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Strategic Management: Project Report On Kraft Foods
Strategic Management: Project Report On Kraft Foods
STRATEGIC
MANAGEMENT
PROJECT REPORT ON KRAFT FOODS
B11074
KUNAL SINGH
B11089
ROHIT SURI
B11104
VRAJESH SHAH
B11121
Contents
Introduction.................................................................................................................................................. 2
SWOT Analysis........................................................................................................................................... 3
External Environment ................................................................................................................................ 4
The Macro Environment ........................................................................................................................ 4
The Micro Environment ......................................................................................................................... 5
Industry trends ........................................................................................................................................ 6
Porters National Diamond for Kraft.................................................................................................. 7
Vision and Values....................................................................................................................................... 8
Customers ................................................................................................................................................... 9
Krafts Corporate Strategies ................................................................................................................ 10
Business level Strategy ....................................................................................................................... 11
Value Chain ........................................................................................................................................... 11
Managing Growth at Kraft Foods ............................................................................................................... 12
Acquisitions ................................................................................................................................................ 13
Kraft-Cadbury ......................................................................................................................................... 14
International Strategy .................................................................................................................................. 15
Organization structure and Integration ....................................................................................................... 17
The post-merger Culture ............................................................................................................................. 17
Integration and success: .............................................................................................................................. 18
Kraft View .............................................................................................................................................. 19
Cadbury View ......................................................................................................................................... 19
Success so far .......................................................................................................................................... 20
Oreo ........................................................................................................................................................ 20
Core Chocolate business ......................................................................................................................... 20
The Expensive Kraft Split ........................................................................................................................... 20
The Way Ahead ........................................................................................................................................ 21
Brands and positioning ........................................................................................................................... 21
Understanding the Emerging markets ..................................................................................................... 21
The inevitable-revenues focus ................................................................................................................ 21
Kraft's -Leadership .................................................................................................................................. 21
Cadbury's-Leadership ............................................................................................................................. 21
Introduction
The firm Kraft Foods was formed in 1923 with a view to consolidate the ice cream industry in the
United States which was pretty fragmented at that time. However, through a number of
acquisitions, it expanded and its product portfolio included a wide range of dairy products. In this
manner, it became the worlds and United States largest dairy company only within a matter of
8 years (that is by 1930).
It was in 1909 that James L. Kraft started a cheese business under the name of J.L. Kraft and
Bros. Company in Chicago. Their strategies included extensive product development and
marketing through which they started selling 31 varieties of cheese in the U.S.
The National Dairy Products Corporation, which was how Kraft Foods was known then, was
formed as a result of a merger Rieck McJunkin Dairy of Pittsburgh, Pennsylvania with
McInnerney's Hydrox. It was listed on the New York Stock Exchange and its acquisitions were
done through stock instead of cash. In the 1950s, the company started diversifying into the
confectionary businesses like candies, macaroni and margarines as commodity dairy products
started becoming low value added. The extent of diversification is signified by the fact that it
also ventured into the business of glass-packaging with the Metro Glass acquisition. This
continued even into the 1960s as the company forayed into markets worldwide through
acquisitions. The name of the company was changed to Kraft in 1969 which was followed by
reorganization in the structure. Marketing and advertising of the products has always remained
one of the focus points at Kraft Foods. This is what the organization has heavily relied on for the
sale of their products across the world.
The company has several product offerings in cheese, confectionery, snack foods, dairy foods,
convenience foods and beverage segments with its products being marketed in over 170
countries. Krafts brand portfolio has 12 brands with revenues of over $1bilion with 50 other
brands providing revenues exceeding $100 million. Around 80% of these revenues come from
brands which are leaders in terms of market share. Kraft has expanded into various product
domains and also into different markets worldwide primarily with the help of acquisitions and
mergers only. This seems to be the organizations most adopted way of expanding their
operations and introducing different products from their portfolio into the local markets. As of
2010 the company, headquartered in Northfield Illinois, had revenues of US $ 49.2 billion with
127000 employees worldwide.
Kraft has also faced various fallouts in the numerous acquisition deals it has taken up in the
past. A similar kind of fallout was also experienced after it acquired Cadbury also. Typically
mergers and acquisitions result in a high amount of implementation and integration costs which
are expected to be offset by the gain from synergies. However, estimation errors are
unavoidable as it is very difficult to predict he exact roadmap of how the deal would turn out.
Empirical data suggests that value added through an acquisition is always less than what is
expected at the time of the deal.
Following the poor performance of the companys shares and criticism from its stakeholders, the
company has announced a split in 2011in to two separate entities. Kraft Foods will continue to
run the North American foods business while the new entity tentatively named as Mondelez
International will focus on the Global snacks brands including Cadbury.
