Lessons from Marlboro Monday

Synopsis:
The tobacco industry in the 90's was seeing the private label brands of cigarettes grabbing market share from premium labels due to its lower price for similar quality. The market leading brand was Philip Morris' Marlboro brand, which suffered the most. Michael Miles, the then CEO of Philip Morris was forced to take action as Marlboro was Philip Morris' "cash cow", and he was also facing drop in market share across the board in other premium brands like Kraft and Maxwell House coffee. On Friday April 2 1993, Miles announced a 20% price cut for Marlboro. in addition it also announced various cost cutting measures and increased expenditure on advertising. This was to cost Philip Morris 40% of their pre-tax profits. The price cut launched a price war with other competitors also dropping prices. On the following monday, which later came to be known as Marlboro Monday, investors triggered a selloff of tobacco manufacturers' shares across the board. Investors extrapolated that there could be similar price cutting for premium brands in other consumer product categories, resulting in a sell off of stock of most consumer product manufacturers. One explanation could be that since Philip Morris also manufactured other consumer products like cheese and coffee, investors felt that it may announce price cuts in those categories as well.

Lessons Learnt:
In retrospect, Miles took the correct decision because within a year, Marlboro had surpassed its highest ever market share and profits were again on the rise. However, could he have avoided Marlboro monday? Probably not if he had to turn the brand around. Marlboro monday made it clear that there was low investor confidence in the management's ability to turn it around. They seemed like desparate measures that could be too late.
the larger issue of dropping market share of Marlboro also needs to be looked at. While being marketed as a premium brand, there was not enough product differentiation from the private labels. the high price of premium brands in general and Marlboro in particular was not justified in the minds of the people. the other approach Miles could have taken is to invest in R&D to come up with a new Marlboro cigarette that was better than the private label cigarettes.
Another lesson to be learnt is that management decisions in another industry can sometimes affect other unrelated industries. it would be very difficult to predict this beforehand. But one should be prepared for such an eventuality and address it. For e.g. the management of the other consumer product manufacturers should have calmed Wall Street by issuing statements.

Sources:
http://www.duke.edu/web/soc142/team11/globalvaluechain.htm
http://query.nytimes.com/gst/fullpage.html?res=9F0CE2DD113FF935A1575BC0A965958260
http://books.google.com/books?id=DGfyhDs88PgC&pg=PA21&lpg=PA21&dq=marlboro+monday&source=web&ots=ANa8NhGzwD&sig=3jo2QCpoHc9e4NyFAfyKoX8pi7U&hl=en#PPA20,M1