Activities and global presence of Philip Morris International

Introduction

The purpose of this report is to analyze the transnational company in terms of its core activities and global presence. This report will analyze the strategies that company has employed over the years to sustain growth and several legal challenges that were faced. In addition, the analysis of one of the company’s subsidiary will be provided as well as some recommendations.

A transnational company, also known as a multinational company, is a “one that has one or more investments located abroad, in countries other than that of its headquarters” (Mead & Andrews, 2009). In other words, it is a company that has its main headquarters in one country (home country) and operates in some other countries (host countries).

Company overview

Philip Morris International (PMI) is the leading international tobacco company that spun off from its previous mother company the Altria Group on March 28th 2008 with manufactured goods sold in approximately 160 countries worldwide. Philip Morris International’s tobacco products consist of traditional cigars and cigarettes as well as smokeless products such as “snuff” and chewing tobacco. Although Philip Morris International has headquarters in New York, NY, all of its processes are performed globally though its operation center situated in Lausanne, Switzerland.

Prior to its separation from Altria, PMI has historically produced the highest balanced sales revenue and operating income out of all of the segments in Altria’s portfolio. Main reason of the spinoff of PMI from Altria Group was to tolerate stakeholders to profit directly from tobacco revenue. As a consequence of separation, each shareholder of Altria obtained, for every share of Altria held, a share in the new independently traded and autonomous Philip Morris International. Another factor in the companies’ separation is difference in demand for international vs. domestic tobacco deals (Wikinvest, n.d.).

With their various brands led by Marlboro in the first rank worldwide, followed by L&M as the fourth most popular brand PMI in 2009 estimated 15,4% share of the international cigarette market. Other seven brands rank in the top fifteen brands worldwide. Company contains a strong combination of international and local products that appeals to a broad range of adult smokers. PMI through the history was expanding their business throughout a blend of organic development, geographic growth and acquisitions. They already have a history of acquiring and integrating companies, the last one was acquisition of Rothmans Inc. of Canada. PMI is proud of its employees and finds them as a most important asset and the strength of the company. Company recruits highly motivated, talented and united by the goal of venture in providing adult smokers with high excellence and original tobacco products. Its global workforce is more than 77,000 employees and consists of more than 100 nationalities. PMI like all other tobacco producers is aware of diseases and addictiveness caused by their product, thus company communicates about the health risks of smoking and support a comprehensive and broad regulation of tobacco products. PMI is proactively working with stakeholders and the governments to campaign for regulations that are related to all tobacco products and are based on the code of harm decline. Company’s support for regulations extends across every market where its product is being sold. With PMI world-class research and development potentials, they focus on the development of products with the capability to reduce the risk of tobacco-related diseases. The newest state-of-art R&D center was recently opened in Neuchatel, Switzerland. For PMI Social Responsibility starts with their product – cigarettes. That is one of the reasons why PMI is assigned to communicate regarding the health risks of smoking in an open and transparent way, and to sustain tobacco regulations everywhere their products are traded. Main competitors of PMI are (share price is mentioned in the brackets):

Imperial Tobacco Group ($60,10)

British American Tobacco ($75,75)

Japan Tobacco International (N/A).

In 2009, PM earned a total of $25.0 billion in total revenues. Due to recession company lost negligible amount of revenues, in 2008 PMI earned $25.7 billion, thus in effect PMI’s net income struggled significantly, net income declined from $6.9 billion in 2008 to $6.6 billion in 2009 (Philip Morris International (PM), 2010).

In comparison to 2005 PMI is positively growing year by year. In 2005 PMI had a net income of $5.6 billion and it increased nearly by 16% in 2009 to $6.6 billion. Earnings per Share (EPS) jumped from 2.66$ in 2005 to 3.37$ in 2009. Share price raised from 34.21$ per share in 2008 to 59.50$ per share in 2010, 15th of December (Spain, 2010).

Strategies employed

External growth strategies

Every company sets goals and objectives for future development and one of the most widely used strategies is an external growth. It offers rapid expansion and diversification, greater speed in achieving desired results, opens new markets, increases the market share, leads to costs savings, spreads business risks and improves company’s competitive advantage. There are several ways for a company to grow externally such as through strategic alliances, joint ventures, partnerships, mergers and acquisitions, franchising and operating a subsidiary.

Throughout the Philip Morris history there were quite a few cases that company undertook to grow externally. The most common were joint ventures, mergers and acquisitions, and forming a subsidiary.

