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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with

reference to British American Tobacco Bangladesh

Introduction
Tobacco-use is a widespread phenomenon in Bangladesh. More than half of all men and nearly
one in three women use tobacco in Bangladesh, according to a latest study on tobacco
consumption. Conducted by Human Development Research Centre (HDRC) and Campaign for
Tobacco-Free Kids, the study looked at tobacco consumption trends among people aged 15 and
older, estimating that 46.3 million people out of 107 million consume tobacco.
About 58% of men and 28.7% of women smoke or chew tobacco in one of the cheapest tobacco
countries across the globe making up 43% of its total adult population. Bangladesh ranked
among top tobacco consuming countries where 57,000 people over the age of 30 die each year
from tobacco-related illness. Though Bangladesh signed WHO Framework Convention on
Tobacco Control (FCTC) in 2003 to control tobacco use by all means, it is yet to form a national
agency that experts think a key to fight tobacco. The survey revealed that tobacco consumption
in Bangladesh sharply rose in recent years, with cigarette sales going up by 40% and tobacco use
in the form of bidi increased by 80% between 1997 and 2013. Compared to 50.9 billion
cigarettes bought in 1997, the consumption was 76 billion pieces in 2013, while bidi sales
climbed from 43 billion in 1997 to over 82 billion in 2013. Excise taxes on cigarettes account for
half of the retail cigarette price in the country while total taxes are two-thirds of the retail price.
Anti-tobacco campaigners allege that the policy is at odds with countries having comprehensive
tobacco reduction approach where excise taxes typically account for 70% of retail price with
total taxes claim 75% of it.

Different tax rates on different price slabs only benefit tobacco

manufacturers, they argued.


Amongst the tobacco manufacturers, British American Tobacco Bangladesh has grown to be the
premier multinational company in Bangladesh, and has witnessed a robust growth and
development in the tobacco sector. It is esteemed as one of the largest multinational
companies in the country and has been operating for over 100 years. This paper, from the
perspective of Economics, and with reference to British American Tobacco Bangladesh is an
attempt to observe how the organization is fueling the development in this sector.

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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A.1 Origin of the Report


The report titled Application of Economics Theories and Practices in the Tobacco Industry
of Bangladesh with reference to British American Tobacco Bangladesh has been prepared
for Dr. A. K. M. Saiful Majid, Professor & Senior Fulbright Scholar, as a partial requirement
for completion of the course Managerial Economics (E501).

A.2 Rationale of the Study


The study, conducted by group-2 in the context of British American Tobacco Bangladesh
ventured forth into various applications of different concepts of Managerial Economics in the
tobacco sector of Bangladesh. In an effort to do so, we have scrutinized the demand and supply
scenario of tobacco products, identified the major players in the industry, the market structure,
cost behavior, and also government control in terms of price control and tax imposition and their
effect on the consumers.

A.3 Objectives
A.3.1 Broad Objective
The broad objective of this paper was to carry out an intensive study on British American
Tobacco Bangladesh (mostly concentrated in Dhaka), i.e. gather and compile all possible
relevant data regarding the tobacco industry in Dhaka and provide an accurate depiction of the
recent development in this sector relating to the concepts of Economics learned in classroom
sessions till date.

A.3.2 Specific Objectives


1.

Understanding the principles of economics and their application in respect of British

American Tobacco Bangladesh and the relevant industry.

2.

Absolute and competitive advantage of British American Tobacco Bangladesh in the

sector.
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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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3.

Understanding the demand and supply function, market equilibrium, income and

substitution effects on cigarettes developed by British American Tobacco Bangladesh.

4.

How price elasticity of demand and supply works in the tobacco industry, and computing

both for British American Tobacco Bangladesh.

5.

Price ceiling and price floor existing in the tobacco sector, impacts of government control

in the city.

6.

Consequences of Govt.s regulation and taxation in relation to British American Tobacco

Bangladesh.

7.

Effects of Inflation of the tobacco sector.

8.

Recommendations for enhancement and growth for the tobacco sector in Bangladesh.

A.4 Scope of the Study


The geographic scope of this research is confined within Dhaka city. For the demand side of the
study, information was drawn from British American Tobacco Bangladesh officials, and existing
and potential buyers within Dhaka city. For the information on supply side, executives of British
American Tobacco Bangladesh and employees of the organization were interviewed.

A.5 Methodology
The study was conducted on two sets of population, one representing the demand side and the
other the supply side of the tobacco sector. On the demand side, the population consists of
existing and potential consumers, and the supply side consists of interview with employees of the

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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organization. Interviews consisted much of the way through which information was gathered for
this study.

A.5.1 Sources of Data


This study was conducted based on both primary and secondary data. The secondary study was
mainly required for the background study on this sector. For the supply side, secondary sources
and interviews are the primary sources of data.
For the demand side, primary sources will be from existing and potential clientele. Besides, some
secondary sources like small scale research reports conducted will also be used. Primary source
of information came from the interview conducted for the purpose of the study.

A.5.2 Research Design


This study is a combination of both Exploratory and Descriptive research methods.

A.5.3 Instruments of Data Collection


Various articles, websites and newspapers were taken into account to get the necessary
secondary information. Interviews enabled specific information relating to supply and demand,
price ceiling and price floor, govt. regulations and taxation, and inflationary effects.

A.5.4 Sample Design


As mentioned above, this study was conducted on two sets of population, one representing the
demand side and the other the supply side of the tobacco sector.

A.5.5 Sampling Technique


Non-probabilistic sampling methods was selected because the complete sampling frame for the
target population was not available that is necessary to conduct the usual probabilistic sampling
techniques. Besides, limited time and budget would guide the researchers to go for nonprobabilistic methods.

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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A.5.6 Sample Size


The sample size of the interviews was small. The interview sessions provided much in depth
knowledge and information required for the fulfillment of the study.

A.6 Criticalities and Limitations


While conducting the study there were few obstacles that constrained the effectiveness and
comprehensiveness of the study. Certain limitations hampered the accuracy of this study. First
of all, employees were reluctant to give out company information. The accuracy of information
provided by the company hampered the overall quality or success of the study. Bangladesh does
not have organized secondary data of this sector unlike most developed countries. Thus the
information generated from primary research may not reflect the precise scenario of current
needs and our limited sample size may not be large enough to make accurate generalizations
about the entire population.

B. Trends in Tobacco Production and Market Share


Despite a significant improvement in awareness about the deleterious effects of tobacco use in
recent years, tobacco product production and trade have remained largely unchanged, if not
increased. Although there has been a lot of campaigning against tobacco, it appears to have been
ineffective in reducing demand. This section discusses recent trends in tobacco production and
trade. Both agricultural and industrial productions in recent years are analyzed. Aspects of
imports and exports are also discussed in order to get an idea of recent trends in the tobacco
industry.

B.1 Tobacco products market shares


The tobacco products available on the domestic market are tobacco leaf and other chewing tobacco,
cigarettes and bidi. WHO estimates that cigarettes and bidi account for about 70% of all tobacco

used in Bangladesh; chewing tobacco for 20%; and the remaining 10% is consumed in the form
of cigars, snuff and pipe tobacco. The smoking market is clearly divided into two categories:
machine- made cigarettes and hand- made bidi. Although bidi outsell cigarettes by about three to
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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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one in volume, cigarettes far outstrip bidi in total sales value.

Manufactured cigarettes account for an estimated 80% in value, but only 25% in volume of all
manufactured tobacco products sold in Bangladesh. Conversely, bidi account for 20% in value
and 75% in volume. Imported cigarettes account for 9% in value and less than 3% in volume of
manufactured tobacco products sold. Some smokers are reported to be switching from bidi to
cigarettes as cheaper cigarettes become available on the market, however, production data
suggest that in volume terms, bidi market share is growing. Information on market share is not
available for tobacco leaf or other forms of chewing tobacco.

B.2 Tobacco Agriculture


While widely grown, tobacco is a relatively minor crop in overall agriculture in Bangladesh. In
2010, the acreage devoted to tobacco growing accounted for only 0.25% of acreage for all crop
production and, in 2009, the value of the tobacco grown was only 0.22% of the value of all
agricultural production. The acreage devoted to tobacco growing in Bangladesh has been falling
steadily for most of the past three decades, before rising sharply in 2010 (Graph 3.1). In 2009,
tobacco was grown on just under 30,000 hectares, down 46% from 1982, before rising to over
38,270 hectares in 2010. In many years, imports and exports of unmanufactured tobacco were
similar. Much of the recent rise in the quantity of tobacco grown in Bangladesh is accounted for
by these increased exports, with the share of tobacco exported rising from about 2.5% in 2000 to
nearly 34% in 2009. In 2008, the export incentive was eliminated. In the 2010/11 budget, the
government imposed a 10% duty on tobacco leaf exports in an effort to discourage tobacco
growing.
The Bangladesh Bureau of Statistics estimated that, in 2008/09, 115,500 persons were employed
in tobacco growing, about 0.3% of the agricultural labor force. While the recent rise in tobacco
growing in Bangladesh is likely to have increased the number of tobacco farmers in the country,
the overall share of agricultural employment in tobacco growing is likely to be less than0.5%.

