Japan Tobacco Internship Report

Submitted by:

HAMNA BANO

L1S16BBAM0020

Session 2016 - 2020

Faculty of Management Studies

University of Central Punjab
1 Khayaban-e-Jinnah, Johar Town Lahore, Pakistan

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 Japan Tobacco Internship Report

Submitted by

Hamna Bano
L1S16BBAM0020
Session 2016 - 2020

Supervised by

Prof. Talha Zubair Ahmed Khan

A report submitted in partial fulfillment of the requirements for the degree of

Bachelors of Business Administration

Faculty of Management Studies

University of Central Punjab

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COPY RIGHTS

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All rights are reserved. No part of the material protected by this copy right notice may be reproduced
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any information storage and retrieval system, without the permission from FMS, UCP.

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NON-PLAGIARISM STATEMENT

By submitting this report, the author declares to have written this report completely by
himself, and not to have used sources or resources other than the ones mentioned. All
sources used, quotes and citations that were literally taken from publications, or that
were in close accordance with the meaning of those publications, are indicated as such.

COPYRIGHT©2020 BY HAMNA BANO

The UCP has copyright of this report, but also acknowledges the intellectual copyright of
contributions made by the supervisor, which may include important ideas and data.
Author and supervisor will have make clear agreements about issues such as
confidentiality. Electronic versions of the report are in principle available for inclusion in
any UCP database and repository.

______________
(Student’s name)

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 CERTIFICATE

Board of examiners, UCP Faculty of Management Studies, University of Central Punjab has
evaluated the report submitted by Mr./Ms. Student’s name, Registration No. Student’s
registration number student of UCP Faculty of Management Studies, towards fulfillment of
prescribed requirements for the award of (Program). The title of his/her report is “Title of the
Report”. Based on the result of viva voice, the Board of Examiners has accepted his/her
Internship and recommends that credit hours be awarded to him/her.

________________________

Internship In-charge

_______________________

Examiners’ Signature

_______________________

(Prof. Dr. Faisal Mustafa)

Dean
Faculty of Management Studies
University of Central Punjab
Lahore

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 DECLARATION

I hereby declare that the report “Japan Tobacco Internship Report” submitted by me in

partial fulfillment of BBA. (Hons.) Degree, is my original work and has not been submitted or

published earlier. I declare that I have prepared this report entirely on the basis of my personal

effort made under the sincere guidance of my supervisor. I also solemnly declare that it shall

not, in future, be submitted by me for obtaining any other degree from this or any other

university or institution.

Hamna Bano
L1S16BBAM0020

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Executive summary:
The extent of this report is to have a closer look on Japan Tobacco and its performance around

the globe, which includes company’s ethical standards, its product lines and its structure of the

organization.

Furthermore, the report evaluates how the firm is coping with COVID-19 situation, along with

the measures being taken and the plans being strategized. Environmental trends and marketing

tactics, management strategies are defined being used by the company. And in the end the report

includes the recommendations being proposed, in order for the organization to flourish and be

better than before to deal with the uncertainties and short comings and to work according the

latest trends in market.

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Contents
Executive summary.....................................................................................................................................7
Overview of the organization....................................................................................................................10
About the organization:.........................................................................................................................10
Vision Statement:..................................................................................................................................10
Mission Statement:................................................................................................................................10
Values:...................................................................................................................................................11
Product Line:.........................................................................................................................................12
Competitors:..........................................................................................................................................13
Questions:.............................................................................................................................................14
Structure of the organization....................................................................................................................17
Organizational Chart:.............................................................................................................................17
Key Positions:........................................................................................................................................19
Number of Employees:..........................................................................................................................19
Number of Departments:......................................................................................................................19
Description of the Departments:...........................................................................................................20
Format of work:.....................................................................................................................................22
Questions:.............................................................................................................................................22
Industry analysis:.......................................................................................................................................23
Questions:.............................................................................................................................................23
Qualitative analysis of functional areas of the company...........................................................................29
Marketing..................................................................................................................................................29
Segmentation:.......................................................................................................................................29
Product Mix:..........................................................................................................................................29
Marketing campaigns of the major product/service:............................................................................30
Distribution Channels:...........................................................................................................................31
Questions:.............................................................................................................................................31
Operations.................................................................................................................................................34
Factory layouts, Assembly line, production and supply chain:..............................................................34
Questions:.............................................................................................................................................36
Management.............................................................................................................................................38
Corporate governance practices:...........................................................................................................38

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 Executive Remuneration........................................................................................................................38
Company Policies and efforts towards corporate social responsibility:.................................................39
Employee Benefits:................................................................................................................................39
Questions:.............................................................................................................................................40
Quantitative analysis of functional areas of the company.........................................................................42
Financial Analysis:......................................................................................................................................42
Ratios:....................................................................................................................................................42
Dividend Policy:.....................................................................................................................................42
Questions:.............................................................................................................................................43
Future valuation/company growth:...........................................................................................................44
Questions:.............................................................................................................................................45
Conclusion:................................................................................................................................................46
Recommendations:....................................................................................................................................46
References.................................................................................................................................................48

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Overview of the organization

About the organization:

Japan Tobacco is a dominant cigarette manufacturing company founded as an enterprise by the

government of Japan in 1945 as, Japan Tobacco and Salt Public Corporation and turned into a

public company in 1985. The JT Group is a leading international tobacco company with sales in

more than 130 countries. Winston, Camel, MEVIUS and LD are internationally recognized

brands of the JT group. With that, they are also very active in pharmaceutical and

processed/frozen food businesses. The company owns 16 flagship brands, out of which 4 are

operating outside the USA. The headquarters of the company are based in Minato City, Tokyo.

