Harvard Case - A World Without Cigarettes? Building a Sustainability Materiality Matrix
"A World Without Cigarettes? Building a Sustainability Materiality Matrix" Harvard business case study is written by Vanina Farber, Maria Helena Jaen. It deals with the challenges in the field of Strategy. The case study is 13 page(s) long and it was first published on : Nov 10, 2020
At Fern Fort University, we recommend Philip Morris International (PMI) adopt a comprehensive strategy that leverages its existing strengths and resources to navigate the evolving tobacco landscape. This strategy should focus on:
- Accelerating the transition to smoke-free products: PMI should prioritize investment in research and development, manufacturing, and marketing of smoke-free alternatives to accelerate their adoption.
- Building a robust sustainability framework: This framework should address environmental, social, and governance (ESG) issues, including reducing the environmental impact of its operations, promoting responsible consumption, and engaging with stakeholders on ethical concerns.
- Developing a clear and compelling value proposition for consumers: PMI needs to effectively communicate the benefits of smoke-free products to current and potential consumers, emphasizing reduced risk and improved health outcomes.
2. Background
This case study explores the challenges and opportunities facing Philip Morris International (PMI) as it transitions from a traditional tobacco company to a smoke-free products leader. The company faces increasing regulatory pressure, public health concerns, and consumer demand for alternative products. PMI's CEO, Jacek Olczak, recognizes the need for a bold strategy to navigate this complex landscape and secure the company's future.
The case study highlights the development of a Sustainability Materiality Matrix, a tool to prioritize ESG issues and inform strategic decision-making.
3. Analysis of the Case Study
Strategic Analysis:
- Porter's Five Forces: The tobacco industry is characterized by intense competition, high barriers to entry, and significant power of buyers (governments and consumers). The threat of substitutes is increasing due to the emergence of smoke-free alternatives.
- SWOT Analysis:
- Strengths: Strong brand recognition, global distribution network, significant financial resources, expertise in tobacco manufacturing and research.
- Weaknesses: Negative public perception associated with traditional tobacco products, potential regulatory risks, dependence on a declining product category.
- Opportunities: Growing demand for smoke-free alternatives, potential for new product development, expansion into emerging markets.
- Threats: Increased regulation, consumer health concerns, competition from other smoke-free product manufacturers.
- Resource-Based View: PMI possesses valuable resources, including its brand, research capabilities, and manufacturing infrastructure. These resources can be leveraged to develop and commercialize smoke-free products.
- Dynamic Capabilities: PMI needs to develop dynamic capabilities, such as innovation, agility, and adaptability, to respond to the rapidly changing tobacco landscape.
Financial Analysis:
- Value Chain: PMI's value chain includes research and development, manufacturing, distribution, marketing, and customer service. The company needs to optimize its value chain to reduce costs and enhance efficiency.
- Business Model Innovation: PMI is transitioning from a traditional tobacco business model to a smoke-free products model. This requires significant innovation in product development, marketing, and distribution.
Marketing Analysis:
- Market Segmentation: PMI needs to identify and target specific consumer segments interested in smoke-free alternatives.
- Product Differentiation: PMI should differentiate its smoke-free products based on features, benefits, and brand positioning.
- Marketing Strategy: PMI needs to develop a comprehensive marketing strategy that leverages digital channels, influencer marketing, and public relations to reach target audiences.
Operational Analysis:
- Manufacturing Processes: PMI needs to optimize its manufacturing processes to produce smoke-free products efficiently and cost-effectively.
- Supply Chain Management: PMI needs to manage its supply chain effectively to ensure the availability of raw materials and components for its smoke-free products.
Sustainability Analysis:
- Environmental Sustainability: PMI needs to reduce its environmental footprint by reducing emissions, conserving water, and minimizing waste.
- Social Responsibility: PMI needs to address concerns about the health and well-being of its consumers and employees.
- Corporate Governance: PMI needs to implement strong corporate governance practices to ensure ethical and responsible business conduct.
4. Recommendations
1. Accelerate the Transition to Smoke-Free Products:
- Invest heavily in research and development: PMI should allocate significant resources to develop innovative smoke-free products that meet consumer needs and regulatory requirements.
- Expand manufacturing capacity: PMI should invest in new manufacturing facilities or upgrade existing facilities to produce smoke-free products at scale.
- Develop a comprehensive marketing strategy: PMI should launch targeted marketing campaigns to educate consumers about the benefits of smoke-free products and encourage trial and adoption.
- Leverage digital channels and social media: PMI should utilize digital channels and social media platforms to reach target audiences and build brand awareness.
2. Build a Robust Sustainability Framework:
- Develop a comprehensive ESG strategy: PMI should develop a clear and ambitious ESG strategy that addresses environmental, social, and governance issues.
- Set measurable targets and track progress: PMI should set quantifiable targets for its ESG performance and track progress regularly.
- Engage with stakeholders: PMI should engage with stakeholders, including investors, consumers, employees, and government agencies, to gather feedback and build trust.
