The first quarter or 1998 was marked by the prospect of comprehensive federal tobacco legislation (Case 11 n.d.). However, it did not pass because of two reasons: conservative opposition instigated by an advertising campaign and the President being involved in an ongoing investigation. Nonetheless, Philip Morris faced a risk of future federal legislation potentially reducing the profit from its domestic sales. Moreover, numerous lawsuits were filed against the company. The parties that brought lawsuits against Philip Morris claimed that it was responsible for severe health damages linked with the use of tobacco products. Specifically, 39 states engaged in litigation with the company and expected to be reimbursed for Medicaid expenses associated with the treatment of smoking-related illnesses (Case 11 n.d.). Moreover, nicotine was classified as a drug and fell under the regulatory jurisdiction of the Federal Drug Administration (FDA). Numerous legal actions against Philip Morris could be divided into three groups: individual smoking-related cases, class action smoking-related actions, and recovery of healthcare costs by states (Case 11 n.d.).
Another company’s problem was 6 percent reduction in cigarette shipments in the second quarter of the same year (Case 11 n.d.). Furthermore, negative public sentiment towards tobacco products presented an ethical problem for the management of the company. Therefore, Philip Morris had to deal with issues on the ethical, legal, and operational dimensions.
Philip Morris started diversification even before new tobacco legislation was enacted. Taking into consideration that diversification is an unpredictable process, it could be argued that the company’s strategy was associated with a significant level of risk. Nonetheless, the rise of public concern over the harmful effects of tobacco consumption pushed management of Philip Morris to increase shareholder value by diversification. Moreover, the company decided to expand into sectors that were not related to either tobacco production or retail thereby making the strategy riskier.
Nonetheless, the organization has managed to acquire Kraft Foods, Inc. (KFI) which later became “the largest processor and marketer of retail packaged food in the United States” (Case 11 n.d., p. 4) thereby creating a substantial competitive advantage. A domestic portion of KFI was responsible for creating 48 percent of the company’s operating revenues in 1997 (Case 11 n.d.). The international division of KFI generated 12 percent of operating income margin in the same year (Case 11 n.d.). Another dimension of diversification included acquiring brewery company Miller Brewing in 1969 (Case 11 n.d.). Due to the fact that markets of both tobacco and beer divisions of Philip Morris were overlapped to the significant extent, Miller Brewing has moved from seventh to fourth position in domestic sales in six years (Case 11 n.d.).
SWOT Analysis
Industry
The tobacco industry has grown significantly over the last decade (WHO 2016). This expansion is associated with a rapid growth of economies in the Latin America and the Middle East that coincided with the increase in tobacco consumption. According to the World Health Organization (WHO) report, there are around one billion smokers in the world (WHO 2016). Almost 80 percent of them live in low-and-middle-income countries (WHO 2016). Domestic growth rates, on the other hand, have significantly slowed down over the past decade due to the ever-increasing level of public awareness about negative consequences of smoking. In an effort to reduce tobacco consumption, 12 countries implemented bans on tobacco advertising campaigns (WHO 2016).
Competitor Analysis
The tobacco industry is associated with a high degree of both national and international competition. Altria Group, British American Tobacco, Reynolds American, Japan Tobacco, and Imperial Brands are the main players in the industry (Market Realist 2016). A recent report shows that market capital of Altria Group and British American Tobacco amounts to $124, 856 and $100, 983 million respectively (Morningstar 2016). Market capital of Philip Morris is $137, 899 (Morningstar 2016). Even though the company owns 7 of the world’s top selling brands, the industry’s main players create stiff competition for Philip Morris (Morningstar 2016).
Profitability Potential
Philip Morris has been ranked as one the most profitable companies by the Fortune Global 500 for many consecutive years. However, the company’s gross profit margin, operating profit margin, and net profit margin “deteriorated from 2013 to 2014 and from 2014 to 2015” (Philip Morris International 2015, p. 8).
Nonetheless, the company still has a strong competitive position, and if it manages to increase its sales volume in developing countries, their profits will increase. The company’s annual report reveals that its “total marketing share excluding China and the United States increased by 0.2 percentage points to 28.7 percent in 2015” (Philip Morris International 2015, p. 8). Taking into consideration the fact that Philip Morris plans to expand its OCI margin and “largely rational international excise tax environment” (Philip Morris International 2015, p. 8) it could be argued that the company will not see their profits significantly deteriorating during the following year.