In 2009, the company made it to number 312 on the fortune 500 list. The company completed the

biggest takeover in the history by acquiring Gallaher Group Plc. The main subsidiaries owned by

JT Group are Japan Tobacco International, Mighty Corporation, Torii Pharmaceuticals Co, LTD,

JT Marvelous and Fuji Foods Corporation. As of 2012, the company’s Chairman is Hiroshi

Kimura and the CEO/President is Mitsuomi Koizumi. JT controls 66.4% of the cigarette market

in Japan. According to authentic sources, the firm has generated approximately 2.2 trillion yen

(20 Billion USD) in revenues in 2019.

Vision Statement:
Our vision is to meet the needs of customers by creating, apprehending and nurturing our brands.

Alongside, taking in consideration the respect and understanding associated with the

environment.

Mission Statement:

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Our mission is to be committed to make our business one of the fastest growing of its own kind
and also on the other hand we are thriving to make it the most viable and innovative business.
The aim is to foster our internationally known brands by working on the new ways of doing our

Values:
The values of Japan Tobacco are very vividly and clearly stated.

 They believe in freedom of choice for adults and with that they also focus on making

informed decisions.

 They make sure that all consumers of tobacco products understand the risks associated

when making the decision to smoke or consume tobacco containing products.

The company adheres and sticks to 6 core values that define the company’s attitude to smoking.

1. The openness about the risk of smoking:

Japan Tobacco has a firm belief when it comes to letting its consumers know about the

hazards that are associated with smoking and the serious diseases being caused by it.

2. Transparency of the products being manufactured:

The company believes in providing full clarity of the ingredients that are used in its

products by making a mention of them on the website and it also provides the

information when questioned by the authorities and government.

3. Reduced Risk Products:

Japan Tobacco is committed to bring reduced risk products to the market, by looking at

the results attained through experiments about the products that are more suitable for

consumers, keeping in view the health hazards. As it is more into the manufacture of

products that don’t involve combustion.

4. Underage Smoking:

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 JT’s belief that, ‘underage people shouldn’t smoke’ is a valid part of its code of conduct.

The company is working to avert the youth from smoking, but the terminal success

depends on the response that society gives.

5. Accommodation between the smokers and non-smokers:

Keeping people’s concern in mind about the use of cigarettes in front of underage kids, JT

provides with the settlement of both the smokers and nonsmokers by focusing on their

interests.

6. Respect for local norms and cultures:

JT respects each country’s culture, norms and legislations but, on the other hand it

believes that it has a right to express its view point on the regulation that affects its

production and the tobacco industry eventually.

Product Line:
JT is involved in the production of three different categories of products that include Tobacco

products, pharmaceutical products and processed/frozen food. So the product lines are mentioned

below separately for each category.

Tobacco Products:

In the international tobacco business, Japan Tobacco manufactures and offers conventional

tobacco products, mentioned below:

Cigarettes, cigars, pipe tobacco, smokeless tobacco, water pipe tobacco, Kretek and RRP

(Reduced Risk Products). Japan Tobacco’s brands that are recognized internationally for selling

cigarette products include Winston, Mild Seven and Camel. Along with cigarettes, JT also is

involved in the production other products such as, hamlet cigars, amber leaf, a roll your own

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tobacco camel snus etc. And all these products mentioned are sold under the flagship brands

owned by Japan Tobacco that include Silk Cut, LD, Natural American Spirit, Glamor, Benson &

Hedges and many more.

Pharmaceuticals:

JT established a business collaboration with Torii Pharmaceuticals. In this partnership, R&D for

new drugs came under the control of Japan Tobacco, but later in April 2006, Torii extended its

manufacturing operations to include those of JT. So, company’s major products includes

medicines for kidney diseases such as, Riona Tablets, Remitch, Keixalate etc.

Processed/Frozen Food:

When it comes to frozen food Japan Tobacco provides a diverse variety of food products through

different brands that it owns. Focusing on staple food products such as, frozen noodles, frozen

and packed cooked rice along with frozen baked bread.

In the seasoning businesses Fuji Foods Corporation owned by Japan Tobacco provides a number

of products. Such as Halal Seasonings, Yeast Extracts and all sorts of customized seasonings.

In the baker business, a company owned by JT named as Saint-Germain offers, freshly baked

oven bread

Competitors:
Japan Tobacco’s main competitors include:

Altria: Altria Group produces and markets tobacco products and some other related products.

The product range includes pipe tobacco, smokeless tobacco, electric vapor products, and

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machine-made cigars. With that, the company is also providing table and sparkling wines. This

company has a total revenue of $25.1 Billion as of year 2019.

British American Tobacco (BAT): British American Tobacco (BAT) is a well-known cigarette

producing company, which produces other tobacco products around the globe. The main brands

working under this brand are Kent, Dunhill, Pall Mall, Vogue and Kool which sell through retail

stores. The brands are involved in the manufacture of products including oral tobacco, nicotine

products i.e. cigars and e-cigarettes and other heating products.

Philip Morris: Philip Morris is a multinational cigarette and tobacco manufacturing company

based in New York, USA. The company manufactures and sells nicotine containing products,

cigarettes and other tobacco containing products. The company’s revenue as of year 2019 totals

to be $29.8 Billion.

Questions:

Answer # 1:

Companies that enjoy enduring success have core values and ethical standards that are firmly

connected with the vision of the company in order for the business strategies and practices to

adapt to the changing world. Core ethical standards and vision form the underlying guiding

principles of every aspect of the business, be it the planning, the reputation of the company or

the mission. Clear vision and values (ethics) of a company are the basic foundation for

creating a company’s culture, decorum and its code of conduct.