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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Figure 1: Tobacco production

B.3 Production of Manufactured Tobacco Products


Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is much
more fragmented. As Table 1 indicates, cigarette markets are dominated by two firmsBritish
American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco Industries (DTI), a
part of the Akij Group. BATB is one of the oldest tobacco product manufacturers in Bangladesh,
in operation for over 100 years. BATB brands account for almost 46% of cigarette consumption
in 2010, down somewhat from the 54% half of the market the company had controlled as
recently as 2006.
DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of
subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals,
and much more. DTI has historically focused on the lower priced segment of the market. 7 DTIs
key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma;
other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI entered
into an agreement with Philip Morris International (PMI) to market PMIs brands, most notably
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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is around 40%
in recent years.
There are a number of other smaller domestic cigarette companies operating in Bangladesh,
including Abul Khair Tobacco Company (AKTC), Alpha Tobacco Manufacturing Company,
Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir Tobacco.
Together, they account for 10-15% of the Bangladeshi cigarette market. To date, Japan Tobacco
International and Imperial Tobacco/Altadis, the worlds other leading multinational tobacco
companies, have not established a significant presence in Bangladesh, with imports of their
brands and other multinational brands accounting for a very small share of the Bangladeshi
market.
The dominance of BATB and DTI is reflected in brand shares in the Bangladeshi cigarette
market, as shown in Table 2, derived from household survey questions on brands used in the
GATS (2009). Star (BATB) and Sheikh (DTI) are the two most popular brands, followed by
Navy (DTI), Gold Leaf (BATB), and Marise (AKTC). Together, the top 4 brands account for
over two-thirds of cigarette consumption. To date, DTIs agreement with PMI has not generated
much interest in Marlboro, which had less than 1% market share in 2010.
Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at
around 86% for the past decade, after rising sharply in the 1997. Nearly all cigarettes consumed
in Bangladesh are high-tar cigarettes, although lower tar brands are starting to emerge. Most
premium brand cigarettes are sold in packs of 20, while less expensive cigarette brands are more
often sold in packs of 10. The smaller packs appear to be targeted at keeping pack prices
affordable for lower income smokers. Over half of cigarette consumption is of inexpensive
brands and about 30% is of mid-priced brands.
In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4
firms account for a little less than 50% of the market, and, according to the 2001/03 Economic
Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household based.
Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the Akij
Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009). Akij
Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result in
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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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shared distribution channels and marketing practices. Aziz Bidi Factory is the only other
company with more than 10% of the market, while the remainder account for shares of around
5% or less. Most bidis are sold in packs of 25.

C. Current Pattern of Tobacco Consumption


Bangladesh is one of the largest tobacco consuming countries in the world. Tobacco is
consumed in many forms in Bangladesh, including smoking of cigarettes, bidis, waterpipe
(hookah), and chewing (often with betel leaves and nuts, as jarda). Cigarettes and bidis account
for most of smoked tobacco consumption. Data from various surveys suggest that smoking
prevalence has been relatively flat or rising in Bangladesh since the mid-1990s. Initiation of
tobacco use occurs at relatively older ages in Bangladesh, but a large number of Bangladeshi
youth have tried smoking and many consume other tobacco products.

Years

Per Capita

Total Consumption

Consumption

(Millions of Cigarette

(Cigarette Sticks)

Sticks)

1980

492

17787

1990

294

14007

1995

194

12373

2000

239

17449

2010

234

19717

Table 1: Annual Cigarette Consumption

C.1 Age-specific and Sex-specific smoking rates


It is clear from the table that as age increases so does prevalence of smokingboth for males
and females. The highest rates of smoking are found in people aged 35 years and above. These
rates refer to the smoking of both cigarettes and bidi.

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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The BBS surveys show a small fall in smoking rates between 2005 and 2006, for males and
females. However, surveys in two districts of Bangladesh in 2009 and 2010 found the opposite
a large increase in smoking prevalence for both males and females. The study found prevalence
rates for males of 41.1% in 2009 and 48.3% in 2010 and for females, 4.0% in 2009, and 20.9%
in 2010.

The same study reports differentials between rural and urban respondents, especially for older
respondents. Tobacco prevalence reached 80% for older rural male respondents; the highest agespecific rate among urban men was 69% (35-49 age groups). Prevalence was systematically
lower among urban female respondents than among rural women across all age groups.

C.2 Socio-economic differentials in male smoking


There are significant variations in male smoking among households from different socioeconomic groups. Differences are found with respect to educational status, household income
and other socioeconomic variables. Table 3.2 presents smoking rates among males by household
income groups. The lower the income of the household, the greater the prevalence of smoking of
its male members. Smoking prevalence among men appears to have declined between 1995 and
1997 for almost all income groups. The decline is significantly bigger among the lower income
groups.

Education is strongly correlated with smoking: the higher the level of education, the lower the
rate of smoking. The BBS surveys show a fall in smoking rates between 2009 and 2010 for all
except for the most educated men. The same relationship between education and smoking
prevalence is found in India and many other countries.

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C.3 Smoking among poor people


Clearly, smoking rates are highest among the poor. Table 3.5 and 3.6 present an estimate of the
number of poor smokers (male and female). The smoking rate among adult males living below
the poverty line is 54.8% and the corresponding rate for adult females is 3.6%. It is estimated
that 9,872,181 poor adult men (15+) and 612,060 poor adult women smoke, making a total of
nearly 10.5 million poor people spending scarce income on cigarettes and bidi. Given the
increases in population and 2009-10 data on smoking, this number has almost certainly been
increasing.

D. Circular Flow Diagram


The model that helps explain how a market economy works is a circular-flow diagram. A
circular-flow diagram is a visual model of the economy that illustrates how households and
businesses interact through markets for products and markets for resources. The circular-flow
diagram with reference to BATB is illustrated in Figure 2.

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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Factor Market [Land,


Labor, Capital]
-Household Sells
-Firms buy

Income
Cost
Factors of
Production

Factors of
Production

Households

Taxes

Taxes

BATB

-Sells Factors of production

-Buys factors of production


-Sells Cigarette

Govt.
Spending

Government

-Buys Cigarette
Govt.
Spending

Cigarette
Cigarette

Product Market
Revenue

-Companies Sell
-Consumers Buy

Figure: 2 Circular Flow Diagram

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Consumption/Expenditure

Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
reference to British American Tobacco Bangladesh

The two types of economic agents in a simple market economy are households and business
firms. A household is a social unit comprised of those living together in the same dwelling. Here
the tobacco manufacturer company as a representative of business firm is producing goods i.e
cigarettes that cater to different segments of customers in an effort to make profit. The profits they
are generating are the revenues minus expenses. Revenues are the monetary income received from
the sales of cigarettes and expenses are the total costs of the production that encompasses raw
materials purchase, labor expenses, employee salary, utility, miscellaneous expenses, taxes,
interest expense, administrative expenses, maintenance and so forth.

The household part in this particular diagram interacts with business firm i.e. BATB in two
distinct ways:
(1) Households supply economic resources, such as labor to businesses in exchange for income,
and
(2) They use their incomes to buy goods produced and sold by business firm. The first type of
interaction occurs in markets for resources. The second type of interaction occurs in markets for
products.

The bottom half of the circular-flow diagram, which represents product markets, shows those
households give money to businesses in exchange for goods and services. Money flows
clockwise, while the goods and services flow counter-clockwise. In the context of BATB, the
households or the cigarette consumers buy cigarettes in exchange of money and in turn inject the
amount to the companys coffer. In markets for products, the companies are usually the suppliers
and households usually are the demanders being no exception to the case of British American
Tobacco here. The money that flows from cigarette consumer to BATB is consumption spending
from the perspective of households and is revenue from the perspective of producer firm. The

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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products that flow from business firms to households are sales by the business firms and
purchases by household consumers.

The top half of the circular-flow diagram, which represents resource markets, shows those
businesses provide money to households in exchange for economic resources used as factors of
production. For example, Labor is an economic resource that every adult household can
potentially supply in the markets for resources. Wages are the payments made to workers in
exchange for labor, typically based upon the amount of time worked or amount of output
produced. A salary is a fixed payment made regularly to a worker in exchange for labor. Bluecollar workers typically receive wages in exchange of their physical labor. White collar workers
are typically paid salaries. In the diagram, this process is illustrated by the counterclockwise flow
of money and the clockwise flow of economic resources. Besides, if households own natural
resources, such as land, they can supply them to businesses in exchange for rent payments.
The company has set up distribution houses at different locations all over the country owned by
households and thereby attributing them for another factor of production, Land. Hence we can
clearly observe that, in markets for economic resources, households are usually the suppliers and
the firms are usually are the demanders. The money that is flowing from the company to
households are expenditures from the perspective of BATB and incomes from the perspective of
workers, employees, managers and land owners. Conversely, the labor, capital, and natural
resources that are flowing from households
perspective

of

households

and

inputs

to the business are sources of income from the


from

the

perspective

of

businesses.

When workers receive more income than they spend on the purchases of goods and services, they
are able to create savings. Savings are the portion of a persons income that is retained or invested
for use in the future. Household savings can become financial capital if the money is borrowed by
a business firm. For example, money that is deposited by households in a bank savings account
might be lent by the bank to the company in order to purchase machinery, equipment or to meet
short term liabilities. When this occurs, the business firm pays interest to the bank for the
borrowed funds. Interest is a rate of return that represents compensation from the borrower or

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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receiver of funds to the lender or depositor of the funds. The bank, in turn, pays interest to the
householders for the funds deposited in the savings accounts. Consequently, other transactions
that occur in resource markets are the supply of financial capital by households in exchange for
interest income.

