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Integrated Case: Accounting 3 – Financial Decision

Making

Ky Phuoc Lam- 4764

Mahima Rana- 8721
Mohit Payare- 7679
Shaurya Ahuja- 9711
Shivjit Deshpande- 3768

Vancouver Island University

MBAA 536

Dr. Sameer Mustafa

December 22, 2021

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Table of Contents

1. Executive Summary 3

1.1 Introduction 3

2. Review of Income Statements 4

2.1 Activity Level 4

2.2 Break Even Analysis 4

2.3 Margin of Safety ratio 4

2.4 Limitations 5

3. Financial Fraud Identification 5

3.1 Inventory Frauds 5

3.2 Diversion of Charitable Donations 6

3.3 Economically motivated adulterations 7

3.4 Improper capitalization expenses 8

3.5 Diversion of Bank Loans 8

3.6 Falsifying company finances 10

3.7 Vendor Fraud 11

3.8 Financial frauds due to dependence on technology 12

4. Balanced Scorecard 13

4.1 Financial perspective 13

4.2 Customer Perspective 16

4.3 Internal Process Perspective 18

4.4 Learning and Growth Perspective 20

5. References 27

6. Appendix 32
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1. Executive Summary

The financial decision-making report is majorly divided into three parts and looks at different
aspects of financial decision making. The first aspect aims to understand the cost structure
of Kellogg’s. After reviewing the income statements for the past five years, The team has
estimated the total annual cost formula for the company using the high-low method. The
team has also computed the variable cost as percentage of sales, the amount of total annual
fixed costs and annual required sales in dollars to breakeven. The part ends by discussing
the limitations of the analysis done how these limitations can impact our findings.
The second aspect of the decision making in this report develops a risk management plan.
The team has identifed and prioritized eight to ten financial fraud risks facing the company
and suggested how each risk could be managed. Kellogg’s although holds the position of
leader of cereal aisle, the organization isn’t succeptible to the drastic events like the
pandemic. Having grown in various aspects makes the organization prone to different types
of frauds as well.
Finally, the third aspect in the financial decision-making report, the team has built a Balance
Scorecard (BSC). It is a strategic management performance metric used to identify and
improve various internal business functions and their resulting external outcomes. Through
strategy mapping, employees can see the causeand-effect relationships among the four
BSC perspectives (strategy maps use the BSC perspectives as a framework) and gain a
better understanding of how the job they perform every day affects the organization's ability
to achieve its strategic objectives. The report therefore consists of different perspectives and
possible objectives including how Kellogg’s can keep track of the same.

1.1 Introduction
Kellogg Company, or Kellogg’s, was founded in Battle Creek, Michigan and is the world’s
leading producer of cereal and a leading producer of convenience foods, including cookies,
crackers, toaster pastries, cereal bars, fruit-flavoured snacks, frozen waffles, and veggie
foods. (Kellogg’s, n.d.). Kellogg’s Corn Flakes was one of the earliest and remained one of
the most popular breakfast cereals in the United States. It currently employs a workforce of
31,000 with its vision as “a good and just world where people are not just fed but fulfilled.”
Kellogg’s looks to create better days and a place at the table for everyone through their
trusted food brands.
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2. Review of Income Statements

2.1 Activity Level

The activity level is the amount of an activity used by a cost object. The concept is employed
in activity-based costing. If the activity level can be reduced, then activity costs should
decline, thereby reducing the overall expenditure level of a business.
Change in activity can be calculated by dividing Total Sales by Average orders. Total sales
is an organization’s revenue and can be devised from Kellogg’s annual report. Total annual
cost calculation also requires total cost, which can be referred to as the operating expenses
in the income statement of Kellogg’s (PricewaterhouseCoopers LLP, 2021). The average
serial price is assumed to be $3.27 per box of serial
The maximum activity level occurred in 2020, and the minimum level of activity occurred in
2017. Using a high-low formula, we then determine the difference in activity level, which is
280,123 orders. Based on the years used in calculating the difference in activity level, we
then calculate the difference in expenses simultaneously, which is (111,000) thousand U.S.
Dollars. Based on these, we calculate the variable cost per unit:
{111,000 / 280123} = 0.39 USD
Total fixed cost can now be calculated by subtracting the variable costs from the operating
costs during the same years chosen to measure the activity level:
Variable cost for 2020: 0.39 * 4211009 = $1642239
Variable cost for 2017: 0.39 * 3930886 = $1533045
Therefore, the Fixed cost for 2020: $1323761
Fixed cost for 2017:
The total annual cost formula can be written as: $1323761 + (0.39 * Number of orders)

2.2 Break Even Analysis

To determine annual required sales, we need to calculate the break-even point in $.
Break-even point in $ = Break-even per unit * price per unit
Break-even point in units = 1323761/0.39 = 3394258 orders
Therefore, Break-even point in $ = 3394258 * 3.27 = $11,099,226

2.3. Margin of Safety Ratio

The margin of safety is a financial ratio that measures the number of sales that exceed
the break-even point. It is the revenue earned after the company or department pays all its
fixed and variable costs associated with producing the goods or services. The margin of
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safety formula is calculated by subtracting the break-even sales from the budgeted or
projected sales.
= $13,770,000- $11,099,226
= $2670774
Margin of safety ratio = Margin of Safety/Net Sales
= 2670774/13770000
= 19.3%
A low percentage of margin of safety might cause Kellogg’s to cut expenses, while a high
spread of margin assures a company that it is protected from sales variability. It also means
that Kellogg’s has high fixed overheads, and profits are not earned unless the activity level is
so high that it covers fixed costs.