It is very important for Japan Tobacco, to be clear and transparent when it comes to the

ethical standards and its vision, as the vision helps the company clarify its purpose and

actions to be taken in order to make it to the road to success. Also, it provides the employees

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with the utmost guidance that they are looking forward to and makes it easier for them to

understand the course of action to be followed. In this way employee engagement is achieved

which eventually leads to his/her job satisfaction. Alongside go the customers, who

ultimately will be loyal to the company if, the same vision and ethical standard are passed

down from the top management to the whole organization’s employees.

Answer # 2:

By looking at the director’s report to shareholders, if the affairs are seen in financial terms, it

is noticed that the revenue of the current year (2019) decreased 40.3 billion yen or 1.8%

year-on-year to 2,175.6 billion yen as compared to the last year (2018) where it was 2216.0

billion yen (As mentioned in Figure 1). It happened due to lower revenue in the Japanese

domestic tobacco business, pharmaceutical business and the processed food business.

Figure 1:

If we look at the profit, it decreased 37.5 billion yen or 9.7% year-on-year to 348.2 billion

yen in current year (2019) as compared to the last year (2018) which was 385.7 billion yen,

15
due to the decline in operating profit and increase in financing costs (As seen in Figure 2

below). Income tax expenses decreased (positive impact in the graph) due to a lower

effective tax rate and decline in the profit before income tax.

Figure 2:

When the Adjusted operating profit is observed, it decreased 79.5 billion yen or 13.4%

year-on-year to 515.9 billion yen, mainly because of the unfavorable currency movements in

the international tobacco business. Operating profit decreased in current year by 11.1%

year-on-year to 502.4 billion yen due to a decrease in adjusted operating profit (As seen in

Figure 3 below).

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 Figure 3:

Structure of the organization

Organizational Chart:
The Organizational Chart of the JT Group is quite vast and detailed, as it is a multinational

company running three main businesses of tobacco products, pharmaceutical products and

processed food. First comes the Board of Directors that assumes responsibility in making

decisions for important issues including supervising all the activities of the Group. Currently,

Japan Tobacco has nine directors in which three independent outside directors are included. Then

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there’s the President of the company and after him come the Executive Vice Presidents and the

Senior Vice Presidents of the company. The rest of the hierarchy is mentioned with details

below:

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 Board of
Directors

President
(Masamichi
Terabatake)
CEO,
President,
Tobacco
Business

Executive
Vise Senior Vise
Presidents Presidents

(Kiyohide (Naohiro (Kazuhito

Hirowatari) (Junichi (Yuki Maeda)
Minami) Yamashita) Fukuchi)
Legal, Chief Chief
Corporate Chief Chief Financial
Sustainabilit
Strategy,digit Financial Executive Officer of JT
y Officer,
alization.HR, Officer Officer of JT tobacco
Compliance Business business
Business and and General
Planning
Assurace, Affairs
Pharmaceutic
Communi
al and cation
processed (Kenji Ourag)
food (Eiichi (Chigusa
Kiyokawa) Scientific Ogawa)
business.
and Leaf
Sales, regulatory
Tobacco Procurement
affairs, JT Tobacco
Buisness Tobacco Buisiness
Business

(Yasuhiro (Hiroiyuki
Nakajima) (Shuichi
Hirosue) Miki)
Head of RRP R&D,
Japan office, Marketing
Tobaco Tobacco
JT Business
Business

(Akihiro (Toru Oguchi) (Toru Hijikata)

Koyanagi)
Head of China Quality
Manufacturi Division, Assurance
ng Tobacco Tobacco Tobacco
Business Business Business

(Shigenori
(Muneaki Ohkawa) (Hiromasa
Fujimoto) Furukawa)
Head of central
President, Pharmaceutical Food
Pharmacetical research Businesses,
Business institute, JT JT

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(Kei Nakano) (Takehisa (Takanori
Corporate Shibayama) Kikuchi)
Strategy Digitalization General Affairs
Key Positions:
As of March 2020, the key positions include:

Board of Directors:

It includes the chairman of the board, deputy chairman of the board, representative director, and

other 4 members of the board. The Audit and Supervisory Board conducts accounting audits as

well as operating audits. JT consists of five audit and supervisory board members, including

three independent outside audit members. Afterwards comes the president, executive vice

presidents and senior vice presidents of different departments that are mentioned by names in the

chart above.

Number of Employees:
As of December 31, 2019 JT has a total of 61,975 Consolidated and 7,464 Non-Consolidated

employees.

Number of Departments:
Japan Tobacco being a multinational company consists of mainly 9 departments that include:

1. Manufacturing

2. R&D

3. Leaf Procurement

4. Marketing

5. Sales and Distribution

6. Quality Assurance

7. Human Resource

8. Finance

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 9. Legal

Description of the Departments:

1. Manufacturing:

Japan Tobacco’s manufacturing department focuses a lot on the improvement of the

quality of the products, so that it can meet with expectations of the customers, which

includes introduction of unconventional products. The company makes sure to make

timely deliveries of the products to the market, which shows an efficient and optimum

production of JT.

2. R&D:

Research and Development department of Japan Tobacco uses a globally recognized

platform to focus on the research and development of its products. This department plays

a major and vital role in the research and experimentation of reduced-risk products

(RRP). Keeping in view the regulatory trends and the changing needs of the market,

R&D nourishes development of the new products to be introduced.

3. Leaf Procurement:

This department plays a vital role in the supply of leaf that is of unmatchable quality. Not

an ordinary supply, but one that is renewable and long lasting, as tobacco leaf is the first

and foremost raw material to be needed for tobacco products. Also, this department has to

maintain good relationships with the suppliers to let the supply in flow, so that production

keeps happening smoothly.

