Pakistan Tobacco Company

Introduction:
Pakistan Tobacco Company Limited (PTC) is a part of British American Tobacco - the world's most international tobacco group - with brands sold in 180 markets around the world. Pakistan Tobacco's operations in Pakistan began in 1947, making it one of Pakistan's first foreign investments.

Principal line of business:

The company produces high quality tobacco products to meet the diverse preferences of millions of consumers, and it works in all areas of the business - from seed to smoke. The company provides a number of reputed brands of cigarettes to consumers in Pakistan, including Benson and Hedges, Embassy, Gold Flake, Capstan and Gold Leaf.

Location:
Registered Office: Pakistan Tobacco Company Limited Dubai Plaza, Plot No. 5 Street 20, Salman Market, F-11/2 P.O. Box 2549 Islamabad-44000 Telephone: +92 (51) 2083200, 2083201 Fax: +92 (51) 2111913 Web: www.ptc.com.pk Regional Sales Offices: North Punjab & N.W.F.P. House # 57-A/6, Satellite Town Rawalpindi Telephone: +92 (51) 4582390-91 Fax: +92(51) 4582392

Reason for decreasing Employees

Organizational restructuring Telecom sector attracted many employees of the company at high pays, as a result high turnover of employee observed. This issue is somewhat now resolved by the company as it has started paying more incentives to the employees and also giving training and development courses to its employees.

Achievements:
The Company was awarded the following Awards:

Corporate Excellence Award by the Management association of Pakistan BATs Global Environmental Health & Safety Award BATs Global Leaf Award. 25th Corporate Excellence Award in Business and Industry Category PTC Annual Report for 2007 was recognized as the best in its category by ICAP

Brands of Pakistan Tobacco Company Golf Leaf Dunhill Gold Flake Capstan Wills Embassy Benson & Hedges

Focus of the Organization

The Company focuses on the following operational targets: Continued strong volume and profit growth. Increased focus on productivity savings.
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Launch of the 3rd cycle of our social reporting dialogues. Improved corporate governance. Environment, Health & Safety

Organizational Culture
Their culture consists of values they derive from their four guiding principles. PTC is currently in the process of launching internal campaigns to further inculcate these values into the daily lives of their employees. Their guiding principles in brief are:

Guiding principles
They follow four guiding principles that represent: Strength from Diversity Open Minded Freedom through Responsibility Enterprising Spirit 1. Strength from Diversity Strength from Diversity reflects the cultural mix within the Company and a work environment that respects employees individual differences. It also reflects their vision of harnessing diversity of people, cultures, viewpoints, brands, markets and ideas to create opportunities and strengthen performance. 2. Open Minded Open Minded reflects their openness to change, opportunities and new ideas, including ways of addressing regulatory issues and changing social expectations. They seek to listen without prejudice, actively and genuinely considering other viewpoints. 3. Freedom through Responsibility Freedom through Responsibility describes how they make decisions: as close to the consumer as possible. It also affirms their belief that decision-makers should accept responsibility for their own decisions.

4. Enterprising Spirit Enterprising Spirit has been a characteristic of their business for more than a century. It is reflected in PTCs ability to grow their business and its value within challenging environments in the confidence to seek out opportunities for success, to strive for innovation and to accept considered risk-taking as part of doing business.

5. Capacity and production Against an estimated manufacturing capacity of 43,991 million (2007: 42,797 million) cigarettes, actual production was 41,159 million (2007: 38,183 million) cigarettes. Actual production was sufficient to meet market demand. There was no production through any outside manufacturing source.

PTC and Corporate Social Responsibility:

Maintaining a large scale Corporate Social Responsibility (CSR) program in the midst of political change and economic uncertainty was not only a challenge but also a personal stretch for the people involved. In the past, they have seen and surmounted many hurdles, however, the kind of problems they faced in NWFP in 2008 were unprecedented. In this context, it is indeed a testament to the steadfast nature of their resolve that they remain partners of first choice for their communities, and their CSR initiatives continue undeterred, with the same energy and resolve as before. Their forestation program continues, with an expansion of the total plantation area and increased distribution of saplings. In the area of public health, PTC have completed construction of 8 water filtration units, with 5 more planned in 2009. Their Mobile Doctors Units continued to operate extensively treating patients in the underprivileged areas; this was in addition to the 19 medical camps organized in the year. PTC also held free eye camps and diabetic screenings in partnership with various organizations such as Merck and Layton Rehmatullah Benevolent Trust. In education, the Companys Learning Resource Centers saw 588 more students graduate, with an 11% increase in the number of female students. Some 200 students have been provided with the Adult Basic Education Society scholarships during the course of the year. PTC is well aware of the unique challenge of operating in the field, and is committed to rise to the occasion. I commend their efforts in the year past, and I am confident that despite some testing times ahead, they will continue to contribute to the communities that they work with. The people in PTC have always been one of their greatest asset and they will continue to invest in the same through various initiatives that helps them to build a winning organization. These include programs such as WAADA focusing on shop floor employee morale, continuous investment in focused functional/leadership training programs and coaching programs for first line leader such as TLDW (Team Leader Development Program). An Employer Branding campus campaign by the name of Battle of Minds was also launched in 2008, focusing on attracting the right talent to our organization, and this was met with great success. Demand for our highly developed local talent also remained high and during 2008, 15 of our managers were sent out for long and short term assignments to various Operating Companies of BAT around the globe. Environment Health & Safety, PTC has always been a leader in the field of Environment, Health & Safety. EHS principles are woven into the fabric of their organization and have now become part of the culture in all areas of their business from seed to smoke. PTCs endeavor to improve
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environmental programs has been recognized repeatedly by the Parent Group (BAT) with PTC being awarded the annual EHS Excellence award for the fourth consecutive year in 2008 and also, being awarded the accident free award for 2008 with No Lost Work day Case incident reported across the organization during the year.