SWOT Analysis
Here is a SWOT Analysis of Kraft Foods.
STRENGTHS
WEAKNESSES
OPPORTUNITIES
Market Share
Competition
Debt requirements
Geographic Concentration
Cost Control
Decline in Profitability
THREATS
External Environment
The Macro Environment
For a firm involved in catering directly to the consumers, the external environment plays a very
significant role in its operations and planning. It is imperative for the firms strategy makers to
factor in the uncertainty caused as a result of this dynamic nature of the external environment.
Lets take a look at the macro environmental factors affecting Kraft Foods through the PESTEL
framework.
Political: From a US perspective, the political environment is favorable for Kraft Foods. For
several decades the company has been participating in initiatives of political and social
relevance. They support political candidates who are involved in drafting government policies
relating to the companys business and brands. Kraftpac, a political action committee started by
the company provides corporate contributions to political parties and candidates in the federal
and state government within the legal ambit. 1However, as was seen with Cadbury, acquisition
attempts of foreign companies may bring about strong opposition from the local governments.
Economic: Food and Beverages industry is non-cyclical in nature and hence is not impacted by
broader economic conditions to a high degree. Still, Kraft Foods may feel the strain of tough
economic conditions as some of its brands are targeted towards the premium segment. Tough
economic conditions notwithstanding, the company has been able to deliver impressive financial
results by investing in their heritage and power brands across both grocery and snacks
markets in order to deliver a winning product mix. The acquisition of Cadbury has opened up
opportunities to expand in to the developing markets like India and Brazil which makes the
company ideally placed to sustain its impressive economic performance. However, things like
exchange rate fluctuations would have an impact as the company is involved in operations
across multiple geographies.
Social & Environmental: Kraft Foods committed itself to focus on products, policies and
partnerships to bring about a real difference in challenging areas of social concern like health
and well-being of its consumers. The company has helped found Healthy Weight Commitment
Foundation in 2009 in order to help reduce obesity in the US. They have actively introduced
healthier product offerings which have whole grains, fiber and micronutrients while cutting down
on harmful sodium, fat, salts and calories. They have implemented policies on responsible
http://www.kraftfoodscompany.com/investor/corporate-governance/politicalcontributions.aspx
marketing, nutritional awareness and education which are critical to help consumers make
better choices about health and wellbeing2. The company took initiative to improve the living
standards of more than 1 million farmers with effective partnerships with them. They removed
nearly 6.5 million pounds (3 million kg) of salt from products in 2010 and helped to provide more
than 1 billion servings of food since 1999 in the United States alone (Ref. CSR wire, 2011).
Technological: Being a capital intensive industry, technology does play a part in making the
company competitive and profitable. Kraft employs the best of technologies in its manufacturing
and distribution systems and exploits the cost advantage with the use of economies of scale
and scope. This gives an edge in terms of quality as well as cost. The company has employed
SAP
Netweaver
technology platform
to
ensure
effective
information
and
business
transformation strategy within all the business units (FBR, 2008). The company won the Most
Innovative Company award in 2008 at the Growth and Innovation Forum held by the Consumer
Goods Technology magazine.
Legal: The Company ensures compliance to all local and international regulatory provisions
governing the food industry like those relating to nutritional information labels, food content,
advertising, packaging, etc. Further, a company like Kraft Foods has to have various
manufacturing locations in various parts of the globe. It employs a large work force which brings
in the angle of labor laws and legalities involved with operating in multiple countries. The
political stability of the countries of its primary focus has a great impact on the business. Along
with the advantages of globalization, the organization also has to face the impact of trade
restrictions.
http://www.kraftfoodscompany.com/SiteCollectionDocuments/pdf/kraftfoods_deliciousworld.pdf
Bargaining power of Buyers: Due to the competitive nature of the market the buyers have the
freedom to switch to sellers who offer acceptable quality product at the lowest prices. Big retail
chains like Wal-Mart utilize their process and distribution efficiencies to achieve economies of
scale and scope to attract the attention of buyers. As a result buyers have high bargaining
power and they extract consumers surplus.
Threat of new Entrants: The state of industry is already very competitive with presence of a
large number of players. In this scenario it is very difficult for a new entrant to match the existing
players expenditure on branding, R&D, partnerships and scale of production. Without these
internal resources and capabilities it is difficult to cause consumer to switch to a new brand.
