Philip Morris – A case analysis
Recommended Mission statement
“Create quality products in the area of tobacco, beer and packaged foods. Protect our shareholders interests while being social responsible. Create an environment where our members can be challenged and grow.”
About the company
The Phillip Morris family of companies is the world’s largest manufacturer and marketer of consumer packaged goods. It has three main lines of businesses – 1) Tobacco 2) Kraft Foods Division 3) Miller Brewing. It revenues were $72 Billion in 1997. It has got 12 brands whose sales are $1 billion or more.
Competition – The US market of 1999
* Brand names (Marlboro, B&H)
* Core Competency
* High ROE
* Little use of financial leverage
* Management Effectiveness
* Different products for same market (Cigarettes, Beer)
* Product is bad for health
* Government Regulation
* Social / Cultural Acceptance
* Losing Ability to Promote Product
* International Expansion
* Purchase of Nabisco
* Further Diversification
* ANTI TOBACCO
* Billions of Dollars in Settlements
Diversification & Philip Morris
Philip Morris is using the portfolio diversification as its main strategy. The company started this strategy a few years after the 1964 Surgeon General’s Report on the tobacco effects. Since then it acquired Miller Brewing Co., Kraft Foods and General Foods. By making several major diversification efforts, Philip Morris was able to invest a portion of its cash and diversify the risk. Analyzing the consolidated operating results for Philip Morris Companies and Subsidiaries we can question if the company is accomplishing its strategy. From 1995 to 1997 the percentage of the operating revenues from its tobacco operations increased from 48.9% to 55.3%. In the same period of time its beer and food revenues decreased from 6.5% to 5.8% and from 44% to 38.4% respectively. The company is still very dependent on the revenues from its tobacco operations.
Corporate Social Responsibility (CSR)
Company Statement on Social Responsibility “We don’t just measure our performance in terms of financial success. We also track whether we measure up to the expectations that society has of us, as a major multinational company – and as a tobacco company.” The company conducted a survey to understand its perception in the eyes of the public and got low marks on trustworthiness and social responsibility. The main areas where the public expected more action were:
* open discussion of the health effects of our products
* preventing youth smoking
* the development of reduced risk products
Philip Morris currently supports around 100 youth anti smoking programmes across various countries focusing on teaching children to decide against smoking and on establishing laws to prevent them from buying cigarettes. The main areas of work on this front are:
1. Access prevention
2. Media campaigns
3. Education programmes
In fact these steps are also in the business interests of the company as this is what the society expects from the company. It would not make sense for a company to position itself as a youth smoking brand. By keeping the society satisfied by its anti-smoking initiatives, the company is gaining in reputation.
The development of reduced risk products is one of the major initiatives that has been taken up by Philip Morris International. In fact, the company has been urging the Government to set up a proper regulatory framework in order to put this into action. The company will gain from this in the following ways:
* Positioning as a less risk cigarette manufacturer
* Goodwill on account of lesser risk products
In fact the very reason why PMI is promoting the idea of legislation in this area and getting cigarettes under the purview of the FDA is that it will indirectly help the company. The FDA stamp would be a major marketing asset. It also sees a major chunk in the ‘safe cigarette’ segment. It could also shrink the market share of its competitors which cannot afford to tap this segment.
Phillip Morris gives more money to charities than any other company. Since 1990, Cash and Food donations just for hunger and nutrition programs alone topped $170 Million
In 1999, Employees pledged, out of there own pockets, $5.5 million to charitable organizations in their communities. Their charity activities became more intense after the time period of 1997 given in the case.
There are several entry barriers in the tobacco industry. Economies of scale are very important because companies can leverage their fixed costs with a bigger market share, which enables a company to be able to decrease its prices if necessary. As described in the case, the market share for less expensive cigarettes has been increasing in the last years due to government taxes and regulations. As the markets become more sensitive to the price factor, economies of scale will play an even more important role as an entry barrier to the tobacco industry. Product differentiation is a not a high entry barrier to the industry. The biggest difference between all the different cigarette brands is not the product itself but the brand and image it transmits.
If a company can develop a smokeless cigarette or a non-harmful, non-addictive substitute to nicotine, the product differentiation factor would be much higher. Capital requirements present a high entry barrier. The costs associated with producing and marketing cigarettes are quite considerable. A company in this industry has to gather capital for physical facilities, marketing activities and liabilities, between others. Government policies are another important entry barrier. The tobacco industry has been increasingly regulated since the sixties. That pattern is expected to get even more intense in the following years.
Legislation and litigation as a threat to the company
The company is facing significant legal threats and legislation and litigation is a significant factor which makes the tobacco industry uncertain and unpredictable. The significant problems which has made it problematic for the company are as follows
1. The consumer is becoming more aware of their rights and especially after Ligett was awarded the liability suit in 1988, things started changing and now the consumers are more confident that their complaints are going to be addressed. It has become a more expensive proposition for all tobacco companies after they were made liable to reimburse expense related to smoking related illness.
2. Nicotine has now come under the umbrella of Federal Drug Administration (FDA) which means more legislative problems for the companies as processes will get more formal and legalized.
3. The tobacco problem is an international issue. Different policies and governance is used at different places and thus it becomes very difficult for the company to adapt to various conditions.
4. The tobacco claims among the consumer segment have been growing consistently. In fact these claims can be structurally classified into individual cases, class cases and health care cost claims.
5. The growing incidence of underage smoking has further aggravated the situation and it’s been seen as a very serious repercussion of the publicity by the tobacco companies by the international community. Philip Morris had to form a separate strategy to cater to this particular issue like banning cigarette sampling and contracting its reach in areas which has free access to minors.
6. The growing negative feeling among the global community towards Philip Morris would have dire consequences not only on Philip Morris’s ambition of expanding in the global markets but in markets like USA where it already has a strong foothold.
Certain areas which generate a positive feeling are
1. The tobacco industry even though very competitive is very united when it comes to fighting against the legal and legislative issues. So the industry as a joint force can leverage its power to combat this growing threat.
2. Another positive trend for Philip Morris is that there aren’t many claims from markets toper than USA and that might be due to there scant presence in the world market but this also shows that they still have a pretty clean slate in the international market.
3. The company is very confident within itself that it can defend all the claims against its name and that is always a good sign.
In 1997 the net earnings for the company was $6.3 billion dollars. Philip Morris should invest part of the money in R&D for tobacco related products. The focus of its research should be the development of a cigarette that diminishes or even eliminate the harmful effects caused by smoking. Philip Morris should also focus on their international operations, especially in markets with great potential like developing East European and African countries.
The company should also ensure that they invest in a strategy that will decrease its dependence on the North America tobacco revenues. This action is very important due to the increased liability risks and regulations in that market. Another important step to decrease its revenue dependence from tobacco is to expand its packed food and beer operations
The next 5 years – Philip Morris should focus on leveraging their different operations in order to create further synergies between them. The degree of diversification should depend of current events on the tobacco industry. If the company expects the government to take a more extremist approach, by for example considering nicotine an illegal substance, it needs to be prepared to react or, even better, to avoid it. To accomplish that the company should focus in two main courses of action.
The first is R&D. Philip Morris needs to invest in other alternatives to the current cigarette. This is not a simple task since the cigarette has been practically the same for decades. How can they eliminate the negative effect to the consumers’ health? How can they diminish or eliminate the second hand smoke? The second is to expand diversification. The company should look for attractive companies that complement its actual products in the areas of packaged food and beer. The company should also continue to work on its image. It should disassociate itself from all the negative publicity resultant from the tobacco lawsuits.