E. Relative Market Share in the Tobacco Industry


Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is
much more fragmented. As Table 3.1 indicates, cigarette markets are dominated by two
firmsBritish American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco
Industries (DTI), a part of the Akij Group. BATB is one of the oldest tobacco product
manufacturers in Bangladesh, in operation for over 100 years. BATB brands account for
almost 46% of cigarette consumption in 2010, down somewhat from the 54% half of the
market the company had controlled as recently as 2006. BATB largely focuses on the premium
segment of the market, but in 2009 entered the lower priced segment of the market in an
apparent effort to regain market share. BATBs leading premium brands include John Player
Gold Leaf, Benson & Hedges, Pall Mall, and Capstan. Mid-priced brands include Star and
Scissors, while Pilot and Bristol are BATBs recently introduced low-priced brands.
DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of
subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals,
and much more. DTI has historically focused on the lower priced segment of the market. DTIs
key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma;
other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI
entered into an agreement with Philip Morris International (PMI) to market PMIs brands, most
notably Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is
around 40% in recent years.

There are a number of other smaller domestic cigarette companies operating in Bangladesh,
including Abul Khair Tobacco Company (AKTC), Alpha Tobacco Manufacturing Company,
Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir
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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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Tobacco. Together, they account for 10-15% of the Bangladeshi cigarette market. To date,
Japan Tobacco International and Imperial Tobacco/Altadis, the worlds other leading
multinational tobacco companies, have not established a significant presence in Bangladesh,
with imports of their brands and other multinational brands accounting for a very small share
of the Bangladeshi market.

The dominance of BATB and DTI is reflected in brand shares in the Bangladeshi cigarette
market, as shown in Table 3.2, derived from household survey questions on brands used in the
GATS (2009). Star (BATB) and Sheikh (DTI) are the two most popular brands, followed by
Navy (DTI), Gold Leaf (BATB), and Marise (AKTC). Together, the top 4 brands account for
over two-thirds of cigarette consumption. To date, DTIs agreement with PMI has not
generated much interest in Marlboro, which had less than 1% market share in 2010.
Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at
around 86% for the past decade, after rising sharply in the 1990s7. Nearly all cigarettes
consumed in Bangladesh are high-tar cigarettes, although lower tar brands are starting to
emerge. Most premium brand cigarettes are sold in packs of 20, while less expensive cigarette
brands are more often sold in packs of 10. The smaller packs appear to be targeted at keeping
pack prices affordable for lower income smokers. Over half of cigarette consumption is of
inexpensive brands and about 30% is of mid-priced brands.

In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4
firms account for a little less than 50% of the market, and, according to the 2001/03 Economic
Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household
based. Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the
Akij Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009).
Akij Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result
in shared distribution channels and marketing practices. Aziz Bidi Factory is the only other
company with more than 10% of the market, while the remainder account for shares of around
5% or less . Most bidis are sold in packs of 25.

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E.1 Competitive Landscape


50%
45%
40%

43%
39%

38%

38%

44%

43%

42%

41%

39%

38%

35%

35%

35%

30%
BATB

25%
20%

16%

17%

15%

DTI
15%

14%

14%

14%

AKTC

10%
5%

0%
2009

2010

2011

2012

2013

2014
(Current)

Figure: 3 Cigarette Company Market Share: Year 2009-2014

Brand

Company

Year -2012

BATB

25.6%

Sheikh

DTI

18.3%

Navy

DTI

13.7%

Gold Leaf

BATB

10.3%

Marise

AKTC

8.9%

Others

---

23.2%

Star

Table 1: Cigarette Brand Shares: (Based on a Household Survey)

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
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F. Company Profile
British American Tobacco Bangladesh (BATB) is a pioneer and leading multinational cigarette
manufacturer. Based in England, British American Tobacco was formed at the turn of the 20Th
century with the objective of establishing a worldwide business. British American Tobacco is
recognized as one of UK's largest companies and the World's most global tobacco company.
Today British American Tobacco sells the leading brands in over 30 markets covering 102
countries, has more than 200 brands worldwide, employs more than 55,000 people and produces
some 2 billion cigarettes every day. More than a billion people across the globe enjoy smoking
tobacco. One in every eight chooses a British American Tobacco brand. In order to support the
company's business goals the merger of British American Tobacco with Rothmans International
had been announced on 11 January 1999. This global merger was completed on 7thJune 1999.
This brings together the number 2 and 4 players which together will boast a combined volume
exceeding 900 billion cigarettes around the world with some 120,000 employees and a
worldwide market share of 16 percent (Phillip Morris has a 17 percent share).
British American Tobacco Bangladesh (BATB) was previously known as Bangladesh Tobacco
Company (BTC). On March 22, 1998 the company changed its identification and established
commitment to the highest international standards. The Companys main business is tobacco,
which involves growing, processing, manufacturing and marketing of tobacco leaf, cigarettes and
pipe tobacco. The company also exports processed tobacco leaf in the international market,
mainly in the European Countries with its effort to create an international market of its products.
Based in Dhaka the company has one packaging factory in Dhaka and one leaf-processing
factory in Kushtia. The companys current employees are more than 200 managers and 1300
employees. In its effort to create an international market for Bangladeshi leaf tobacco the
company has been exporting tobacco to markets in developed countries like UK, Germany,
Poland, Russia and New Zealand.

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F.1 Vision and Mission of the Company


F.1.1 Vision
Companys vision is to achieve leadership of the global tobacco industry in order to create
shareholders value.
F.1.2 Mission
Double the net revenue by 2014
Growing companys share of the total tobacco market
Dominating key identified segment

F.2 Product Portfolio


BATBs product offerings can be categorized in Four Segments which are in alignment with the
Local Government Tobacco Control Guideline

Premium
Benson and Hedges or B&H is regarded as a premium segment product of this company.
Launched in 1997, B & H maintains BATBs dominance in its respective segment and drives the
growth in Bangladesh market. Within a short time Bangladesh became a leading B& H market
across the BAT world. After a price increase

2004, B&H still remains a Successful and

happening muscle in our portfolio. British American Tobacco Bangladesh was the first market to
launch the new pack of E&1-1 at the beginning of September 2005.

Aspirational Premium
JPGL is the prominent aspirational premium segment brand that was Launched in 1980 and is
one of the highest selling brands of BATB in this segment. Apart from Johon Player Gold Leaf,
there are also two other brands in aspirational premium segment which are Pallmal and Capstan.

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reference to British American Tobacco Bangladesh
Value for Money
Star, launched 40 years ago is still a dominating brand in this segment for BATB. Recently,
BATB has introduced a new variant in the Star Family named as Star Next.

Low
BATB low segment consists of three brands namely Pilot, Hollywood and Derby. Among these
three, Derby makes out the most volume per year from the low segment

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reference to British American Tobacco Bangladesh

Low Segment

BATB
PRODUCT
PORTFOLIO

Premium Segment

Value for Money Segment

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reference to British American Tobacco Bangladesh

F.3 Sales Trend over Last 10 years


The tobacco business had a very slow growth rate in the first decade. The industry
grew in a moderate pace till 2006 but between 2008 and 2012 the growth rate happened to be
fluctuatiing. The following figure self-explains the trend in BATB sales volume over the past
years.

BATB Sales Volume (Bln sticks)


45
40
35
30
25
20
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 (estimated)

BATB Volume (Bln


sticks)

Figure 4:
Sales trend of BATB over last decade

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
reference to British American Tobacco Bangladesh

F.4 Countrywide Sales (By Region)


Over the past two decades BATB marked significant growth in terms of volumes sold
amongst the regions. The statistics have been furnished herewith:

Volume (in Bln sticks)


Years

Dhaka

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

23 | P a g e

Chittagong

3
.5
3
.5
4
.6
4
.9
5
.4
6
.5
7
.5
7
.1
7
.1
8
.1
8
.8

Sylhet

Rajshahi

Total

Khulna

BATB

1.2

2.7

1.5

1.0

9.8

1.2

2.7

1.5

1.0

10.0

1.6

3.6

2.0

1.3

13.0

1.7

3.8

2.1

1.4

13.8

1.9

4.2

2.3

1.5

15.4

2.3

5.1

2.8

1.8

18.5

2.6

5.8

3.3

2.1

21.4

2.5

5.5

3.1

2.0

20.2

2.5

5.5

3.0

2.0

20.0

2.8

6.3

3.5

2.3

23.0

3.1

6.8

3.8

2.5

25.0

Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
reference to British American Tobacco Bangladesh

2011

2012

2013

1
0.2
1
0.9
1
2.3
1

2014
(estimated)

4.1

3.6

7.9

4.4

2.9

29.0

3.8

8.5

4.7

3.1

31.0

4.3

9.5

5.3

3.4

34.8

4.9

10.9

6.1

4.0

40.0

Table 2: BATBs region-wide Sales

F.5 Contribution to the Industry

BATB's Contribution to the Industry


Premium
6%
Aspirational
Premium
12%
Low
58%

Figure 5: BATBs Contribution to the Industry

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Value For
Money
24%

Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
reference to British American Tobacco Bangladesh

G. SWOT Analysis
Strengths
1. Wide recognition BATB is widely recognized as good corporate company for its corporate
value and ethics. The good deeds are in terms of highest tax payment, community services,
afforestation programs and helping some social organizations like Shandahni and others.
2. International brand Image BATBs manufactured premium and medium segment brands
Benson & Hedges, State Express 555 and John Player Gold Leaf are internationally recognized
& valued by its loyal customers. This is because these brands are manufactured in different BAT
operating companies and dominating in the world market. Quality of these brands is legendary
and consistent, when it is compared. In order to ensure the quality product BATB use global
sourcing of all the raw material, which is common for all the operating companies in BAT.