Intensity of Rivalry: As mentioned earlier there is high competition on the industry. Companies
establish their market share by inducing brand loyalty among consumers and by ensuring
presence across multiple market segments. In general it is difficult to preserve loyalty from
consumers as they continuously weigh the tradeoff between price and quality. Thus there are
minimal switching costs for the consumer and the products are generally price elastic in nature.
Thus most players in the industry aim to provide good quality at affordable prices. The
importance of brands is supplemented by huge spends on advertising and promotions in order
to counter private label products. Kraft and the other major players undergo frequent
restructuring to stay agile and responsive to consumer needs so that they can develop better
product mix than the competition.
Threat of Substitutes: As the consumer weighs the tradeoff between quality and price of
products there is a medium threat of substitutes. As big retail marts are the primary sales
channel in developed countries the primary threat of substitutes is posed by private label
products. To counter this threat all major players perform major branding exercises to establish
the image of quality in the consumers mind.
Industry trends
The current trends in the foods and beverages industry in the US provides good growth
opportunities to established players.
Shift in consumption pattern in favor of quality products offering value and convenience
Growing opportunities in the developing markets like Brazil, India and China
Focus on sustainability initiatives like water usage, recycling and power efficiency
Kraft Foods has the resources and internal competencies to exploit these trends in the Foods
and Beverage industry and convert them into profitable business opportunity. The company is
continuously innovating on its product portfolio to come up with product offerings which provide
value to the consumer at affordable prices. Its strong R&D capabilities and decades of
experience in product development enable it to provide a strong line of healthy snacking options
for the health conscious consumer. Its various policy measures and social partnerships
promoting health and wellbeing and environmental consciousness also differentiate it from its
competitors in the mind of the consumer. Finally, with its string of acquisitions, most notably
Cadbury, the company has managed to get a foothold in the developing markets. Here the
company can ride on Cadburys brand equity to introduce its powerful brands in other product
categories. For example, in India and Mexico, the strategy is to push Krafts marquee brands
Oreos and Lacta chocolate through Cadburys established network of mom-and-pop stores.
Factor Conditioning: The recent technological advancement in the United States plays
a major role in production of agricultural products, also there are huge skilled labors
available to operate in modern equipment and the capital required for excess production
is easily available.
Intensity of the rivalry: The United States Food Industry is highly competitive, there
are many big players like the Unilever, Frito-Lay, Cargill, Tyson Foods, ConAgra Foods
and Smithfield Foods etc.
Local demand condition: The urban population of United States is high and its always
increasing which is potential market for food industry, also the partnership with firms like
Safeway Store provides additional demand for products of Kraft Foods.
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CC8QFjAA&url=http%3A%2F%
2Fclassof1.com%2Fhomework-help%2Fsamplesolutions%2FStrategic_analysis_of_Kraft_Foods.docx&ei=1n50T72IDcO8rAfWlM3PDQ&usg=AFQjCNFHruLKh
7H5emZBu6O25Rwy5hJ9kw
We inspire trust.
http://www.kraftfoodscompany.com/cn/en/About/values.aspx
We keep it simple.
Customers
Before deciding on a generic business level strategy the company must look at its customers.
Essentially it must determine
a) Who will be served
b) What needs those target customers have that it will satisfy
c) How these needs will be satisfied
The product portfolio of Kraft can be classified in to five product categories like Snacks,
Convenient meals, Cheese, Grocery and Beverages. The following are the categories in which
Kraft Foods segments its customers based on the needs which must be met by designing an
appropriate product offering.
Health and Wellness: This is the health and nutrition conscious customer segment.
They want to consume healthy food and they choose their products based on its
nutritional content. They have various needs like managing their weight, consuming
essential vitamins and minerals etc. Kraft Foods provides various products which meet
all their demands.
Quick Meals: These are customers having a fast and busy life, but they dont want to
miss the delicious foods. Kraft Foods have various ready to eat and ready to heat
products to satisfy their needs.
Snacking: Kraft provides a huge variety of snack products to customers who seek for
on the go foods. Oreo wafer sticks, Crystal light ready to drink are few of the largely
sold snacking products of Kraft Foods all around the world.
Premium: These are customers who wants high quality restaurant like food in their
home. Kraft Foods satisfies their needs with premium foods like DiGiorno Ultimate
Pizza, Cote dOr Chocolates etc.
Organic Revenue
Growth > 5%
Mid-High teens
margins
EPS Growth 9-11 %
The management viewed the company in a good position to gain grow owing to a virtuous cycle
as shown below. The following are the key features of the virtuous cycle visualized to grow
faster than key competitors and categories
Reinvest in
growth
Leverage
Overheads
Drive Top-Tier
Growth
Reduce Costs
http://phx.corporate-ir.net/phoenix.zhtml?c=129070&p=irol-news2011
Thus the overall focus of the corporate strategy seems to be divided in two parts
Brand Building: Associate quality and uniqueness with the power brands in the minds
of the consumer by aggressive push through advertising, sales and marketing efforts.
