Strategic Capabilities and Competitive Advantage Assessment

Abstract

This article explores strategic capabilities and competitive advantage assessment of Philip Morris International. It describes the historical and modern aspect of strategies of the company, investigates the results of company’s work to answer whether they provide competitive advantage. It also offers a new direction of company’s strategy.

 Keywords: marketing strategies, strategic capabilities, small businesses, competitive advantage.

Strategic Capabilities and Competitive Advantage Assessment

The economy of any country is self-sufficient if it is composed of industry producing competitive products. The parallel development of small and medium business allows the economy to create the conditions for the growth of the gross national product and, therefore, the standard of living of the population. But the development of any business is impossible without a strategy.

The marketing strategy is a defined process by which a variety of marketing activities are planning and carrying out. These activities are intended to achieve the goals set by a company. To assess the competitive advantage a strategy of Philip Morris International, the way of doing business in the historical aspect and nowadays should be considered (Hafez, Ling, 2005).

The most famous company’s history dates back to the time when Philip Morris started business with a single store for tobacco and cigarettes in 1847 in London on Bond Street. Until the mid-twentieth century, the company ranked sixth in the world by sales volume. 1954 was a turning point in the life of Philip Morris. At this time, there were two events, one of which brought the company its success, and another – the problems. They can illustrate the marketing strategy, which first brought the sustainable competitive advantage and success for Phillip Morris. For the first time, lawsuit was filed against Philip Morris – it was incriminated by a smoker from Missouri who had suffered on throat cancer. Then the company decided to implement a new strategy. It studied thoroughly its own customers and their needs. Subsequently, it has invested large sums of money in the reducing the harm from smoking. But at that moment Phillip Morris also discovered an interesting point. On cigarette advertising, especially on older advertisements necessarily, a man and a woman were. This was because the cigarette companies wanted to maximize the target audience and attract both men and women. Phillip Morris decided to explore the market and ask itself whether it is necessary to attract both of them. And despite the fact that at first, Marlboro cigarettes were for women and occupied 0.1% of the US market, the company decided to narrow the target audience. It directed all its efforts to men, especially to the mature masculine men who want to feel free. On advertisements the company did not describe its products – it described those men, their dignity and status. Confident “men had become be a new target audience for Philip Morris Thus the famous advertising image of the company was born – a cowboy Marlboro. Since then, sales of the company have started to grow. Today, Marlboro cigarettes are the most widespread cigarettes in the world. In the United States, Marlboro cigarettes are the most sold cigarettes among both men and women. For advertising business, Marlboro Man is the epitome: how a brand can “fix” a certain way of life to its product. It was an example of guerrilla strategy which can be explained not as the positioning and studying the own company, but learning own buyers.

After gaining a confident position in the USA, the company Philip Morris Incorporated has decided to distribute their products around the world. In 1954, the enterprise has founded a branch office in Australia, and a year later – the international division of Philip Morris Overseas, which became the Philip Morris International in 1961.

But Philip Morris then felt that a strong position in the tobacco market is its weak point. Consideration of the suit in 1954 ended only in 1962 (when the company was acquitted), and it was remembered by American shareholders very well. In 1964, Philip Morris even published a first report on the dangers of smoking. Apparently, in those years, the new strategy of the company was born: product diversification strategy (Hill, 2003).

Meanwhile, the tobacco business of the company was also going well – Marlboro cowboy was doing his job. In 1972, these cigarettes came out on top in the world in volume sales. In 1980, sales of Philip Morris increased in comparison with the end of the 60’s in ten times and amounted in 10 billion U.S. dollars. In the mid-80s, this figure rose to 25 billion. In 90s years, tightly controlled Eastern European markets opened for business, and Philip Morris acquired several factories in Poland, Russia, and Lithuania by obtaining their controlling stakes. So, the company expanded their business to that region, using an aggressive strategy to capture the market – lowering prices and increasing advertising (Wilson, Johnson, 1999).

After that, Philip Morris did marketing discovery. It all started with the fact that the U.S. tobacco subsidiary of Philip Morris began to lose positions. In the early 90’s, Marlboro share in the U.S. market (the main market for Philip Morris) fell by 5% (to 21%). According to the company’s authorities, Marlboro cannot compete with cheaper, but similar in taste cigarettes. In April 1993, Philip Morris began dumping war. The company has cut prices on premium brand Marlboro by 20%. One year later, the brand regained lost positions and continued growth. It turned out that price regulation could do what even a cowboy Marlboro could not manage.

