Imperial Tobacco And Philip Morris example essay topic

TABLE OF CONTENTS SECTION PAGE 1.0 INTRODUCTION 3 2.0 HISTORY AND ACQUISITIONS 4 2.1 General Foods Takeover 4 2.2 Kraft Inc. Takeover 5 3.0 CHANDLER LOGIC OF INDUSTRIAL SUCCESS 7 3.1 Diversification 7 3.2 Economies of Scale 8 3.3 First Movers 10 4.0 CONCLUSION 12 5.0 BIBLIOGRAPHY 13 ENDNOTES 14 1.0 INTRODUCTION Today's business world is a very complex environment. We have seen in the last few years many companies that have had difficulties, and to an extent some have gone bankrupt in the local scene. Take Eaton's for example, the now defunct retailer, very few could have predicted its downfall just a couple of years ago, and today its in ruins.

However, other corporations like Philip Morris introduced in this report is one of successful outcome. Today, a company can't focus only on the local scale but must consider every single enterprise in its own industry no matter where they are coming from. Another factor of one's success is also adapting itself to technology that is moving at the speed of light. Therefore, companies adapt, change, and move to higher levels, at least those whose industrial success is above all others, just like Philip Morris'. The company Phillip Morris Inc. is one of the largest corporations around the world. Phillip Morris is most known for selling tobacco products.

The tobacco industry is a huge enterprise with a large market beginning with 16 year olds and creating an addiction which allows their market to expand to those as old as 90 or even 100. Although Phillip Morris is known for selling tobacco, much of the company's income also comes from subsidiaries such as: Kraft Foods, Maxwell House Coffees, Miller Brewing Company and many of the most popular household brands in the United States. Phillip Morris, just like any other successful company, must have started somewhere in order for the company to grow into a multinational corporation. With Chandler's logic of Industrial Success, it can be seen that through diversification, economies of scale, and the concept of First Movers, Philip Morris has become the corporate power of its industry and beyond. 2.0 HISTORY AND ACQUISITIONS Phillip Morris was an Englishman who owned a cigarette shop in 1850, located in London. Although much is not known about the man himself and how he started his career, company literature suggest that Phillip Morris was seeking the American dream.

He seems to have placed himself into American history. Company publishing's state that "tobacco is an important part of this country's heritage and has touched every aspect of society - including education, agricultural advancement, politics and the arts. More than any other commodity, tobacco has influenced U.S. history as well as our nations development and economic growth". . Phillip Morris sells 19 brands of cigarettes in the United States and many more throughout the world. Its cigarette products are sold in over 180 markets worldwide which make it the worlds leading tobacco company.

In 1998, one out of every six cigarettes sold worldwide was a Phillip Morris brand. Although Phillip Morris principle activity was to sell cigarettes, it grew into a huge corporation by acquiring subsidiaries in other company's. The two most notable acquisitions of Phillip Morris are General Foods corporation and Kraft Foods. 2.1 General Foods Takeover General Foods was a goliath in the food industry during the 1980's.

In 1984, it sold $7.5 billion in annual sales and employed 56.000 people. The chairman of Phillip Morris stated that, "General Foods was a high-class operation, run by well bred people in a country club atmosphere in suburban Westchester County north of New York. Its management, though, was viewed a sleepy and overly reliant on its great old trademarks such as Jell-o desserts and Maxwell House Coffee. Overall, General Foods was found to be an underachiever and this sluggish company seemed a likely candidate. If and when Phillip Morris walked off with it, the result would become the nation's largest consumer products company, surpassing Proctor & Gamble.

Phillip Morris made an all cash tender offer of $109 a share for General Foods, a premium of nearly 50 percent above the market price. No one else could or wanted to match that kind of offer. Many analysts said that Phillip Morris overpaid since the price was 3.5 times the book value of the company. But Phillip Morris insisted that it was a fine catch and that General Foods brands had great global potential. Why stop there. Phillip Morris's tock had risen and split 2 for 1 and domestic tobacco margins also kept growing within a year after the General Foods takeover, but the Company's big new stake in the food industry led it to expand its empire.

2.2 Kraft Inc. Takeover Though General Foods was a great acquisition, Phillip Morris' highest need was a dynamic management for the food business. That's when Phillip Morris set its eyes on Kraft Inc. This big food processor had sales of $10 billion, the largest piece in the dairy products business. Phillip Morris knew that this company would mesh perfectly with General Foods since there was practically no duplication in their respective product lines.

Kraft's most important quality, according to Phillip Morris, was its managerial style and philosophy that was different from General Foods which was distracted by the form of things - frilly business practices, exotic research and development, elaborate training programs, which really didn't convert to higher earnings in the end. Kraft, on the other hand, was very much a sales and operations directed company. It had solid and steadily growing earnings, famous brands to add to General Foods collection, able management, global reach and low debt. The only real problem that would dissuade Phillip Morris into a Kraft takeover was its heavy dependence on dairy products, which is unprotected against changing dietary habits.

