Definition of Industry Market Concept
The tobacco industry consists of many competitors trying to satisfy a specific customer need. Companies such as Philip Morris, RJ Reynolds, Brown and Williamson, and Lorillard hold almost the entire market share in the tobacco industry. While each company has different advertising and marketing techniques, they all target the same customer group. Tobacco companies try their best to generate interest in their particular brand or brands. Companies market a number of attributes that usually include, but are not limited to: taste, flavor, strength, size and image in order to distinguish themselves from competitors (Business Week 179, November 29, 1999). However, all tobacco companies are satisfying the same needs. Many long-time smokers are addicted to the nicotine in cigarettes. They smoke because the nicotine is needed to help them feel normal (Focus group). Many addicts go through withdraw without nicotine. All tobacco companies have nicotine in their cigarettes, which fulfills the need of long-time smokers. Other smokers depend on cigarettes in social settings. Many smoke to look sophisticated and mature. Tobacco companies make many kinds of cigarettes that target different groups. Social smokers may perceive certain brands as more sophisticated, and therefore they shy away from other lesser-known brands. For example, a person who smoked generic cigarettes at the bar may be perceived as uncultured. On the other hand, the smoker with the Marlboro Lights may be more socially accepted because they have a brand name product (Focus group). Many types of cigarettes cater to the many markets of smokers who want to portray a certain image in social settings. Tobacco companies do not create the need to smoke, but try to generate interest in their particular brand (Hays, New York Times, November 24, 1999). Overall, the tobacco companies satisfy consumer demand for the millions of adult Americans who choose to use tobacco by providing differentiated products to different target markets of smokers.
The tobacco industry has developed a rather large array of products. Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson, as well as the other smaller competitors, all provide the same product- cigarettes. The tobacco industry is filled with fierce competitors. But underneath the brand names and images, the product is relatively the same. All tobacco companies produce an inhalant that is made with tobacco, tar, and nicotine. These materials are rolled in a special kind of slow-burning paper for longer smoking time. The cigarettes are approximately three to four inches long and come in packs of twenty to twenty-five. With so many similarities, one would think that the market would resemble that of a commodity. However, through brand marketing and promotions, each cigarette is uniquely different in the mind of the customer.
Boundaries The tobacco industry can be broadly or narrowly defined. Many products use tobacco as the main material. We chose to define the market by focusing on the tobacco and the way it is smoked. Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson are the main competitors in the tobacco industry (Pollack, Advertising Age, August 30, 1999). They produce cigarettes, which are lit and the smoke is inhaled to the lungs. Tobacco products such as cigars, snuff, and chew are considered close substitutes to cigarettes. Cigar smoke is just taken into the mouth, but not inhaled like cigarettes. Snuff and chew do not even contain smoke, but are put on the skin for nicotine absorption. Companies such as Imperial Tobacco, which produce a wide array of chew and snuff products, would be considered a company that provides substitutes to cigarettes. They would not fall in the cigarette industry itself.
2 .Situation Analysis
2.1 Industry Structural Analysis
2.1.1 Threat of Entry
The tobacco industry has a very low threat of entry. A few powerful firms, such as Philip Morris, RJ Reynolds, Lorillard, and Brown and Williamson, control most of the industry (Pollack, Advertising Age, August 30, 1999). Any new entrants would be sure to receive heavy retaliation from the other companies fighting to keep their share of the lucrative industry. For example, Philip Morris is by far the industry leader with estimated tobacco sales of $46.7 billion is 1999 (Business Week 179, November 29, 1999). They have a huge base of resources with which to attack other competitor entrants. They could easily start promotions such as “buy one, get one free” or offer coupons at certain times during the year to discourage entrants to the industry. Many small companies will not be able to compete with the capital requirements in the tobacco industry. The barriers to entering the tobacco industry are numerous. First, the high volume of cigarette sales gives existing firms economies of scale, which would be a disadvantage for newcomers to the market. The products currently on the market are differentiated somewhat in their design, but mostly through the large advertising budgets that are used to promote them. Tobacco companies now pour $4 billion a year into promotions and advertising- nine times what they spent in 1971 (Elliot, New York Times, September 22, 1999). These firms have finely tuned distribution channels, which include legions of sales representatives that vie for shelf space. One of the biggest obstacles to a new entrant would be finding a decent place of the shelf with such heavy-handed competition already occupying that space. Store managers may be reticent to give away prime slots for fear of losing discounts or other offers from major players. Government policy is another possible deterrent to enter the market. Large settlements against the tobacco companies have been the norm in the past several years. Although gigantic companies like Philip Morris are able to handle the charges because of their extensive monetary resources, it is difficult to imagine how a small startup company would be able to burden the expense. Switching costs are very high in the tobacco industry. Many smokers are still smoking the same brand they first started smoking (Focus group). Even if the price of their brand is raised, they would not consider switching to another brand (Focus group). Many companies who would want to come into the industry would not easily take away market share, due to high brand loyalty.
2.1.2 Competitive Rivalry
The tobacco industry is a very competitive market. As mentioned above, about four very large corporations control the entire market. Philip Morris is the biggest company in the industry, but others such as Lorillard and growing in brand name (Pollack, Advertising Age, August 30, 1999). All companies battle for market share through heavy advertising budgets and slotting deals. The cigarette market is well into the maturity stage of the PLC, and some might even argue that given the recent anti-smoking campaigns and lawsuits the industry is nearing the decline phase. However, sales show that decline has not yet been reached. As mentioned before, Philip Morris has estimated tobacco sales of $46.7 billion (Business Week 179, November 29, 1999). Apparently, brand loyalty still exists. Buyers Retailers. The stores that sell tobacco products have a moderate influence on the market. Retailers have some power over manufacturers who need prime slotting to ensure strong sales. However, manufacturers have leveraged quite a bit of power by offering retailers special incentives for giving their products good placement or for installing certain numbers of brand advertisements around the store. To some stores, such as gas stations, losing a major cigarette brand would mean large loss of revenues from customers who would rather go to another gas station to locate their favorite brand. Also, companies are trying to develop closer relationships with bars and coffeehouses. Tobacco companies offer ashtrays, napkins, and matches, saving each buyer thousands of dollars in supply costs (Heuslein, Forbes, January 11, 1999). Retailers now are marketing the brand on coasters and napkins for the company. Consumers. The end-users in the industry also have moderate power. Brand loyalty is very high, and it has been shown that smokers generally chose a brand in their teen year and continue to smoke that brand the rest of their lives (Focus group). However, in the face of a dramatic price hike, consumers have been quick to notice that brands are interchangeable and then go for the lowest price. But the dearth of substitutes for tobacco products makes it difficult for the industry to lose customers all together. Suppliers The suppliers in the tobacco industry have a low level of influence, even though there is no close substitutes that the industry can use in place of tobacco. Tobacco is purchased from farmers, who essentially have to take the market-determined price for their crops. Tobacco is a commodity, so it makes no difference from which supplier a firm buys its materials. The large number of individual farms that supply the industry makes it almost impossible for anyone to raise the price. There is not a threat of forward integration from suppliers because they have none of the tools necessary to manufacture or market tobacco products. The farmers have only the land and equipment necessary to grow the leaf. If they were to try to produce cigarettes, they would probably not be able to compete with the many large companies that have economies of scale (from Threat of Entry section).