2.4 Limitations

The limitations of the High-low method include the fact that the results are estimates, not
exact numbers. Another disadvantage of the high-low method is the number of steps
necessary to perform this analysis. Each additional step increases the potential for errors.
The technique uses only the lowest and highest production activities to estimate the variable
and fixed cost by assuming the production quantity and cost increase in linear. It ignores the
other points of productions, so it may be an error when the price does not increase in a
linear graph. Therefore, I would recommend that the board members not wholly rely on the
method as the method might result in multiple inaccuracies.

3. Financial Fraud Identification

3.1 Inventory Frauds

Inventory is one of the biggest assets on a manufacturer’s balance sheet. It’s also one of the
hardest assets to measure and track. Therefore, protecting it becomes essential for direct
growth. Inventory fraud involves the theft of physical inventory items and the misstatement of
inventory records on a company’s financial statements (Inventory Fraud, 2020). Kellogg’s
owns massive manufactories in 11 locations worldwide which caters to the entire world
thereby creating a massive warehouse infrastructure holding this inventory.

Implications: There are different ways in which this fraud occurs which includes include
missing packing slips and sales receipts, complaints from customers about lost goods,
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spikes in the number of damaged goods and sharp drops in sales, even during normally
busy periods (Inventory Fraud, 2020). The severe implications are:

 Overstated inventory will add the omitted stock, increasing the amount of closing
stock and reduces the COGS and converse (2021).
 Creates doubts in investors and stakeholder’s minds about the anomaly in the
inventory (Franklin, 2018).
 Creates a domino effect on the Net Income & Gross Profit (Franklin, 2018).
 Inflating inventory values by moving inventory between locations to fictitiously inflate
inventory quantities, postponing and under-reporting of write-downs and reserves for
obsolescence, manipulating unit valuations applied to on hand inventories, and
improper inventory capitalization (Deloitte, 2009).
 False Inventory includes falsifying journal entries, receiving and shipping reports,
purchases orders, or cycle counts for reasons such as to decrease cost of sales as a
percentage of sales or maintain inventory balances for debt covenants (Deloitte,
2009).

Recommendations: To offset the inventory frauds, we recommend Kellogg’s to implement

and keep in place steps as the following:

 Segregate duties: Simply put, “segregation of duties” means you don’t allow one
person to be involved in two processes that have a conflict of interest.
 Inventory Management Systems: This is the physical technological aspects such as
barcode labels and scanners, inventory management software that provides a
database for all the goods in inventory,and generates reports and processes for
labelling and documentation of goods (Islam, 2021).
 Incorporate “Surprise Audits”: Surprise inventory checks and unannounced shipping
audits creates an excellent deterrence for preventing inventory fraud (Islam, 2021).
 Use Data Analytics: Data inputs like wheat, oats, sugar, manpower, HLP, etc can be
computed to provide a specific output with a certain margin of error. If this has a
consistent anomaly, the company can take action (Islam, 2021).

3.2 Diversion of charitable donations

Kellogg’s is partnered with multiple food banks, food organisations and charities for which it
collects funds. These funds are used for the betterment and welfare of food supply chains,
providing and paying for the meals its helps for communities, Mexico’s Mercado Libre e-
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commerce platform, partnering with other stores and chains to donate to the various
programs associated with food banks (Singapore’s RedMart online shopping site, Amazon in
the U.S., Kakao Talk Store mobile shopping mall in South Korea) (Kellogg Company CR
Report - Food Bank Partnerships/Food Drives, 2021).

Implications: There are severe reputational implications which can arise from the above
mentioned frauds. A few more are as follows:

 Donors who provide to such causes can face legal consequences in an event where
the company is involved in such financial frauds.
 Abuse of charity funds to minimise tax liabilities
 Money laundering

Recommendations: To prevent these types of frauds, Kellogg’s should implement or have in

place the following protocols.

 Provide a disclaimer which states that Kellogg’s reserves the right in using the
collected funds as it deems fit (McRay, 2021).
 Ask for permission to ‘re-purpose’ a gift Kellogg’s receives (maybe something like
physical items such as physical assets) (McRay, 2021).
 Segregating restricted and unrestricted funds and adding the same line when
collecting such funds (McRay, 2021).
 Independent body to determine the accounts in addition to the internal audit team’s
report.

3.3 Economically Motivated Adulteration

Economically motivated adulteration (EMA) of food, also known as food fraud, is the
intentional adulteration of food for financial advantage (Everstine et. al., 2013). 

