«Sustainable Management Futures» - Free Essay Paper
Table of Contents
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- Theoretical / Conceptual Approaches and Analysis of the Corporate Social Responsibility
- Stakeholder Approach
- Shareholder Approach
- Relation of the Stakeholder and Shareholder Approaches to the PMI Business
- Stakeholder Approach
- Shareholder Approach
- Discussion and Conclusion
- Related Management essays
Philip Morris International (PMI) is the leading international tobacco company. Its history dates back to 1847 when it was established in London, UK (Philip Morris International n.d.c). Nowadays, its head office is situated in New York, USA. The company has built about 50 manufacturing facilities all over the world, in which more than 82 thousand of employees are engaged (Philip Morris International n.d.c). In 2014, Philip Morris International has produced 855,954 million of cigarettes (Philip Morris International n.d.c). After their selling, the company’s net revenues were $80,106 million (Philip Morris International n.d.c). Cash dividends per share have increased from $3.58 to $3.88 in 2014 compared to the previous financial year (Philip Morris International n.d.c). During more than 150 years of its development, the company has created six world’s top international brands and expanded 180 markets (Philip Morris International n.d.c). One of its most famous brands is Marlboro, which is the world’s number one selling brand. Due to its immense popularity, Marlboro volume exceeds the volume of the next two largest brands combined. For example, in 2014, Marlboro’s volume outside the United States was 283 billion cigarettes (Philip Morris International n.d.f). Few years ago, the Marlboro brand was divided into three identities, namely Flavor, Gold, and Fresh. The next famous company’s brand, L&M, is the third most popular tobacco brand in the world. In 2014, its shipment volume outside the United States was 94.2 billion cigarettes. The third largest world brand is Bond Street. In 2014, its volume was 43.6 billion units (Philip Morris International n.d.f). Other company’s brands are Sampoerna A, Chesterfield, Philip Morris, Lark, Fortune, and DjiSam Soe. In addition, PMI produces tobacco products such as Swedish snus (Philip Morris International n.d.b). For its production, the company uses the following ingredients: ground, air-cured tobaccos, flavourings, salt, and water. This product is popular not only in Sweden but also in Norway, the United States, and many other countries.
Nowadays, there is a greater awareness of incidences of the unethical business practices in the tobacco industry. Consumers tend to react quickly to the unethical practices of the tobacco companies (Sundaram & Kaushik 2007). Ethical issues are closely related to the tobacco business since smoking causes serious illnesses such as cardiovascular diseases, lung cancer, and emphysema (Weiss, 2014). Thereby, Philip Morris International makes considerable efforts to reduce harm associated with smoking. It is essential that the company has started to develop and commercialise the Reduced-Risk Products. In comparison with the traditional tobacco products, Reduced-Risk-Products potentially reduce the individual risk and harm to the population. Current studies stress that modern corporations should extend beyond making money for their needs (Shaw 2016). Thus, the responsibilities of the corporations are not limited to their business operations.
In the modern scientific literature, numerous perspectives of business responsibility can be discovered. These approaches differ in various contexts, such as the purpose of doing business, responsibilities of the company’s managers, the role of business in society, the type of proper relationship between the business and government, et cetera (DesJardins & McCall 2014). One of the perspectives that the majority of the companies apply is a corporate social responsibility perspective. On the base of this perspective, a significant number of approaches were developed. Nowadays, stakeholder and shareholder approaches are among the most controversial and useful ones.
The purpose of the report is to evaluate the Philip Morris International from the stakeholder and shareholder approaches. In order to do it, the following steps were taken. Initially, the analysis of the theoretical approaches related to these perspectives was provided. Furthermore, the given theories were discussed relatively to the Philip Morris International business.
Theoretical / Conceptual Approaches and Analysis of the Corporate Social Responsibility
For the purpose of this report, the corporate social responsibility concept was chosen. This approach is relevant to the Philip Morris Incorporated case since the company states on its corporate strategy the importance of the social responsibility (Philip Morris International n.d.d). Corporate social responsibility can be defined as a system of business practices that provides the production and distribution of wealth for the community, including the company’s stakeholders, by implementing and integrating ethical and sustainable management practices (Crane & Matten 2010). Trevino and Nelson (2011) distinguish three reasons that corporations should care about social responsibility, namely pragmatic, strategic, and ethical. According to them, corporate social responsibility policy should build meaningful and lasting relationships with customers, employees, and the public (Fisher, Lovell & Valero-Silva 2012). In accordance with the corporate social responsibility perspective for the business well-being, it is necessary to take the broader community needs into account (Crane & Matten 2010). Idowu (2015) argues that companies may implement the corporate social responsibility concept in their strategy using the sponsorship primarily for creating a better reputation among their customers or other stakeholders. If the company builds long-term partnerships with the community, avoids environmentally and socially damaging short-term solutions, and secures enduring economic stability, it prospectively will gain main benefits for its business (Crane & Matten 2010). Thus, corporations require aligning with social norms while generating financial returns.
