and cigars
whereas the Norwegians twist their cigarettes themselves. For many years ST has had a very strong
position at the Scandinavian market and the necessary broadness both concerning categories and
brands to fulfil many different needs for tobacco in the Nordic countries.

Prince leads
The historical success of ST is mainly due to the Prince cigarette which for 50 years has been the
most popular brand. Prince is clearly the most well-known and sold cigarette in Scandinavia. ST’s
market share of the total cigarette market in Scandinavia is 62% in 2006/07 – an increase from last
year of a few per cent. In Denmark ST is in top with almost 90% in market share, followed by
Norway with 68% and Sweden with 33%.

Discount price grows

The new discount-price cigarettes have taken considerable market shares within the latest years.
First the cheap cigarettes have captured a part of the Swedish market, then the Danish and lately
also the Norwegian market. Naturally, ST has defended its market position and has therefore also
launched cheaper cigarettes with nice market shares as a consequence.

Smoke and smokers are challenged

The restrictive regulations throughout Scandinavia concerning smoking in the public domain,
inclusive of prohibitions and restrictions in cafes, bars and restaurants, naturally influence the total
market. The experience in Sweden is a drop the first year of 1-2% of the total cigarette market. In
Norway the drop is 3-4%, and we estimate that this will also be the case for the Danish market.

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Tobacco without smoke grows
On the contrary smokeless tobacco products are in progress, among other things snuff which has
always been an important factor in Sweden and which is spreading quickly in Norway. The
Scandinavian market for snuff is at approx. 250 mio cans a year, and the market has grown steadily
during the latest 10 years. Furthermore, there is a product in the form of tobacco bits which seem to
get a footing in Denmark. Therefore, ST has currently invested in building up a modern and
innovative business within smokeless tobacco. The target is that also in future ST will be
Scandinavia’s leading supplier of all sorts of tobacco – with our without smoke.

5 years' development of ST sale of cigarettes in Scandinavia (in pcs.)

Millions
10600
10500
10400
10300
10200
10100
10000
'02/03 '03/04 '04/05 '05/06 '06/07

5 years' development in the total market of snuff in Sweden (in cans)

Millions
215
210
205
200
195
190
185
180
'02/03 '03/04 '04/05 '05/06 '06/07

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 5 years' development of ST sale of smoking tobacco in Norway (in tons)

2000

1500

1000

500

0
'02/03 '03/04 '04/05 '05/06 '06/07

http://www.skandinavisktobak.dk/graphics/st/Pdf/Aarsberetning_06_07_DK/Side4_8.pdf

Clip 5.
The Skandinavisk Tobakskompagni concern
The financial year 2006/07 was satisfying for the ST concern. The result of the concern before tax
totalled DKK 2,348.3 mio in 2006/07 against DKK 2,340.6 mio the year before. The result of the
year after tax was DKK 1,615.9 mio against DKK 1,547.5 mio the year before and is better than
expected.

As per 1 July, 2006 ST Sales has bought the shares in Nordisk Tobaks Kompagni (NTK) and
Stanwell Nobel of ST. After this NTK’s handling of marketing and sale of cigars, pipes and
smoking articles in Denmark and Stanwell Nobel’s corresponding function for cigars, smoking
tobacco, pipes and smoking articles in Germany have been gathered in ST Sales. With the purchase
of the American cigar company, CAO International, as per 1 January 2007 ST Cigar Group (STCG)
has gained foothold in the large and growing American market for cigars.

Furthermore, STCG has bought British American Tobacco’s (BAT) Belgian cigar activities in
Tabacofina-Vander Elst with takeover in September, 2007.

Orlik Tobacco Company (OTC) has strengthened its position as the world’s largest producer of
smoking tobacco by the purchase of more smoking tobacco brands from BAT. Commonwealth
Brands which since the divestment of OTC’s American sales company in 2005 has handled the sale
of OTC’s twist tobacco products McClintock and Bali in USA, has in June 2007 made use of the
option for which the company had the right to buy the brands.