Core Competencies
Business Process Re-engineering
2008 has also been a year of change for PTC with a number of Business Process Reengineering initiatives successfully implemented across the Company as the organization embarked on a challenging and ambitious journey classifying their must do objectives to succeed in the market as the Big Mountains. The Enterprise Program Office played a vital role in supporting the Company strategy by setting-up the governance structures and process framework for effective program and project management. Projects implemented during the year focused on the key areas of Talent, Growth, Illicit Trade reduction, Productivity improvement and proactive approach to Regulations. PTC is on the forefront of adopting best practices on Corporate Governance and Reporting standards, as their Annual Report for 2007 was recognized as the best in its category by ICAP. In addition to the above, PTC won the 25th Corporate Excellence Award in Business and Industry Category from the Management Association of Pakistan which is recognition of the excellent management processes in their Company.

External Analysis: Tobacco Industry Analysis

Industry overview: The tobacco industry is a source of revenues, employment and foreign exchange for the country. The industry has to pay very high excise and sales tax while complying with various strict rules and regulations of the government. During 2007-2008, it contributed above Rs.68 billion as Central Excise Duty and Sales Tax. Despite its contribution to the economy, the industry is highly criticized for its negative impacts on the society. Structure of Industry: In Pakistan the industry consists of farmers who grow tobacco, firms that convert the raw materials into finished goods (Cigarettes), exporters and importers of tobacco and its products. Smuggling of tobacco products to and from neighboring countries is also quite common. Size and number of sellers:
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In Pakistan, tobacco cultivation occupies a relatively small area of 0.27% of the total irrigated land. The country has been divided into various zones depending on the type of tobacco being grown in that region. The major firms involved in the manufacture of finished goods and exports include
Pakistan Tobacco Company Lakson Tobacco Company Souvenir Tobacco Company Saleem Cigarette Industry Universal Tobacco Company Imperial Cigarette Industry Khyber Tobacco Company International Cigarette Industry Walton Tobacco Company Sarhad Cigarette Industry

Of these firms Pakistan Tobacco Company is the market leader with lakson Tobacco Company in second place.

Market share PTC

53.70%

46.30%
Market share Remaining Companies

Number of buyers: The firms that manufacture finished goods act as purchasers themselves, buying it from the farmers. They serve as intermediaries that purchase, process and resell. In the local market, Twenty-nine percent of men and 3.4% of women smoke cigarettes regularly, concluded the National Health Survey, while the Pakistan Society of Cancer Prevention says 37% of men and 4% of women over 15 years of age are smokers. According to Pakistan Pediatric Association, 1,000 to 1,200 children between the ages of 6 and 16 years take up smoking every day.

Cigarette consumption in Pakistan is five times higher than in India with 620 cigarettes per adult per annum against 119 for India. This shows that the market for tobacco industry is very immense locally. Chewing tobacco is in demand in the villages. Alongside this; various countries are also acting as buyers for the tobacco industry. Product differentiation: The major product differentiation exists between chewing tobacco and cigarettes and cigars. The main differentiation exists between the manufactured goods in the form of branded cigarettes. The firms target different segments of the society with different price levels. Differentiation also exists between imported and local cigarettes and cigars. Consumers are willing to pay a premium price for the imported product especially cigars. Entry conditions and government regulations: There are no entry conditions as such but when a company enters in the industry, it has to abide by all the rules and regulations of government. This is very costly especially in terms of advertising. The firms have to inform the consumers about the potential health hazards related to tobacco products. This implies that in order to enter as a manufacturer, heavy investment is required. The government is providing incentives to the tobacco growers in order to promote the industry. This is being done through the Pakistan tobacco board. The board tries to find out their problems and to educate them about the cultural operations, plant protection measures, picking and curing operations. Other responsibilities of the board are to regulate, control and promote the export of tobacco and tobacco products, and to fix grading standards. Demand and supply: The tobacco board also manages the demand and supply in the industry. According to legal requirements, the tobacco manufacturing and exporting companies are required to inform their tobacco requirements by the 21st of October to the Pakistan Tobacco Board. After discussions between the Board and other stakeholders like buyers, growers, dealers, etc. and taking into account factors like crop size, prices, domestic usage and exports, these figures are finalized. In this way the growers get a rough estimate of how much they should grow. This creates a balance between demand and supply. The Pakistan Tobacco Board, in collaboration with tobacco companies, holds meetings in the tobacco growing areas to inform the growers about the requirements of tobacco companies.

