Value Chain Analysis Of Philip Morris International
Posted by Taylor Byrne on Sep-23-2018
1.1 Advantages of conducting Value Chain Analysis of Philip Morris International
Value Chain Analysis of Philip Morris International can offer various advantages:
1.1.1 Identify competitive advantage sources
By conducting the Value Chain Analysis of Philip Morris International during the planning process, possible sources of competitive advantage can be identified. The firm/company is a collection of different activities that share relatedness to some extent. Philip Morris International cannot trade all activities in the external market. The Value Chain approach suggests that a company can consider these activities as economic rent sources. These activities can also act as barriers to new entrants or cause cost disadvantages to competitors.
1.1.2 Identify complex inter-relationships and interdependencies
Philip Morris International can identify various internal and external linkages among activities through the value chain lens. The internal linkages are- interrelationships between activities within same organisational units and external linkages are between business units of same or different firms. Studying these interrelationships can help a company take benefit from coordination and joint optimisation.
1.1.3 Improved flow of materials, information and finances
The use of Value Chain Analysis can optimise the finances, products and information flow.
- The improved information flow can help the company identify and exploit new opportunities and reduce external threats. The continuous Value Chain evaluation can result in timely filling important gaps that may affect a firm's productivity.
- The effective implementation of the Value Chain Analysis of Philip Morris International can improve the material and product flow due to improved demand and sales forecasting. The inventory management also improves as Philip Morris International can minimise the delays by tracking activities throughout the supply chain.
- Modern customers place high importance to the quick response and convenient access to the important product related information. The unexpected interruption in the information flow can affect the customer-supplier relationship. Philip Morris International Value Chain Analysis and its implementation can highlight and remove the bottlenecks to the information flow.
1.1.4 Formulate effective firm-specific strategies
Philip Morris International Value Chain Analysis can be used in the competitive strategic decision-making process. However, choosing the right competitive strategy (cost leadership, differentiation or focus) requires knowledge of own and rivals’ cost structure.
1.2 Challenges associated with Value Chain Analysis of Philip Morris International
- The company may lose its vision and overall strategy by dividing operations into different activities.
- Dividing the operations into primary and support activities may not be separable due to increased complexity.
- The division process can be time consuming and finding the required information can also be difficult.
- Effective value chain implementation does not only require familiarity but detailed expertise.
- Philip Morris International may find it difficult to get required information if its Business Information System is not structured accordingly.
2. Porter’s Value Chain Analysis of Philip Morris International
Porter's value chain model is highly popular in the business world. However, Philip Morris International must not take it as a rigid, standalone framework by assigning the equal importance to all activities. The effective Value Chain Analysis requires Philip Morris International to realise that all activities or functions do not require same scrutiny level. Hence, the first step of adapting the Porter Value Chain framework is to identify the importance of activities according to their role in product/service delivery process.
Here is the list of primary value chain activities as proposed by Porter:
2.1 Primary Activities
The primary value chain activities of Philip Morris International are directly involved in producing and selling the product to targeted customers. Analysis of primary value chain activities can improve the performance of Philip Morris International as explained below.
2.1.1 Inbound Logistics
It is important to develop strong relationships with suppliers as their support is necessary to receive, store and distribute the product. Without analysing the in-bound logistics, Philip Morris International can face various challenges in product development phases. Analysis of in-bound logistics requires a company to focus on every aspect of transformation from raw material to finished product. Some examples of inbound logistics are retrieving raw material, storing the inputs and internally distributing the raw material and components to start production.
The importance of analysing operational activities raises when raw material arrives, and Philip Morris International is ready to process the raw material into the end product and launch it in the market. Some examples of operational activities are machining, packing, assembling and testing. Equipment repair and maintenance also falls into this category.
It includes both- manufacturing and service operations. Analysis of operational activities is important for improving productivity, maximising the efficiency and ensuring the competitive success of Philip Morris International. The increased productivity can help Philip Morris International to achieve consistent economic growth, increase profitability and set a powerful basis for competitive advantage.