Implications: This is a serious concern for Kellogg’s. The company uses many ingredients
like wheat, oats, sugar, oil, preservatives etc. to make its products. If it decides to substitute
one batch of ingredients for a lower price, the product made will have a higher margin which
can be passed onto Kellogg’s employers and compromise on the quality (BSI, 2017). Few
more implications are listed below:

 Hit to the food supply chain (BSI, 2017).

Recommendations:
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 Clearly segregating duties and assigning a one job to the one team responsible for
the manufacturing. By ensuring access to critical areas, e.g., product labels or
packaging, are given only to authorized personnel to prevent use for EMA (Wayne
Labs, 2013).
 Systematically conduct random audits to detect divergence from standard operating
procedures that may detect fraudulent activity (Wayne Labs, 2013).

3.4 Improper Capitalization Expenses

Capital expenditures are costs that benefit the company over more than one accounting
period, and accordingly, the expenditures should be amortized over the life of the asset.
Companies may improperly capitalize certain expenditures in order to avoid recognizing the
full amount of the expense in the current period. Expenses may be capitalized into various
asset accounts, and may include software development costs, research and development
costs, start-up costs, interest costs, advertising costs, inventory and labour costs, etc
(Deloitte, 2009). Kellogg Company's research and development (R&D) expenditure
worldwide was $ 135 million in 2020 (Statista, 2021).

The implications of these are as follows:

 Sudden improvements in profit margins with a large jump in certain assets which can
arouse suspicions (How Companies Misuse Capitalizing of Expenses |, n.d.).
 Abnormal fluctuations in free cash flows and cash generated from operations (How
Companies Misuse Capitalizing of Expenses |, n.d.).
 Unexpected CAPEX rises or increases (How Companies Misuse Capitalizing of
Expenses |, n.d.).
 Inordinate rise in stockholder’s equity.
 Assets being added in the company’s name which otherwise should not be present.

Recommendation: Kellogg’s can counter these by issues by following a written mandate

describing the policy of company’s capitalization. There should also be a keen eye kept on
the changes in every accounting policy the company undertakes.

3.5 Diversion of Bank Loans

Companies like to expand and banks are more than willing to help them out. This helps the
company keep its cash flow intact, reduce more budgetary planning and in some cases,
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avail tax benefits. Recently was a case with Argentinian major soy and cereal producer,
‘Vicentin’ (Bronstein, 2020). The company was going bankrupt and borrowed $600 million
which was later found to be funnelled for different purposes rather than to keep the company
afloat (Translated by Content Engine, 2021).

Kellogg’s currently has long-term debt at $6.75 billion and current debt at $729.00 million,
amounting to $7.47 billion in total debt (A Look Into Kellogg’s Debt, 2021). This credit is
offered from a bunch of banks ranging from HSBC, Chase Morgan Stanley, Barclays, Bank
of America, etc. (2020 Annual Report, 2021). This credit is used for R&D, expansion and
other M&A arrangements.

The implications of diverting bank loans are:

 Creates a false sense stable/ better performance by the company for the
shareholders and stakeholders.
 Companies practicing this may still have the unresolved financial conditions in reality.
 Stricter and harsher banking and governmental sanctions in an event the company is
caught.
 Public humiliation caused by the said event.
 Additional financial fines and possibility of closure of business leading to insolvency
and employees being out of jobs.
 Banks becoming increasingly cautious while lending thereby access to working
capital becoming increasingly difficult for companies.

To prevent these issues, Kellogg’s needs to do the following:

 Code of Conduct: Kellogg’s should have a clear statement by the institution’s board
of directors of its ethical position, such as a code of business principles. Since it is
the management which sets the tone for the way the company is run and how it
influences its people, a guideline to the above morality should be observed (FFIEC,
2002).
 Employment Practices: Employees engaging in frauds often fit a profile. As stated
earlier, they may be involved with drugs, alcohol, gaming, or personal relationships
creating extraordinary financial needs, or may be experiencing personal financial
hardships that are otherwise unknown to their employer. Ongoing monitoring and
awareness of all employees’ immediate situational factors is essential. Many of the
most scandalous insider loan frauds have been generated by persons of
“impeccable” social background with no previous record of dishonesty (FFIEC, 2002).
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 Independent Loan Review: Loan review functions should be independent of the credit
administration and loan approval processes.
 Internal & External Audit
 Internal Controls

3.6 Falsifying company finances

The risk of material misstatement is a function of the following parameters – inherent risk
and control risk. In effect, the risk of material misstatement is the susceptibility of the
financial statements, accounts, and assertions to material misstatement, and the risk that the
client’s current internal controls would be ineffective in proactively identifying and correcting
the misstatements (Corporate Finance Institute, 2020).For the purposes of increasing their
profit margins on paper, SEC had charged the CFO and the CEO of Diamond Foods on
falsifying the cost of goods (walnuts) and was also slapped with a $5 million fine (SEC.Gov |
SEC Charges Diamond Foods and Two Former Executives Following Accounting Scheme
to Boost Earnings Growth, 2014).

Severe implications such as the following will be notices such as:

 Reputation becomes at stake.

