Sally Fitzgibbons Foundation

Beginning the Academic Essay

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Table of Contents
Introduction 1
Company Snap shot 2
New Focus and Core product 2
SWOT Analysis 4
PESTEL Analysis 5
Recommendations for PMI to monitor 7
Porter’s Five Force Analysis for PMI 8
Conclusion 9
References 11
Appendix 1 12
PMI Announcement 12
Appendix 2 13
PMI SWOT analysis 13

Introduction

The start of the New Year has always brought changes. It has been seen as a time to instigate changes that could result in some sort of positive reward. This most prolific time for resolutions at an individual level, was also used by Philip Morris International (PMI) to announce a dramatic shift in their business strategy for the foreseeable future. Like many individuals around the world, Philip Morris announced that it was giving up smoking.

In an advert I first noticed in the British broadsheet, the Independent (Appendix 1), Phillip Morris stated: “We are trying to give up cigarettes… Philip Morris is known for cigarettes. Every year many smokers give them up. Now it is our turn.”

Essentially, the tobacco company reported that it wanted to stop selling cigarettes. This was the first time, a tobacco company laid out its intentions in the general press about its business future.

This writing aims to assess the new smoke-free strategy of Philip Morris International. PMI new company mission and vision that it has crafted to be able to take its business and industry into the future will be examined. The analytical tools of SWOT and PESTLE Will be employed in the discourse to evaluate the strategy’s effectivity and potential possibility to transform an industry that is constantly under threat. It is important to note that the strategy at Philip Morris is a transitional one, and as such, this assessment will make recommendations for areas that would require monitoring if the strategy and mission is to be successful.
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Company Snap shot

Philip Morris International (PMI) is a leading international tobacco company. Its rivals include Imperial Tobacco, Japanese Tobacco, and British American Tobacco on an international scale, while PMI faces competition from smaller regional players in the tobacco Industry (Forbes, 2018). The tobacco industry is one that has seen many issues in recent history. It is a volatile and constantly shifting industry that is highly regulated by governments. Therefore, PMI has declared its intentions for future business in an industry that is tough with many more unforeseen and well known coming challenges.

Philip Morris International began its life 1847 when a Mr. Philip Morris opened a tobacco shop on London’s Bond Street (PMI.com, 2018). Today PMI products are sold in over 180 markets and the company employs over 81,000 workers from different parts of the world (PMI.com, 2018).

PMI possesses a portfolio of leading international and regional tobacco products of which cigarettes make up the majority of products sold. This portfolio is led by the most iconic cigarette brand in the world, Marlboro (PMI.com, 2018). Marlboro is the world’s best-selling cigarette brand. PMI’s tobacco portfolio includes other well known international brands of cigarettes, such as L;M and Parliament. In addition to a prestigious cigarette brand portfolio, PMI own the rights to several other tobacco products that are not as widely consumed as cigarettes, such as cigars, pipe tobacco and chewing tobacco. However recent trends in the tobacco industry has seen PMI expand its tobacco portfolio to include new generations of tobacco products in the form of non-burning products and vaporizing non-tobacco products.

New Focus and Core Product(s)

PMI says its future exists beyond cigarettes. It is working to design a smoke-free future with these new generation products at its core strategy. PMI announced the decision, in the most dramatic fashion at the beginning of 2018, that it will build the future of its business around these new smoke-free products. PMI states:

“Now we’ve made a dramatic decision. Because we should and because we can. A future PMI that’s known for replacing cigarettes with a portfolio of revolutionary products.” (PMI, 2018)

The ultimate strategic goal of PMI it Is to replace cigarettes with smoke-free products that are in development as well as those options that are currently on sale in various regional markets across the globe, the most visible being its IQOS product.

IQOS is PMI’s is non-burning tobacco product alternative to cigarettes. It has been championed by PMI as any safer alternative for adult smokers that wish to continue smoking (PMI, 2018). This product is technical in design and function compared to ordinary cigarettes. It comes in three parts that consist of a pen like holder, tobacco heat sticks and a charging unit. Other options for continued smoking include a vaporizer which does not contain tobacco but delivers nicotine (PMI, 2018).

PMI has recognized these two categories as the focus and possibility of its future success. Over $3 billion has already been spent on research and development of these types of products. PMI continues to do so with a team of over 400 scientists, engineers, and technicians at sites for R&D in Switzerland and Singapore.

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SWOT Analysis

The SWOT analysis matrix (Appendix 2), has identified strengths and weaknesses as well as opportunities and threats across PMI’s current business strategy. The strengths and weaknesses are internal to the company while opportunities and threats are external from the business’ control. First, I will turn to the opportunities and threats because I believe that these areas are most pertinent to understanding the new business strategy of PMI potential for success.

The key threat recognised for PMI with this new strategy are linked to continuing tobacco related legislation from governments across the globe. As more regulation is put in place around tobacco products, PMI must move to develop alternative that do not include the use of tobacco. PMI will have to spend money and time to counter any legal challenges that it may face as a tobacco seller as well as to continue fighting current legislation.