The affect of substitutes on profits is also low. Nicotine can be found in cigarettes, as well as cigars, chew, and snuff. But most people will not switch over to chew and snuff if the price of cigarettes rises. Chew and snuff do not substitute for the needs of a cigarette. Cigarettes are smoked for the nicotine and for social acceptance. Chew and snuff are not acceptable substitutes for most smokers; the nicotine is not inhaled but put on the skin for absorption.
3 . Profit Analysis
“Why are tobacco executives still smiling? Simple: They continue to rake in the huge profits from the category despite a decade-long stagnation in dollar and unit sales growth.” (Arrizza, Discount Merchandiser, p 97) Indeed, the tobacco industry has faced much opposition during recent years but still remains profitable. To be specific, there are two main reasons that the industry has continued to be prosperous: addiction and management practices. Government influence and lobbying have also played a smaller role. First, the strong addiction of tobacco has allowed for a very loyal following in the tobacco industry. In fact, most tobacco users are very brand-loyal and therefore less price sensitive than most would think. Not only does this bring in revenue for the companies themselves but for the wholesalers and retailers as well. “The average smoker still smokes 1.2 packs per day, which means strong profits for the industry as a whole” (Heuslin, Forbes, p 160). Buyer power is lower because the smokers depend on the cigarettes to fulfill their addictions. On average, the industry’s profit on cigarette sales is about 23 cents a pack. When the average store sells around 25 packs per day, the industry is bound to make substantial profits (Sullum, Reason, p 18). The loyalty of customers in tobacco has allowed for a successful forecast of future profits in the industry. The management practices of the tobacco industry have also contributed to the industry’s success. For example, The “Retail Masters” program has allowed for strong profits. “Retail Masters is a multi-level program of promoting brands in the retail environment. This program has the potential to increase a store’s cigarette sales by 11 percent” (Arrizza, Discount Merchandiser, p 99). Simply by getting better displays and shelf space, for instance, the tobacco industry could become more profitable. Buyer influence increases because they have the power to delegate displays and shelf space. Overall, if the industry were to constantly maintain better displays and shelf space, tobacco companies as a whole would have a better chance of achieving greater profits. Also, most tobacco companies are introducing new products in order to keep high profit margins. RJ Reynolds, for example, is in the final phase of conducting market studies on its latest product, Eclipse. The company claims the new product reduces second-hand smoke by nearly 90 percent, ridding itself of ash and odors ( Arrizza, Discount Merchandiser, p 98). Tobacco companies are also trying to get a better public image by producing public service announcements such as the “Be Smart, Don’t Start” campaign. And although the industry has been under close scrutiny as of late, their customers are impressed with the message. Again, the marketing management practices behind the tobacco industry bring a promise of strong future profits. As already stated, the profits of the industry look to be good, but there are a lot of changing conditions that might affect the future of the industry. For example, the new product inventions mentioned above could either help or harm the industry depending on how well they do. For example, the new Eclipse cigarette will more than likely be imitated by other competitors, who will also have to invest a great deal of capital to get the product on the market. And finally, tobacco companies are having to pay more and more money for court settlements. Profits can be decreased greatly if money the money is spent defending the company. The government is also a very limiting factor to tobacco. Just over the past decade, the government has passed so many laws that it has forced the tobacco companies to double their prices on cigarette packs. Although the customers still seem to be buying as they have in the past, there is certainly a price ceiling that a customer will not be willing to pay above. It is highly unlikely that the same customers who are currently paying less than three dollars a pack, will pay ten dollars for a single pack of cigarettes. However, if the government keeps increasing excise tax and still allots money to the prosecution during tobacco lawsuits, the industry will be severely handicapped. Overall, as the restrictions of the government increase and lawsuits are lost, the profits of the industry are bound to decrease.