Image: The industry has a negative image among its consumers and the general public. This is due to the various health hazards associated with tobacco consumption. People are also blaming the

government for its support for the industry. Smoking is the cause of lung cancer in 90% of the cases. Its users get addicted to it. Although the companies cannot change the nature of their product, they are trying to build a socially responsible image in the eyes of the consumers. PTC is currently engaged in various programs such as a forestation, Mobile doctors program, Youth smoking prevention, learning resource centers. The laskson group has set up Lakson medical center (Sahiwal hospital) and a Medical complex in Sawabi NWFP. Price: The government fixes the lowest price that firms can pay to growers. There is a restriction that price for the current year cannot be lower than that paid in the preceding year. The tobacco board has specified the criteria for fixing prices. Smuggling is resulting in revenue leakage for the government. Some groups say that high taxation on the tobacco industry is encouraging smuggling.

Competitor Analysis
Laskson Tobacco Company is the main competitor of Pakistan Tobacco Company or you can say that the direct competitor. It is a public listed company on Karachi stock exchange having more than 5000 employees and it is a largest exporter of tobacco having four factories over here in different cities Dadu, Sahiwal, Rawalpindi, Sawabi. Their main strengths are the support of an international player Philip Morris international, second largest cigarette manufacture in a country, strategic location of factories and established distribution network, largest leaf processing factory in the country and dedicated workforce, these are there main strengths. Brands of LTC Royals Red&white Diplomat K2 Morven Gold

Vision We maintain transparency in our financial practices towards stakeholders and institutions by assiduously following the laws of business, while working for continuous increase in share holder value to extent allowed by macro economics environment. Mission To build a successful business model that encompasses the needs of our customers, our share holders, and our employees.
Key Success factors Product innovation R &D Manufacturing technology HR Selling and distribution Supply chain strength Financial muscle Patronage support of an international player Government lobbying Brand equity CSR Total Weight 0.12 0.12 0.7 0.7 0.1 0.1 0.2 0.5 0.12 0.5 1 PTC ranking 4 3 4 3 3 3 4 3 3 3 PTC extended 0.48 0.36 0.28 0.21 0.3 0.3 0.8 0.15 0.36 0.15 3.39 LTC ranking 3 2 3 3 2 3 4 3 3 1 LTC Extended 0.36 0.24 0.21 0.21 0.2 0.3 0.8 0.15 0.36 0.05 2.88

As you can see in this table the factors where Lakson Tobacco Company lags behind, and from those points PTC has gained the competitive advantage over their main competitor LTC and continuously growing their market share by providing high quality products. PTC has truly understood their segments and now they have a complete understanding of the needs and wants of their segments.

SWOT Analysis

Strengths
Economies of scale in production Enterprise resource management for quick and cost effective operations Efficient management Marketing efficiency and capital effectiveness
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Business process re-engineering

Weaknesses
Wastage of material in production.

Opportunities
Growing demand of cigarettes despite such anti smoking campaigns.

Threats
Illicit sector activities The illicit sector continues to be the single biggest threat to long term commercial viability and sustainability of the legitimate sector along with its adverse impact on Government revenue Law and Order Situation The law and order situation has been precarious, culminating in the bombing at the Marriott hotel which led to collateral damage to our Head Office in Islamabad. The general security situation in the country continued to deteriorate in 2008 and it was especially difficult in the tobacco growing areas of NWFP.

Technology Changing Optimization techniques not only to ensure capacity enhancement but also to adhere to international Environment, Health and Safety standards. Social and economic trends Social trends: Increasing know how of cigarettes hazards Anti - cigarette campaigns and litigations

Economic trends: Rising taxes High inflation Rupee devaluation Rising commodity and oil prices Sharp increase in energy costs.
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 Government action Cigarette use prohibition and awareness in people for hazards of smoking Ban on sales promotions Ban on product advertisements including sports sponsorships, TV, radio and outdoor hoarding. Changing Consumer needs Switching to Discount brands due to decrease in purchasing power of the consumers Threat of rivalry and new entrants PTC faces rivalry from Lakson Tobacco Pakistan in major, after it there is no other big market player and cannot affect the sales of PTC that much. As there have been the anti tobacco campaigns internationally, there is a threat that the other international industries might direct themselves for the developed countries to ensure their sustainability. Pakistani market may also be in the threat for the international companies to enter, as government policies for the entry are much relaxed but afterwards the company has to abide by the strict rules and regulation for operating in the region.

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PORTERS MODEL:

1. Rivalry among existing firms:

In Pakistan only two major companies compete with each other. These are Pakistan Tobacco Company and Lakson Tobacco Company. But the competition between these two firms is very aggressive both are trying to eat others market share. So the rivalry is very high.

2. Bargaining power of buyers:

Cigarette consumption in Pakistan is five times higher than in India with 620 cigarettes per adult per annum against 119 for India. This shows that the market for tobacco industry is very immense locally. According to Pakistan Pediatric Association, 1,000 to 1,200 children between the ages of 6 and 16 years take up smoking every day. Therefore bargaining power of buyers is relatively low.

3. Bargaining power of suppliers:

Most of the tobacco used by the firms is produced in Pakistan, but still a considerable amount of tobacco is imported every year so suppliers have some bargaining power regarding the prices especially.

4. Potential Entrants:
While the anti-tobacco movement in the USA helped lower cigarette sales, Big Tobacco, the largest US companies: Philip Morris, R.J. Reynolds and Brown and Williamson have continue to expand overseas. They have flooded the markets in Asia and Eastern Europe with advertisements, promotional products and cut-price brands designed to encourage new smokers.