Nevertheless, Kraft would be a valuable asset to Phillip Morris and therefore a bid of $11.5 billion dollars. The chairman of Kraft stated, "We were being acquired for all the right reasons. Our franchises and our people. Not to be built on and sold off piecemeal".

Kraft knew that there would be no real contender so they needed to play a little hard ball. After countless negotiations both parties agreed upon a final price of $13.1 billion. 10. Phillip Morris newly expanded company became the seventh in the nation in terms of revenues. 3.0 ENDURING LOGIC OF INDUSTRIAL SUCCESS THROUGH DIVERSIFICATION, ECONOMIES OF SCALE, & FIRST MOVERS ACCORDING TO CHANDLER. 3.1 Diversification Philip Morris is a big company that has maintained itself throughout the years as one of the top producers in the tobacco industry, and will continue on being.

The company on its own is recognized and known around the world, but its subsidiaries are considered as brand names that are very reputed. Subsidiaries like Miller, Kraft Inc., and General Foods have made Philip Morris Companies Inc. maintain a competitive advantage in most of their markets. The company has grown from the tobacco industry to another one that does not incorporate the same principles of growth and strategies for success. This move to the food and beverage market is evidently successful just by looking at the numbers alone. In 1969, they took that first horizontal leap forward into a different world. The importance here was based on the long-term, where the logic of the managerial enterprise is growth itself, because once a company becomes almost larger than their own market, they cannot simply take for granted what they have: they have to evolve.

In other words, evolving means diversification. A managerial enterprise grows by moving into related markets and abroad, and Philip Morris did so. Their managers and its leaders envisioned a brighter and more prosperous future for the company and its shareholders, as well as stakeholders. Recently providing shareholders a return of 25% solid, plus dividends, and a 20% increase on the stock market during 1997; and, providing its stakeholders good and essential quality products, thus being the foundation of an industrial success story. Therefore, Philip Morris' philosophy to please both its shareholders and stakeholders lie upon the constant financial returns of this major corporation. What makes them BIGGER?

It's simple, their diversification into new markets. The notion of diversification grew in 1969 where they first acquired 53% of Miller Brewery in the United-States, and three years later, buying off the rest. Up until 1969, Philip Morris' mergers and acquisitions were done within the tobacco industry, which strengthened their position as leaders in their field. As of 1969, a new strategy was developed; one that stemmed off to new economies of scale.

Thus arises the next section of this report. 3.2 Economies of Scale "An economy of scale can be defined as large plants that can produce products at a much lower cost than small ones because the cost per unit per product drops as the volume of output rises", according to Chandler's definition. In other words, if more products are made and manufactured, the lower the price of production will be. In Philip Morris' case, one of its tobacco subsidiaries, Marlboro, has become an American domestic competitive winner. Philip Morris USA assumes almost half of the tobacco industry's cigarette volume in the United-States. Philip Morris's uccess in the tobacco industry and in business has made its mark all over the world.

In the last couple of years, 73 of Philip Morris' brand names have generated revenues of more than 100$ million dollars each, and from these, 12 of them have reached revenues that have climbed beyond 1$ billion dollar mark over a single year. Thus, Philip Morris' brands names each contributed to each other's growth and economies of scale. Thanks to Philip Morris' brand names, marketing, and infrastructure, they have become a leader in the tobacco industry in the United-States, and in 30 other competitive markets all around the globe. Furthermore, their business strengths and scale put them on top in 18 of 20 most profitable food categories all in North American lands, and in more than 40 elsewhere.

Throughout this analysis on economies of scale, the focus lies only on Philip Morris' rise to ultimate success, but it is not always a smooth ride. On the way to the top, huge companies encounter problems. These situations need to be handled delicately in order to prevent terrible circumstances from arising, and affecting the normal procedures of a successful business enterprise. Therefore, these problems could be internal ones as well as legal ones. In Philip Morris's itu ation, the legal matters arose in the late 1990's, where many legal proceedings took place pending claims that the tobacco companies were being accused of manipulating tobacco products to influence users' habits. These legal matters were all over the news, and the large lawsuits portrayed a very bad image.

