Business Critical Analysis Report

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Student’s name BA 3103 –XXX T&R, 11:00 AM – 12:20 PM Professor’s name

Big Tobacco and the Advent of E-Cigarettes

Background

The U.S. tobacco industry is among the most heavily regulated and heavily taxed industries in the United

States (The Economist, 2014). Medical evidence of the adverse effects of smoking continues to grow, and the

share of American adults who smoke has declined markedly during the past fifty years, from 42% in 1965 to less

than 18% in 2013 (CDC, 2013). But in spite of ever-increasing regulation and public wariness of the U.S. tobacco

industry, tobacco companies continue to thrive. This oligopoly industry, dominated by big tobacco companies

Altria, Reynolds American, and Lorillard, serves a shrinking but remarkably loyal customer base. Critics are quick

to point out that, despite extensive regulation of the marketing practices in the industry, tobacco products

remain highly lucrative, with sales of over $66 billion in 2014 (Hargreaves, 2014).

This beleaguered but very profitable industry must now deal with another, potentially very disruptive

innovation in the form of e-cigarettes. This new product category, the modern version of which dates from

2007, generated U.S. sales of $2.5 billion in 2014 (Richtel, 2014). Although the e-cigarette sector is still

relatively small, it clearly has the potential to disrupt tobacco sales in the coming years. E-cig use is generally

perceived to be less unhealthful than cigarette smoking, and the e-cig habit is substantially less costly than

consuming tobacco cigarettes (Richtel, 2014). Moreover, e-cigarettes are far less regulated than tobacco

products, without many of the marketing constraints.

The early success of e-cigarettes has not gone unnoticed by the big tobacco companies. Lorillard was the

first to enter this sector with the acquisition in 2012 of the Blu eCig brand (Esterl, 2012). Since then, Altria and

Reynolds American have indicated their intention to introduce e-cig product lines (Richtel, 2014).

Commented [MS1]: Class meeting days and times.

Commented [MS2]: Title should be related to the article title.

Commented [MS3]: Use section headings to guide your reader through the report.

Commented [MS4]: Notice how the author cites the source of information and claims throughout this section.

Commented [MS5]: Avoid beginning a sentence with a conjunction (and, but, or).

Commented [MS6]: If making the claim that the industry is “lucrative,” it would be better to support it with profits rather than just sales.

Commented [MS7]: When using a contracted version of the topic, introduce it immediately after the full name followed by the contraction in parentheses: “Although the e-cigarette (e-cig) sector is still….” You can use the contraction throughout the document thereafter. The same goes for acronyms.

Commented [MS8]: Unless this is part of the Blu brand name, be consistent with the contraction “e-cig” as used above.

Commented [MS9]: This pronoun is OK because “their” refers to Altria and Reynolds American.

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Problem Statement

Tobacco companies must address the advent of e-cigarettes in order to defend their tobacco business and

to identify business opportunities in the growing e-cigarette product sector.

Alternative Solutions

In order to limit the impact of e-cigarettes on the sales of tobacco cigarettes, tobacco companies can lobby

for additional regulation of this new product category. Increased regulation will help to “level the playing field”

and reduce the advantages enjoyed by e-cigs as a consequence of their largely unrestricted marketing. Among

the areas for increased regulation of e-cigarettes, the tobacco companies can lobby federal, state, and local

governments to ban television and radio broadcasting of e-cig advertising, prohibit online sales of this product

category, and proscribe e-cig use in public places. These changes will reduce some of the advantages of e-cigs

over tobacco products, thereby presumably slowing the market acceptance of this product category.

The tobacco companies can also lobby the federal government to regulate e-cigarettes as an over-the-

counter pharmaceutical. The Food and Drug Administration (FDA) would then regulate product approvals and

monitor the distribution of e-cigs across the United States. Compliance, in the form of application submissions,

clinical testing, and pre-market approvals, will be costly for applicants. This will likely limit the number of new

entrants in this market, and will therefore help to reduce the intensity of market competition.

