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Philip Morris International Inc McKinsey 7S Analysis

Philip Morris International Inc Overview

Philip Morris International Inc. (PMI), established in 2008 following its spin-off from Altria Group, is headquartered in Lausanne, Switzerland. The company operates as a leading international tobacco company, primarily focused on manufacturing and selling cigarettes, smoke-free products, and related electronic devices and accessories. PMI’s corporate structure is organized around geographic regions and product categories, including combustible tobacco products and reduced-risk products (RRPs).

As of the latest fiscal year, PMI reported total revenues of $31.76 billion and a market capitalization of approximately $140 billion. The company employs over 71,000 individuals worldwide. PMI maintains a significant global presence, with operations in over 180 markets across the Americas, Europe, the Middle East, Africa, and Asia.

PMI’s primary industry sector is tobacco, with a growing focus on RRPs, including heated tobacco and e-vapor products. The company’s market positioning varies across regions, with strong market share in traditional cigarette markets and increasing penetration in the RRP segment. PMI’s stated mission is to deliver a smoke-free future by replacing cigarettes with RRPs. Key milestones include the development and commercialization of IQOS, PMI’s flagship heated tobacco product. Recent strategic priorities include accelerating the transition to RRPs, expanding geographic reach, and enhancing operational efficiency. Challenges include navigating regulatory complexities, addressing public health concerns, and managing the decline in traditional cigarette consumption.

Part 2: The 7S Framework Analysis - Corporate Level

1. Strategy

Corporate Strategy

• PMI’s overarching corporate strategy centers on transitioning from a traditional tobacco company to a technology-driven organization focused on smoke-free products. This involves significant investment in R&D, manufacturing, and marketing of RRPs.
• The portfolio management approach emphasizes diversification within the nicotine space, balancing investments in traditional cigarettes with the growth of RRPs. The rationale is to mitigate risks associated with declining cigarette consumption while capitalizing on the potential of RRPs.
• Capital allocation philosophy prioritizes investments in RRPs, with a focus on markets with favorable regulatory environments and consumer acceptance. Investment criteria include market size, growth potential, and regulatory feasibility.
• Growth strategies encompass both organic growth through product innovation and market expansion, as well as acquisitive growth through strategic acquisitions of companies in the RRP space. For example, the acquisition of Swedish Match for $16 billion in 2022 expanded PMI’s portfolio of smoke-free products.
• International expansion strategy involves targeted market entry approaches, focusing on countries with supportive regulatory frameworks and consumer demand for RRPs. This includes leveraging existing distribution networks and establishing partnerships with local retailers.
• Digital transformation strategies focus on enhancing consumer engagement, optimizing supply chain operations, and improving data analytics capabilities. This includes investments in e-commerce platforms, digital marketing, and data-driven decision-making.
• Sustainability and ESG strategic considerations are integrated into PMI’s business operations, with a focus on reducing environmental impact, promoting responsible marketing practices, and addressing social concerns related to tobacco use. PMI aims to be carbon neutral in its direct operations by 2025.
• Corporate response to industry disruptions and market shifts involves adapting to changing consumer preferences, navigating regulatory challenges, and mitigating risks associated with declining cigarette consumption. This includes investing in R&D, diversifying product offerings, and engaging with stakeholders to shape regulatory policies.

Business Unit Integration

• Strategic alignment across business units is achieved through corporate-level strategic planning processes, performance management systems, and resource allocation decisions.
• Strategic synergies are realized across divisions through shared R&D capabilities, manufacturing facilities, and distribution networks. For example, the R&D division develops technologies that are used in both heated tobacco and e-vapor products.
• Tensions between corporate strategy and business unit autonomy are managed through a decentralized organizational structure that allows business units to adapt to local market conditions while adhering to overall corporate objectives.
• Corporate strategy accommodates diverse industry dynamics by tailoring product offerings, marketing strategies, and regulatory engagement approaches to specific market conditions.
• Portfolio balance and optimization approach involves regularly assessing the performance of different business units and allocating resources to those with the highest growth potential and strategic alignment.