5. Substitutes:
Substitutes are easily available in Pakistan so people have the option to switch to brands of other firms.

6. Other Stakeholders:
Every year, the government spends some US$20,000 on anti-smoking messages but Antitobacco campaigners are also playing their role to minimize smoking but cigarette companies spend millions of dollars annually on advertising so this threat is neutralized up to much extant.

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TOWS Matrix

Large number of brand loyal customers. Economies of scale in production Good distribution network ERP

Wastage of material in production

Growing Consumer Market. Less no. of companies in the market.

Retaining Loyal Customers Attracting new customers by promotions

Plant replacement which ensures least material wastage and high production

Illicit sector activities Technology Social, politico-legal and economic trends Threat of rivalry and new entrants

Production of harm free cigarettes Pull Strategy to be adapted

Discount brands to be focused more

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Economic Environment: Majority of the population of Pakistan belongs to the low class and has low purchasing power. The taxes imposed by the govt. on tobacco industry are also very high that causes a significant increase in the prices of cigarettes which takes the quality brands away from the reach of the majority. So for this segment (lower class) PTC has introduced Embassy and Gold Flake. For lower middle there is Capstan and Wills and for high and upper class there is Gold Leaf and Benson and Hedges.PTC is promoting itself as an environmental friendly organization by adopting tree plantation campaign. PTC planned 3 million trees* annually in different areas of the country.

Technological: PTC is the pioneer of using latest technology in Pakistan. The machine they use to manufacture cigarettes Loga Max can produce 8000 sticks per minute. Although now Lakson is also using the same technology but it was PTC which introduced it in the country. Everyone knows that technology has a significant effect on companys production capabilities. Use of this technology (Loga Max) enables PTC to fulfill the market demand well in time and more efficiently.

Political: Ministry of Health has made all possible efforts in informing the masses that smoking is injurious to health and PTC maintains that smoking is an adult choice. Cigarettes are being manufactured and each packet must contain a warning Tobacco seriously damages health or smoking is injurious to health. But as such it has no effect on company's marketing strategies and tactics, although cigarette manufacturers can not promote it as good for health" product. The law no smoking in public places might effect sales volume because the people who use to smoke for style or fashion may give it up.

Socio-cultural: In Pakistan the basic traditions, customs and values are not much different but because of the dish culture mostly young generation like European and American culture which leads to liberalism so these youngsters go for smoking as an essential of stylish life. On the other hand in villages the elderly people smoke Hukka and the youngsters smoke cigarettes. The sole reason behind it is that the young generation does not really see why should they be dependant upon someone to fill up the paraphernalia of Hukka, and even if they have to do it themselves it is time consuming and so they prefer ready to smoke stylish cigarettes instead of Hukka.

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Task Environment: As mentioned earlier, the population of Pakistan is growing by 2.7% annually and number of smokers is increasing as well. Market size therefore is getting larger and it is an opportunity for cigarette manufactures. But unfortunately Lakson has emerged as a strong competitor of PTC and has attracted all the 10% growth of potential consumers where PTC was not able to do so. This tough competition is brining a decline in the profits of the company due to which PTC has decreased the prices of almost all its brands (except Benson & Hedges) to remain in the competition.

Internal Environment of the Firm:

Resource based view of the Firm: Tangible Resources Financial Firms capacity to raise equity Support from British American Tobacco Firms Cash account and cash equivalents Modern Facilities Favorable Locations Machinery and Equipment Effective Strategic Planning Process

Physical

Organizational

Intangible Resources Human Managerial Skills Diversified Workforce Retained Employees Firm-specific practices and procedures

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Innovation and creativity Innovation capacities Employees are welcome to suggest new ideas Training sessions are held almost every year

Organizational Capabilities Ability to hire, motivate and retain employees Outstanding Customer service Proactive approach

Competitive Advantages from resources From the start to end, ownership of property, brand reputation, employees loyalty, supply chain, management judgment all these things helps PTC to gain or sustain their competitive edge, brand recognition is so high thats why they dont need any kind of advertisement for their brands. With the help of certain packages that they give to their employees they have retained them so the turnover rate is relatively low as compared to the competitors. They have their own fields of tobacco that makes their supply chain so strong and helps to minimize the overall cost. Resources Capabilities There resources are valuable, rare, difficult to imitate in the presence of substitute so thats make their competitive edge sustainable in the market.

Value Chain Analysis:

Primary Activities Inbound logistics Inbound logistics is primarily associated with receiving, storing and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers. In PTC they have their own fields of tobacco so the receiving of the material is no problem for the company and they store all of the material in their warehouse and then distribute it in the different factories at different locations in the country. They believe in just in time inventory system to keep their material or product fresh. Every delivery meets the defined time or schedule. They have a strong inventory control system in their company.

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Operations After harvesting and curing, the cured leaf is processed through a Green Leaf Threshing plant. The main purpose of this processing is to:

remove sand, dust, scraps and foreign matter; separate the lamina from the stem (threshing) Drive down the moisture content to safe storage levels.