Now Philip Morris International, which belongs to Altria, is one of the leading tobacco companies in the world, headquartered in Lausanne (Switzerland). It owns, in part or in fully, 50 factories around the world and sells its products in more than 160 countries. The major brands of the company are Marlboro, L & M, Philip Morris, Chesterfield, Bond Street, Lark, Parliament. Brand value of Marlboro in 2010, according to Forbes data was 29.1 billion U.S. dollars (Hafez, Ling, 2005).

In 1998, the anti-tobacco campaign has brought first effects. U.S. cigarette manufacturers and authorities of 46 states signed an agreement under which the tobacco industry had to pay for the government $ 35 billion over 25 years (governments assess in such sum of money the requirements according to legal lawsuits and state Medicaid program, “the victims of smoking”).

Investors panicked. By the end of 1999, the shares of Philip Morris on the NYSE dropped from 60 to 25 dollars. But Philip Morris, in this situation, was able to return its lost ground. It involved its senior management, scientists, lawyers and consultants and has developed two strategic solutions: strategy of pressure on the legislature and strategy of approach from the rear.

1) The company has forced the U.S. Supreme Court to make a decision prohibiting the Federal Commission on Food and Drug Administration to intervene in the case of tobacco companies since the Commission wanted to restrict tobacco advertising.

2) It started health program by itself.

By early 2002, the shares had grown to $ 50.

In 2011, Philip Morris International announced a change of strategic goal on complete orientation on the client.

Now Philip Morris is using a strategy of price raising and looking for ways to increase its position in emerging markets, trying to cope with falling profits and volumes in Western Europe and other developed regions. The company diversifies market, targeting the Asian markets, where the number of adults is increasing. These regions have more attractive opportunities for growth than mature European markets.

The strategies which company used and uses should be summarized:

– guerrilla strategy;

– product diversification strategy;

– market diversification strategy;

– aggressive market penetration strategy – lowering prices and increasing the advertising;

– strategy of the dumping war;

– strategy of price regulation;

– strategy of pressure on the legislature;

– strategy of approach from the rear;

– implementation strategy – finding an individual approach to the market in each country.

In this case, the basic strategy of the company is not the positioning and studying own company, but learning own buyers. The Company constantly studies the clients of each market. And on each market, it narrows the target audience, directing all its efforts on its achievement.

In addition, research and development define recent strategic direction of the company. They allow reducing the harm from smoking. The company purposefully reduced the risk of diseases caused by smoking. It is developing products, which can bring results not in a few decades, but more quickly. It combines the classic scientific methods, including clinical and non-clinical studies with systems biology, advanced numerical methods, and modeling of diseases.

Whether these strategies provide the organization with a (sustainable) competitive advantage, we must consider the results of Philip Morris.

February 7, 2013 – Philip Morris International announced the results of its work in 2012.

Total sales of cigarettes in the past year increased by 1.3%, revenue (excluding excise taxes) totaled $ 31.4 billion, which is 0.9% more than in 2011. Sales (shipments) in Asia grew by 4.2%, revenues – by 5.7% (excluding fluctuations).

Sales in the EU were decreased by 6.4% while cash revenue was the same. Shipments in Eastern Europe, Middle East, and Africa rose by 4.7%, revenues increased by 11.6%. Sales in Latin America and Canada decreased by 1.6%, while revenues increased by 6.6% comparing to 2011.

In absolute terms, the company delivered to the markets of the world 927 billion cigarettes (– 915,3 billion in 2011). In the European Union, the decline in sales is due to a decline in demand for legal products in the countries of Southern Europe, which are in a serious economic depression, as well as in France.

Markets of Egypt, Russia, and Turkey provide outstanding results. Good results in the Asian markets of Indonesia, Philippines, Thailand, and Vietnam have been slightly flattened by lower indices in Japan and Korea.

Shipment on the Russian market in 2012 grew by 3.8%, due to the overall growth of the market share of the company and particularly good results in the 4th quarter. Market share, as measured by Nielsen, was 26.3%, showing a good (at present) increase of half a percent per year. Capacity of the Russian market is estimated at 170 billion cigarettes. Three major brands, such as «Parliament» (+15%), «L & M» and «Next» (+11,7%) in total showed especially significant trend (+3,7%).

Globally, if to talk about the flagship brands, «Marlboro» showed a growth (+0,5%, to 301.6 billion cigarettes), «L & M» (+4%, to 93.7 billion), «Bond Street» (+4 , 1%, to 46.8 billion cigarettes) and «Parliament» (+10,1%, to 43.4 billion cigarettes). These absolute figures are related to cigarette sales in all countries of the world. Because results are related to the company Philip Morris International Inc., separated from Altria in 2008, these figures do not include the results of “Philip Morris” in the U.S.