Cost reduction: Achieve cost saving measures end-to-end in order to improve
profitability.
Value Chain
The value chain of Kraft Foods operations is represented below6. It details the primary activities
and support activities which are carried out by the company in order to implement its chosen
business level strategy.
Same as footnote 3
Whole of the Kraft foods is divided into 3 main teams comprising of the corporate core, business
units and shared services. Each of the units has separate functions assigned to them.
As we can see in the figure corporate core is the team which decides on the overall strategy of
the company. It is the one deciding about the composition of the business portfolios. Setting
standards and managing talent is also being done by this team itself.
Business units are the separate entities looking after their separate business but works in
coordination with the other two teams. Business units are basically units manufacturing biscuits,
cheese, beverages, confectionery and grocery. It is responsible for running the business and
measuring the performance standards of the corporate core function.
Shared services provide the company with business units with market information and scale
sensitive expertise for efficiency for business. They help in making tradeoffs among priorities
and expenses following guidelines from business nits and corporate core.
Acquisitions
Kraft foods over the years have maintained their growth using mostly the inorganic route.
Acquisitions have been their main way of maintaining growth over the years. It has been
acquiring companies since the year 1916 and most recent was the acquisition of the British firm
Cadbury. The following table gives the list of all the acquisitions:Year
Acquisitions
Phenix Cheese
1928
Southern Dairies
1928
10 "cheese dealers"
1928
Henard Mayonnaise Co
1929
D.J. Easton
1929
2 mayonnaise companies
1929
10 cheese companies
1929
1930
1953
General Foods (which later merged with Kraft) acquires Perkins Products
1980
1981
1985
1988
1989
Phillip Morris combined Kraft with General Foods to form Kraft General Foods, Inc.
We see that over the years the company has acquired various companies across geographies
and products. In this report we would try and explore the Kraft-Cadbury acquisition using
various frameworks and models.
Kraft-Cadbury
Kraft acquired Cadbury in the year 2010 for 19$ billion. In order to broaden its position in the
developing market, Kraft made bids to acquire Cadbury. Initially the offer was rejected but later
the revised offer for 19$ billion was approved by Cadbury. The acquisition provided Kraft with
the following advantages:1. Increased Market Power: - A primary reason for the acquisition is to achieve greater
market power. Acquisition has allowed the company to achieve economies of scale
because of increase in their size and economies of scope because of various products.
In case of Cadbury the company would be able to offer new products along with the
existing products of Cadbury. Cadbury being a 186 year old brand has a very strong and
long global presence.
Adding to it sales of Cadbury has been growing at a rate of 20% and profits at
30% in most of the markets where it operates. This helped Kraft in increasing its
revenues to about 52$ billion out of which 25% comes from the sales of Cadbury in
emerging markets.
2. Overcoming Entry Barriers: - Cadbury has a well-established market in India, Brazil
and Mexico. Entering these markets would have required Kraft to spend significantly on
capex, advertisements and supply chains. Because of the acquisition Kraft was able to
not only negotiate with these factors but was also able to use the existing supply chains
to supply many of its own brands. We have the example to OREO which has been
launched in India and has been very successful. Few of the reasons which are behind
the success of Oreo are the supply chain and brand name of Cadbury.
3. Increased diversification: - By acquiring Cadbury, Kraft was able to widen its portfolio.
Apart from selling its own products now Kraft would be able to sell Cadburys products in
various markets and achieve more profits. In addition Kraft would also be able to use the
existing networks of Cadbury to make its own products available in the markets.
4. Leadership in Markets: - Although Kraft is second largest food and beverage
manufacturer of the world and is a leader in various markets, but acquiring Cadbury
further helped it to become leader in new developing markets. Ex. Cadbury was the
leader in India and Mexico, two of the fastest growing markets.
5. Cost optimization: - Cadbury being located in India also offers a cost advantage for
Kraft foods. Kraft can use Cadburys existing plants and distribution channels in India to
gain cost advantage.
International Strategy
Kraft has segmented its market geographically into 3 sections:The following pie chart shows the 3 main
markets Kraft caters to. Here we can see
24%
American
Market
16%
60%
European
market
Developing
Market
wants
to
target
the
main
the
near
future.
It
will
Grocery Business
Snacks Business
Business
markets
markets.
holding
new business
focused
towards
Developing
economies
foods.