Processed tobacco is then packed into 200kg cardboard boxes for shipping to their manufacturing sites. Pakistan Tobacco Company's Green Leaf Threshing plant is located at Akora Khattak, in the NWFP. Manufacturing At the factory, the matured tobacco is checked for quality and then carefully blended with other ingredients which the brand recipe may call for, such as flavorings or pre-processed tobacco. Keeping track of the various types of tobacco and blend components is a key and computers are increasingly used to track production runs. Moisture content is crucial. Too dry and the tobacco leaf will crumble; too moist and it may spoil during storage. The blended tobacco is treated with just the right amount of steam and water to make it supple and then cut into the form in which it appears in the cigarette. Excess moisture is then removed so the cut tobacco can be given a final blending and quality check. Cigarette making, once done entirely by hand, is today almost fully automated, with the cut tobacco, cigarette paper and filters continuously fed into cigarettemaking machines. The technology has advanced dramatically over the years, but quality is not forgotten; each cigarette is automatically quality controlled to ensure that it meets every benchmark for its specification. As packing machines put them into the familiar brand packs, wrap the packs in protective film, and group them into cartons and cases; further testing takes place at each stage to make sure the cigarettes are properly protected. The completed cases, timedated to ensure the freshest product possible is then ready for distribution.. Outbound logistics Around 250 exclusive distributors, employing a contingent of over 1,200 distribution representatives, provide direct store delivery services for their finished products to the 500,000 plus retail stores throughout the country. In doing so, they aim to optimize their finished goods supply chain efficiencies in delivering products of consistent quality on-time, every time. The strong performance of PTCs brands suggests that theyre getting it right.

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Marketing and sales Trade marketing is a large part of their marketing activities, managing business-to-business relationships with the retailers and distributors from whom PTCs consumers buy their products. They believe their win-win-win approach sets them apart in the market place. They dont just focus on achieving their own goals, but aim to create benefits for their trade customers as well as their consumers. They work to operate in the most efficient and effective way so that retailers can offer the products their consumers want to buy, where and when they want to buy them, and at the right quality. Their trade marketing field force provides value added services in complimenting the distribution effort, in select stores of the retail universe to enable mutually beneficial partnerships. They make substantial investment in retail, through quality in-store and on-store furniture and fittings to stock and display their products for the convenience of their consumers.

Supporting Activities General Administration They have the effective planning system to attain overall goals and objectives, they have excellent relationship with their workers, and the top management are very much involved in every small opportunity to make the organization better.
Human resource management

They have the effective HR team to hire the best employees or skilled workforce; there are many reward and incentive programs to retain the employees. The working environment over there is highly professional and effective for the company Technology Development They have the latest technology and upgraded machined in their factory that makes them ahead from their competitors Procurement They are their own suppliers of raw materials which help them to minimize their cost and removed all the threats which are normally there in suppliers and companys relationship. They import tobacco for their premium brands in order to give the customer best quality product

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Financial Analysis of the Firm: Gross Volume Year 2004 2005 2006 2007 2008 2009 Volume 27 Billion 31 Billion 35 Billion 37 Billion 41 Billion 41 Billion Gross Profit 3,483 Million 4530 Million 5534 Million 6516 Million 7277 Million 8224 Million Operating Profit After Tax Profit 1,077 Million 665 Million 2,081 Million 1,322 Million 2,841 Million 1,905 Million 3,720 Million 2,420 Million 3,860 Million 2,532 Million 4,589 Million 3,022 Million

Liquidity Ratios

The analysis of Pakistan Tobacco Companys financial statement shows that it has a high tendency to pay its debts and to convert assets into liquid form within short intervals of time. The current ratio of PTC remained between 0.90 1.14 in the last six years and it shows its ability to pay short term liabilities.

The quick ratio of PTC ranged between 0.069 0.133 from 2005 to 2010. It shows the companys ability to convert its current assets into liquid form (cash form) in order to meet current liabilities.

On yearly basis from the year 2005 2010, we observed that the number of times the total inventory or stock of the company was sold on the average of 2.25 times/year. It

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shows the sales of the company are on a very large scale and also gives rise to the company opportunity to generate huge profits in the long run.

Average Account Receivables Turnover shows that how many times a company is able to recover the amount of credit sales to people. PTC has shown a high Accounts Receivables turnover rate which shows its high liquidity transformation rate.

Profitability Ratios

Pakistan Tobacco Companies Profitability ratios clearly reflect its great ability to generate huge profits and of generating dividends for its shareholders. Average Assets turnover of the company ranges between 1.21 - 1.91 times per year. It shows the generation of huge sales from the worth of assets of the company and in the case of Pakistan Tobacco Company, it shows the firm's efficiency at using its assets in generating sales or revenue- the higher the number the better.

The profit margin of PTC lies between 31.27% - 40.61% in previous six years. It measures the percentage of each dollars of sales that results in net income. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.

The return on assets of PTC ranges among 0.80 to 0.27 according to preceding six years record. An overall measure of profitability is return on assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.This number tells

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you what the company can do with what it has, i.e. how many rupees of earnings they derive from each rupee of assets they control.

Return on common stockholders equity of PTC varies between 0.28 0.76 between the years 2005 to 2006. Another widely used profitability ratio is return on common stockholders equity. It measures profitability from common stockholders point of view. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.Averaging ROE over the past 5-10 years can give you a better idea of the historical growth.