2. Structure

Corporate Organization

• PMI’s formal organizational structure is a matrix organization, combining geographic regions with product categories. This structure allows for both regional adaptation and product-specific expertise.
• The corporate governance model includes a board of directors with diverse backgrounds and expertise, responsible for overseeing the company’s strategic direction and performance.
• Reporting relationships are structured to ensure clear lines of accountability and decision-making authority. Span of control varies depending on the level of management and the complexity of the business unit.
• The degree of centralization vs. decentralization is balanced, with corporate functions providing strategic guidance and oversight, while business units have autonomy to manage their operations and adapt to local market conditions.
• Matrix structures and dual reporting relationships are used to facilitate cross-functional collaboration and knowledge sharing.
• Corporate functions include finance, legal, human resources, and corporate affairs, while business unit capabilities include sales, marketing, R&D, and manufacturing.

Structural Integration Mechanisms

• Formal integration mechanisms across business units include cross-functional teams, shared service centers, and corporate-level committees.
• Shared service models are used for functions such as finance, IT, and human resources, providing economies of scale and standardization.
• Structural enablers for cross-business collaboration include matrix structures, cross-functional teams, and knowledge management systems.
• Structural barriers to synergy realization include siloed organizational structures, conflicting priorities, and lack of communication.
• Organizational complexity can impact agility by creating bureaucratic processes and slowing down decision-making.

3. Systems

Management Systems

• Strategic planning and performance management processes involve setting corporate-level objectives, developing business unit plans, and monitoring performance against targets.
• Budgeting and financial control systems are used to allocate resources, track expenses, and ensure financial accountability.
• Risk management and compliance frameworks are in place to identify, assess, and mitigate risks related to regulatory compliance, product safety, and financial performance.
• Quality management systems and operational controls are used to ensure product quality, manufacturing efficiency, and supply chain reliability.
• Information systems and enterprise architecture are used to manage data, support business processes, and enable decision-making.
• Knowledge management and intellectual property systems are used to capture, share, and protect intellectual property assets.

Cross-Business Systems

• Integrated systems spanning multiple business units include enterprise resource planning (ERP) systems, customer relationship management (CRM) systems, and supply chain management (SCM) systems.
• Data sharing mechanisms and integration platforms are used to facilitate data exchange and collaboration across business units.
• Commonality vs. customization in business systems is balanced, with some systems standardized across business units and others tailored to specific market conditions.
• System barriers to effective collaboration include data silos, incompatible systems, and lack of integration.
• Digital transformation initiatives across the conglomerate include investments in cloud computing, data analytics, and artificial intelligence.

4. Shared Values

Corporate Culture

• The stated core values of PMI include integrity, innovation, and responsibility. The actual values also emphasize performance, collaboration, and customer focus.
• The strength and consistency of corporate culture vary across business units, with some units more aligned with corporate values than others.
• Cultural integration following acquisitions is managed through communication, training, and leadership alignment.
• Values translate across diverse business contexts by adapting communication and training materials to local languages and cultures.
• Cultural enablers to strategy execution include a shared commitment to innovation, a focus on customer satisfaction, and a culture of continuous improvement.
• Cultural barriers to strategy execution include resistance to change, lack of collaboration, and a focus on short-term results.

Cultural Cohesion

• Mechanisms for building shared identity across divisions include corporate events, employee recognition programs, and internal communication channels.
• Cultural variations between business units reflect differences in market conditions, regulatory environments, and business models.
• Tension between corporate culture and industry-specific cultures is managed through communication, training, and leadership alignment.
• Cultural attributes that drive competitive advantage include a focus on innovation, a commitment to quality, and a customer-centric approach.
• Cultural evolution and transformation initiatives are used to adapt to changing market conditions and strategic priorities.

5. Style

Leadership Approach

• The leadership philosophy of senior executives emphasizes strategic thinking, innovation, and collaboration.
• Decision-making styles are typically data-driven and consultative, involving input from multiple stakeholders.
• Communication approaches are transparent and proactive, with regular updates on company performance and strategic initiatives.
• Leadership style varies across business units, with some leaders more directive and others more empowering.
• Symbolic actions, such as attending industry events and visiting manufacturing facilities, demonstrate leadership commitment to strategic priorities.

Management Practices

• Dominant management practices across the conglomerate include performance management, project management, and risk management.
• Meeting cadence is regular and structured, with a focus on reviewing performance, discussing strategic issues, and making decisions.
• Collaboration approaches include cross-functional teams, shared workspaces, and online collaboration tools.
• Conflict resolution mechanisms include mediation, arbitration, and escalation to senior management.
• Innovation and risk tolerance in management practice are encouraged, with support for experimentation and new ideas.
• Balance between performance pressure and employee development is maintained through training programs, mentorship opportunities, and career development planning.

