OPEN UNIVERSITY MALAYSIA

INSTITUTE OF PROFESSIONAL DEVELOPMENT

EXECUTIVE MBA

PROGRAM: EXECUTIVE MBA IN CORPORATE MANAGEMENT

MODULE: CORPORATE STRATEGY

TOPIC: Select a company ( local or global ) and carry out a critical evaluation of its business strategy/ strategies.

LECTURER: DR. LOURDES

NAME OF STUDENT: LO SOO FUN

MATRIC NO: EMBA-CM-121546

I/C: 750209-14-5140

DATE: 12/07/2012

Contents

1.0 Executive Summary 1

2.0 Introduction 2

2.1 Basic Information

2.3 Company History

3.0 Business Segment 3

3.1 Products

4.0 Competitive Analysis 5

5.0 Entry 6

6.0 Supplier Power 7 ~ 8

7.0 Buyer Power 8

8.0 Kraft Foods SWOT Analysis 9 ~ 12

8.1 Kraft Foods

8.2 Kraft Foods Analysia

8.3 Strength

8.4 Weakness

8.5 Opportunities

8.6 Threats

9.0 Porters Five Forces Analysis 12 ~ 13

9.1 Bargaining power of buyer

9.2 The bargaining power of buyer

9.3 The threats of the entry of new competitors

9.4 Rivalry among established competition

9.5 The threats of substitute product or services

10.0 PESTEL analysis 13 ~16

10.1 Political

10.2 Economic

10.3 Social

10.4 Technology

10.5 Economic

10.6 Legal

11.0 Conclusion 17

12.0 References 18

1.0 Executive Summary

Kraft Foods is changing. Sometime in 2006, Altria will sell its daughter company. CEO Roger

Deromedi is selling sections of the business, consolidating divisions, and slashing jobs. Altria

and Deromedi aim to create a leaner, more independent food company

Kraft Foods Inc operates in the food and beverages industry. The industry is constituted by

those companies that involve in stages of activities from procuring the raw food material after

harvest till the retail purchase. The activities involved are the processing of raw food materials,

manufacturing, packaging the food products and distributing them. The products may be fresh,

prepared foods, packaged foods, alcoholic and nonalcoholic beverages. All the products that

are meant for human consumption except the pharmaceutical products belong to this industry.

The dairy sector forms the largest part of the food industry. The baked and cereal items and

chilled foods are the close second and third. In case of the beverages industry, it is divided into

alcoholic and nonalcoholic segment. A vast of the alcoholic market is made up of beer, cider

and other flavored alcoholic beverages. On the other hand, soft drinks, coffee, tea, juice and

water constitute the nonalcoholic beverage market.

The industry is highly competitive and fragmented. Though the competition is among few

notable players, no player has a dominant position to dictate the price levels. The players rely

largely on advertisements to promote their brand and secure the market position.

2.0 Introduction

2.1 Basic Information

Kraft Foods is an international food manufacturer. Kraft’s corporate headquarters is located in

the Chicago suburbs at Three Lakes Drive, Northfield, Illinois, 60093.6 Kraft’s main telephone

number is 847 646-2000, and its fax number is 847 646-6005. Kraft maintains two websites:

www.kraft.com contains corporate information, while www.kraftfoods.com provides product

descriptions and recipes for Kraft’s brands.

Kraft is publicly traded on the New York Stock Exchange. Kraft trades under the ticker symbol

KFT. Kraft has been traded since the company’s initial public offering in 2001. Despite this

public offering, Altria, formerly Philip Morris, still holds 85% of Kraft stock and controls 98% of

shareholder votes. In 2006, Altria plans to spinoff Kraft, creating a fully-independent company.

Kraft Foods Inc is the largest Food and Beverages Company in the United States. The company

operates in around 70 countries across the world with around 98000 employees and sells its

products in over 150 countries in Europe, Latin America, Asia Pacific, Middle East and Africa

through its subsidiaries, Kraft Foods International Inc and Kraft Foods North America Inc (Kraft

Foods Global, Inc, 2010).

2.2 Company History

Over the last one hundred years, Kraft has grown from a small Chicago cheese firm to a

multinational manufacturer of dozens of food brands. Today, Kraft Foods is much more than just

cheese. Kraft is an empire of popular brands in dairy, biscuits, cereal, confectionery, coffee, and

beverages. This growth quickened in the last two decades as several large food companies

merged to form today’s Kraft Foods.

In 1909, J.L. Kraft founded his cheese business in Chicago. Kraft pioneered the mass

production of sterilized, packaged cheese. First, the company mastered the pasteurization of

processed cheese. Later, the company developed cheese slices, Velveeta, and Cheez Whiz.

