The Wall Street Journal, by Alix M. Freedman

By Alix M. Freedman

"You can switch down to lower tar and still get satisfying taste," Merit cigarette ads assure smokers.

For decades, ads for Merit and other "light" and "ultralight" brands have all trumpeted their lower tar and nicotine numbers, citing official U.S. government rankings.

Now the Federal Trade Commission is preparing to overhaul the way tobacco companies must measure and disclose the numbers they use in cigarette advertising. Behind the FTC's review, which is expected in the next two months: mounting evidence that the government's system of measuring tar and nicotine doesn't come close to reflecting what smokers actually inhale.

The FTC's key new proposal would require ads to show a wide range of tar and nicotine levels, instead of a single, reassuring number. Moreover, the FTC would warn smokers that the actual tar and nicotine levels they consume depend entirely on their own smoking technique. For example, cigarette smokers, particularly those who smoke "lights," can "compensate" by inhaling more deeply, plugging up filters' ventilation holes with their lips or fingers or taking more frequent puffs.

"If people think that by smoking a cigarette with half the tar and nicotine, they can smoke twice as many cigarettes, then they are misusing the numbers, and we'll find a way to do a better job of letting them understand that," says Robert Pitofsky, chairman of the FTC. "The FTC will be looking at reform that alerts smokers to the problem of compensatory smoking."

With its projected rule change, the agency is finally acknowledging flaws in its measuring system that the $45 billion tobacco industry has long been aware of -- and successfully exploited. As early as 1974, a Philip Morris Cos. document titled "Some Unexpected Observations on Tar and Nicotine and Smoker Behavior" acknowledged that the FTC test results didn't indicate what people get from cigarettes.

The internal document obtained by The Wall Street Journal states: "Generally, people smoke in such a way that they get more than predicted by machines. This is especially true for dilution [i.e. low tar, low nicotine] cigarets." The report's conclusion: "The FTC standardized test should be retained: It gives low ratings."

Steven Parrish, Philip Morris's top spokesman, says the company believes the FTC test method is useful because it "provides a basis for comparison between brands," a point the 1974 document also stresses.

Another cigarette giant, B.A.T Industries PLC, also determined that smokers change their behavior to "compensate" for low tar and nicotine. In one B.A.T document detailing a Smoking Behavior-Marketing Conference held in Montreal in July 1984, Ian Ayres, group research manager, stated that B.A.T was exploring ways of "designing products which aid smoker compensation."

Joe Helewicz, a spokesman for B.A.T's U.S. unit Brown & Williamson Tobacco Corp., said the issues Mr. Ayres was discussing are "probably much more complex than are indicated in any single document."

Officials at several big tobacco companies play down the supposed phenomenon of "compensation." Philip Morris and RJR Nabisco Holdings Corp. have both offered the National Cancer Institute research to contend that low-tar smokers who "compensate" still inhale less tar and nicotine -- and they give up the "compensating" technique shortly after switching down.

An FTC overhaul would be the latest blow to the embattled tobacco industry, which is already under intense attack from state governments, plaintiffs' attorneys and the Food and Drug Administration. Among the leading brands that would feel the brunt of any FTC action is Philip Morris's Merit, whose ads carry headlines such as "Yes you can!" over pictures of exultant smokers who have managed to "switch down to lower tar."

Other big brands that take a similar tack include Brown & Williamson's Carlton, RJR Nabisco's Now brand, and True, sold by Loews Corp.'s Lorillard unit. In all, light brands make up almost half the U.S. cigarette market, while ultralights make up 12%, according to Wheat First Securities analyst John Maxwell.

Joel Cohen, a University of Florida marketing professor, recently completed a study suggesting that the FTC ratings do a poor job of telling smokers about tar and nicotine. Mr. Cohen's survey, slated to appear next month in the American Journal of Public Health, found that 56% of low-tar smokers incorrectly use the advertised tar numbers to make judgments about different brands' relative safety.