4. Marketing:

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 Marketing department at JT works hard to make effective and fruitful communication

with the customers through different platforms. JT makes sure that it conducts market

programs that are abiding by the laws and regulations of the country where it operates,

keeping the global marketing principles of tobacco in consideration.

5. Sales and Distribution:

The sales department at JT aims to increase availability of the products through a lot of

channels and develops good relationships with retailers. It also focuses on the use of right

channel, out of different channels (supermarkets, vending machines, convenience stores

etc.) that exist, depending up on each country. The department also takes in consideration

the marketing initiatives that are suitable for different markets.

6. Quality Assurance:

The Quality Assurance department works for the fulfilment of goals related to products

and services by focusing on the procedural activities that help in the system to check for

the quality of the products services and activities. For the error prevention, the products

are compared with the standards already being set to provide the customers with the

consistent quality.

7. Human Resource:

Japan Tobacco’s HR department ensures that it has the best of people with the best of

skills, no matter where it operates, in whichever part of the world. Also, the culture of the

company attracts, develops and retains the employees with high caliber so that they can

align and work with the company’s code of conduct and its policies.

8. Finance:

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 The key role of this department in JT is to focus on the efficient management of the

financial issues and coming up with their solutions. All kinds of financial reporting and

all the budgeting is done by the department.

9. Legal:

The legal issues that the company faces and those that arise in the company are dealt by

the legal department. This department is responsible for making policies for the JT Group

and deals with the cases, if arise any.

Format of work:
Japan Tobacco is more inclined towards centralized format of work. But at the same time when

we see the organizational chart, it looks quite functional, it can be seen that people are not

assigned to one designation because of the work being suitable to their abilities, but it seems

more like the designations are made especially for some people keeping their comfort in

consideration and not their abilities. But with changing trends and overall demands and needs

changing around the globe, the company is establishing itself it be more decentralized, as it frees

the top management to take big decisions for the company when work is taken under control by

other managers.

Questions:

Answer # 1:

COVID-19 is the most significant challenge the global economy has faced. No business is

unaffected. Some are battling with a collapse in revenues and some are responding to an

unexpected change in demand. So, a company with more of a decentralized structure would be

able to respond in the current business environment, where the top management and the middle

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management will divide the work and can be more productive and cohesive, as there are a few

chances of travel and move around in this pandemic, it would be easier for a decentralized

organization compared to a centralized organization to work virtually together.

The biggest advantage of this organizational structure is that, the top management gets a relief

when the work is basically divided among other managers and it is being completed timely

because the decisions are being taken on time, but on the other hand there is a possibility of goals

being molded into something else, because of the lack of coordination or division of the

authority, which counts as a drawback.

Answer # 2:

Right now, given the situation mainly decentralized structure prevails in the organization, as this

helps the organization have a broader and immediate contact with customers by allowing

management to have more decision-making ability. By providing this ability, it allows managers

to gain valuable experience and expertise in different areas and they can further invest in

developing highly skilled employees to make favorable decisions in the organization, in order to

achieve its goals and objectives.

Industry analysis:

Questions:

Answer # 1:

As Japan Tobacco is a multinational company, it is quite normal for the company to feel

pressurized while operating in so many countries having different cultures and environments at

the same time, each with their own standards. So, in order to set aside these pressures, it is vital

for the company to follow quick-thinking in the face of uncertainty. Keeping in view the

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challenges that might arise in the company, it should devise a plan in expectation for an outcome

other than the usual outcome. It is often used for risk management for an exceptional risk that

might arise due to unlikely changes that alters industry profitability.

Answer # 2:

PESTLE Analysis: (Analysis of Political, Economic, Sociocultural, Technological, Legal

and Technological Factors)

Political Factors:

Due to the Japanese Government being more concerned about the promotion of public health,

and the security of the financial income, there has been a considerable increase in the taxes. With

that excise taxes are being increased in many parts of the world. Japan Tobacco is revising its

prices due to this sudden change in the taxes, in order to see if this increase in the taxes is

manageable or not by making an increase in the prices.

Economic Factors:

If it is generally seen, the people around the world who are rich are getting richer. And because

of which they end up spending on stuff and buying things that are not even necessary or required,

which includes tobacco products. All of this, due to the disposable income that is more than they

had before. If developed countries are compared with the developing countries, the people in

developed countries have a lot more spare cash on them to purchase tobacco, so this abnormal

amount of cash might make people end up buying more tobacco products.

Sociocultural Factors:

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The tobacco industry has a large number of consumers that are loyal by necessity and those too

who are loyal by habit. As, it is well known that tobacco contains a vital compound that is called

nicotine, which makes people addicted towards smoking and other tobacco products. This habit

formation of people is not something to be proud of, but it gives Japan Tobacco growers and

manufacturers a solace that their business is going to flourish only.

Technological Factors:

With the changing trends in the world with each passing day, an amazing alternative to smoking

has been introduced by the geniuses of the 21 st century, which is called as Vaping. It is said that

vaping products have lesser effects on the lungs of the smoker as it doesn’t involve any kind of

inhalation. All the vaping devices provide their consumers with the same exact feeling of

smoking, as it uses warm water vapors but contains fewer amount of nicotine. Japan Tobacco is

taking all the advantage from this and is producing a number of advanced vapor products for the

consumers.

Legal Factors:

In most of the developed countries it is seen that the consumption of the tobacco products is

illegal before the age of 18 and strict laws are being passed for its control. A number of legal

factors affect the tobacco industry and the consumption of its products, and if this restrictive

approach keeps going this way it is possible that the governments in all parts of the world would

take in consideration the gateway to enter the right smoking age.

