Harvard Case - PMI'S VISION OF A SMOKE-FREE FUTURE: CAN A TOBACCO COMPANY BE SUSTAINABLE (ABRIDGED)
"PMI'S VISION OF A SMOKE-FREE FUTURE: CAN A TOBACCO COMPANY BE SUSTAINABLE (ABRIDGED)" Harvard business case study is written by Vanina Farber, Natalia Olynec. It deals with the challenges in the field of Strategy. The case study is 24 page(s) long and it was first published on : Oct 4, 2020
At Fern Fort University, we recommend that PMI pursue a multi-pronged strategy focused on disruptive innovation and digital transformation to achieve its vision of a smoke-free future. This strategy should involve a phased approach to transition from a traditional tobacco company to a technology-driven, consumer-centric organization focused on sustainable growth.
2. Background
This case study examines Philip Morris International (PMI), a global tobacco giant, and its ambitious goal to transition away from traditional cigarettes and create a smoke-free future. The company faces significant challenges, including intense competition, growing public health concerns, and increasing regulatory scrutiny. PMI's CEO, Andr' Calantzopoulos, is leading the charge, emphasizing the importance of innovation and corporate social responsibility to navigate this complex landscape.
The main protagonists are:
- Andr' Calantzopoulos: PMI's CEO, driving the company's transformation towards a smoke-free future.
- PMI's Board of Directors: Responsible for overseeing the company's strategy and ensuring its long-term sustainability.
- Investors: Concerned about the impact of the transition on PMI's profitability and future growth.
- Consumers: Seeking alternatives to traditional cigarettes with reduced risk and improved health outcomes.
- Governments and Regulators: Monitoring the tobacco industry and implementing policies to promote public health.
3. Analysis of the Case Study
SWOT Analysis:
- Strengths: Strong brand recognition, global distribution network, significant financial resources, expertise in product development and manufacturing.
- Weaknesses: Negative public perception, dependence on traditional tobacco products, regulatory challenges, potential for consumer resistance to new products.
- Opportunities: Growing demand for smoke-free alternatives, technological advancements in e-cigarette and heated tobacco products, emerging markets with high growth potential.
- Threats: Increasing competition from established and emerging players, evolving regulations, consumer health concerns, potential for lawsuits and litigation.
Porter's Five Forces:
- Threat of New Entrants: High, due to the relatively low barriers to entry in the e-cigarette and heated tobacco product market.
- Bargaining Power of Buyers: Moderate, as consumers have various choices for smoke-free alternatives.
- Bargaining Power of Suppliers: Low, as the supply chain for e-cigarette and heated tobacco products is relatively standardized.
- Threat of Substitutes: High, as consumers can choose from a wide range of nicotine delivery methods, including patches, gum, and vaping devices.
- Competitive Rivalry: Intense, with established tobacco companies and new entrants competing for market share.
Value Chain Analysis:
PMI's core competency lies in its product development and manufacturing capabilities, which are crucial for creating innovative smoke-free alternatives. However, the company needs to adapt its value chain to incorporate new technologies and distribution channels for these products.
Business Model Innovation:
PMI's existing business model is based on traditional tobacco products. To achieve a smoke-free future, it needs to innovate its business model by:
- Diversifying its product portfolio: Expanding beyond traditional cigarettes to include a wide range of smoke-free alternatives.
- Developing new distribution channels: Utilizing online platforms, partnerships, and direct-to-consumer models.
- Adopting a digital-first approach: Leveraging technology for marketing, customer engagement, and data analytics.
- Investing in research and development: Continuously innovating and improving its smoke-free products.
Corporate Governance:
PMI needs to demonstrate its commitment to corporate social responsibility by:
- Transparency and accountability: Openly communicating its vision, strategy, and progress towards a smoke-free future.
- Ethical sourcing and production: Ensuring its products are manufactured responsibly and sustainably.
- Investing in public health initiatives: Supporting research, education, and awareness campaigns on the harms of smoking.
Mergers and Acquisitions:
PMI can leverage mergers and acquisitions to:
- Acquire promising start-ups: Gain access to cutting-edge technology and expertise in the smoke-free sector.
- Expand its geographic reach: Enter new markets and enhance its global presence.
- Strengthen its product portfolio: Acquire complementary products and technologies.
Strategic Planning:
PMI needs to develop a comprehensive strategic plan that outlines:
- Clear objectives: Defining its vision for a smoke-free future and setting measurable targets.
- Phased approach: Gradually transitioning from traditional tobacco products to smoke-free alternatives.
- Resource allocation: Prioritizing investments in research, development, marketing, and distribution.
- Risk management: Identifying and mitigating potential challenges and risks.
4. Recommendations
1. Disruptive Innovation and Digital Transformation:
- Develop a portfolio of innovative smoke-free products: Invest in research and development to create a range of e-cigarettes, heated tobacco products, and other alternatives that meet consumer needs and preferences.
- Embrace digital technologies: Utilize the internet, social media, and mobile platforms to engage with consumers, build brand loyalty, and promote its smoke-free products.
- Leverage data analytics: Collect and analyze data on consumer behavior, market trends, and product performance to optimize its strategy and product development.
2. Strategic Alliances and Partnerships:
- Form strategic alliances with technology companies: Collaborate with leading technology providers to develop innovative products and solutions.
- Partner with public health organizations: Work with NGOs and government agencies to promote awareness of the harms of smoking and the benefits of smoke-free alternatives.
