Case Study: The Seven-Up Division of Philip Morris

THE SEVEN-UP DIVISION OF PHILIP MORRIS

1. Asses the most important threats in tobacco industry in 60-70. Why Philip Morris decided to implement strategy of diversification?

The end of World War II brought increase of tobacco consumption in United States. It changes in early 50s when many organizations and individuals started investigating the correlation between smoking and cancer. In 1952 Reader’s Digest published first article that was detailing the dangers of smoking cigarettes titled: “Cancer by the Carton”. It was a beginning of avalanche of articles in this topic. More and more researchers started conducting their own investigations and sharing them. In a result, cigarette sales decreased for the first time in over two decades.

Even though, the tobacco companies handled this problem by forming in 1954 the Tobacco Industry Research Council which was in charge of conducting mass-marketing of filtered cigarettes and low-tar formulations that promised a “healthier” smoke, they were able to increase sales only for a moment. In early 60s, the Surgeon General’s Advisory Committee on Smoking and Health was established. This institution released in 1964 a 387-page report on an impact of cigarettes on a human’s health entitled “Smoking and Health” that was also a result of constant political pressure and a growing body of scientific evidence suggesting a causal relationship between those two phenomenon. Most important conclusions for companies that were doing business in tobacco industry were as follows:

“cigarette smoking is causally related to lung cancer in men”;

in case of the data for woman was stated more or less the same:

“though less extensive, point in the same direction”;

According to the investigation conducted in the report was stated that the average smoker is 9 to 10 times more likely to get lung cancer than the average non-smoker and cited specific carcinogens in cigarette smoke, including DDT, cadmium, and arsenic.

That was devastating news for all companies from tobacco industry. Even though smoking used to be fashionable that time, after all anti-smoking campaigns sales of cigarettes in 60s and 70s were declining (Figure 1).  The government of United States decided to “enter to the game” and in 1965, Congress passed the Federal Cigarette Labeling and Advertising Act that was requiring the surgeon general’s warnings on all cigarette packages. Six years later all broadcast advertising cigarettes was banned.

Figure 1 Annual adult per capita cigarette consumption and major smoking and health evens - United States, 1900-1998

[pic 1]

Source: 1 Office on Smoking and Health, National Center for Chronic Disease Prevention and Health Promotion, CDC, online [retrieved: 09/06/2015] http://www.cdc.gov/mmwr/preview/mmwrhtml/mm4843a2.htm

According to Calori and Harvatopoulos (1988) diversification has two dimensions of rationale.

First one is related to the nature of the strategic objective, thus, diversification can be offensive or defensive. While taking offensive position, the company wants to conquer new positions, use cash that is retained and exceeds total expansion needs or just to take opportunities promising greater profits than expansion opportunities. On the other hand, defensive position is most likely spreading the risk of market contraction or it can occur when a company is forced to diversify due to potential lack of opportunities for growth with current product or with current market orientation.