Saturday, May 18, 2019
Philip Morris Essay
1.How would you describe Marlboros competitive position in early 1993?Marlboro, the leading cig bette brand for Philip Morris, was the dominant player in the premium determined market. composition RJR was the hour largest player in the market, RJRs rump brands were fragmented. At the end of 1992, Marlboro had 24.4% unit market share, while from each one of the RJR brand cigarettes had less than 7% market share. Philip Morris, at 53% operating contribution margin, was significantly more(prenominal) gainful than RJR, at 34% operating contribution margin.Marlboro was essentially backed by the biggest, most profitable player Philip Morris. Philip Morris was also the consistent market share leader, at least since 1988, over RJR and other very much smaller companies. The industry had sustained profitability over time. There we can conclude that there are significant barriers to adit in the cigarette market. Additionally, the need for a knock-down(prenominal) distribution netwo rk with retailers and wholesalers added to the barriers to entry into the market.ThreatDiscussed on more detail later, Marlboro was facing stuff competition in the 90s from give the sack brands, especially RJR brands. While Marlboro, a premium brand, suffered a steadily declining market share since 1989, usher out brands were quickly gaining market share.2.What is Marlboros marketing outline at this time?Marlboro positioned itself as a premium brand cigarette. While it played in the discount piece as well, it was second to RJR brands in the discount component. Marlboro spent a significant amount of money in advertising and promotions to command its premium pricing. Marlboro became synonymous with Iconic vision such as the Marlboro man and wild western country images. This led to Marlboros strong halt amongst young men. Marlboro outspent its competitors in advertising spending $3.5 one million million million per percent market share in 1992, compared to $2.1 million spend p er percent market share by RJR. (RJR was centraliseed on the discount segment by 1992)Marlboro also used its market power to operate on in Trade loading, essentially forcing retailers to preceding buy and to stock up on Marlboros just before a price add-on. This probably boost retailers to allocate more shelf space to Marlboro to get their inventories moving from their warehouses.3.How does this compare to R.J. Reynolds?RJR focused on its discount brand. RJR had built it self to the discount segment market share leader with 33% discount segment share by 1992. RJR carried about 200 brands under its umbrella. While they had national brands, they also created individual brands for each retailer, resulting in a string distribution system. This was probably well received by the retailers since a cigarette was one of the most profitable products sold in stores. RJR not only cut back price to increase discount market share, but also invested in price promotions. Their growth in the 90 s had come by taking market share from premium brands during a recessionary period.4.What accounts for Philip Morris dramatic shift in strategy in April 1993? What are its goals? 6. What kind of industry future does Philip Morris anticipate?Market shift (Consumer conduct and regulation)The 1990s was a recessionary period in the US. While cigarette smokers were believed to be loyal to their brands (and are in general very sticky consumers), there was a marked shift in the emergence of discount brands. In a span of 11 years (1981- 1992), the market share for discount brands in the US went from 0 to 30%. Meanwhile, Marlboro was steadily loosing market share, loosing 2 market share percentage points from 1989 to 1992.Additionally, the regulatory climate was place an upward imperativeness on price. While government taxes were on the rise, restrictions on advertising of cigarettes were emerging, both of which do selling cigarettes more expensive. It can be argued that with the rising a wareness amongst consumer on the hazards of smoking this upward pressure on price from a regulatory perspective would persist in the medium term.RJRPhillp Morris was also presumably worried about the aggressive price cuts and promotions by RJR to increase its market share.Goals of Philip Morris StrategyPhilip Morris needed a aggressive competitive response to tacklethe threats of declining market share, increasing share of discount brands, regulation, and RJRs promotions and price cuts. They refractory to aggressively attack the existing discount brands and make the Philip Morris brand significantly more price competitive.Philip Morris efficaciously cut price by 20%, creating 2 tiers of cigarette pricing (from 3 tiers before). Their premium products were forthwith significantly more competitive, compared with the discount brands due to their reduced price and existing strong brand image. Philip Morris were promise that a large portion of consumers would compare their premium pro duct as price competitive with the discount brands, and would chose Marlboro due to its superior brand image and comparable prices. They essentially wanted to win the pricing post and lead with their brand. Surprisingly, they passably increased the price of their discount brand by a mere 6 cents. This was probably to restrict the range in which the pricing war could be played by other players.Industry Outlook for Philip MorrisSurely with the consumer behavior shift and the increasingly hostile regulatory climate exposit above, Philip Morris views the industry margins becoming thinner and realizes it will get progressively harder to get new consumers. Therefore attracting dangerous smokers becomes key for growth and long term profitability. Additionally, Marlboro views the market as price sensitive, especially for heavy smokers. Attracting and retaining this segment is not only a branding plump for but also a pricing game as well since there is a high frequency of repeat purchas es.5.How should R.J. Reynolds respond?In my opinion, RJR ask to make good (option 3 below) with Philip Morris. The three options for RJR areFight with a further price cut or increase in advertising not only will this option further whittle down industry margins, but also RJR will probably get crushed in a price/advertising war against the much larger and more efficient Philip Morris.Do nothing and risk neediness of its discount market share dominance to Philip Morris.Price increase (make good) Philip Morris is clearly star sign that it will play aggressively in the discount segment, and in the war for consumers moving or in all probability to move to the discount segment. With a slight price increase, RJR can signal to Philip Morris that it does not want to engage in a further price war, and it will maintain industry profitability. Such collaborative behavior is probably best for both players in the industry. Additionally, since RJR has a strong distribution with personalized b rands for retail outlets, it should focus on building its capability in such brands. The localized brands are arguably a slightly different turf than only fighting the game as big national brands (where Marlboro is very strong with its dominant brand imagery), and local retail branding is RJRs stronghold.