market segment is more unattractive than attractive. It is quite unlikely to attract more companies to enter the tobacco industry.
● long-term and well established links with the suppliers
● cigarette brands in different segments
● zero indebtedness
● integration in a one factory and thus saving costs
3.3.2 Weaknesses
● revenues are influenced by exchange rates
● no diversification – entirely dependant on the cigarette industry
● inability to price the products independently
3.3.3 Threats
● strong competition within the tobacco industry
● decline in the market share
● cigarettes are subject of a high taxation
● illicit trade and pirate production of cigarettes
● rise of excise tax faster than in some neighbouring countries (e.g. Poland)
● cigarettes are subject to regulations, as they are addictive and badly affecting health
● trend of smoking bans around Europe
● cigarettes brands have substitute
3.3.4 Opportunities
● stable political conditions
● smokers are usually somewhat loyal to the certain brands
● tobacco industry is a differentiated oligopoly
● high barriers to enter the tobacco industry for new entrants
● cigarettes themselves do not have a real substitute
● company actively innovates its products
● production facilities located in the Czech Republic
● rising export shipments
3.3.5 Matching
The next step in applying SWOT analysis is matching.
The key to the successful achievement of company's goals depends on its ability to transform key strengths into capabilities by matching them with opportunities. Capabilities can become competitive advantages if they provide better value to the customers than competitors' offerings.34
Philip Morris has the dominant position in the Czech and Slovak market and owns strong portfolio of different cigarettes' brands. Smokers are usually loyal to the certain brands. Thus, company should continue in the efforts of providing the best quality available through different pricing segments, while still actively innovating its products in order to attract new and retain current customers.
Due to its dominant position, the Company should try to persuade its customers, when they want to switch between different brands because of the price, to switch to a cheaper Philip Morris' brand.
Company uses modern production facilities. This could be used in order be perceived as an up-to-dated and trendy company.
Company has its production facilities in the Czech Republic,so they should use it, to show to its customers, that the cigarettes are Czech product.
3.3.6 Converting
The last step of SWOT analysis is converting. Firms can convert weaknesses into strengths, and even capabilities, by investing in key areas and by linking key areas more effectively.
Likewise, threats can be converted into opportunities if the right resources are available. If
34 Marketing Management p. 63
this is not possible, then the company should at least try to minimize the bad affects of it.35 First, I will start with consideration of the weaknesses.
Significant part of the Company's revenue is in other currencies than CZK. Yet, as demonstrated by the following graph.
Source: PM Annual Reports
PM earns money on the foreign exchange every year. Therefore, the Company uses this weakness in order to generate bigger revenues.
Company entirely relies on a single product, however the trends show that consumption of cigarettes is in slight uptrend in its base markets and demand for cigarettes from Philip Morris ČR is rising.
Company cannot freely decide about prices of its products, as they are subject of high taxation. But Company, due to its size and financial position, can absorb e.g. excise tax rise and market the product for unchanged price for some time. It is more likely that its competitors will not be able to compete in this way for long time.
Now, I will take a look at the threats.
There is a trend in rising of the excise tax, which will stimulate illicit trade or smokers will be more likely to buy cigarettes in the neighbouring countries. The Company has to work on to make its customers loyal to its brands. Good point about it is that Philip Morris produces some typical Czech and Slovak brands, that cannot be bought anywhere else.
Cigarettes are badly affecting health. Philip Morris will have to try to innovate and produce
“healthier” versions of its products.
3.3.7 Strategic summary
From the strategic analysis we can conclude that the Company is sufficiently strong to strive
35 Marketing Management p. 65
Table 3: Net profits (losses) from foreign exchange
Foreign exchange (n CZK mil) 2009 2008 2007 2006 2005
Gains 238 271 121 72 56
Losses (229) (255) (106) (35) (48)
Difference 9 16 15 37 8
to maintain its dominant position in the Czech and Slovak market, while increasing its export shipments at the same time. Company follows the strategy of organic business growth. Every year PM reaches higher shipment, that is expected to rise in the future as well. Company invests considerable amount of money into modernizing of its production plant in order to be innovative.
Philip Morris has a broad variety of different cigarettes brands through all pricing sectors.
Moreover, Company can count on a numerous loyal smokers.
Philip Morris can rely on its business partners with whom they have long-term and well established business relationship.
Philip Morris do not have to be afraid of new potential competitors as it is quite unlikely for new companies to enter the tobacco industry.
The tobacco industry is stable with slight but permanent growth. The cigarettes do not have any real substitutes and demand for them is stable over the year.
However, Company will face some problems in the future, such as rising excise tax and more restrictive tobacco regulations. The illicit trade is becoming to be a serious threat.
We can also state that Company follows its strategy in a very good way.
4 Financial analysis
In this chapter, there will be presentation of historical financial statements analysis. The chapter starts with overview of accounting principles and quality review of financial statements. Then, there will be short overview of Company's risk management. After that, we will move to the profitability analysis. In the beginning, I will prepare reformulated financial statements and continue with computation of financial calculations. With the analytical financial statements, we can move on to the common size and indexing analysis. Further, I will calculate the value drivers. Afterwards, I will calculate Weighted Average Cost of Capital and Economic Value Added measure, followed by Free Cash Flow as basis for the forecasting.
The first step in valuing a business is analyzing its historical performance. Understanding of the company's past performance provides an essential perspective for developing and evaluating forecasts of future performance.36
Core objective of this chapter is to evaluate financial health of PM and to find out drivers which will be used for the valuation of Philip Morris ČR.