Environmental:

Cigarettes produced all over the world have special butt filters at their ends and these filters

contain a lot of pollutants. The disposing of the cigarettes when not done in the correct and

26
proper way releases harmful chemicals and toxins in the environment. As the world right now is

focusing a lot on the climate change, there can be seen a push against tobacco containing

products. That is the reason why Japan Tobacco is playing smart and is so focused on the

production of Reduced Risk Products (RRP).

Challenges: With the current situation going on with the pandemic, JT being an international

tobacco promoter is facing a lot of challenges as people who smoke are more prone to be

infected by COVID-19 as it attacks the lungs of the person suffering. So, a lot of the potential

customers have been lost during this time. According to the report issued of the first quarter in

March 2020 by JT, they say that there has been no serious risks being observed as of the first

quarter, but the company is closely keeping an eye on the financial impacts of the pandemic and

also the potential business threats to be observed are taken in accountability.

Answer # 3:

The suggestion would be to pass this pandemic journey through each phase keeping the

customers along and supporting them with carefully articulated programs that are sketched in

order to eradicate or shrink the psychological and behavioral tensions being arising which will

eventually make the brand trust nourish and strengthen.

The most important part of this strategy would be the introduction of a workable communication

program. The focus of this program would be on protecting the brands values by conveying its

message to the consumers and empathizing with the target audience through the crisis phase by

phase.

Answer # 4:

Environmental:

27
Environmental issues, such as climate change, are of increasing concern these days. With the

changing trends of the operations of the companies, environment is being affected badly.

Because of the emissions and the discharge of the waste by tobacco industries and the other

industries, our home ‘Earth’ is at a great risk. But on the other hand the tobacco industries are at

a huge risk too as they play an important role in the destruction of our home, so all the

organizations that are taking part actively in the preservation of their home are getting strictly

against the use of tobacco products, which itself is a threat for Tobacco producing companies i.e.

JT.

Technological:

With increasing technological trends and health concerns, an increase in the alternatives for

habitual smoking have been introduced. According to an article published by Forbes, E-Vapor

products have a year-on-year growth of around 70%. So these changing trends have had a

positive impact on tobacco industry as, the companies are working more towards manufacturing

alternatives that are less harmful and can be easily disposed-off, which will be resulting in

increased revenues eventually.

Social:

With this COVID-19 situation going on, smokers are inclined more towards products that are not

harmful for their lungs. So they are opting other options instead of cigarettes, as it is said that the

other options like e-cigarettes contain lesser amount of nicotine. So, socially it is just impacting

the sales of cigarettes negatively but increasing the sale of products that are apparently less

harmful on the other hand.

Economic:

28
For the past few years, the tobacco industry has been noticing an increase in the number of

people who use tobacco products, also the industry has been producing huge tax revenues, which

has had a positive effect on the industry all in all.

Answer # 5:

In the past the JT group has been criticized several times for playing a huge role in the increase

of pollution, because of the tobacco products being made by the company, it was said that the

cigarettes release toxins in the air that causes air pollution and the toxic chemicals in the remains

seep into soil and waterways resulting into water pollution. But Japan Tobacco being a

responsible firm, took all these challenges with grace and worked on the short comings. So, in

order to cope up with this situation, they came up with Reduced Risk Products already that

include T-Vapor products and E-Vapor products as T-Vapor products contain tobacco which is

heated rather than combusted to create an inhalable vapor and E-Vapor products heat a liquid

that usually contains nicotine, but no tobacco, creating an inhalable vapor. Moreover, then in

2019 they launched JT Group Environmental Plan 2030 that addresses company’s key steps

taken to reduce the Green House Gas Emissions by focusing on three areas: Energy &

Emissions, Natural Resources and Waste.

According to the report of the first quarter of Japan Tobacco, the manufacturing facilities and

most distribution networks are operating normally in the corona pandemic in principle with strict

personal care and sanitation measures. There have been no significant impacts to sales and

demand of tobacco products, as of now. In the frozen food and seasoning business the demand

has slightly increased, but a lower customer footfall has been noticed in the bakeries.

29
Qualitative analysis of functional areas of the company

Marketing
Segmentation:
The company has been in this business for a very long time, and the product portfolio of Japan

Tobacco being so diverse, there is no denying in saying that the company is targeting almost all

the segments demographically, geographically, psychologically and behaviorally.

Demographically, to target different groups the company has targeted all the groups, with

higher income to people who are brand conscious to the ones with not so high income.

Geographically, the company has expanded it in almost all the continents and the major

countries, targeting all the urban and domestic areas.

Psychologically, JT group has went deep down to search for the interests, the lifestyles and

opinions of people, who like to use tobacco and has come up with the diverse product portfolio

to serve all.

Behaviorally, the purchasing behaviors and patterns of the consumers have kept under

consideration by JT Group, in order to attract the potential customers and retain the loyal ones.

Product Mix:

30
Cigarettes are one of the top sellers and the main product that Japan Tobacco manufactures and

sells, in addition to cigarettes, the company offers many other products including, Cigars, pipe

tobacco smokeless tobacco, water pipe tobacco, and RRP. Other tobacco products i.e. Camel

Snus, Hamlet Cigars, Amber Leaf, A roll your own tobacco product are also offered. In the

processed food business, frozen noodles, frozen packed cooked rice and frozen baked bread are

included. In the seasonings business, Fuji Foods Corporation a company owned by JT Group

plays a central role in providing a variety of product lines using its unique technology. In the

bakery business, Saint-Germain offers fresh oven-baked bread.

