Decades of selling cigarettes has led Philip Morris International (PMI) to become one of the world’s largest corporations. Today, the company’s “smoke-free” alternatives, such as IQOS, have successfully lured smokers away from cigarettes to less harmful alternatives. But it was no mean feat, as Tommaso Di Giovanni, Vice President Market Activation & Support, tells Executive. It took years of trial and error before the company landed on the model we know today. Despite IQOS global presence, the cigarette business remains primary for PMI in some countries, Di Giovanni says, which brings business stability and wards off competitors.
Philip Morris International has embarked on a strategy that has now gone global; embracing innovation, design thinking, and an intuitive approach to problem solving. Can you explain to me this repurposing exercise that started before we saw the first IQOS in 2014? For example, what was this exercise anchored in? What was the by-in of the board of directors? How is the responsibility spread within the company in terms of governance?
Let me start from the easy question: the board. There’s a few people actually in this company who are really behind the change, and they were really the driving forces of change. One of them and probably the most important one is André Calantzopoulos, who at the time when we announced we would go smoke free in 2016, was our CEO. He’s now the chairman of the board and I can tell you he is totally behind this change. I would say the board is not only fully on board, [but] the chairman of the board is [actually] the driving force behind the change, the visionary mind behind the change. When we tested the previous [IQOS] prototypes, people didn’t like them. And if people don’t like them, you can keep it in a drawer where it doesn’t really help. It started in 2007-2008, exactly under Andre’s leadership, we decided we were getting closer to having a product that delivers on the risk reduction, but also delivers on the adoption for smokers.
I saw some of the prototypes; they weren’t there. For instance, we tested the heat bar in 2008 I think, and it didn’t deliver, people didn’t like it. But by 2014, we thought we had something like IQOS that was really worth putting on the market. So that’s how it all started. The reason why it started is because, and you’re totally right – we are a company, we do want to make profits and we have shareholders to whom we need to deliver profits, absolutely. There’s nothing to say about that and it’s true, but addressing a key concern of society with regards to our product, actually, does help the company be more sustainable, more stable and having less tension with society than if we sell cigarettes. So, it actually makes full business sense and it’s a win-win. If you manage to respond to public health concerns, and at the same time [you are] being more profitable, well you do bingo. If on top of that, you’re growing capabilities in areas that then can help you go beyond the nicotine health care and wellness because now you have scientists, you have scientific facilities like this one, you’re even expanding your footprint eventually. So it’s really a place where it’s courageous, it’s brave because cigarettes, let’s face it, were a business going really well.
My next question is regarding Environmental, Social, Governance (ESG). I read your sustainability report and I did not see any reference to the board of directors, and yet the three letters of ESG are environmental, social and governance.
When it comes to governance, I think you touched on a good point because it’s a complex transition. On one hand, we do have a cigarette business, and that cigarette business is still primary in many countries, and it’s what if you will, fuels our ability to do smoke free which is very resource consuming, because it needs a lot of investment. In some countries actually we can’t transition because “smoke-free” [products] are prohibited. So of course, the cigarette business remains important. At the same time, we needed new capabilities and new expertise which is sometimes different than the one used for cigarettes.
A little example: with cigarettes, you don’t need engineers who can design technology and electronics. Here [with IQOS] you do. With cigarettes, you don’t need after sales support, here you do need it. The way you sell cigarettes is very different than the way you sell IQOS. Cigarettes in a shop, it’s 30 seconds. Here, you actually need to convince the consumer, you need to explain what are the hurdles you need to accompany [them] during the beginning of the journey when usually they go back to cigarettes because they don’t know how to charge the product, they need to clean it, they don’t know how it works. It’s all the hiccups of electronics that they face. So, governing this complex machine of course, it’s much more difficult than what used to be with cigarettes.
Now not only we are a much more complex organization, but we need to govern (to your point) to realities that are sometimes almost opposing each other. They have different logics and different businesses and you need to make sure that both coexist until one disappears and the other one takes fully over, and on top of that we’re building the business beyond nicotine. So, you really have three souls of the company at the moment and keeping them together is what the governance is primarily looking at the moment. We had numerous discussions on how to govern and organize all this, ultimately, the way it’s working today seems to be delivering. So that’s where we stand today, but it’s much more complex.
How do you integrate your reporting on the new smoke free business? It’s PMI that is doing these activities and you need new reporting to integrate your full activity. So, how do you communicate and reconcile PMI’s original business alongside the smoke-free movement launched in 2014/15?
Well, there’s a difference in both. One is a business that’s historic, [and] there to stay to a certain extent, but slowly will disappear into the other one. So of course, we focus our communications on the new business because that’s what really drives the change of the company, the transformation is the new business. But at the same time, we can’t be disparaging or forget that a) our success was with cigarettes, b) cigarettes will be there for a long time and they will fuel the success of the transformation until they disappear, and c) the fact that we cannot compete solely based on reduced risk products [so] we do need to compete on cigarettes because otherwise we would simply leave room to our competitors. I think this is where the challenge resides, but I think in our communications, especially with the financial communities, we’re very direct on those, and I think that’s the way to be. By the way, the financial community actually looks at the cigarette business as part of what actually drives the solidity of the company because it’s a stable business. So, it’s exactly the balance between the two, on one hand, they look at the future that we’re building, which is promising – that’s why our share went up after the latest acquisitions, if you noticed. On the other hand, they also want to be reassured that the basis is solid. And that’s exactly what drives our communication to the financial community.