Case: the ultimate dillema of tobacco



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Case:
THE ULTIMATE DILLEMA OF TOBACCO

2004



This case was written by an MBA student. The name has been removed to protect the author.

"I'LL TELL YOU why I like the cigarette business," billionaire Warren Buffett is reported to have once remarked. "It costs a penny to make. Sell it for a dollar. It’s addictive. And there's fantastic brand loyalty." 1
Smoking a cigarette is a way of life for millions of Americans. Smoking, however, has become one of America’s most contentious and debated topics. Evidenced by public smoking bans, anti-smoking marketing campaigns, lawsuits against tobacco companies, and governmental health warnings, to name a few, the smoking debate will continue to play a litigious role in our business, politics, and personal choices for years to come.
A new pack of cigarettes gives one a pleasant feeling. A full, firm pack in the hand signifies that one is provided for, and gives satisfaction, whereas an almost empty pack creates a feeling of want and gives a decidedly unpleasant impression. The empty pack gives us a feeling of real frustration and deprivation2’—Ernist Dicther
The United States Government in recent years has forced the smoking industry to post health warnings on marketing materials and has heavily taxed cigarette sales. Further, state laws and legal precedents hold manufacturers more liable for the effects of their tobacco products. According to CNN, ‘the old legal defense of contributing negligence -- which prevented lawsuits by people with some measure of responsibility for their own condition -- is no longer viable in most jurisdictions.’3 Instead, a defendant (the tobacco industry) can be held partially liable and forced to pay a corresponding percentage of damages.’
Legal precedence has been set, which states the tobacco industry is at least partially responsible for negative health effects to smokers. Is this legal precedence the only moral and ethical responsibility that should be required of the tobacco industry? Conversely, should the tobacco industry have any responsibility at all, given it sells a legal product and fully warns its consumers of the potential negative health effects of smoking? These two questions highlight the moral dilemma of selling cigarettes. However, these two questions alone only touch the surface. To fully understand these and other dilemmas; we must look at all affected parties and their role in the cigarette industry.
Tobacco is interwoven with the economic and cultural history of our country. Native Americans cultivated a form of tobacco and smoked it in pipes for medicinal and ceremonial purposes. Christopher Columbus brought tobacco leaves with him back to Europe in the fifteenth century. Tobacco gained widespread acceptance in Europe in the mid-16th century, when adventurers like France’s Jean Nicot (for whom nicotine is named) began to popularize its use. In America, the first successful crop was cultivated in 1612 and within seven years, it was the colony’s largest export4.
Proceeds from tobacco were truly the base with which our nation’s economic independence was laid upon. The tobacco leaf was accepted as legal tender, used for wages, and was even accepted as interest on loans from France. Two of our most renowned founding fathers, George Washington and Thomas Jefferson themselves were tobacco farmers.

Industry Economics

Today, tobacco still plays a vital role in our economy. With a 2002 farm value of $1.7 billion, tobacco is one of the top ten U.S. cash crops representing nearly 3% of the total value of all cash crops and farm commodities.5 However, at over $4,000 per acre, tobacco is clearly the most valuable crop, exceeding the dollar value per acre of wheat, hay, soybeans, corn and others.6 On the flip-side, per-acre costs for tobacco farmers average $2000, compared to crops such as corn which require approximately only $200 per acre.7


The tobacco industry employs hundreds of thousands. Two sources studying the employment impacts of the tobacco industry in the 1990’s show the extensive impact to the economy. A Tobacco Institute study in 1994 showed that over 520,000 people were employed directly by the tobacco industry, including over 140,000 people employed by growing and nearly 50,000 people involved in production. The Tobacco Merchants’ Association (TMA) puts the employment figure in 1997 at over 1.5 million jobs. The TMA list is more exhaustive, including suppliers and tertiary employment.8
In the United States, tobacco is produced in twenty-one states, primarily in the Southeast. Tobacco is grown in most counties of Kentucky, North Carolina and Tennessee, with Virginia and Georgia also major contributors. Government anti-tobacco polices have led to a decreased demand and in turn has negatively affected these tobacco dependent areas. Maureen Kennedy, in a study for the International Labour Office, argues, ‘these (tobacco) manufacturing and agricultural jobs are virtually irreplaceable. Few, if any, other jobs in these communities provide comparable wage rates and benefit packages.’9 Further, because tobacco has high comparative economic value and because tobacco farming requires expensive overhead, tobacco farmers cannot easily switch to other lower yield crops.
Consumer Health Impacts

As controversial as tobacco is, the tobacco industry prides itself on being a benevolent and responsible member of our society. As an example, the homepage at the Phillip Morris USA website contains six key subject headers in which the user can get additional information. These subject headers are as follows:




