The twelve year return-on-equity data for the Tobacco Industry of 27.9% is substantially above the all-industry average of 14.1% given in the Business Week data. Examining Porters five forces reveals the keys to the Tobacco industries superior profit performance. The price customers are willing to pay for a product depends, in part, on the availability of substitutes. The absence of close substitutes in the case of cigarettes means that consumers are comparatively insensitive to price increases. This …
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showed last 75 words of 724 total
…is able to bargain effectively with them on the basis of price and service. Lastly, the tobacco industry's size and strength enables them to backward integrate. If it becomes more convenient and profitable to do so, they may purchase their own tobacco farm or card board box company and produce it all in house. This credible threat of backward integration has also added to the tobacco industry's strong bargaining power and subsequent superior profit performance.