1.
Executive Summary
The Board of Directors of Kraft Foods Inc. declared a
regular quarterly dividend of $0.29 per common share of Class A stock payable
on July 14, 2010. According to their advertising, Kraft Foods makes today
delicious in 150 countries around the globe. Their 100,000 employees work to
make delicious foods consumers can feel good about it. Kraft’s American brand
icons include Kraft cheeses, dinners, and dressings. Maxwell House coffees and
Oscar Mayer meat, to global powerhouse brand like Oreo and LU biscuits,
Philadelphia cream cheeses, Jacobs and Carte Noire coffees, Tang powdered
beverages, and Milka, Cote d’ Or, Lacta and Toblerone chocolates.
The largest food company in the United States, Kraft first quarter
2009 profit increased 10 percent and its organic revenues increased 2.3
percent. The company’s North American sales rose 2.9 percent, helped by much
higher demand for its cereals. Kraft’s second quarter 2010 earnings increased
11 percent to $927 million but sales dropped 5.9 percent to $0.16 billion. The
weakest performing segment of the company was North American Foodservice which
reported a 10 percent drop in sales. Kraft European segment reported a doubling
of profit of the quarter.
2.
Introduction
James Kraft founded what is now known as the Kraft Food
Company in 1903 when he sold a few standard varieties of cheese wholesale in
Chicago. The company grew and was soon distributing some 30 varieties of cheese
packaged under the brand names of Kraft and Elkhorn. By 1914, the cheeses were available
in most towns across the United States. In 1916, Kraft was granted a patent for
what came to be known as processed cheese. Kraft began to mass produce a number
of specialty cheeses like Gouda and blue cheese and began to exports products
to Canada and Europe in 1920.; plants would later be established in both
England and Germany.
3.
Performance Analysis
A key to the success of Kraft Food was James Kraft’s
commitment to developing new products and using innovative advertising methods.
Kraft was an early user of all communications media and , as early as 1911, was
advertising on Chicago elevated trains, using outdoor billboards and mailing
circulars to retail grocers. He was among the first to advertise in consumer journals
and was also the first to use colored advertisements in national magazines. In
1993, the company started to use radio on extensive scale. It sponsored the
one-hour weekly musical and variety show Kraft Musical Review which headlined
notable show business personalities. Kraft’s commitment to innovation was
demonstrated through a variety of products that were introduced. These products
include items like Velveeta (1928), Miracle Whip (1940), sliced processed
cheese (1951), and Cheez Whiz (1952). http://www.kraftfoodscompany.com/About/who-we-are/)
Even though Kraft Foods has a fairly well documented company
history, it has primarily operated as a subsidiary to other larger
corporations. The first of these was the National Dairy Company in 1930; Kraft
purchased Philip Morris in 1988 for $12.9 billion. In March 1989, Philip Morris
merged with Kraft and its General Foods units into one entity called Kraft
General Foods, Inc. As a result of the merger, the company became the largest
food company in the United States and the second largest the world. Initially the merger created a competitive advantage for a newly formed
subsidiary; the company was able to save $400 million through consolidation and
increased purchasing power.
Philip Morris acquired Nabisco for $14.9 in cash plus
assumption of $4 billion in debt. Philip Morris completed its acquisition of
Nabisco in December 2000 and immediately began integrating the Nabisco
operations into those of Kraft Foods and Kraft International. In 2001, Philip
Morris created a new holding company for the combined operations known as Kraft
Foods Inc. (lacking the comma of the previous Foods, Inc.) The previous Kraft
Foods was renamed Kraft Foods North America, giving the new Kraft Foods two
main units: Kraft Foods North America and Kraft Food International. The two
CEOs of these units, Betsy D. Holden and Roger K. Deromedi, respectively, were
named co-_CEO of Kraft Foods . In June 2001. Philip Morris sold a 16.1 percent
stake at Kraft Foods to the public, retaining the remaining shares. The second
largest initial public offering (IPO) in the US history, the offering raised
$8.68 billion, which Philip Morris earmarked to reduce debt it had incurred in
acquiring Nabisco. The result of this IPO is that Kraft Foods Inc. is a company
that is less than 10 years. http://www.kraftfoodscompany.com/About/who-we-are/)
3.2
Global Code of Business Conduct:
More and more people are dining out, and
food producers are devoting more attention to products designed for
restaurants, vending machines, and other foodservice providers. Thus, companies
are spending more money researching consumer eating habits and preferences at
home and restaurants. This is bad news for grocery retailers, but food makers
realize food eaten away from home is still food they can provide, many times at
higher margins.
Another trend in the industry has been the
development of health foods, such as those containing less trans- fat or lower
calories, or those containing only organic ingredients. Bottled water has
become established in the market and enhanced waters containing vitamins or
supplements gaining popularity.