Joint venture is an alliance of two or more companies that satisfies strategic goals of the parties (Mead & Andrews, 2009).

Merger is a combination of two or more companies where one single company is formed and parties share interest in the new corporation, while acquisition is performed mainly in unfriendly way when one company is bought by another against its will.

Operating a subsidiary requires a parent company to hold at least 50% of shares in another entity.

In 1992 PMI acquires a majority holding in state-owned Czech Republic Tabak AS. The deal was worth $420 million and it was the largest single investment by a U.S. company in central Europe at the time. The reasons for this acquisition were mainly access to new market and it was done during the time of privatization that eased the purchase of the Czech company. Because of the same reasons in the beginning of 1990’s PMI acquires factories in Kazakhstan, Lithuania, and Hungary.

In 2003 PMI acquires majority stake in Papastratos Cigarette Manufacturing S.A. for €368 million. Papastratos is the largest cigarette manufacturer and distributor in Greece which had long lasting relations with PMI. This deal was made out of the mutual interest of both parties, hence it is more a merger than acquisition. The reasons for it were combination of Papastratos attractive brand and excellent reputation with technological know-how of PMI.

Also in 2003, PMI acquires 74.22% of DIN Fabrika Duvana AD Nis in Serbia which continued by the following increase in holdings up to 80% in 2007. Fabrika Duvana is the biggest tobacco factory in Serbia and Montenegro that has a dominant position in this market. PMI now operates through 14 subsidiaries in Serbia.

In 2005 PMI acquires PT HM Sampoerna Tbk in Indonesia and Compania Colombiana de Tabaco SA (Coltabaco) in Colombia. Both of the companies are the major cigarette manufacturers in their countries. Big growth opportunities, access to Indonesian market and strong presence of company’s brands in the Asian duty free market that were one the main reasons for this acquisition (Moodie, 2005). Coltabaco was very attractive because of its established network that involved distribution, import, export and sale of a wide range of local brands.

The same year PMI made an agreement with the China National Tobacco Company (CNTC) which allowed the licensed production and distribution of Marlboro China and the establishment of an international 50-50 joint venture outside of China (Philip Morris International, 2010). That was a strategic move for both parties that offered a presence of Chinese brands on the global market, extended the export of tobacco products from China and discovered other business opportunities.

In 2007 PMI acquires an additional 50.2% stake in Lakson Tobacco Company in Pakistan. This deal contributed into bringing its total holding to approximately 98%. Lakson is the second largest tobacco company in its domestic market and the reasons for this acquisition were to combine “PMI’s international expertise and global brand portfolio with Lakson Tobacco’s local knowledge and strong brand” (Reuters, 2007).

In 2009 PMI establishes a joint venture with Swedish Match AB to commercialize smoke-free tobacco products worldwide. In 2010 PMI announces an agreement with Fortune Tobacco Corporation in the Philippines. Companies agreed to combine their core businesses into a new company called PMFTC that will control 90% of a local market.

One of the difficulties that PMI encountered during its early expansion was a licensing agreement with Japan that was mutually beneficial for both until Japan started producing brands that were competing with PMI products. As the result, PMI took back the license that led to the loss of profits in this market for both companies.

History of PMI is full of examples of external growth strategies, however there are several differences that occurred during competitive comparison. Imperial Tobacco Group (ITG) during its history put a big effort into diversification, therefore most of the acquisitions and mergers are with unrelated industries such as food, beverage and leisure. British American Tobacco has a long history of continuous expansion. The diversification is also part of its strategy, however of less importance than in ITG. Japan Tobacco International is the youngest company out of all competitors and it is mainly focusing on expansion into related industries to ensure global presence.

Human resources strategies

Working for Phillip Morris means working for the global leader in the tobacco business. Taking this into account, expectations are placed on the highest level. Being in such a challenging and vigilant industry where the space to make mistakes is highly minimized, the exceptional performance of employees is essential in order to meet company’s goals and retain its current position. People in PMI are constantly provided with incentives since they are one of the most valuable reasons for achieving company business goals. Moreover, international environment where more than 80 languages are spoken, truly have a positive impact on people in a way that they become more open-minded and expand their horizons. Employees coming from different backgrounds with unique characteristic and life experiences presents pushup factor and they keep company moving further (Philip Morris USA, n.d.). PMI cares about its employees since it considers that key success lays in its people, their ability to adapt to the market changes, and sends the message in domestic market and across the national borders.