The tobacco industry is an environment with many strong competitors that have many opportunities in the market. There are also many threats, mostly imposed by the government. The tobacco companies play off each other for market share and innovate marketing strategies to fight back and keep the smoking demand. The tobacco industry has limited media coverage due to government restrictions placed over the past two decades. The tobacco companies have been prohibited from advertising on television and radio, and even more recently from billboards and outdoor posters because of the harmful side effects their products may cause. Since so many channels of marketing are closed for the tobacco industry, magazines are the most common method of advertising (Elliot, New York Times, September 22, 1999). Even with magazines and other legal forms of advertising, tobacco makers are still running into restrictions. In each magazine advertisement, a Surgeon General’s warning is required to appear with information about tobacco-related health risks that the product may lead toward. Companies have also been required to create advertisements solely about the harmful consequences of using tobacco products. These ads were a result of an advertising war between the tobacco industry and anti-tobacco campaigns. The tobacco companies were mocking the ads and celebrating those who continued to use tobacco. The government intervened and required the “tobacco warning advertisements” for all tobacco companies (Fairclough, Wall Street Journal, B12, 1999). The government has also intervened with tobacco marketing by altering the slogans and gimmicks the companies use. The government wants the companies to avoid targeting vulnerable markets, such as young children and teenagers under the legal smoking age of 18 years. Since government regulations have become such a threat to the tobacco industry, companies are coming up with creative ways to advertise and appeal to consumers. Some companies are developing “smoker’s lifestyle magalogs”, a combination of a magazine and catalog. The issues come out monthly and contain articles about travel, cooking, and shopping. The magalogs do not contain articles about smoking and do not have pictures of people smoking, but they do advertise tobacco products and accessories. The idea of the magalogs is to portray an image that a smoker’s lifestyle is fun and exciting (Wyatt, New York Times, C5, November, 24, 1999). Tobacco companies are hoping these magalogs will persuade the existing smokers to purchase more. In the past consumers have been proven to remain loyal to one company throughout their lives, but as tobacco prices have steadily increased several times, more brand switching from the premium brands to the lower priced one is occurring. The price increases are decreasing the demand for tobacco products as well. Figures show the number of smokers has decreased 10% in 1999 (Heuslein, Forbes, January 11, 1999). One of the main reasons for the price increases in the tobacco industry is that companies are trying to keep shareholders happy by paying them high dividends. Another reason is that companies need to cover the higher costs that they have incurred from legal settlements with state governments. The premium brand companies are also spending more money on advertising as the prices increase to keep their customers from switching to the lower-cost brands (Fairclough, Wall Street Journal, B12, 1999). The tobacco industry has many strong competitors with varied portions of market share. As of now, the price leader is Philip Morris. When they increase prices, other brands will follow the lead to avoid price wars. Any attempt to take away market share from the leader will result in more harm than good for the lower companies with less share. If a price war were to be started, Philip Morris, with its extensive capital, could easily outprice all other brands (Porter). The smaller tobacco companies could not compete and would soon go out of business. This type of competitive rivalry causes threats to all competitors. The companies with less market share want to follow the trends to avoid losing share no matter how high costs are, and they are trying to gain new consumers as well. The competitors have to watch the price leader carefully to make a competitive strategy. The price leader controls the industry and sets the “rules of the game”. But the opportunities of the leader and the other companies can be dampened by government regulations. As more restrictions are being placed in the tobacco industry, all companies will lose consumers if they do not find successful alternatives to marketing their products. Once the tobacco gain market share, it is somewhat easy to keep it. The addictive substances in tobacco products give the industry opportunities to keep consumers brand loyal and trying their new products. The environment of the tobacco industry is constantly changing with all of the threats and opportunities. Tobacco makers rely on the key success factor of image in all that they do. The new magalogs are another attempt to create a wanted tobacco user’s lifestyle, and they will continue to find alternatives around regulations to keep their image up as they fight hard in the competitive environment. Competitive Analysis
We have chosen Philip Morris and their brand of Marlboro. Philip Morris is the industry leader and is able to heavily promote and advertise a new product. Marlboro is one of the most well-known brands in the world. We could easily create a line extension and rely on the brand name for customer loyalty. The tobacco industry consists of many competitors striving to provide tobacco products that satisfy the consumer’s need to smoke. Companies such as Philip Morris, RJ Reynolds, Brown and Williamson, and Lorillard are the top four competitors in the tobacco industry that together hold almost all of the market share. While each company targets the same customer group, they have different advertising and marketing techniques. Philip Morris is by far the industry leader with tobacco sales of $46.7 billion (Business Week, 179, November 29,1999). The industry giant is responsible for the development of Marlboro, Virginia Slims, and Basic, three of the best-known brands on the market. Other than producing tobacco products, the company has expanded and purchased Kraft Foods in 1988, the largest food company in the United States in (Business Week 186, November 29, 1999). Kraft’s affiliation with Philip Morris has led to much scrutiny from anti-tobacco users and a decrease in profits. Philip Morris has a strong advantage with the Marlboro brand. Marlboro is one of the most well-known brands in the world. The brand loyalty to Marlboro will help Philip Morris keep customers. Lorillard is responsible for cigarette brand Newport, which is currently second behind Marlboro (Pollack, Advertising Age, August 30, 1999). Lorillard is the fasted growing brand in the cigarette category, but is still quite far behind Philip Morris (Pollack, Advertisng Age, August 30, 1999). Currently, the company is trying to introduce a new kind of cigarette that would directly compete with Marlboro. The new product would be a non-menthol cigarette, which is a first in the industry because most companies usually introduce menthol cigarettes. Lorillards strength is shown with its creativity. As long as they try new products, they can gain some market share from Philip Morris. Also, Lorillard is undertaking a series of print advertisements to expand on their commitment to responsibility. They are trying to become a more responsible company in the eyes of the public. RJ Reynolds, currently third in the standing, has undergone some recent changes in their corporation. In March of 1999, RJ Reynolds decided to sell its overseas cigarette unit to Japan Tobacco Incorporated and concentrate on its United States business (Hwang A3, Wall Street Journal, March 10, 1999). RJ Reynolds will use the money from the international sale to pay off large debts and to repostion in the market. RJ Reynolds is responsible for such brands as Monarch, Doral, and the ever-popular Camels. The weaknesses of our competitors are the weaknesses of the market. The lawsuits and government regulations have hindered many people from smoking. In the cigarette industry, there is not much difference within the products. Therefore, cigarette companies must market more heavily to increase brand awareness. Finally, the smaller companies must always watch that they do not compete head on with Marlboro, for fear of retaliation from Philip Morris. Competitive Analysis (Part B) As mentioned before, Philip Morris is the leader in the tobacco industry, with over twice the market share of its closest competitor, RJ Reynolds. After whom several international companies such as