Related to the development of health foods
is the concern of childhood obesity, which has reached epidemic proportions in
the twenty first century with rising rates in both developed and developing world.
Rates of obesity in Canadian boys increased from 11 percent in the 1990s to over
30 percent in 2000; during the same time period rates increased from 4 to 14
percent in Brazilian children. As with obesity in adults many different factors
contribute to the rising rates. Changing diet and decreasing physical activity
are believed to be the two most important in causing the recent increase in the
rate of obesity. Activities from self propelled transport, to school physical education,
and organized sports has been declining in many countries. Treatments used in
children are primarily lifestyle interventions and behavioral techniques.
Workers at one of the Krafts’ manufacturers
in Illinois turned up a batch of fruits and nuts that were contaminated with
Salmonella in December 2007. Another positive sample appeared again in
September 2008. It was only after the company conducted thousands of tests that
it was able to pinpoint the source for the second positive test. This test showed
that the tainted nuts came from California based supplier; more specifically
from Setton Pistachio of Terra Bella, Inc. Even though pistachio related
illnesses, the company voluntarily recalled more than 2 million pounds of nuts
and temporarily shut down its manufacturing plants. http://www.kraftfoodscompany.com/About/who-we-are/)
Customers today view food as an expression
of their cultural and social identity and are therefore asking a lot more from
producers than just good quality. Environmental concern, social responsibility,
and economic viability are commonly identified as the three pillars of
sustainability. With global inequalities becoming more pronounced, food costs
climbing, and global warming becoming a major political issue, food producers
are simultaneously cast as perpetrator and potential healer. Meeting the needs
of the present without compromising the future has to be taken into account by
the food industry without undermining the balance sheet.
3.3
Improvement of Industry Leading Capabilities
The Kraft Foods Inc. mission statement was presented to the
general public during the CAGNY conference in February 2009. According to the
Kraft Foods, Inc, Website (http://www.kraftfoodscompany.com/About/who-we-are/)
the mission statement consists of three words and reads as follows:
Make Today Delicious
In order to fulfill Kraft Foods, Inc.
focuses on consumers in everything that they do. The company also understands
that action speak louder than words, so at Kraft Foods:
·
We inspire trust
·
We act like owners
·
We keep it simple
·
We are open and inclusive
·
We tell it like it is
·
We lead from the head and the heart
·
We discuss. We decide. We deliver
Because of
the large numbers of food, health and environmental scares over the past
decade, a greater cynicism about government, politicians, big business and
brands has emerged. Ethical consumerism has been a response to this and
reflects the desire to gain control over one’s life. Buying ethical products
from supermarket involves no major life changes, but it is an easy way to make
the consumer feel he or she is making a difference. In these circumstances,
prices are often of less importance than how the product is positioned.
Because of the growing awareness of the ability and personal
responsibility for individuals to influence their own health, the greater
evidence regarding links between diet and disease, and the shift from the
welfare state to the individual, there has been an upsurge in the emphasis
given to the lifestyle management. Underpinning this is the recognition that
diet is an important contributor to healthiness (“ I am more concerned about
what I eat and drink than I used to be”)
and that children today are increasingly exposed to smoking, pollution,
drugs, stress and the lack of exercise. There is, though a general confusion
over how to eat healthily, the advice given on healthy eating is always
changing and growing body of consumers who just opt out or cannot afford to
participate ( “I would like eat healthier foods but it costs a lot more to buy
the higher things”).
With society generally becoming wealthier, the rises in
consumers disposable income and the number of people considering themselves
“middle class”, tastes and aspirations are changing. Stressful lifestyles and
time famine means there is a greater need for pampering and enhanced leisure
time. Even in times of economic hardship small indulgencies remain intact; in
fact, these are increasingly seen as essential.
3.4
Market Entry Strategies
Kraft Foods Inc. manages over 100 different
brand name food product and tracks operating income in five specific consumer
segments.
Figure 1
Figure 1 provides a summary of the Kraft
Brands and operating segments:
·
Snacks- primarily biscuits (cookies and
crackers), salted snacks, and chocolates confectionery
·
Beverages – primarily coffee, packaged juice
drinks, and powdered beverages
·
Cheese- primarily natural, process, and cream
cheeses
·
Grocery- primarily spoonable and pourable
dressings, condiments, and desserts
·
Convenient Meals- primarily frozen pizza,
packaged dinners, lunch combinations, an processed meats.
According to Nielson Company Kraft only lost 0.3 percent of
market share during 2009 despite 9.8 percent increase in pricing.
The introduction of Kraft Foods Inc. in February 2009 was
accompanied by the launch of a new corporate website: http://www.newkraft.com. Visitors at the
site can view commercials from around the world while learning about new
product innovations. Kraft Foods Inc. has also launched several websites that
would considered viral in nature. One of these is the Oreo Double Stuf Racing
League (DSRL) site :http://www.dsrl.com; visitors can watch videos, play games
and of course they can join the league.