6. Staff

Talent Management

• Talent acquisition strategies focus on attracting top talent from diverse backgrounds and experiences.
• Talent development strategies include training programs, mentorship opportunities, and leadership development programs.
• Succession planning and leadership pipeline are in place to identify and develop future leaders.
• Performance evaluation and compensation approaches are aligned with corporate objectives and individual performance.
• Diversity, equity, and inclusion initiatives are used to promote a diverse and inclusive workforce.
• Remote/hybrid work policies and practices are in place to support employee flexibility and work-life balance.

Human Capital Deployment

• Patterns in talent allocation across business units reflect strategic priorities and business needs.
• Talent mobility and career path opportunities are available to employees who demonstrate high potential and performance.
• Workforce planning and strategic workforce development are used to ensure that the company has the right skills and capabilities to meet its strategic objectives.
• Competency models and skill requirements are used to define the skills and knowledge needed for different roles.
• Talent retention strategies and outcomes are monitored to ensure that the company retains its top talent.

7. Skills

Core Competencies

• Distinctive organizational capabilities at the corporate level include strategic planning, financial management, and regulatory affairs.
• Digital and technological capabilities include data analytics, e-commerce, and digital marketing.
• Innovation and R&D capabilities are focused on developing new products and technologies in the RRP space.
• Operational excellence and efficiency capabilities are focused on improving manufacturing efficiency, supply chain reliability, and cost management.
• Customer relationship and market intelligence capabilities are focused on understanding customer needs and preferences, and adapting product offerings and marketing strategies accordingly.

Capability Development

• Mechanisms for building new capabilities include training programs, partnerships with external organizations, and investments in R&D.
• Learning and knowledge sharing approaches include internal training programs, online learning platforms, and knowledge management systems.
• Capability gaps relative to strategic priorities are identified through skills assessments and performance evaluations.
• Capability transfer across business units is facilitated through cross-functional teams, knowledge sharing platforms, and mentorship programs.
• Make vs. buy decisions for critical capabilities are based on cost, expertise, and strategic importance.

Part 3: Business Unit Level Analysis

Selected Business Units:

1. Combustible Tobacco (Cigarettes): The traditional business unit focused on manufacturing and selling cigarettes.
2. Heated Tobacco (IQOS): The business unit responsible for the development, manufacturing, and commercialization of IQOS.
3. Oral Tobacco (Swedish Match): The business unit responsible for the development, manufacturing, and commercialization of oral tobacco products.

Business Unit 1: Combustible Tobacco (Cigarettes)

1. 7S Analysis:
   • Strategy: Maximize profitability while managing decline.
   • Structure: Traditional hierarchical structure.
   • Systems: Mature, well-established systems for manufacturing, distribution, and marketing.
   • Shared Values: Focus on efficiency, cost control, and regulatory compliance.
   • Style: Conservative leadership, emphasis on operational excellence.
   • Staff: Experienced workforce, focus on operational skills.
   • Skills: Manufacturing, distribution, and marketing of cigarettes.
2. Unique Aspects: High regulatory scrutiny, declining market demand.
3. Alignment: Aligned with corporate strategy in terms of generating cash flow to fund RRP investments.
4. Industry Context: Highly regulated, mature industry.
5. Strengths: Established market presence, strong brand recognition.Improvement Opportunities: Streamline operations, reduce costs.

Business Unit 2: Heated Tobacco (IQOS)

1. 7S Analysis:
   • Strategy: Drive growth through innovation and market expansion.
   • Structure: Agile, cross-functional teams.
   • Systems: Developing systems for manufacturing, distribution, and marketing.
   • Shared Values: Focus on innovation, customer satisfaction, and regulatory compliance.
   • Style: Entrepreneurial leadership, emphasis on innovation.
   • Staff: Skilled workforce, focus on technical and marketing skills.
   • Skills: R&D, manufacturing, and marketing of heated tobacco products.
2. Unique Aspects: High growth potential, complex regulatory environment.
3. Alignment: Aligned with corporate strategy in terms of transitioning to smoke-free products.
4. Industry Context: Emerging, rapidly evolving industry.
5. Strengths: Innovative product, strong brand recognition.Improvement Opportunities: Scale up manufacturing, expand distribution.

