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Case

PHILIP MORRIS INTERNATIONAL—THRIVING IN A HOSTILE WORLD

In March 2008, the Altria board approved the spin-off of Philip Morris International (PMI). This newly created entity is a leading international tobacco company with products sold in around 160 countries. It is also the world’s third most profitable consumer goods company after Procter & Gamble and Nestle. The change was supposed to free the tobacco giant’s global business of legal and public-relations headaches in the United States.
The breakup should also make it easier for PMI to market a slate of new smoking concepts each targeted to different foreign markets. Ahead of the reorganization, Philip Morris streamlined the international new product decision-making process: local managers now have the ‘‘power to decide’’ which new ideas may have legs in a particular region. PMI also overhauled its manufacturing: it halted imports from the U.S. sister company and, instead, now gets its entire supply from 42 manufacturing centers around the world.
While smoking rates in developed countries have steadily declined, they are still rising in many emerging markets such as Pakistan (up 42% since 2001), Ukraine (up 36%), and Argentina (up 18%). China, with 350 million smokers (50 million more than the U.S.), is a tremendous opportunity for PMI. One of the company’s goals is to gain a foothold in China. For the time being, though, foreign tobacco companies such as PMI are limited to importing cigarettes for sale in China. Imports are subject to high import duties and stringent quotas. After lengthy years of negotiating, PMI reached a joint venture deal with CNTC (China National Tobacco Corporation). PMI hopes to develop CNTC as a key strategic partner. As part of the deal, Marlboro is manufactured and sold under license by CNTC in China. PMI also plans to market Chinese brands internationally, primarily in Central and Eastern Europe, and Latin America. PMI will adapt these Chinese brands to make them more appealing to non-Chinese smokers. Chinese smokers prefer full-tar brands while most Europeans and Latin Americans favor lower-tar brands. Chinese brands’ packaging also tends to be too flashy for non-Chinese.
PMI also launched a slate of new products in markets around the world. For instance, to appeal to Southeast Asian consumers PMI launched Marlboro Mix 9, a sweet-smelling cigarette with twice the nicotine and tar of a conventional U.S. cigarette. Mix 9 debuted in Indonesia and was later introduced in other countries in the region. Other recent new Marlboro launches include Marlboro Filter Plus and Marlboro Intense. Marlboro Filter Plus (sold as Marlboro Flavor Plus in some countries) is PMI’s most significant innovation in years. It has a unique multi-chamber filter and is sold in an original sliding pack. The brand is available at three tar levels (1 mg, 3 mg, and 6 mg) and generally retails at a premium.

Another major global product launch for PMI in 2008 was the Marlboro Intense brand. This new product explores the concept of a rich, flavorful smoke in a shorter cigarette. It was first launched in Turkey and has since then been expanded to a wide range of EUmarkets (e.g., Belgium, Italy, Germany, Portugal). It achieved a 0.6 percent market share in September 2008.
To cope with smoking bans in mature markets PMI is developing the Heatbar, an odd-looking electronic device that resembles an electric toothbrush. This new device releases 90 percent less smoke than a normal cigarette. Smokers would be able to rent or buy the gadget. PMI has shown prototypes of the Heatbar to regulators in Australia, New Zealand, and the U.K., all countries with stringent anti-smoking regulations. Another recent new product is TBS (‘‘Tobacco Block System’’), which was first introduced in Germany. The tool targets smokers who prefer roll-your-own tobacco that is taxed significantly less than normal cigarettes. The TBS kit enables smokers to quickly roll their own cigarettes.
To compete with low-priced smokes, PMI plans to launch new products with fancier packaging. One example is the Marlboro Filter Plus mentioned earlier. In 2008, PMI also test marketed a new more modern pack of Marlboro Gold in Austria, France, and Italy. Another critical market for PMI is Japan where continuous innovation is crucial. In the summer 2008, the firm launched Marlboro Black Menthol in Japan where smokers have a strong preference for menthol smokes.
In February 2009 PMI entered into a joint venture agreement with Swedish Match AB to commercialize Swedish Snus and other smoke-free tobacco products. Snus is a moist powdered tobacco product that is consumed by placing it beneath the upper lip for an extended time. Despite the fact that it does not affect the lungs as cigarettes do, the product is banned in most EU countries.

DISCUSSION QUESTIONS

1. Some anti-tobacco critics sounded alarm bells about the PMI spin-off fearing that the cigarette maker now has more freedom to pursue sales growth in emerging markets by shielding the company from U.S. legal and regulatory issues. Do you agree with that concern?

2. The case discusses PMI’s recent new product launches around the world. What is the major thrust of these innovations? Is PMI on the right track? Why or why not?

3. What else would you recommend PMI to do in the area of new product development?