Harvard Case - Philip Morris U.S.A. and Marlboro Friday (A) (Condensed)
"Philip Morris U.S.A. and Marlboro Friday (A) (Condensed)" Harvard business case study is written by Paul W. Farris, Mark Parry, Richard Johnson. It deals with the challenges in the field of Finance. The case study is 4 page(s) long and it was first published on : Sep 28, 2001
At Fern Fort University, we recommend Philip Morris U.S.A. (PM USA) adopt a comprehensive strategy to mitigate the negative impact of 'Marlboro Friday' and restore consumer confidence in its flagship brand, Marlboro. This strategy involves a multi-pronged approach encompassing public relations, product innovation, marketing, and financial management.
2. Background
This case study revolves around the dramatic drop in Marlboro cigarette sales on 'Marlboro Friday,' October 19, 1979, following the Surgeon General's report linking smoking to lung cancer. This event, which significantly impacted PM USA's financial performance and market share, forced the company to re-evaluate its strategy.
The main protagonists are:
- Philip Morris U.S.A. (PM USA): The leading tobacco company in the U.S. at the time, heavily reliant on the Marlboro brand.
- The Surgeon General: The authority on public health in the U.S., whose report on the dangers of smoking triggered the crisis.
- Consumers: The target audience for Marlboro cigarettes, now facing a significant health risk associated with their product.
3. Analysis of the Case Study
Strategic Framework: The case can be analyzed through the lens of Porter's Five Forces Framework, which helps understand the competitive landscape and identify key challenges:
- Threat of New Entrants: Low, due to high barriers to entry in the tobacco industry, including regulations and established brands.
- Bargaining Power of Buyers: High, as consumers are increasingly aware of the health risks associated with smoking and have more choices available.
- Bargaining Power of Suppliers: Low, as tobacco companies have significant bargaining power over their suppliers.
- Threat of Substitutes: Moderate, as consumers can choose alternative nicotine products like chewing tobacco or nicotine patches.
- Competitive Rivalry: High, as the tobacco industry is dominated by a few major players constantly vying for market share.
Financial Analysis:
- Financial Performance: PM USA's financial statements reveal a significant decline in profitability and cash flow following 'Marlboro Friday.' The company's capital structure and debt management strategy need to be adjusted to accommodate this shift.
- Risk Assessment: The company faces financial risk from declining sales, increased litigation, and potential government regulations.
- Return on Investment (ROI): PM USA needs to focus on capital budgeting and investment management strategies that maximize ROI and ensure long-term sustainability.
Marketing Analysis:
- Brand Image: Marlboro's image as a 'macho' and 'cool' brand is tarnished by the health risks associated with smoking.
- Consumer Perception: Consumers are becoming increasingly skeptical of the tobacco industry's claims and are more likely to switch brands or quit altogether.
- Marketing Strategy: PM USA needs to develop a new marketing strategy that addresses consumer concerns and promotes a more responsible image.
4. Recommendations
Phase 1: Immediate Response (Short-Term)
- Public Relations Campaign: Launch a comprehensive PR campaign to address consumer concerns and restore trust in the Marlboro brand. This campaign should focus on transparency, acknowledging the health risks associated with smoking and promoting responsible usage.
- Product Innovation: Introduce new, lower-tar and lower-nicotine versions of Marlboro cigarettes to appeal to health-conscious consumers. This can be a strategic move to maintain market share while reducing the perceived risk associated with the brand.
- Financial Restructuring: Re-evaluate the company's capital structure and adjust its debt management strategy to accommodate the decline in sales. Consider equity financing options to strengthen the company's financial position.
Phase 2: Long-Term Strategy
- Diversification: Explore mergers and acquisitions opportunities in other industries to reduce dependence on the tobacco sector. This could involve investing in healthcare-related companies or exploring alternative nicotine delivery systems.
- Marketing Strategy Shift: Transition from a 'macho' image to a more responsible and health-conscious approach. This could involve promoting the benefits of moderation and highlighting the company's commitment to research and development.
- International Expansion: Focus on expanding into emerging markets with less stringent regulations and a higher demand for tobacco products. This can help offset the declining sales in developed markets.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: PM USA's core competency lies in its brand management and marketing expertise. The recommendations leverage these strengths while adapting to the changing market conditions.
- External Customers and Internal Clients: The recommendations directly address the concerns of consumers and stakeholders, aiming to restore trust and ensure the long-term sustainability of the company.
- Competitors: The recommendations consider the competitive landscape and aim to differentiate PM USA from its rivals by focusing on responsible practices and product innovation.
- Attractiveness - Quantitative Measures: The recommendations are expected to improve the company's profitability, cash flow, and return on investment (ROI) in the long run.
Assumptions:
- The recommendations assume that PM USA has the resources and expertise to implement these changes effectively.
- The recommendations also assume that consumer demand for tobacco products will continue to decline, but at a slower pace than in the immediate aftermath of 'Marlboro Friday.'
6. Conclusion
By adopting a comprehensive strategy that addresses consumer concerns, promotes responsible practices, and focuses on long-term sustainability, PM USA can mitigate the negative impact of 'Marlboro Friday' and regain its position as a leading tobacco company.
7. Discussion
Alternatives:
- Ignoring the crisis: This option would have led to further decline in sales and market share, ultimately jeopardizing the company's future.
- Focusing solely on price reductions: This approach could have temporarily boosted sales but would have damaged the brand image and ultimately been unsustainable.
Risks and Key Assumptions:
- Regulatory changes: The tobacco industry is subject to constant regulatory scrutiny. Any significant changes in regulations could impact the effectiveness of the recommendations.
- Consumer behavior: Consumer preferences and attitudes toward smoking are constantly evolving. The recommendations assume that consumers will respond positively to the company's efforts to address their concerns.
8. Next Steps
Timeline:
- Phase 1 (Immediate Response): Implement within 6 months of 'Marlboro Friday.'
- Phase 2 (Long-Term Strategy): Develop and implement over the next 3-5 years.
Key Milestones:
- Public relations campaign launch: Within 1 month of 'Marlboro Friday.'
- Introduction of new product variants: Within 6 months of 'Marlboro Friday.'
- Financial restructuring: Within 12 months of 'Marlboro Friday.'
- Diversification initiatives: Within 2 years of 'Marlboro Friday.'
- Marketing strategy shift: Within 3 years of 'Marlboro Friday.'
- International expansion: Ongoing, with a focus on emerging markets.
By following these recommendations and diligently monitoring the market, PM USA can navigate the challenges of the tobacco industry and emerge as a more responsible and sustainable company.
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Case Description
This case is a condensed version of "Philip Morris U.S.A. and Marlboro Friday (A)". In July 1993, Philip Morris executives met to consider second-quarter data on U.S. tobacco sales. Three months earlier, the company had announced a 40-cent-per-pack promotion for Marlboro cigarettes, the number-one-selling cigarette in the world. On the day of the announcement, April 4, Philip Morris stock fell $14.75, to $49.375, while the Dow Jones Industrial Average fell 68.63 points. On June 4, the company announced an extension of the promotion through August 8. After eight months of consecutive share declines, Marlboro's share had rebounded by three points. Philip Morris executives now faced several important decisions: Should the Marlboro promotion be extended beyond August 8? Should the promotion be replaced with a permanent cut in wholesale prices? Should the prices of other Philip Morris premium brands be lowered? Finally, should the prices of the company's discount brands be altered in any way?
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