  1. About Us (Company info, Mission, and Employment)

  2. Product Facts (Ingredients)

  3. Health Issues (Addiction, Pregnancy & Smoking, Second-Hand Smoke and Surgeon General’s Reports)

  4. Responsible Marketing

  5. Policies, Practices and Positions (Youth smoking prevention, Community Involvement, and Environment)

  6. Customer Service10

Four of the six headers contain information regarding the impacts of smoking and Phillip Morris’s law-abiding responses. The web sites of R.J. Reynolds and Brown & Williamson (the other two of the big three U.S. tobacco companies) are similar. Clearly, tobacco companies are not shying away from the negative health impacts from smoking. Phillip Morris explains on their web site:

Cigarette Smoking and Disease in Smokers - Philip Morris USA agrees with the overwhelming medical and scientific consensus that cigarette smoking causes lung cancer, heart disease, emphysema and other serious diseases in smokers. Smokers are far more likely to develop serious diseases, like lung cancer, than non-smokers. There is no safe cigarette.
Addiction - Philip Morris USA agrees with the overwhelming medical and scientific consensus that cigarette smoking is addictive. It can be very difficult to quit smoking, but this should not deter smokers who want to quit from trying to do so.
Quitting Smoking -To reduce the health effects of smoking, the best thing to do is to quit; public health authorities do not endorse either smoking fewer cigarettes or switching to lower-yield brands as a satisfactory way of reducing risk.”11

The cigarette industry has also dedicated a significant amount of time and money to develop a ‘safe’ cigarette. According to Tara Parker-Pope and Nova Online, “a safe cigarette that can both satisfy smokers' demands for taste and nicotine delivery and placate public health concerns is the Holy Grail of the tobacco industry.”12 While the economic benefits for the company that can create a ‘safe’ cigarette are a key motivator, it would be hard to argue to the tobacco industry’s intentions to decrease smoking-related deaths.


The facts regarding the dangers of smoking are staggering. The Centers for Disease Control (CDC) released the following statistics regarding smoking in 2004:


  • Tobacco use is the leading preventable cause of death in the United States. Cigarette smoking causes an estimated 440,000 deaths, or about one of every five deaths, each year. This estimate includes 35,000 deaths from secondhand smoke exposure.

  • Cigarette smoking kills an estimated 264,000 men and 178,000 women in the United States each year.

  • More deaths are caused each year by tobacco use than by all deaths from human immunodeficiency virus (HIV), illegal drug use, alcohol use, motor vehicle injuries, suicides, and murders combined. (See graph below)

  • On average, adults who smoke cigarettes die 13–14 years earlier than nonsmokers.  Based on current cigarette smoking patterns, an estimated 25 million Americans who are alive today will die prematurely from smoking-related illnesses, including 5 million people younger than 18.13 The chart below, from the CDC,14 compares the numbers of annual preventable deaths in the United States.

These statistics have been contested by the tobacco industry. Their main contention is that other types of preventable deaths are easier to measure (i.e. homicide, AIDS, etc.). Smoking related deaths are not always easy to diagnose, and many of these deaths could be attributable to other factors.

While it is true that cigarette companies recently have openly professed the negative health effects of tobacco, they have not always done so. In the late 1980’s, Phillip Morris secretly began efforts to rebuke negative public perception of smoking, in what became known as the ‘White Coat Project’. Phillip Morris and other companies worked to recruit and pay scientists to provide alternative ‘facts’ that smoking did not cause cancer and that cancer should be attributable to other non-tobacco factors. As part of recent tobacco court orders, Phillip Morris has released internal documents proving their effort to slant science and public perception in their direction regarding smoking health effects.
In addition to the obvious and direct health costs to smokers, we should also consider indirect costs to non-smokers via second-hand smoke and increased healthcare costs. While the CDC contends 35,000 people die annually from second-hand smoke, it is safe to ascertain that many of those people chose to be around the people supplying that second-hand smoke. However, it is also safe to assume that many of those people had no legitimate choice to retreat from that smoke. As far as societal medical costs, in a 2002 study the CDC estimated the nation's smoking-related medical costs at $3.45 per pack sold and put the nation's total cost of smoking at $3,391 a year for every smoker, or $157.7 billion. Another study conducted in the 1980’s estimates that medical-care benefits are needed 50 percent more than by nonsmokers. 15
Marketing

Past legislation has limited the means by which the tobacco industry can market their product. The last television cigarette commercial (for Virginia Slims) was broadcast on the Johnny Carson Tonight Show - 11:59pm on January 1, 1971.16 More recently, the tobacco company has further been forced, via the Master Settlement Agreement (MSA) in 1998, to regulate where and how it markets tobacco products. The MSA made specific rules including a ban on marketing with cartoon characters and limiting marketing from movies, shirts, caps, or other free advertising, especially when non-adults may be a key intended or unintended audience. The tobacco industry has been relegated to magazine ads as their main advertising outlet.


