How Hersheys company emerged to a multibillion-dollar organization - Research Paper Example

Internal Analysis of Hershey's, BCG Matrix & Directional Policy Matrix, Big Problem, and SWOT Analysis Introduction Hershey Company that was known as the Hershey Foods Corporation till April 2005 and is commonly known as Hershey’s now is the largest manufacturer of chocolate operating from North America (Stock Market Game, 2009, p.2). It is headquartered in Hershey, Pennsylvania. It was founded by Mr. Milton S. Hershey (Hershey’s, n.d.) in the year 1894 and was named the Hershey Chocolate Company that was also a subsidiary unit of the Lancaster Caramel Company (Stock Market Game, 2009, p.1). It is specially known for its milk bar chocolates, chocolate bars, candies and baking products. Apart from its chocolate products, the company is also well known for its philanthropic activities. The paper is a full scale elaboration of how Hershey’s company developed itself from a small scale unit to a global leader in the chocolate industry. Appropriate management tools are taken and the performance of the company is tested on the basis of those tools with provision of rational justifications. 1. Internal Analysis The internal analysis of a company provides information about its core competencies, as well as functional analysis; in order to establish the firm’s core competencies, Porter’s value chain model can be used. 2.1 Core Competences and Unique Resources - The core competencies should possess four traits. They should be valuable to the customer, the competencies need to be unique, the competencies should be durable and difficult to imitate and the competencies need to be developed in a way that they cannot be substituted by any other means. The core competencies of Hershey’s lie in the fact that the company is a well known organization in the chocolate and confectionary industry. It is hugely popular because of its chocolate bars, particularly the S'more (Hershey’s, n.d.). The second competency of Hershey is the quality of the product. The consumers believe that no matter which part of the world they might be staying, the taste and the quality of Hershey chocolates would remain the same. Thirdly, Hershey is also well known for its supply chain management. It maintains control over its suppliers by initiating internal risk analysis, social audits, identification of the high risk suppliers and many more (Hershey’s, 2011, p.1). The company also takes care of its perishable products by keeping it in clod storages. The unique resources for the company range from its farmers who supply it with the raw materials to the consumers who buy its products (Hershey’s, n.d). These leverage the output and revenue of the company. 1.2 Porter's Value Chain of Hershey’s – according to Porter’s value chain model, the primary activities and the supporting activities are described as follows: Primary activities Hershey maintains a strong control over its suppliers and pioneers in its inbound logistics operations. Along with the implementation of cold storage, the company highly stresses on the application of organizational theory. Recently, it has implemented the stylized statistical technique of Six Sigma for improving its products. Six Sigma is an extravagant technology applied in manufacturing sector for identifying defects of the products and help improving the products. Sig Sigma technology reduces the error to around 3.4 defects per million. The benefits of Six Sigma for logistics operation include that of improvement in process, reduction in cost as well as increase in operational efficiency. By applying this technique, the companies can determine the root causes of problems and also find out the mechanism of process improvement. Hershey’s company in partnership with GENCO also underwent an implementation of Six Sigma to make a root cause analysis for an optimal sales level. It has implemented Six Sigma in its Lebanon manufacturing unit and planning to implement in other areas as well (Partridge, 2006). The company also provides a sound operational system by offering rigorous training to its workers. The company has trained approximately 700 employees. The company’s Chocolate Town Challenge is a fitness and wellness challenge which is designed for promoting health the camaraderie and friendly competition among the employees. The company’s CSR (Corporate Social Responsibility) Sales Advocates program and its team is dedicated in the inclusion of field personnel, organizing volunteer and service opportunities as well as sharing their CSR success with the entire team of the company. The CSR network of the company has initiated program on commuter services, established company’s page on Freecyle @ Work, organized a recycle event analyzing employee participation in corporate recycling efforts and mobilized huge donations to a food bank in need of creating a disciplined area to work (Workplace, 2012). The company’s outbound logistics also has a good network of retailers and distributors. For its marketing and sales operations, the company uses different modes. It uses advertising in different forms for its propagation. The company has also entered into several mergers to increase its market size. The company is also strong in its service provision with adaption of 0-compromise strategy for high quality. Supporting activities Among the supporting activities, there are the company’s procurement policy, human resource management, technological development (famous for R&D strategies) as well as the provision of a well structured infrastructure with good form of patenting rights and administrative functions. 