Opportunities are also key and must be exploited quickly if PMI is to succeed in its strategic business plan of selling and switching to nonburning tobacco products. The first clear opportunity is that of new technologies and the ability to optimize the possibilities of uses to create new and diversify the products. The second opportunity is change in customer behavior. With these new technologies, customers more open to using tobacco products that report to have greater health benefits then traditional smoking cigarettes (PMI, 2018). Consumers of tobacco products are urged to use other alternatives or quit entirely by government and health authorities (WHO, 2018).

These threats and opportunities are unfortunately linked. Therefore, it must be noted that a threat could become an opportunity but more problematic is opportunities that can be turned into threats to their business strategy. However, as one of the leading companies in its industry, Philip Morris International has numerous strengths that enable it to thrive in the market place. These strengths not only help it to protect the market share in existing markets but also help in penetrating new markets.

The weaknesses and strengths of PMI are internal strategic factors. I want to highlight two clear strengths that can aide in achieving PMI’s business strategy successfully. The first is the brand Marlboro. As the leading cigarette brand, this icon of the tobacco industry must be leveraged for the future. The strength of their brands in the portfolio means that PMI has good standing in the market share. This must be transferred to the new brand of IQOS.

Another strength is PMI’s loyal customer base based on its extensive portfolio. A high customer loyalty means a higher demand for products. Loyal customers are more likely to purchase new products from PMI as opposed to new products offered by their competitors. PMI must use the strength of its customer base to fulfil the new business strategy goals to convert smokers to their alternative smoking products.

The weaknesses identified for PMI for this business strategy related to serious internal forces. One such key weakness relates to the cost of production of the new products and most specifically the workforce needed to build, engineer and market them. Therefore, the high skills rate needed for PMIs workforce is a threat to the profit margins of the new products.

Another weakness relates to the first in that research and development requires substantial investment that must be continued into the long-term. PMI have noted that it has already spent over $3 billion on research and development of the alternative products. To ensure and deliver profitable margins, PMI should follow the cost related to ongoing research and ensure that over expenditure does not occur in the battle of research and development.

PESTEL Analysis

The SWOT analysis is best understood alongside PESTEL analysis because it provides a more nuanced view of potential areas of concern. PESTEL stand for the factors of political, economic, technological, environment and legal, which would affect and impact PMI strategy at a macro level. Starting with the political aspects, PMI must look to the political importance of tobacco production or use. I think this will be especially important in scrutinizing the supply chain and costs relating to it.

Factors stemming from the economic considerations of a PESTEL Analysis can be identified with some of the threats of the SWOT analysis. For example, cost and productivity in the operational countries can be higher than anticipated. With PMI bases in Switzerland and Singapore, the economics of labor costs should be examined against the value from the tax incentives afforded by these locations. Social factors identified are also key areas to be monitored. These include attitudes about health, as well as ethical and environmental thoughts about tobacco. Social factors should also include review of the demographics of populations by education level and class structure in relation to the ability to be able and willing to consume PMIs new products.

This brings up the technological factors that warrant careful consideration. The recent technological developments will impact the cost structure in the tobacco industry, which will directly impact the consumer through the value chain. Important for PMI is the rate of diffusion technology especially as competitors bring similar products to the markets which will then become saturated. The environmental factors for PMI to consider are numerous due to the nature of the business as the combination of raw materials and technologies combine. At a base level, climate change and weather will be a problem for tobacco farms producing the raw tobacco that goes into their products. With the new technological advantages of the non-burning products, comes the regulation around electronic products and the disposal at end of life. Philip Morris should consider factors of the environment when are focusing on certain social factors but also legal questions. Legal issues come not only from government laws about a protection of health but also from patents, copyrights, intellectual property law with the advancement in the technologies used.
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Recommendations for PMI to monitor

The SWOT analysis of PMI’s new mission and core product has revealed the vast advantages that the company potentially holds as it aims to execute the new business strategy. An overarching strength identified is the value of PMI brands, especially Marlboro. The strength of this iconic brand can, should and is being used by PMI to diversify the product portfolio of new alternative products by applying the Marlboro name to the IQOS product choices for customers. Additionally, the depth of PMI’s existing cigarette brands, could be transfer into the new smoke less formats to continues to offer a broad choice to customers and maintain the brands that have always been critical to success in the tobacco industry.
Another opportunity which PMI must act to utilize is the marketing possibilities of the new products while regulations around them are still low. PMI is already successful in its marketing strategies for its traditional smoking products such as Marlboro. It should use this opportunity to showcase the new products, marketing before the window closes and before its competitors.