The tobacco industry is ultimately and directly responsible for cigarette marketing and contends its efforts are not directed towards attracting new smokers. According to Phillip Morris, Inc., ‘Our marketing programs are designed to enhance brand awareness, recognition and loyalty among adult smokers, while honoring the Company's commitment to responsible marketing.’17 The tobacco industry uses brand loyalty as the main justification for continuing marketing efforts. Further, other elements of society that indirectly market tobacco are not regulated. As an example, the number of shows glamorizing smoking has decreased during the last decade. However, television shows still show characters smoking and one show, the long-time running, animated and very popular Simpson’s claims to be family programming. Yet every main character on the program has been documented with a cigarette. Both Bart and Lisa, the adolescent main characters have smoked, and even Maggie, the infant sister of Bart and Lisa has been seen sucking on a cigarette.18

Many popular iconic institutions, including professional sports and entertainment industries, continue to embrace smoking in both actions of its publicly visible employees and acceptance of tobacco marketing campaigns. However, recent efforts by non-smoking initiative groups have provided a visible and vocal counterweight to direct and indirect tobacco marketing efforts. Some would argue the MSA restrictions and non-smoking initiatives actually tip the marketing efforts completely in the favor of non-smoking groups.


Corporation Beneficence

The tobacco industry has posted solid economic prosperity in recent years. In 2002, the Altria Group, Inc., the parent company of Phillip Morris declared $11 billion of net profit. Historically, other tobacco companies have shown similar if not as large profits. The tobacco industry is a leading contributor to charitable causes and non-smoking programs. In 2002 the Altria Group disseminated $126 million to charitable causes and grants, equating to 1.1% of its net profit.19 R.J. Reynolds and Brown & Williamson also both have foundations which give to hundreds of worthy causes annually.


For comparison purposes however, consider a working professional earning $50,000 in annual salary. After annual costs suppose that person retains $5000 in true profit. Using Altria’s example of returning 1.1% to charity, the professional would give back $55 to charity during the year. This is not a perfect comparison and the point is not to minimize Atria’s charitable giving, because indeed, the $126 million probably meant a great deal to those people and groups who received money. But in perspective, perhaps that figure is not as large as it first seems. The counter argument is that private corporations have no legal obligation to provide any charitable donations and the $126 million granted by Altria, is more than what could ever be expected.
The Industry Dilemma
Smoking is as much a psychological pleasure as it is a physiological satisfaction…it is not the taste that counts. It’s the sense of satisfaction you get from a cigarette that you can’t get from anything else.’20
Smoking is clearly part of our society. For many people the pleasure received from a cigarette overrides the potential negative health benefits, and by current legal standards, that is their right. For others, cigarettes are a form of drug needing at a minimum, regulation and perhaps even complete prohibition. Yet, the tobacco industry has melded into our economy and culture and continues to thrive after 400 years since its inception.
Whether you view cigarette smoking as a filthy dangerous habit, or a guaranteed personal freedom, the economic and health impacts from the tobacco industry are obvious if not conflicting. Profiteer of addiction or a legal and vibrant economic producer; that debate illustrates the ultimate dilemma of tobacco.
Questions for thought and discussion:
Question #1: The tobacco industry is a law-abiding economic sector producing a legal product. Should they have a moral responsibility to the health of their consumers beyond that mandated by law?
Question #2: Compare the moral and ethical responsibilities of the tobacco industry to its consumers to that of the alcohol industry and victims of drunk driving accidents.
Question #3: How would a Stage 5 Utilitarian attempt to weigh the ethical dilemma facing the tobacco industry?
Question #4: Given the tobacco industry’s spotty historic record in reporting and covering-up the negative health impacts of smoking, should companies like Phillip Morris and R.J. Reynolds be allowed, or conversely mandated to explain those health impacts on their websites? Why do you suppose the tobacco companies discuss this touchy topic on their websites?
Question #5: Brown and Williamson a leading U.S. tobacco company posts the following on their web-site:

As a leading tobacco company in the United States, Brown & Williamson is in a position to demonstrate what a socially responsible tobacco company should be. Employees believe that working in the tobacco business can be consistent with the practice of corporate social responsibility. Businesses that may not be popular or politically correct can still be socially responsible if their actions focus on addressing society's concerns.’21


