Kraft Foods Corporate Strategy - Assignment Example

Kraft Foods Case Analysis Kraft Foods Case Analysis Question One: Kraft’s Corporate Strategy Kraft Foods’ corporate strategy revolves around 3 dimensions: a) A performance-based corporate culture. b) Eliminating weaknesses in core brands and establishing global dominance. c) Developing unique brands. Since its establishment, Kraft Foods has focused on aligning its corporate culture with its results so that it can achieve its long-term goals. The corporate culture at Kraft is geared towards supporting the company’s performance objectives. The company has ensured that its employees and its partners are in perfect harmony with its goals, such that corporate strategy is developed with all stakeholders in mind (Thompson, Peteraf, Gamble, & Strickland III, 2015). Employees, suppliers, and stockholders are indoctrinated in the firm’s vision, which is focused solely on performance. This alignment has enabled the company to outlast and outperform some of its fiercest competitors in the North American and foreign markets. At Kraft, all efforts are aimed at achieving results. The company develops results-based objectives and then communicates these objectives to its employees so that they can work towards achieving them. Kraft has a core base of brands that it uses to drive its corporate strategy. The company ensures that all its key product lines are as competitive as they can be in order to support weaker brands that are yet to dominate their respective markets. By eliminating weaknesses in its core brands, the company has made them so competitive that the weaker brands also seem strong overall. For decades, Kraft Foods has adopted a glocalization strategy to support is expansionist ambitions (Thompson, Peteraf, Gamble, & Strickland III, 2015). The company has solidified its presence in the North American market and used it to launch operations in foreign markets. Finally, the company has been developing new, unique products that differentiate it from other competitors and create value for consumers. Kraft has some of the most popular household brands in the world, and it continues developing more to stand out from the competition. This corporate strategy has undergone some minor and major changes since 2007. Firstly, as per now, the company has replaced almost 80 percent of its senior management (Thompson, Peteraf, Gamble, & Strickland III, 2015). This has been done to incorporate a younger, more dynamic core of promising leaders and to reduce wages paid to top managers. The company has also embarked on an initiative aimed at developing its own pool of managers and leaders who are well-versed in its culture, rather than keep hiring from outside. Secondly, Kraft Foods has revised its organizational structure, particularly at the commercial level, and increased advertising expenditure by almost 600 million. This is a shift from its modest approach to advertising, which involved reliance on established brands to drive international expansion. The company has realized that the fast-moving consumer goods (FMCG) segment is becoming more competitive, and its new brands are unlikely to be successful if it does not become more aggressive in marketing (Thompson, Peteraf, Gamble, & Strickland III, 2015). Thirdly, the company has adopted a cost-saving strategy that is aimed at reducing operating costs and maximizing revenue. This is a new aspect in its corporate strategy, which relies on creating synergies in its various divisions, outsourcing, franchising, and reducing recurrent expenditures. The move has seen more resources freed up to fund global expansion and product development. Question Two: Long-term Attractiveness and Competitive Strength of the industries in Kraft Foods Business Portfolio Kraft Foods operates in the food processing industry. This industry is usually singled out for praise because of its ability to provide good returns on a consistent basis. In fact, over the past two decades, the stocks of food processing companies have generally delivered satisfactory single-digit yearly cumulative returns. More importantly, these stocks have delivered such returns with much less risk compared to the broader industry (Thompson, Peteraf, Gamble, & Strickland III, 2015). It is, therefore, safe to say that the North American and global food processing industries are not only attractive in the long-term but also competitively strong. There are challenges, of course, such as tariffs and the cost of vital inputs (milk, beef, sugar). Sugar prices have remained particularly high in the last decade, with companies being forced to increase their prices in some cases so that they can recoup the costs incurred in procuring inputs. In North America, the stocks of food processing companies like Kraft are favored by moderately shy investors who are averse to share-price volatility. In the past 5 years, Kraft has recorded positive balance sheets, adequate interest coverage, and consistent growth, showing that the market is attractive and viable enough to support growth and profitability (Thompson, Peteraf, Gamble, & Strickland III, 2015). The food processing industry is one of the most competitive in the world. In the US, the competition is both intense among local firms and between local firms and foreign outfits. In the US alone, Kraft, Tysons, Anheuser-Busch, Dean Foods, General Mills, PepsiCo, and Smithfield Foods form a core of competitors that dominate the country’s food processing industry, with Kraft leading the way. Foreign firms that also provide intense competition include Nestle and Cadbury Schweppes, all of which want a share of the lucrative US market. However, NAFTA agreements have given US companies a price advantage over foreign competitors when it comes to tariffs on American processed food exports (Thompson, Peteraf, Gamble, & Strickland III, 2015). NAFTA has also been influential in facilitating US firms’ entry into Canadian and Mexican markets, which are some of the largest and most promising in terms of processed food sales. Question Three: What a 9-cell Industry Attractiveness/Business Strength Matrix displaying Kraft Foods Business Units looks like Business A: Refrigerated meals Business B: Cheese Business C: Beverages Business D: Foodservice Industries A, B, C, and D: The North American and global food processing industries. From the image above, it is clear that Kraft Foods prioritizes resource allocation for beverages because it is its most valuable business unit. This is followed by the refrigerated meals segment, the foodservice unit and then, lastly, the cheese segment. Question Four: Kraft’s Product Portfolio, Strategic Fit, and pertinent Value-chain Matchups Kraft Foods portfolio exhibits an excellent strategic fit. To illustrate this assertion, it is important to clarify the nature of Kraft’s product line. Throughout its existence, Kraft has been focused on global expansion and the development of strong and extremely unique brands. Brands like Kool-Aid, Taco Bell, and Kraft Macaroni and Cheese are synonymous with American culture, and have been instrumental in placing the company at the helm of the US food processing industry (Thompson, Peteraf, Gamble, & Strickland