Philip Morris Essay

1.How would you describe Marlboros competitory position in early 1993?Marlboro, the leading cigarette rat for Philip Morris, was the paramount player in the allowance priced securities manufactureplace. While RJR was the second largest player in the securities labor, RJRs cigarette blemishs were fragmented. At the end of 1992, Marlboro had 24.4% unit commercialize conduct, temporary hookup each of the RJR snitch cigarettes had less than 7% market share. Philip Morris, at 53% operating contri more(prenominal)overion margin, was profoundly to a greater extent advantageous than RJR, at 34% operating contribution margin.Marlboro was basically backed by the biggest, most profitable player Philip Morris. Philip Morris was also the consistent market share attractor, at least since 1988, over RJR and other much smaller companies. The industry had sustained positiveness over time. There we can conclude that on that point are significant barriers to entry in the cigarett e market. Additionally, the need for a strong diffusion network with retailers and wholesalers added to the barriers to entry into the market.ThreatDiscussed on more than detail later, Marlboro was set about stuff competition in the 90s from send away brands, particularly RJR brands. While Marlboro, a premium brand, suffered a steadily declining market share since 1989, can brands were right away gaining market share.2.What is Marlboros marketing strategy at this time?Marlboro positioned itself as a premium brand cigarette. While it played in the discount segment as well, it was second to RJR brands in the discount segment. Marlboro spent a significant amount of money in advertize and promotions to command its premium pricing. Marlboro became synonymous with Iconic imagery such as the Marlboro man and haywire western country images. This led to Marlboros strong hold amongst raw men. Marlboro outspent its competitors in advertising spending $3.5 million per percent market s hare in 1992, compared to $2.1 million spend per percent market share by RJR. (RJR was foc employ on the discount segment by 1992)Marlboro also used its market power to take up in Trade loading, essentially forcing retailers to forward buy and to stock up on Marlboros just sooner a price increase. This probably encouraged retailers to allocate more ledge space to Marlboro to ascertain 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 two hundred 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 increases sold in stores. RJR not only cut price to increase discount market share, but a lso invested in price promotions. Their addition in the 90s had bring forth 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 miscellanea of industry future does Philip Morris anticipate?Market shift (Consumer behavior and regulation)The 1990s was a recessionary period in the US. While cigarette smokers were believed to be loyal to their brands (and are generally 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 putting an upward air pressure on price. While government taxes were on the rise, restrictions on advertising of cigarettes were emerging, both(prenominal) of which made selling cigarettes more expensive. It can be argued that with the rising consciousness 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 presumptively 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 decided to sharply attack the existing discount brands and make the Philip Morris brand significantly more price competitive.Philip Morris effectively cut price by 20%, creating 2 tiers of cigarette pricing (from 3 tiers before). Their premium products were now significantly more competitive, compared with the discount brands due to their reduced price and existing strong brand image. Philip Morris were betting that a large portion of consumers would compare their premium product 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 adventure and lead with their brand. Surprisingly, they slightly 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. pains Outlook for Philip MorrisSurely with the consumer behavior shift and the increasingly hostile regulatory climate described above, Philip Morris views the industry margins becoming thinner and realizes it will get progressively harder to get new consumers. Therefore attracting non-buoyant 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 granular but also a pricing game as well since there is a high frequency of repeat purchases.5.How should R.J. Reynolds respond?In my opinion, RJR postulate 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 erode 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 loss of its discount market share dominance to Philip Morris.Price increase (make good) Philip Morris is understandably signaling that it will play aggressively in the discount segment, and in the war for consumers moving or likely 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. Ad ditionally, since RJR has a strong distribution with personalized brands 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.