PMI invests in employees and supports their growth trough individual development and well structured career management. Furthermore, company believes in providing the continuous opportunities in order to stimulate future development, advancement and increase in overall productivity (Butler & Campbell, 2004). Strong compensation and benefit programs are designed to encourage, retain, attract and motivate employees. PMI’s employees collect some of the biggest paychecks and enjoy lavish benefits. Benefits vary from country to country and different job positions. For example, Senior Brand Manager obtains $145.000, Associate principal scientists – $130.000, Sales manager – $72.000, Engineer – $87.000 etc. Even thought salaries are higher than average, is just a small incentive comparing to the other benefits and motivation programs that PMI offers. Upon the starting date, complete medical coverage is provided, annual preventive health care checkups, dental coverage up to $2.000 annually, paid time off, personal health advocate programs, employee assistance program in case if employee faces some family problems and so on. Beyond the basic benefits they provide scholarships for employee children up to $5,000, employee stock purchase program, matching gift plan (up to $30.000 annually), national merchant service discounts and service products such as vehicles, electronics and other produces. This again proves the fact that PMI has a high appreciation for their people and that it strives to create healthy and pleasant environment.

Creating capable team that can meet every day challenges requires clear vision, commitment and constant development programs. PMI is passionate about organizational development and it strives to enrich people lives. There is a wide variety of development and training programs designed that range depending on the specific job and departmental experience. Those programs are developed with aim to create more enjoyable and relaxing atmosphere where employees from the entry level could collaborate with their managers. Moreover, goal of those programs is to build up trust, integrity and respect in both levels. Completing objectives of such trainings enables employees to become more productive and enhance their contribution in the current role. As mentioned those trainings vary depending on the position, department and they include hourly workers, first line supervisors and upper level managers.

One of the examples is the training for the Territory Sales Managers Foundation, where the sales people have a chance to acquire broad knowledge and improve their existing skills. This particular training includes Quality Call Process, Territory planning, Category Management and Leadership development program which certainly enhances employee performance. This kind of programs intend to prepare employees for the future and incentives them for coming promotions. Another example of a program that PMI offers is a Leadership Journey for new managers, when the new managers and the promoted ones undertake one week journey in order to understand better the PM leadership model and their leadership responsibilities. All those trainings report better atmosphere, increase in employee’s satisfaction that is supported by the low percentage of the staff turnover (4.2%). Around 60% of PMI’s employees have worked and stayed in the company for more than 11 years. This is due to the career perspectives and many possibilities that PMI offers in order to meet customer’s expectations and retain satisfied employees in a dynamic and constantly evolving industry. There is a ton of opportunities to move up in the company but people need to be committed, courageous and ready to meet challenges and overcome all obstacles. For employees this means lifelong experience, education opportunity with goal to understand company standards and with that both sides can gain benefits.

PMI emphases on retaining people on the highest positions such as Vice presidents, Senior operating officers through empowering them to make valuable decisions and providing them with adequate benefits with aim to lead company to the future prosperity. PMI’s employees that have reached those admirable positions have been working for many years and all of them are well aware of company’s culture, values and goals. Mr. Camilleri, who is currently a Chairman and Chief Executive officer, has joined PMI’s team in 1978 and has gone through many different positions during his career (Philip Morris International, 2010). Furthermore, taking a risk of losing some of the main people or inability to keep them could cause big changes in PMI’s operations. Though, for that reason company does not just take care about top managers but it as well takes care about their families, such as finding the best school for employee’s children and houses in case of relocation. However, nowadays mostly young people are the once who are promoted because they are being moved all around the world with aim to successfully execute company standards.

Corporate responsibility and environmental consciousness strategies

Philip Morris is publicly known as a harmful company since cigarette related diseases kill millions of people every year. However, tobacco is considered to be a lawful product which each person has the freedom to consume or not. There is no difference from the right of owning a handgun or consuming alcohol, which are also harmful products that kill millions of people a year.

PMI understands the situation it is in and even though people might think company only sells harmful products, there is a high importance in investments of a large percentage of company’s revenues to prove the contrary.

The company has spent over a $100 million on campaigns to persuade children not to smoke. Even though main revenues come from selling harmful products, company is still concerned by the effects these products have on human health.

The company does not only spend money in that area, in fact Philip Morris is known to be one of the world’s most generous companies with an annual contribution of $60 million in cash and $15 million in food to fight hunger, domestic violence and to support art.

Company also invested over $8.5 billion in order to reimburse the costs of smoking related diseases.