1.3 Functional analyses The functional analysis can be conducted by examining its marketing, financial and logistics operations. The company has strong marketing strategies as it was expanding its business outside Europe. The company had entered into several mergers and acquisitions to grow itself in the market. The basis of Hershey’s marketing strategy is found in its solid brand equities, different product innovations, and the superior quality seen in their products, its manufacturing expertise, and mass scale distribution capabilities of the company. The logistics chain of Hershey is good as it always strives to maintain a good relation with its suppliers. The company also has shown an increase in its financial outputs. This can be made through a comparative analysis of the company’s dividend paid per share in the year 2010 and 2011 as well as by following performance graph: 2010 Common Stock ($) 2011 Common Stock ($) 1st Quarter .3200 1st Quarter .3450 2nd Quarter .3200 2nd Quarter .3450 3rd Quarter .3200 3rd Quarter .3450 4th Quarter .3200 4th Quarter .3450 Aggregate 1.2800 Aggregate 1.3800 Table 1. Comparison of dividend paid per share –An indicator of growth (10 K filling, Hershey’s company, 2012, p.17) Fig. 1 [*Hypothetical $100 invested on December 31, 2006 in Hershey Common Stock, S&P 500 Index and S&P 500 Packaged Foods Index, assuming reinvestment of dividends] (10 K filling, Hershey’s company, 2012, p.19). The above graph shows that the company’s performance deteriorated within the time span of years 2007-2009 but it has picked up pace and is now on a rising platform. 2. SWOT Analysis A comprehensive SWOT analysis of the Hershey Company would provide an in-depth strategic analysis about the company’s businesses as well as its operations. The Hershey Company - SWOT Analysis Strengths Stringent business mechanics delivering success The strengths of Hershey’s are in the form of its broad product portfolio, license agreements, and its sturdy R&D activities (Hershey’s, n.d.). The Company has grown from a single product and a single unit company to a multibillion organization (Stock Market Game, 2009, p.1). One of the significant spreading mechanisms executed by the company is that of focusing on a wide array of regions like that of entertainments, resorts, restaurants and so on for an optimum spread of business. The R & D programs of the company are also its strong pillars. A big jolt in quality management –Focus on the retail industry The company continually invests in the quality management system for ensuring product quality as well as their top priority remains in the food safety trajectory. The company places its rigorous focus on the retail industry; with the collaboration of 15 other retailers, the company has founded The Health Weight Commitment Foundation, a national, multi-year effort has been conjectured towards neutralizing childhood obesity with a dynamic vision by the end of the year 2015. The company has also developed a “Moderation Nation’ program which is a useful campaign for the consumers, as well as the employees, in learning the ways of balancing nutrition as well as various activities while enjoying chocolate in moderation (10 K filling, Hershey’s company, 2012, p.19). Largest investments in manufacturing technology The company has made the largest investments in the manufacturing technology with an amount of investment around $ 300 million and marks the company’s dedication towards innovation, quality as well as excellence (Press Release: The Hershey Company, 2012). Escalating profit levels despite non compliance with US GAAP The management’s discussion and analysis of the Financial Condition and Results of Operations section include various measures of financial performance which are not defined by the generally accepted accounting principles ("GAAP"). But despite of that, for each of the non-GAAP financial measures, Hersheys provides measures which are directly comparable with GAAP measures, reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure as well as strong explanation regarding how these measures can help the investors, as well as additional purposes for which the company uses these non-GAAP measures. The investors of Hersheys get robust year to year operating results. While evaluating the internal performance, impact of known trends and uncertainties of the Hersheys, it excludes various items from EBIT ( Earnings before Interest and Income Taxes), Net Income and Income per Share-Diluted-Common Stock ("EPS") which provides a balanced view of business dynamics. The company’s propulsive growth can be visualized by a cross comparison of EBIT within the time span of 2010 and 2011 given in the following diagram: Fig. 2 