Modern scientific literature is full of debates whether the approaches related to corporate social responsibility concept are necessary for corporations. For example, Broomhill (2007) argues that researches may criticise this concept because there is a high pressure on corporations that requires them to demonstrate their ‘corporate citizenship’ by working with a range of stakeholders. In addition, the researcher provides the visions of other scientists who argue that companies must act strategically in order to enhance their financial stability rather than be coerced into making investments in the corporate social responsibility.
On the other hand, there are numerous arguments that justify the necessity of using the concept of corporate social responsibility in business. For example, Smith (2011) argues that strategic corporate social responsibility is good not only for the society but to also for the business. According to the literature review, there are two sources that bring potential benefits for companies fom the activities related to the corporate social responsibility. The first one is expectations held by the company’s stakeholders (employees, investors, and consumers) for responsible company’s behaviour. The second source of benefits is the threat that the state will impose new binding regulations on companies. Thus, in case of potential threats, the company should build stable relations with its stakeholders (Smith 2011). For example, if the customers notice that the company achieves high profits at the expense of its stakeholders, they will likely to express hostility to this organisation. Consequently, they may start ignoring its products or services, which in turn will result in the decrease of the company’s profits. Thus, the firm should ensure balance between two points, which means it should be both profitable and socially responsible.
There are numerous approaches related to the corporate social responsibility. The most famous are stakeholder and shareholder approaches. The major difference between them is that in the first approach, the stakeholders are more important than shareholders. Thus, the company should not only focus on the financial results but also provide necessary goods and services to the community.
Stakeholder approach was developed by Edward Freeman. According to it, stakeholders’ benefit is other than shareholders’ one (e.g. employees, consumers, nongovernmental organisations, debtors, suppliers, and government), and it is a critical component for effective corporate social responsibility. In general, the stakeholder management is regarded as a critical function for corporations. However, companies find it difficult to perform successfully with this approach. For example, challengers for the company’s managers arise from the need to integrate the influences of investors’ lenders, customers, suppliers, employees, government, etc. (Smith 2011). Thus, the major argument of this approach is that in modern world, global corporations can be successfully managed in case of taking into account stakeholders’ interests only.
One of the important tools of the corporation in this approach is social media. Corporations can use them in order to leverage their benefits. However, if the company is not able to effectively manage its social relations, social media may conversely become the source of major problems (Smith 2011). Furthermore, in stakeholder approach, philanthropy is advised. Due to the relationship with investors, this activity may be optional. However, due to the effectively executing strategic philanthropy, the majority of the company’s stakeholders groups can benefit (Smith 2011). Nowadays, most of the world’s largest corporations claim that their corporate strategy is based on the stakeholder approach.
The shareholder approach was proposed by Milton Friedman. According to it, the sole responsibility of business is to increase its profit and provide its owners with high dividends. It is based on the fact that shareholders hire managers in order to run the company for their benefit. The company’s managers are legally and morally obligated to serve the shareholders’ interests. Thereby, the major point of this approach is to make as much money as possible.
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This approach allows the owners of the assets rights to have the priority in making decisions about the use of them. For example, they may invest their assets in a company. Thus, several owners of the property may become the investors of the company. Therefore, they may create a set of rules where their rights will be prioritised (Waldkirch 2008). Thus, according to this approach, the function of a firm is also determined from the perspective of meeting the financial interests of its investors.
Nowadays, this approach may be regarded as the historic way of doing business for companies, which realise the disadvantages of concentrating solely on the interests of shareholders. As aforementioned, many corporations’ owners hire professional managers for managing the company. In this case, the interests of shareholders and the company’s managers may diverge. Consequently, the new problem of interaction between them will arise.
Relation of the Stakeholder and Shareholder Approaches to the PMI Business
The analysis of the corporate documents provided by the Philip Morris Incorporated on its website proves that the company actively implements stakeholder approaches in its business activities. For example, in 2013 Philip Morris Incorporated supported critical societal issues across the globe by providing $39 million to 300 organisations in 70 countries (Philip Morris International n.d.a). According to the company’s Contributions programme, Philip Morris International focuses on four key areas. They are providing access to education, ensuring economic opportunity, empowering women, and disaster relief and preparedness.
Furthermore, the company states that it applies high standards in all business operations and relationships. Moreover, in order to ensure the improvement on the community, the Philip Morris International has stated clear and measurable targets (Philip Morris International n.d.d). It has focused its sustainability efforts into the key areas such as environmental performance, climate change, good agricultural practices, rural communities, and workplace safety.
One of the social responsibilities of the company is based on the fact that its business provides earnings for thousands of people. For example, according to the company’s reports, it purchases from farmers and suppliers from 30 countries about 400 thousand metric tons of tobacco leaf annually (Philip Morris International n.d.d). Furthermore, the Philip Morris International uses that leaf for producing tobacco product in 53 manufacturing facilities around the world (n.d.d). Finally, according to Philip Morris International’s (n.d.g) reports, more than 50 thousand of employees are engaged in the company’s manufacturing process. Thus, due to the company’s business activity, thousands of people in many countries have become able to work and receive fair wages.