Although Kraft Foods Inc. has the effective management the
element of marketing mix is largely evident. The need to pay attention in which
the mix is managed and how the various
elements can be integrated in such a way that a high degree of synergy is
achieved. In the absence of this it is almost inevitable that the nature of the
interrelationships between the different elements of the mix will be ignored or
misunderstood and conflicting messages will be sent to the market. In
discussing this , Jobber (2002) highlights the ways in which an effective
marketing mix being used by Kraft Food Inc.
·
It matches customer needs by reflecting the
issues of importance to them and the choice process.
·
It creates a competitive advantage
·
It matches the resources available to the
organization
·
It is well blended in that each of the elements
contributes to a single consistent theme.
In order to achieve this , Kraft Foods Inc needs to have a
clear understanding not just of what the mix is designed but also the spectrum of factors that
contribute to and inhibit organizational capability. There are several ways in
which the integration can be achieved, but most obviously by being clear about
the product’s strengths and weaknesses, its current and future market
positioning, how the competition is behaving, and the role of each element of
the mix is capable of playing within the market. Against this background, Kraft
Foods Inc. can then focus upon linkages that exist between the mix element and
how they might possibly be leveraged.
3.5
Trade Limitations/ Barriers
Market structures are not affected by the
number of firms in an industry and their relative output, but also by the
potential number of new entrants to the market. Firms in an industry where
there are unlikely to be new entrants may behave differently from firms in the
industry where there are many strong potential competitors.
Kraft most important limitation is the
legal barrier where the law gives particular privileges. Patent law can prevent
competitor firms from making a product for a given number of years after
invention. Since Kraft products are well researched to the needs of the
consumer this may not be hindrance to the company.
With the advent of the high spending of
advertising and marketing, existing firms in an industry may be able to erect
barriers. The purpose of these is to make consumers associate a particular type
of good with the firm’s product creating a powerful brand image.
3.6
Financial Position
Kraft recent income statement shows that
the revenue increased to $42.2 billion in 2009 , while earnings increased to
$3.9 billion. Kraft weathered the 2009 global recession really well from a
revenue /earnings perspective.
Kraft recent balance sheets has over $ 37.5
billion in goodwill , which is not good , and also has over $19.5 billion in
long term debt, which is also not good. Kraft long term debt increased about 50
percent in 2010 from 2009.
3.7
Skills Shortages
One factor which influences the demand of
labor is the price of labor. The higher
the wage rate, the less will be demanded. One reason for this is that
the higher the price of labor, the more incentive there is to substitute capital
for labor. In the workplace, machines can be bought which will do the work of
labor. If wage rates rise and the price of capital remain the same, producer
will buy more machines and use less labor.
The demand for labor in UK is affected by
changes in the price of labor in other markets. In recent years , globalization
and expansion in the European Union into Eastern Europe has meant that many
goods and services are produced abroad in lower wage economies like China and
Poland. This has reduced demand for workers in UK which compete directly with
products imported from these countries. At any given wage rate, UK employers in
a wage range of industries.
New technology often means that machines
replace workers. So the demand for labor will fall. On the other hand, the
demand for labor for workers servicing new technology will rise. If the demand
makes rises, then the demand for labor making the product will rise. If the
demand for Kraft Food Inc products rises for a long time, then demand of labor
rises.
In many poorer developing countries around
the world, birth rates have been high and there are large numbers of young
people entering the workforce each year. This increase in supply will depress
wage rates. In the developed countries, particularly in Japan and EU, there is
the opposite problem. Birth rates have been low over the past thirty years and
the number entering the workforce has been falling. This is likely to raise
wages.
3.8
Laws and Regulations governing Business
Activities:
With many markets having grown in their
complexity in recent years, so the demand for increasingly detailed and
effective market intelligence systems has escalated. Although many of the
inputs to a market intelligence system can be obtained through relatively
straightforward and conventional market research routines, the much more
strategically useful – and indeed more necessary –information on competitors’
intention, capabilities and strategies can, as we saw in Kraft Foods Inc. often
only be obtained by radically different approaches. Although the legality of
these approaches has been called into question, the law, both in Europe and the
USA , has many instances failed to keep pace with the developments that have
taken place in information and electronic data distribution.
The implication of this is that whilst the
techniques used to gain the more confidential forms of competitive information
may not be strictly legal sense be wrong, the ethics of the approach are
arguably rather more questionable. The net effect of this in many companies the
search for a competitive edge has led managers to enter what has been referred
to as “ the twilight zone of corporate intelligence” , in which the traditional
boundaries of legal and ethical behavior are blurred.
4.