EBIT of Hershey’s (2010-2011) (10 K filling, Hershey’s company, 2012, p.21). In the above diagram, the vertical axis measures the dollar value (in millions except per share) and it shows that EBIT of the company has escalated from the previous years; in both cases, EBIT is greater in non-GAAP approach as compared to the GAAP approach. Drive towards greater child development The company has also made a great sponsor in the Hershey’s Track and Field Games in the last three decades. Recently, around 3000 communities and more than 400000 kids have been an integral part of company’s physical fitness program. The strength lies in the fact that this program is the largest youth program of its kind. This program provides immense support to activities like running, jumping, and throwing. Every year the company provides an all expense paid trip to North America finals to 500 qualifying children. For further enhancing the awareness of the fitness of America’s youth, the company has entered into a partnership with USA Track (Communication activities, 2012). Weaknesses The weaknesses of the company, as compared with its competitors, are the following: the company is lacking in its global market share. The company also faces hindrances in its pricing policies, as with a small increase in price in the retail shops, the buying capacity of the products depletes away. The company’s international subsidiary, Hershey international, is not all strong in its marketing campaign. The company also possesses longer term debt as compared to its rivals. The advertisement expenses of the company have also increased by around 46% (Weaknesses, 2012). The company faced many difficulties in controlling because of entering into different geographical markets. In the late nineties Hersheys started to modernize the hardware and the software systems of the company. The company was basically running on legacy systems and with the Y2K problems it chose in replacing to shift to client/server environment. The company went for the Big Bang ERP implementation which led to various problems related to the order fulfillment, processing and shipping (ERP Implementation Failure at Hershey Foods Corporation, 2008). Opportunities 1. Hersey has a big opportunity to expand its business operations in the Asian markets like China, India, and Thailand which are mostly growing and untapped. 2. It can also enhance its image in the markets by reducing industrial wastes. This can be done by recycling its products such as the used bags etc. This would help the company to remain in the focus of the consumers. 3. It can also extend its business by entering into the non chocolate industry like the organic food markets that is growing rapidly in the European countries. 4. The company can restructure or reorganize its business programs according to the changing needs or preferences of the consumers. Threats 1. Hershey faces strong threats from companies like Cadbury, Kraft foods, Nestle and Mars. Mars is a bigger threat as it has a strong market in Asia and Europe (Ryan, 2012). 2. It also faces challenges from the changing consumer preferences. 3. Increasing counterfeited good markets can also pose threats for the company. 4. Strategic choice We will analyze the BCG matrix and the Directional Policy Matrix for Hershey to understand its strategic choice. BCG matrix - The Boston Consulting Group (BCG) matrix is used to enhance the efforts of a multidivisional to formulate its strategies. This matrix enables an organization to handle its portfolio of different businesses by examining its relative position in the market shares and the growth rate of the industry in each division in comparison to the different divisions of the organization. The BCG matrix is divided into four quadrants which are known as question mark (1st quadrant), stars (2nd quadrant), cash cows (3rd quadrant) and dogs (4th quadrant). It is shown below with each strategy suitable in each condition (Hillestad & Berkowitzk, 2004, pp.124-125): Relative market share Industry growth rate high Stars (II) Market Penetration Market Development Product Development Question mark (I) Market Penetration Market Development Product Development Divestiture Industry growth rate low Cash Cows (III) Product Development Diversification Dogs (IV) Retrenchment Divestiture Liquidation High low Fig. 1 (Hillestad & Berkowitzk, 2004, pp.124). Quadrant I Question mark presents a low relative market position, but a high growth industry. The cash requirements of such firms are high but the cash generation is comparatively low. Quadrant II Stars shows the most favorable long-run opportunities needed for growth and profitability. Star division shows a high relative market share with a high growth rate in the industry. Next Quadrant III Cash Cows shows a high relative position in market share but the firms compete in low growing industry. This division can be maintained for utilizing in non profitable conditions of the company. Finally, Quadrant IV Dogs shows a poor relative market share position of a company along with a low or slow market growth industry. Quadrant four is weak both in terms of its internal, as well as external, position and