Strategic Framework for Philip Morris - Case Study Example

Strategic Framework – Philip Morris Name Class Unit Introduction Philip Morris history can be traced back to 1847 when it started as a tobacco shop in London. After Morris death the company was sold to William Thompson who introduced cigarettes to USA in 1902. The firm has grown to be one of the largest tobacco firms with a diversified products portfolio which includes cigarettes, packaged foods, beer and real estate. The firm has the largest market share in the cigarettes industry and gains a third of its revenue from the food and beer subsidiaries the rest coming from tobacco sales. Despite the competition, Phillip Morris has maintained lead in the industry. The main competitors are B.A.T industries plc. Gallaher Group plc., Imasco Ltd, RJR Nabisco Holdings Corporation, Loews Corporation, UST Inc. and Universal Corporation (Fronk et al., 1998). This essay will carry out a strategic analysis of Phillip Morris. This is through doing SWOT analysis, Porter five forces analysis, and critique of the company strategy, leadership and organisation structure. The essay will then give an opinion on Philip Morris potential future. SWOT analysis The main aim of SWOT analysis is to examine and organisation strengths and weakness and its existing growth and improvement opportunities. It also involves looking at the threats from the external environment which affects the business survival (Dobbs, 2014). Philip Morris international has been a successful industry due to its expertise based on sales and marketing (Fronk et al., 1998). At the moment, the firm is the largest cigarettes maker and has the largest market share. The following is a SWOT analysis for the firm. Strengths Phillip Morris has been able to diversify its revenue. This is through engaging in the beer and packaged food divisions which are doing well hence reducing financial risks. The firm has a strong financial position. Based on the firm financial situation, the firm has been gaining substantial revenue from their tobacco business segment. For example, the firm was able to make sales of US$7.011 billion. The firm shows strong revenue growth in all its segments in the industry. The company also has well established brands in the industry. This includes brands such as Marlboro and Philip Morris. Since the firm has established itself as a brand, there is less money which is spent on advertising and promotion. The form has been able to have able leadership. This has helped in management which have steered research and development. A strong market position has made it possible for the firm to benefit from economies of scale especially when making purchases, manufacturing or distributing. Philip Morris has very strong brand equity with Marlboro being one of the world’s most recognised cigarettes (Fronk et al., 1998). Weakness Phillip Morris has been very venerable to tobacco based litigation. This is due to fact that the firm relies heavily on the tobacco business. The firm have been facing a lot of tobacco related litigations both in USA and international market. These are litigations based on smoking and health cases, health care costs and recovery cases and class action smoking. Based on the case study, the firm has over 400 filed cases. Another weakness is the high dependability on the tobacco segment. This makes the firm revenue highly venerable to market conditions as well as litigations (Fronk et al., 1998). Opportunities The tobacco market has been expanding despite the anti-tobacco campaigns. The market seems to be still lucrative based on the case study. The firm also have high opportunities in global investment. With globalisations, the firm can take advantage of the low cost of labour and expand their production. This can lead to higher profits for the company. Another opportunity is mergers and collaborations. The firm can collaborate with like-minded firms to continue expanding its market share (Fronk et al., 1998). Threats The firm faces a major threat from anti-tobacco activists. The industry has always been criticised for being responsible for tobacco related deaths. There have been a lot of litigations based on the consumption of tobacco and health issues. The industry also faces strict control from the government. This includes the age limits and rules which bans tobacco use in the public places. Public awareness on the consequences of tobacco use based on activists’ advertisement is also a major threat to the industry. The firm also faces problems based on the strong competitors in the tobacco industry such as BAT industries plc. and Imasco Ltd (Fronk et al., 1998). Competitor Analysis and the Profitability Potential of the Industry (Porter’s 5 Forces Model) Porter 5 forces analysis helps in determining the attractiveness of the industry. It helps in revealing the competitive situation in a market through looking at the five forces (Dobbs, 2014). Market rivalry The tobacco industry is a differentiated oligopoly. There are a few large companies which sells similar products which are differentiated. Based on the case study, it appears that the type of oligopoly is non-collusive. Philip Morris is a market leader and other companies can be looked as followers. Despite this, tobacco firms are interdependent and their decisions affect each other. The market rivalry is based on the price leading to price war in the market. The main competitors in the industry based on the case study are B.A.T industries plc. Gallaher Group plc., Imasco Ltd, RJR Nabisco Holdings Corporation, Loews Corporation, UST Inc. and Universal Corporation (Fronk et al., 1998). Threat of new entrants There are a lot of barriers for a new entrant into the tobacco industry. The industry is capital intensive and there are a lot of laws regulating it. Furthermore, there is high brand loyalty in the existing firms which would act as a barrier to a new brand (Fronk et al., 1998). The market is horizontally integrated with few dominant players globally who have merged with the local players. This makes it hard for a new participant to find a niche in the market. The exit barriers in the industry are also very high. It is hard for a firm to just quit the industry and enter another since the equipment used in manufacture is special. Based on the argument, it is hard for a new firm to enter in to the tobacco market. Threat of substitutes Cigarettes do not have a real substitute. In addition, cigarette smoking is addictive hence users find it hard to stop smoking. There have been efforts to come up with substitutes such as gums, sprays and e cigarettes but they have not been able to fully replace cigarettes. Despite this, cigarettes from different brands act as substitutes. It is easy for the smokers to switch from the Philip Morris brand to B.A.T or other competitors brand. The price can lead to brand substituting (Fronk et al., 1998). Buyers bargaining power Due