2.1.3 Outbound Logistics
Outbound logistics include the activities that deliver the product to the customer by passing through different intermediaries. Some outbound logistics activities are material handling, warehousing, scheduling, order processing, transporting and delivering to the destination. Philip Morris International can analyse and optimise the outbound logistics to explore competitive advantage sources and achieve its business growth objectives.
Because, when outbound activities are timely managed with optimal costs and product delivery processes put a minimum negative effect on the quality, it maximises the customer satisfaction and increases growth opportunities for the firm. Philip Morris International should pay specific importance to its outbound value chain activities when its offered products are perishable and require quick delivery to the end customer.
2.1.4 Marketing and Sales
At this stage, Philip Morris International will highlight the benefits and differentiation points of offered products to persuade the customers that its offering is better than competitors. Only producing a high quality product at affordable costs and distinctive features cannot create value until Philip Morris International invests on the marketing and sales activities. The sales agents and marketers play an important role here.
Some examples of Philip Morris International's marketing and sales activities are- sales force, advertising, promotional activities, pricing, channel selection, quoting and building relations with channel members. The company can use the marketing funnel approach to structure its marketing and sales activities. The marketing strategies can either be push or pull in nature, depending on the Philip Morris International’s business objectives, brand image, competitive dynamics and current standing in the market.
Effective and wisely integrated marketing activities can develop the brand equity of Philip Morris International and help it stand out from the competition. However, Philip Morris International must avoid making false commitments about product features that cannot be fulfilled by the production department. It indicates the need to ensure coordination between different value chain activities.
The pre-sale and post-sale services offered by the Philip Morris International will play an important role in developing customer loyalty. The modern customers consider post-sale services as important as marketing and promotional activities. The power of negative e-WOM due to poor support service cannot be undermined in the current technologically advanced era. The company must analyse its support activities to avoid damaging brand reputation, and instead use it as a tool to spread positive word of mouth due to quick, timely and efficient support services.
2.2 Secondary Activities
The support activities play an important role in coordinating and facilitating the primary value chain activities. Philip Morris International can also benefit from analysis of its support activities as explained below.
2.2.1 Firm infrastructure
The firm infrastructure denotes a range of activities, such as- quality management, legal matters handling, accounting, financing, planning and strategic management. Effective infrastructure management can allow Philip Morris International to optimise the value of the whole value chain. Philip Morris International can control the infrastructure activities (or commonly called overhead costs) to strengthen the competitive positioning in the market.
2.2.2 Human resource management
Philip Morris International can analyse human resource management by evaluating different HR aspects, including- recruiting, selecting, training, rewarding, performance management and other personnel management activities. The effective HR management can allow Philip Morris International to reduce competitive pressure based on motivation, commitment and skills of its workforce. The company can also achieve its cost minimisation objectives by analysing hiring and training costs with their relative return. The heavy dependence of Philip Morris International on employees' talent will increase the importance of this value chain support activity.
2.2.3 Technology development
In a modern, technological advanced era, almost all value chain activities depend on technological support. The technological integration in production, distribution, marketing and human resource activities requires Philip Morris International to realise the importance of technology development. It can be divided into product and process technological development activities. Some examples are- automation software, technology-supported customer service, product design research and data analytics. The research and development department of Philip Morris International is classified in this category.
The procurement in value chain denotes the processes involved in purchasing the inputs that may range from equipment, machinery, raw material, supplies, raw material and other items necessary for producing the finished product. Due to its linkage with multiple value chain activities, Philip Morris International should carefully consider its procurement activities to optimise the inbound, operational and outbound value chain.
As mentioned above, the application of Porter Value Chain model depends on understanding the importance of all activities. After understanding the relative importance of identified value chain activities, Philip Morris International should highlight areas where value can be added, cost efficiency can be achieved, differentiation basis can be set, or processes can be optimised.