Top cigarette industry officials say the current FTC method does a good job of offering a benchmark for comparing brands, and was never intended -- by the industry or the government -- to mimic human smoking. If the FTC does change the method, they say, it won't necessarily hurt the marketing of low-tar brands.

"The idea that potential action by the FTC would undercut our light and ultralight cigarettes rests on a premise that our ads for these brands carry health claims -- and they don't," says Philip Morris's Mr. Parrish.

Industry officials also brush off the finding that smokers are ostensibly mistaking the FTC tar numbers for indexes of safety. "The tobacco industry has never made a health claim about lower-tar cigarettes, so if smokers are confused about the FTC rating, it's not because of something the industry has done and it's not for lack of a surgeon general's warning," says Brennan Dawson, a spokeswoman for the Tobacco Institute, an industry trade group.

For years, there has been a controversy over the smoking machines that industry testers, under government supervision, use to gauge tar and nicotine. The machine smokes at a steady rate of one 35-milliliter puff every minute. But studies cited in the 1988 surgeon general's report showed that, on average, people actually take one 43-milliliter puff every 34 seconds.

Moreover, public-health officials charge that cigarette merchants have devised ways to serve extra tar and nicotine without boosting the measurement numbers.

Among alleged techniques cited recently by FDA Commissioner David Kessler and others: Companies can increase the "burn" rate of cigarettes so the machine will take fewer puffs. But human smokers can compensate by simply smoking faster.

"Right now, the FTC method is as inaccurate as if the Environmental Protection Agency tested for mileage with cars just going down steep hills," explains Jack Henningfield, chief of the pharmacology branch of the government's National Institute on Drug Abuse. "What is proposed for cigarettes is the same idea as testing cars going down hills, up hills and in normal driving conditions."

The Tobacco Institute's Ms. Dawson says the industry's various manufacturing techniques aren't intended to "beat the machine." She adds: "There just isn't a way that a smoking machine can duplicate what car ads call `driving conditions,' but it does provide a relative ranking of where cigarettes fall in a standardized test of tar and nicotine yields that is descriptive, stands up and isn't skewed towards heavy pedals or light pedals."

Still, the FTC is awash in published studies conducted over the past 15 years that show scant relationship between a smoker's actual smoke intake and the numbers the machine registers.

One analysis, published last July in the Journal of the American Medical Association, said that all marketed cigarettes contain about six to 11 milligrams of nicotine, from which smokers obtain on average one milligram of nicotine. The report found that average was the same, regardless of whether the cigarette's official nicotine rating was 0.1 milligrams (a typical ultralight) or two milligrams (a full-flavor cigarette).

Ms. Dawson counters that there are studies that "find directly the oppositethat the FTC method is a reasonable predictor of nicotine intake."

Lee Peeler, associate director of the FTC's division of advertising practices, stresses that while the FTC isn't prepared to scuttle the smoking machine outright, certain features such as how deeply the machines inhale may be altered to more closely replicate the way people smoke. "The two things set in stone are that we aren't going to scrap the system, but we are going to fix it," he says.

Whatever the adjustments to the testing, the FTC's authority extends only to brands that list FTC numbers in their ads. Discount brands that don't advertise, about one-third of the entire U.S. cigarette market, don't disclose their numbers to the public. Nor does the FTC have the authority to force cigarette makers to list the numbers on cigarette packs.

How Low Is Low?

Some of the lowest tar U.S. cigarette brands as measured by 'smoking machine' under FTC method, based on 1993 data

                                        TAR         NICOTINE
     CIGARETTE BRAND (Description) (milligrams)   (milligrams)

       
     Carlton (king size, filter, hard pack, ultra light)
                                   Less than 0.5  Less than 0.05

       
     Now (100s, filter, hard pack)
                                   Less than 0.5  Less than 0.05

       
     Now (king size, filter, hard pack)
                                   Less than 0.5  Less than 0.05

       
     Bristol (king size, filter, soft pack, lowest)
                                          1              0.1

       
     Cambridge (king size, filter, soft pack, lowest)
                                          1              0.1