Do you agree with this statement? Explain. Is the tobacco industry socially responsible and are they addressing society’s concerns?
Question #5: Does the government have a moral responsibility and/or the right to forbid or regulate cigarette sales? How would a Stage 6 person argue that question?
Hypothetical Situation #1: You have been offered a Vice President position by one of the leading U.S. cigarette manufacturers paying over five times what you currently earn annually, plus stock options. Not only does the job pay better and have better benefits, it would provide you opportunities and experiences that could not be matched in the near future from your current job. Would you take the job? Explain.
Hypothetical Situation #2: A 29 year-old friend of yours who has been smoking since age 22 develops lung cancer that can be directly attributable to his smoking habit. Who is responsible?
Hypothetical Situation #3: A 29 year-old friend of yours has been smoking since age 16 develops lung cancer that can be directly attributable to his smoking habit. People who know him insist he was influenced by his friends that when they started smoking it was thought to be very cool, and were even influenced to obtain hats and shirts of a very trendy smoking cartoon character used in cigarette marketing. Who is responsible and are they different than those responsible in Hypothetical Situation #2?

1NOTES
. Sheldon Rampton and John Stauber, “Smokin,” The Tucson Weekly, November 1995, p.1.


2. Ernest Dichter, “Why Do We Smoke Cigarettes,” The Psychology of Everyday Living, 1947.


3. Cable News Network (CNN), “A Brief History of Tobacco,” CNN.Com: Focus-Tobacco under Attack, 2000, found at http://www.cnn.com/US/9705/ tobacco/history/ index.html.


4. CNN, “A Brief History”.



5. Economic Research Service (ERS), “Briefing Room: Tobacco,” United States Department of Agriculture, September, 2003, found online (04-20-04) at: http://www.ers.usda.gov/ briefing/tobacco/.


6. The Fuji Publishing Group (FPG), “Tobacco: Working for America,” 1997, found online (04-20-04) at: http://fujipub.com/fot/working.html.


7. Dr. Dixie Watts Reaves, “Economic Impacts of Tobacco Industry Changes on Producers and Their Communities,” Department of Agriculture and Applied Economics, Virginia Polytechnic Institute & State University, August 1999, p. 15.


8. FPG, “Working for America”.


9. Maureen Kennedy, “The Tobacco Sector in the United States: A study of five states,” Sectoral Activities Programme, International Labour Office, Geneva, 2002, p.22.


10. Phillip Morris, USA, Inc., Information found online (04-19-04) at: http://www.philipmorrisusa.com/ home.asp


11. Phillip Morris, International, Inc., “A few thoughts regarding cigarettes and adult choice,” found online (04-19-04) at: http: /www.pmicareers.com/ corporate/eng/get_to_know_pmi/ tobacco_issues.asp.


12. Tara Parker-Pope, "Safer Cigarettes: A History,” Nova Online, Public Broadcasting Services, October 2001, Article found online (04-19-04) at: http://www.pbs.org/wgbh/nova/cigarette/ history.html.


13. Centers for Disease Control, “Tobacco-Related Mortality Fact Sheet”, February 2004, found online (04-19-04) at: http://www.cdc.gov/tobacco/factsheets/Tobacco_Related_Mortality_ factsheet.htm.


14. Centers for Disease Control, Graph found online (04-21-04) at: http://www.cdc.gov/ tobacco/ research_data/ health_ consequences/andths.htm. Graph includes the following sources: (AIDS) HIV/AIDS Surveillance Report, 1998; (Alcohol) McGinnis MJ, Foege WH. Review: Actual Causes of Death in the United States.JAMA 1993;270:2207-12; (Motor vehicle) National Highway Transportation Safety Administration, 1998; (Homicide, Suicide) NCHS, vital statistics, 1997; (Drug Induced) NCHS, vital statistics, 1996; (Smoking) SAMMEC, 1995.


15. Erin McClam, “CDC Estimates Costs of Smoking”, Associated Press, April 2002.


16. Billy Ingram, “Lighten Up & Light Up (Or Vice Versa): Cigarette Advertising on TV,” TV-Party.com, Article found online (04-19-04) at: http://www.tvparty.com/ vaultcomcig.html.


17. Phillip Morris, USA, Inc., “Responsible Marketing,” http://www.philipmorrisusa.com/ responsible_marketing/default.asp.


18. Stuart Jackson, “FAQ’s, Guides & Lists: The Simpsons Vs. Smoking,” The Simpsons Archive, List found online (04-19-04) at: http://www.snpp.com/guides/ smoking.simpsons.html.


19. The Altria Group, Inc., “Contributing to Worthy Causes for More than 45 Years,” Article found online on Altria Group website (04-27-04): http://www.altria.com/ responsibility/04_05_contributions.asp.


20. Ernest Dichter, “Why Do We Smoke Cigarettes.”


21. Brown and Williamson, Inc., “The Historical Perspective,” Found online on B&W website (04-26-04) at: http://www.brownandwilliamson.com/Index_sub2.cfm?ID=10.




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