The PESTLE analysis of PMI and IQOS shows further depth to the external factors that need to be considered, some of which should be treated as critical in order to maintain profitable sales potential of the new business strategy and products. Top of these are economic factors such as increased production and labor costs relating to the need for more highly skilled works in areas of research and development. The IQOS product requires a technological minded population with access to vendor points – not to mention electricity to charge the unit. This brings the socioeconomic conditions into greater view as factors straddle social, economic and technological factors. While PMI must pay attention to these factors, an undisputable factor of concern comes in the form of a legal threat. Continuing anti-tobacco and anti-smoking regulations are subjects for current at future review to PMI mission and the resulting products viability for sale. Governments around the world continue to pass legislation that would hamper the growth and sales potential of tobacco related products, including the smoke free options being proposed by PMI and the industry.

Porter’s Five Force Analysis for PMI

Consequently, it must be stressed that PMI has made a bold move with this mission statement and product focus. By evaluating the external factors that need to be monitored and acting upon them going forward, PMI’s pivot within the tobacco industry does not appear as a great shock. Porter Five Force Analysis can help to understand the mission and vision as set out by PMI and why it sees this as the most viable strategy to continue or gain success. Starting with the power of buyers’, which PMI can claim with large market share and iconic brand products with loyal customers. If these customers continue to buy their products as replacement of traditional cigarette use, then PMI will continue to maintain market share and hopefully profitability levels. Additionally, PMI’s bargaining power is strong as it signals to its supply chain that it will continue to invest in tobacco products on another scale that is predicted to grow (See Fig 1).

Figure 1

From tobacco farmers to scientists researching tobacco, PMI appeals by appeasing such actors simply by stating that its commitment to the tobacco industry – something its competitors have yet to state so openly as a marketing announcement. The rivalry with existing companies is set to grow as British American Tobacco, Japanese Tobacco and Imperial Tobacco follow the trend and need to diversify their product portfolio in response to the industry environment. However, PMI is well placed to mitigate this as it is already a market leader of leading cigarette products and has already begun to transition customers to the new generation tobacco products. The threat from new entrants and substitutes can be seen as slightly lower to PMI, however they should still be monitored particularly as PMI’s IQOS product maybe costly, driving customers to search for lower priced substitutes.

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Conclusion

Assessments made in the course of this paper has highlighted the complexities of multinational business. More specifically, the PMI case study presented a number of possibilities of exploration due to the unique nature of the strategy. This is a strategy of transition and requires time and money across many different segments.

The future which PMI has outline for its business is not revolutionary as it claims but rather it is reactionary. PMI is reacting to the growing weakness and threats to its current and most lucrative business model of selling cigarettes. Some of these threats can be identified in the vision statements of PMI as reasons for the decision to build a smoke free future, such as the changing health attitudes amongst smokers as well as their ability to cater to the desires of smokers with technological advancements and science driven products. These new generation of tobacco products allow PMI to talk about and market tobacco once more through the lens of scientific scrutiny and research. All eyes are on PMI’s present and future offerings while competitor brands seem somewhat invisible or non-existent caused by PMI’s marketing announcement.

The core product of IQOS and others that PMI claim to be developing, still have a number of threats that will need to be addressed as the strategy is played out and executed. A primary issue and threat is the costs resulting from the necessary and ongoing research and development needs. Updates to design and performance will be expected from the regional markets which could erode the potential profit-making capabilities of the products. Additionally, with this strategy and focus products, PMI has inadvertently declared its target audience as persons with a particular income threshold, educational background and access to the markets where the product is sold. From the outset, PMI will need to prepare for the inevitable threats to market share as cheaper alternatives will be sort by customers with unparalleled access options and capabilities as well as growing competitor competencies in the field of alternatives products.

What PMI has done with this announcement and brand vision/mission, is to pivot and position itself in an industry under continuous and ever-growing regional and global scrutiny coming from various sources. Consequently, PMI new mission may force its nearest competitors to enter a race which they are not fully prepared to run with subpar products that fail to raise to the standards set by the early planning, development and marketing of PMI. Philip Morris International never said it was quitting the tobacco industry. I believe that this is key to understanding the potential opportunities that has been recognised as a result of their announced pivot and the possibility to continue to be the world’s most successful tobacco company with the world’s number 1 alternative product that continues the legacy of old. The Marlboro name will live on in the most sophisticated methods of tobacco consumption or vaporised – whichever customers buy that reap the most reward in term of profits and returns on all investment.
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References

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Appendix 1
PMI Announcement

Appendix 2
PMI SWOT analysis

Internal
Strengths Weakness
• Large market share
• Strong Brand Portfolio
• Loyal customers
• Strong distribution network
• Strong R ; D
• Legacy of its Products
• Skilled Labour costs
• R;D costs
• High pricing
• Production plant upgrades
External
Opportunities Threats
• New trends in the consumer behavior
• Increase its competitiveness with new products
• Diversify portfolio
• Technology for customer insight
• Market development lead • New technologies developed by the competitor
• Rising material costs
• Rising pay level
• Mounting legal regulations of tobacco products

N.B
These are the most important factors recognised that are discussed in the paper.

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