JTI, the Imperial Group and Brown and Williamson compete for the right to own the third spot in the industry. Much like Philip Morris, tobacco companies aim their sites through very general segmentation strategiesmen and women. Indeed, they too rely on a multi-segmented market to bring in the majority of their sales revenue. Not only that, but tobacco companies use several line extensions in order to gain market share in an attempt to overthrow the king Philip Morris. Several recent trends in competitive products have shown just that. For example, the scientific communities in both the United States and Europe have been developing new nicotine delivery systems in an attempt to transform the cigarette industry as we know it. Basically, the idea behind it all is to make a product with a controlled, gradual reduction in nicotine delivery. However, these new products are not quite that simple for companies to create. In fact, only one domestic tobacco company has attempted to commercialize a new type of nicotine delivery device. A few years ago, RJ Reynolds publicly announced a new type of cigarette called Premier. It was offered in two test markets in Arizona and Missouri. The markets did not do well and a little over one year later they closed. Premier was hard to light, did not burn down the way people wanted them to, smelled and tasted bad. But it had a number of key attributes: no ashes, very little second-hand smoke, and limited fire safety problems. (Freedman, 85, 1995) Maybe if those who had tried it had taken the time to acquire a taste for it, the product would have established itself as a mainstream smoke. Instead, it eventually failed. Since Premiers introduction, RJ Reynolds has continued to work on the product to try to improve the problems associated with it. This work, along with a large collection of project ideas on the way, is a strong indication that RJ Reynolds is doing its best to steal the number one position away from Philip Morris.(Freedman, 85, 1995) Not only that, but RJ Reynolds is not alone in its pursuit of a better smoke. Other activity has been noted form tobacco industry companies such as JTI, the Imperial Group, Procordia A.B., and Brown and Williamson. This can be easily seen as a strong indicator that several companies have extensive interest in the development of a superior nicotine delivery device. Through all of this, the outsider can easily see that the competition of Philip Morris is trying to gain market share in the tobacco industry and eventually overthrow the strongest company in the industry, Philip Morris. (Freedman, 85, 1995)
Value Chain Analysis
Philip Morris creates value in a number of ways, from product design to getting the product into the customers hand. Many parts of this value chain have been strategically used to build a competitive advantage in the cigarette industry. As discussed earlier, research and design are an important part of Philip Morris strategy. They are constantly trying to find ways to make their products better, safer, or more convenient for the customer to use. A product like cigarettes may seem impossible to improve on, but time and again they have made minor improvements that have added to their differentiation in the market, such as the flip-top box and the soon-to-be-released slow-burning paper, which should reduce cigarette related fires significantly. Even though cigarettes cause cancer and a myriad of other fatal illnesses, Philip Morris wants customers to know that they are looking out for their safety. A discussion of Philips Morris value chain cannot ignore their operational advantages, such as the economies of scale they have achieved by being the biggest supplier of tobacco products in the market. They also have made a number of production oriented advancements that have allowed them to produce high quality products at sufficiently low cost to buffer profits. The marketing aspects of the value chain are the points where Philip Morris has related differentiated itself. Promotion, distribution, and overall marketing clout and prowess have made brands such as Marlboro industry leaders and the envy of marketers everywhere. Distribution is a function which Philip Morris has mastered. Anywhere that sells cigarettes carries most of their brands, and always carries the top brands such as Marlboro. Convenience stores, gas stations, discount stores, bars; the list goes on and on. In distribution, Philip Morris is the industry leader, and the other firms watch and learn. Most of Philip Morris differentiation has been achieved through aggressive promotional strategies. They spend a great deal of money and effort getting out the message about their products in all (legal) media. The campaigns they use are seen as cutting-edge by customers and the industry. A powerful, inescapable message that Philip Morris brands are the best cigarettes on the market have been a key factor in the success of the company. An important ingredient to their formula success has been a clever branding strategy that seems to leave no segment without the perfect brand. With eighteen individual brands of smokes, each smoker is almost certain to be able to find one the fits his or her particular image or lifestyle. And although Philip Morris is a megabrand, it is not a powerful one. The company name is stamped on all of its products and customers often know which company produces their brand, but who can say what makes a cigarette a Philip Morris? The individual brands have much more power than the megabrand, and they are what have a vivid position in each consumers mind. Indeed, Philips Morris skillful branding is a major competitive advantage for the company. Philip Morris has built and deployed an effective sales force to build strong relationships with cigarette retailers, and with great success. In any given store, one is likely to notice Marlboro and the rest of the Philip Morris family in a prominent place at eye level. The company has also developed a rewards program whereby retailers actually get paid for giving them freedom in the store. Retailers get points for things like point of purchase displays, in-store advertising and prime slotting, and of course for doing the opposite with other companies products, and the retailers get money back or credit for the points. This strategy has given Philip Morris a big advantage at the point of purchase by making retailers happy. Linkages Through the variety of effective linkages Philips Morris has carefully constructed over their years of deft marketing practices, they have built a competitive advantage that is seemingly rock solid. Philip Morris uses its large market share to help it leverage for shelf space. Although the aggressive sales tactics described above are used to get total retailer cooperation, they do not have to use such persuasive techniques to simply get good shelf space. No cigarette seller would think of eliminating Marlboro from their shelves, for instance. Due to the high demand for their products, buyer (retailer) power is limited. Not all tobacco companies have this sort of power. The strong promotional tactics that they employ give them much of the power that they have over retailers. By giving their products such appeal and differentiation, customers will not be satisfied without them. This strong demand forces the hands of retailers. Strategy At this point, it would be difficult to make very strong recommendations to Philip Morris for strategic change. The strategy that they have formulated has worked extraordinarily well for them. As the strong market leader, the most important thing for them at this point is to not fall asleep at the wheel. They must stay one step ahead of competitors at all times and resist complacency. A flexible strategy that stays in touch with changing consumer wants and needs is paramount to remaining on top of the industry. However, Philip Morris should be using a defensive strategy. From their market leader position, they should focusing much of their attention on blocking the offensive moves of competitors to ensure that market share is not eroded. At the same time, they should be constantly finding ways to improve the current product line. Brands that are weak should be repositioned or replaced with more appealing ones. Popular brands have to be monitored to ensure that they remain vital and profitable. Kotler would suggest building the total market, that is, creating a larger demand for cigarettes overall. This is a sound strategy, but may be a difficult one for Philip Morris to pursue, for social as well as legal reasons. Such efforts must be undertaken with care so as not to offend or prompt litigation. As long as Philip Morris is able to market their products carefully while avoiding stagnation, they should enjoy market leadership for a long time to come.
