E-mail this page1996 — National Reporting
Philip Morris Cos. draft report
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This is the text of a Philip Morris Cos. draft report regarding a proposal for a "safer" cigarette, code-named "Table." COMPETITIVE ANALYSIS Background -- The Cigarette and the Smoking Experience Philip Morris USA is a producer of American blend cigarettes. The cigarettes are designed to provide a smoking experience for an adult. Made primarily from tobacco, flavorings and paper, the majority of the products have a cellulose acetate filter to adjust the delivery of the smoke that is emitted when the cigarette is lit. The consumer draws on the cigarette and inhales the smoke or gaseous, vaporous system into his or her lungs, then exhales the smoke into the air. The smoke delivers flavors, carbon monoxide, nicotine and tar to the smoker. Different people smoke for different reasons. But the primary reason is to deliver nicotine into their bodies. Nicotine is an alkaloid derived from the tobacco plant. It is a physiologically active, nitrogen containing substance. Similar organic chemicals include nicotine, quinine, cocaine, atropine and morphine. While each of these substances can be used to affect human physiology, nicotine has a particularly broad range of influence. During the smoking act, nicotine is inhaled into the lungs in smoke, enters the bloodstream and travels to the brain in about eight to ten seconds. The nicotine alters the state of the smoker by becoming a neurotransmitter and a stimulant. Nicotine mimics the body's most important neurotransmitter, acetycholine (ACH), which controls heart rate and message sending within the brain. The nicotine is used to change physiological states leading to enhanced mental performance and relaxation. A little nicotine seems to stimulate, while a lot sedates a person. A smoker learns to control the delivery of nicotine through the smoking technique to create the desired mood state. In general, the smoker uses nicotine's control to moderate a mood, arousing attention in boring situations and calming anxiety in tense situations. Smoking enhances the smoker's mental performance and reduces anxiety in a sensorially pleasurable form. Other reasons for smoking, besides nicotine delivery, include habituation, attachment, personality, culture and genetics. Smoking is many different things to different people, including:
In its broadest sense, the cigarette is a pleasure product. It alters mood states just like the caffeine, alcohol and sugar in other Philip Morris products that affect human physiology and psychology. As with nicotine, these substances become part of an individual's life style and are used as coping mechanisms to help adjust to the environment. Competitive Products -- Nicotine Delivery Nicotine delivery devices range from snuff, chewing tobacco, cigars, pipes and conventional cigarettes to unique smoking articles, chewing gum, patches, aerosol sprays and inhalers. The manufacturers of these products also vary considerably in type, size, areas of expertise and marketing approach. The chart below summarizes the major competitors, their area of focus and their target market.
Competitive Products -- Market Size
Consumption Expenditures/Retail Purchases
(in millions of dollars)
Change YAG
1991 1990 % Amount
Smoking Tobacco $252 N/A - -
Chewing Tobacco 780 N/A - -
Snuff 873 N/A - -
Subtotal $1,905 $1,663 +14.6% +242.0
Large Cigars 553 552 FLAT FLAT
Small Cigars 83 68 +21.3% +14.6
Subtotal $636 $620 +2.5% +16.0
Cigarettes $45,200 $41,536 +8.8% +3,664.0
Grand Total $47,741 $43,819 +9.0% +3,922.0
Source: TMA Estimates (10/05/92)
Competitive Products -- Recent Trends In the last five years, the scientific community in both the United States and Europe has been pursuing innovative nicotine delivery systems to either replace or transform the worldwide cigarette business as we know it. The majority of the patent activity has been focused on transdermal and nasal delivery systems, although more recent work has moved into tablets and injectable nicotine. The primary motivation for the products is smoking cessation through a controlled, gradual reduction in nicotine delivery. The companies dominating the development and the marketing are primarily pharmaceutical firms, although Procter and Gamble, Seimens and JTI have also shown interest in the subject. The barriers to entry that have characterized the tobacco business do not constrain the broad field of potential competitors we now face. In addition, the nature of competitive product development relies on legal protections afforded to technological innovation -- an area not historically of value to the oligopolistic tobacco industry. In fact, only one domestic tobacco company has attempted to commercialize a new type of nicotine delivery device. In September 1987, R.J. Reynolds publicly announced a new type of smoking article called Premier. The Premier article, which looked like a cigarette, consisted of a carbon heat source, a reservoir of nicotine and glycerol on aluminum oxide pellets and a weakly efficient filter system. It was offered in two test markets in Arizona and Missouri in 1988. The markets did not do well and were closed in early 1989. Premier was hard to light, did not burn down, smelled and tasted bad. But, it has a number of key attributes: zero biological activity, no ashes, minimal sidestream smoke and limited