Cuban Cigars: Case 1

Cuba’s General Environment:

- The tropical region has provide a good location, weather for the production of cigar
- Premium Cigar can be hand-made, machine-made.

1. Evaluate the attractiveness of the Cuban cigar industry for hand-made cigar
producers by applying Porter’s Five Forces Model.
THREAT OF NEW ENTRANTS:
a. Hand-made cigar
There is strong product differentiation. The newcomers are likely to face problems in
obtaining the necessary skilled people, materials and suppliers, so it is favourable situation
for hand-made cigar. The brand perception and strong brand identity is strong, so it will
prevent any threat of entrants. The customers might perceive it as significant cost when
switching suppliers.
You might need some finances but not a lot of capital such as purchasing of machines etc.
The newcomer will expect strong retaliation upon entering the market. As it is labour
intensive, so it is unlikely that they will enjoy cost advantage (economics of scale will not be
achieved).
It will be very difficult to obtain licenses because there is governmental restriction such as
trade embargo.
 Skilled labor is in short supply, differentiated product, distribution channels are fully
developed, state controlled industry
b. Machine made cigar
Don’t have much bran identities. Will have economics of scale because there is cost
advantage. Less differentiated. It will require more capital for machine made. It is easier to
switch because the product will be quite similar, standardized and generic. It will make the
skilled people less attractive.
 Scale benefits, capital requirement for machines, distribution channels are fully developed,
state controlled industry

BARGAINING POWER OF BUYERS:

a. Hand-made cigar
The customer faced significant costs in switching suppliers. The product is unique to some
degree. For hand-made cigar, buyer will need more information than machine made cigar.
There is something to prevent the customer from taking function-in house to produce at the
back. There is only one buyer (distributors) – Altadis (joint venture which has been
purchasing both hand-made and machine-made cigars) who purchases the output from these
producers.

Bargaining power of buyers is relatively low for hand-made cigar, possibly higher for
machine made cigar if they ignore the government.

THREAT OF SUBSTITUTES:
a. Hand-made cigar
- Once the customer has been used to a blend, taste of the cigar, it is unlikely that you will
substitute or change. Customer might want to get cigar for some status.
- In this case, they might be some real substitute.
- Substitute might have performance limitation that does not completely offset their lowest
price, performance advantage is not justified by their higher price.
- There might be some costs in switching to a substitute.
Hence, the threat of substitutes is low for hand-made cigars, and higher for machine-made
cigars.

BARGAINING POWER OF SUPPLIERS:

a. Hand-made cigar
- Hand made cigar is not standard because they can be differentiated.
- It is not easy to switch between suppliers quickly and cheaply.
- You cannot substitute inputs readily.
- The business is important to suppliers.
- Farmers (Suppliers) where we are depending on a few to produce, so it would not be
difficul for them to enter the distribution, but it would be difficult for distributor to
grow.

Bargaining Power of supplier is high for hand-made cigar, maybe less for machine-made
cigar.
Suppliers  Government or Individual Farmers
It might also worth to consider a mutual hold up situation to reduce bargaining power.

DETERMINANTS OF RIVALRY:
a. Hand-made cigar
Competitor business are approximately the same size. The industry is not growing rapidly.
The product is complex and requires a detailed understanding on part of competitors. It is
easier to get out of this business for hand-made. The industry is not cyclical with
intermittent.
No machine made, unique product and limited number of other brands

The rivalry is high for machine-made cigar and less intense for hand-made cigars.

Hand-made Cigar Machine-made cigar

Threats of new entrants Yes favourable Yes favourable
Bargaining power of buyers No unfavourable No unfavourable
Threat of new substitutes Yes No
Bargaining power of Suppliers No No
Competitive Rivalry Yes favourable No

2. How would your evaluation change if you analyze the industry for (a) machine-made
cigar producers, (b) tobacco growers, and (c) cigar distributors?
b. Tobacco growers
- Growers  Producers  Distributors
As a producer, you might want to diversify into another industry.

c. Cigar Distributors

3. Given the analysis you have made, would you make an investment in this
industry/these industries? Where would you target your investment (producer, grower,
distributor, etc.)?
If you invest in distributor, there is a likely case where there is higher bargaining power of
suppliers. Hence, in this case, it would be a concern about entry barrier, such as being
shareholders in the distributor so we can enjoy the value chain. It is hard to come up with a
new company as we only have $1 million.
It is hard to evaluate without considering the environment. Many often by easing government
restriction, it can make production for hand-made cigar attractive.

4. How does your analysis and decision change under the following two scenarios? Why?
(External Environment)
a. The U.S. embargo lifts
Will the strategy be different?
There will be a larger market for the cigars. It might make the value chain of distributors
more attractive. With US embargo, it will be more threat of new entrants that makes the cigar
market less attractive/favourable. This might increase the rivalry among competitors.

b. Land ownership laws are reformed such that foreign investors could take minority
equity positions in land with cigar growing capabilities.

There will be more backward integration as distributors might also still growing the
tobacco.