Scandinavian Tobacco SIA, Latvia has been transferred from ST to the HoP concern as per 1 July,
2007.

As per 1 May, 2007 Dagrofa has bought Alta Discount consisting of 55 shops in Funen and Jutland
and has in this way secured a position at the discount market.

http://www.skandinavisktobak.dk/graphics/st/Pdf/Aarsberetning_06_07_DK/Side38_40.pdf

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Clip 6.
The tobacco industry has adjusted the sight at poor people in the developing
countries

With the increasing awareness of health and the many campaigns against smoke in the Western
countries, it is in the developing countries that the tobacco industry earns the income.

“Generally, the companies move to the third world, as most potential customers live there and
because the countries have the weakest legislation which is poorly enforced”, says John F. Banzhaf,
chairman of the American organisation Action on Smoking and Health (ASH).

Doubled surplus since 2004

In the Western countries the sale of cigarettes drops with the number of smokers, but the large
tobacco companies earn more and more money each year anyhow. Actually, more of them have
doubled the surplus since 2004.

British-American Tobacco (BAT) commands 17% of the world market, and in 2003 half the surplus
of the company came from the developing countries. Today, 65% of the surplus comes from the
third world.

“It is correct that the tobacco companies move more and more activities from the Western to the
developing countries, but we have been in Africa and Asia since the beginning of the 1900s, so it is
not new for us. But we intensify our activities all over”, says press officer Catherine Armstrong.

BAT hands out cigarettes for free

From more sides BAT is criticised for using illegal methods to poach new customers. The Nigerian
government accuses BAT and other companies of among other things alluring with gratis cigarettes
for children and youngsters to get them to smoke.

BAT recognises that they hand out cigarettes for free, but the Nigerian trial is to decide whether it
has also taken place to children.

“We hand out cigarettes for free different places in the world, but never to children”, says Catherine
Armstrong.

BAT commands 70% of the tobacco sale in Nigeria where the number of smokers increases by
3.5% eavery year in spite of more interventions against advertising.

Richly coloured cigarettes tasting of fruit

According to Actions on Smoking and Health (ASH) many companies hand out cigarettes for free
to children in the third world.

“In the developing countries the companies often make rock and hip hop arrangements which
primarily address the youngsters, and here they hand out cigarettes for free. They also send out
employees to nightclubs and other places where youngsters hang out at nights, to give them
cigarettes”, says John F. Banzhaf who is also prof. in public rights at George Washington
University.

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When children get a sweet tooth in India and Singapore they can just buy a smoke. Here, the
company Phillip Morris sells richly coloured cigarettes tasting of liquorice and fruit.

“The company simply changes the cigarettes to sweets because they see the future potential in the
poor countries”, says project manager in the Danish Cancer Society, Per Kin Nielsen.

http://politiken.dk/udland/article451860.ece

Clip 7.
In the EU there is an increasing awareness of how harmful smoking is. The EU emphasises greatly
the fight against smoking. The most important targets are prevention and smoking cessation. In
spite of significant progress, the number of smokers is still high – approx. one third of the EU
population – and the health implications are correspondingly big with approx. 650,000 smoke-
related deaths a year in the EU. Almost half of these deaths affect persons of the age range 35 – 69,
i e far below the average expected lifetime. Smoking is also influencing the health of non-smokers,
especially the exposed target groups which to a greater extent demand protection.

Legislation, projects to fight against tobacco smoking under the public health programme and
information campaigns are the backbone in the present and coming smoke fighting activities in the
EU. The anti smoking strategy of EU is characterised by a holistic approach. Activities in the entire
EU concerning prevention of smoking and cessation are supported, including among other things
health education, better consumer guidance and counselling and restrictions as regards tobacco ads
and marketing of tobacco. Besides, the EU incorporates fighting against tobacco smoking in a series
of other EU-policies f. inst. the tax and duty policy and the agricultural policy.