       
     Carlton (100s, filter, hard pack, light, menthol)
                                          1              0.1

       
     Carlton (100s, filter, hard pack, light)
                                          1              0.1

       
     Carlton (king size, filter, soft pack, light, menthol)
                                          1              0.1

       
     Carlton (king size, filter, soft pack, light)
                                          1              0.2

       
     Merit (king size, filter, hard pack, ultima)
                                          1              0.1

       
     Merit (king size, filter, soft pack, ultima)
                                          1              0.1

       
     Now (king size, filter, soft pack)
                                          1              0.1

       
     Now (king size, filter, soft pack, menthol)
                                          1              0.1

Source: Federal Trade Commission

© 1995, The Wall Street Journal

By Alix M. Freedman

[O]ne obstacle to marketing something that isn't "as good or as sexy" as a conventional cigarette is that "you turn a person who smokes for pleasure into someone who looks like an addict pumping something into their arm."

Tobacco-company executives have long maintained that people smoke because they enjoy the taste and sensation. The industry publicly rejects the allegation that cigarettes function primarily as nicotine dispensers.

But with unprecedented bluntness, an internal Philip Morris Cos. draft report freely acknowledges what critics have charged: Cigarettes are a "nicotine delivery system"; the main reason people smoke is to get nicotine into their bodies; and nicotine is chemically "similar" to such drugs as cocaine.

The confidential internal document, which is undated but cites data from as recently as 1992, is a proposal for a "safer" cigarette with the code name Table. Steven Parrish, Philip Morris's top spokesman, says the document was written by a nonscientist and doesn't reflect the views of the company on nicotine or smoking. An individual at the company further explains that the task force working on Project Table disbanded in late 1992 after making a presentation to senior management.

Public-health officials say that information about the cigarette project, while intriguing, is less important to regulators than the draft report's extraordinary summary of why people smoke and how nicotine affects the brain.

This is because the role of nicotine is central to current attacks on the industry by class-action lawyers and federal regulators. Plaintiffs' attorneys and four state governments have filed lawsuits alleging that tobacco companies have known for years that smoking is addictive but have hidden this information from the public. And the Food and Drug Administration is seeking for the first time to regulate cigarettes as drugs, arguing that cigarettes' main function is to supply nicotine to smokers. Government scientists say nicotine is the addictive component in cigarettes, a conclusion that the industry rejects.

In congressional testimony and other public statements, top cigarette-company executives have denied the FDA's allegation about cigarettes' chief purpose. The Philip Morris document, however, appears to lend some support to the claim by asserting that "the primary reason" people smoke is "to deliver nicotine into their bodies."

The 15-page Philip Morris draft report likens nicotine to a drug in both its composition and its effects on the brain. In calling nicotine a "similar, organic chemical" to the drugs cocaine, morphine, quinine and atropine, the document states that "while each of these substances can be used to affect human physiology, nicotine has a particularly broad range of influence."

Government and independent scientists say they are astonished at what they regard as admissions in an internal document of the nation's biggest cigarette maker. But they say they have no quibble with the draft report's statements about nicotine and smoking.

The draft report is a "blunt recognition of what public-health scientists have been saying all along -- that the critical effects of nicotine are those in the brain and not in the mouth," says Jack Henningfield, chief of the pharmacology branch at the government's National Institute on Drug Abuse. Neal Benowitz, a nicotine-research specialist at the University of California in San Francisco, says, "This sounds like an excerpt from the Surgeon General's report. This is very much the current view on the role of nicotine acting on the brain to produce addiction."

Nicotine travels to the brain about eight to 10 seconds after a smoker inhales and "alters the state of the smoker," according to the Philip Morris draft report. Nicotine does this, it says, by becoming both a neurotransmitter, a chemical substance that transmits signals from one nerve cell to another, and a stimulant. "Nicotine mimics the body's most crucial neurotransmitter, acetycholine (ACH), which controls heart rate and message sending within the brain," the draft report states.