In Japan, the import of foreign cigarettes grows. For the fourth quarter of 2012, one of the largest tobacco companies in the world, Philip Morris International, which manufactures the most popular brands of cigarettes, stated that the increase in the supply of its tobacco products in Japan increased by 6 percent. The increase in the import of cigarettes in the country mainly relates to the events of March 11, 2011. After the earthquake and tsunami, Japanese company Japan Tobacco Inc., which is the third largest company in the world producing tobacco, has been forced to reduce the supply of cigarettes in the internal market. The empty niche was occupied by the products of the company Philip Morris International, which acquired in 2010 the Philippine company Fortune Tobacco Co. in order to support its business in the Asian sector (Blane, Draca, 2010).

Profit of tobacco giant Philip Morris International Inc. in 4-quarter rose by 11% on increased sales in Asia, Eastern Europe, and the Middle East.

Improvement in demand in Asia (on the largest volume market for Philip Morris) has led to an increase in profit in the last quarter of 2012. But a stronger dollar is slowly consuming opportunities for profitable growth of Philip Morris.

If we sum up the showed above results, the volume of sales in the last reporting period in Asia rose by 5.7%, sales in the European Union fell by 5.7%, sales in Eastern Europe, the Middle East and Africa grew by 7.1 %, sales in Latin America and Canada decreased by 1.1%. Philip Morris profit in the 4th quarter rose to $ 2.1 billion, or $ 1.25 per share (from 1.89 billion, or $ 1.08 per share, a year earlier). Excluding write-downs, taxes, and other items, adjusted earnings rose to $ 1.24 per share (from $ 1.10 per share a year earlier). Net income, excluding excise taxes, increased by 2.8% to 7.9 billion dollars and increased to 6.4% excluding currency fluctuations. Analysts recently expected a profit at $ 1.22 per share, and revenue at 8.01 billion dollars. Philip Morris has narrowed the outlook for the year, due to the prevailing exchange rates, and now expects adjusted earnings per share in the range of 5,12-5,18 5,10-5,20 dollar comparing with last year expectations of 1 dollar per share.

In 2011, the giant Philip Morris owned approximately 16.0% of the global cigarette market outside the U.S., or 28.1% excluding China and the U.S. Philip Morris is number one company in 13 countries and ranks second in the other 10 of the 30 countries with the largest volume of sales of cigarette products (Moodliar, 2001).

Thus, the results of the company can be assessed in different ways, but they point out that the strategic capabilities of the company can provide sustainable competitive advantage.

Consideration of possible new strategies is rather complicated issue as the company is quite successful and it is promoting all possible strategies in all areas. But after considering the company’s work, it should be said that it a little missed one direction. The strategy of further encouragement of own staff should be established.

Constant training employees should be established. To implement all the strategic goals, the staff should have a high level of competence. The ability to control the quality and delivery process is necessary to maintain the customer base. Attracting of customers is based on the ability to communicate and negotiate, the ability to know and understand the client environment, customer needs, formulate value proposition, and successfully conduct a transaction. It requires skills that must be taught. Therefore, the further development of a personnel reserve, strengthening the effectiveness of the management and the organization as a whole, support a balanced and competitive compensation and benefits is a necessary condition for further success.

In some markets, the company already has a scheme of work with the staff., we propose to strengthen and establish it at all markets. In addition, the center of self-education should be on the territory of the firm, where workers can browse their skills and knowledge in their spare time. The company should cooperate with different companies that provide training and development of personnel in various fields. Department of Human Resources should also develop training programs for the management of the factory, using advanced methods and techniques of increasing leadership and management skills, rising initiative, and creativity, and much more.

But it should be said that the company is conducting a satisfactory policy with staff. It just should be strengthen and set up at all levels.

Electronic cigarettes  can be another strategic promising avenue for Phillip Morris. Recently, “Philip Morris acquired the rights to the technology that will allow people to inhale alkaloid of tobacco, not consuming traditional smoke, which contains tar and carbon monoxide.

Nicotine spray system has been developed by Jed Rose, director of the Center for Study of Smoking in Durham (USA). “Philip Morris” has turned his attention to the invention of professor Rose and bought the patent. E novelty has become very popular in Japan, and the pace of its conquest of the market suggests that it is worth to invest in this direction.

Thus, Philip Morris International has different development strategies that can provide and have provided sustainable competitive advantages for it. The company also should develop and strengthen own personnel strategy.

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