But today cheese is only one part of Kraft. Several major mergers in the 1980s broadened

Kraft’s brand base. First, in 1981, General Foods acquired Oscar Mayer. Then in Europe,

Jacobs Kaffee merged with Suchard-Tobler in 1982. In 1985, two cigarette firms joined the

merger wave: Philip Morris bought General Foods, and RJ Reynolds merged with Nabisco.

Finally, in 1988, Philip Morris bought Kraft.

These mergers continued in the next decade, producing Kraft Foods. First, in 1990 Kraft

General Foods bought Jacobs Suchard. Then, at the end of the decade, Philip Morris acquired

Nabisco from RJ Reynolds, integrating the company into the current Kraft Foods.

3.0 Business Segments

3.1.Products

Kraft manufactures and distributes branded food products around the world. Kraft divides its

dozens of brands into five categories: Snacks, Beverages, Cheese and Dairy, Grocery, and

Convenient Meals.

The company manufactures and markets packaged retail food products like cookies,

confectionery, coffee, juices, powdered beverages, cheese products, ready-to-cereals, desserts,

convenient meals and processed meats. All these products cover major consumer sectors like

Snacks, Beverages, Cheese, Grocery and Convenient Meals under the major brands like Kraft,

Jacob’s, Philadelphia, Maxwell house, Nabisco, Oscar Mayer, Post, Oreo and LU.Kraft plans to

concentrate on these five categories and to sell brands outside of this core. In 2005, Kraft

completed a sale of its confectionery business to Wrigley.Each of Kraft’s product categories

contains major North American and international brands:

• Snacks. Biscuits, crackers, cookies, and confectionery brands such as the Oreo and Milka

brands

• Beverages. Coffee, juice, and powdered beverage brands such as the Maxwell House,

Jacobs, and the new Tassimo hot beverage system

• Cheese and Dairy. Cheese brands such as Kraft Singles, Velveeta, and Philadelphia

Cream Cheese

• Grocery. Cereal, salad dressings, and desserts brands such as Kraft salad dressings,

Post cereals, and Miracle Whip

• Convenient Meals. Frozen pizzas, packaged dinners, and meat brands such as DiGiorno,

Tombstone, and Oscar Mayer

The company focuses on providing foods that fit the consumers by concentrating on health

and wellness, snacking, quick meals and premium products. The Kraft products are sold

through various distribution channels like distribution centers, satellite warehouses,

company-operated and public cold-storage facilities, depots, and other facilities.

4.0 Competitive Analysis

Kraft Foods Inc. operates in a vast industry generally defined as either Diversified Food and

Beverages or Branded Foods and Beverages (SIC codes fall between 2011-2099 and 5141-

5149). This broad industry definition serves as an umbrella under which a variety of firms

operate. Firms falling into this industry include Kraft, Kellogg, Nestle, Campbell Soup Co.,

General Mills, Unilever, Danone, Archer Daniels, ConAgra, Heinz, Cadbury Schweppes, Frito-

Lay, Hershey, Sara Lee, Wrigley, Hormel, Starbucks, Coca-Cola, Pepsi Co., Anheuser-Busch,

and a host of others. For the purpose of analyzing the competitive landscape of the industry, we

will restrict this broad group to large and diversified firms in the Branded Foods and Beverages

industry. These firms are Cadbury Schweppes, ConAgra Foods, Group Danone, Nestle, Sara

Lee, Unilever,General Mills, and Kellogg, all of which have market capitalizations in excess of

$10 billion. Firms in the industry are involved in the processing, packaging, marketing, and

distribution of primarily food products. A geographic market definition is of lesser importance

because of the mere size of the firms in the industry. These firms are so large with such a

variety of products that all operate both in the U.S. and internationally. In both geographic

markets, the Branded Foods and Beverages Industry must compete with generally less

expensive, private label products. Competition with this category of products will be further

discussed in the substitutes and complements section of this analysis.

5.0 Entry

The Branded Foods and Beverage industry is a mature market and has already experienced

significant consolidation at the large company level. Because of this, the threat of entry by a

new competitor is slim. The existing companies in the industry have already spent significant

amounts of money on branding, and the quality associated with brands by consumers is difficult

to overcome, though necessary for entrants to entice switching among consumers. A new

entrant would have to offer the same quality as existing products and would have to beat

existing companies on price to steal market share. Further, this is a relatively capital intensive

industry with significant start-up costs. The fixed costs necessary for entry, including the costs of

production and packaging facilities and distribution networks, are daunting. These fixed costs

serve as the largest barrier to entry. An entrant would also have to spend a disproportionate

amount of money on marketing and advertising to induce switching among consumers. Even if a

company were able to enter, it is doubtful they could acquire significant market share. The

companies in the industry are large and established and have the advantage of significant

economies of scale and scope in production, marketing, and distribution which enhances an

entrant’s inability to compete on price, quality, or promotion. Potential entrants must also realize

the threat of predatory pricing. These are large firms who could easily reduce prices and take

short run losses to deter entry. Lastly, if a firm was able to enter the industry, it is likely the

entrant would be acquired by one of the larger companies before reaching the scale and scope

of a Kraft or Kellogg.Therefore, the threat of entry of a major player in the industry is low.