The EU is an important factor in global policies in the fight against tobacco smoking and is part in
the framework convention about tobacco control, the first international treaty ever about health. The
framework convention obliges countries all over the world to reduce the number of smoke-related
illnesses and deaths and forms the frames for a smoke-fighting effort, which the parties carry
through to limit constantly active and passive smoking severely.

http://ec.europa.eu/health-eu/my_lifestyle/tobacco/index_da.htm

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Clip 8.
The largest tobacco companies
GLOBAL MARKEDS
COMPANY
SHARE (%)
China National Tobacco Co. (CNTC) 32.7
Altria Group, Inc. (USA) 17.3
British American Tobacco PLC (BAT, UK) 16.0
Japan Tobacco 9.0
R.J. Reynolds Tobacco (USA) 2.0
Imperial Tobacco (UK) 2.0
Altadis (France and Spain) 2.0
PT Gudang Garam (Indonesia) 1.4
TEKEL (Turkey) 1.3
ITC (India) 1.0
Fortune Tobacco Co. (Philippines) .9
Eastern Company (Egypt) .8
Thailand Tobacco monopoly .8
Lorillard Tobacco Co. (USA) .7
Iranian Tobacco Company (Iran) .5
LCWGS (Australia) .2

http://en.wikipedia.org/wiki/Tobacco_industry

Clip 9.
To drive out smokers by law
In Spain where 30% of the population smokes, which is one of the highest figures in Europe, a
smoking ban was introduced on all workplaces as per 1 January. However, the Navarra province
was the first one to introduce a smoking ban on all workplaces with more than two employees. In
2007 a smoking ban will be imposed also in bars and restaurants all over country.

We have got used to not being allowed to smoke in airplanes, but also the trains will be affected
now. 8 January, 2005 was the last day with smoking compartments in Copenhagen’s local trains,
where a total smoking ban was imposed in connection with the opening of a new railway route.
Smoking compartments do still exist in long-distance and regional trains. Surprisingly, Ireland is
the country which has imposed most smoking bans and many Danish associations lobby to get
Denmark to follow Ireland’s example, but the politicians seem to be nervous to lose votes at the
amendment. But even in the hotel and restaurant business they ask the government to intervene, as
they ought not have the confrontations with the customers themselves.

On 7 January in Italy a smoking ban was imposed on the country’s 240,000 public places – bars,
restaurants, offices etc. The 14 mio smokers of Italy risk fines of EUR 275 if they are tempted
beyond means to light anyway. Already in 1988 in California a smoking ban was imposed in
workplaces and in all pubic areas. From 1988 to 2002 the consumption of cigarettes per inhabitant
dropped by 60%, whereas it dropped by an average of 40% in the other American states.

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About 175,000 Spaniards give up cigarettes every year, whereas 100,000 Danes stopped smoking in
2004 alone, and among other things it is because it has become harder for us to light but also
because it is not so trendy any longer to smoke. Hollywood can also have a positive influence.
While in Europe we succeed in getting many smokers to drop the cigarettes, smoking is a still
bigger problem in the developing countries where the tobacco industry has increased the sales
efforts. The countries most badly off are Chile, Bolivia, Russia and Ukraine where approx. one third
of the teenagers smoke.

Ads and alternatives

With more restrictions and the many that succeed in stopping, even more energy is spent on ads. In
Spain the advertisement budgets of the tobacco industry rose by 108.8% between 1995 and 2000.
Advertising which mostly is focused on teenagers who are seduced to believe that by smoking the
sex life gets more successful, one seems daring, glamorous and very adult. Some autonomous
regions have imposed a ban against ads along the roads, but this obstacle the tobacco industry skips
by sponsoring sport events as Gran Premio Marlboro, Estopa Ducados and Equipo Fortuna.