Here is a pictorial presentation of Porter Value Chain model:
3. Competitive Advantages through Value Chain Analysis of Philip Morris International
It is important for Philip Morris International to base its competitive advantage on activities in which it has access to the rare or scare resources. It may include- intellectual capital, assets, skills or distribution network. The Value Chain Analysis can help Philip Morris International identify those activities and develop those areas to get a strong competitive edge over rivals. There are many examples (like Toshiba and Sharp) that consider Value Chain Analysis as a tool to get a competitive advantage and invest heavily in research and development activities within their value chain network. Porter’s generic strategies for achieving the competitive advantage and value chain model can be used together to set strong competitive advantage basis.
Following diagram shows Porter's competitive advantage model:
The analysis of the value chain activities can be done to understand the competitive advantage sources. Philip Morris International can either use the operations, marketing and other relevant value chain activities to avail the cost advantages or it can use the human resource, technology, infrastructure, service or other relevant activities to set the strong differentiation basis. Broadly, the competitive advantage sources can be grouped into two types- cost and differentiation. Philip Morris International can obtain a competitive advantage from one or both sources, depending on the depth and breadth of its Value Chain Analysis. Next parts of the article present in detail how Philip Morris International can configure primary and/or secondary value chain activities to achieve the desired cost and differentiation objectives.
4. Cost Advantage of Philip Morris International
4.1 Cost advantage through Value Chain Analysis of Philip Morris International
Philip Morris International can avail the cost advantages by reducing the costs associated with the value chain activities. However, it requires the company to firstly map the activities and then associate costs to make necessary adjustments. The connection between the value chain and cost leadership strategy reflects a parallel focus on the low cost operational activities. If Philip Morris International aims to obtain cost advantage, it needs to identify each element within the value chain can be optimised to get the whole effect
- A Value Chain Analysis Example for Philip Morris International is that it can use the analysis as a tool to negotiate the best prices and maximise the in-bound and out-bound transportation processes.
- Another Value Chain Analysis Example is using the value chain information to make modest advertising budget that can reduce marketing costs and offer the product at an affordable cost.
If Philip Morris International aims for the low-cost, the Value Chain Analysis can optimise the profitability. If product differentiation is the aim of Philip Morris International, Value Chain Analysis will help the company in maximising the efficiency and enhancing the product quality by improving processes.
4.2 Cost drivers of Philip Morris International Value Chain Analysis
Philip Morris International can control following drivers to add value, set differentiation basis and enhance efficiency.
- Organisational policies
- Economies of scale
- Capacity utilisation
- Learning and Spillover
However, it is important to note that costs can be reduced only to some extent. Philip Morris International Value Chain Analysis must also consider the customers’ perceived value that may justify the higher price charged by the company compared to competitors.
5. Company Differentiation Advantage
Philip Morris International can obtain the differentiation advantage by analysing different value chain activities. For instance, a company can procure the unique and valuable inputs that are not easily available to competitors. Philip Morris International can either reconfigure the whole value chain or change individual entities to set the differentiation basis. The cost drivers (such as timing, interrelationships, linkages, scaling and integration) can also be altered to develop uniqueness.
Some examples of differentiation through analysis of value chain are:
- Forward integration or backward integration to exercise better control over inputs
- Utilisation of new channels of distribution
- Implementation of innovative process technologies.
5.1 Differentiation through primary value chain activities
Philip Morris International can individually analyse the primary activities from all aspects and create differentiation basis by identifying the following sources:
- Inbound logistics: possible differentiation basis for Philip Morris International are:
- Procure high quality inputs to offer high quality finished product
- Effective incoming input handling to reduce damage
- Operations: possible differentiation basis for Philip Morris International are:
- Flexible manufacturing system
- Wide product range
- Improved product appearance
- Prevention of product pre-mature failure
- Quick response to unique specifications
- Improved customer satisfaction through lower defect rate
- Improved product performance due to conformance to technical specifications
- Outbound logistics: possible differentiation basis for Philip Morris International are:
- Effective handling and better shipping to reduce product damage
- Timely product delivery
- Flexible delivery capabilities
- Effective order processing procedure
- Marketing and sales: possible differentiation basis for Philip Morris International are:
- Improved relationships with suppliers and customers
- Enhanced communication with customers by offering high quality information.