3. Strong brand portfolio: BATB offers product in all price segments in the market. All their
products are the market leaders, having the majority of market share in term of value and
volume.
4. Talented workforce - People are BATBs fundamental advantage-the sources of all their
strength. This include management, workforces and all other business partners, who are directly
involved in the value chain process. People are highly trained and motivated, productive and
team-oriented. Some important aspects are listed below:

Planning

Long term orientation

Many people involved in preparing and making decision

Decision making takes long time but implementation is fast

Employees share power and responsibility

Organizing

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reference to British American Tobacco Bangladesh

Common organization culture

Organizational change by changing goals

Staffing

Rapid advancement highly desired and demanded

Reward for individual achievements

Training and development undertaken

Leading

Directive style, strong, firm and determined

Leaders are decision maker is heading the group

Controlling

Control by supervisor

Control focus on individual performance

5. Superior technology Technology used in BATB is superior from the competition in


Bangladesh. Their state of art manufacturing plant in Dhaka is not only sophisticated but also
benchmark facility within the operating companies of BAT in their AMESCA (Africa, Middle
East, Sub-Continent & Asia) region. In this industry technology is the key for superior quality
product. Technology revolutionizes the product and production process and BATB always uses
latest technology which smoothing out the production process.

Process Technology: It is used for tobacco processing and its conversion to cigarettes. It
encompasses extrusion technology, aspects of packing and painting, cutting and dying
technology, application of instrumentation, control system and process automation and
separation of tobacco and non tobacco materials.

Material Technology: The Company has been using latest material technology to the design and
develops the cigarettes and packing. These area covers paper technology, combustible smoking
material etc.

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reference to British American Tobacco Bangladesh

Information technology: BATBs computer section is very much updated and well oriented. All
the external and internal information is being controlled through a network.

MRP II: BATB is the only company in Bangladesh who uses MRP II (Manufacturing Resource
Planning II) in their production and operation. This is the latest technology and only a few
companies in the world have the capability to implement MRP II. This is a very distinctive
competitive advantage of BATB over other companies.

6. Better product quality relative to the rivals: As mentioned earlier BAT maintains its consistent
quality with good blend of tobacco through superior technology, thus BATB is always in an
advantages position compare to its competitor. BAT grows tobacco for their own consumption in
Bangladesh and they have completely separate function responsible for tobacco growing and
processing, which their competitors do not have.

7. High financial strength: BATB has a huge financial back up. The company can devote a large
fund to R&D, advertisements, quality control, and training and also in other areas, which its
competitor cant match.

8. Absorbing economies of scale in producing BAT products: BAT product has a higher demand
in Bangladesh. As the company produces in a large scale, it possesses economies of scale and
hence per unit of cost is comparatively lower in Bangladesh. On the other hand production
sources land, labor and raw materials are also low in this country.

9. BATB is the largest tax payer in Bangladesh: BAT is the largest tax payer in our country. It
paid more than Tk. 300 million tax in the last year. As a result of this huge amount BATB enjoys
a cordial relationship with the government of Bangladesh.

10. Low manufacturing cost: There are many reasons for low manufacturing costs of BATB.
First, it can hire labor at a cheaper rate, which is not possible in developed countries. Secondly,
the company has been using the latest technology in production by which it is able to minimize
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reference to British American Tobacco Bangladesh

its production cost by producing bulk of cigarettes. Thirdly, transportation cost is also
comparatively lower in our country.

Weakness
1. Strong Trade Union: Trade union is one of the weakness for BATB. They are resistant to any
changes. It takes lot of management effort and time to make the union leaders to motivate for any
minor changes in the entire process. Management in BATB is working hard to change the culture
and practice through different projects and program.

2. Missing a large number of consumers due to high price: BATB is loosing a large number of
consumers in Bangladesh due to high price of its products. It does not have a product for very
low income consumers and Biri consumers. Evidence shows that 74.5% of the total volume of
market share of smokers (Cigarette and Biri combined) belongs to local company where BATB
has no access. Hence we may suggest that BATB may capture a large portion of the local
smokers market, if it produces a low priced product for the low income consumers.

3. Wholesalers and retailers are not getting enough attention: Distributors of BATB do not
provide adequate attention to wholesalers and retailers. Enough merchandizing materials are also
not provided to them. On the basis of the above in depth external analysis the following
opportunities and threats have been identified for BATB that need to be considered with due
care.

Opportunities

1. Global Merger with Rothmans: Global merger of BAT with Rothmans Industries and closer of
all Rothmans facilities in South Asia gave BATB opportunity to become regional source of John
Player Gold Leaf & Benson & Hedges for Middle-East market. BATB already sent samples of
these two brands for physical & sensory test in R&D Center in the head quarter.
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reference to British American Tobacco Bangladesh

2. The increased number of smokers in Bangladesh: The number of professional smokers is


gradually declining in the western countries where as the same is increasing in Bangladesh.
BATB can grab this opportunity and can make a consumer forecast for the future. At present, the
cigarette market in Bangladesh is growing at a rate of 10%. It is indeed a very good opportunity
for BATB to grow.

3. Augmenting GDP: GDP of Bangladesh is increasing due to economic expansion, open market
policy, industrialization and educational development. Its a great opportunity for BATB to
expand its market and product line.

4. Increasing number of population: The number of population is increasing at a higher rate in


Bangladesh. And at the same time the number of smokers are increasing. So it is an opportunity
for the company.

5. 80% people smoke Biri: In our country a large section of urban and rural people smoke Biri.
This means that the market potential of BATB is very high. If the Biri consumers can be
persuaded to smoke cigarettes instead, the company will have a very big market for its products
in this country.

Threats
1. Anti smoking lobbies activities: Anti-Smoking lobbies are now getting very strong in
Bangladesh. Recent demonstration against Voyages of Discovery (VOD), a global campaign of
John Player Gold Leaf and government legislation against ban in cigarette advertisement in all
media reflects clear threat for cigarette industries.

2. High Excise rate: Excise is another threat for BATB. In the recent past there was several
increases in tax structure specific to BATB to get more revenue for the government. If this
continue BATBs strategy for price leadership will be at stake.

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reference to British American Tobacco Bangladesh

3. Smuggled/ Transit cigarettes: Smuggled cigarettes are available in Bangladesh. These are
companies same brand or other international brands. These transit cigarettes are decreasing
locally produced international brands. This is one of the greatest threats for BATB. BATB
cannot lower the price of its products, as the company has to pay a huge tax for those.
But the same brands of smuggled cigarettes are sold in Bangladesh at a lower price. As a result
consumer is purchasing the transit one.

4. Violation of patent: It is very common in Bangladesh, even though the government is taking
legal action against it. Many companies are copying the brand names of BATB products. For
example: there is a cigarette called Five Five which resembles to the BATBs popular
international brand SE 555.

5. Social pressure on the company is increasing: At present people are becoming more and more
health conscious and a strong social pressure is being created on the cigarette companies
worldwide. BATB is not free from this pressure.

6. International competitors are coming to Bangladesh: Phillip Morris Incorporation has already
started its operation in Bangladesh. This is a significant threat for BAT Bangladesh.

7. Political instability and violation: Political instability, hartal, public demonstration, anti social
activities are the most common phenomenon in Bangladesh. These external forces hamper sound
business environment. So these factors are big threats for the company.

8. Natural disasters: Natural disasters like flood, cyclone, and tornadoes are very common in
Bangladesh. These natural disasters cause a huge loss of crops, production and property, which
directly reduces the purchasing power of the consumers. This in turn reduces demand for
cigarettes including BATB products. As BAT cultivates a considerable amount of tobacco in the
Country to use them as raw materials in cigarette production, sometimes natural disaster greatly
hampers leaf cultivation.

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reference to British American Tobacco Bangladesh

9. Implementation of Existing Laws: If the following laws are implemented in will be great
threat to tobacco industry.

Railway Act, 1890, section 110 prohibits smoking without the consent of the fellow
passengers.

Juvenile Smoking Act, 1919 prohibits smoking by a person under 16 years of age. Also,
no tobacco products can be sold to such a person.

Prohibition of Smoking in Show Houses Act, 1952 prohibits smoking in cinemas,


theaters etc. during demonstration or show. Offenders are liable to be arrested without
any warrant.

H. PESTEL Analysis
H.1 Macro Environmental Factors
With the framework of PEST/PESTEL/PESTLE analysis, BATs threats and opportunities are
defined, and help to visualize external aspects, which usually cannot be controlled and have
potential to affect objectives.

H.2 Political/ Legal


Generally, tobacco industries are enforced regulatory control by imposing taxes and duty
charges. Also restrictions on marketing, advertisement, and exhibition of the product, avoid
descriptions like, light and mild, nicotine, carbon monoxide smoke yields and tobacco
ingredients, prohibition of smoking in public places - BAT is aware of these aspects and employ
lawyers to have legal advice on these social responsibilities, marketing and stakeholders issues.

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reference to British American Tobacco Bangladesh

H.3 Economic
Tobacco duty was raised in line with inflation. The impact of high taxation in the UK cigarette
market resulted in high prices, which led to reduced annual industry volumes, greater price
competition and trading down by consumers to lower-price cigarette brands. Imposing taxes on
tobacco causes major revenue for government around the world. Such industry, like BAT
contributes considerably to the financial system of more than 150 countries. About 100 million
of people worldwide do have job opportunities from the industry.

H.4 Social and Culture


Due to risks to health number of smokers has decreased over the years as people are becoming
educated. BAT is aware and manages operations responsibly. They are working through dialogue
in advertisement objectives, alarming about health hazardousness on packets, prohibition of
smoking in public places and bans on displaying at POS.

