Business strategy fundamentals and organizational applications

Cuban cigar industry is a microcosm of how industries become weakened when communist regimes cripple free enterprise with the intention of keeping specific industries more nationalistic, free of outside investment and control. The revolution that led to a communist take-over of the economy also led to the disbanding of entire companies and brands. The dissolution of entire brands hurled the industry into disarray and opened up significant opportunities for global competitors including Swedish Match AB, French-based SEITA S.A. that merged with Tabacalera S.A. To form Atladis S.A. In addition Habanos S.A. also entered the Cuban market via a joint venture with Atladis S.A., a common market entry strategy by cigar and tobacco distributors from Asia, Europe and the U.S. Cuba's Union of Tobacco Enterprises wielded much political power as to which distributors could gain access to the country-run cigar factories.

The crippling effects of the communists' regime on free trade quickly began to drive down economic growth, leading to severe austerity programs and rationing. Starting with the U.S.-led blockade of Cuba and the curtailing of all sugar purchases, Cuba's GNP and GDP plummeted. Russia began subsidizing entire Cuban industries starting with sugar, yet this failed to avert financial hardship and the need to continue rationing for all citizens. At one point, Russia was responsible for subsiding 25% of Cuba's total economy. During the early 1990s as the Eastern Bloc collapsed as did Russia's ability to provide foreign assistance to Cuba, the rationing increased and a national program titled "Special Period for Peacetime" was instituted. It was during this time that the effects of the U.S. embargo grew more acute and noticeable throughout all industries including tobacco. The Helms-Burton Act passed in 1996 further fueled greater restrictions on U.S.-based corporations looking to trade with Cuba. The net effect of all this was a per capita GNP that in 2002 was at $1,700. It is a wonder there has not been a revolution to overthrow the existing Communist government, as many of the Cuban people continue to experience severe economic and social hardship. All of these factors culminated in many Cuban political and Cuban-Americans to call for the renunciation of the embargo. In the tobacco industry the possibility of the embargo being lifted is both a major opportunity for those companies who are positioned to take advantage of the Cuban sourcing of tobacco; yet for others including Swedish Match that does not have significant joint ventures in place, the renunciation of the embargo would become a significant competitive threat. Amidst the troubled economy, lack fo funding from Russia, and a sub-standard GNP, Cuba looks to revitalize their tobacco and cigar industry through selective joint ventures with distribution companies, looking to keep American culture, investment and influence from changing their island nation.

SWOT Analysis

Strengths

Abundant soil and climate conditions for growing premium tobacco used in the production of cigars.

Expertise in all forms of production, from manually-based, through hybrid (manual and machined-based) to entirely machine-based.

The Cuban government has extensive experience and a developed expertise working with tobacco distributors and wields power through its Union of Tobacco Enterprises.

Expertise in the production process of cigars, including the curing and storage of cigars for optimal flavor.

Despite the communist regimes' approach to disbanding brands, Cuban cigars still have a highly respected reputation as the best cigars in the world.

Weaknesses

Dissolution of brands nearly crippled permanently one of the most promising industries that Cuba has.

Lack of agricultural stewardship may impact yields in the future.

Embargo from the U.S. takes the majority (well over 70%) of global demand for cigars through distributors who are not Cuban-based, enriching other nations and companies instead of Cuba themselves.

Lack of foresight on the part of communist party leaders and market planners nearly ruins the structure of the tobacco and cigar industry in the early 1990s.

Lack of supply chain management and planning on the part of Cuban communist party officials who apparently from the case study are quite poor at market planning and allocation.

Lack of privatization and continual state ownership of the tobacco and cigar industry by the communist party is in effect robbing the Cuban economy of billions of dollars a year.

Nearly killed off the most powerful premium cigar brand in the world by converting all industries to communism.

Opportunities

Allowing for a higher level of Foreign Direct Investment (FDI) by all countries including the U.S. Specifically with regard to the U.S., there is the need to work through the issues of the embargo and get it lifted. The bottom line is that Cuba needs to embrace free trade to survive.

Create more opportunities for distribution and joint venture agreements with tobacco growers and create investment funds specifically aimed at enabling higher levels of productivity in this specific industry.

Allow for greater use of branding and stimulate overall branding and messaging through government agencies that seek to turn the Cuban reputation for premium cigars into a lasting competitive advantage.

Allow for greater privatization of sales from growers to global distributors, getting the Cuban government out of the way to fuel more capital investment in this industry.

Threats

Low per-capita incomes often lead to political turmoil and even revolution, and this has certainly been the case in the island nation of Haiti for example. Cuba's Communist leaders need to realize that their most critical experts (tobacco and cigars) need to be more freely traded globally to stimulate the economy.

Threat of American tobacco growers increasing quality (they already lead in terms of yield per the case study) and creating premium brands that overtake Cuba.

Island nations more attuned to global growth and with comparable climates conducive to growing tobacco including Jamaica will be able to overtake the premium branding and Cuba will lose that competitive advantage.

An epidemic of blue mould or insects could significantly impact the profitability of any given years' crop.

Porter's Five Forces Analysis

The following figure illustrates Porter's Five Forces Model. The Cuban cigar industry is now analyzed using this framework:

Threat of New Entry:

This is a minimal threat as the entire industry is controlled by the communist party and the Union of Tobacco Enterprises.

Cuba's tobacco growers have the most powerful barrier to entry there is: state-based protection and subsidies.

As a result of these factors the threat of new entry is very low.

Brand pirating and forgeries have increased and while this practice will not dominate the market, it has the potential to significantly impact the perception of quality that Cuban cigars have long enjoyed.

Competitive Rivalry:

High levels of industry rivalry with American-based, Jamaican and foreign growers.

Cuba's significant tobacco growing expertise has differentiated the country and also led to the development of a premium branding reputation globally.

Quality control of the cigar production process is emerging as a competitive advantage; Cuba has yet to make significant strides in this area.

Rivalry is today focused in one area of the industry on mergers, acquisitions and overall consolidation. In the other area, there is concentrated focus on creating distribution agreements and ensuring access to premium materials through the Cuban tobacco supply chain. On both of these fronts, Cuba faces significant hurdles.

Supplier Power:

The Cuban government acts as a supplier-aggregator and exerts significant influence on the overall market for tobacco in general and cigars specifically, hence the financial strength of tobacco product distributors globally.

The Cuban government as a result has significant supplier power advantage due to their ability to consistently deliver cigars from their unique tobacco growing regions.

Threat of Substitution:

As the Cuban government acts as the centralized aggregator of all tobacco output, there is no threat of substitution. The Cuban tobacco industry is the epitome of a state-run industry in a communist nation.

Buyer Power:

Cuban tobacco and cigar purchasers are sold to through multi-tier distribution channels, with distributors being at the first tier, dealers and smaller distributors at the second tier, and the end customer at the bottom of the multi-tier channel structure.

First-tier buyers are distribution companies who have joint ventures and agreements with the Union of Tobacco Enterprises to re-purchase tobacco and cigars and then re-sell them.