In countries like France, Portugal, Australia, New Zealand and all the Nordic countries a total ban
against advertising for tobacco has been imposed, and the result is that far fewer teenagers start, an
example showing that bans pay off anyway. Unfortunately, we have got used to see the warnings on
the cigarette packets and on the initiative of WHO the plan is to show pictures of tar lungs instead.

Passive smoking
A new American investigation confirms that children exposed to passive smoking are two to five
IQ-points below non-exposed children. About one mio Danes are daily exposed to passive smoking
at the workplace or at the educational institution and by this the higher risk for lung cancer. A
Danish waiter, a passive smoker, was recently awarded damages for a cancer illness caught after 20
years’ work in the business.

Blame others
For the smokers themselves the situation looks differently. In USA where the practice is to sue
everybody for everything, the tobacco producers have been sentenced to pay billions in damages.
With all the scare campaigns and warnings at the cigarette packages it is a puzzle that one can
blame others for the unfortunate affair. According to the World bank there are fewer smokers
among the better educated people. So smokers are more stupid. Well, something could indicate this
when we choose to play Russian roulette with our health. Should somebody be held to account
despite of one self it could just as well be the school inspector who did not watch us then at the
school’s toilet.

While nobody yet has won a case in Spain, the state has considered suing the tobacco industry
whereas others think that the state is the guilty one as the cigarettes are sold in the state-operated
estancos. At SK they are optimistic. In October 2003 the Norwegian High Court passed a verdict in
a case against the subsidiary company, J.L. Tiedemanns. As in the other cases the verdict was a
clear acquittal. In Denmark two smokers have brought charges against SK’s House of Prince in
2003. One of the cases is suspended while the first brought case is tried. The company evaluates
that the claimants will not win the case. A way to get us to stop could be to dig deep into the
pockets. A packet of cigarettes costs between EUR 2.20 and 2.65 in Spain, in Denmark EUR 3.30
for the new cheap ones and 4 for the traditional brands, in UK the packet costs about EUR 6.60 and
in Norway as much as EUR 7.70.

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http://www.dansk-costablanca.com/article.108.html

Questions:

IMPORTANT: Be sure to read all the questions before you begin to answer them. Some of them
may take longer to answer than others, AND if necessary it is allowed to make your own
preconditions in relation to evaluating the various factors, but make them explicit.

You are allowed to use the internet to find further information, but be sure to inform the source and
be critical.

1) PESTEL
1a) From the information enclosed in the case, please make a PESTEL analysis for the case
company and give reasons for the placement of factors in the respective groups. It is allowed to
make your own preconditions for evaluating the factors.

2) Industry Life Cycle

2a) Please describe shortly the purpose and contains of the Industry Life Cycle model.

2b) In which stage of the Industry Life Cycle model do you want to place the tobacco industry?
Give reasons for your answer.

2c) Please discuss the strategic implication of your chosen stage on the ILC.

3) Key Factors for Success

3a) Please describe shortly the purpose and contains of Key Factors for Succes.

3b) What are the Key Factors for Success in the tobacco industry?

4) Five forces
4a) Please give a short version of how the five-forces model looks like for the tobacco industry.

4b) How will you characterize the attractiveness of the business partly from ST’s point of view,
partly from the competitors’ point of view. Give reasons for your answer.

5) SWOT
5a) Please describe shortly the purpose and contains of the SWOT model

5b) From the information enclosed in the case, please make a SWOT analysis for the case company
and give reasons for the placement of each of the factors in the respective groups. It is allowed to
make your own preconditions for evaluating the factors.

6) Strategic development

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6a) Please describe shortly the purpose and contains of the strategic development model (market
options matrix – environment-based strategic options).

6b) Which strategic development options (market options) do you think SK can/ought to make use
of? Give reasons for you answer.

IMPORTANT: Be sure to read all the questions before you begin to answer them. Some of them
may take longer to answer than others, AND if necessary it is allowed to make your own
preconditions in relation to evaluating the various factors, but make them explicit.

You are allowed to use the internet to find further information, but be sure to inform the source and
be critical.

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