APPENDIX A
SECRET
GROUP INVESTMENT STRATEGY
The 1981 paper gives a reasonable indication of broad
direction with some specific financial objectives and
four broad objectives all of which relate back to the
Group's financial targets.
What the paper does not have is a specific statement
of "Group Mission". It does not really address itself
to the following questions:-
What is our business?
Why does it exist?
What do we intend it to become?
In other words the burden of our strategic thinking is
directed at achieving objectives designed to measure
our performance rather than at determining what it is
that we are trying to perform, for whom, how when and
where? There would be no contradiction in this if we
saw BAT Industries as only 'a financial holding company
- but we do not.
We readily accept that our main business is tobacco -
"the first priority etc." Why have we diversified into
non-tobacco businesses? Certainly not for the sake of
increasing dividends to our shareholders - we have diverted
our cash flow to new investment. Nor for the sake of
increasing our return on assets employed - the return on
tobacco assets is almost double that on non-tobacco assets.
Nor for the sake of our debt:equity ratio or any of our
other current financial objectives.- The reason why we
have diversified is that we perceive tobacco as a mature
industry whose growth as measured by volume sales is
slowing down or even becoming negative in some saturated
markets. This prospective erosion of our consumer
franchise is aggravated by national aspirations in
developing markets (in many of which there are still
reasonable growth prospects) which put pressure on us to
disinvest/dilute our interests thus limiting our
participation and giving further impetus to the slowing
down process so far as the future of our tobacco business
is concerned.
Thus, diversificaZion is a response to the lack of growth
prospects in tobacco on the assumption that BAT has a
basic competence ("our financial resources, management
skills and unrivalled knowledge of overseas markets")
which should be applied to the pursuit of growth
opportunities in other activities/products. This raises C)
the question of whether we are concentrating our efforts
on the right activities/product fields. Simply pursuing 00
growth opportunities incurs the risk of turning BAT into -
an unmanagable conglomerate and of subordinating organic .10
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growth to growth by acquisition. Significant investment needs
commitment; commitment should be based on knowledge; there is
a physical and intellectual limit to the number of activities/
products that can be comprehended by a Board (even assuming some
sharing around of depth of knowledge).
Ideally, we should have concentrated BAT's non-tobacco effort
into not more than two or three centrally directed major
activities and aimed to extend internationally. We started
that way with Cosmetics (BAC) and Paper (Wiggins Teape) but
the major investment in Retailing which does not fit a
centrally directed mould had moved us to a geographical
solution in part with the formation' of BATUS. Geographical
delegation has produced good performance results and having
seen the results of similar geographical arrangements in
Australia and notably Canada (historically brought about by
their associate status with majority local' shareholders) we
have extended the geographical solution to Germany (Interversa).
The matrix between centrally directed Product Groups and .
Geographical Groups already has its complexities. We are now
seeing a new development with a Geographical Group (Interversa)
launching into a new Product Group (Rome Improvements) which
aims to extend internationally. There are minority local
shareholders in the Home Improvement business (Pegulan) and
therefore it will not only lack central direction but also
Interversa itself may be subject to some constraints in terms
of control.
Before returning to the Organisation problem, it is worth
reviewing our attitude towards the geographical allocation of
the Group's resources and the related question of what sort
of investment interest is necessary or acceptable. It must be
accepted that in most parts of the world BAT's investments are
locked in. However, we should have a broad policy on areas
suitable for new investment and on areas where dilution of
BAT's existing interests is acceptable. We should also be
clear about areas where there mav be opportunities to exploit
which do not involve major investment - export potential,
technical consultancy arrangements, joint ventures etc.
In my view we should aim to shape the BAT Group on the
following geographical lines:-
Europe/USA To be regarded as BAT's
domestic base: 100% subsidiaries
as far as possible:
BAT stock to be widely held
over the area if possible:
major investment area.
Other OECD Countries - Avoid further dilution as far
as possible: selective
investment.
CD
OPEC Countries and - Resist dilution unless at
Major Primary Producers full value with remittable co
proceeds: pursue technical
consultancy arrangements: major
potential export markets: no new
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investment likely to be
pemitted but joint ventures
in primary produce desirable.
"Third World" Developing - No new investment: dilution
Countries acceptable: attempt technical
consultancy on phase out.
The above analysis of the geographical allocation of resources
may help us to arrive at a satisfactory organisational
solution to handling the matrix between geographical and
product groups. We could regard North America and Europe
as the domestic markets of the group and substantially
orgamise to manage these geographically. We could similarly
handle the major associated companies as geographical entities.
The rest of the world should be handled on a product basis
with responsibility for operations being allocated to product
divisions within one or other of the two domestic geographical
groups. Where there are product divisions operating in common
in both Europe and North America the European division should
handle the rest of the world (e.g. Tobacco and Paper).
Product divisions with only one principal headquarters (e.g.
Printing and Packaging, Cosmetics and Home Improvements) would
manage operations in the other domestic market as well as in
the rest of. the world.- At present examples of these are all
Europe based but it is possible to conceive of BATUS
developing a new product line which it might extend to both
Europe and the rest of the world. In this context the
H Company proposal which has been put foiward in a separate
paper would produce an ideal parent, company structure for
these arrangements.
co
29.9.81.
BAT Industries document for Province of British Columbia 23 April 1999