In this way, the document continues, "nicotine is used to change psychological states leading to enhanced mental performance and relaxation." The draft report adds that "a little nicotine seems to stimulate, while a lot sedates a person. A smoker learns to control the delivery of nicotine through the smoking technique to create the desired mood state."

Mr. Parrish, the Philip Morris spokesman, responds, "We have acknowledged in public documents that nicotine, like many, many other things, has pharmacological effects, but that doesn't mean that cigarette smoking is addictive." He adds, "This document nowhere says that nicotine produces addiction -- the document doesn't even discuss addiction."

The cover page of the Philip Morris document, which identifies it as a "1st draft," is signed by B. Reuter. At the time, Barbara Reuter says, she was part of the operations group, which deals with manufacturing the company's products. Ms. Reuter is currently employed at Philip Morris as category director of premiumbrands marketing planning. She declines to comment on the contents of the document. An individual familiar with the project says that Ms. Reuter wasn't asked to prepare anything on how nicotine works and that she never presented her conclusions about nicotine to senior management.

Cigarette-company executives have described the role of nicotine much differently than does the Philip Morris document. Last April, for instance, William Campbell, then head of Philip Morris's tobacco unit, testified at a congressional hearing that "nicotine contributes to the taste of cigarettes and the pleasures of smoking. The presence of nicotine, however, does not make cigarettes a drug or smoking an addiction."

Mr. Parrish, the Philip Morris spokesman, says that Mr. Campbell "spoke truthfully" and that "this document doesn't support any claims to the contrary."

In the same April 1994 hearing, Thomas E. Sandefur, former chairman and chief executive of Brown & Williamson Tobacco Corp., described equating cigarettes with hard drugs as "nothing more than rhetoric." And James W. Johnston, chairman and chief executive officer of R.J. Reynolds Tobacco Worldwide, said that nicotine "enhances the taste of the smoke and the way it feels on the smoker's palate, and it contributes to the overall smoking enjoyment." In written testimony, Mr. Johnston added that under the FDA's definition of addiction, "cigarette smoking is no more addictive than coffee, tea or Twinkies." He also said, "Cigarettes are clearly not in the same class as addictive, mind-altering [drugs] like heroin and cocaine."

Mr. Sandefur didn't respond to a request for comment made through Brown & Williamson. Mr. Johnston was unavailable for comment, but an R.J. Reynolds spokeswoman said the Twinkie reference was intended to show that "the term `addiction' has been so broadened as to be virtually useless scientifically."

A federal grand jury is currently looking into whether any cigarette-company executives or scientists may have perjured themselves in congressional testimony or other sworn statements concerning nicotine addiction and the alleged manipulation of nicotine in their products. Prosecutors are understood to be reviewing executives' statements in light of internal industry documents that have surfaced in recent months.

The Philip Morris draft report discusses the role of nicotine in the context of the company's consideration of a new cigarette that would continue to deliver nicotine while apparently reducing substances such as tar that have been linked to disease.

Ever since 1964, when the surgeon general stated unequivocally that cigarettes cause lung cancer and other diseases, tobacco companies have pursued the quest for a cigarette with reduced risks. In its Table project, Philip Morris followed in the footsteps of R.J. Reynolds, which introduced the "smokeless" cigarette Premier in 1988.

Premier significantly reduced smoke and virtually eliminated tar, which includes the chemicals that many scientists believe increase the risk of cancer. An R.J. Reynolds spokeswoman says the company never claimed Premier was "safer"; rather the product was billed as "cleaner." R.J. Reynolds, a unit of RJR Nabisco Holdings Corp., withdrew Premier just five months after its test-market launch because smokers found it hard to light and didn't like its taste or smell.

Even so, the Philip Morris document praises Premier for a "number of key attributes," including "zero biological activity." Government scientists say the term "biological activity" is used by the tobacco industry as a euphemism for the health risks associated with cigarettes. But Philip Morris's Mr. Parrish disputes the contention that "biological activity" refers to health effects in humans.