H.5 Technology
Due to advancement in technology making of cigarette is fully automated into machines, from
processing of tobacco to cutting cigarette paper and filters. Packaging are also automated,
cigarettes are filled into respective brand packs, wrap in protective film and placed in cartons.
Factory machines at each location are contemporary and those cannot be redeployed are
destroyed. BAT itself participate in technological progress by carrying their own researches
either into their department or other institutions for innovating new and fresh ideas and
production. They believe in testing and adapting new available technology for their production.
BATB has also developed and promoted new cultivation methods that to replenish soil by using
organic substance for better fertility structure as well as having environmental benefit. They
work with BAT Biodiversity Partnership and Bangladesh Agriculture University.

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reference to British American Tobacco Bangladesh

H.6 Environment
BATB should work to protect the long term security of the tobacco leaf supply by encouraging
sustainable agriculture based on multi-stakeholder partnerships and held two stakeholder
dialogues on the issue. There is biodiversity risk and opportunity assessments should be done to
inform about their approach to sustainable agriculture. Commissioned independent research
undertaken, considering the impact of tobacco farming on communities and the environment.
Human rights of suppliers, contracted farmers and local communities should be protected. BATB
has a considerable impact upon the environment in both through their direct operations and in
tobacco growing areas and for several years they have put in place various initiatives to help
mitigate their impact on biodiversity, to limit and reduce deforestation in the leaf growing
operations and to improve efficiencies relating to energy and water use. In the supply chain its
important to ensure that the rights of tobacco farmers are respected and that the industry and
stakeholders work together to tackle child labour. Initiatives such as Social Responsibility in
Tobacco Production Program and participation in the Eliminating Child Labour in Tobacco
Growing Foundation are taken. Sustainable agriculture is important too tobacco farming makes
an important contribution to rural development by improving both landscape and livelihoods and
through providing agronomy support to the contracted farmers help share best practice.

H.7 Micro Environmental Factors


The microenvironment factors determine BATs internal entities that can be controlled and
manipulated to collect information for marketing strategies.

Product: BAT manufactures Cigarettes, Smokeless Snus, Cigars, Roll-your-own and Pipe
tobacco.

Price: Products are sold at Gross Price with proper VAT. Wholesalers are allowed discounted
prices for orders exceeding 6,000 outers or more of cigarettes, cigars and / or tobacco for a single
delivery.
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reference to British American Tobacco Bangladesh

Promotion: To aware target customer, advertisements are done through TV and newspapers
with compliance to the legal and regulatory environments.

Place: BAT delivers product directly to the appropriate premises or any other secure addresses
as agreement, i.e. to valued consumers.

I. Porters Five Forces Industry Analysis


For this part, five competitive forces model developed by Professor Michael Porter has been
used.

I.1 Threat of Rivalry


Rivalry depends on mostly in terms of price and quality. International brand image, major
competitors consists of domestic manufacturers are accounted for the rivalry. The industry is still
growing opening the door of opportunity for augmented business as consumers are up coming
from Biri to cigarette. Rivalry in this particular segment is very intensive in terms of price rather
than quality (Market share of BATB and its competitors). Moreover, there are also some foreign
brands, which are either smuggled or imported illegally, which have been termed as transit
brands. The most important brands in this category are Dunhill, Benson & Hedges, Marlboro,
London etc. It is notable that recently Marlboro has started operating seriously in Bangladesh.

Though BATB is holding the major market share in the Dhaka City as well as whole country,
there are also other companies that are operating in the market. Although none of these
companies have become a major threat to BATB, except perhaps Dhaka Tobacco, yet the
presence of these companies signals that other companies can also join in this market.

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reference to British American Tobacco Bangladesh

I.2 Threats of Substitute


Price, quality, performance, perceived value of the product and brand image are the key factors
for brand substitution. In the low price segment readily available and attractive priced substitute
creates competitive pressure. But in the mid-price segment the key for the substitution is the cost
as well as price. Product with more and new attributes can create product substitution in this
segment. In the premium price segment quality and product image is key for the substitution.
Customers in this segment are brand loyal. BATB has no threat for the substitute products as
there are no substitutes in terms of cigarette quality with other product in the industry.

I.3 Threats of Potential New Entrants


Industry is safeguarded from the potential entrants due to government lawful barrier for setting
up new tobacco industry, high capital investment, economies of scale, brand Image, and
specialized know-how, existence of learning and experience curve effect, brand preference and
customer loyalty. But the introduction of the operation of an international tobacco company like
Marlboro in Bangladesh is really a big threat for BATB. This is an external threat over which
BATB has no control. However, the company should take steps to increase its market share to
combat Marlboro.

I.4 Bargaining Power of Suppliers


As the products are classified as Fast Moving Consumable Goods and produced in all over the
world, all the firms have the leverage to choose the wrapping materials from anywhere in the
world. These materials are cigarette paper, aluminium foils, boards, filter papers, cellophane
paper etc. Tobacco for medium and low price segment cigarette is grown in Bangladesh and is
capable of fulfilling the entire industry demand. Tobacco for premium priced cigarette are also

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Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with
reference to British American Tobacco Bangladesh
grown in Bangladesh and around 18 20% high quality tobacco is imported from different
tobacco growing countries, where tobacco is surplus compared to its consumption. Therefore,
suppliers tend to have less leverage to bargain over price and quality.

I.5 Bargaining Power of Buyers


Low substitutes and a very close pricing of the competitors in the industry leave very low
bargaining power for the buyers, especially in the low priced segment. But in the medium priced
segment, quality and price are factors key for substitution and therefore, different brand
preferences are available in the market and the market share of each competing rivals tend to
shift in very significant margin. But it is not very relevant scenario for the premium segment
where most of the customers are loyal to their brands.

J. Analysis and Applications of Economic Principles and Theories


J.1 Principles of Economics (Relating to the Ten Principles of Economics)

How People Make Decisions

1. People Face Tradeoffs: In order to get something, we must always give up


something else. As a society, we need to make similar types of choices: there is always a tradeoff
between efficiency and equity. For example, we can choose to enact regulations that protect the
environment from industrial waste. It is, however, important to understand that these tradeoffs
are real, and that policy makers must try to choose the most appropriate balance between
efficiency and equity. Similarly, while investing and consuming products such as cigarettes of
the tobacco sector people face tradeoffs between the risks of investing the money in that area or
in some other area that will give out positive externalities, such as increasing their consumption
on fruits and vegetables. (Mankiw, Principles of Economics).

2. The Cost of Something is what You Give up to Get It: Because of the abovementioned tradeoffs, people get in a situation of deciding whether to spend money on cigarettes
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reference to British American Tobacco Bangladesh
need some sort of method to determine which course of action produces the most beneficial
tradeoff. The cost of one action versus another may not be immediately clear. A good example
would be a consumer trying to decide on his consumption of cigarettes. When he thinks about
the total costs and benefits from the consumption of tobacco, he might consider the fact that the
cigarette will give him a sense of satisfaction in his life and also let him socialize with other
smokers but it will cost him money in terms and consumption and healthcare. One thing he may
not even take into account is that with time the effect of consuming cigarettes is harmful.

3. Rational People Always Think at Margin: A marginal change simply means an


incremental change to a pre-planned action. Similarly, in the case of buying cigarettes, some
choices actually are made based on marginal changes or what economists describe as small,
incremental adjustments to existing plans of action. For instance, when one is deciding whether
to purchase a pack of cigarettes, the person must compare the marginal cost of this purchase with
the marginal benefits (satisfaction) associated with consuming a pack of cigarettes. By doing
this, one can evaluate whether the purchase is worth the attendant costs.

4. People Respond to Incentives: Most decisions in life are based in some way on a
cost and benefit analysis of available courses of action. Because people make decisions by
comparing costs and benefits, their behavior may change when the costs or benefits change.
Public policymakers should never forget about incentives, for many policies change the costs or
benefits that people face and, therefore, alter behavior. A lower tax on cigarettes, for instance,
encourages people to consume more cigarettes. On the contrary, if govt. hikes the tax rate on
cigarettes, people will consume cigarettes a bit less and their consumption would be hampered.
Therefore, the consumption of cigarettes will be hindered.
How People Interact

5. Trade Can Make Everyone Better-off: Trade allows people to focus on serving a
specialized purpose in the economy, such as food production, textile production, tobacco
production, computer engineering, etc. By trading with other people, people get access to a much
wider variety of goods than you would be able to produce ourselves, and at a better opportunity
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reference to British American Tobacco Bangladesh
cost (price). The reason why someone would prefer buying a cigarette from a manufacturer is
simply because that person does not have the time and skills in manufacturing cigarettes for
himself. The trade between a manufacturer and a buyer thus benefits both. The manufacturer
receives a reasonable profit for managing the entire activity of manufacturing cigarettes, and the
buyer gets the satisfaction from consuming the production of cigarettes.

