Corporate strategy fundamentals and implementation

Altria Group: Overview

Level of diversification

The Altria Group is the parent company of the famous tobacco giants Phillip Morris and John Middleton. The Altria Group also has an 8.5% economic interest in SABMiller, the world's second-largest brewing company "("Our companies and their brands," 2008, Altria). Phillip Morris alone dominates half the American tobacco market. However, in terms of its diversification, although Altria's companies have strong brand loyalty, Altria is not particularly diversified as an entity. In fact, Altria has grown less diversified in recent years. In 2007, Altria divested itself of its shares in Kraft Foods, the snack food company in which it once had a considerable interest, and in 2008, Altria's Board of Directors authorized the spin off of 100% of the shares of Philip Morris International Inc., Altria's international division ("Corporate Restructuring, 2008, Altria).

Instead, Altria has turned its focus away from snack products like Kraft and its international potential and it is intent upon growing (or maintaining, it insists in its literature) its base of smokers domestically. According to its most recent press release, since the sale of Kraft and its divestiture of Philip Morris International Inc., Altria "now has greater focus, with most of our corporate resources directed toward building our leadership position in the U.S. tobacco industry. The U.S. tobacco industry remains one of the largest and most profitable markets in the world, and has additional growth opportunities for Altria Group. Altria Group will have the ability to leverage resources, such as Philip Morris USA's distribution network and strong field sales force, across an array of tobacco products including acquisitions like John Middleton. Altria Group will also have a more flexible capital structure" ("Strategy for financial growth," 2008, Altria)

International operations

Despite the sale of Kraft and spin-off of its international branch, Altria continues to have an international outreach both through SABMiller and also through Philip Morris Capital Corporation, a subsidiary owned by the Altria Group. "The company's portfolio consists primarily of leveraged and direct finance lease investments leased to predominately investment grade credits. The portfolio of assets of Phillip Morris Capital generates operating companies' income, cash flow, and tax deferral [status] for Altria" ("Phillip Morris Capital Corporation" 2008, Altria). Although one might think that the international market was a better source of generating new tobacco users, to cut costs Altria has turned its manufacturing focus to the domestic arena, where it has some of its most loyal brand users, although it is still maintaining an international financial presence to ensure sustained cash flow.

Recent events

The revenue of the tobacco industry has been hard-hit by recent legislative blows, including the banning of smoking in restaurants in New York City and many other major urban areas. Taxes on cigarettes are up in many states, and coupled with the downturn in the economy as well as social pressures, many Americans are seeking to quit their smoking habits. The tobacco industry continues to receive bad publicity for its marketing efforts to teens as well as the negative personal and public policy consequences of tobacco addiction. This could prove problematic to Altria's strategy to focus on maintaining its domestic market to ensure a strong revenue base while reducing its overall costs of operation. The tobacco industry has also garnered recent bad press with the discovery that "reanalysis of nicotine yield from major brand name cigarettes sold in Massachusetts from 1997 to 2005 has confirmed that manufacturers have steadily increased the levels of this agent in cigarettes. This independent analysis, based on data submitted to the Massachusetts Department of Public Health (MDPH) by the manufacturers, found that increases in smoke nicotine yield per cigarette averaged 1.6% each year, or about 11% over a seven-year period " (Herman 2007).

Alliance or joint venture

One recent potentially lucrative joint venture for Altria is the announcement that SAB Miller and Molson Coors will combine their U.S. operations. "The joint venture, now known as MillerCoors is designed to create cost savings in the U.S., where SAB is the second biggest brewer and Molson the third behind Anheuser Busch" (Herman 2007). Thus, the SABMiller arm of Altria is also falling into line with the general acknowledgement for the need to cut costs in terms of business operations in the U.S. This is good news for Altria as well because it ensures that the product lines in which it still possesses an interest extend beyond the realm of tobacco are likely to cut costs and may improve their market showing in upcoming months. Given that beer is less expensive than many other alcoholic beverages, even during a recession it is more likely that people will consume beer than more expensive wine or spirits, and alcohol is more socially acceptable from a health standpoint than cigarette smoking in the U.S.

What is the business logic and rationale behind Altria Group's corporate strategy?

Although the U.S. tobacco market is shrinking, Altria hopes that through cost management, the financial drain of doing business can be reduced at a rate that exceeds the declines in cigarette consumption in the United States ("Strategy for financial growth," 2008, Altria). Altria manufactures some of the most famous cigarette brands in the world, including Marlboro, Basic, Black & Mild, L&M, Parliament and Virginia Slims ("About Altria overview," 3008, Altria). Through streamlining its operations and maximizing its distribution and supply chain, Altria hopes to cut back its operating costs, continue to make a profit from its core consumer base, and draw further revenue from SABMiller and the Phillip Morris Capital corporation.

How well do Altria Groups' decisions about formulating and implementing corporate strategy fit with that logic and rationale?