The document describes Philip Morris's own proposed entry as a "nicotine delivery device." And it lumps cigarettes with products that have no other function than to dispense nicotine: "Nicotine delivery devices range from snuff, chewing tobacco, cigars, pipes and conventional cigarettes to unique smoking articles, chewing gum, patches, aerosol sprays and inhalers." This statement is potentially useful to the FDA in its effort to prove that tobacco companies are in the drug business, health officials say.

Like Premier, Philip Morris's new cigarette would involve "heating rather than burning the tobacco," the draft report says. The result is "a cleaner, safer smoking experience." The document predicts that the product "has the potential to replace the conventional cigarette."

It is not clear whether the cigarette described as safer in Project Table will ever be marketed. Asked about the current status of the effort, Mr. Parrish said the company's policy is not to comment on product development. But another person familiar with the initiative describes its status as "neither dead nor ready for introduction." This individual explains that one obstacle to marketing something that isn't "as good or as sexy" as a conventional cigarette is that "you turn a person who smokes for pleasure into someone who looks like an addict pumping something into their arm."

Still, it now appears that all three of the top cigarette companies have contemplated a move toward a new kind of cigarette. In addition to Philip Morris and R.J. Reynolds, Brown & Williamson, a unit of B.A.T Industries PLC, has taken out patents related to such a project, the draft report says. This "illustrates extensive interest in the development of a superior nicotine delivery device," the draft report states. A spokesman for B&W says, however, that the company is in the business of selling cigarettes "which aren't nicotine-delivery devices."

With the exception of R.J. Reynolds, no U.S. tobacco company has taken a product such as Premier to the public.

© 1995, The Wall Street Journal

This is the text of a Philip Morris Cos. draft report regarding a proposal for a "safer" cigarette, code-named "Table."

COMPETITIVE ANALYSIS

Background -- The Cigarette and the Smoking Experience

Philip Morris USA is a producer of American blend cigarettes. The cigarettes are designed to provide a smoking experience for an adult. Made primarily from tobacco, flavorings and paper, the majority of the products have a cellulose acetate filter to adjust the delivery of the smoke that is emitted when the cigarette is lit. The consumer draws on the cigarette and inhales the smoke or gaseous, vaporous system into his or her lungs, then exhales the smoke into the air. The smoke delivers flavors, carbon monoxide, nicotine and tar to the smoker.

Different people smoke for different reasons. But the primary reason is to deliver nicotine into their bodies. Nicotine is an alkaloid derived from the tobacco plant. It is a physiologically active, nitrogen containing substance. Similar organic chemicals include nicotine, quinine, cocaine, atropine and morphine. While each of these substances can be used to affect human physiology, nicotine has a particularly broad range of influence.

During the smoking act, nicotine is inhaled into the lungs in smoke, enters the bloodstream and travels to the brain in about eight to ten seconds. The nicotine alters the state of the smoker by becoming a neurotransmitter and a stimulant. Nicotine mimics the body's most important neurotransmitter, acetycholine (ACH), which controls heart rate and message sending within the brain. The nicotine is used to change physiological states leading to enhanced mental performance and relaxation. A little nicotine seems to stimulate, while a lot sedates a person. A smoker learns to control the delivery of nicotine through the smoking technique to create the desired mood state. In general, the smoker uses nicotine's control to moderate a mood, arousing attention in boring situations and calming anxiety in tense situations. Smoking enhances the smoker's mental performance and reduces anxiety in a sensorially pleasurable form.

Other reasons for smoking, besides nicotine delivery, include habituation, attachment, personality, culture and genetics. Smoking is many different things to different people, including:

• as an aid to vigilance, rapid information processing and memory
• doing nothing while doing something
• a communication tool
• a sexually alluring act
• a sign of rebelliousness
• something to do with your hands
• an oral gratification device
• a taste experience and other sensory stimulation at back of throat, windpipe and lungs
• a personal statement of image -- based on the culture, it is positive or negative
• a sign of a risk-taker
• predisposed in people by genetics

In its broadest sense, the cigarette is a pleasure product. It alters mood states just like the caffeine, alcohol and sugar in other Philip Morris products that affect human physiology and psychology. As with nicotine, these substances become part of an individual's life style and are used as coping mechanisms to help adjust to the environment.