6. Markets are usually a Good Way to Organize Economic Activity: The


disadvantages of decentralized decision making were identified several centuries ago. Free
markets are the ultimate democratic tool, where every time a market participant decides to
purchase a product or service, he or she is casting a vote for it over its competitors. This principle
clearly predicted how and why communism would never succeed - central planners interfere
with the natural forces of the market, distorting prices - they achieve sub-optimal results and
eventually, systemic failure. Central planners failed because they tried to run the economy with
one hand tied behind their back - the invisible hand of the marketplace
7. Government Can Sometimes Improve Market Outcomes: Governments need to be
there to protect market participants from fraud or other dangerous business practices, and to
enforce contracts. Without any rules, we do not have a free market system, but rather anarchy. In
order to allow markets to perform their function properly, governments must be on the lookout
for two main causes of market failures - externalities and market power. In the tobacco sector of
Bangladesh, several government policies and set standards play a vital role as they provide a tool
for monitoring the activities of manufacturers.
8. A Countrys Standard of Living Is Determined by Its Ability to Produce Goods
and Services: In today's world, it is absolutely staggering how standards of living vary from
country to country. People in advanced economies, on average, live far longer and more
comfortably than their counterparts in less advanced economies. These vast differences are
attributable mainly to one variable - productivity. A country's productivity is defined as the
amount of goods and services produced by an average worker in an hour. The correlation
between a country's productivity and the standard of living enjoyed by its citizens, is striking.
However, tobacco contribution to GDP is increasing each year; productivity remains high
enabling the country towards a better standard of living.
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reference to British American Tobacco Bangladesh

9. Prices Rise When Government Prints Too Much Money: There have been a
number of spectacular cases of inflation throughout history. The cause, each time, was not some
mysterious force that robs money of its purchasing power. The culprit, always, is the
government's aggressive increase in the supply of money. The reason governments inflate the
money supply can differ somewhat from case to case, but generally they happen because of war
or other large expenditure that the government cannot afford, so it devalues the currency in order
to lessen the debt burden. Due to inflation, the price of cigarettes has increased comparatively
throughout the years (as with inflation the purchasing power of people has declined).

10. Society Faces a Short-term Tradeoff between Inflation and Unemployment: The
explanation for this effect is that prices do not adjust immediately to an increase in the supply of
money. Nominal prices of tobacco products have increased over the past decades, but real
cigarette prices (adjusted for inflation) have fallen over the past ten years, fuelling an increase in
demand. Moreover, increasing incomes are also associated with rising tobacco product
consumption. The positive (and significant) income elasticity of demand for cigarettes implies
that if no anti-tobacco measures are taken, economic growth and rising incomes will lead to an
increase in cigarette consumption.

J.1.1 Effect of Invisible Hand in the Tobacco Market


A free market arguably provides numerous opportunities for maximizing ones own profit at the
expense (rather than for the benefit) of others. The tobacco industry is often cited as an example
of this: the sale of cigarettes and other tobacco products certainly brings very good revenue, but
the industrys critics deny that the social benefits (the pleasures associated with smoking, the
camaraderie, the feeling of doing something cool) can possibly outbalance the social costs. An
invisible hand works here, that promotes the societys well being from the sale of cigarettes, not
in terms of satisfaction but also in terms of revenue it provides to the government (BATB, one of
the largest taxpayers in Bangladesh) which can be put to use in specific government projects that
depicts social welfare. As a result there is a presence of invisible hand in the tobacco market.
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J.2 Demand and Supply Function


Supply and demand is perhaps one of the most fundamental concepts of economics and it is the
backbone of a market economy. Demand refers to how much (quantity) of a product or service is
desired by buyers. The quantity demanded is the amount of a product people are willing to buy at
a certain price; the relationship between price and quantity demanded is known as the demand
relationship. Supply represents how much the market can offer. The quantity supplied refers to
the amount of a certain good producers are willing to supply when receiving a certain price. The
correlation between price and how much of a good or service is supplied to the market is known
as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship
between demand and supply underlie the forces behind the allocation of resources. In market
economy theories, demand and supply theory will allocate resources in the most efficient way
possible.
Today, in the tobacco industry in Dhaka, both price and demand for cigarettes have gone up
exponentially. Though the price of cigarettes has increased on an average, the demand for
cigarettes has not declined as well. It is estimated that the demand for cigarettes will further
increase in the next few years. This is primarily due to the income and inflationary effects which
we cannot assume to be constant in the long run.
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is
important to supply because suppliers must, but cannot always, react quickly to a change in
demand or price. So it is important to try and determine whether a price change that is caused by
demand will be temporary or permanent.
When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its
most efficient because the amount of goods being supplied is exactly the same as the amount of
goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the

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current economic condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding. In the real market
place equilibrium can only ever be reached in theory, so the prices of goods and services are
constantly changing in relation to fluctuations in demand and supply.
When technological progress occurs, the supply curve shifts. For example, assume that someone
invents a better way of growing tobacco so that the cost of growing a given quantity of tobacco
decreases. As a result of a supply curve shift, the price and the quantity move in opposite
directions. If the quantity supplied decreases, the opposite happens. The movement of the supply
curve in response to a change in a non-price determinant of supply is caused by a change in the
y-intercept, the constant term of the supply equation. The supply curve shifts up and down the y
axis as non-price determinants of demand change.
J.2.1 Price Elasticity of Demand
There was not enough information available or gathered that could be used to calculate the Price
Elasticity of Demand for the tobacco sector. However, from the information that was available it
was seen that the demand for BATBs cigarettes is fairly inelastic.
J.2.2 Price Elasticity of Supply
Due to non availability and lack of information provided by the company officials, the price
elasticity of supply could not be calculated. However, the interviews provided some depth and
insight about the price elasticity of supply. According to the company officials and the analysis
of the information the price elasticity of supply is observed to be elastic. Usually the supply of
cigarettes is supposed to be more elastic, i.e. the supply is more sensitive to change in the price
of cigarettes. Assuming the pattern of demand for cigarettes remains unchanged, the more the
price rise in the market the producer will be willing to supply more. As a consequence, the rate at
which the price of cigarette rises, rate of increase in supply will be more than that.
However this will not happen if there is a restriction on the part of the government on the supply
of cigarettes .If it is considered to be a socially undesirable product then the supply may remain
inelastic due to government intervention in the market.

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J.3 Price Ceiling and Price Floor


Price ceilings are limits on the amount that can be charged for a specific product or service. In
many cases, a price ceiling is imposed by a government, in an effort to correct some issue with
the general economy while also protecting the interests of consumers in general. The imposition
of a price ceiling can help stabilize a particular market, as well as have a beneficial impact on the
economy in general. The strategy often prompts suppliers that were charging exorbitant rates for
their products to either cut back on production or possibly abandon the market altogether.
However, a price ceiling can cause problems if imposed for a long period without controlled
rationing. Price ceilings can produce negative results when the correct solution would have been
to increase supply. Misuse occurs when a government misdiagnoses a price as too high when the
real problem is that the supply is too low. In an unregulated market economy price ceilings do
not exist.
On the other hand, a price floor is a government limit on the lowest sales price of a good. Such
limits are usually part of a program to protect a given industry and keep the domestic economy
strong, but they can have unintended consequences. Not all goods and commodities have a price
floor, as many governments prefer to let the market determine prices, rather than controlling
them through regulations. Markets tend to be self-correcting, and problems with pricing often
resolve on their own before the government needs to intervene.
In the tobacco sector there are no price ceilings or price floors, but there is tax imposed by
the government on tobacco products.

J.4 Market Structure


The tobacco sector highlighted in this study is essentially cigarette manufacturing. The tobacco
industry is small in Bangladesh, yet there are significant group of producers in the Bangladeshi
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economy. Tobacco production remains an industry with high value addition and high production
per worker, relative to the rest of the manufacturing sector. The demand for tobacco is in large
part determined by the demand for cigarettes. The volume of tobacco sold can be expected to
closely follow increases (or decreases) in the demand for cigarettes. However, demand for
tobacco leaves does not necessarily increase at the same pace as that for cigarettes. Product
demand is fairly inelastic but is in a long-run downward trend as a result of health concerns and
legislation. There are 10 firms engaged in the manufacturing of cigarettes in Bangladesh.

British American Tobacco Bangladesh is the dominant player in this sector. It manufactures and
markets major international cigarette brands like Benson & Hedges, State Express 555, John
Player Gold Leaf and London, which are complemented by local brands such as Capstan, Star
and Scissors. By its own estimate BAT controls around 50 percent of the Bangladesh cigarette
market. The tobacco industry in Bangladesh has an oligopoly market structure. An oligopoly is
a market structure in which a few firms dominate. When a market is shared between a few
firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that
many small firms may also operate in the market. For example, major producers like British
American Tobacco Bangladesh and AKIJ operate their organization with only a few close
competitors, but there are also other producers catering or offering cigarettes as well.
Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires
strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. Under
oligopoly, a seller is big enough to affect the market. Producers must respond to their rivals
choices, but rivals are responding to their choices as well. In oligopoly markets, there is a tension
between cooperation and self-interest. If all the firms limit their output, the price is high, but then
firms have an incentive to expand output. The techniques of game theory are used to solve for
the equilibrium of an oligopoly market.

J.5 Effects of Tobacco Control Policies


There are different impacts of tobacco controlled policies. The policies are ordered in terms of
their likely importance. A large increase in cigarette taxes and the passage of comprehensive
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clean air laws are the cornerstone of strategies that have been successful in reducing smoking
rates. Each has reduced smoking prevalence by 10% or more. A substantial tax has a larger and
relatively immediate effect on the young and on lower income smokers. Work-site restriction
shave a more pronounced effect on male, middle age, and higher income workers, unless those
workers are already working in firms covered by voluntarily imposed smoking restrictions. Tax
revenues are earmarked for other tobacco control policies. A mass media campaign provides the
third prong in successful tobacco control strategies. A campaign of large enough scale and
duration further reduced smoking prevalence by 5% to 10%. Media campaigns also publicize
other programs, such as cessation or youth policies, or target to those groups which have the
highest smoking rates.

Government cessation policies, such as financial coverage of treatment or quit lines, may also
play an integral role in an effective strategy. These policies, initially, may have relatively small
effects on smoking prevalence, but the effects grow over time and help heavier smokers who
have the most difficulty in quitting smoking.