to high intensity of market competition in the tobacco industry, buyers have some bargaining power. Despite this, Philip Morris has been able to hold a dominant position in the global market. The firm has top brands and have customer loyalty. The firm also holds the largest market share and chances of buyers switching brand are low. Thus, the buyers have little power compared to the suppliers. The end users are also highly fragmented hence they fail to hold power over their suppliers. The buyers do not have strong or a growing bargaining power (Fronk et al., 1998). Suppliers bargaining power There are few suppliers which makes it hard to enhance their bargaining power. The existing suppliers have already established a long term relationship with the tobacco industry. It is hard for the tobacco companies to switch their suppliers while at the same time, suppliers do not have a choice on whom to sell their product. This makes the two parts to have equal bargaining power. The relationship is balanced and no party have more power than the other (Dobbs, 2014). Evaluation Although the firm has been faced with litigations and regulations in the tobacco industry, it is still in an attractive market. This is a high profit margin business as proved by the financial statements of Philip Morris. For the new entrants, regulations and capital intensity are the main reasons why the industry fails to be attractive. The main players have a total control of the market with Phillip Morris being a market leader. The industry has low threat of substitutes since the alternative have low popularity compared to tobacco. Due to addiction, there are low to medium bargaining powers of the buyers (Fronk et al., 1998). Vertical integration with the leaf suppliers have led to increased stability in supply and low bargaining powers of the suppliers. Based on the above analysis, it is clear that Philip Morris is trading in a competitive market. Despite this, the firm has a large market share compared to the competitors. Tobacco industry is one of the most concentrated sectors globally with the main players controlling the major market share. This is a product differentiated oligopoly where the few top players such as Phillip Morris dominating the industry. The firms have similar products with varying characteristics which enables them to gain a better market share than the competitors. The competition in this industry is price based though price change can be easily matched by the competitors (Fronk et al., 1998). Conclusively, the tobacco industry is attractive and Philip Morris needs to focus on the emerging markets to enhance their profits and revenue. Critique of Philip Morris strategy Philip Morris strategy is well placed for its future success. The firm has diversified its revenue which has reduced risks in an effective manner as well as dominance in the cigarette industry. Through acquisitions, the firm has diversified their portfolio and reduced the risk of starting new firm through acquiring the established ones. This is a major strategy as seen from the SWOT analysis that it has marked success in the beer, real estate and packaged food divisions. The firm was able to realise the need to diversify which has helped in spurring their growth. This makes the firm less venerable to tobacco liability. The firm strategies for growth are based on its premium segments which are led by brands such as Marlboro (Fronk et al., 1998). The firm is benefiting from its portfolio as seen in the SWOT analysis. Based on the Porter 5 forces analysis, the firm has been able to hold a dominant position in the oligopoly. The firm has necessary structures which will help it to expand in the market. The firm seems to focus on the emerging markets as they expand from developed markets. These are markets with high projected growth rates. These are also countries with less government intervention and regulations. Leadership Philip Morris leadership was right, informed and skilled which enabled on attaining their strategic objectives. Since the inception, the firm has been able to attain success through transformative and innovative leadership. The leadership ensured that the firm was able to diversify their revenues hence reducing risks. The leadership has steered the firm through the litigations and negative public sentiments and ensured success. This shows that the firm has capable leadership. For example, Geoffrey C. Bible was able to ensure the firm succeeded despite the challenges it faced (Fronk et al., 1998). Philip Morris organizational structure Philip Morris has a flexible organisation structure based on their strategy. This is due to fact that the structure and strategy are intertwined. Through their diversification and growth of the premium business segments, the firm structure had to be less hierarchical for fast decision making. This structure best fits the firm as it is designed based on the strategic objectives. The structure ensures that the different business units under the firm are able to operate together. With a less hierarchical organisation structure, it becomes possible to control different business unis while at the same time empowering employees. With acquisitions during diversification, it would have been hard to use a centralised leadership since this would have affected decision making. The flexible structure enables all the all parts of the organisation to fit together and links the different segments and units (Fronk et al., 1998). Philip Morris potential future (10 – 15 years) To sum up, the tobacco industry is very attractive based on the analysis. For the next 10 to 15years the industry will do great despite the litigations and regulations. In fact, Philip Morris has been performing well despite being faced with litigations, proposed legislations and increasing public awareness against smoking. However, the future operating results of the industry may face unfavourable climate. The firm has to continue strengthening their diversified business portfolios such as beer, packaged food and real estates (Fronk et al., 1998). The firm has to convert its weakness into strengths and threats into opportunities. For example, cigarettes are being criticised for their health effects. The firm can invest in innovative and healthier version of cigarettes in the next 10 years. There is need for more investment in research and development through modernisation. The firm can continue counting on their loyal customers and partner with firms which they already have a long business relationship. Despite this, the firm has to brace itself for more restrictive tobacco regulations and rising criticism due to health impact of smoking. This might affect profits in the long term future. References Dobbs, M.E. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45. Fronk, R. Pilgrim, B., Prosier, B., Urquhart, R. Wiltse, M. (1998). Philip Morris Case 11, University of Oklohama. Read More