- Brand awareness, reputation and image development due to extensive and effective advertising.
- Effective coordination among product, research and marketing departments.
- Wider sales force coverage.
- Services: possible differentiation basis for Philip Morris International are:
- Superior service quality
- High quality technical assistance
- Reliable and quick repair/maintenance service
5.2 Differentiation through secondary value chain activities
Philip Morris International can also analyse the secondary value chain activities to set differentiation basis:
- Firm Infrastructure: Philip Morris International can set differentiation basis through:
- Extensive database development for effective marketing
- Advanced information system to get deeper customer insights.
- Human Resource Management- Philip Morris International can set differentiation basis through:
- Attractive rewards to encourage creativity and maximise productivity
- Personnel training for effective interaction and superior customer service
- Technological development- Philip Morris International can set differentiation basis through:
- Quick new product development
- Innovation integration in product designing
- Innovative product features with patented technology
- Procurement- Philip Morris International can set differentiation basis through:
- Reliable transportation to ensure quick delivery
- Procure high quality raw material and replacement parts.
6. Value Chain Analysis Example
Value Chain Analysis of the Philip Morris International can be better understood with the help of some examples.
- By using Value Chain Analysis, Philip Morris International can select and source premium quality raw material and develop
customer loyalty on the basis of it. It can also use Value Chain Analysis to develop brand identity.
- Starbucks provides a good Value Chain Analysis Example. The organisation created a strong brand identity and set a strong competitive advantage basis through aggressive marketing and strengthening coordination between marketing and product development department.
- Philip Morris International can also achieve competitive differentiation by speeding up the delivery of offered products to the
- Pizza Hut provides another successful Value Chain Analysis Example where organisation outpaced competitors by re-configuring value chain activities to ensure quick delivery.
- The Value Chain Analysis can also be used by Philip Morris International to improve its human resource practices.
- FedEx is a good Value Chain Analysis Example to understand how Philip Morris International can achieve competitive advantage through analysis of its human resource activities.
- FedEx emphasised over its value chain support activities, invested heavily on employee development, took excellent human resource initiatives and made visible infrastructure improvements, resulting into visible increase in brand loyalty and market share.
- Philip Morris International can analyse value chain activities to reduce the costs, find better deals with suppliers and offer
high quality products at affordable prices.
- A relevant Value Chain Analysis Example is provided by Walmart that continuously analyses its value chain activities to remain innovative, minimise operational costs and offer low-cost yet reliable services.
- Philip Morris International can analyse the support value chain activities to offer superior customer support. It can also
analyse the operational activities to expand the presence in geographically dispersed areas.
- It can be understood with the help of another Value Chain Analysis Example. Starbucks places high importance to analysing value chain activities and has successfully opened direct stores in more than 50 countries.
- Philip Morris International can also use the Value Chain Analysis as a tool to do backward integration. It can be done by
merging or purchasing the suppliers to ensure timely raw material availability.
- Apple provides a relevant Value Chain Analysis Example in this regard. The company is known for its efficient value chain and successfully controls the product and parts.
- The Value Chain Analysis can also be done by Philip Morris International to maximise the operational efficiency, reduce waste
and integrate sustainability in business operations.
- Intel is a good Value Chain Analysis Example that has reduced the waste and negative impact on the environment by analysing its value chain operational activities. The company has received appreciation for its waste reduction efforts.
- Philip Morris International can learn from value chain practices of Dow AgroSciences. Dow has used Value Chain Analysis to explore the unique marketing opportunities and extracted value from generic commodity market. The company has also used Value Chain to manage the risks at different product lifecycle phases.
The above-stated examples show how Philip Morris International can benefit from conducting a detailed Value Chain Analysis. However, it is also important to note that the Porter Value Chain model application depends on the unique contextual variables that must be considered when assigning the weightage to primary and secondary value chain activities.
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