Marketing campaigns of the major product/service:

After taking over the Gallaher Group, JTI a subsidiary of Japan Tobacco profited greatly from

the acquisition of the Glamour brand. Glamour super-slims are sold in lipstick packaging, the

brand was able to become a top-selling super-slim brand only after two years of its launch,

mainly because of it selling at half the price of its main competitors.

Another very important campaign used by JTI was, that it expanded its Winston brand with the

launch of Winston XS Blue and Winston XS Silver with the introduction of a new charcoal filter.

The use of images of filters and the term “charcoal filter” resulted in misleading of consumers to

believe that the new technology makes these products less harmful than other products. This

mass marketing campaign to launch Winston XS in Russia used point of-sale displays, print ads

and online promotions.

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Distribution Channels:
Japan Tobacco uses a vast distribution channel in order to reach to the end consumer, by using

intermediaries i.e. wholesalers and retailers. Furthermore, there are many channels for tobacco

products to be distributed from small independent retailers to supermarkets. The importance of

each channel differs from country to country. JT increases the availability of its products by the

use of different key channels by developing good relationship with retailers.

Questions:

Answer # 1:

According to reports from March, no drastic change in the patterns of consumption of cigarettes

was observed, due to Covid-19 outbreak, as it is a daily purchase product, people were seen

purchasing it every day. But now as the virus has spread in a deadly manner, and with the shops

being closed it is very likely for consumers to shift to online buying of cigarettes, but not

everybody is interested in that. But the shift of the customers to online buying can give the

company an opportunity to market those of its products that are risk reducing. On the other hand

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it is being observed that the changing social circumstances are providing an opportunity to quit

smoking as well.

Answer# 2:

Product: Japan Tobacco has already started working more on its products that are risk reducing,

by looking at the changing buying behaviors of people and by the threat that people might quit

smoking, due to smokers being a big target of the virus. E-Cigarettes and Tobacco Vapor

products have already gained so much popularity among the consumers. The inclusion of liquid

inside the products and lesser nicotine gives consumer the idea of a product that is less damaging

to lungs. So, JT being one step ahead, is working on the shift of consumers from cigarettes to

vapor products.

Price: With the ongoing threats of people quitting smoking, Japan Tobacco shouldn’t think of

increasing the prices of the products at this point. As people are already finding it difficult to buy

the products in different parts of the world, so the company should play smart and should

maintain its existing prices.

Place: The JT Group has been following all the sanitation measures ensuring the delivery of its

products to the stores or wherever needed. But following the outbreak, the consumers are being

encouraged to practice social distancing and are told to stay in their homes, the company is

considering selling their products online more actively.

Promotion:

The promotional activities have shifted mostly on the social media, since the pandemic has

started, as the outdoor advertisement are risky as they encourage more social contact.

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Answer # 3:

As the advertisement has been shifted mostly online on the social media, it is expected that the

company will be focusing on the psychological segmentation more, as the number of social

media users includes a huge chunk of youngsters, so the company shall be advertising images

portraying their products as attractive, accepted and admired, to attract the youth.

Answer # 4:

Recent findings show that in 2018, Japan Tobacco was secretly advertising cigarettes on social

media platforms including Facebook, Instagram and Twitter, by paying the social media

influencers who have a large following, especially the young people to post the pictures of

cigarettes and smoking as part of their campaign. The influencers were told to post pictures in

such a way that they don’t appear as staged advertisements and look ‘natural’ and they were not

allowed to disclose that they were involved in paid advertisement of the cigarettes. Also, the

company organized contests and parties with cigarette brand sponsorships and encouraged the

participants to post on their social media platform accounts. The USP of this campaign was the

use of hashtags instructed to the influencers to use for promoting cigarettes of different brands

offered by JT. Along with JT, this social media campaign was followed by other multinational

giants too.

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These deceptive social media campaigns have been viewed over 25 billion times worldwide,

including 8.8 billion times in the United States.

Answer # 5:

In order to communicate and market their products companies should be thoughtful about the

digital communication strategy in times of this pandemic, JT Group should be using social media

marketing and e-mail marketing to communicate with their customers. The website will play a

big role in keeping the audience engaged with the brand. Even if your physical location closes

temporarily, company can continue to provide products and services information through the

website. Some businesses are offering internet-only deals as well. So, JT should learn and opt for

such tactics and strategies.

Operations

Factory layouts, Assembly line, production and supply chain:

Japan Tobacco being a multinational has a total of 29 factories worldwide and produces 20,000

cigarettes every minute by using the most advanced technology.

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The quality and the taste or which Japan Tobacco is known, comes from the tobacco leaves and

the expertise of the ones who cultivate them. Firstly the curing and drying of the leaves is done.

After finishing the curing, leaves from different sources are graded to create a particular brand,

before the actual manufacturing begins, tobacco leaves are blended to meet the requirement of

the pre-established JT blends. Then comes the trading with the farmers which is done at absolute

fair prices and for the storage of the crops farmers need barns, but these can have negative effects

on the environment, so JT believes in making live barns that need 3 to 4 years, as they save wood

resources and last much longer. More than 120 barn experts are training farmers to make their

own barns in Malawi and by the end of 2020, a total of 15000 barns will be made.

Now, starts the actual operation with the arrival of the raw material, on the assembly line what

happens is that cut and conditioned tobacco (including selective additives, flavorings and

humectants i.e. water) are wrapped in the cigarette paper by the help of machine and a long

continuous cigarette is made. The wrapping paper is specially designed to stabilize the ash

produced while smoking. The cutting of the long continuous cigarette into standard size is then

done and filters are added afterwards using tipping paper. Finally two or three rows of holes are

drilled into the tips using laser, in order to make sure the cigarette lights up and delivers smoke.

