Friday, February 6, 2015

Kraft Foods International Business Strategy by Jolito Ortizo Padilla


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.

Even the main website for Kraft Foods Inc. has undergone a facelift. The new site address is http://www.kraftfoods.com.

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



http://www.newkraft.com; published 2014 (see website)

 

Nathanson et al (1982, p 93); Effective Strategic Planning and the Role of Organization Design, Chapter 6 (pp 91-113.

 

 

 

 

 

 

 

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