Introduction
Many multinational tobacco companies are successfully doing business in the world cigarette market. In an attempt to compensate for the loss in the domestic market, multinational tobacco companies are pursuing global strategies. An increase of international business activities including M&A, joint ventures, and alliances, precipitated by the growth in competition has also been witnessed over the past decade.
Philip Morris International is among the largest processors of tobacco globally. The company’s management team is led by CEO André Calantzopoulosndré. The company boasts of a workforce of about 81,000 employees ("Who We Are", 2018). The workforce of the company is diverse and multicultural. Part of the company’s values is that it’s committed to being a good employer. The company also strives to be both socially and environmentally responsible. Out of 15 top international brands of tobacco in more than 180 markets, the company produces 6 of them, a good example being Marlboro which is the world’s number one ("Who We Are", 2018).
The company operates about 46 production facilities in 32 various countries. The company has about 150 million customer base all over the world. The firm has more than 400 experts drawn from different sectors with the primary task of developing smoke-free products. Additionally, its products are sold to more than 150 markets around the world ("Who We Are", 2018).
Globalization Process of Philip Morris International
The corporation sold approximately 234.25 billion cigarettes in Asia, 256.15 billion in Eastern Europe, Middle East & Africa, 187.29 billion in the European Union and 84.22 billion in Latin America and Canada. The firm has created a global enterprise, with the brand operating in six continents (‘Global cigarette volume of Philip Morris in 2017’, 2018). However, the company has been successful in some countries than others. The three key markets that Philip Morris has experienced success include; Indonesia, which is the largest cigarette market for Philip Morris and the market, continues to grow. In the second fiscal quarter in 2016, the company estimated a total of 83.6 billion units in the Indonesian cigarette market. In 2017, the company’s total cigarette market increased by 5 billion to 88.6 billion units. About a third of the cigarette brand used by most Indonesians is; Dji Sam Soe and Sampoerna and four-fifths of the customers in the country are the ‘white segment’ (Global cigarette volume of Philip Morris in 2017, 2018). One of the strategies that Philip Morris tried to implement in order to tackle the issue of shrinking market was through raising the prices. This, however, did not work since after this move the company saw a decrease in its market shares. The second being, Italy- although the European Market is very small; the EU has been an important part of the organization’s success. This is because of the company’s market penetration and the success of its strategies in many European countries. For example, in the second quarter of the year 2017, the sales in Asia and the EU were close to being the same (Global cigarette volume of Philip Morris in 2017, 2018). However, the EU operation income was $1.07 billion which was higher than $320 million in Asia. Out of all the European Union countries, Italy stands out. For example, by June 2016, Italian cigarettes sold 18.7 billion units of cigarettes; Philip Morris was responsible for more than half the units sold (Global cigarette volume of Philip Morris in 2017, 2018).
Host Country Analysis
As earlier mentioned Philip Morris International has been successful in a number of countries. However, for our host country analysis we will look at Russia. Key country/regional factors affecting PMI choice to invest in Russia include:
1. Smoking culture
Russian is a country well known for its smoking culture and the country holds a large number of Philip Morris International customer base. It’s because of the countries strong smoking culture that I believe makes it a good place for Philip Morris International to invest. According to the Russian business market, about 72.1 billion units of cigarettes were sold in the second quarter of the year 2017. Of those, Philip Morris International sold about 20.5 billion of them. The bestselling brand for the company was Bond Street (8%), Parliament (3.9%) and surprisingly Marlboro was at (1.4%). It’s however important to note that the Russian cigarette market is has been on the decline. 34.9% of adults, which is about 21.9 million of the population, are exposed to smoke in the workplace ("International Legal Materials", 2018).
Here’s a look at some of the statistics that prove how deep the smoking culture is in Russia. At least 30% of the country’s adults smoke or use tobacco-related products ("International Legal Materials", 2018), 60% of the males in Russia smoke. Smoking is such an addiction in the country that most male’s life expectancy is around 60. In addition, 60.4% of the nation’s population use smokeless tobacco, while around 3% smoke water pipe tobacco ("International Legal Materials", 2018). About 22% of Russian women are smokers. About 10% of female youth and 17% of male youth are tobacco smokers, with a quarter of these girls and a third of these boys stating that they started the behavior at the onset of their teen life. Smoking is such an addiction in Russia that about 500,000 Russians die yearly due to cigarette smoking ("International Legal Materials", 2018). 25% all male deaths and 5% of all female deaths in the country are smoking related, with the figure being 15% in the general population.
2. Population
According to recent 2018 population census carried out in Russia. The population of its people was about 143, 968,229 million people. Russia stands as one of the few countries in the European Union that is least likely to have a reduction in its population growth rate. Due to its large population, Russia serves as an important part of the company’s overall strategic vision.
Foreign Entry Strategies
According to Uppsala model, companies gradually intensify their business activities across various markets. The model further states that, firms first gain their stand in the domestic market. This is true because PMI has a strong base in the United States market. Once the company gains a firm domestic market, they then move to foreign markets in countries that have a close either culturally/geographically. This is true, because over the years, PMI has gradually entered foreign markets first from its close neighbor’s until it spread throughout the six continents.
