Business strategy concepts and applications

Business Strategy

Which reasons for acquisition was used as the logic by the Altria Group in justifying the acquisition? Explain your answer and support it with reasons.

Altria faced the paradox of having on the one hand great opportunities for growth in the Philip Morris International business unit by focusing on rapidly growing economies in Asia including China (Hindo, 2008) and declining sales yet market leadership in the U.S. And western nations (Bary, 2007). In addition, the Altria Group brand had consistently been misinterpreted, often leading to confusion over the brand's value and product messaging (Smith, Malone, 2003). Compounding these factors was the slowing U.S. economy, and the need for Altria Group to continually provide dividends, a practice the investment group had initiated (Bary, 2007) earlier in its commitments to shareholders, and one that was in danger of being discontinued based on the performance of the U.S.-based brands (Bowe, 2007).

Altria Group's senior management made the decision to spin off the International unit to concentrate on higher-growth, less tightly regulated international markets including China and countries throughout Asia including India, while concentrating on cost reductions and process efficiencies throughout the U.S. Altria will own half of the U.S. Tobacco market mainly due to the strength of its Marlboro brand which has a 41% market share alone according to both Financial Times (Bowe, 2007) and Barron's (Bary, 2007). As growth prospects are modest in the U.S. due to continued regulation, public sentiment towards smoking being unhealthy, and in general a lack of trust of tobacco companies the Altria branding strategies failed to negate (Smith, Malone, 2003) the Altria Group senior management team also is first looking at operations-based cost reductions by eliminating duplicated departments, roles, functions, and processes to contribute significantly to cost reductions. More significant however is the planned stock re-purchases that Altria senior management will initiate once the transactions are complete. Altria is projecting a reduction of $250M in total costs after the stock buy-backs are complete, in addition to the company's market valuation significantly increasing after the buy-backs are complete (Bary, 2007). It is widely anticipated that the Philip Morris USA subsidiary will focus on smokeless tobaccos and also achieve a significant cost reduction through stock buybacks as well. Philip Morris International is expected to also attain significant market share in China as distribution agreements are put into place to expedite partner and channel relationships (Hindo, 2008).

Altria Group's interest in SABMiller and alcohol-related companies is also focused on how to generate revenue during recessionary economic cycles, as tobacco, alcohol and gaming are counter-cyclical to recessionary economic cycles (Anderson, 2008). The tendency of many consumers during tough economic times is to travel less and spend more on the vices of smoking drinking and gambling, and this has been shown in a variety of analyzes of stock performance by Kiplinger's for example (Anderson, 2008). The combination of operating cost reductions in conjunction with investments in smokeless tobacco and other innovations, in addition to looking at joint ventures with SAB Miller all underscore a strategy of looking at developing a countercyclical business strategy that can become resilient to recessionary economic pressures.

Which of the sources of integration difficulties seem to be of concern in this acquisition? Explain your answer and support it with reasons.

There are many different integration difficulties Altria Group must confront and overcome to attain the ambitious objectives they have set. First, Philip Morris International must become more self-sufficient from a product development, process and channel management standpoint (Hindo, 2008). There is also the issue of overcoming the branding inconsistencies and lack of clarity that the Altria Group brand had degenerated into as well (Smith, Malone, 2003). Most significant however is going to be the managing of the value chain the companies shared, beginning with their shared supply chain and the use of process costing to manage their product inventories (Bowe, 2007). This is going to be made even more challenging with the currency translations that will be required for the company to contend with.

The most long-term source of integration difficulties however will be in aligning domestic vs. international channel partners, specifically on the issue of synchronizing demand forecasts to the shared Altria Group supply chain. The need for making the Collaborative Planning, Forecasting & Replenishment (CPFR) process which is used for coordinating the demand for tobacco through its many suppliers and procurement partners as efficient as possible (Bowe, 2007) is both a process- and system-related challenge that is long-term in scope. In conjunction with the challenge of disengaging the CPFR process from a single location to a domestic and international one, Altria Group will in turn have to define unique supply chain, order management, manufacturing and new product development processes for each geography. These added costs will be more than offset by the stock repurchase program and the reduction in operating expenses. Manufacturing locations that are specifically designed from a process, systems and information technologies standpoint are also needed to make the specific product strategies in each geography profitable as well.