 Revenue is exaggerated but the true nature of the health of the organisation is still
poor.
 Non-compliance with GAAP regulatory rules (Attah & Jindal, 2017).
 Loss of faith in the management team tasked with preparing the financial statement.
This can cause the company stock to tank and lose its investors and invite law
authorities to clamp down on them (Attah & Jindal, 2017).

To avoid issue like the above from happening the following must be followed by the
company:

 Segregation of duties
 IT General Controls: IT general controls generally include controls in information
security, application development, and systems maintenance and operations. As part
of risk-assessment procedures, external auditors identify and assess risks arising
from IT, including certain cybersecurity risks facing the entity. Relevant controls,
including IT general controls, are identified to address these risks (Centre For Audit
Quality, 2019).
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 Entity-Level and Process-Level Controls: These controls pertain to a single activity,

such as requiring that delivery receipts be matched with vendor invoices before a
vendor payment is authorized (Centre For Audit Quality, 2019).
 Management Review Controls (Centre For Audit Quality, 2019)

3.7 Vendor Fraud

Vendor Fraud includes a multitude of layers involving billing schemes, check tampering,
overbilling, and price fixing including others. Vendor fraud can be committed by employees
acting alone or in collusion with vendors. This type of fraud can also be committed by
vendors on their own (Lomer, 2020). Kellogg’s being an international entity with operations in
more than 95% of the world, it relies on over 20,000 vendors, suppliers and partners
throughout the world (Partners Advantage, n.d.). These mean that there are daily financial
transactions of extremely high value and nature and frequency.

The implications of such a criminal enterprise are as follows:

 Loss of vendor operational practices which can be an IP issue.

 Reputational Risk
 Loss of confidential information involving numbers and prices.

The recommendations to avoid these unlawful activities are:

 Conduct thorough background checks on new employees (Lomer, 2020).

 Implement checks and balances on payments to vendors (Lomer, 2020).
 Separate the functions of check preparer and check signer (Lomer, 2020).
 Rotate duties of employees in procurement (Lomer, 2020).
 Conduct random audits of vendor files (Lomer, 2020).
 Conduct due diligence when setting up vendors by verifying (Lomer, 2020):
a) Vendor’s business name
b) Tax Identification Number (TIN)
c) Phone number
d) PO box and street address
e) Bank account
f) Vendor contact person
 Use data mining to uncover anomalies and patterns (Lomer, 2020).
 Compare vendor addresses with employee addresses (Lomer, 2020).
 Implement a dual review process for master vendor file management (Lomer, 2020).
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 Review the vendor master file to check that volume of billing is reasonable and
consistent (Lomer, 2020).

3.8 Financial Frauds Due to dependence on Technology

Kellogg’s is a making a big push into the digital space just about recently with its ‘Deploy For
Growth’ Strategy. In 2018, Kellogg’s board of directors placed Steve Cahillane in the role of
CEO in 2017 to specifically change the way the company conducts business and push the
entire envelope in a digital space, from engaging with its consumers to making all records
online (Ladd, 2019).

When it comes to the operational part of the company, Kellogg’s partners with vendors,
suppliers, partners, associates different agencies and multiple other organisations.

We have to keep in mind that this new shift to a digital sphere will open doors from internal
saboteurs colluding with external entities to commit financial fraud.

With multitudes of transactions occurring online, the following are a few implications for the
company:

 Loss of confidential financial data of the vendors, suppliers, partners, etc. (THE EU
CYBERSECURITY AGENCY, 2018).
 Identity Theft of the company (THE EU CYBERSECURITY AGENCY, 2018).
 Disclosure of price lists of different third parties engaged in business with the
company leading to potential price discrimination (THE EU CYBERSECURITY
AGENCY, 2018)
 Siphoning money into foreign accounts (THE EU CYBERSECURITY AGENCY,
2018).

Company like Kellogg’s can implement the following to prevent this from happening in their
journey into the digital arena.

 Access Control: Only certain individuals can and will be allowed to access these
digital payments (Xie, 2021).
 Automation: To even further secure the transactions, automation should be
introduced within the payment process to eliminate the need of human interaction
altogether (Xie, 2021).
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 Internal audit teams have to monitor the transaction, bot activity or any other form of
anomaly in every single proceeding (Xie, 2021).

4.1 Financial Perspective

Objective 1: Improve Net Income

Kellogg’s has had an explosive growth this fiscal year despite the obvious setback by the
coronavirus pandemic. Their net income improved to a staggering $1.25 billion from $960
million in 2019 (PricewaterhouseCoopers LLP, 2021). This year’s growth could well be
attributed to reduced one-time charges and the lower reported effective tax rate (Schroeder,
2021). However sustained income growth is the need to the need of the hour especially now
that the world returns to its new normal and Kellogg’s CEO’s (Steven Cahillane’s) promise of
returning to a balanced financial growth with equal importance being given to top line
expansion, margin expansion and cashflow conversion stands tall amongst all the
stakeholders.

Measure: Monitor Net income and Year on year net income change.