PESTLE Analysis
Political Factors
Philip Morris operates in numerous countries and regions such as the Middle East and Ukraine that are currently experiencing a wave of conflicts that disrupt the company’s manufacturing and distribution operations. Moreover, civil unrests could potentially result in loss of property thereby reducing earnings and revenues. Furthermore, Philip Morris is “dependent on governmental approvals of various actions such as price changes” (Philip Morris International 2015, p. 9).
Economic Factors
Just like every industry, the tobacco industry is subject to economic fluctuations. It could be argued that company products are inelastic. Even though the total volume of the industry is not expected to drastically change, the growth rates of developing countries such as India and China could have an effect on the volume trends. There is also an issue of currency exchange rate that negatively affects both the company and the industry (Philip Morris International 2015).
Social Factors
The majority of the developed countries have seen a significant decline in the consumption of tobacco products caused by the increased public awareness about negative consequences of smoking. Another social factor contributing to the reduction in cigarette sales is the “diminishing social acceptance of smoking” (Philip Morris International 2015, p. 6).
Technological Factors
Technology has a significant influence on Philip Morris because it could potentially reduce operational costs by improving efficiency. Moreover, the organization tries to reduce its carbon footprint with the help of innovative production methods (Philip Morris International 2015).
Legal Factors
There are numerous legal constraints that stem from social attitudes towards the industry. Excise, sales, and other cigarette-related taxes have significantly increased during the last years. Moreover, numerous countries have imposed severe restrictions on advertising and packaging design as well as smoking in public (Market Realist 2016). Therefore, the company’s profitability is directly influenced by governmental actions aimed at tobacco regulations.
Environmental Factors
The company produces an agricultural commodity; therefore, it is subject to weather and climate conditions (Market Realist 2016). Moreover, the recent years have been marked by increasing concerns over the impact of the industry on the planet. The growing environmental concerns significantly influence the company because of the fact that tobacco production leads to the deforestation (Market Realist 2016).
7S
Strategy
One of the most important elements of the company’s strategy is to “strengthen its brand and market positions through selective acquisitions and the development of strategic business relationships” (Philip Morris International 2015, p. 6). Moreover, Philip Morris plans to reduce its carbon footprint and energy consumption thereby improving its public image.
Structure
Philip Morris is an international company. It has centralized structure—head office provides direction to regional divisions. Key strategic decisions are made by company’s board of directors that holds regular and additional meetings (Market Realist 2016). A flow chart of the company’s organizational structure is presented in appendix A.
Systems
Philip Morris has directional systems that help to align company’s operations with its strategic objectives. It also has management systems and process systems. Management systems instituted at managerial and subordinate levels. Process systems help to track milestones and achievements at the sub-divisional level of the company (Market Realist 2016).
Style
The company puts a strong emphasis on innovation and sustainability. Its culture is forward looking and dynamic. The recent efforts to reduce its carbon footprint have significantly increased Philip Morris’ public image. The company wants to develop a new portfolio of products that are associated with reduced health risk thereby framing public perception of the company as innovative one (Market Realist 2016).
Staff
Philip Morris prides itself on having “diverse global force of more than 82, 000 employees” (Philip Morris International 2015, p. 11). The company supports its employees by implementing reasonable policies and performance measurement systems that help to reduce attrition rates.
Skill
Taking into consideration the fact that Philip Morris has a significant portion of the market and has operations in different countries it could be argued that the company scores high in terms of skill. However, the management of the organization could put more emphasis on innovative approaches to R&D in order to improve its product content (Market Realist 2016).
Shared Values
The company promotes innovative programs, corporative responsibility, and sustainability (Philip Morris International 2015).
Potential
Taking into consideration the current trend towards reduction of tobacco consumption in developed countries, it is reasonable to say that the industry will significantly diminish in the next ten to fifteen years. However, if the company manages to expand its market share in the countries with developing economies it could see volume and profit increases. The company financials are presented below:
Reference List
Case 11 n.d.
Market Realist 2016, The future of tobacco giant Philip Morris: an inside-out breakdown. Web.
Morningstar 2016, Philip Morris International Inc. Web.
Philip Morris International 2015, 2015 Annual Report. Web.
WHO 2016, Tobacco. Web.