All these factors show that PMI is keeping up its image and that it is concerned with the negative effects its products have. That is why company invests an important sum of money in domains such as charity, campaigns against youth smoking and many more.

Philipp Morris does not only focus on corporate social responsibility but it also has a high environmental consciousness. One of the company’s main goals is to reduce environmental impacts and promote sustainability of natural resources. In 2004 the company introduced the Good Agriculture Practices (GAP) that encourages farmers to reduce their environmental impacts but also supports good labor management.

Philip Morris buys quality tobacco from local independent farmers in order to support the local economy. A contract is signed between the farmers and the company, where farmers receive support from the buyer.

PMI also operates tobacco farming abroad, in countries such as Brazil, Argentina, and Macedonia. There is a big focus on sustainability of agricultural resources, reduction of environmental degradation, training communities, enriching forestation etc.

Following are the areas that PMI is mostly concerned with:

Air and energy impacts: the objective of the company is to use a cleaner form of energy, pursue renewable energy sources. In order to fulfill these objectives, the company has done several efforts, for example the conversion to more energy efficient lighting systems, improvements in the use of HVAC systems. As you can see in the table below there have been considerable changes since the implementation of these efforts.

Solid waste and recycling: the company’s aim is to generate less solid waste by using fewer materials. In order to do so the company started to recycle and compost many of its materials.

Water: Water is one of the main components used for tobacco processing and cigarette manufacturing, here as well the company’s objective is to reduce as much as possible the consumption of water. The water reduction is not only done on site, but the company also informs the farmers to watch the consumption of water. PMI within 4 years managed to reduce the water consumption around 30%.

Cigarette butt litter prevention: Cigarette butt litter is a main contributor to polution in the environment, that is why PMI has put in place several strategies to decrease this problem. With the help of other companies, PMI managed to create awareness among smokers that cigarette butts are considered to be litter and that they should be disposed in an adequate place. Installations of ash receptacles have been placed in strategic locations, encouragement of portable litter devices has been made and most important enforcement in litter laws has been made.

Fig.1. Environmental concerns

Due to Philipp Morris’ commitment in decreasing environmental effects and creating awareness among smokers considerable improvements have been made as you can see on the table below. Philipp Morris is a company that is highly concerned with environmental issues and Corporate Social Responsibility. Company is ready to invest in these areas in order to improve the image, to respect the environment and to participate in areas such as charity.

Legal challenges

Tobacco industry is a lawful business however there are many rules and regulations enforced by governments that companies operating in this sector must follow. In the past decades the number of tobacco-related lawsuits and other legal issues has increased and major companies quite often are present in court. For example, in US there were 7,500 cases against tobacco companies during past 50 years, but less than 30 cases were won by plaintiffs. There are three main types of cases: individual, class actions and health care cost recovery cases.

Philip Morris supports the tobacco regulation programs based on the principal of harm reduction throughout all the chain of production. However, there are many legal cases that company faced.

Fig.2. Timeline of PMI lawsuits

The majority of lawsuits in this timeline are from individuals accusing the company for early deaths and diseases of smokers. However, there were also some examples of lawsuits filed by PMI against some government organizations and agencies. As it is seen on the timeline graph most of the lawsuits took place during 1995 – 2005. In 1996 there were 125 lawsuits against PMI, one of them could have been the largest class action case in history. Tobacco companies including PMI were accused of hiding evidence that smoking is addictive and of manipulating nicotine levels in cigarettes (Collins, 1996). The judges overturned the decision that would allow every individual to join the lawsuit against tobacco companies which would result in major expenditures.

The most recent legal case is known as a Philip Morris International vs. Uruguay. The company filed a lawsuit against the country’s government followed by an attempt to enforce the extra regulations on packaging of cigarettes in the country. The company says it is being treated unfairly, since the new law requires 80% of each side of the pack of cigarettes be covered with images of health effects of smoking. PMI argues that this type of regulation conflicts with the intellectual property rights, since it limits the possibilities for branding. Uruguay is not the first country to enforce similar requirement, however PMI has never filed a lawsuit like this one. The company says that they are not trying to stop government from protecting the health of its people, however it should be done in a way that does not clash with the rights of the company. There are many critics for this case, mainly because of a threat that major companies like PMI are abusing the power by not allowing governments to implement legislation that attempts to protect the people.

As many other tobacco companies, PMI’s competitors were also involved in numerous legal cases. In 1994 British American Tobacco was arguing that if American Tobacco joins together with Brown & Williamson, the joint company would have an 18 % share of the United States cigarette market and will be closely competing with Philip Morris and RJR Nabisco, which have more than 70 percent of the market.