Target: Year on Year growth of 7% in the net income

In the five years leading up to the pandemic-2020, Kellogg’s had an average year on year
organic income growth of around 6.5% (PricewaterhouseCoopers LLP, 2021). Extrapolating
this past performance, we can assume a 7% growth as an achievable target for the next
fiscal year (Refer appendix A

Objective 2: Improve Stock Prices

The stock price for Kellogg’s has remained constant this year despite massive turnovers in
the NSYE leading to 17% increase (NYSE Composite Index - CNNMoney.Com, 2021).
Ensuring the continued improvement in the shareholders invested wealth is a continued
objective for Kellogg’s. The company wished to capitalize upon the high growth in revenue
this year by its continued investment in emerging markets as was summarized by the
company’s Chief Financial Officer – Amit Banati (Reuters, 2021). One such venture by
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Kellogg’s is the acquisition of Multipro which opens the gateway of the African market to
Kellogg’s (PricewaterhouseCoopers LLP, 2021). Kellogg’s acquired about 51% stake in the
FMCG conglomerate that has operations spread across the African continent
(PricewaterhouseCoopers LLP, 2021).

Measure: Monitor the stock price on the NYSE

Target: Given this year’s sales growth and the upcoming projections a 7% median increase
in the stock price of Kellogg’s seems very plausible (K - Kellogg Co Forecast -
CNNMoney.Com, 2021)

Source: Kellogg’s Annual Report

Objective 3: Improve returns to shareholders

With a continued dividend payment of $2.28 per share Kellogg’s remained a strong favourite
amongst potential investors (PricewaterhouseCoopers LLP, 2021). Kellogg’s has added
around $400 million to its shareholder equity from last year taking the total equity to around
$3.1 billion this year.

Measure: Monitoring the return on shareholder equity, the total shareholder equity and the
year on year increase in the shareholder equity.

Target: If past performance of Kellogg’s is to be considered an average 10% year on year

growth in the total stockholder’s equity has been the trend for the past 5 years (Refer to the
diagram below). An improvement in the return on equity represents the improvement in the
equity as compared to the total assets of the company and hence displays the company’s
ability to generate profits for its stakeholders.
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Source: Ycharts

Objective 4: Control inventory costs

Inventory management is an inseparable part of the financial process of decision making.

Kellogg’s has to maintain the optimum amount of inventory to be supplied and stocked to its
various regions around the world. The company employs a Just in time Inventory
management technique for achieving the same (Lu, 2014). Just-In-Time means that just
enough products are made to fulfil orders and limited stock is kept. Thus, it is imperative that
Kellogg's gets the balance right at each section of the supply chain. Delays in deliveries or
the failure to deliver due to a lack of products may turn the retailers to the competitors
products. Kellogg’s attempts to reduce the lead time for deliveries by predicting the supply
based on past demand by said customers (Lu, 2014)

Measure: Monitoring the cash conversion cycle and the days in inventory

Target: Kellogg’s has a steady 50-55 days in inventory for the past 4 years and a healthy
cash conversion cycle of -9 days as of 2020 as could be observed in the table below:

Kellogg's
2020 2019 2018 2017 2016
52.69555 55.20876 28.05620
Days Inventory 50.59366 50.7198 6 8 5
Days Accounts 37.74582 39.66397 38.80290 18.91862
Receivable 4 8 37.23555 2 7
97.92191 95.52625 97.15678 93.45432 42.80254
Days Accounts Payable 3 9 5 3 6
Cash Conversion Cycle -9.582428 -5.14248 - 0.557346 4.172285
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7.225679 9 9
Source: Financials obtained from Mergent database; ratios calculated by the team.

Kellogg’s should aim to maintain both the days in inventory as well as the cash conversion
cycle at the same level +/- 5% for the next year.

Objective 5: Reduce long term debt

Kellogg’s has a long-standing commitment to reduce its long-term debts as is clearly

specified in its annual report this year (PricewaterhouseCoopers LLP, 2021). For the past 3
years the company whittled down its long-term debt from $8.2 billion to about $6.7 billion this
fiscal year a year on year reduction of around 6 % per year. Kellogg’s have a dedicated non
GAAP financial measure added to the annual report in order to capture this repayment
statistic in their annual report (PricewaterhouseCoopers LLP, 2021).

Measure: Monitor the total long -term debt owed and the year on year reduction in the long-
term debt to capture this objective effectively.

Target: As already discussed Kellogg’s plans to have a reduction in the long-term debt owed
as a part of its long-term objectives, this annual reduction could be estimated at around 6%
per year based on the past financial performance (PricewaterhouseCoopers LLP, 2021)

Source: Kellogg’s Annual Report

4.2 Customer Perspective

Objective 1: Customer Retention

Customer loyalty programs are one of the best ways of achieving customer retention and
increasing your customer lifetime value. Retaining the business and the loyalty of existing
customers is just as important as acquiring new customers, expanding into a new market or
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launching a new product line. Kellogg’s has vast distribution network across the world
however, 19% of their total sale coming from Walmart making it their single largest client
(PricewaterhouseCoopers LLP, 2021). The Company has a program in which a discrete
group of customers are allowed to extend their payment terms in exchange for the
elimination of early payment discounts (Extended Terms Program)
(PricewaterhouseCoopers LLP, 2021). In addition, it classifies promotional payments to its
customers, the cost of consumer coupons, and other cash redemption offers in net sales
(PricewaterhouseCoopers LLP, 2021). The end goal of all these promotional activities is
improving the customer retention rate.

