Pricing for Profitability and Activity-based Pricing for Competitive Advantage - Assignment Example

Table of Contents 1.(a) Question 2 1.(b) Question 3 2.(a) Question 4 2.(b) Question 5 3.Question 6 4.Question 8 Reference 12 1. (a) Question As mentioned in the case study above, Kellogg is going through a challenging time. Perform an external audit on Kellogg. Discuss the opportunities and threats facing the company. Kellogg’s is an US-based manufacturer of conventional food. This multinational company has expanded its business in different global markets and is competing with many leading competitors to occupy the leading position. The company was established in 1906 and it experienced rapid growth in the US market as its foods products gained tremendous popularity. At present, this giant food manufacturer has its manufacturing units in 18 countries and its products are available in nearly 108 countries of the world (Kellogg’s, 2010). As per the case study, the increasing competition in global convenient food market is one of the biggest challenges faced by the company. For conducting external audit of the company, its opportunities and threats are discussed below. Opportunities Consumers are becoming more health conscious and consequently the demand for healthy and organic food products is also increasing significantly. Kellogg’s’ is capitalising on this trend to develop its brand image (Seaberg et al, n.d.). The company has expanded its business in global market and is equipped with necessary human and other resources to gain upper hand position in the international market (Wayne State University School of Business Administration, n.d.). Threats The rate of competition is increasing drastically which poses a vital threat to the company. The company is facing intense competition from General Mills and PepsiCo. The products offered by its competitors act as substitute for its ready-to-eat cereal products. The main buyers of its products are Wal-Mart and Target Group. Their bargaining power is very high and it affects the pricing strategy of the company. 1. (b) Question Apply Porter’s Five Forces Model to assess the Competitive Position of Kellogg. Justify assumption made, if any. Porter’s Five Forces analysis indentifies the five factors that affect the competition level of an industry. These five forces are bargaining power of suppliers and customers, threat of substitute products and new entrants, and rivalry from existing competitors (Henry, 2008, p.69). The company relies on its suppliers for manufacturing high quality food products. It needs suppliers for a wide range of products from raw materials and ingredients, packaging equipment and skilled labours. However, a large number of such suppliers are easily available in the global market and it can negotiate with them. Therefore, the bargaining power of the suppliers is quite low in this industry. In convenient food market, a large variety of ready-to-eat products are available. Fast-foods are the greatest threats to Kellogg’s products. The barrier to enter this industry is comparatively low due to low investment. Many small and medium companies try to enter this mature market due to high profitability, demand and rapid growth. However, due to the presence of three giant company (PepsiCo, General Mills and Kellogg’s), the market structure is oligopoly in nature. This is one of the factors that hinder the entry of new players. The primary buyer of Kellogg’s includes the wholesaler and retailer marketers and other individual consumer groups. Due to large availability of substitute products, the buyers enjoy very low switching cost. The two strongest and influential buyers of Kellogg’s are Wal-Mart and Target and they hold the ultimate power in setting the price. Therefore, the company faces high bargaining power from its major buyers. In this oligopoly market structure, Kellogg’s has to compete with two main rivals i.e. PepsiCo and General Mills. These three companies are matured and have acquired brand image in the market. To increase the market share, they are competing with other at each level like product development, pricing and promotional strategy. The degree of rivalry is very high which affects the market share and profitability of this company. 2. (a) Question Should Kellogg’s attempt to acquire Quaker Oats from PepsiCo? Would Quaker Oats be a good strategic fit for Kellogg? Kellogg’s is the leading breakfast manufacture of US. It alone enjoys significant market share and does not need to acquire Quaker Oats to make its presence more conspicuous. However, it can’t be denied that if Kellogg’s is able to acquire Quaker Oats successfully, its market share will increase significantly. The company has sufficient funds to acquire this company which in turn will help it to lead in US as well as in the global market. However, currently the company is facing some internal and external challenges. Instead of acquiring Quaker Oats right now, the company must rectify these problems. For example, the most popular products like Corn Flakes, Rice Krispies and Bran Flakes are fifty years old and require further development. Another challenge is to address the shortage of soybean oil, necessary for producing its core products. The company must make necessary investments in addressing them. Kellogg’s has already acquired a decent position in the market. If the company is able to solve its existing problems, its market