There are many strategies that companies use for foreign entry such as; partnerships, venture, acquisitions and mergers, franchising and operation of a subsidiary. Throughout the history of the company, Philip Morris International, there are quite a few examples of how the company has undertaken foreign entry strategies example being a joint venture. A joint venture is a partnership between two or more company for the purposes of meeting their own strategic goals. Another example is through mergers. Mergers are a combination of two or more companies and in the end, one company is formed, however; both of the companies have shared.
Subsidiary involves a parent company holding about half of the shares in another entity. In 1992, for example, the firm acquired a controlling stake in the Czech company, Tabak. The deal was estimated to be around $420 million. The reason why PMI acquired the company was that they wanted to access the new market. In 2003, PMI acquired the majority stake in Papastratos Cigarette; the firm leading cigarette distributor in Greece. The price of the acquisition was 368 million (Clifton, 2017).
In 2005, Phillip Morris International acquired a majority stake of Compania Colombiana de Tabaco SA in Colombia and PT HM Sampoerna Tbk in Indonesia. The reason for the acquisition of these two companies was because of the company’s strong presence in the Asian market. In 2017, PMI acquired 50.2% additional stakes in Lakson Tobacco Company in Pakistan. This deal increased the company’s total holding to 98%. (Lambert, 2014). In 2009, Phillip Morris International agreed on a joint venture with Swedish Match AB, which saw commercialization of smoke- free tobacco products
Through partnerships, venture, acquisitions and mergers, franchising and operation of subsidiary Philip Morris International have been able to expand its business and achieve its global strategies. So what are the benefits of using this way as a foreign entry strategy?
Through partnerships, venture, acquisitions, and mergers Philip Morris International have been able to obtain quality staff/ additional skills and business intelligence in the field of Tobacco (Kotsogiannis, 2008). Reduced competition is also another benefit of mergers and joint ventures (Kotsogiannis, 2008). Through PMI’S strategy of buying intellectual property rights of rival companies, they are able to reduce their competition. An increase in customer base is also another example. Through the acquisition of companies in various countries, PMI will be able to increase in market share in different countries and thus a wider customer base (Kotsogiannis, 2008). Mergers can also lead to product development. Through joining forces PMI will be able to be more innovative. A good example as earlier mentioned was on 2009, Phillip Morris International agreed on a joint venture with Swedish Match AB, which saw commercialization of smoke- free tobacco products (Lambert, 2014).
Having looked at some of the benefits, here are some of the pitfalls of using the above methods. One of the pitfalls can be culture clash- this is an area PMI should look into deeply. For example, if PMI buys a company and fails to provide a good environment for the top salespeople, research and development team, technical expert and salespeople to flourish. If the company is not careful it can end up losing vital people in the company. To avoid such a scenario PMI should ensure once it acquires a new company, it maintains due diligence in maintaining the positive culture of the company (Kotsogiannis,2008).
Another pitfall is due diligence mistake. For example, PMI makes mistakes and fails to consider issues such as new competition or environmental regulatory changes while acquiring a new company (Kotsogiannis, 2008). This can be very damaging especially if the above critical issues are worse. Another pitfall of mergers and acquisition is if the acquisition cost impacts the company in a negative way. For example, if PMI acquires a company whose rate growth is lower than the company. This can negatively hinder and affect the company’s growth (Kotsogiannis, 2008).
MNCs and their Impacts
In September 2015, the UN’s General Assembly adopted the Sustainable development agenda of 2030 which included 17 goals. Life Below Water, No Poverty, Zero Hunger, Life on Land , Good Health and Well-being, Quality Education, Gender Equality, Clean Water and Sanitation, Reduced Inequality, Affordable and Clean Energy, Partnerships to achieve the Goal, Decent Work and Economic Growth, Industry, Innovation and Infrastructure, Responsible Consumption and Production, Sustainable Cities and Communities, Peace and Justice Strong Institutions (Colglazier, 2015).
In the future, Philip Morris International should focus on Goal number 3, which is; Good Health and well-being. Tobacco although, legal is one of the most harmful substances in the world. Thousands of people have died due to tobacco related issues. The company should focus more on creating smoke free tobacco products. The company should also focus on goal number 8 of providing decent work and economic growth. In the future the company should look into how they can increase their work force to accommodate more people especially, the young people because of the high cases of unemployment among the youth.
References
Clifton, C. (2017). Attacking Tobacco: Philip Morris International v. Uruguay. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2941581
Colglazier, W. (2015). Sustainable development agenda: 2030. Science, 349(6252), 1048-1050.
Global cigarette volume of Philip Morris in 2017, r. (2018). Philip Morris cigarette volume by region, 2017 | Statistic. Statista. Retrieved 1 May 2018, from https://www.statista.com/statistics/500477/cigarette-volume-of-philip-morris-worldwide-by-region/
International Legal Materials. (2018). Retrieved 1 May 2018, from https://www.tobaccofreekids.org/assets/global/pdfs/en/Russia_tob_burden_en.pdf
Kotsogiannis, C. (2008). Mergers and Acquisitions: Benefits for Acquiring and Target Firms. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1465340
Lambert, A. (2004). How Philip Morris unlocked the Japanese cigarette market: lessons for global tobacco control. Tobacco Control, 13(4), 379-387.
Who We Are. (2018). Pmi.com. Retrieved 1 May 2018, from https://www.pmi.com/who-we-are