Business Unit 3: Oral Tobacco (Swedish Match)

1. 7S Analysis:
   • Strategy: Expand market share and product portfolio.
   • Structure: Relatively autonomous structure, integrated post-acquisition.
   • Systems: Established systems for manufacturing, distribution, and marketing of oral tobacco products.
   • Shared Values: Focus on quality, tradition, and customer satisfaction.
   • Style: Collaborative leadership, emphasis on market knowledge.
   • Staff: Experienced workforce, focus on sales and marketing skills.
   • Skills: Manufacturing, distribution, and marketing of oral tobacco products.
2. Unique Aspects: Strong market position in Scandinavia and the US, diverse product portfolio.
3. Alignment: Aligned with corporate strategy in terms of expanding smoke-free product offerings.
4. Industry Context: Growing market for oral tobacco products, varying regulatory environments.
5. Strengths: Strong brand portfolio, established distribution network.Improvement Opportunities: Expand geographic reach, integrate with PMI’s global operations.

Part 4: 7S Alignment Analysis

Internal Alignment Assessment

• Strongest Alignment Points: Strategy and Shared Values are strongly aligned, with a shared commitment to transitioning to smoke-free products.
• Key Misalignments: Structure and Systems may be misaligned, with traditional hierarchical structures and mature systems in the combustible tobacco business unit hindering innovation and agility.
• Impact of Misalignments: Misalignments can slow down decision-making, reduce innovation, and limit the company’s ability to adapt to changing market conditions.
• Alignment Variation: Alignment varies across business units, with the heated tobacco business unit exhibiting stronger alignment than the combustible tobacco business unit.
• Alignment Consistency: Alignment consistency varies across geographies, with some markets more receptive to RRPs than others.

External Fit Assessment

• Fit with Market Conditions: The 7S configuration is well-suited to the changing market conditions, with a focus on transitioning to smoke-free products.
• Adaptation to Industry Contexts: The company adapts its 7S elements to different industry contexts by tailoring product offerings, marketing strategies, and regulatory engagement approaches to specific market conditions.
• Responsiveness to Customer Expectations: The company is responsive to changing customer expectations by investing in R&D, developing new products, and improving customer service.
• Competitive Positioning: The 7S configuration enables the company to maintain a strong competitive position in the tobacco industry, while also positioning itself for growth in the RRP space.
• Impact of Regulatory Environments: Regulatory environments have a significant impact on the 7S elements, with the company adapting its strategies and operations to comply with local regulations.

Part 5: Synthesis and Recommendations

Key Insights

• PMI’s strategic shift towards smoke-free products necessitates a comprehensive alignment of all 7S elements.
• Interdependencies between elements are critical, with strategy driving structure, systems, and skills.
• Unique conglomerate challenges include managing the decline of traditional cigarettes while scaling up RRPs.
• A key advantage is PMI’s global reach and established distribution network.
• Alignment issues requiring attention include streamlining organizational structures, enhancing digital capabilities, and fostering a culture of innovation.

Strategic Recommendations

• Strategy: Prioritize RRP investments, optimize portfolio by divesting non-core assets, and focus on markets with favorable regulatory environments.
• Structure: Streamline organizational structures, reduce bureaucracy, and empower business units to adapt to local market conditions.
• Systems: Invest in digital technologies, improve data analytics capabilities, and integrate systems across business units.
• Shared Values: Foster a culture of innovation, collaboration, and customer focus.
• Style: Promote entrepreneurial leadership, encourage risk-taking, and empower employees to make decisions.
• Staff: Attract and retain top talent, develop skills in digital technologies and RRPs, and promote diversity and inclusion.
• Skills: Invest in R&D, develop capabilities in digital marketing, and enhance operational excellence.

Implementation Roadmap

• Prioritize: Focus on quick wins, such as streamlining organizational structures and improving data analytics capabilities.
• Sequence: Implement long-term structural changes, such as divesting non-core assets and investing in digital technologies.
• KPIs: Track progress by monitoring revenue growth, market share, customer satisfaction, and employee engagement.
• Governance: Establish a corporate-level committee to oversee implementation and ensure accountability.

Conclusion and Executive Summary

PMI is undergoing a significant transformation, shifting from a traditional tobacco company to a technology-driven organization focused on smoke-free products. The current state of 7S alignment is mixed, with strong alignment in some areas and misalignments in others. The most critical alignment issues include streamlining organizational structures, enhancing digital capabilities, and fostering a culture of innovation. Top priority recommendations include prioritizing RRP investments, optimizing the portfolio, and investing in digital technologies. Enhancing 7S alignment will enable PMI

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