position will become stronger. Therefore, under such circumstances, Quaker Oats is not a good strategic fit for Kellogg’s. 2. (b) Question In order to strengthen the strategic fit with Quaker Oats, discuss the key issues that Kellogg’s should focus on to the acquisition a success. The acquisition of Quaker Oats by Kellogg’s will develop a significant synergy for the company. The company is expected to gain a stronger market by this acquisition. Quaker Oats has a well established manufacturing unit and other technical expertise that will enhance the profile of Kellogg’s. However, in this process, Kellogg’s may face certain issues that will hinder the strengthening of strategic fit with Quaker Oats. First of all, management style, structure and its core operational process may clash with Kellogg’s. Quaker Oats is also a ready-to-eat food manufacturer and has its own typical style. Kellogg’s must understand and arrange these factors accordingly. Secondly, after acquiring Quaker Oats, Kellogg’s must maintain its consistency as operational activity will increase significantly. The company is committed to offer high quality product and it should live up to its promise. Thirdly, before conducting this acquisition, the Kellogg’s must recognise its own internal problems. Kellogg’s brand value is higher than Quaker Oats and so is the consumers’ expectation. The consumer will keep looking for further development in its product offering. 3. Question What are the pitfalls in strategic planning that management in an organisation should watch out for or avoid? Identify any five pitfalls and describe them. Business strategic planning is the game plan used by business organisations to help them sustain in the industry. The strategic planning is a useful and effective management tool as it strives to provide necessary competitive advantage to a company (Lorange, 1977, p.11). The top level managers and decision makers of a company are responsible for drafting, implementing and evaluating the strategic process. It is the most important and crucial task of a company as it decides its sustainability and profitability. It is very necessary to formulate relevant strategies that are in accordance with its internal and external environment. However, sometimes, the decision makers fail to develop effective strategy as they are unable to recognise and rectify the underlying pitfalls in the strategic process (Special Libraries Association, 2001, p.2). Five major identified pitfalls in strategic planning are discussed below. Failing to communicate the plans to employees, who continue to remain ignorant: The primary aim of strategic planning is to achieve high growth keeping in mind the long term objectives and mission of the organisation. The lack of communication within the industry has resulted in the failure of proper implementation and execution of strategies. The management has failed to covey the organisational strategic plan to its employees, for which they no longer feel motivated. It affects their performance as they do not have any idea about the strategic planning process of the company (Nelson and Economy, 2010, p.319). Top managers are not supportive of the strategic-planning process: Top management plays a very crucial role in implementing and executing the formulated strategy planning. Their support is very necessary factor for the success of strategic planning. However, the negligence of top level management made the subordinates disillusioned. The subordinates do not have sufficient authority to take necessary decisions on behalf of the top level management. This affects the effectiveness of strategic planning. Failing to use plans as a standard for measuring performance: Evaluation of organisational performance is very necessary for ensuring the proper execution of strategic planning. For example, budgeting is one of the major integral parts of strategic planning, and after the end of each operational period, there should be performance evaluation to measure the level of achievement as per the budgeted statements. When management fails to implement such performance evaluation process, the overall performance of the organisation declines. Failing to involve key employees in all phases of planning: Proper organisational transparency is mandatory for maintaining an efficient organisational culture. Sometimes management fails to implement transparency by avoiding the key employees while planning the strategies. The key employees usually have all the pertinent information regarding the companies’ internal condition. Their valuable contributions to strategic formulation process increase the authenticity and reliability of strategies. However, management often overlooks the importance of such employees. Too hasty movement from mission development to strategy formulation: While planning the strategic process, the management must consider the mission and the long term objective of the organisation. Besides, the management also needs to measure the feasibility of strategies in achieving organisational goal. Before planning the strategies, the management must take into account the internal and external environment of an organisation. However, for short term goals, the management takes decision too hastily often neglecting important issues. 