In order to further blunt the effect of new entrants in the marketplace, tobacco companies can acquire any

promising e-cig brands in order to manage the marketing communications and distribution of these products –

or perhaps to simply discontinue these lines. Lorillard acquired Blue eCigs and is seeking to grow this product

without cannibalizing the sales of its tobacco cigarettes. Similarly, Altria and Reynolds American could acquire

existing product lines in order to manage competition in the tobacco industry.

Recommendations

The best solution for dealing with the threat posed by e-cigs is to seek new legislation to regulate this

growing product category. By lobbying for new product clinical trials and pre-market approvals, the tobacco

Commented [MS10]: You typically do not need extra line spaces such as this if your document is formatted with double spacing.

Commented [MS11]: This pronoun is OK because “their” refers to tobacco companies (plural).

Commented [MS12]: Cite the source of this claim.

Commented [MS13]: Good introduction of the acronym, FDA.

Commented [MS14]: Cite the source of this claim.

Commented [MS15]: Cite the source of this claim.

Commented [MS16]: This was the second of the three alternatives proposed in the previous section of the document.

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companies will raise the cost of entry for new competitors. Similarly, bans on broadcast advertising and online

sales will reduce the advantages currently enjoyed by e-cig marketers over tobacco marketers. The advantage

of these solutions to the tobacco companies stem from their substantial existing capabilities for lobbying

federal, state, and local governments. The tobacco companies would only need to shift their lobbying emphasis

from their tobacco products to the new e-cigarettes.

Program Performance Metrics

An intermediate metric to determine the effectiveness of any new regulatory legislation is the number of

new entrants in the e-cigarette product category. If the newly erected entry barriers reduce the number of

entrants, this would provide an early indication of success. Also on an intermediate basis, it will be possible to

determine the success of newly implemented marketing regulation of e-cigs by tracking current and potential

customers’ awareness of e-cigarette brands prior to and following the enactment of such regulations. There

should be a statistically significant decline in awareness levels following the enforcement of regulations.

A conclusive metric of the success of tobacco companies’ lobbying programs is the goodwill premium

associated with the market capitalization of e-cigarette companies. If the entry barriers and marketing

regulations are successful, the goodwill premium of these firms should decline. The resulting higher cost of

capital will presumably reduce their ability to compete in the market and thereby to take market share from the

tobacco companies.

What I Have Learned from This Critical Analysis Exercise

The e-cigarette product category is a disruptive innovation because of its potential to reduce demand for

tobacco products. There are clear indications that tobacco companies are taking the necessary steps to defend

their very lucrative market, but these efforts are still at an early stage. We can expect further efforts by the

tobacco companies to protect their positions, perhaps by lobbying more intensively for the regulation of e-

cigarettes.

Commented [MS17]: Supports the reason why this alternative was selected as the recommendation.

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References

Anon. (2014, January 5). Running out of puff: Big tobacco firms are maintaining their poise, but quietly

wheezing. Retrieved from https://www.economist.com/news/business/21594984-big-tobacco-firms-are-

maintaining-their-poise-quietly-wheezing-running-out-puff

Centers for Disease Control and Prevention (CDC) (2013). Cigarette smoking among adults—United States,

2013. Retrieved from https://www.cdc.gov/mmwr/preview/mmwrhtml/mm5644a2.htm

Esterl, M. (2012, April 25). Got a light – er, charger: Big tobacco’s latest buzz. Retrieved from

https://www.wsj.com/articles/SB10001424052702304723304577365723851497152

Hargreaves, R. (2014, April 18) Tobacco is still an extremely profitable business, and this won’t change soon.

Retrieved from https://www.fool.com/investing/general/2014/04/08/tobacco-is-still-an-extremely-

profitable-busines-2.aspx

Richtel, M. (2014). A bolder effort by big tobacco on e-cigarettes. The New York Times. Retrieved from

https://www.nytimes.com/2014/06/17/business/a-bolder-effort-by-big-tobacco-on-e-cigarettes.html

Commented [MS18]: Cited in-text as “The Economist” so that needs to be matched here on the list of References.

Commented [MS19]: Missing a period.

Commented [MS20]: The original article (found under a different title) with the publication’s URL needs to be included here as well as cited at least once in the document.