Definition of Industry Market Concept

Definition of Industry Market Concept

The tobacco industry consists of many competitors trying to satisfy a specific customer need. Companies such as Philip Morris, RJ Reynolds, Brown and Williamson, and Lorillard hold almost the entire market share in the tobacco industry. While each company has different advertising and marketing techniques, they all target the same customer group. Tobacco companies try their best to generate interest in their particular brand or brands. Companies market a number of attributes that usually include, but are not limited to: taste, flavor, strength, size and image in order to distinguish themselves from competitors (Business Week 179, November 29, 1999). However, all tobacco companies are satisfying the same needs. Many long-time smokers are addicted to the nicotine in cigarettes. They smoke because the nicotine is needed to help them feel normal (Focus group). Many addicts go through withdraw without nicotine. All tobacco companies have nicotine in their cigarettes, which fulfills the need of long-time smokers. Other smokers depend on cigarettes in social settings. Many smoke to look sophisticated and mature. Tobacco companies make many kinds of cigarettes that target different groups. Social smokers may perceive certain brands as more sophisticated, and therefore they shy away from other lesser-known brands. For example, a person who smoked generic cigarettes at the bar may be perceived as uncultured. On the other hand, the smoker with the Marlboro Lights may be more socially accepted because they have a brand name product (Focus group). Many types of cigarettes cater to the many markets of smokers who want to portray a certain image in social settings. Tobacco companies do not create the need to smoke, but try to generate interest in their particular brand (Hays, New York Times, November 24, 1999). Overall, the tobacco companies satisfy consumer demand for the millions of adult Americans who choose to use tobacco by providing differentiated products to different target markets of smokers.

Industry Concept

The tobacco industry has developed a rather large array of products. Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson, as well as the other smaller competitors, all provide the same product- cigarettes. The tobacco industry is filled with fierce competitors. But underneath the brand names and images, the product is relatively the same. All tobacco companies produce an inhalant that is made with tobacco, tar, and nicotine. These materials are rolled in a special kind of slow-burning paper for longer smoking time. The cigarettes are approximately three to four inches long and come in packs of twenty to twenty-five. With so many similarities, one would think that the market would resemble that of a commodity. However, through brand marketing and promotions, each cigarette is uniquely different in the mind of the customer.

Boundaries The tobacco industry can be broadly or narrowly defined. Many products use tobacco as the main material. We chose to define the market by focusing on the tobacco and the way it is smoked. Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson are the main competitors in the tobacco industry (Pollack, Advertising Age, August 30, 1999). They produce cigarettes, which are lit and the smoke is inhaled to the lungs. Tobacco products such as cigars, snuff, and chew are considered close substitutes to cigarettes. Cigar smoke is just taken into the mouth, but not inhaled like cigarettes. Snuff and chew do not even contain smoke, but are put on the skin for nicotine absorption. Companies such as Imperial Tobacco, which produce a wide array of chew and snuff products, would be considered a company that provides substitutes to cigarettes. They would not fall in the cigarette industry itself.

2 .Situation Analysis

2.1 Industry Structural Analysis

2.1.1 Threat of Entry

The tobacco industry has a very low threat of entry. A few powerful firms, such as Philip Morris, RJ Reynolds, Lorillard, and Brown and Williamson, control most of the industry (Pollack, Advertising Age, August 30, 1999). Any new entrants would be sure to receive heavy retaliation from the other companies fighting to keep their share of the lucrative industry. For example, Philip Morris is by far the industry leader with estimated tobacco sales of $46.7 billion is 1999 (Business Week 179, November 29, 1999). They have a huge base of resources with which to attack other competitor entrants. They could easily start promotions such as "buy one, get one free" or offer coupons at certain times during the year to discourage entrants to the industry. Many small companies will not be able to compete with the capital requirements in the tobacco industry. The barriers to entering the tobacco industry are numerous. First, the high volume of cigarette sales gives existing firms economies of scale, which would be a disadvantage for newcomers to the market. The products currently on the market are differentiated somewhat in their design, but mostly through the large advertising budgets that are used to promote them. Tobacco companies now pour $4 billion a year into promotions and advertising- nine times what they spent in 1971 (Elliot, New York Times, September 22, 1999). These firms have finely tuned distribution channels, which include legions of sales representatives that vie for shelf space. One of the biggest obstacles to a new entrant would be finding a decent place of the shelf with such heavy-handed competition already occupying that space. Store managers may be reticent to give away prime slots for fear of losing discounts or other offers from major players. Government policy is another possible deterrent to enter the market. Large settlements against the tobacco companies have been the norm in the past several years. Although gigantic companies like Philip Morris are able to handle the charges because of their extensive monetary resources, it is difficult to imagine how a small startup company would be able to burden the expense. Switching costs are very high in the tobacco industry. Many smokers are still smoking the same brand they first started smoking (Focus group). Even if the price of their brand is raised, they would not consider switching to another brand (Focus group). Many companies who would want to come into the industry would not easily take away market share, due to high brand loyalty.

2.1.2 Competitive Rivalry

The tobacco industry is a very competitive market. As mentioned above, about four very large corporations control the entire market. Philip Morris is the

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