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. Lorillard?s 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 strategies?men 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 Premier?s 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 customer?s 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 consumer?s 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 today?s 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 Misty?s, 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 today?s 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.