Measure: The customer retention rate could be estimated by using the following formula:

Customer Retention Rate = (Customers at the End of the Period) - (New Customers
Acquired) / Customers at the Start of the Period (Smith, 2021).

Target: The company should aim for a 100% customer retention rate.

Objective 2: Brand Awareness

In the modern context of marketing social media plays a crucial role in both creating and
maintaining brand awareness for a said brand. The number of followers on social media
define the reach and the impact that the brand has on the society rather than advertising in
traditional media, which would soon be obsolete. Kellogg’s ha a massive presence online on
platforms such as Facebook (Kellogg’s Canada, 2021). This reach is however limited to
Facebook as the other social media platforms have a mediocre following which could be
observed in the infographic below

Source: Facebook, Instagram, Youtube, Pinterest (compiled to an infographic by the team)

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Measure: The reach could be estimated by monitoring the number of followers on various
social media outlets. For reference we have created a digital inventory of all the social media
outlets of Kellogg’s and aggregated them on our website :
https://wordpress.viu.ca/team4mba533/digital-inventory/

Target: Kellogg’s should attempt to replicate the following achieved on Facebook on other
social media.

Objective 3: Customer Satisfaction

We already know that customer satisfaction is important. A higher customer satisfaction

indicates that financial performance expectations will be exceeded. There’s data indicating
that when research analysts and management have forecasted earnings for a retailer,
there’s a better chance that those targets will be exceeded if customer satisfaction is high
(Kestenbaum, 2018). Traditionally, feedback data from the customers could be obtained
from direct surveys into retail outlets, however with the advent of technology measuring
customer satisfaction is a little easier. Reviews of the services and the products on google
and other social media and ecommerce websites such as Amazon etc, have a ready
database available to be harnessed

Measure: The product rating on Google, Amazon etc.

Target: The company should attempt for a 5 star rating which would in turn boost its visibility.

Objective 4: Customer Profitability and lifetime value

Customer lifetime value is the total worth to a business of a customer over the whole period
of their relationship. It’s an important metric as it costs less to keep existing customers than it
does to acquire new ones, so increasing the value of your existing customers is a great way
to drive growth (What Is Customer Lifetime Value (CLV)? //, 2021). Customer Lifetime Value
goes hand in hand with another metric – Customer Acquisition cost. This is the total cost
spent in order to attract a new customer. This includes advertising, marketing, special
discounts, one time offers etc. Keen analysis of the both the customer acquisition cost and
the customer lifetime value could reveal some interesting statistics such as which type of
strategy to employ when attracting new customers, which demographic of customers are the
most beneficial, What measure should be employed to reduce the acquisition cost
(Fontanella, 2021).
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Measure: Both Customer Lifetime Value and Customer Acquisition cost must be monitored

Target: Kellogg’s should attempt to identify the most loyal type of customers based on these
metrics and prioritize discounts and promotions based on the results.

4.3 Internal Process Perspective

Objective 1: Completely sustainable packaging

According to the Ellen MacArthur Foundation, 311 million tonnes of plastic is produced each
year and annually, 8 million metric tonnes of this plastic enters the oceans.
Already, Kellogg’s has one of the smallest plastic packaging footprints among peer food
companies and 76% of its packaging is recyclable globally. Most of Kellogg’s other
packaging uses either recycled-content paperboard cartons or corrugate cardboard. It also
uses composite cans, and for bars and convenience foods, it uses flexible plastic packaging.

The objective can be measured by examining the packaging of Kellogg’s.

Target: Kellogg’s has reduced the thickness in some of our bag-in-box retail cereal packages
by 17% to reduce our plastic packaging by 97,000 kilograms, or the equivalent of nearly 35,
30-gallon barrels of uncrushed plastic bottles each year. Kellogg’s has identified sustainable
packaging goal is part of its global Kellogg’s Better Days®️ commitment to create Better
Days for 3 billion people around the world by 2030 by addressing the interrelated issues of
wellbeing, food security and climate resiliency (Sustainable Packaging, 2021).

Objective 2: Ensure employees’ maximum efficiency

The Employee Value Proposition is a program that kellogg’s has been considering
increasing employees’ efficiency. The program’s launch will help the employees embrace
their identity. It gives the employees an opportunity to talk vibrantly about Kellogg's to the
external world and help them blend their scale and culture. The program thrives on three
strategic pillars, namely, ‘Be the Real You’, ‘Make a Mark’, and ‘Do a World of Good’ (Tewari
& ETHRWorld, 2021).

The objective can be measured by incorporating different training modules with interactive
and much more frequent feedbacks
 20

Target: Kellogg’s should look to incorporate the program all across its branches. Kellogg’s
should give employees the space to discover themselves through a culture of openness and
accessibility. It can also increase the employees’ efficiency by providing them opportunities
and responsibilities to make their own mark.