Performance Assessment
There are two organizational Issues Kraft
Foods Inc, needs to address in its Global Operation; Suggestions have been made
by Hayhurst and Wills (1972), that changing organizational needs may lead to
the disintegration of a marketing organization. This could be achieved by the
separation of operational activities and on the one hand and the planning
activities on the other. Selling and distribution might fall into the former
category.
It is clear (Hooley, et al; 1984) that the
increasingly competitive environment in which marketing is undertaken has
created recognition that organizational flexibility is a necessary element of
marketing orientation.
To large extent the successful
implementation of marketing strategies relies upon an appropriate structure. As
Hughes (1980) has pointed:
“ Many marketing plans fail because the
planner did not consider the fact that the organization was not capable of
implementing the plan. Short range plans will require adaptation to the existing
organization, whereas long range plans may require redesigning the
organization.”
Apart from
serving as a means of linking the organization to its environment,
thereby ensuring that the outputs and activities are compatible with the
external milieu in which organization is operating, planning also serves as a
means of integrating the goal striving activities of the organization into a
coordinated whole. This latter role is facilitated by effective organizational
design, as Nathanson et al (1982, p 93) point out:
“ Organization design is conceived to be a
decision process to bring coherence between goals or purposes for which the
organization exists, the pattern of division of labor and inter-unit
coordination and the people who will do the work”.
5.
Suggestions
In considering the framework for Kraft
Foods Inc. I suggest that it could be guided by:
·
Allocating task responsibilities to individuals
·
Designing formal relationships leading to
hierarchical levels and spans of control
·
Grouping individuals into department, departments
into division
·
Designing systems for integration and
communication
·
Delegating authority and evaluation
·
Providing systems for appraisal and reward
Gailbraith , M( 2001) has developed a conceptual framework in which Kraft
Food Inc. determine the number of variables over which choices must be made by
managers in creating an organizational design. These are task, structure,
information and decision processes, reward system and people. In choosing how
to balance those elements, top management of Kraft Foods Inc. has considerable
scope for varying and influencing all five. However, the organization design
that emerges should be one that fits the product –market strategy of the Kraft.
If a consciously developed strategy is to be effectively implemented, this
needs to be done via a properly designed organization.
In the Global market the tendency towards increasingly unpredictable and
discontinues change implies that organizational forms need to be considered as
being short term and subject to adjustment in response to the frequent changes
in the contingencies that underpin it. Doyle (1979) points to such factors as
an increased focus on integration, a change from volume to productivity
orientation and a move towards a portfolio management as indicating that a
traditional functional structure is becoming less appropriate. A more complex
and ambiguous set of alternatives is to be found in divisional and matrix forms
of organization, but these too may be transitory.
6.
Conclusion:
Kraft just reported strong second quarter of 2014 result.
Although revenue declined 5.9 percent year over year to $13.2 billion,
primarily due to unfavorable negative 8.1 percent of foriegn currency and a
negative 0.7 percent impact from divestitures. Kraft’s organic revenues
increased 3.9 percent. For that quarter Kraft’s North American segments (KNAC)
sales were flat year over year as gains in US Convenient Meals (7.1 percent, US
Grocery (6.7 percent) , US Beverages (6.0 percent) and US Snacks (1.3 percent)
were offset by the declines in US, Cheese (8.7 percent) and Canada and North
American Foodservice (10.0 percent). In the International segment, net revenues
in the European Union decreased 17.4 percent. Based on the strong year to year
to date performance, CEO Rosenfield has raised guidance for 2014. She now
expects earnings of at least $3.0 per share compared to $2.0 guided earlier, http://www.kraftfoods.com.
7.
Recommendation:
Among the most obvious consequences of
market becoming more competitive and customers more demanding is that many of
the traditional bases of competitive advantage have been eroded. One way in
which to combat this is for KFI to differentiate the organization from its
competitors, by focusing upon the delivery of greater customer value.
The basis for a strong considerable amount
of marketing thinking for many years was the idea of strong selling
propositions, in which the customer would be presented with one or more good
reasons for buying the product-this is reflected in the notion of “ buy this
product, receive benefits”. From here , thinking moved to the idea of the
unique selling proposition (USP), in which the strategy was based upon a
feature or benefit that was unique to the organization or brand. However, in a
highly competitive market like food products, the scope for retaining
uniqueness in anything other than the short term is limited unless the product
is protected by a patent. The notion of the USP based strategy has been
therefore largely undermine from the brand over the past few years.
References
Doyle (1979) P, (1994) Marketing
Management and Strategy London, Prentice –Hall,pp78,79
Gailbraith, J.K ( 2001), The Affluent Society,
Harmondsworth: Penguin Book, pp243.
Hayhurst and Wills (1972), Organizational Design for Marketing Futures;
London: Allen and Unwin, pp345-246
Nathanson et al (1982, p 93); Effective
Strategic Planning and the Role of Organization Design, Chapter 6 (pp 91-113.
