Wednesday, October 31, 2012

How Can Philip Morris International Tackle the Chinese Cigarette Market?

Philip Morris International, Inc., maker and marketer of the famous Marlboro cigarettes outside of the United States, is attempting to increase its share of the market in China. More than a third of the cigarettes smoked in the world are smoked in China, but Marlboro only has a 0.3 percent share of that market, minute compared to its shares in other dominating countries. Philip Morris has to somehow overcome the competition it faces from the state-owned company China National Tobacco, which has the largest share of smokers globally at roughly 40.6 percent in 2011. Total retail of cigarette sales in China are expected to be roughly $180 billion in 2012, growing from the $160 billion in sales in 2011. While Philip Morris is the world’s second largest cigarette company by volume, paving a road into the Chinese market will require more than just fame or name. In order to access this market and get market share in China, the only true way is to innovate a new and exciting product technology that provides something the others don’t.

As detailed by Michael Porter in his paper on the five competitive forces that shape strategy of any market or industry, China National Tobacco faces constant threat of new entries into the market. However, due to its monopolizing status in the cigarette industry today, China National Tobacco, or CNTC, does not have to worry too much about these so-called threats. In addition, it not only has the support of its consumers but also the support of the distributors and suppliers in the Chinese market. An interesting fact to bring to one’s attention that will clearly demonstrate the difficult journey that lies ahead for Philip Morris is that it had signed a strategic partnership with China National Tobacco for aid in producing Marlboros under license in China for exchange of distribution aid of CNTC brands outside of China. But as we note, CNTC has a 97 percent market share in China for tobacco products, compared to Marlboro’s 0.3 percent share. This suggests that the rivalry between competitors is obviously not enough to catch the attention of consumers seeing as CNTC practically has a monopoly over other competitors in the cigarette industry. 

Philip Morris International has strategized two different tactics to, as they claim, “potentially game change” in China. They are pouring millions of dollars into developing innovative cigarettes that are, in essence, less harmful by generating smoke at below-combustion temperatures in order to release fewer toxins. These are meant to compete against alternatives to traditional cigarettes such as electronic cigarettes. The other project Philip Morris is engaging in is the development of flu vaccines from a specific tobacco plant through licensing from Medicago, Inc, a company that specializes in producing flu vaccines from Nicotiana benthamiana, a relative of the tobacco used in cigarettes. Because China is generally more prone to such flu outbreaks seen in history with for example the H1N1 outbreak in 2009 and 2010, the flu vaccine industry is an attractive area to place one’s fit in China. Philip Morris already owns roughly 40 percent of Medicago, Inc., and in September it signed a deal to pay an initial $4.5 million for the rights from Medicago to develop pandemic and seasonal influenza vaccines in China.

This article caught my interest, as it is a clear example of how a company, in order to create a path into a monopolized market, has to develop strategies that target new and innovative ideas to compete with existing market players. As discussed in class, it is crucial for a company to know how to strategically position itself in a market, with a clear understanding of how to make certain tradeoffs in competing.  In this example, Philip Morris clearly knows that its sales of the standard Marlboro brand are not hitting point with the Chinese consumers. But clearly China is a difficult market all in all to get into due in part to exclusive distribution markets and home-based company domination, and so Philip Morris will have to overcome these large hurdles to clear a path for market share in China.  As a result, it has to create a new set of strategies that acts to serve a different population of consumers to differentiate itself and access a market.  

Philip Morris International is focusing on a smaller target market for its less harmful cigarettes to build up momentum in China. Through use of other tobacco products in its influenza vaccine, Philip Morris International plans to solidify its presence in the tobacco industry as a whole. How do you think Philip Morris’s new strategies in the coming years will play out as their products are developed in the CTNC-dominated industry? 


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