Objective 3: To optimise supply chain infrastructure

Kellogg’s operations and processes show that the three sections of the industrial supply
chain need to interact to ensure goods or services reach consumers efficiently.

The objective can be measured by keeping a track of how efficient the supply chain
infrastructure is. The structure consists of dfferent aspects that Kellogg’s can keep track of
like where to locate the business, where and how materials and finished goods are to be
stored until needed for sale and where its customers are.

Target: Every aspect of supply chain infrastructure can have a target of its own. For
example, Kellogg’s should look to acquire warehouses at different locations and move closer
to the production base. This provides specialist energy-efficient warehousing of stock 24
hours a day. Kellogg's manufactures the right products, manages the distribution channels to
place its products in stores, focuses on cost-effective systems ensures its prices remain
competitive but can always manage inventory in a better way. Kellogg’s can reduce lead
time to preempt uncertain customer demands and control excessive costs.

Objective 4: Obtain/maintain everlasting competitive advantage

Kellogg’s has created a Family Reward program, enabling their users to get a myriad of
privileges: discounts, toys, books, apparel, sports equipment, gift cards and also get a
chance to win free groceries. Moreover, families are allowed to enter sweepstakes and build
up points for rewards. “Kellogg’s position as a leading packaged food manufacturer and its
arsenal of resources have afforded Kellogg the ability to maintain valuable shelf space for its
offerings, even in the cereal aisle, where category dynamics have languished from the
onslaught of competition resulting from lower-priced private-label fare, other branded
operators, and the encroachment of smaller foes from within the category and other
breakfast alternatives. There is little to suggest this competition will subside, particularly if
the economic climate becomes more challenging, but the strength of Kellogg's relationships
 21

with its retail partners should ultimately ensure its edge persists longer term” (Kellogg’s Co,
2020).

The objective can be measured by keeping a track of consumer’s database and research on
how many consumers Kellogg’s is able to retain.

Target: To maintain a cost edge resulting from the economies of scale in production and
distribution across its global network.

4.4 Learning and growth

Objective 1: Employee retention and training

A Kellogg’s company survey revealed that only about half of their employees felt that they
regularly received recognition for a job well done (Achievers, 2021). Kellogg also faces a
challenge of giving monetary recognition outside of their regular compensation and bonuses.
Moreover, of the existing recognition practices the company has, many are siloed, and most
are top-down, which is out of step with the organization’s values and objectives.

Measure: The company should focus on giving frequent recognition to at-least 70 percent of
their workforce. According to Rees and Smith (2021), employers can ensure the retention of
labor by providing firm-specific training in skills. Moreover, there should be strong emphasis
on internal grading systems that provide equitable rewards for employees of the same level
of skill or knowledge. Overall, the focus must be on equity, security of employment and
career development within the firm. This will protect the organization from having its staff
‘poached’ by competitors. Kellogg’s has recently partnered with a company called Achievers
to create an employee engagement and peer-to-peer recognition hub which is a good first
step in creating a global culture of recognition. This program was first launched in North
America in order to establish best practices, then to Latin America, Europe, and Asia Pacific.

Objective 2: Increase product range and reach

Kellogg’s should experiment in other fields of products for expanding their business in this
era of cutthroat competition. The company is observed to be slow in diversification and
innovation of the contents of the cereals which is one of its weaknesses in the growth. There
is a need to reshape the company portfolio to better align with consumer trends. If it is
evident that the brand’s products aren’t performing well, if demand is low for specific
 22

products or an entire category, the best move strategically will be to divest the products and
brands to become stronger as a company.

Measure: Developing healthier options and products that accommodate dietary issues of
consumers has huge potential. For example, cereals that can be consumed by people with
health conditions such as diabetics. Also, it is observed that the company’s products are
focused more towards children and women. Therefore, it can consider in creating and
marketing products designed to suit the needs of men. Moreover, Kellogg’s can begin home
delivery services in countries that have a high demand for its products.

Objective 3: Increase focus on innovation and expansion

Among the variety of factors considered to influence business longevity, innovation is a

prominent one (Visnjic et al., 2016). Kellogg’s is highly efficient as a company in
manufacturing, new food product designing, logistics and supply chain management, and
meeting customer demands. Consequently, thinking big on capabilities driven innovation has
the potential to transform Kellogg’s into a global leader.

Measure: The next big trend predicted in food will be the ability of companies to cook and
deliver food at a price cheaper than a trip to grocery store for purchasing the ingredients and
prepping a meal at home. Owning to the brand name Kellogg’s has successfully created, it is
one of the companies that has the potential to partner with Tesla and Uber (or other
companies) to altogether design a new supply chain for growing and processing food;
opening kitchens powered by latest technologies and providing consumers with the option to
order meals from thousands of recipes eliminating the need to order higher-priced food from
restaurants and maybe installing food trucks in the near future all the while ensuring that the
food maintains the nutritional content.

