Assignment:
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).
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 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.
Bibliography
Anon. (2014, January 5) "Running out of puff: Big tobacco firms are maintaining their poise, but quietly wheezing" The Economist
Centers for Disease Control and Prevention (CDC) (November 2013) "Cigarette smoking among adults-United States, 2013"
Esterl, Mike, (2012, April 25) "Got a Light - er, Charger: Big Tobacco's latest Buzz", The Wall Street Journal
Hargreaves, Rupert (2014, April 18) "Tobacco is Still an Extremely Profitable Business, and This Won't Change Soon" The Motley Fool ,
Richtel, Matt (June 17, 2014) "Why big tobacco companies are betting on e-cigarettes" The New York Times
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By anne d'innocenzio