BAT Enterprise Systems Strategy: ERP and SAP Implementation

Introduction to British American Tobacco

British American Tobacco (BAT) is a leading global tobacco company producing approximately 200 brands of cigarettes. The company's global drive brands are Dunhill, Pall Mall, Kent, and Lucky Strike, which together provide 35% of the company's revenue. Other international brands manufactured by the company include Benson & Hedges, Rothmans, Viceroy, Vogue, Kool, Gold Leaf, John Player, and Express 555. BAT operates within the tobacco industry and is the second-largest tobacco company in the world, with a market capitalization of $98.07 billion. The overall market capitalization of the tobacco industry is $356 billion, and within the global tobacco industry, BAT holds approximately 27.55% of the market share. Philip Morris International Inc. is the industry leader, with a market capitalization of approximately $151.2 billion.

British American Tobacco operates in 180 markets, with more than 708 billion cigarettes sold annually. The company's vision is to achieve a leadership role within the global tobacco industry. At the end of the 2011 fiscal year, BAT recorded revenue of £15.4 billion, with a company turnover of £46 billion. The company's business strategy centers on increasing funding for research and development (R&D) and investing in innovation to produce high-quality, less-toxic products for consumers. BAT differentiates itself within the industry by focusing on innovation, which contributes to revenue growth and builds shareholder value.

British American Tobacco has been operating for more than 100 years. The company was formed in 1902 as a joint venture with the UK's Imperial Tobacco Company. Over the last five decades, BAT has focused on acquiring other companies and expanding internationally. By 1970, the company was manufacturing tobacco in 140 factories across 50 countries. In 1976, the company underwent a reorganization process, and within two years it became the third-largest company in the UK and the largest tobacco company globally. Through continuous acquisition, BAT acquired several important brands, including Kent in the 1970s. In 1990, the transition of communist economies to free-market economies provided additional opportunities for British American Tobacco.

In the 1990s, economic liberalization and the break-up of state monopolies opened up new trading opportunities in Central and Eastern Europe and the Far East. BAT acquired Hungary's Pecsi Dohanygyar in 1992. Acquisitions and joint ventures followed rapidly in Ukraine, Uzbekistan, the Czech Republic, Russia, Romania, and Poland (British American Tobacco, 2011, p. 5).

The 2000s brought a further series of opportunities. In 2009, the company concluded a US$580 million acquisition of Bentoel. More recently, BAT concluded a $452 million acquisition of Protabaco, based in Colombia (British American Tobacco, 2011).

Use of ERP and Associated IT Within the Tobacco Industry

The continued success of British American Tobacco has been attributed to significant investment in innovation over the last few years, enabling the company to differentiate itself within the industry. BAT implements the latest technology in product manufacturing and packaging, achieving speed to market. The company also employs the latest technology in developing low-toxicant cigarettes that are less harmful to consumers. Additionally, BAT has implemented Enterprise Resource Planning (ERP) to reduce maintenance costs. Within the tobacco industry, firms implement ERP to integrate data and achieve operational efficiency.

Rapid changes in Information and Communication Technology (ICT) have created both benefits and threats for organizations. Digital information systems have created a new paradigm in which business leaders use digital knowledge to deliver value to customers while achieving business performance goals. Tight competition within the tobacco industry, combined with the vision to achieve a leadership role within the industry, has compelled tobacco firms to integrate Enterprise Resource Planning in order to improve performance (Zain, 2008). Many leading firms within the industry have incorporated ERP systems into their business models to facilitate best business practices, cost reduction, rapid decision-making, and better management. The implementation of ERP systems has been identified as an effective tool for facilitating both strategic and operational benefits in competitive market environments (Huang & Hsu, 2011). Unfortunately, many organizations have yet to fully derive the benefits associated with ERP due to the high costs of implementation.

Enterprise Resource Planning is the strategy firms employ to provide an efficient working environment and to integrate business functions within a single database, enabling efficient information flow between management functions. Shi and Halpin (2003) define Enterprise Resource Planning as "a computer program that provides a general working platform for all departments of an enterprise with their management functions being integrated into the program. The program runs off a single database so that all departments can easily share information and better communicate with each other" (p. 214).

The tobacco industry is one of the most highly competitive industries globally, and it continues to face criticism from stakeholders on the grounds that cigarette smoking is harmful to human health. To ensure that firms within the industry produce highly innovative products with low toxicant levels, tobacco companies employ ERP for business integration to bring greater efficiency to the production process. Since the 1990s, firms within the tobacco industry have been integrating ERP to achieve business and production efficiency. One such company is BAT, which implements the SAP application to achieve industry-leading performance. British American Tobacco has integrated ERP to enhance network stability and, over the years, has faced challenges in reducing IT and maintenance costs. To address these challenges, BAT deployed a SAP-based application to reduce costs associated with application delivery (Lane, 2008).