Evidence on the effects of advertising bans and warning labels is mixed, but a recent study
indicates that comprehensive advertising reduced smoking rates by 6%. In addition, strict
advertising bans and warning labels have been adopted, have been successful in their tobacco
control efforts and may be important in low- and middle-income nations with growing smoking
rates.
J.5.1 Taxes on Cigarettes in Bangladesh and Strategies in encountering Government
interventions
The government of Bangladesh enters and alters the tobacco market through taxes. The
government discourages the sale and use of tobacco; they charge tobacco sellers a tax on tobacco
products. In Bangladesh, sellers pass as much of the added cost on to buyers as possible. Because
the sellers don't want to lose any profits, they increase their selling price in order to maintain the
same profit margin, since they had to pay an extra tax when obtaining the products for resale. In
such cases, the supply curve will shift vertically by the exact amount of the tax.

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Furthermore, taxing all bidis at a specific tax rate of 4.95 taka per pack (40% of average prices)
could lead 3.4 million adult bidi smokers to quit and prevent 3.5 million youth from initiating
bidi smoking, preventing 2.5 million premature deaths and raising additional excise revenues of
7.2 billion taka (US$ 87.5 million).
J.5.2 Impact of Taxation on Smoking Behavior
Tobacco taxation, passed on to consumers in the form of higher cigarette prices, has been
recognized as one of the most effective population-based strategies for decreasing smoking and
its adverse health consequences. On average, a price increase of 10% on a pack of cigarettes
would reduce demand for cigarettes by about 4% for the general adult population. Tobacco taxes
can benefit smokers who quit, reduce the overall consumption of tobacco, and put smoking
cessation on the radar of those who continue to smoke. Increased taxes also have a positive
impact on non-smokers by reducing their exposure to second-hand smoke. However, much less
is known about the impact of taxation on specific subgroups.
Taxing all cigarette brands at a specific tax rate of 34 taka per 10 sticks (70% of retail price)
could lead nearly 7 million current smokers to quit and prevent 7 million youth from initiating
smoking, preventing 6 million premature deaths and raising additional excise revenues of 15.1
billion taka (US$ 200 million). A uniform specific tax of 17.5 taka per 10 cigarettes will reduce
the number of premature deaths among adult cigarette smokers by over 1 million. An excise tax
to 34 taka per 10 cigarettes (amounting to 70% of average retail price) would reduce premature
deaths in adults by almost 2.5 million.

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The following figure shows the percentage of income tax imposed by the govt. on popular brands
in each category:

Figure 6: Cigarette Taxes and Prices per Pack of 10 Cigarettes Selected Brands,
Bangladesh, 2012

J.5.3 Anti-tobacco Campaign


Anti- tobacco campaign in the country is carried out by mainly Bangladesh Anti-Tobacco
Alliance (BATA) and Tobacco Control Program of Dhaka Ahsania Mission. These organizations
have programs that are designed to involve the entire community with voluntary involvement of
youths, students, teachers and other conscious citizens. They have a network of Branch
Committees at the local levels and a Central Committee at the apex. The Central Committee
formulates policies, advocates, and maintains close liaison with the relevant Department of the
Government and different international anti-tobacco organizations. The main approach in
tobacco control is to make the general people aware of the harmful effects of tobacco on the
persons themselves and their families and to prepare a group of motivators to motivate the
people to refrain from using tobacco.
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J.6 Private Goods, Public Goods and Tragedy of the Commons


Private goods: Private goods are both rival and excludable in consumption. Excludable means
anyone can be refrained from consuming these goods and rival means if someone consumes one
good then that good cant be consumed by others. Example of private goods can be an Ice cream.
Public goods: Public goods are those which are neither excludable nor rival in consumption.
That means one person cant be refrained from using public good and that persons consumption
of one good doesnt reduce other persons ability to use that. Example of public good can be
tornado siren in a city.
We know that all the products of the BATB which they produce for making profit are private
goods. One can be prevented to smoke a cigarette or one persons used cigarette cant be used by
others. The products of BATB are both rival and excludable by nature.
The Tragedy of the Commons
We know that the common goods are those which are not excludable but rival in nature. That
means one cant be prevented from using these goods but ones consumption of these goods
reduce the ability of others to consume that.
Tragedy of the commons says that what is common to all is taken least care of. Everyone has a
greater concern for the goods owned by them not for the goods which are available freely to all.
Thats why common goods are often overused and their condition becomes very poor with time.
We know that BATB is using huge amount of land for tobacco production in our country. Due to
excessive tobacco production the soil loses it fertility gradually and those lands cant be used for
further production of other crops. So there is a negative externality of producing tobacco. To
internalize the externality government has imposed tax on tobacco producer. Beside this the
lands are now no more a common good. It has been divided among several farmers and BATB
has to make agree the farmers for tobacco production by giving them a good incentive.
Government has turned the common goods like land into a private good to prevent the tragedy of
the commons.

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J.7 Production Function


A production function specifies the maximum output that can be produced for a given amount
of input. Alternatively, a production function shows the minimum quantity of input necessary to
produce a given level of output.

In our selected organization BATB the output is different cigarettes and inputs are land, labor,
capital and raw materials. So the production function can be written as the following way
Q= f(W,X,Y,Z)
Here, Q= output
W=raw materials
X=labor
Y=land
Z=capital
J.7.1 The Law of Diminishing Return to a Factor
This law states that as the quantity of a variable input increases, with the quantities of all other
factors being held constant, the resulting increase in output eventually diminishes.

Considering an assembly line for the production factory of BATB, if only one employee is put to
work, that individual must perform each of the activities necessary to assemble equipment.
Output from such a combination of labor and capital is likely to be small. In fact, it may be less
than could be achieved with a smaller amount of capital, given the inefficiency of having one
employee accompany a refrigerator down an assembly line rather than building it at a single
station. As additional units of labor are added to this production systemholding capital input
constantoutput is likely to expand rapidly. The intensity with which the capital resource is
used increases with additional labor, and increasingly efficient input combinations result . We can
assume the following result keeping all other input constant .
Eventually, sufficient labor is combined with the fixed capital input so that the benefits of further
labor additions will not be as large as the benefits achieved earlier. When this occurs, the rate of
increase in output per additional unit of labor, the marginal product of labor, will drop. Although

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the marginal product of labor is positive and total output increases as more units of labor are
employed, the rate of increase in output eventually declines.

Return to scale:
In law of diminishing return that if one input is changed keeping all other input constant then
what effect is there with total output curve. Return to scale measures the effect on output if all
inputs are changed together. For an example we can assume that BATB has increased all of its
input land, labor, capital and raw materials to double in order to increase productivity. What
possible effect can be on the total output can be determined by the following 3 types of return to
scale

Constant return to scale

If the output increases in the same amount of input, which means if the output is also doubled
with the input then will be called constant return to scale. In such case BATB will produce
double output with double input.

Increasing return to scale

If the output increases more than the input then it will be termed as increasing return to scale.
That means if the output increases 3 times with the input increase in 2 times then it will be called
increasing return to scale.

Decreasing return to scale

Finally if the output is decreased with the increase in input then it is called diminishing return to
scale. This usually occurs in case of very large groups. For an example in case of BATB if the
inputs are increased too much then the associated costs will be also increased. Sometimes these
costs can surpass the profits of extra input which may eventually cause a decreasing return to
scale.
Isoquant
We know that to produce a single unit of cigarette we need certain amount of tobacco and filter.
So these components are perfectly complementary by nature. We cannot substitute tobacco for
filter or filter for tobacco. Thats why the isoquant curve for a product say Benson & Hedges
will be like the one of an imperfect substitute.
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Production Cost
BATB is a process-based organization, instead of having isolated departments the company has
some support functions and some core functions. Typically the structure of the organization can
be explained through the supply chain.
In BATB it is called seed to smoke as the supply chain process.
Mission of supply chain is - To be the most competitive supply chain in terms of cost quality and
EH&S (Environment Health and Safety) practices. The core functions are:

Leaf

Production

Brand Marketing

Trade Marketing

CORA

Along with the core functions there are some support functions such as

HR

IT

Finance

Fixed Costs
Land
Building
Chain link fencing
Salaries of Executives
Vehicle and Furniture cost
Depreciation cost
Plant and Machineries
Machineries used in BATB Plant:

Counter Flow Classifier

Stem Tester

Thresher

Conditioning Machine for Lamina - [DCCC Direct Conditioning & Casing Cylinder
(DCCC)]

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Lamina Line Cutter RC-4

Lamina Dryer-ITM (Imperial Tobacco Machineries) Drier

ADMOIST (stemline Conditioner)

KT-2 Cutter

Stem dryer-FBD

SILO

Protos (Filter Rod Maker)

Decoufle Nano 8 (Filter Cigarette Maker)

Focke (Packaging Machine)

Variable Costs:
Raw materials
Utilities ( Electricity, Fuel)
Wages of workers
Promotional expenses
Transportation cost

HR plan Structure:
CEO
Financial Manager
Marketing Manager
Operations Manager
HR Manager
Technician/Skilled labor
Semi-skilled labor
Peon
Security guard

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J.8 Game Theory and Cigarettes


Nash believed that humans were inherently suspicious of each other, hardly surprising since he
was a paranoid schizophrenic. His gloomy and pessimistic view of the world, but it did not apply
to the mass of humanity. In reality, we are more likely to collaborate than Nash thought. We do
not always act in naked self-interest.
So what's this got to do with tobacco? Well, as Stephen Fry pointed out, game theory can be
applied to advertising. If one company is advertising, all the rest must do the same. But if no
companies advertise, they can save money. And in the case of tobacco advertising, the
Bangladesh government intervened to remove the competition. In effect, the government forced
the tobacco companies to collaborate.
If neither of them advertised, they could keep the money and the market would remain the same.
So what it resulted in is the bizarre situation where they banned tobacco advertising, and it was
to the benefit of the tobacco firms because they were saving money which they were otherwise
wasting.
It is almost heretical to say this, but the purpose of tobacco advertising is to make people switch
brands (or to stick with the brand they are already smoking). Anti-smoking groups have long
disputed this, saying that tobacco advertising exists to make people start smoking, but they have
never produced any credible evidence to show that this is the case.
It is likely that the anti-smoking groups are wrong. Cigarette sales happened to go up in countries
after cigarette commercials were banned on TV.
There are cigarette companies that would love to see tobacco advertising reintroduced, but not
the big ones. As so often happens, the anti-smoking groups have inadvertently done Big
Tobacco's work for them.

