BAT Zambia headed to a new Nash equilibrium
British American Tobacco, Strategy

BAT Zambia’s competitive landscape indicates that the firm is currently in a battle with other established players for 70% of a “legal” market. The other 30% currently belongs to illicit cigarette traders. Annual report after annual report has seen their Chairman Michael Mundashi consistently complain about the unwelcome competitive forces of illicit cigarettes.

When assessing the competitive landscape that BAT Zambia is currently in, we searched for signals that could indicate what impact the forces had on their strategy. Their business in Zambia purses an economies of scale approach through their distribution strategy. However, this strategy appears to have minimum barriers of entry for new players who chose to compete albeit the elephant in the room being excise duty. With legislation still work in progress, players in this game are dependent on external forces such as governments to set rules on how trade is conducted.

When the management team of BAT Zambia saw their market share being threatened, the question of what type of competitors were entering their market must have been asked. If they were not, they would soon discover that if their market share dwindled, they were faced with a Baumol type player who is motivated by gaining market share at the expense of value.  However, we have not been able to find data that indicates that illicits have an established supply chain that can rival that of BAT. Therefore, logic would have it that the 30% currently occupied by the illicit traders is fast approaching equilibrium. In a Nash equilibrium, each player’s predicted strategy must be that player’s best response to the predicted strategies of the other players according to Professor Patrick McNut of Alliance Manchester Business School. Due to the legal restrictions of distribution and the eminent pressure that will come from ZRA, illicits will eventual also find themselves trying to protect their 30% market share.

But then the question that shareholders of BAT Zambia should be asking of their management team:

  1. With the coming of the new factory in Lusaka, will our strategy to improve the product mix with locally manufactured product (being introduced to beat the excise duty costs) be enough to protect market share?
  2. Is our market ready to possibly consider a strategy of product diversity through economies of scope? Head office has identified two key products: Vapour (e-cigarettes) and tobacco heating as the next sources of value for the firm.

With the parent company investing over $1 billion over the last 5 years in Next Generation Products (NGP), maybe it is time to consider playing outside the game. This however, will largely depend on consumer preferences and in-depth market research. Therefore, it is entirely management’s decision to ensure whatever their next steps are in the market Zambia, they are in the interests of preserving value in this new equilibrium.

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