Earnings per share are a measure of net income earned on each share of common stock. PTCs earning per share of last six years lies among 4.47 - 11.83. The EPS formula does not include preferred dividends for categories outside of continued operations and net income. Earnings per share serve as an indicator of a company's profitability.

Payout ratio of this company ranges from 0.8 - 1.34. It measures the percentage of earnings distributed in the form of cash dividends. The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings.Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividend.

Price earnings ratio is an oft-quoted measure of the ratio of the market price of each share of common stock to the earnings per share. It is also called its "P/E", or simply "multiple". The P/E ratio is a vital ratio for investors. Basically, it gives us an indication of the confidence that investors have in the future prosperity of the business. A P/E ratio of 1 shows very little confidence in that business whereas a P/E ratio of 20 expresses a

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great deal of optimism about the future of a business. It is the valuation ratio of a company's current share price compared to its per-share earnings.

SOLVENCY RATIOS

Solvency ratios measure the ability of a company to survive over a long period of time. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Different countries use different methodologies to calculate the solvency ratio, and have different requirements.

Debt to total assets ratio measures the percentage of total assets that creditors provide. A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt. Calculated by adding short-term and longterm debt and then dividing by the company's total assets.

The average value of Times interest earned of PTC is approximately 2.8 for previous six years. It provides companys ability to meet interest payments as they come due. Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. The times interest earned lets the creditor understand whether or not a company has sufficient income to cover its interest payments requirements. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt.

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Recognizing Firms Intellectual Assets:

Intellectual assets of PTC are their workforce, goodwill, resources, and their image in the market. I have explained everything above in my report so I will focus on the human capital here, what they do with their workforce, how they do it and they retain their employees in order to gain or maintain their intellectual assets. Re-Engineering the Human Capital (Attitudinal Change): PTC focuses on individual to inspire them and provide them with tools to pursue personal excellence without getting bogged down through self-imposed limitation in thinking and actions. PTC believes in supporting people to learn from mistakes in pursuit of business excellence. Encourage people to think differently. Reduce Emphasis On Training Only Approach: Create an understanding that Training Only would not be sufficient to develop people and that other development opportunities should be identified and agreed by the individuals and line managers e.g., Job development Special projects Short-term assignments Short-term attachments with other functions/sections Cross functional projects / teams etc.

Compensation: PTC considers its employees not just as a cost but as a resource in which the company has invested from which it expects valuable returns. Pay policies and programs are one of the most important human resource tools for encouraging desired employee behaviors. The advantage of paying above the market average is the ability to attract and retain the top talent available, which can translate into highly effective and productive work force. People The people in PTC have always been one of their greatest asset and they will continue to invest in the same through various initiatives that will help them build a winning organization. These include programs such as WAADA focusing on shop floor employee morale, continuous investment in focused functional/leadership training programs and coaching programs for first
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line leader such as TLDW (Team Leader Development Program). An Employer Branding campus campaign by the name of Battle of Minds was also launched in 2008, focusing on attracting the right talent to their organization, and this was met with great success. Demand for our highly developed local talent also remained high and during 2008, 15 of our managers were sent out for long and short term assignments to various Operating Companies of BAT around the globe Great Place to Work They have been challenging and motivating their people to achieve daring and stretching milestones set under the umbrella of three Must Achieve Objectives. During 2005, they further improved the focus of their business and people through the Strategic Leadership Agenda (SLA) and by embedding People Processes based on the system of Leadership Capabilities. During 2005, they invested heavily in building their Employer Brand and related activities. PTC launched the We challenge you media campaign to attract and recruit talented graduates. As a result, they recruited a batch of 12 Management Trainees (MTs) who were currently being developed within the Global Management Trainee Program. Moreover, they continue to invest generously in developing their people through exposure on international development programs. Such a high degree of investment has created a surging demand for their talent. Consequently, they have now achieved the status of net exporters of talent in the BAT World. During 2006, apart from furthering the above agenda, PTC defined it in such a way that we will drive more organizational initiatives linked to our business objectives. These include development frameworks for Business Support Officers, Supply Chain Integration for Leaf, Manufacturing & Supply Chain roles that will lead to an integrated function, and a Reward & Recognition scheme that will ensure motivation for better performance and retention of the right talent. We will continue our focus in this area by having the right people with the ability and the hunger to drive and deliver competitive advantage through superior performances. All these things give us an idea about the internal environment of the PTC and the strategies they use to retain their employees e.g. o Foreign training is given to unskilled labor almost every year to make them working more efficiently o High Incentives are paid to the employees to ensure their loyalty with the company and decreasing the turnover. o Day Care Centre at Akora Khattak Factory to provide child care facilities to infants and children of all working mothers.

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Business level Strategies: Creating and Sustaining Competitive Advantages:

Pakistan Tobacco Company is using the Cost Leadership Strategy in order to be one step ahead from their competitors; they have minimized their cost as they are their own suppliers and own the fields of the tobacco so this gave them the competitive edge and an opportunity to attract more and more customers through this cost leadership strategy. Penetration Pricing In the past years PTC reduced the prices of their products by half of the current selling prices. As a result more people are purchasing the products, that has lead PTC to gain a market share of 46.3%. Discount brands of PTC including Gold Flake have seen a rigorous growth in sales. Almost 18% sales growth in Gold Flake has been observed as compared to previous year.