III, 2015). Global expansion has been aided by mergers and acquisitions that have been aggressively pursued by its senior management. The company is now one of the largest food companies in the world and the largest in the United States. It would be mistaken to ignore the influence of a distinct brand image on Kraft’s rapid growth and expansion, because the company relies heavily on them to project its image. Kraft Foods has one of the most effective product portfolio management strategies in the world. It balances its products so that in spite of having some weak brands, the strong ones are so formidable that the company can remain profitable and dominant. In summary, Kraft Foods’ product lines are a core part of its corporate (Thompson, Peteraf, Gamble, & Strickland III, 2015). They are intertwined with the company’s current and future growth plans. In terms of value chain matchups, Kraft Foods exhibits four linkages that are typical of the food processing industry: Opportunities for the company to partner with other entities to establish vital new competitive advantages. Opportunities to transfer technologies, intellectual properties, and skills from one department to another. Opportunities to blend the performance of specific operations in order to reduce prices. Opportunities to license the use of famous brand names. Question Five: The Planned Restructuring in 2012 and why Shareholders will benefit from the Spinoff Kraft’s overall strategy can be summarized as: acquisitions, rapid growth, and acquisitions. The spinoff is part of the company’s differentiation and expansion plans. It is also an aspect of Kraft’s vertical integration objectives, which will enable the company to expand without diluting its brand or compromising its market share. Kraft Foods’ strengths, especially in regards to the spinoff and restructuring, are visible in many areas. These include return on equity (ROE), solid growth in net profits, and revenue growth (Thompson, Peteraf, Gamble, & Strickland III, 2015). When pitted against other firms the food processing sector and other markets, the company’s return on equity is much higher than those of both the market average and the S&P 500. Kraft is a sustainable and profitable firm with a good dividend return and that will record gradual growth over time. Since most of its operations are in North America, the spinoff will allow Kraft Foods to avoid the bureaucratic and financial challenges associated with the Asian and European currency volatilities that have been affecting its rivals. The firm understands the negative dynamics that were relegating and constraining it to poor performances, especially with regards to brand management. The new Kraft Foods is focused on groceries only, and the spinoff will allow it to avoid brand dilution. In addition, a small product portfolio means the company will manage its brands more effectively and steer clear of the difficulties often connected with large brand portfolios and global expansion. The new entity is currently working to redefine its corporate culture to avoid the obstacles that characterized its predecessor and negatively affected the effectiveness of its business model. When it comes to the potential benefits to shareholders, most industry analysts and industry figures show that Kraft Foods is expected to provide high returns to its esteemed stockholders. The company is confident that the spinoff will allow current and potential investors to have their cake and eat it (Thompson, Peteraf, Gamble, & Strickland III, 2015). They will benefit from the best of both worlds. For example, Kraft can now exploit Cadbury’s effective and efficient marketing and supply networks in developing nations like China, India and Brazil to facilitate the growth of new brands the firm intends to introduce in these countries. Emerging markets are already a major growth accelerator for Kraft, and the company is convinced that the growth of its beverages and foodservice business units were somehow slowed down by the dormant nature of the US grocery segment. As a result, the spinoff will help Kraft Foods achieve high value for both of the new entities to offer higher dividends to its shareholders. In fact, Kraft’s shareholders will be the biggest beneficiaries of the spinoff (Thompson, Peteraf, Gamble, & Strickland III, 2015). To show how the spinoff will benefit shareholders, it is necessary to go back seven years, when Altria split its tobacco unit into two distinct firms: Altria Group and Phillip Morris International. Since the split, both firms’ performances in the S&P 500 have exceeded expectations, and by a wide margin. For example, Phillip Morris’ shares have risen 63 percent (17 percent CAGR). On the other hand, Altria shares have risen up to 44 percent (13 percent CAGR), compared to a 6.5 percent drop in S&P 500 in the same period (Thompson, Peteraf, Gamble, & Strickland III, 2015). This shows that similar spinoffs (e.g., the Kraft one) can be expected to deliver high returns to shareholders without. Interestingly, Kraft also spun off from Altria in 2007. In summary, the Phillip Morris and Altria case set a good precedence for other spinoffs like Kraft Foods’ when it comes to stock performance. Question Six: Recommendations to improve Kraft Foods’ Performance and boost Shareholder Value after the Spinoff It is clear that the spinoff will benefit Kraft Foods. However, the company still faces many challenges in terms of performance and shareholder value. Within the first few years of the spinoff, the company’s stocks will perform well and the firm will be able to provide high returns to its shareholders (Thompson, Peteraf, Gamble, & Strickland III, 2015). However, good performances must be sustained or bettered for the value of stocks to continue growing. To improve performance and avoid disappointing shareholders, the company must do the following: Differentiate the new entity from its predecessor. If the company wants to achieve profitability as a unique and valuable brand, it must create its own identity. Consumers should be able to distinguish the company from its parent so that it can exploit opportunities in emerging markets. Kraft Foods should expand and restructure its brand portfolio. Having spun off from its parent company, the firm should now develop a new line of products that will facilitate its growth and profitability. In 2014, it established two new business units to add to the existing ones, showing that it is not burdened by its new-found autonomy. Any new brands added must be high-value and profitable, in line with the trend set by its predecessor. Kraft Foods should embark on an ambitious human resource development program in order to compensate for the loss of valuable skills and expertise necessitated by the spinoff. The company should then proceed to indoctrinate new employees in its corporate culture and, finally, align this culture with its corporate strategy. Reference Thompson, A., Peteraf, M., Gamble, J., & Strickland III, A. (2015). Crafting executing strategy: The quest for competitive advantage: Concepts and cases the quest for competitive advantage: Concepts and cases (20th ed.). 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