Competitive Products -- Nicotine Delivery

Nicotine delivery devices range from snuff, chewing tobacco, cigars, pipes and conventional cigarettes to unique smoking articles, chewing gum, patches, aerosol sprays and inhalers. The manufacturers of these products also vary considerably in type, size, areas of expertise and marketing approach. The chart below summarizes the major competitors, their area of focus and their target market.

Competitive Products -- Market Size

Nicotine Patch Company Sales Habitrol Ciba-Geigy $300 Nicoderm Marion Merrell Dow 275 Prostep American Cyanamid 75 Nicotrol Warner-Lambert 50 Total Estimated 1992 $700

Source: TMA Estimates (10/05/92)

Estimated 1992
Nicotine Patch Prescription Sales
(in millions of dollars)

   Nicotine Patch           Company                 Sales
     Habitrol             Ciba-Geigy                 $300
     Nicoderm             Marion Merrell Dow          275
     Prostep              American Cyanamid            75
     Nicotrol             Warner-Lambert               50
                            Total Estimated 1992     $700

Source: Capital Institutional Services (8/19/92)

Competitive Products -- Recent Trends

In the last five years, the scientific community in both the United States and Europe has been pursuing innovative nicotine delivery systems to either replace or transform the worldwide cigarette business as we know it. The majority of the patent activity has been focused on transdermal and nasal delivery systems, although more recent work has moved into tablets and injectable nicotine. The primary motivation for the products is smoking cessation through a controlled, gradual reduction in nicotine delivery. The companies dominating the development and the marketing are primarily pharmaceutical firms, although Procter and Gamble, Seimens and JTI have also shown interest in the subject.

The barriers to entry that have characterized the tobacco business do not constrain the broad field of potential competitors we now face. In addition, the nature of competitive product development relies on legal protections afforded to technological innovation -- an area not historically of value to the oligopolistic tobacco industry.

In fact, only one domestic tobacco company has attempted to commercialize a new type of nicotine delivery device. In September 1987, R.J. Reynolds publicly announced a new type of smoking article called Premier. The Premier article, which looked like a cigarette, consisted of a carbon heat source, a reservoir of nicotine and glycerol on aluminum oxide pellets and a weakly efficient filter system. It was offered in two test markets in Arizona and Missouri in 1988. The markets did not do well and were closed in early 1989. Premier was hard to light, did not burn down, smelled and tasted bad. But, it has a number of key attributes: zero biological activity, no ashes, minimal sidestream smoke and limited fire safety problems. In a sense, the use of a carbon heat source in an aluminum capsule filled with flavor pellets, surrounded by tobacco, paper and a filter revolutionized cigarette smoking.

Perhaps if those who had tried it had taken the time to acquire a taste for it, the product would have established itself as a mainstream smoke. But, the sensory sacrifice was too great -- and the product failed. Since 1988, R.J. Reynolds has continued to work on this device to improve its subjectives. This work, along with a large collection of patent activity, indicates that RJR maintains a strong commitment to new smoking devices.

R.J. Reynolds is not alone in its pursuit of a better cigarette. Other tobacco industry patent activity by JTI, the Imperial Group, Procordia A.B. and Brown and Williamson illustrates extensive interest in the development of a superior nicotine delivery device, with or without a tobacco base. In addition, Austria Tabak is constructing a new research center with the stated ambition of developing "the world's lowest risk cigarette."

The pharmaceutical companies, on the other hand, are pursuing substitute nicotine delivery devices in a range of formats -- from patches to pills to inhalers. Their stated motivation is smoking cessation. The drug company devices generally lack the ritual of the smoking act and its sensual pleasures, but they do deliver nicotine in its most basic form. In addition, Siemens is working on battery powered devices and inhalers that could deliver nicotine. A summary of recent patent activity follows this analysis.

