In 2016, Philip Morris International announced that it was committing to a major business transformation — a move away from cigarettes and other combustible tobacco products and toward healthier, smoke-free alternatives to nicotine delivery. The goal by 2025, the company declared, was to get at least 40 million of its adult customers to stop smoking and switch to one of the alternatives, with the goal, ultimately, of achieving a “smoke-free future.”
Last month, the company released a lengthy report touting its progress since 2016. It says it’s shipped 114 billion fewer units of cigarettes and other combustible products — attributing half of that decline to its own efforts — and 52 billion more units of its smoke-free products. Additionally, the company has committed improving itself along several ESG dimensions. It aims to become carbon neutral by 2030, for example, and to halve the amount of plastic litter its products produce by 2025.
These all seem to be promising developments, as does the announcement, made on July 7, that the FDA has declared the company’s smokeless heating system a “modified risk tobacco product,” the marketing and use of which the agency now expects will lead to a move away from smoking that will “benefit the health of the population.”
But doubts remain. Many investors, large and small, still exclude Philip Morris from their portfolios because of the harm that its cigarettes and other combustible products continue to do around the world. Can investors trust the company’s commitment to a smoke-free future and the principles of ESG? What are the challenges that a traditional “sin stock” faces as it tries to develop trust and reinvent itself?
HBR recently discussed these questions and others with Andre Calantzopoulos, the CEO of Philip Morris.
Your ESG efforts are impressive, but they’re complicated by the fact that you sell a product, the cigarette, that harms people. How are you dealing with that paradox?
When we talk about ESG, it’s important to address the question of impact. The first step is to identify and acknowledge the problem, which we have done. Then, obviously, once you have the technology and the ability to address the problem, you must address it.
A lot of people think it’s the nicotine in cigarettes that causes morbidity and mortality. But it’s not. Nicotine is addictive, but it’s not the primary cause of disease. The FDA has clarified that. The problem is combustion. If you can eliminate combustion, then you significantly reduce the harmful chemicals the product emits compared to cigarette smoke. The best thing a smoker can do, of course, is to stop nicotine consumption altogether. But a billion people still smoke, so the next best thing you can do is to convince them to change their behavior by creating products that they can switch to. That is what we are doing.
So how do you make the switch?
Once you know that you have products that reduce toxicity, the next step is to substantiate that what you want to achieve is quantifiable and qualifiable compared to cigarette smoking. When we started this journey, we had absolutely no guidelines on how we should do this. The FDA had not issued any guidance at that point in time. So we decided to follow a two-part process that’s very similar to what happens in the pharmaceutical industry: pre-market studies and post-market surveillance.
In the pre-market phase, we gathered data and developed a fair degree of confidence that our new products are better than cigarettes. When we compared cigarette smoke to the aerosols generated by these new products, we found a drop in the levels of harmful substances that was between 90% and 95%.
Of course, in a pre-market setting you can’t quantify the exact amount by which you can reduce morbidity and mortality. A 95% reduction in harmful substances doesn’t necessarily mean a 95% reduction in disease. But you can have the confidence, even at the pre-market stage, that it’s not going to be at the same level as cigarettes. These are not zero-risk products, but they are vastly better than cigarettes, and they can help us phase out cigarettes.
And post-market?
For post-market surveillance, you have to do two things. First, you try to quantify the long-term reduction in morbidity and premature deaths. But also, very importantly, you try to ensure that you can maximize adoption of the product with your intended audience, which in our case is adult smokers, while minimizing the impact on any unintended audience — primarily, teenagers.
The other part is commercialization. For our new products, this is vastly more complicated than cigarettes. Some countries have legislation that doesn’t allow you to tell people that they are better than cigarettes. But even if you can tell smokers that switching completely from conventional cigarettes to these products reduces exposure to harmful or potentially harmful chemicals, you need to repeat that message a lot. And you have to do a lot of hand-holding. If somebody buys a device, you have to follow up with them for at least three weeks or a month to make sure they don’t go back to cigarettes.
You’re doing that?
To the extent possible. Our objective is to use our technology and apps to register everybody who buys these products, so that we can follow up with frequent calls, asking, “Are you continuing to use the device?” We are developing specific applications to help them psychologically during that period.
With these new products, it’s not at all the transactional thing you have with cigarettes, where customers see the product, buy it, and leave. We’re now working with electronics, which means call centers, supply chains, replacement, reverse logistics, recycling. Organizationally, it is a big change, and a vastly more expensive exercise.
Your plan is a “smoke-free future.” How far away is that?
Well, if you do a phase-out too early, you create unintended consequences, including contraband and so on. But with the right demand and supply measures, I think we can eliminate cigarettes in certain countries within reasonable time horizons — 10, 15 years. But for that you need the public sector and private sector to work together, just as we need them to do anytime we want to improve the conditions on the planet. What I would like to have is the regulation and the conditions that say, “You do these things, but under very clear supervision.”
What advice do you have for other companies that have bad reputations and trust problems and want to reinvent themselves?
As I’ve said, the first thing is to admit the negative impacts of your product. If you admit your impact, that creates an externality that you can innovate against.
The second thing is: Be serious. It’s very unlikely that consumers will choose something unusual or complicated unless you put a lot of commercial effort behind it. You can’t just put them out there and assume you’ve done your job. No. You’ve done your job only when you’ve convinced consumers to move to your new product en masse.
The third thing is that if you’re disrupting your own business, you need an innovation that is very different from your previous product, and you need to make changes to your organization to support it. You have to transform your organization so that it’s fit for purpose. For us, that means working much more in multi-functional project teams. We now have vertical functions that we never had before — electronics, product development, digital, and so on.
A lot of what we’ve been talking about comes down to developing trust, doesn’t it?
Correct. And I know we have a deficit of trust. There is also an emotional component to this whole thing. Some of the NGOs who oppose our plans have fought against tobacco companies for so long that they’ve forgotten the welfare of smokers. Attacking Philip Morris might be emotionally satisfying, but I don’t think it will ever convince a single person to quit smoking.
The same goes for the exclusion of cigarette companies by ESG investors. I don’t think that will help anybody improve. Instead, when it comes to a problem like smoking, the best way to bring about change is to engage with the companies that are causing the problem.
But coming back to your question about trust. My argument to those who say “You can’t believe them, you can’t trust them” is the following: I don’t think we will have a second chance as a company. If all the things we’ve done to move toward a smoke-free future were not true, as some claim, then we would be doomed. Why would I engage my company in a multibillion-dollar transformational exercise if I didn’t believe that it was the right thing to do? Even more importantly, how you can refuse people the chance to access a product that is better for their health?
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How Philip Morris Is Planning for a Smoke-Free Future - Harvard Business Review
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