In 2010 The Yokohama District Court on 21st of January 2010 dismissed a damages suit filed by three former smokers who argued they have developed health problems, including lung cancer, because Japan Tobacco Inc. has sold cigarettes despite recognizing their harmfulness and the state has not imposed important regulations on distribution. But this case was rejected due to filed in January 2005 document, saying they smoked of their own will and there was no evidence smoking had directly caused their disease.

In 2010 Imperial Tobacco lost legal case stating that cigarette ads in Scotland will be banned on over-the-counter cigarette displays and vending machines by Scottish government.

Tobacco lawsuits are quite popular in media, however they are not the best way to achieve tobacco control aims. Legal actions are costly, ineffective, repeatedly wasteful and unnecessary. The best way to reach tobacco control aims is not litigation but regulation (Philip Morris International, 2010).

Subsidiary analysis

Looking at Philip Morris International timeline, the latest joint venture they undertook was with the Swedish company Swedish Match. Swedish Match is a company focusing on substitute products for cigarettes such as chewing tobacco, snus, matches, pipe tobacco, etc. The joint venture was created between the two companies to expand the non-cigarette products worldwide, including all countries except USA and Scandinavia. The profits are being shared 50-50 and the reason behind the deal is to combine production skills of Swedish Match with the international sales network established by PMI. There is a projection that the amount of people smoking will decline in the future due to higher taxes upon cigarettes and laws implied on public smoking. For Swedish Match, which is mainly operating in the Scandinavian countries and in US, there is an opportunity to expand and introduce its products as a solution to the smoking problem to the countries affected. Now, PMI also sees the opportunity in the substitute products.

The joint venture was signed in 2009 and operation center was decided to be in Stockholm, Sweden. The deal required presence of six board of directors for the new established company, three from each side (Philip Morris International, 2009). For a person who is interested in participating in this venture, it is important to consider the following aspects:

Political perspective. Sweden is quite similar to the American way of government. Sweden is a stable democratic country. Therefore, bribes to the government to allow business would not be necessary. On the other hand, there are strict laws towards smoking and that is the reason why snus has become higher consumed product throughout the past decades than cigarettes. However, even snus and other no-smoking products are being regulated by the government in form of high taxation. Matches are another product produces by Swedish Match which is included in the expanding program of the joint venture. The issue rising in this matter is the production material of matches. For instance, northern Sweden has a rich amount of wood, but if the demand will increase due to the expansion, more wood will be required. This will wake the attention of the government since the Swedish government is working hard on environmentally friendly programs to help preserve the natural resources (Swedish Match, 2010).

Economic perspective. The Swedish tax system will not affect the product since it is sold outside the country. The economic problem will be faced in the countries where iJV is planning to expand into. For example Germany has a law that company cannot advertise tobacco products, therefore it will be difficult to raise awareness of a new product. Expansion will require more resources and more production tools. Since the tobacco growing and manufacturing facilities are placed in two different countries, the materials need to be transported from one place to another. This becomes of importance when looking at trade barriers and trade agreements between countries.

Social perspective. A venture in this will not survive and maintain its image without increased social responsibility. The major argument for snus, for example, is that it is less harmful then cigarettes since. However, new campaigns and additional research would be still required to develop. In terms of the potential wood needed for increased production mentioned earlier, the solution would be to invest in the sustainability of forest reserves in Sweden.

Technological perspective. There might be a big issue in terms of developing more or new transportation channels to the countries where IJV is planning to expand into. Therefore, the challenge might be a negotiation process with partner countries that will allow new business to operate. In the long term, the production can be moved to these countries due to low production cost and economies of scale could be achieved. Coming back to Sweden and its match production.

Conclusion

This report analyzed the most important aspects of a transnational company. Philip Morris is an example of a major player in the tobacco industry that still has a lot of opportunities to grow. The logical step that can be recommended is to expand into unrelated industries, in order to diversify products and secure sustainable growth in the future. As a tobacco company, Philip Morris will be stereotyped as a company that “kills people”, and it is very important to continue social responsibility programs and offer environmental support. The tobacco industry is a highly competitive industry with several more opportunities to develop. In addition, there are numerous threats imposed by the government and the trend is that the regulations will increase. Therefore, in order to stay in the game and increase market share, Philip Morris International must follow the market signals, be cooperative with governmental rules and regulations and diversify its products.

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