Philip Morris has chosen to pursue a nicotine delivery device that, like RJR's Premier, continues the cigarette tradition of sucking on a cylindrical mouthpiece to inhale flavorings and nicotine form a tobacco based product. The approach of heating rather than burning the tobacco produces a cleaner, safer smoking experience. Known by the code name of Table, the product has the potential to replace the conventional cigarette -- in much the same way that cigarettes replaced chewing tobacco over a hundred years ago -- as a more socially acceptable form of tobacco use.

As preparations are made to consider launching Table, two key challenges face Philip Morris:

• Can Philip Morris build a world-class nicotine delivery device that can compete successfully with conventional cigarettes as well as pharmaceutical company cessation products?
• Will the consumer find this revolutionary nicotine delivery device uniquely appealing?

If you believe that both of these can be answered in the affirmative, it is imperative that Philip Morris move quickly to pre-empt the competition and deliver a superior cigarette to the American public.

ORGANIZATION

Philosophy -- Network Model

Table offers an opportunity for Philip Morris to create a new corporate entity to manage, produce and market a new product in a new way. The computer industry (Silicon Valley and Route 128), the automotive business (Saturn Project) and industrial firms like Eastman Kodak have made major changes in the way they are organized and in the way they operate. They offer working models for Philip Morris to refer to as we seek to move from the traditional corporate approach of the industrial age to the new wave partnership of the twenty-first century.

The new proposition for Table rejects the hierarchical approach to business management and replaces it with a network model. The network is based on the natural flow of ideas, allowing leadership to emerge based upon the issue at hand. It is expected to surface any and all problems, new approaches and new solutions. It is designed to continually seek a better way to do business. FLEXIBILITY, CREATIVITY and INNOVATION characterize the thinking of the new workforce. Each descriptive characteristic of the new management approach contrasts with the traditional Philip Morris management philosophy, suggesting that a separate entity be created to support the Table business.

Contrasting Management Paradigms*

* Source: J.E. Cook of Computervision Corporation and J. Sculley of Apple Computer

+ Genetic coding imprints identity and values, but it does so with a focus on future evolution, not on the tradition of the past.

The type of people on the Table team will be flexible enough to do cross-functional jobs and pitch-in whenever/wherever business needs require them to. The organization will be kept as flat and lean as possible. Information, authority and communication move horizontally, in an oval, not vertically, and not top down. The manufacturing facility will be treated as a laboratory where experimentation is on-going. Because of the changes that continue, work will be done in leased facilities and in open work spaces.

The organization will be made up of temporary teams of people who gather together to collectively confront an issue. Once a subject is tackled, the team will disband. A leader of one network is often a follower in another. The number of people is kept small because each employee wears a number of hats. In addition, there is considerable reliance on an independent network of business partners and/or suppliers outside the company. This external network of relationships is key to gaining competitive advantage in a product dependent upon technological advances.

(Diagram from report omitted)

The circles within circles in this schematic illustrate how functionally oriented high level councils would operate in our company, much the way they work at Saturn. The TDAC or Technical Development Action Council coordinates advanced engineering and design. The CAC or Customer Action Council brings sales, service and marketing together. MAC stands for Manufacturing Action Council and encompasses engineers, materials management, finance and systems, within manufacturing. These three key groups intersect to form the SAC or Strategic Action Council. This core oversee the organization and sets strategic direction. Outside this center are both the long-term management "guru" and the short-term operator who leads day to day activity who come together on the corporate committee to insure company goals are met.

It is important to note that unlike traditional staff functions, the resource teams are flexible and fluid. They are groups of professionals who move from business team to business team and actively participate in the decision making process.

The ultimate goal of the team -- both internal company employees and external business partners -- is to make the current product and process obsolete -- as the status quo is constantly upgraded to a better way and a better product. The aspiration of the employees for the future of the company must lie beyond current resources. In fact, it is the commitment to the change and growth ideology that motivates the workforce -- not promotion, salary, office size and title. They do have a stake in the success of the company. Their reward comes in the form of stock options.