- Report on ESG performance transparently: PMI should publish annual reports detailing its ESG performance and progress towards its goals.
3. Develop a Clear and Compelling Value Proposition:
- Communicate the benefits of smoke-free products: PMI should clearly communicate the health benefits of smoke-free products compared to traditional cigarettes.
- Emphasize reduced risk and improved health outcomes: PMI should focus on the scientific evidence supporting the reduced risk associated with smoke-free products.
- Address consumer concerns about safety and effectiveness: PMI should be transparent about the science behind its smoke-free products and address any concerns about safety and effectiveness.
- Position smoke-free products as a viable alternative for smokers: PMI should position its smoke-free products as a credible and appealing option for smokers looking to reduce their risk.
5. Basis of Recommendations
- Core competencies and consistency with mission: These recommendations leverage PMI's existing strengths in research, development, manufacturing, and marketing, while aligning with its mission to transition to a smoke-free future.
- External customers and internal clients: The recommendations address the needs of both external customers (consumers) and internal clients (employees and stakeholders) by prioritizing consumer health, environmental sustainability, and ethical business practices.
- Competitors: These recommendations position PMI to compete effectively in the evolving tobacco market by focusing on innovation, sustainability, and consumer engagement.
- Attractiveness: The recommendations are expected to enhance PMI's long-term profitability by driving revenue growth and reducing risk.
6. Conclusion
PMI faces a pivotal moment in its history. By embracing a comprehensive strategy that prioritizes smoke-free products, sustainability, and a compelling value proposition, the company can navigate the evolving tobacco landscape and secure a sustainable future. By focusing on innovation, responsible business practices, and consumer engagement, PMI can create value for its stakeholders and solidify its position as a leader in the smoke-free revolution.
7. Discussion
Alternatives:
- Continuing to focus primarily on traditional tobacco products: This would be a high-risk strategy, as the traditional tobacco market is declining and facing increasing regulatory pressure.
- Exiting the tobacco industry altogether: This would be a drastic measure that could alienate investors and employees.
Risks:
- Regulatory uncertainty: The regulatory landscape for tobacco products is constantly changing, and PMI faces the risk of new regulations that could impact its business.
- Consumer acceptance: There is no guarantee that consumers will fully embrace smoke-free products, and PMI faces the risk of low adoption rates.
- Competition: PMI faces intense competition from other tobacco companies and emerging smoke-free product manufacturers.
Key Assumptions:
- Consumer demand for smoke-free products will continue to grow: This assumption is based on trends in consumer behavior and the increasing awareness of the health risks associated with traditional tobacco products.
- PMI will be able to develop and commercialize innovative smoke-free products: This assumption is based on PMI's existing research capabilities and its commitment to innovation.
- PMI will be able to manage the regulatory environment successfully: This assumption is based on PMI's experience in navigating complex regulations and its commitment to compliance.
8. Next Steps
- Develop a detailed implementation plan: PMI should develop a comprehensive implementation plan that outlines the specific steps required to achieve its strategic goals.
- Allocate resources and establish timelines: PMI should allocate sufficient resources to support the implementation of its strategy and establish clear timelines for key milestones.
- Monitor progress and make adjustments as needed: PMI should monitor progress towards its goals and make adjustments to its strategy as necessary to address changing market conditions and emerging opportunities.
By taking these steps, PMI can position itself for success in the evolving tobacco landscape and create a sustainable future for its business.
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Case Description
The case is about a company in one of the so-called sin industries that has committed to phase out cigarettes - the origin of its sins - in favor of a smoke-free future based on reduced-risk products. In early 2020, Huub Savelkouls, Chief Sustainability Officer at Philip Morris International (PMI) and Jennifer Motles Svigilsky, PMI's Director of Social Impact & Sustainability, were working on the company's first ever integrated report due for publication in June 2020. Motles, perceived skepticism and mistrust about PMI's strategy and, specifically, serious doubts about the health effects of IQOS. In 2017, the UN Environment Programme Finance Initiative, in conjunction with Tobacco Free Portfolios, had called for a Tobacco-Free Finance Pledge. By 2020, the pledge had 141 signatories and 41 supporters. Some environmental, social and governance (ESG) investors still seemed interested in PMI's strategy, but not many were ready to engage publicly. In January 2020, they met with Professor Robert G. Eccles (PMI's advisor on matters regarding sustainability, social impact and investor engagement since May 2019). They were ready to build and validate PMI's materiality matrix and try to align stakeholders' demands with PMI's priorities. They needed to look at PMI's value proposition in more depth in light of the feedback received from stakeholders and the significance of PMI's impact on society and the environment. And they needed to do this in the context of a blanket exclusion of the tobacco industry by ESG investors, mistrust from stakeholders and reputational liabilities. Motles stressed the importance of validating the sustainability materiality matrix because she thought that materiality was a foundational concept in integrated reporting. The case ends with Motles feeling the challenge (a make-or-break moment for her career) and how much was at stake; the sustainability team could not let their stakeholders down and destroy the rapport they were trying to build.
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