Objective 4: Increase job satisfaction through hygiene factors

Yoon and Suh (2003) stated that employees who are satisfied with their jobs tend to be more
involved in their employing organizations, and more dedicated to delivering services with a
high level of quality.

Measure: To identify the focus areas for maximising job satisfaction, Herzberg’s (1968) two-
factor theory can be taken as reference. It has two factors – motivating and hygiene, that
govern the zeal of employees at workplace (Rees and Smith, 2021). Simply put, the
 23

presence of motivating factors which include achievement, recognition, responsibility,

advancement, growth and the work itself, cause employees to work harder and absence of
hygiene factors like company policies, supervision, relationships, work condition,
remuneration and security will cause them to work less harder. The company has focused
lately on the later, but it can increase its efforts on the former.

Balanced Scorecard

Perspectives Objectives Measures Targets

Improve Net Income Monitor Net income Year on Year growth

and Year on year net of 7% in the net
Financial income change. income
Perspective
Improve Stock Prices Monitor the stock A 7% median
price on the NYSE increase in the stock
price of Kellogg’s

Improve returns to Monitoring the return An improvement in

shareholders on shareholder equity, the average 10% year
the total shareholder on year growth in the
equity and the year on total stockholder’s
year increase in the equity
shareholder equity.

Control inventory Monitoring the cash Kellogg’s should aim

costs conversion cycle and to maintain both the
the days in inventory days in inventory as
well as the cash
conversion cycle at
the same level +/- 5%
for the next year.

Reduce long term Monitor the total long- An annual reduction

debt term debt owed and of 6% per year.
the year on year
reduction in the long-
term debt to capture
this objective
effectively.

Customer Customer Retention Increase customer The company should

Perspective retention rate through aim for a 100%
customer retention
 24

promotional activities. rate.

The customer
retention rate could be
estimated by using the
following formula:

Customer Retention
Rate = (Customers at
the End of the Period)
- (New Customers
Acquired) / Customers
at the Start of the
Period

Brand Awareness Create and curate Kellogg’s should

content for social attempt to replicate
media platforms such the success achieved
as Instagram, on Facebook on other
YouTube and social medias.
Pinterest. Monitor the
number of followers
on various social
media outlets.

Customer Satisfaction Product ratings on The company should

Google, Amazon etc. attempt for a 5 star
ratings to boost
visibility.

Customer Both Customer Kellogg’s should

Profitability and Lifetime Value and attempt to identify
lifetime value Customer Acquisition the most loyal type of
cost must be customers based on
monitored these metrics and
prioritize discounts
and promotions based
on the results.

Completely Examining the Kellogg’s should

sustainable packaging packaging at present increase sustainable
Internal Process packaging goal from
76 to 100 as part of
Kellogg’s Better
Days commitment
 25

Ensure employees’ Incorporate different Implement the

maximum efficiency training modules with program all across its
interactive and much branches. Give
more frequent employees the space
feedbacks to discover
themselves through a
culture of openness
and accessibility.

To optimize supply The objective can be Reduce lead time to

chain infrastructure measured by keeping a preempt uncertain
track of how efficient customer demands
the supply chain and control excessive
infrastructure is. costs.

Obtain/maintain Keep a track of Maintain a cost edge

everlasting consumer’s database resulting from the
competitive and research on how economies of scale in
advantage many consumers production and
Kellogg’s is able to distribution across its
retain. global network

Employee retention Provide firm-specific Give frequent

and training training in skills; recognition to at-least
Learning and internal grading 70 percent of their
Growth systems that provide workforce.
equitable rewards for
employees; focus on
equity, security of
employment and
career development
within the firm.

Increase product Develop healthier Create products that

range and reach options and products address the needs of
that accommodate diabetic consumers
dietary issues of and also design some
consumers. products for men.

Increase focus on Design a new supply Partner with

innovation and chain for growing and companies such as
expansion processing food; open Tesla and Uber.
kitchens powered by
latest technologies and
provide consumers
 26

with the option to

order meals from
thousands of recipes
eliminating the need to
order higher-priced
food from restaurants.

Increase job Work on hygiene Increase job

satisfaction through factors like company satisfaction through
hygiene factors policies, supervision, hygiene factors.
relationships, work
condition,
remuneration and
security

Strategy Map
27
 28

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 33

Appendix
Appendix A: Activity Level

Appendix B: Total Cost Formula

Appendix C: Heat map for the risks

Heat Map
6 Falsifying
Financial Frauds
due to depen- company fi-
5 nances
dance on tech-
nology
4
Probability

Improper capital- Inventory Fraud

3 ization expenses
Diversion of Bank
2 Economically mo- Loans
tivated adulter-
1 Diversion of Char- ation
itable donations
0
1.5 2 2.5 3 3.5 4 4.5 5 5.5

Impact
 34

Appendix D: Risk Description

Risk Factors Impact Probability

Inventory Fraud 4 3
Diversion of Charitable donations 2 1
Economically motivated adulteration 3 2
Improper capitalization expenses 2 2
Diversion of Bank Loans 4 3
Falsifying company finances 5 5
Vendor Fraud   4
Financial Frauds due to dependence on
technology 3 4