People in this type of company aren't looking for a secure job for their working lifetime. They are looking for the challenge and personal growth you experience when you create and build. They know they have to give of themselves -- and they want to. Their thoughts are welcomed. People aren't fearful of saying what they really think. In fact, the more unconventional the thinking, the better. It is through applying an open mind and challenging conventional industry practices that new approaches and new solutions can be found to continuously improve business in the fast changing technologically based arena of the Table product.

Reengineering -- A New PM Company

The reorganization or reengineering of the traditional structure around the work process requires a fundamental analysis of the product the consumer seeks. Starting with the end product, and working back, we need to focus on the core competencies required for the new entity. The core competencies will determine what business we will be in -- and what we need to supply from either inside or outside the company.

It is understood that PM USA has traditionally had trademarks, flavoring expertise, cigarette making and packing knowledge, as well as marketing, sales and distribution prowess. However, we don't know what and who will transfer well to the new company. In addition, we lack the technological strength to produce Table in its entirety, in the same way we manufacture and market our current product line. Therefore, the identification of the core competencies required as well as those of our partners -- are crucial in identifying the processes around which the Philip Morris team will be "reengineered".

The Center for Reengineering Leadership at Eastman Kodak provides a description:

UNDERSTANDING REENGINEERING
What it isn't:

• Brute-force automation
• Cutting fat, squeezing, downsizing
• Tinkering, fixing and incremental thinking
• Reorganizing the current processes

What it is:

• Starting from scratch: Greenfield Designs
• "Thinking out of the box"
• Simplifying everything
• Strong customer focus
• Changing: business and manufacturing processes, job structures, management reward systems and culture/values

Reengineering requires a total rethinking and redesign of the Philip Morris USA business system. It demands new business processes and newly identified job definitions, organization, management and control systems to complement the new design. A radical change in beliefs and behavior is also required. The following schematic visually demonstrates how the key components of the new organization would interact and what they consist of.

(Diagram from report omitted)

As with any major change to a business, the most critical success factor in re-engineering is the active participation of executive leadership. That participation is not one of setting policy, but rather identifying long-term strategic goals -- and challenging operational management to improve upon those goals in the business process.

With the focus on the customer, all employees are charged to continuously improve through innovation in response to market needs. Consequently, there are three driving forces motivating the behaviors of all employees:

1. increased customer satisfaction;
2. improved efficiency; and
3. decreased costs

In all aspects of work. Management must execute these three principles -- and also lead by example, coaching in the following ways:

• Help set goals for improvement
• Take initiative
• Communicate all the information people need to get the job done well
• Demonstrate support
• Make on-site visits to measure, coach, guide improvement
• Create environment that promotes teamwork
• Respond quickly to employee ideas
• Provide necessary tools and training
• Recognize individuals and teams who achieve results
• Use and encourage others to use tools and measurements
• Hire, develop and promote people who practice "World Class Performance"
• Use customer satisfaction as key performance measure

Table requires a small team of key people to develop the organization. The individuals must be bright, have a broad experience base, be risk takers and visionaries. They need to be assigned to the project full time and be trained on existing "reengineering thoughtware".

The reengineering for Table can be expected to follow a stepped progression similar to one that Eastman Kodak experienced during the life cycle of its reengineering project.

Mobilization Team

• Business/Customer Understanding
• Vision and Case for Action
• Projected Deliverables

Project Initialization

• Project Team Formation
• Co-location

Re-Design Team

• New Process Development
• Reorchestration
• Prototype

Implementation Team

• Detail Design
• Communicate and Educate
• New Process Installation

Support and Follow up

• Results Verified
• Continuous Improvement
• Knowledge Transfer

The Table Task Force would like the opportunity to start with a clean sheet and build the best operation to support the new business. A small project team of empowered cross-functional individuals is needed to take charge and make the Table network a reality.

© 1995, The Wall Street Journal

This is a "Patent Search" that appeared in the Philip Morris Cos. draft report regarding a proposal for a "safer" cigarette.

© 1995, The Wall Street Journal