Finished cigarettes are then packed individually, and then in cartons where each carton almost

contains 200 packs and then in shipping cases where each contains 10,000 cigarettes. Then

comes the distribution and sales and the product finally reaches to the end consumers. So,

maintaining a well-maintained and managed supply chain is essential for the JT businesses to

sustain. The company is working towards the reduction of environmental and the social risks, by

enabling transparent and responsible practices across the supply chain.

36
Questions:

Answer # 1:

Keeping the customer needs and tastes in consideration a lot of the firms are moving towards

flexible production and customer driven production instead of mass production, as customer

driven guides the company to produce products that are actually liked by the targeted audiences

and are needed and will be purchased.

37
In my opinion, given the current scenario, flexible production would be more beneficial for

firms, as it does production in smaller runs and results in cost effectiveness with shorter lead

times, lower cost per unit and increased production rate, as compared to mass production where

an effective combination of machines and employees is used to produce large quantities.

Answer # 2:

The layout plays a vital role in a business as it makes or breaks the effectives of production and

productivity of the employees. The current layout of the facility is made as such that the flow of

work and information never slows down, by effective utilization of the labor, space and the

force. The flexibility of the operations is also observed, in order to change the layout for adding

any new technology. Also, JT is well known for its environmental friendly facility layouts and

sets the bench-mark for all the factories around the globe.

Answer # 3:

JT Group makes sure that it uses standards to show the ability to provide with the consistent

quality products that meet regulatory demands along with fulfilling customers’ needs. Japan

Tobacco makes sure that its factories are certified by the global safety authorities. When it comes

to the factories that manufacture frozen food products, have been certified to the food safety

standard ISO 22000 or FSSC 22000, which is an assurance of the food safety. FSSC is

recognized by the (GFSI) which is Global Food Safety Initiative.

Japan Tobacco uses ISO 14001, as the framework for their environmental management systems

to manage important environmental aspects, risks, and optimize opportunities. They track the

proportion of their cigarette and tobacco-related factories that are certified to ISO 14001. They

are aiming to achieve 100% ISO 14001 certification of the factories by the end of 2020.

38
Management
Corporate governance practices:
JT believes in building a governance system that ensures timely, fair, effective and transparent

decision making. The company’s aim is to continuously enhance the organization to build value

that lasts and can be shared with the valued consumers, shareholders, employees, and last but not

the least, with the society. JT’s governance framework is based on an absolute system of internal

controls.

Japan Tobacco Corporate Governance Report updated on March 20, 2019 shows,

 15 Board Meetings were held by The Board of directors with 99% of the attendance rate.

 In order to talk about JT’s key compliance issues a total of 3 JT Group Compliance

Committees were held

Executive Remuneration
The remuneration of the board of directors, comprises of:

1) Base salary that is being paid monthly

2) Executive bonus in the relevant year aligned to the business performance

3) Stock Option Grants

The Bonus Payment of executive directors, is decided by the group profit target, which is the

adjusted operating profit (AOP). The bonus payment of the executive directors are also

dependent to profit for the period.

The salary package of the company is providing with all the employee benefits, including health

insurance, bonuses, along with scholarships for the kids.

39
Company Policies and efforts towards corporate social responsibility:
As a good citizen, JT being a multinational fulfills its corporate responsibility by making

contributions to the communities, in which it operates in order to give back to the society. JT

Group supports the regeneration of the local communities by focusing on,

 Arts and culture

 Disaster Relief

 Environmental Protection

 Social Welfare

JT’s policy is to select the most critical out of these 4 priority areas for providing support. This

will help the company make harmonious relationships with the community along with

employees’ participation.

The JT Group’ Environmental Action Plan has been running for years in order to save the

environment, be it by fighting against emission of GHG (Green House Gases), reduction of water

usage or effective use of resources.

Employee Benefits:
The benefits given to the employees are predetermined based on conditions, such as employee’s

points gained, years of service or the payment rate. Special termination benefits are being

provided to employees on their early retirements under serious circumstances. The Company is

required to bear pension for the employees who gave services in or before June 1956.

40
Questions:

Answer # 1:

By looking at the first quarter results of JT Group 2020, it is observed that no such layoffs have

been taken place, but with the severity of the pandemic, it could be expected that the employees’

morals will get down with each passing day.

The best things the company can do right now is to,

 Keep the communication going with the employees, as having a direct dialogue and being

transparent helps the company to remove ambiguities of the staff.

 To the employees working in the operation and manufacturing plants, proper

precautionary measures should be explained.

 Empathy plays a vital role too.

Answer # 2:

The company is offering excellent packages to the top management, the details can be seen from

the figure below. That includes, basic salary, executive bonuses and stock option grants.

41
Answer # 3:

The details for the salary structure of 2019 are given below:

Suggestion id want to give is that the company is already giving maternity leaves to female

employees and those are paid, but the rest of the leaves for new moms are unpaid, it would be

more helpful if these leaves could be paid too.

Answer # 4:

Sincere Praise:

A simple ‘Thank you’ or a shout-out given at a meeting counts a lot for an employee. Just by

acknowledging the efforts of an employee boosts his confidence and can make him feel

motivated.

Encourage Competition:

42
Competition Encouragement Programs should be conducted in order to motivate employees, like

choosing employee of the month, week or year. This not only will motivate employees but will

increase employee productivity.

Freedom of Decision Making:

An employee feeling constrained in making decisions, despite of getting a good sum of money,

is a big reason behind demotivation. Employees should be given freedom to make decisions at

least without reporting every petty detail.

