Philip morris Pest analysis

PEST

The key micro-environmental factors which might affect future performance of PMI can be identified as below: POLITICAL/ LEGAL

Political barrier such as legal factor and government tax might become the hindrance for PMI to emerge its strategy in business operation.

Cigarette is a product which has bad effect on the health, therefore imposes many strict regulations. A report on Tobacco Free Initiative (TFI) stated that there are 2.3 billion of people protected from smoke free law. Moreover, details in Wikipedia shows that by the year 2012 there are more than 100 countries with active smoking ban. These indicate falling of revenue to PMI.

It has been almost impossible for PMI to promote its brand to public through the restriction of government on advertising and sponsorship. Marlboro was once ranked as Top 20 best global brands by Interbrand in 2009, has no longer appeared in Interbrand’s Top 100 due to the lack of social media presence.

According to WHO, price is the primary instrument of tobacco. The World Bank review concluded that 10% rise in cigarette price will lead to 4% of fall in demand. International Tax and Investment Centre (ITIC) reported that current tax plans in Russia (second largest tobacco market) could cause the cigarette price to be five times higher by 2018. The Russian Finance Ministry has planned an increase in excise duties on tobacco by around 40% in 2013 and 2014 and 10% hike in 2015. [Trefis Team, 2013] If the law has successfully approved, there could be an accelerated decline in cigarette volume in region due to the sharp increase in cigarette price.

ECONOMIC

PMI possess over 15.7% world market share of cigarettes [wikinvest, n.d] and market capital of $138.31 billion [Philip Morris Market Cap, 2013], at the same time selling product with stable demand due to the addictive nature of the product. Therefore, PMI is not sensitive to recession and economic downturn.

Cigarettes are considered as a product with price inelastic. As aforementioned, the price elasticity estimated by World Bank shows that the percentage change in price will not affect the demand of cigarette at the same level. Thus, slightly increase of the price will not have much effect to the tobacco demand

Diagram below indicates the overall cigarette consumption since PMI spun off from Altria group has slightly improved, despite the slight fall on EU region mainly due to tougher restrictions in countries such as Australia and Russian etc. On top of it is quite stable, maintaining at a range between 860 billion to 930 billion units of cigarette regardless of economic factor such as unemployment, inflation, government policy and taxes.

SOCIAL

The world number one cigarette brand Marlboro leads PMI to be criticized as main contributor of smoking related death globally. In order to rehabilitate itself in the public eye, PMI has contributed significantly to the public. PMI’s annual report 2012 reported it has contributed over $38 million to more than 250 organisations in over 60 countries globally to implement programs within areas of Hunger and Poverty, Education, Rural Living Conditions, Domestic Violence and Disaster Relief.

PMI is actively engaged in Corporate Social Responsibility (CSR) in developing social awareness against harm of cigarette through its official webpage. In addition, it supported regulation and is developing products based on the principle of harm reduction. Moreover, PMI is firmly opposed to child labour that is vulnerable to “green tobacco sickness”.

Despite all these, PMI is held guilty of causing 6 million tobacco-related deaths every year. According to WHO, tobacco-related deaths will increase to more than 8 million each year by 2030.

Actions has taken from few countries by anti – smoking groups to reduce the population of smoking, such as the proposed of smoking license in Australia, forcing young smoker to take test of health risk knowledge and pay fee to smoke. At the same time, encourage smokers to quit by rewarding with financial incentives for permanent license surrender. [Imogen Crispe,2012] Moreover, the Health Promotion Board (HPB) has proposed to ban smoking for those born in Singapore in and after year 2000. [Kevin Naughton, 2013]

Although PMI’s retail volume remains more or less the same in last few years, the company does concern about the fact that smoking has started to be viewed as something inappropriate. The whole world is fighting against smoking to the greatest extent particularly in Europe region.

TECHNOLOGICAL

PMI has invested heavily in implementing work methodologies consistent with Design Chain, Supply Chain and Customer Chain Operations Reference model, Lean Manufacturing and Six Sigma principles. As a result, PMI was awarded as the winner of the Global Supply Chain Operational Excellence Award for its 3 years hard work in implementing product development times, superior supply chain performance and improve financial returns. [Supply Chain Council, 2012]

Product innovation and packaging has become important to PMI in communicating with customers since the banned of tobacco advertising. Two of the impressive innovations of PMI are the L&M U-spin cigarette which has a unique filter that allows smokers to choose the strength of the flavor and Parliament with “Frensnel lens” designed pack making it stand out on the shelf. [Gus Lubin, 2012] Innovation not only helps in business growth, but also leads to competitive advantage.

PMI trying to create something better than current electronic cigarette targeting products that not only contained less harmful nicotine but also maintain the taste and sensory experience similar to the traditional cigarettes. They called it “Next Generation Products” (NGPs).

To do so, PMI bought the global rights to a nicotine aerosol technology from investors including Jed Rose, the director of Duke University’s Duke Center for Nicotine and Smoking Cessation Research [Melissa Korn, 2011]. PMI’s research and development (R&D) department includes a team of scientists led by Jed Rose with expertise across a range of disciplines including biology, chemistry and computing. The key focus area of R&D is to understand the mechanism of diseases caused by smoking and to reduce the level of toxic chemical compound produced (more than 7000 smoke constituents) during the burning of tobacco in cigarette.

In 2012, the company has announced plans to invest €500 – €600 million, building two NGP manufacturing facilities in Europe with an initial capacity of 30 billion units, with a goal to commercialise in 2016/2017.