- Engage with retailers and distributors: Develop strong partnerships to ensure wide availability of its smoke-free products.
3. Market Segmentation and Targeting:
- Identify key consumer segments: Target specific groups of consumers who are interested in smoke-free alternatives, such as young adults, smokers seeking to reduce their risk, and former smokers.
- Develop tailored marketing campaigns: Create targeted marketing messages and campaigns that resonate with different consumer segments.
- Utilize social media and influencer marketing: Reach out to consumers through social media platforms and leverage influencer marketing to promote its products.
4. Corporate Social Responsibility and Sustainability:
- Invest in public health initiatives: Support research, education, and awareness campaigns on the harms of smoking and the benefits of smoke-free alternatives.
- Adopt sustainable manufacturing practices: Reduce its environmental footprint by implementing sustainable manufacturing processes and reducing waste.
- Promote responsible consumption: Educate consumers on the safe and responsible use of its smoke-free products.
5. Continuous Monitoring and Evaluation:
- Track key performance indicators: Monitor the performance of its smoke-free products, market share, and consumer satisfaction.
- Conduct regular market research: Stay informed about consumer preferences, emerging trends, and competitive landscape.
- Adapt its strategy as needed: Be flexible and agile in adapting its strategy to changing market conditions and consumer needs.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with PMI's core competencies in product development and manufacturing, while also supporting its mission to create a smoke-free future.
- External customers and internal clients: The recommendations address the needs of consumers seeking smoke-free alternatives, while also considering the interests of investors and employees.
- Competitors: The recommendations aim to position PMI as a leader in the evolving smoke-free market by leveraging its resources, innovation, and strategic partnerships.
- Attractiveness ' quantitative measures if applicable: The recommendations are expected to drive long-term growth and profitability for PMI, although quantifying the exact financial impact is challenging due to the evolving nature of the market.
6. Conclusion
PMI has a unique opportunity to transform itself from a traditional tobacco company to a technology-driven, consumer-centric organization focused on a smoke-free future. By embracing disruptive innovation, digital transformation, and a commitment to corporate social responsibility, PMI can navigate the challenges of the evolving tobacco industry and create a sustainable and profitable business model.
7. Discussion
Other Alternatives:
- Spin-off a separate smoke-free subsidiary: This would allow PMI to focus on its core tobacco business while also pursuing a separate smoke-free strategy.
- Focus solely on traditional tobacco products: This would involve maintaining its current business model and focusing on cost leadership and market penetration in the traditional tobacco market.
Risks and Key Assumptions:
- Consumer acceptance: There is a risk that consumers may not embrace smoke-free alternatives, particularly if they are perceived as less satisfying or more expensive than traditional cigarettes.
- Regulatory uncertainty: The regulatory landscape for smoke-free products is constantly evolving, and changes in regulations could impact PMI's strategy and profitability.
- Technological advancements: The rapid pace of technological advancements in the smoke-free sector could create challenges for PMI in keeping up with competition.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Disruptive Innovation and Digital Transformation | Potential for high growth and profitability, aligns with future trends, enhances brand image | High investment costs, risk of consumer resistance, regulatory uncertainty |
| Spin-off a Separate Smoke-Free Subsidiary | Allows for focused strategy and investment, reduces risk for core tobacco business | Potential for conflicts of interest, may limit resources for both businesses |
| Focus Solely on Traditional Tobacco Products | Lower investment costs, established market presence | Limited growth potential, declining market share, negative public perception |
8. Next Steps
- Develop a comprehensive strategic plan: Outline the company's vision, objectives, and key initiatives for achieving a smoke-free future.
- Establish a dedicated team: Assemble a team of experts in innovation, technology, marketing, and public health to drive the transformation.
- Invest in research and development: Allocate resources to develop a portfolio of innovative smoke-free products.
- Pilot test new products and strategies: Launch pilot programs to test consumer response and refine its strategy.
- Communicate its vision to stakeholders: Clearly communicate its vision, strategy, and progress to investors, employees, consumers, and regulators.
By taking these steps, PMI can position itself for success in the evolving tobacco industry and create a sustainable and profitable business model that aligns with its vision of a smoke-free future.
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Case Description
Philip Morris International (PMI) CEO André Calantzopoulos announced in 2016 a radical pivot in the Marlboro cigarette manufacturer's strategy: the company would shift to "smoke-free" products in more than 180 countries around the world. One of these products was IQOS, a new "heat-not-burn" (HNB) device aimed at providing the world's over 1 billion "adult smokers with better options." The innovation of the products which, PMI claimed, were less harmful than cigarettes was welcomed by many investors and PMI. Calantzopoulos and PMI's Board of Directors believed that its sustainability strategy was critical to the company's long-term success. Nevertheless, convincing important stakeholders that a tobacco company could be part of the solution to rid the world of cigarettes by offering better alternatives was a different matter. The United Nations, World Health Organization (WHO), regulators, public health advocates, and some sustainable investors said that there was no safe level of use and no opportunity for effective engagement with tobacco companies. After a two-year wait, the US FDA issued an order authorizing the sale of IQOS in the US market of 40 million smokers. The FDA found that IQOS was "appropriate for the protection of health." PMI organized the 2020 Stakeholder Engagement Meeting in Lausanne, Switzerland to convene key stakeholders to engage with PMI's smoke-free business transformation.
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