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Industry Life Cycle:

Tobacco industry is right now at maturity stage. Market growth is low to moderate, there are many segments, competition is very intense, emphasis on product design is very low but very high on the process design, their major area of concern is production and overall objective of this industry is to defend their market share and extend product life cycle. If I talk about PTC here then they are truly at the maturity stage and still working on their process design to maintain their competitive edge over their competitors. The main threat for this industry is the continuous change in the government regulations and restrictions on this industry, now they have placed a condition on them that they have to publish a picture of a mouth disease in each and every pack of their cigarette just to inform people the negative effects of smoking and this restriction played a very huge role in cutting the profits of this industry because many youngsters left smoking after seen this warning on the cover of the packet. Now this found to be a good sign for the society but at the same time its a wrong sign for this industry.

Stage/Factor Generic Strategies Market Growth No of Segments Intensity of competition Emphasis on product design Emphasis on process design Major functional areas of concern Overall objective

Introduction Differentiation

Growth Differentiation

Low Very few Low Very high Low Research and development Increase market awareness

Very large Some Increasing High Low to moderate Sales and marketing Create customer demand

Maturity Differentiation overall cost leadership Low to moderate Many Very intense Low to moderate High Production

Decline Overall cost leadership focus Negative Few Changing Low Low General management and finance Consolidate, maintain, harvest, or exist

Defend market share and extend product life cycle

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BCG Matrix
PTC has total seven brands in the market to capture various segments of target market. Golf Leaf Dunhill Gold Flake Capstan Wills Embassy Benson & Hedges

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Introduction stage of Question mark: The brand Gold Flake of PTC is in the introduction stage but that doesnt mean they are not earning profits through this brand, this is an overall analysis of the brands of PTC that is why I have placed Gold Flake in the introduction stage, Gold Flake isnt available in every market of our country; its for a small segment, people living in the villages or for the labor class. This brand is not known or used by a large segment. Star or Growth: Dunhill, Benson & hedges, and Wills are in the growth stage, these brands are very much popular or gained value in the mind of customers and positioned as the premium brands. The customers of these brands are mostly the people living in the big cities e.g. Islamabad, Karachi, Lahore, and Multan. These brands have taken place the position of number 1 selling brands in our country and they are still growing and making profits from other parts of the country. Cash Cow or Maturity: Gold leaf and Capstan are enjoying the maturity period; they also have gained the value of customers by giving them a good taste of cigarette. These brands are priced very strategically that almost everyone can afford these brands. Decline or Dog: Embassy is now in a decline stage and almost lost its image from the mind of their customers, the place of embassy had been taken place by the competitors brand e.g. Morven Gold and Red & white and now demand of Embassy is almost dead. Turnaround Strategy for Embassy: There is a chance to turnaround the brand embassy by adopting some strategies e.g. PTC should re position the brand embassy as mentioned above that by reducing prices PTC has gained a huge market share so by reducing prices of that cigarette and positioned it as a high valued product in a less price for the customers live in rural areas or sub urban areas, PTC should redesign the packet of embassy and target a particular segment because now they are not making this cigarette for everyone. This could be helpful for the company by squeezing the segment of this brand in order to gain some profit or test the smaller market in the start.

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Corporate Level Strategy: Creating Value through Diversification:

Pakistan Tobacco Company owns different brands of cigarettes and targeted it in a such way that for every class they have made a particular type of a cigarette, e.g. Marlboro and Dunhill for upper class, Gold leaf for middle class and Gold Flake etc for lower class, through this kind of segmentation they are covering the whole population who smokes cigarette. And this also helped them to gain value from every type of customer either he lives in a quarter or a mansion, if he smokes cigarette then he is in their target population. We have seen from past few years that there is a dramatic increase in a consumption of cigarettes in Pakistan but we unfortunately didnt focus on other side of the coin, we also have a ongoing trend of Sheesha in our country, and the market of sheesha is approx 40 percent larger than the market of cigarettes, because people who dont smoke cigarettes love Sheesha and everyone who smoke cigarette also love to have sheesha twice in a week except people aged above 40. So its very clear that this industry is growing day by day in fact the people who smokes cigarettes sometimes skip one or two cigarettes because they are having sheesha at that time which gives them same kind of satisfaction with a flavor of their choice and also thick smoke fascinates them, and in future it can be found as a threat for a company so in this case PTC should focus on a related diversification over here and step into this Sheesha flavor industry which also contains a small proportion of tobacco in them, And through this PTC can gain a huge advantage because of image of the company and also their customer will prefer their flavor while having sheesha and due to the vertical integration which they have will minimize the cost of supplier and material and can help the company to meet their objectives. They should also introduce a line of flavored cigarettes for the people above 40 because this segment are not very much in to sheesha but yes they want to have something new for their daily life and flavored cigarettes can fulfill their needs of having something new in shape of cigarettes and it will be less harmful for the ladies who smoke cigarettes for style and just to maintain their status and image in fact thin flavored cigarette will be preferred by ladies who love to smoke because it is light and gives you a taste of your choice.

International Strategy: Creating Value in Global Markets

Pakistan Tobacco Company is a part of British American Tobacco the worlds most international tobacco group, with brands sold in 180 markets around the world. So the Parent company has already gained or created value globally so what I think is that, there is no need of going global, and so as PTC is a part of British American Tobacco so they can also help PTC stepping in to a new industry and can support PTC from every perspective.