mostly requires to the company to be wound up or liquidated. Going by these analyses, we can say that Hershey’s company falls in the second quadrant of stars as it has a high industry growth rate and a high relative market share. Apart from that from the company’s internal review process the directors of the company are held to the highest standards of integrity. The code of ethical business conduct applies to the directors and that of the officers and the employees and also covers areas which include areas of conflict, insider trading as well as compliance with the laws and regulations (Governance guidelines, 2012). Directional Policy Matrix The Directional Policy Matrix helps in evaluating the commitment levels of different divisions in a company. It employs two variables: The business position, i.e. it measures the company’s competitive position as well as the market performance and the business sector prospects, i.e. if the concerned company growing ore declining in the industry. In case of Hershey, it has the strong points of being very committed to its quality of products, has a strong brand reputation, good chain of suppliers and retailers, effective R&D strategies, loyal customer base, product innovation, technological leadership and effective marketing strategies. So going by these factors, we can say that Hershey enjoys a strong business position. At the same time, the company revenues have increased considerably and it expanded its business in the Asian markets as shown above. So, we can say that the company has a sound business prospect as well. 5. The “BIG” problem Like every other organization, Hershey also had to face some major problems. One of the hindrances faced by Hershey’s is that it has been lacking in the fair trade policies. Recently, it has been traced out that the company possesses no policies for tracing the cocoa purchases and enforces the labor rights standards. It has been found that majority of the company’s cocoa is majorly sourced down from the Western Africa which faces obnoxious instances of child labor abuses. Fair trade certification is required for covering the production cost and the living wage in a local area with the people engaged in manufacture. Thus, for holding its goodwill, the company must issue the fair trade certificates and help to curb down the adverse child labor issues (Kirkwood, 2011). Another major problem which the company faced is that of making a mark in the global market, as well as in its expansion. The reason behind such outcomes can be attributed to the disorganized and fragmented supply chain network of the company. The company has been unable in handling large volume increase in the product movement through the company’s distribution centers in various geographical domains. The company incurred huge costs with inventory and material management with uncoordinated product flow. The software development procedure is also not well equipped within the company. So, these issues have to be addressed for making the company a global leader in the confectionary market (Learning From Supply Chains: Hershey Foods and the Confectionary Industry, 2007). 6. Conclusion The above points present a picture of how Hershey emerged from a single unit company to a multibillion dollar organization. The company has a strong position in the market as has been shown in the SWOT analysis and the BCG matrix. It enjoys conservable brand loyalty as consumers prefer its taste and its products. The company also has a strong reputation with its supply chain management that is one of the core components for the success of any business. Though it has entered into the untapped markets of Asia, it faces threats from bigger chocolate product manufacturers such as Cadbury and Mars. It needs to improve its product innovation and diversify its portfolio by entering into the non chocolate industry. By this way, it will be able to cater to a different section of the consumers and maintain its hold to be the market leader. References Communication activities. (2012). [Online] Available at http://hersheycompany.wordpress.com/category/8-communication-activities/ [Accessed on November 3, 2012] Governance guidelines, (2012), Available at http://www.thehersheycompany.com/investors/corporate-governance/governance-guidelines.aspx/[Accessed on November 3, 2012] ERP Implementation Failure at Hershey Foods Corporation, (2008) Available at http://www.icmrindia.org/casestudies/catalogue/IT%20and%20Systems/ITSY059.htm[Accessed on November 3, 2012] Hillestad, S. G. & Berkowitz, E. N. (2004). Health Care Market Strategy: From Planning to Action. Jones & Bartlett Learning. Hershey’s. (2011). [Online] Available at [Accessed on November 3, 2012] Hershey to sell pasta business and focus on sweeter profit. (2012). [Online] Available at [Accessed on November 3, 2012] Kirkwood, J. (2011). 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[Online] Available at http://www.thehersheycompany.com/social-responsibility/workplace.aspx [Accessed on November 3, 2012] Weaknesses. (2012). [Online] Available at http://hersheycompany.wordpress.com/category/2-swot-analysis/2-2-weakness/ [Accessed on November 3, 2012] Read More