Quantitative analysis of functional areas of the company

Financial Analysis:

The financial report of March 2020 issued in April by JT Company has a lot to say about

company’s financial position, observing which shows Three months ended March 31, 2019 and

2020, the revenue has actually increased from 505,422 (2019) to 529,620 (2020) million yens.

Profit for the period in 2019 was 133,685 million yens and is 86,882 million yens in 2020.

Ratios:
Looking at the financial results of the first quarter it is seen that the debt to equity ratio is 0.4431

for March, 2020. The debt to asset ratio is 0.15 as of March, 2020. Interest coverage for the

quarter is 8.31.

Dividend Policy:
Dividend distribution to the shareholders is considered as a liability in the period in which, the

Board of Directors approves the distribution of the interim dividends and the distribution of the

43
year-end dividends is announced and approved in the Annual Share Holders meeting. The

distribution for the past five years is given below.

Questions:

Answer # 1:

Financial costs increased in 2019, due to an increase in interest expense correlated with demand

of working capital in the international tobacco business.

According to the report issued in April, 2020 the company issued commercial papers on the

April 6, 2020 amounting 100 billion yens, to be used for short term working capital in order to

reduce any uncertain or unexpected situation caused by the spread of COVID-19. The company

should fund it’s mid to long term capital needs by opting for long term borrowings from financial

institutions, bonds, and equity.

Answer # 2:

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There is literally no economy, no sector, and no business beyond the reach of the influence of

this pandemic. The idea behind CSR is basically to help maintain the social accountability to

stakeholders while ensuring best possible business performance. So, CSR can never be the

reason for bad financial position as it helps in increasing customers’ satisfaction and growing the

reputation of the company.

Example:

CSR is too often seen as being for customers only but, with the social distancing and staying at

home being practiced, it should be thought by companies that as good social responsibility starts

at home, the companies should start this all with their employees and the top priority should be

their safety and comfort. So, primarily creating a safe space for the employees to work is

necessary with the reasonable precautions being observed. Also providing the employees with a

flexible environment to carry out their work tasks would be really helpful, because the company

might be in a position where it would have to adopt some of the changes permanently after the

pandemic is over.

Future valuation/company growth:

The company is thriving to work for Reduced Risk Products (RRP) products in future, in a way

that they aim to establish and maintain a competitive advantage in both high and low-

temperature heating categories by capturing shares from competitors in the high-temperature

category. The company will continue working on the expansion of refill line up, including the

production of digital infrastructure for diverse marketing in future. The company is looking

forward to invest more in R&D, marketing and sales for the future growth, while reducing costs

in 2020. The company expects a decline in the demand of cigarette due to the planned tax hikes

45
in 2020 and in 2021. The company is ready to utilize appropriate pricing to maintain

profitability, as the company believes cigarette category to be an important profit generator.

The company aims to recover its share by taking initiative throughout the product portfolio by

primarily maintaining the share of the premium+ and the prestige segment products on the other

hand by the launch of products from value segment that will tackle down-trading.

Questions:

Answer # 1:

The company is compensating its short term needs by using, short term borrowings from the

financial institutions, commercial paper or combination of both. And for mid to long term needs,

long term borrowings are a solution that company looks for from financial institutions, bonds,

equity and a combination of both. The company has commercial paper launched of amount

totaling 100 billion yens, to cope up with any uncertainty or unforeseen situation caused in the

future due to the pandemic.

Answer # 2:

By looking at the statistics, the calculation of the stock price by using DDM is given below:

Stock value = dividend per share / (required rate of return - dividend growth rate)

For required rate of return,

ROR = (dividend payment / stock price) + dividend growth rate

ROR = (154 yen / 1798 yen) + 0.0940

ROR = 0.1796

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Now for the Stock Value,

Stock Value = 154 / (0.1796 – 0.0940)

Stock Value = 1800 yens

So, by looking at the DDM value of the stock, it can be seen that the amount of the stock is 1800

yens whereas the actual share price as of today is 1798. So seeing the results, it can be seen that

the stocks are neither undervalued nor overvalued. It shows that the company’s dividends are

sustainable. But if the dividend yield is being concerned it is a little too high (0.87%), observing

that I would recommend Japan Tobacco to lower the amount of dividends, as it is giving too

much to the shareholders, compared to its earnings.

Conclusion:

Japan Tobacco being one of the top leading and globally known brands of Tobacco business. But

being that, the company has faced a lot of struggles and challenges as its main product is harmful

for the health of its customers. People getting concerned and looking for alternatives is also

giving a chance to evolve but at the same time it’s a threat, as the company might start losing its

profit generation like it was before. The company has always been fighting risks on the way, be

it the imposed restrictions and the governmental investigations or the restrictions on marketing

and sales in different areas.

Adding to all of this, with all the pandemic situation going on, like all the businesses, the

company is closely monitoring the financial impacts that this virus is going to have. Also, it has

started strategizing for the coming future with all the contingency plans required.

Recommendations:

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As the company always acts in its own interest, by reacting with lobbying and litigating against

government policies. Because, company’s steps towards controlling tobacco will result in its own

financial decline. So the company should focus more on the way it is going to convey its

message to the consumers, for the sake of young teenagers who are most likely to opt for this

unhealthy addiction.

Keeping the latest searches in view, the company should also be mindful of the fact that, it

shouldn’t be producing flavored cigarettes that much, as it is more appealing to the adolescent

smokers and to the youth. Also, with the COVID-19 crisis going on it is very likely that the

people will be switching towards more risk-reducing products, keeping the harmful effects of

smoking on the lungs in mind, so JT Group should be marketing more of these RRP products, in

order to keep its consumers loyal and satisfied.

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