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Appendix:

1. Current Ratio
Years 2004 2005 2006 2007 2008 2009 2010 Current Assets 3,434,601 4,136,116 4,172,950 4,641,368 4,739,867 6,242,528 7,893,825 Current Liabilities 3,137,467 3,604,366 3,750,209 4,822,940 5,210,638 6,856,780 8,630,286 Current Ratio 1.094 1.147 1.112 0.962 0.909 0.910 0.914

2. Quick Ratio
Years 2004 2005 2006 2007 2008 2009 2010 Quick Assets 3,60,549 3,55,185 3,82,097 6,43,187 6,80,804 4,77,161 6,38,818 Current Liabilities 3,137,467 3,604,366 3,750,209 4,822,940 5,210,638 6,856,780 8,630,286 Quick Ratio 0.1149 0.098 0.101 0.133 0.130 0.069 0.074

Liquidity Ratios

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3. Inventory Turnover
Years 2004 2005 2006 2007 2008 2009 2010 Cost of Sales 6,089,955 7,223,576 8,357,474 9,527,306 11,595,736 13,442,066 10,789,048 Average Inventory 3,069,090 3,427,491 3,785,892 3,894,517 4,028,622 4,972,215 6,510,187 Inventory Turnover 1.98 2.10 2.20 2.44 2.87 2.70 1.67

4. Average Account Receivables Turnover

Years 2004 2005 2006 2007 2008 2009 2010

Credit Sales 9,572,576 11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107

Average A/R 1,05,266 1,11,958 98,575 1,61,125 2,38,282 1,67,411 1,06,521

A/R Turnover 90.93 104.97 140.91 99.56 117.15 129.41 147.34

Profitability Ratios

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1. Assets Turnover

Years

Sales

Average Total Assets 6,641,792 7,496,609 8,351,426 9,280,316 10,110,636 11,310,951 12,964,936

Assets Turnover

2004 2005 2006 2007 2008 2009 2010

9,572,576 11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107

1.45 1.56 1.66 1.78 1.86 1.91 1.21

2. Profit Margin

Years 2004 2005 2006 2007 2008 2009 2010

Sales 9,572,576 11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107

Cost of Goods Sold 6,089,955 7,223,576 8,357,474 9,527,306 11,595,736 13,442,066 10,789,048

Profit Margin 36.38 % 38.53 % 39.83 % 40.61 % 38.55 % 37.95 % 31.27%

Profitability Ratios

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3. Return on Assets

Years

Net Income

Average Total Assets 6,641,792 7,496,609 8,351,426 9,280,316 10,110,636 11,310,951 12,964,936

Return on Assets

2004 2005 2006 2007 2008 2009 2010

665,227 1,321,919 1,904,988 2,420,207 2,532,295 3,022,406 1,141,621

0.10 0.17 0.22 0.26 0.25 0.27 0.80

4. Return on Common Stockholders Equity

Years

Net Income

Average Stock Holders Equity 3,262,823 3,451,118 3,889,300 4,081,022 3,656,505 3,934,282 4,065,563

Return on Stock holders Equity 0.20 0.38 0.48 0.59 0.69 0.76 0.28

2004 2005 2006 2007 2008 2009 2010

665,227 1,321,919 1,904,988 2,420,207 2,532,295 3,022,406 1,141,621

Profitability Ratios

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5. Earnings per Share Years Net Income Average Shares Outstanding 2,55,494 2,55,494 2,55,494 2,55494 2,55,494 2,55,494 2,55,494 Earnings per Share

2004 2005 2006 2007 2008 2009 2010

665,227 1,321,919 1,904,988 2,420,207 2,532,295 3,022,406 1,141,621

2.60 5.17 7.46 9.47 9.91 11.83 4.47

6. Payout Ratios Years Dividends per Share 1.61 3.69 5.48 7.88 11.62 9.53 5.99 Earnings per Share Payout Ratio

2004 2005 2006 2007 2008 2009 2010

2.60 5.17 7.46 9.47 9.91 11.83 4.47

0.61 0.71 0.73 0.83 1.17 0.80 1.34

Profitability Ratios

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7. Price Earnings Ratio

Years

Market Price of Share

Earnings per Share

Price Earnings Ratio

2004 2005 2006 2007 2008 2009 2010

2.60 5.17 7.46 9.47 9.91 11.83 4.47

Solvency Ratios 1. Debt to Assets Ratio

Years

Total Debts

Total Assets

Debt to Assets Ratio 0.27 0.33 0.40 0.46 0.47 0.51 0.61

2004 2005 2006 2007 2008 2009 2010

1,896,686 2,916,486 3,505,382 4,586,767 4,897,101 6,338,306 8,377,229

7,024,765 7,968,453 8,734,400 9,826,232 10,395,041 12,226,861 13,613,012

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2. Times Interest Earned

Years

Operating Income

Interest Expense

Times Interest Earned 2.70 2.73 2.99 2.85 2.86 2.85 2.85

2004 2005 2006 2007 2008 2009 2010

1,056,039 2,082,064 2,860,673 3,724,574 3,893,717 4,648,489 1,755,839

390,812 760,145 955,685 1,304,367 1,361,422 1,626,083 614,218

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