Potential Segmentation Dimensions
There are hundreds of different kinds of cigarettes available in todays market. It can be hard to choose which cigarette to buy and pinpointing the differences between brands can be even harder. Besides brand name recognition, tobacco companies look at segmentation dimensions in order to clarify whom the cigarette is for and what features it has to offer to smokers. When the first studies that indicated lung cancer was directly related to smoking came out, smokers began to look for substitutes that would provide a healthier alternative. Philip Morris was the first company to take a step in the right direction by introducing Marlboro. The filtered cigarettes were believed to be healthier and reduce the chance of developing cancer. Since then, more companies have introduced their own version of a healthier cigarette. Tobacco companies introduced such innovations as light and ultra light cigarettes. Light cigarettes are made with less tar; ultra lights have almost no tar in them. The concept of light cigarettes opens up the field of opportunity for smokers. They can now be more health conscious when choosing a cigarette, but light cigarettes can still cause cancer. Cost is another concern when it comes to smokers. Research shows that most smokers are brand loyal and do not pay attention to price, but there is a possibility that some do buy the cheapest brand available. By offering a lower priced brand, tobacco companies can help to gain market share and broaden their variety and assortment of products. Not all current tobacco companies offer a low price cigarette; they tend to focus their strength on their top brand. Gender is segmented within the tobacco industry. Brands like Mistys, Virginia Slims, and Carlton are aimed at the female population. Men have the Marlboro Man; women have slimmer and slender cigarettes. The tobacco industry has been trying to also segment ethnicity, but has failed in the past. One example is the brand Uptown, distributed by RJ Reynolds, which was aimed at African Americans. Many critics felt that the tobacco industry, as well as RJR, were exploiting and encouraging minorities to smoke. Virginia Slims is currently running ads that target many cultures by showing their brand as a cigarette to be smoked by all women worldwide. Flavored cigarettes are becoming an industry favorite. Menthol cigarettes used to be the only choice available for a different taste. In todays market, there are many alternatives to menthol and regular cigarettes popping up around the industry. Camel is currently marketing new citrus and vanilla flavored cigarettes. These cigarettes come in regular, light, and ultra light varieties and offer a different perspective on smoking. Camel also is offering different blends of cigarettes that are made with Turkish and domestic tobaccos, all giving off a different taste. Marlboro was the first brand to alter the appearance of the cigarette package by offering a flip-top box. The idea caught on quickly and now most cigarette packages do have the flip-top box. This little innovation made cigarettes less messy and easier to keep track of. Today, there are still soft and hard packages being offered to the smoking community. Each package comes wrapped in a cellophane seal to help protect the box, but can be removed for immediate use. Cigarette box designs have not really changed much since the 1950s, but there is room for improvement.
Philip Morris has adopted the strategy that they are committed to marketing their tobacco products to adults who choose to smoke. So what is an adult? By company standards, an adult is a person who is at least 21 years old. Philip Morris markets to adults by using a multiple-segment targeting strategy. Product specialization has worked well for the company over the last forty years. They have developed a series of brands that are very popular and well known among the smoking population. Philip Morris has also used market specialization to its advantage. The Marlboro Man is an example of how market specialization has been a success with the public. Marketing Strategy After a failed attempt to target women in the 1920s and 30s, Philip Morris pulled Mild As May brand cigarettes off the market. At the time, the country was engulfed in WWII and people were rationing cigarettes. When the war was over, cigarette consumption skyrocketed, but new studies coupled cigarette smoking with lung cancer. Consumers were outraged and felt betrayed by their brands. There had never been much shift in brand preference before, even considering price and model differences. But consumers felt mislead and dropped their allegiances with old brands. Philip Morris saw this as an opportunity to reintroduce their Mild As May brand, but the product had undergone a drastic makeover. Trying to attract old smokers who feared lung cancer, Philip Morris introduced Marlboro brand to the public in 1955. Marlboro was a filtered cigarette that would be safer for all consumers. There was only one problem; filtered cigarettes were viewed as sissy and feminine. Philip Morris needed to assure male smokers that Marlboro was the right cigarette for them. Marlboro launched a new advertising campaign entitled the Tattooed Man campaign. The Tattooed Man gave off the image of a new Marlboro smoker. Men were portrayed as lean, rugged, merited respect, relaxed, and outdoors oriented. Naval officers, ranchers, and airmen represented a Tattooed Man, all showing that filter cigarettes were not at all sissy or feminine. The mens hands were calloused and rough, depicting they were hardworking and demonstrating that filtered cigarettes were not sissy. Marlboro developed full-page black and white advertisements that featured information on the filter and a new flip-top box. The campaign was a success and turned Marlboro into a top selling filtered cigarette overnight. As the campaign continued, researchers used different personalities to find the ideal Marlboro representative. The cowboy emerged as the most popular character and has gone on to represent what a Marlboro cigarette is today. When the Marlboro Man was first introduced to the public, Philip Morris had to explain him. Life ran an article on who and what the Marlboro Man was in January 1957, where each frame pictured the cowboy talking about freedom, smoking, and ranching out West. The articles purpose was to draw in men and make them jealous of a lifestyle that they did not possess. This introduction led to many more educational ads over the years, which in turn has led to silent, beautiful image-filled ads featured in present day magazines. Without words, the Marlboro Man takes you to a place that many consumers have come to know very well: Marlboro Country. Consumers have also become very familiar with the Marlboro flip-top box. The design is very important to Marlboro smokers, as discovered by Forbes magazine in 1987. At that time, Forbes polled smokers by giving them two different packages of Marlboro cigarettes. One box was the standard red with black, bold lettering on it. The other box contained unaltered Marlboro cigarettes dressed in a generic brown wrapping and at half price. Only 21% were interested in the generic brown box, which proves that consumers prefer the bright red packaging (http://xroads.virginia.edu/CLASS/marlboro/mman3.html). The box symbolizes membership into an elite club that recognizes the Marlboro Man as their spokes-person. Currently, tobacco industry advertising standards are very harsh. Banned from television and any print media that is targeted at people under 21, Marlboro must make use of its minimal space. Marlboro Man ads can still be seen in magazines like Time and Life, and even on some billboards, but overall advertising has diminished. As stated earlier, Marlboro ads no longer explain anything because consumers are well educated and understand their meaning. Modern ads depict cattle running through a field, a mountain scene with wranglers herding cattle, or just the stereotypical Marlboro Man quietly holding his cigarette in his hand. Men understand the message and privately long to be a true Marlboro Man, which is what Philip Morris and Marlboro have been working on for over forty