According to the June 26th, 2000 article on Philip Morris in the Washington Post, it summarizes that "the nation's largest cigarette maker, Philip Morris cos., yesterday agreed to acquire Nabisco Holdings Corp. for $18.9 billion and plans to combine it with Kraft Foods Inc. to create a huge and profitable food company to help offset its tobacco liabilities". (web). Seemingly enough, Philip Morris faced "unfavorable foreign currencies and economic crisis in key growth markets, tobacco legislations... and large lawsuits against the domestic tobacco industry business" (Moody's Industrial Manual), at the end of the 20th century. But through all their economies of scale, with all their corporate support, and all the efforts to help continue mass global production, Philip Morris and its 152 000 employees were capable of withstanding these pressures in order to maintain the industrial success they once had, do have, and will probably continue on having in domestic American grounds and international markets in South America, Asia, and Europe. According to Moody's Industrial Manual, the secret of Philip Morris's uccess over such turmoil, in recent years, has to do with its business strengths, its economies of scale, its business opportunities, and its balanced growth portfolio, which leads to their tremendous growth momentum. Presently, Philip Morris Inc. stands tall in the tobacco industry, but how did they actually find themselves there? Where they "First Movers" of their primary market of tobacco?

Thus, the topic of the next section. 3.3 First Movers In order to understand a bit about Philip Morris' position in tobacco industry as a "first mover", it has to be understood that the past comes into the picture here. As smoking became a new fashion in England after the Crimean War (1854-56), its soldiers had been exposed to smoking in America, and returned to England requesting cigarettes. Prior to the Crimean War, tobacco had been seen as something suitable for the poor. At the time, Philip Morris was a tobacconist with a small shop on Bond Street. Philip Morris wasn't among the top sellers of tobacco in Britain.

In 1901, the thirteen top tobacco companies in Britain combined their assets to create Imperial Tobacco, and Philip Morris was not a part it. In 1902, the new king (formerly Prince Albert), who had developed a liking of the Philip Morris brand as the Prince of Wales, made Philip Morris his royal tobacconist. In the previous year, a public offering of stock ownership of Philip Morris of 60 000 pounds was made, and this new fame increased the offering that year to 360 000 pounds. This allowed the company to open manufacturing facilities at Poland and Marlborough streets in England. At the same time, the company began advertising in stylish English periodicals. The large U.S. market in tobacco urged Philip Morris to open a small branch there.

There wasn't a large demand for imported cigarettes in the U.S., and high tariffs made it expensive to ship into the country, so Philip Morris formed Philip Morris & Company Ltd., incorporated in New York that same year. This allowed the company to manufacture finished goods in America. Philip Morris was the first British company to enter the American market because the larger British tobacco companies (which made up Imperial Tobacco) had made a deal with American giant Continental Tobacco to stay out of each other's countries. Tobacco Products, an American company, acquired Philip Morris in 1919. Philip Morris would still use its English name and ties to royalty to sell cigarettes, although the king had died ten years ago. In 1925, the Philip Morris brands had a combined total of half a percent of the cigarette market.

Philip Morris then sent field men to New York City, where the new brand had twenty percent of its sales, to promote the brand. Philip Morris's trategies had paid off. Its sales were doubling annually and in 1938 it was the fourth largest seller in the tobacco industry. It was making large profits because of the fifteen cent price. From the start, America had comparative advantages for tobacco production with respect to Britain. Philip Morris was small, even within its own country, thus it had less competitive advantage in comparison to the larger British tobacco companies.

But it made proper investments in manufacturing, first by expanding within England and then by moving into the large American market ahead of all its British competitors. Although small in size compared to the American tobacco companies, Philip Morris used its limited resources to make proper investments in marketing, setting itself well on its way to becoming the world's largest tobacco firm of today. According to our interpretation, as it can be seen here, Philip Morris could be considered as part of the "First Movers" in the tobacco industry, but it would not be appropriate to acknowledge Philip Morris as the first mover by itself. 4.0 CONCLUSION As we look back at all the points described in third part of this research, it seems obvious that they all have a common goal of ensuring Philip Morris' Industrial Success in the global tobacco market and in business. Thus, it could be said that this world renowned company of companies holds a strong comparative advantage in whichever market they are in, and under any circumstances. Moreover, Chandler's Enduring Logic of Industrial Success lies in the three points previously mentioned: diversification, economies of scale, and the concept of "first movers".

Therefore, not only do the examples above show that Philip Morris is an industrial success, it shows the different roads they had to travel to actually get there. And finally, it can be said that Chandler's logic of industrial success brought forward these three concepts to portray Philip Morris Companies Inc. as a leader of their diversified markets. Kluge r, Richard. Ashes to Ashes, New York. Alfred A. Knopf, 1996 Moody's, "Industrial Manual", Financial Communication Co.

Inc., 1998 Chandler, Alfred A. "The Enduring Logic of Industrial Success", Harvard Business Review, March-April 1990 Koudski, Suzanne, "Phillip Morris is down, but is it snuffed out?" Fortune, New York, Dec 6, 1999 web web web web web (internal company documents) web web.