Durable businesses evolve by self-disrupting to transform
In 2016 Philip Morris International, a conglomerate for iconic tobacco brands such as Marlboro, Camel and the sister company of vaping trending Juul set out on a major business transformation initiative. The goal is to transition 40M customers to its smoke-free alternatives by 2025, ultimately achieving its
The tobacco industry globally has employed the same tactics over the decades, from fallible advertising in the 40s & 50s to government lobbying throughout but particularly in the 90s. But finally, after 90 years, there's a clear consensus and education of the general public that smoking is a harmful activity but remains a voluntary choice.
The tobacco industry clearly faces an existential threat. So Philip Morris (and its parent company Altria) have responded appropriately with an ambitious mission that's truly transformational. The initiative has been set through an amazing strategic lens that secures their survival into a new era and protects profits and ultimately dividends.
A quick stat headline on their claimed progress update:
- 📈 +52B units more smoke-free alternative products
- 📉 -114B units fewer tobacco products
We know that nicotine is the active ingredient that makes smoking addictive. While the science is inconclusive - that removing the combustion makes smoking less harmful. If remotely true, combined with synthesised nicotine, it builds for a compelling business case: arguably healthier/longer living captive customers.
This first point in product development means PMI adapts to evolved consumer preferences whilst maintaining and possibly even improving margins. Margins could be improved because of reduced reliance on supply-chain (farming) and impacts from global warming. Internalising and controlling for better production costs by manufacturing nicotine and product range with flavours and varying nicotine concentrations.
The improvements in business economics and business durability will be reflected in the stock market. As well as the overlooked ESG (Environmental, Social, and Governance) dimension. There's a growing trend of ESG aware funds that don't invest in the sector and other 'sin stocks'. Briefly, this creates an opportunity for PMI to expand into medicinal cannabis which has been expanding rapidly and is a bright spot for the industry.
While PMI's transformational scorecard is yet to be determined, the key takeaway is that while change doesn't happen overnight, firms do need to be aware of shifting market conditions and build a plan to control the self-disruption or risk self-destruction.