years. Focus group The focus group consisted of people with basically the same demographic information. Three males and three females participated in the focus group, each around the age of 21. Every person was from the Midwest, and many attended Truman State University. All the participants in the focus group now smoke Camel Lights or Marlboro Lights. Almost all the participants smoke the brand they had started with. Friends in high school were a main factor in deciding which brand to smoke. One girl had even started smoking the brand her mother used. Many started to smoke a particular brand, became accustomed to the taste, and have never changed. Price is not even a consideration. Although Camel Lights and Marlboro Lights have the highest prices compared to most brands of cigarettes, the people in the group would not switch to another brand even if the price of the competitor’s brand was extremely low. Apparently, the switching costs are high in the tobacco industry. Each group member feels a high emotional connection with their particular brand, and would not consider switching brands. The participants basically smoke because they believe they are addicted to the nicotine in the cigarettes. Many feel that smoking is a relaxing activity. Some agreed that social smoking was enjoyable. For example, Female 1 and Male 1 like to smoke while at the bar. (Interview, p 3) The gas station was a popular place to buy cigarettes, mainly for the convenience. Some group participants liked to stop at the gas station on their way to work or school. One participant, Female 3, buys her cigarettes at the bar where she works, which is convenient for her. Still others, like Female 1 and Male 1, buy their cigarettes at Walmart because the price is cheaper. (Interview, p 3) Male 1 sometimes has trouble getting his cigarettes from the gas station after the weekend because they are usually sold out. Also, the participants prefered hard packs, but most would but a soft pack if hard packs were sold out. Overall, the participants were satisfied with the current product. Some participants were annoyed with the amount of wrapping on the boxes, but others thought that the wrapping protected the cigarettes better. (Interview p3) The price was considered to be high, but everyone would pay to get their favorite brand. The participants were dissatisfied with the soft packaging; the cigarettes were not well protected. Most group members did not like the smell that the cigarettes left on their clothing, but did not have a solution to the problem. Male 3 had a problem with the smell, because his girl friend did not like it, and a problem with the after taste. But these complaints would not stop anyone from smoking. The severity of the problems is not great, but a few ideas have been raised. The tobacco companies need to look at the problems of aftertaste, smell of smoke, and packaging. Soft packs were not liked by any participants. More hard packs should be distributed. One point that surprised us was the excitement for prepacked cigarettes. Tobacco companies might have a marketing strategy with prepacked cigarettes. The high price of the cigarettes was noted within the group, but each was willing to pay for their particular brand. Tobacco companies do not need to lower price because the members of the group were still willing to pay. They all saw the brands of cigarettes as being very differentiated, and therefore the industry has very high switching costs. It was also noted that the participants still smoked the same brand of cigarettes that they started out with. Many have not even bothered to try different brands. This is a key point that the tobacco companies need to focus on. If they can get people to start smoking their brand first, then they have a good chance of having that person making a repeat purchase. The tobacco industry is seen by consumers to be very differentiated, allowing the companies to charge higher prices and creating high switching costs.
Current Marketing Mix
Philip Morris Marlboro is currently in the mature life cycle. The cigarette industry as a whole is in this life cycle. The objectives for the mature stage are to extend the life cycle for Marlboro by maintaining the brand leader position, advertising image, and cannibalizing the product. Marlboro needs to watch competition (RJ Reynolds and Brown and Williamson), maintain high brand loyalty to keep brand leadership, and continue with creating a socially conscious company. The creating of this image as a socially conscious company is a company wide customer orientation. What has helped them remain on top is their size advantage, experience, and well-defined target. Some specific areas that Philip Morris needs to focus on are sales growth, profits, customers, and competition. These will be discussed briefly. We will elaborate on the factors product, pricing, promotion, and distribution in greater detail. Marlboro is currently in a growth maturity stage for sales growth. Although the industry is in the mature life cycle, Marlboro still controls a majority of the share and sales are increasing (1999 Annual Report). With the 1998 Master Settlement Agreement, where Philip Morris had to pay a large settlement to past consumers for with holding information about the harmful effects of smoking, sales still increased from 1998 to 1999. This is mostly due to the high brand loyalty of consumers (focus group). As mentioned above, due to the high and unusually strong brand loyalty of the market, profits have increased even with stricter laws and regulations. Pending litigation, smoking could become even more expensive than it already is. Taxes could be imposed to increase price per pack, which would hurt profits if consumers start buying cheaper brands. If government raises the price per pack as a standard and consumers remain brand loyal, profits could increase for the company. Marlboro targets adults over twenty-one and will not use anybody in an advertisement who looks younger than twenty-five. They wish to retain current customers and try to discourage youth smoking. Many smokers start smoking in high school and remain loyal to the brand they start smoking (focus group). Though reality and their strategy are incongruent, they try to target current consumers. The three big competitors in the tobacco industry are Philip Morris (market leader), RJ Reynolds, and Brown and Williamson. Philip Morris (Marlboro) and RJ Reynolds (Camels) own the two main brands. Due to the price increases delegated by the government, cheaper non-premium brands are catching price sensitive customers. If such price increases persist, competition could increase as well. That is only if the prices increase so much that brand loyalty sways. We would like to discuss how these stated strategies of Marlboro effect Porters Five Forces. Buyers are an overall weak force in that they are so brand loyal, they will pay inflated prices for product. They do expect more from the parent company that helps explain the Philip Morris Foundation, a community service charity ran by the people of Philip Morris, and the new slogan for Philip Morris, Working to Make a Difference. The People of Philip Morris. The main reason buyers are a weak force is because of their strong, unwavering brand loyalty. Competitive rivalry is intense in the tobacco industry. With the changing view of smoking by society from one-time glamorous to now outcast and increasing government restrictions with price increases, the consumer pool is dwindling. Luckily, Philip Morris Marlboro has an advantage as brand leader. The three main competitors are struggling to maintain market share, and Philip Morris is succeeding in remaining the market leader. New entrants in the tobacco industry are rare. It is later in the life cycle, so many would-be new entrants are dissuaded by many factors. First is the sheer size of the established competition. They have the upper hand with economies of scale, experience curve, channels of distribution, and high brand loyalty. New entrants also are thwarted from entering the tobacco market by the uncertain future of the market. The pending legal dealings, increased restrictions, and mandated price increases makes the environment risky for