fire safety problems. In a sense, the use of a carbon heat source in an aluminum capsule filled with flavor pellets, surrounded by tobacco, paper and a filter revolutionized cigarette smoking. Perhaps if those who had tried it had taken the time to acquire a taste for it, the product would have established itself as a mainstream smoke. But, the sensory sacrifice was too great -- and the product failed. Since 1988, R.J. Reynolds has continued to work on this device to improve its subjectives. This work, along with a large collection of patent activity, indicates that RJR maintains a strong commitment to new smoking devices. R.J. Reynolds is not alone in its pursuit of a better cigarette. Other tobacco industry patent activity by JTI, the Imperial Group, Procordia A.B. and Brown and Williamson illustrates extensive interest in the development of a superior nicotine delivery device, with or without a tobacco base. In addition, Austria Tabak is constructing a new research center with the stated ambition of developing "the world's lowest risk cigarette." The pharmaceutical companies, on the other hand, are pursuing substitute nicotine delivery devices in a range of formats -- from patches to pills to inhalers. Their stated motivation is smoking cessation. The drug company devices generally lack the ritual of the smoking act and its sensual pleasures, but they do deliver nicotine in its most basic form. In addition, Siemens is working on battery powered devices and inhalers that could deliver nicotine. A summary of recent patent activity follows this analysis. Philip Morris has chosen to pursue a nicotine delivery device that, like RJR's Premier, continues the cigarette tradition of sucking on a cylindrical mouthpiece to inhale flavorings and nicotine form a tobacco based product. The approach of heating rather than burning the tobacco produces a cleaner, safer smoking experience. Known by the code name of Table, the product has the potential to replace the conventional cigarette -- in much the same way that cigarettes replaced chewing tobacco over a hundred years ago -- as a more socially acceptable form of tobacco use. As preparations are made to consider launching Table, two key challenges face Philip Morris:
If you believe that both of these can be answered in the affirmative, it is imperative that Philip Morris move quickly to pre-empt the competition and deliver a superior cigarette to the American public.
ORGANIZATION Philosophy -- Network Model Table offers an opportunity for Philip Morris to create a new corporate entity to manage, produce and market a new product in a new way. The computer industry (Silicon Valley and Route 128), the automotive business (Saturn Project) and industrial firms like Eastman Kodak have made major changes in the way they are organized and in the way they operate. They offer working models for Philip Morris to refer to as we seek to move from the traditional corporate approach of the industrial age to the new wave partnership of the twenty-first century. The new proposition for Table rejects the hierarchical approach to business management and replaces it with a network model. The network is based on the natural flow of ideas, allowing leadership to emerge based upon the issue at hand. It is expected to surface any and all problems, new approaches and new solutions. It is designed to continually seek a better way to do business. FLEXIBILITY, CREATIVITY and INNOVATION characterize the thinking of the new workforce. Each descriptive characteristic of the new management approach contrasts with the traditional Philip Morris management philosophy, suggesting that a separate entity be created to support the Table business. Contrasting Management Paradigms* Characteristic: Traditional PM: Table: Organization Hierarchy Network Output Market share Market creation Focus Institution Individual Style Structured Flexible Source of strength Stability Change Structure Self-sufficiency Interdependencies Culture Tradition Genetic Code+ Mission Goals/strategic plans Identity/directions/values Leadership Dogmatic Inspirational Quality Affordable best No compromise Expectations Security Personal growth Status Title and rank Making a difference Resource Cash Information Advantage Better sameness Meaningful differences Motivation To complete To build * Source: J.E. Cook of Computervision Corporation and J. Sculley of Apple Computer + Genetic coding imprints identity and values, but it does so with a focus on future evolution, not on the tradition of the past. The type of people on the Table team will be flexible enough to do cross-functional jobs and pitch-in whenever/wherever business needs require them to. The organization will be kept as flat and lean as possible. Information, authority and communication move horizontally, in an oval, not vertically, and not top down. The manufacturing facility will be treated as a laboratory where experimentation is on-going. Because of the changes that continue, work will be done in leased facilities and in open work spaces. The organization will be made up of temporary teams of people who gather together to collectively confront an issue. Once a subject is tackled, the team will disband. A leader of one network is often a follower in another. The number of people is kept small because each employee wears a number of hats. In addition, there is considerable reliance on an independent network of business