4. Question Define and explain three intensive strategies and give an example for each strategy. In order to gain competitive advantage for encountering the increasing competitions, a company can use many types of strategies. There are four main types of strategies that include intensive, integrative, diversification and defensive strategies. Company chooses its specific strategy as per its requirement and the degree of competition within industry (Simon & Schuster, 1999). The intensive strategies are meant to expand the operation, product and market, thereby helping a company to secure significant amount of market share. In this process, an organisation can focus on three aspects of marketing. These are market penetration, market development and product development. By implementing these strategies, the company aims to strengthen its internal position. The following figure shows the three intensive growth strategies. Figure 1: Three Intensive Growth Strategies: Ansoff’s Product-Market Expansion Grid (Source: Regis University, 2003) According to the above model, intensive strategies are used only when market, product or services are in their maturity stage. In case of declining performance, diversification strategies are necessary. Three intensive growth strategies are discussed below with relevant examples. Market penetration: Market penetration strategies are effective and useful while entering new market or for capturing market share in the existing market. According to Daly, “market penetration is a strategy whereby price is initially set low in hopes of generating buyer demand (and market share) through a low price” (Daly, 2002, p.76). However, while implementing this particular strategy, the company must analyse the price and demand of products or services. This strategy works best in the market where price is sensitive and the demand for the product is elastic. Market penetration strategy can also be implemented with extra marketing effort. For example Coca Cola, a leading beverage company has developed its distribution channel by executing extra-ordinary marketing effort. The Coca Cola products are available even in the remotest area, which has helped it to increase its market share significantly. Market development: The market development strategy helps to expand the geographical boundaries of market with the existing range of products or services. Generally, companies try to enter the new and unexploited market where the demand of their existing product is capable of attracting new consumers. Companies present their existing product in a new and innovative way by changing its brand name and packaging style. Market development strategies can be implemented according to the demand of consumer group. Sometime, companies identify its potential consumers within the existing market and manufacture their products accordingly (Hisrich, 2008, p.454), For example, McDonald opened its restaurants in new regions like China, Japan, and Russia with its existing US fast foods and experienced huge success there. Product Development: In product development strategy, companies bring innovation in its existing products or services, to attract the existing consumer of a particular market. In this process, the company has to understand the present consumers’ needs and develop product as per their requirement. It must develop its R&D programs so that it can successfully manufacture its products. However, in case of latest innovative products, it is not necessary to understand consumer needs as the new products are expected to attract consumers. For example, the first launch of cellular phones in market received a great response from the consumers. The new product can easily retain the existing consumers as well as attract new consumers. For example, Apple Inc introduced iPhone in 2007, which helped the company to increase its market share in the global market. Reference 1. Kellogg’s. 2010. Our Company. [Online]. Available at: http://www.kelloggcompany.com/company.aspx?id=32. [Accessed on November 16, 2010]. 2. Daly, J. L. 2002. Pricing for profitability: activity-based pricing for competitive advantage. John Wiley and Sons. 3. Henry, A. 2008. Understanding Strategic Management. Oxford University Press. 4. Hisrich, 2008. Entrepreneurship 6/E. 7th Edition. Tata McGraw-Hill. 5. Lorange, P. August 1977. Implementation of Strategic Planning System. [Pdf]. Available at: http://dspace.mit.edu/bitstream/handle/1721.1/48234/implementationof00lora.pdf?sequence=1. [Accessed on November 16, 2010]. 6. Nelson, B. and Economy, P. 2010. Managing for Dummies. 3rd Edition. Wiley-IEEE. 7. Regis University. 2003. Strategy Overview. [Ppt]. Available at: http://academic.regis.edu/mbren/MBAK%20603/Lectures/StrategyKotlerCravens.ppt. [Accessed on November 16, 2010]. 8. Seaberg, C., Post, J., Boldt, E., Prehm, M. and McNany, M. No date. Kellogg’s. [Ppt]. Available at: http://www.plu.edu/~boldtel/doc/kelloggs-final-1.ppt. [Accessed on November 16, 2010]. 9. Simon & Schuster. September 14, 1999. Types of strategies: intensive integrative diversification defensive. [Online]. Available at: http://www.shsu.edu/~mgt_jxd/476/476CHAPTER02/sld001.htm. [Accessed on November 16, 2010]. 10. Special Libraries Association. May, 2001. Strategic Planning Handbook. [Pdf]. Available at: http://www.sla.org/pdfs/sphand.pdf. [Accessed on November 16, 2010]. 11. Wayne State University School of Business Administration. No date. Kellogg's Marketing Strategy and Marketing Plans. [Ppt]. Available at: http://sbaweb.wayne.edu/~ssasser/pp29.ppt. [Accessed on November 16, 2010]. Read More