new entrants. There are high barriers to entry. Being that the cigarette industry is in the mature life cycle, the number and availability of substitutes should be numerous. There are a few substitutes to cigarettes like chew, snuff, and cigars, but none truly substitute the cigarette. Unlike perfume were the smell is similar enough or clothes that fit well and look nice, the taste and experience of smoking your brand of cigarettes can not be duplicated. This inability to reproduce the experience and taste makes the substitution uncommonly weak for the mature life cycle. As mentioned in the new entrants, channels of distribution are established and the high demand from the brand loyal customers weakens the power of distributors. This is the environment for Marlboro in reference to Porters Five Forces. Although it does not follow the text book definition of the mature life cycle, it is due mainly to the unique industry of tobacco. The competitive strategy of Marlboro is differentiation. Marlboro has a perceived uniqueness industry wide by consumers. The uniqueness of the brand name Marlboro and its image, quality, and taste, is highly valued by customers. The customers value it enough to pay higher prices for the Marlboro brand. Marlboros strategy of differentiation has remained stable and consistent. There are three main strategies Philip Morris has chosen to help differentiate Marlboro. The company has increased the service quality of quick responsiveness to complaints and compliance to federal regulations, assurance of a quality product purchased, and empathy for consumers (smokers and non-) through the services of the Philip Morris Foundation. Philip Morris has differentiated by reputation and brand image as well. The company has remained consistent in their image as a high quality product and an American tradition. Their market expertise, as market leader, has also allowed them to differentiate their product. This strategy reinforces the image as a stable company and plays up the companys longevity and dominance in the market. The current position of Marlboro has been mentioned many times as the brand leader. As the brand/market leader, Marlboro has to defend their position and territory against competition (which as mentioned before is very intense). Luckily for Marlboro, the defensive position is the preferred position. It has becoming increasingly difficult to defend position pending legal results from numerous cases set against Philip Morris and other tobacco companies. If excise taxes ensue (which would increase price of cigarettes by federal government and state) they could lead to a decline in sales, a decline of volume for the entire industry, and a shift from the premium segment (Marlboro and Camels) to the discount segment (GPC) (1999 Annual Report). Given Philip Morris superior defensive position currently, it enables them to have defenses against environmental factors Porter identified as the Five Forces. Marlboro being a differentiated premium brand, this creates a buffer with high price and low cost. The consumers are brand loyal and less price sensitive. New entrants have barriers to entry due to Marlboro’s brand leader position. The barriers include the high emotional switching cost from Marlboro to a new brand due to high brand loyalty, the high product differentiation Marlboro has created and maintained, and the economies of scale and established distribution channels the com from Marlboros experience. The buffer previously mentioned for the defense against the threat of new entrants, also is a defense against competitive rivalry. It is with this buffer that Philip Morris has the excess resources to fight, identified as the Principles of Force by Ries and Trout. The expertise of the company in the mature industry also is a powerful defense against competitors. As the market leader and the high brand loyalty, Marlboro is less susceptible to price wars. For some of the same reasons mention above, Marlboro has similar defense against buyers. Being less susceptible to price wars because of the high brand loyalty helps the company have greater control over pricing. This could change, though, with price increases and pending excise taxes. For now it does not seem to be a problem, but the future of the industry is uncertain. But for now as market leader, Marlboro can create expectations of higher quality products and service. The buffer so prominent in many of the factors defends against suppliers. The defense against substitutes is Marlboros decreased susceptibility to a price ceiling and the brand name loyalty advantage. Due to the position of market leader, Philip Morris and Marlboro have strong defenses against factors in the industrial environment. Their defensive position allows them these perks and if the market is not too effected by litigations pending, it looks to be a very sustainable advantage. Growth strategies of Marlboro have been product development or line extensions. They have created new products like Marlboro Lights and Marlboro Menthol and introduced them in the same market. They have also employed a family of branding such as specific brands (Marlboro, Virginia Slims, and Newport) that target certain segments and offer different images. Marlboro is well positioned and successfully maintaining the leadership position in the mature life cycle stage. They have retained this position through differentiation and product development. These have helped and will continue to help, if the market stays stable, Marlboro extend the mature life cycle and remain market leader. Now we are going to focus and emphasis some major factors in the current marketing mix not yet discussed. These factors are the product, pricing, promotion, and distribution. The product strategy is differentiation and being widely available through distribution. As market leader, Marlboro has taken the Defensive Warfare. They have had the courage to attack themselves through line extensions, and have expanded the market with their family of brands. Strengths of their product position is that the company has a strong position. They are not over, under, confused, or doubtful in their positioning of Marlboro. It makes sense, is not too narrow, is stable and consistent, and consumers believe in the higher quality of the brand. The high brand loyalty and perceived higher quality help the positioning of the product to be strong. Some weaknesses of the product are mainly environmental. Societys view of smoking has changed. Smoking used to be considered glamorous and beautiful, now most buildings are smoke free. Smokers have to huddle outside in rain, sleet, and shine and enjoy their cigarettes. Restrictions on advertising for tobacco products have increased. Outdoor advertising has recently been taken away. The only traditional medium appropriate to find tobacco product advertisements is print. There have also been legal backlashes due to health risks of nicotine use. A negative view of tobacco companies that is prominent in society is one of shiftiness and shadiness. Plus in medium unavailable to the tobacco companies, there has been an influx of anti-smoking campaigns. But even with all of the weaknesses of the market, Marlboro has remained brand leader. The branding strategy of Philip Morris, as mentioned before, is family of branding. Marlboro follows a family branding strategy. Marlboro would be considered the megabrand and Marlboro Lights/ Ultra Lights/ Menthol would be considered the subbrands. This some what follows Ries and Ries 22 Laws of Immutable Branding. Ries and Ries say that family of branding is good, while family branding takes away from the product. Marlboro follows many of the suggestions made by Ries and Ries. Marlboro has a unique and one of a kind name that helps set it apart from other cigarettes. Marlboro also owns a word, that word is rugged. The cowboy, who embodies a sense of a great American tradition, represents this ruggedness. There are many characteristics highly valued in our society that are related directly to cowboy. Marlboro has also been continuously consistent in their brand imaging (with the cowboy) and packaging. Changes have been slight and industry wide, like the introduction to Lights, Ultra