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Philip Morris’s Dominant Positioning in a Tough Industry

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Intensity of competition

Philip Morris International (PM), a leading manufacturer and seller of tobacco-based products, faces stiff international competition in packaging, flavor, and brands from companies like British American Tobacco (BTI), Reynolds American (RAI), and Imperial Tobacco Group (ITYBY). Nevertheless, the tobacco industry has loyal consumers. When competitors change prices to gain market share, for example, it can be an unprofitable strategy because Philip Morris can always do the same. As of March 31, 2015, Philip Morris reportedly had a brand value of $116.7 billion, while Altria Group (MO) and British American Tobacco reported brand values of $98.5 billion and $96.5 billion, respectively.

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New entrants and substitutes

Due to the many regulations surrounding tobacco, it’s difficult for new companies to enter the industry. In addition, the industry is horizontally integrated, with only a few dominant players across the globe, making it that much more difficult for new entrants.

In terms of potential substitutes, inhalator patches, gums, sprays, and e-cigarettes pose the biggest replacement threats to cigarettes, aside from different brands of cigarettes altogether. But Philip Morris has tended to price its products reasonably, making it difficult for most consumers to switch.

Bargaining power of suppliers

The major component in cigarette manufacturing is the tobacco leaf. Philip Morris sources ~35% its global tobacco leaf requirement directly from farmers, which increases the company’s dependency on suppliers. However, Philip Morris is the largest tobacco purchasing firm in the world, buying over 400 thousand tons of tobacco leaf from leaf suppliers and farmers in over 30 countries.

Bargaining power of buyers

Cigarette consumers are usually loyal and do not switch to other brands unless there is a huge price difference in competitor brands. But when prices do change, it’s often likely that consumers switch to another Philip Morris brand, as the company provides such a range of variously priced products.

Philip Morris has exposure in the iShares S&P 500 Growth ETF (IVW), with 0.7% of the portfolio’s total weight.

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