J.9 Price War


Price war is defined "commercial competition characterized by the repeated cutting of prices
below those of competitors". One competitor will lower its price, then others will lower their
prices to match. If one of them reduces their price again, a new round of reductions starts. In the
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short term, price wars are good for buyers, who can take advantage of lower prices. Often they
are not good for the companies involved because the lower prices reduce profit margins and can
threaten their survival. The Bangladesh tobacco industry is faced with intense price war between
the competitors.
In the medium to long term, price wars can be good for the dominant firms such as British
American Tobacco Bangladesh in the industry. Typically, the smaller, more marginal, firms
cannot compete and must close. The remaining firms absorb the market share of those that have
closed. The real losers then, are the marginal firms and their investors. In the long term, the
consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes
higher than before the price war started.
The main reasons that price wars occur are:

Product differentiation: BATBs some products are, or at least are seen as, commodities
because there is little to choose between brands, price is the main competing factor. For
products like Benson & Hedges brand is a factor and they differentiate themselves through
their brand.

Penetration pricing: As Philip Morris (direct competitor of British American Tobacco


Bangladesh) is trying to enter an established market; it may offer lower prices than existing
brands.

Oligopoly: As the industry structure is oligopolistic (that is, has few major competitors),
the players closely monitor each other's prices and be prepared to respond to any price cuts.

Process optimization: BATB are inclined to lower prices rather than shut down or reduce
output as they wish to maintain the economy of scale. Similarly, new processes make it
cheaper to make the same product.

Predatory pricing: BATB sometimes deliberately price new or existing products in an


attempt to topple existing competition in that market.

Competitors: Competitors might target a product and attempt to gain market share by selling
its alternative at a lower price. Some argue that it is better to introduce a new rival brand
instead of trying to match the prices of those already in the market.

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The first reaction to a price reduction should always be to consider carefully. Too often, price
wars have been started because simple promotional activities have been misunderstood as major
strategic changes.
But if it seems that it is a long-term move then there are many possible reactions that BATB can
take to counter the effects of the price war taking place and they are:

Reduce price: The most obvious, and most popular, reaction is to match the competitor's
move. This maintains the status quo (but reduces profits pro rata). If this route is to be
chosen it is as well to make the move rapidly and obviously - not least to send signals to the
competitor of your intention to fight.

Maintain price: Another reaction is to hope that the competitor has made a mistake, but if the
competitor's action does make inroads into a merchant's share, this can soon mean customers
lose confidence and a subsequent a loss of sales.

Split the market: Branch one product into two, selling one as a premium and another as a
basic. This effective tactic was notably used by Heublein, the former owner of
the Smirnoff brand of vodka).

React with other measures - Reducing price is not the only weapon. Other tactics can be used
to great effect: improved quality, increased promotion (perhaps to improve the idea of
quality).

Price stickiness
In oligopoly markets such as the Bangladesh tobacco market, prices can become 'sticky' because
if the price rises, competitors will not follow the rise. So the merchant will lose its market share
to its competitors on lower prices. But if the price falls, other players will merchants will follow
suit if they can. At some point, merchants find that they cannot gain profit if they cut the price
further so the sticky price remains.
Price stickiness is extremely common among large supermarket chains and prices, especially for
commodities, tend not to vary much between them. Many of the supermarkets monitor price
changes in other supermarket chains and vary their prices accordingly until they reach the point
where any further decrease in their price will affect profits.

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J.10 Price Discrimination


There is significant price discrimination in the price of cigarettes in Bangladesh. The government
should impose high tax on tobacco products to rein in soaring consumption of the harmful
products for the sake of public health. They also recommended introducing uniform tax for all
cigarette brands, as the existing four-tier tax system based on the pricing is discriminatory and
offer scopes for tax evasion.
As compared to other countries, the price of cigarettes is lower in Bangladesh. As a result it leads
to smuggling of cigarettes to other countries. Also, since the consumption of cigarettes is high in
the country, a lot of cigarettes is also smuggled into the country. As a result, tobacco
consumption sees rapid growth every year.
However, since the tax rates are low in this country compared to other countries, the price of
cigarettes remains at a low level. If taxes are increased, the price of cigarettes will increase. The
level of smuggling would go up and employment of thousands of people would be at stake if
taxes are increased.

K. Recommendations
The objective of this research was to gather a comprehensive idea about the Tobacco industry of
Bangladesh. During this study, the research team observed many things and identified some
important issues that are to be noted and taken under consideration for ensuring a sustainable
growth in this sector. Based on the observations of the researchers and outcomes of this
research the following recommendations can be made:
Increase prices by at least 5% annually in real terms through raising taxes on tobacco products.
Higher prices are likely to have a particularly strong effect in motivating poor tobacco users and
young people to quit, or deterring them from starting to use tobacco products.

Tobacco manufacturing industries should also be made responsible for informing people more
about the damaging aspects of tobacco use, requiring much larger, stronger and more specific

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and informative health warnings on all tobacco product packages and campaigns intended. The
Government should adopt a uniform specific cigarette excise tax that

significantly raises

cigarette prices and reduces tobacco usage. Earmark tobacco tax revenues for health purposes,
including health promotion and tobacco control.

L. Conclusion
With a rising population and increasing demand, tobacco consumption has grown in Dhaka. The
evidence reviewed in this study notes that consumption of tobacco and tobacco products harms
health and threatens lives, and can be held responsible, at least to some extent, for increasing
malnutrition in Bangladesh. However, tobacco is an important source of government revenue.
Therefore, formulating and implementing tobacco control policies should be done with care.
Policies to reduce the demand for tobacco are recommended. Both price and non-price measures
should be applied. Based on the analysis presented in this report, it is evident that an increase in
prices through an increase in tax rates will reduce demand. For cigarettes, it is estimated that for
each 10% increase in price, demand will fall by almost 3%, while total tax revenues will rise. But
tax increases are not as a complete strategy. Non-price measures such as raising awareness about
the harm caused by tobacco use and the benefits of quitting, banning all advertising or
requiring prominent and strong health warnings and information to be shown with all
advertising, and banning smoking in public places should be used as well.

As mentioned before there are some concerns among Bangladeshi policy- makers with regard to
implementing tobacco control policies. Since the analysis presented here reveals that the price
elasticity of demand for tobacco in Bangladesh is low, demand for tobacco will show modest
(but worthwhile) reductions if prices increase. Without increases in real prices, increasing
incomes and rising population numbers will continue to cause increases in total tobacco product
consumption in Bangladesh, with serious negative consequences for those who use tobacco and
their families. Supply should be left to adjust to changes in demand. In the much longer term, if
tends gradually reverse so that demand levels off or even declines, there will be time for all the
agents concerned to adjust to changing circumstances such as growing alternative crops,
changing enterprises, and looking for alternative jobs. These adjustments will be made much
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easier by the fact that as consumers switch expenditures away from tobacco products to food and
other goods and services, demand for these other products will grow, creating new incomeearning and job opportunities across the economy, to replace those that may be lost in the
tobacco industry.

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K. References
Ali Z, Rahman A, Rahaman T. An Economic Analysis of Tobacco Control in Bangladesh. HNP
Discussion Paper. Washington DC: The World Bank. 2003.

British American Tobacco Bangladesh. About Us. 2014. Available at


http://www.batbangladesh.com, accessed May1 5, 2014.

Nargis N, Ruthbah UH, Fong GT. Taxation of Tobacco Products in Bangladesh: Findings from
the 2009 ITC Bangladesh Survey. ITC Project Working Paper Series. Waterloo, Ontario,
Canada: University of Waterloo. 2010.

Nargis N, Ruthbah UH, Hussain AKMG, Ashiquzzaman SM, Fong GT, Huq I. Pricing and
Taxation of Tobacco Products in Bangladesh:

Findings from Wave 1 (2009) and Wave 2 (2010) of the ITC Bangladesh Survey. ITC Project
Working Paper Series. Waterloo, Ontario, Canada: University of Waterloo. 2011.

Mankiw, N. G. (2012). Principles of Economics. Delhi, India: Cengage Learning India Private
Limited.
Samuelson, P. A., & Nordhaus, W. D. (2012). Economics. New York: McGraw-Hill.
Statistics, B. B. Statistical Yearbook of Bangladesh. Dhaka: Bangladesh Bureau of Statistics.
Hu TW, Mao Z. Effects of cigarette tax on cigarette consumption and the Chinese economy.
Tobacco control. 2002; 11(2):1058.
Karki YB, Pant KD, Pande BT. A Study on the Economics of Tobacco in Nepal. HNP
Discussion Paper. Washington DC: The World Bank. 2003.

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