After
the
integration
Cadbury
has
been
divided
into
five
divisions.
Cadbury
Chocolates
Biscuits
Gum and
Candy
Malt-Drink
Fruit-Drink
Each division is managed by a director who has to maintain his own profit and loss account,
marketing strategy, expenditure and research and development and reports to the country
managing director.
relaxed work environment. Four important senior executives left the company in 2010-11,
including the finance, legal services and marketing heads.
One reason widely accepted by employees is that while Cadbury relied greatly on inputs from
the managers of the country of operations to formulate strategies, Kraft imposes a high-level
strategy on its subsidiaries. Kraft has rigid decision making processes in place and stringently
wants them to be followed," says a former executive of Cadbury. Also Cadbury allowed local
employees a high degree of autonomy in decision making, Kraft does not believe in
decentralizing the decision making to its subsidiaries. Cadbury, UK only gave broad guiding
strategy from the UK, and gave us a lot of freedom" says a former manager.
Employees of Cadbury also add that before the takeover the company was very agile, taking
pricing and promotional decisions at the ground zero level without having to wait for approvals
from the top managers. Approvals for marketing and advertising budgets at Cadbury were
cleared without much problems in a few days; After the merger they say ,it takes more than a
month, and not without many plans and charts to convince the top management. "Before, it was
swift decisions, but today the number of layers we have to go through for approvals is too
tedious," says an employee of Cadbury.
Internal strain has developed because of the step-motherly treatment shown to Cadbury brands.
Investments in Oreo and Tang, the two new brands that were introduced in India are more than
revenues generated by these brands. Bubbaloo, the chewing gum brand introduced by Cadbury
has been neglected, and is even expected to be closed down. Employees feel Kraft does not
understand chocolates and confectionery business at all.
Kraft View
While for Kraft the change in culture is for good as it would help Strengthened Brand, gives a
drive higher performance in turn leading to higher revenue, effective control of the organization,
Efficiencies through alignment of procedures and processes and alignment of goals towards the
larger global strategy.
Cadbury View
Cadbury on the other hand has been forced take over after declining Kraft's initial offer. Adding
to the complexity was that the dialogue (which was very hostile at times) between the two
companies was played out in the news for weeks together prior to inking of the deal. The
management at Cadbury felt that they would be dealt with high handedly by Kraft and the
culture and brands that they have developed within Cadbury are no more going to be the same
again.
Cadbury fears damaged heritage, risk of jobs and benefits to their US employees, weakened
brands and the trust deficit which was wide open. This would have high burnout and low moral
performance among the Cadbury managers.
Types of Culture
Networking
Characteristic Traits
Cadbury Kraft
Participation
Hard work
Fragmentation
Material reward
Destroying competition
Communal
relationships
Deep friendships
Family atmosphere
Success so far
One of the crucial advantages for Kraft from the acquisition - is the entry it gave to India's
enormous market. It had made an initial entry a decade ago, but with mispriced products and
without a sales network it failed to establish and made an exit. But now, with Cadburys brand
reputation and network, the picture is different. Along with Tang, it has launched its Oreo brand
biscuit in India. It has another 10 top global brands in waiting line to be launched.
Oreo
After its launch in India in March 2010, its share of the Rs 13 thousand-crore biscuit market,
occupied by Britannia ,Parle and Sunfeast, is a mere 0.7 per cent, according to Nielsen, but
given Cadburys distribution network and Oreo price which is priced well below the Good Day of
Britannia and Dark Fantasy of Sunfeast, it is very promising.
Kraft's -Leadership
Open and honest relationship with Cadbury is essential to keep the trust deficit at bay. This
gives Cadburys managers and employees a realistic understands the needs of the company,
helping them to make informed decisions about future prospects. Defection of talented people
can only be stopped through trust bridging. Kraft will have to face an immediate challenge as
Cadbury's top talent will leave and no one knows the running Cadbury better than those who
had a role in its success. Kraft also has the set in place a road map for integration and strategy
ahead for Cadbury. The plan should provide guidance on the performance of top managers, the
effectiveness of work units and processes, and the management of organizational change
management.
Cadbury's-Leadership
Integration after an acquisition is difficult for any organization, even under the best of
circumstances. After the deal is closed, it's important for the top managers of Cadbury to
publicly embrace the acquisition by focusing on the benefits of the acquisition. Management at
Cadbury has to take steps to demonstrate their openness to the merger. This might be in the
form of meetings, companywide emails, and even positive internal quotes about the acquisition
in the media. Cadbury has to imbibe the pride in its accomplishments that it has achieved over
the years. Cadbury became an acquisition target because it has been the leader in its business.