Lights, and hard packs. Some other ways in which Marlboro follows Ries and Ries suggestions are their law of color, law of quality, and law of extensions. As mentioned above, Marlboro has followed Ries and Ries law of consistency. They have done this not only in the handling of their brand image, but also in the look of their packaging. Marlboro does not follow all of the suggestions from Ries and Ries. One is their law of publicity. With all of the trials impending and the changed view of society on smoking and tobacco companies, publicity has not helped the product or the market. Though the Philip Morris Foundation would be an excellent vehicle for publicity, they have decided to advertise. If they would let the newspapers and reporters take the drivers seat, consumers might believe it more. Even with all of the problems the industry is seeing, Marlboro is still the brand leader. The high brand loyalty is the key factor to Marlboros dominance in the market. They achieved brand loyalty by being first movers, becoming established, quality of their product, and consistency. This has helped them endure through the turbulent times in the industry. Brand equity is also very important to the product. Marlboro has a lot of brand equity. It has high brand loyalty that increases trade leverage, attracts new customers, and gives consumers a reassurance in you product. The high brand awareness is due in part of it being brand leader. Marlboro sticks out in the mind of consumers, including non-smokers because of familiarity, and is seen as a brand to consider. The perceived quality is very high for Marlboro. It is positioned as a premium brand and the price leader. Marlboro is also closely associated with its parent company, Philip Morris. Philip Morris is currently creating an image as a socially conscious company. This indirectly creates a positive image for Marlboro. And as the market leader, Marlboro has a competitive advantage. All of these factors increase Marlboros brand equity. This brand equity helps the consumer by increasing satisfaction, confidence in purchase and helps them to process information by setting a reference point. Brand equity helps the firms by assisting in creating efficient and effective marketing programs, increasing brand loyalty, to independently set prices, aid in brand extensions, increase trade leverage, and competitive advantage. This is shown through the increase of shares from 1998 to 1999 (1999 Annual Report) even though there has been an increase in restrictions. The increases help demonstrate the power of brand equity. The nineties ushered in a time of relationship marketing. Customer Services programs were the most popular way many companies played the new game. Marlboro and Philip Morris are no different. Marlboro offers Marlboro Miles to their customers. Collect a certain amount of miles and order items out of a catalogue them have Marlboro written all over them. This gives current customers perk and draws in new customers. Philip Morris started the Philip Morris Foundation, a service charity and created a new slogan. Their community service relief is aiding in creating a new image for the Philip Morris company. Instead of a seedy, shady cigarette manufacture, Philip Morris is helping society and is socially conscious. Some recommendations for Philip Morris and Marlboro are to let the news organizations cover your good work. Perhaps send out press releases of activities the Philip Morris Foundation are involved in. Dont stop the advertisements, it creates awareness and since Marlboro and Philip Morris are so closely associated it helps separate them during the legal mess and hopefully will have a carry-over effect from Philip Morris to Marlboro. They need to continue the programs that are working for them. These things are the consistent image of the brand, being a first mover to comply with government regulations, and in creating the image of a socially conscious company. They also could introduce a new product, a line extension, of the brand leader Marlboro. They need to introduce a product that offers what no other cigarette offers, waterproof packaging. Pricing Strategy Marlboro is a very well known company with many subsidiaries. The pricing strategy followed by the tobacco portion of the company is one where the primary objective is to simply sell the most products possible through promotions and brand-loyalty. For the first part, demand has been proven to be inelastic. Even if the United States Government enacts bills where cigarette taxes grow even further, customer brand-loyalty will still exist strongly. In fact, history has shown that demand is very, very inelastic, meaning higher prices dont necessarily translate into equivalent reductions in consumption. (Kennedy, p30, June 1998) Indeed, the one out of six tobacco smokers that use Marlboro products have proven their preference not to change. Secondly, Marlboro uses a fair amount of discounting in order to retain its customer base. The company, two times a year, will run promotions where consumers can buy two packs and receive a third for free. This has been shown to not only keep customers who are loyal to Phillip Morris, but will also tend to take away from the competition. According to the article, Experts Pick: Marlboro, by Nathaniel Kennedy, every time the campaign is launched, Marlboro gains a substantial portion of market share. (Kennedy, p31, June 1998) However, competitors have follwed the lead of Marlboro. They too run the same promotions that, in turn, balance out the market share that Marlboro had just recently taken. Because competition is so fierce, the majority of Marlboro pricing strategy is to promote lower prices. In fact, Marlboroshows that you dont have to make cars and trucks to make money. It has the second-highest profit margins among the top-ten U.S. manufacturers.(Hedden, p26, October 1996) The reason being is simple. Marlboro does not sell low enough for it to be considered a generic, but it does keep its prices compatible with its closest competitors. For example, in Mexico, Marlboro and its Mexican producer Cigarrera La Tabacelera Mexicana are temporarily reducing the price of Marlboro cigarettes in Mexico by 20%. (p2, March 1997) The move is an attempt to beat the competition of cigarette smugglers, who are illegally importing the cheaper U.S.-manufactured cigarettes and selling them at steep discounts. Furthermore, the company must fight in the face of many legal competitors as well. With three main competitors, RJ Reynolds, Brown ; Williamson and Lorillard, Marlboro strives to keep its products at a quality level and it prices competitive with the other leaders in the industry. The aforementioned laws of the United States governments have also proved to be a stiff competitor to the companys overall successes. Through maintaining low prices, an inelastic demand and well-placed discounts, Marlboro share of the market is more than doubling its closest rival. However, that demand could easily switch hands at any time. Marlboro relies too heavily upon brand-loyalty to assume that it would always be the leader. Newcomers are plentiful, and it will take a lot of work for the company to maintain its current market share. Indeed, with cigarette prices on the rise as much as they are, consumers are more likely to become, in the future, more price-sensitive than they currently are. If Marlboro falls into the age-old trap of incumbent inertia, there is a good possibility that the corporation will lose their number one spot in the industry. To prevent market loss, Marlboro needs to pay close attention to consumers preferences and any new additions to the industry (such as a less harmful cigarette). Marlboro will be able to keep on top of the game. Technology is the key here, and the corporation must do everything possible to be ahead of it. Promotion Strategy The biggest problems that Marlboro faces today are health problems and advertising to children. To combat these issues, the company uses a substantial amount of promotion and goodwill to keep its high-quality name. For the first part, the company is constantly giving to charities and running television comm
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