The next social responsibility commitment is based on ensuring the low impact of its manufacturing operations on the environment. In order to provide safe and environmental friendly operations, the company is making efforts to provide sustainable, secure, and safe sources of the livelihood among the communities of their supplier farmers. These commitments are stated in the Good Agricultural Practices programme developed by the company as well as Philip Morris Incorporated Contributions programme (Philip Morris Internationaal n.d.h). For example, in 2015, the company has decreased the CO2 emissions, energy and water consumption in its facilities by 20% as compared to 2010 figures (Philip Morris International, 2016). Furthermore, the company plans to decrease CO2 emissions across its value chain for 30% by 2020 (Philip Morris International n.d.h). According PMI’s reports, it is focusing on reducing energy from fossil fuels. Moreover, the company is making efforts on increasing the energy produced by the renewable sources.
In addition, in 2015, the Philip Morris International signed a partnership agreement with the Mekong Club, a Hong-Kong based NGO (Philip Morris International n.d.e). According to this agreement, the company will ensure the realisation of the following goals. The first goal is to increase an ability to facilitate information sharing within the private sector. The second goal is to provide educational sources and tools for the best practice sharing. The third one is to promote special technical advisory services. The fourth goal of the partnership is engaging other companies in the process of fighting against the human slavery in the entire world.
Philip Morris International is also focused on developing the Reduced-Risk Products, which are stated safer than usual tobacco products. The company claims that the Reduced-Risk Products will potentially reduce the population harm from using tobacco products (Lichtner et al. 2010). The Philip Morris International provides various scientific studies that help it to determine whether it is able to support claims of customers, physiologists, scientists, etc. for harmful constituents in smoke of tobacco products.
Philip Morris International makes efforts in ensuring the contentment of its shareholders. In order to do this, the company seeks to keep the strong performance within the tobacco sector. Its high financial performance is based on several reasons. First of all, it has merit the global market leadership due to its effective marketing strategy. Secondly, it has developed a superior brand portfolio led by Marlboro brand. Thirdly, the company has sustainable, strong pricing power, which is based on its brands. Furthermore, it has developed a reasonable excise tax and manageable regulatory environment. In order to ensure the global leadership, the company has optimised its global footprint and infrastructure, limited its costs, significantly improved its productivity, and endured a strong cash flow. Finally, it provided professional R&D capabilities that allow developing new products (Philip Morris International n.d.h). Thereby, the Philip Morris International has provided a strong commitment to shareholder value.
Discussion and Conclusion
The findings of the report are necessary for delivering the sustainable management practice into the daily business of both big corporations and small and medium enterprises. According to the current business practice, one of the major concepts for sustainable management is the corporate social responsibility concept. The study of the modern scientific literature proves that in the field of the corporate social responsibility concept, there are two main approaches, which have opposite ideas concerning the fact whose interests should be taking into account while making business. The first approach is a stakeholder approach developed by Freeman. The second is a shareholder approach proposed by Friedman. Both approaches state that a company has a commitment about some individuals and needs to build its strategy appreciating the interests of those individuals. The difference between the approaches is in defining the strategic individuals. The stakeholder approach focuses on the interest of stakeholders such as customers, suppliers, government, etc. whereas the shareholder approach focuses on the shareholders’ interests and needs.
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Thereby, difference in focus causes the difference in the strategy goals established by a company. In case of using the stakeholder approach, a company formulates the goals that correspond with the community needs. For example, the firm ensures appropriate working conditions to its employees, provides study resources for their professional development, or medical insurance. Furthermore, the company may struggle with the global poverty and finance appropriate initiatives. The next example is dealing with the environmental pollution. In order to combat it, the company should focus on using environmental friendly materials or renewable energy in the manufacturing processes.
On the other hand, the shareholder approach allows a company focusing only on financial ratios that provide the highest income for its owners. In this case, the company may provide the goal of achieving certain financial results, namely higher margin, profits, and lower costs. Thereby, providing non-business costs such as philanthropy help or building community schools is inadvisable expenditures for a company.
For the purpose of this report, the Philip Morris International was chosen. The analysis of the company’s official reports and press releases allows to draw the following conclusions. Firstly, the company chooses to use the stakeholder approach in its business activities. Since it operates in more than 180 markets, it aims at ensuring the positive image and acquiring formidable reputation. For example, the company actively invests in the community development. It participates in providing essential education services in the countries with low educational levels. Furthermore, Philip Morris International endeavours to contribute to the reduction of poverty in the entire world. Thus, due to signing the partnership agreement with the Mekong Club, it is able to take part in the promoting special technical advisory services to the private sector and engage other companies in the fight against human slavery. Additionally, the company is engaged in numerous research and development initiatives aimed at improving its goods. On the base of its researches, it has developed so-called ‘Reduced-Risk Products.’ According to the Philip Morris International’s research publications, such goods are safer than the traditional tobacco products.
It must be assumed that the peculiarities of the company’s production have certain effects on its social responsibility. It is evident that tobacco products may cause various diseases such as lung cancer or emphysema. Thereby, the company strives to create a positive image and keep its reputation intact among its customers and partners.
However, the organisation’s managers are aware of the fact that in order to get a possibility to finance various social initiatives, appropriate financial results should be first achieved. It is obvious that if the company demonstrates negative financial results, it will not be able to provide any support for the community.
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