partners and/or suppliers outside the company. This external network of relationships is key to gaining competitive advantage in a product dependent upon technological advances. The circles within circles in this schematic illustrate how functionally oriented high level councils would operate in our company, much the way they work at Saturn. The TDAC or Technical Development Action Council coordinates advanced engineering and design. The CAC or Customer Action Council brings sales, service and marketing together. MAC stands for Manufacturing Action Council and encompasses engineers, materials management, finance and systems, within manufacturing. These three key groups intersect to form the SAC or Strategic Action Council. This core oversee the organization and sets strategic direction. Outside this center are both the long-term management "guru" and the short-term operator who leads day to day activity who come together on the corporate committee to insure company goals are met. It is important to note that unlike traditional staff functions, the resource teams are flexible and fluid. They are groups of professionals who move from business team to business team and actively participate in the decision making process. The ultimate goal of the team -- both internal company employees and external business partners -- is to make the current product and process obsolete -- as the status quo is constantly upgraded to a better way and a better product. The aspiration of the employees for the future of the company must lie beyond current resources. In fact, it is the commitment to the change and growth ideology that motivates the workforce -- not promotion, salary, office size and title. They do have a stake in the success of the company. Their reward comes in the form of stock options. People in this type of company aren't looking for a secure job for their working lifetime. They are looking for the challenge and personal growth you experience when you create and build. They know they have to give of themselves -- and they want to. Their thoughts are welcomed. People aren't fearful of saying what they really think. In fact, the more unconventional the thinking, the better. It is through applying an open mind and challenging conventional industry practices that new approaches and new solutions can be found to continuously improve business in the fast changing technologically based arena of the Table product. Reengineering -- A New PM Company The reorganization or reengineering of the traditional structure around the work process requires a fundamental analysis of the product the consumer seeks. Starting with the end product, and working back, we need to focus on the core competencies required for the new entity. The core competencies will determine what business we will be in -- and what we need to supply from either inside or outside the company. It is understood that PM USA has traditionally had trademarks, flavoring expertise, cigarette making and packing knowledge, as well as marketing, sales and distribution prowess. However, we don't know what and who will transfer well to the new company. In addition, we lack the technological strength to produce Table in its entirety, in the same way we manufacture and market our current product line. Therefore, the identification of the core competencies required as well as those of our partners -- are crucial in identifying the processes around which the Philip Morris team will be "reengineered". The Center for Reengineering Leadership at Eastman Kodak provides a description:
Reengineering requires a total rethinking and redesign of the Philip Morris USA business system. It demands new business processes and newly identified job definitions, organization, management and control systems to complement the new design. A radical change in beliefs and behavior is also required. The following schematic visually demonstrates how the key components of the new organization would interact and what they consist of. (Diagram from report omitted) As with any major change to a business, the most critical success factor in re-engineering is the active participation of executive leadership. That participation is not one of setting policy, but rather identifying long-term strategic goals -- and challenging operational management to improve upon those goals in the business process. With the focus on the customer, all employees are charged to continuously improve through innovation in response to market needs. Consequently, there are three driving forces motivating the behaviors of all employees:
In all aspects of work. Management must execute these three principles -- and also lead by example, coaching in the following ways:
Table requires a small team of key people to develop the organization. The individuals must be bright, have a broad experience base, be risk takers and visionaries. They need to be assigned to the project full time and be trained on existing "reengineering thoughtware". The reengineering for Table can be expected to follow a stepped progression similar to one that Eastman Kodak experienced during the life cycle of its reengineering project.
The Table Task Force would like the opportunity to start with a clean sheet and build the best operation to support the new business. A small project team of empowered cross-functional individuals is needed to take charge and make the Table network a reality. | ||||||