Additionally, BAT implements ERP for its global application portal to reduce IT infrastructure and maintenance costs, and has used ERP solutions to deliver fast network management that optimizes performance. Dai and Su (2009) argue that the tobacco industry uses ERP to assure information quality (IQ) as well as to manage production planning and control. The authors note that the tobacco industry faces significant risks in the global marketplace, including the loss of potential customers. Since a major source of industry income derives from existing customers and cash flow from business processes, tobacco firms implement ERP to minimize these risks and reduce customer loss.

Ray (2011) supports this argument, pointing out that the tobacco industry began using ERP for production planning as early as 1999. He reveals that a key factor driving ERP implementation within the tobacco industry is planning, where the industry uses resource scheduling for operational purposes.

Current Issues and Developments Driving Change Within the Tobacco Industry

One of the major issues driving change within the tobacco industry is international pressure to produce toxic-free cigarettes. Stakeholders — including international pressure groups and healthcare providers — accuse the tobacco industry of being a primary cause of cancer and other tobacco-related diseases.

McDaniel, Intinarelli, and Malone (2008) argue that tobacco-related diseases cause 5 million deaths annually, and that the dramatic increase in tobacco-related deaths is partly due to the ability of multinational tobacco companies to undermine tobacco control worldwide. The authors further argue that the tobacco industry has played a major role in worsening the global public health crisis. Since the mid-twentieth century, increased awareness of the risks associated with tobacco smoking has led to growing regulation aimed at reducing tobacco consumption. For example, BAT recorded a decline in tobacco sales of -0.4% between 2010 and 2011, attributable in part to negative publicity from various stakeholder groups. The industry also faces legal risks, including court charges and compensation payments for health-related damages, which can negatively affect revenue. In recognition of these risks, BAT management stated: "We have identified a core list of potential threats that we believe could represent significant risks to our business. As can be seen from our review of the key Group risk factors in this report, we regularly monitor their potential impact and likelihood, and controls are in place to ensure that they are carefully managed" (Annual Report, 2011, p. 6).

One of the major strategies that could enable the industry to manage this risk is the integration of ERP for production planning of non-toxic tobacco and for achieving a sustainable supply chain. The continuous pressure on the tobacco industry to produce non-toxic products has led BAT to integrate sustainable supply chain practices across its overall operations. For example, BAT has integrated ERP to facilitate extensive R&D aimed at producing low-toxicant, smokeless tobacco products, as well as modifying the production of conventional cigarettes. A BAT top executive stated: "Sustainability for us is about creating shared value, which means creating economic value for shareholders while ensuring our business is run responsibly in the interests of all our stakeholders" (Annual Report, 2011, p. 6).

Eshlaghi et al. (2011) reveal that the complexity modern businesses face in dynamic and changing environments has forced organizations to adopt innovative systems to generate profits and respond quickly to the needs of customers and stakeholders. ERP has been identified as a major step toward creating efficient information systems that integrate knowledge and information to enhance organizational efficiency. Since major leaders within the tobacco industry have invested in R&D to produce low-toxicant tobacco, many firms have recognized that ERP integration can facilitate R&D implementation by incorporating applied planning and improving information efficiency within the organization.

Another major issue driving change within the tobacco industry is growing market competition. The global tobacco industry produces over 5.5 trillion cigarettes with a market value exceeding £450 billion. Given the dynamic changes in the global cigarette market, firms must produce high-quality products that deliver value to consumers. As one of the industry leaders, BAT has implemented an innovation strategy to provide exciting, high-quality products to consumers.

Furthermore, the tobacco industry faces increasing regulation. For example, the World Health Organization's Framework Convention on Tobacco Control (FCTC) proposes a series of regulations to reduce tobacco consumption (Annual Report, 2011, p. 9). Specific measures include legislation to introduce plain packaging of tobacco in Australia and pressure from various stakeholders to increase excise taxes on tobacco products. Facing these developments, the tobacco industry has little option but to produce innovative, high-quality, and low-toxicant tobacco that minimizes harm to consumers. These issues have compelled major tobacco firms to adopt the latest technology in order to gain market advantages. In response, BAT has implemented strong governance and sustainable production practices to differentiate itself within the industry, recognizing that one of its key challenges is delivering the most innovative products at lower costs.

Conclusion

The report assesses the enterprise development strategy of British American Tobacco. The analysis reveals that BAT is a leading global tobacco company; however, increasing criticism facing the tobacco industry has compelled BAT to employ the latest technology to assist in producing low-toxicant tobacco products. In recent years, BAT has made significant investments in R&D, and this report demonstrates that ERP has been a dynamic IT tool enabling BAT to cut costs and support the development of less harmful products.