6.0 Supplier Power

Companies that package and market products in the industry generally have more value added

through packaging and distribution than companies involved in the lower margin business of

processing agribusiness commodities. Therefore, Kraft and its competitors should be able to

maintain relatively consistent margins year after year under normal conditions. Prices of inputs

or the industry are generally competitive and market determined, so suppliers of these inputs

should never be able to hold a company in the industry hostage to extract profits. Hedging and

the use of financial derivatives can also be employed to guarantee margin consistency. While

such tools can be used to hedge against commodity prices, the current environment of rising

input costs is a major problem facing the industry. On average, agricultural commodities

represent 19% of a company’s costs and packaging represents 8% of operating costs. The

industry as a whole is suffering from volatile commodity prices, specifically oil prices and

petroleum based packaging products. Prices for pulp, aluminum, nuts, and sugar have also

increased in recent quarters. With yields on sugar beet crops already projected to be low, and

with political changes in the European Union’s sugar policies, sugar prices have increased from

$0.21 per pound to $0.30 per pound. For most companies, sugar represents 5-10% of raw

material costs. Kraft has a particularly high exposure to sugar prices of firms within the industry.

Cheese, coffee, cocoa, and sugar are Kraft’s most valuable input commodities and Kraft

projects that these commodity costs will be $800 million more than 2004 levels. Despite the

rising commodity costs, most firms are reluctant to change their product recipes to save money

on rising input costs for the fear of losing volume and brand quality. While most companies use

hedging to minimize their exposure to rising commodity costs, ultimately these costs are market

determined. Due to hedging, the effect of rising input costs on a company’s financial health is

lagged as derivatives expire and new derivatives are purchased at higher futures prices.

Therefore, even though suppliers do not have significant power in setting prices and extracting

profits, the current environment of rising commodity prices is of significant concern for the

industry.

7.0 Buyer Power

In the current environment, there is significant opportunity for buyers to extract industry and

Firm profits. Although Kraft raised prices by 3.1% for their top 25 products in 2004 as a result of

the increase in input prices, competition in the industry makes it difficult to raise prices. The

main factor contributing to the loss of profits is Wal-Mart. Wal-Mart has significant power to

control the prices of the goods it purchases and has made clear the commitment to do so. If

firms are unwilling to negotiate with Wal-Mart on price, then Wal-Mart can threaten to or pull

products and reduce a company’s volume sales. As Wal-Mart grows, the option of not selling to

Wal- Mart for the sake of preserving price is becoming less and less of an option for

companies in the industry who wish to maintain market share. The Wal-Mart effect places

significant pressure on margins and sales. According to Kraft’s 10Q, “a trend toward increasing

consolidation in the retail trade and consequent pricing pressure and inventory reductions” is a

huge threat to Kraft’s success and profitability. While no specific companies are listed in the

10Q, this appears to be a reference to Wal-Mart more than other retailers. According to Wal-

Mart, sales of grocery, candy, and tobacco in Wal-Mart stores have increased by 10.1% in 2004

and 10.9% in 2003. These increases are likely to apply further pressure to industry margins.

The threat of Wal-Mart’s buyer power and the resulting margin pressure may eliminate strategic

buyers, such as private equity firms, from considering firms or product lines in the industry as

buyout opportunities. Buyer power may also be created as Kraft reacts to the decline in at-home

consumption of food products and coffee. As discussed earlier, in order to compensate for lost

at home consumption, Kraft has begun to sell more volume to restaurants, schools, and

other institutions. In terms of coffee, Kraft has been forced to reduce prices to compete with

Starbuck’s. If buyers are able to sense these weaknesses then they should have more power to

negotiate on price.

8.0 Kraft Foods SWOT Analysis

“SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the

environmental Opportunities and Threats facing that firm. SWOT analysis is a widely used

technique through which managers create a quick overview of a company’s strategic situation.

The technique is based on the assumption that an effective strategy derives from a sound “fit”

between a firm’s internal resources (strengths and weaknesses) and its external situation

(opportunities and threats). A good fit maximizes a firm’s strengths and opportunities and

minimizes its weaknesses and threats. Accurately applied, this simple assumption has powerful

implications for the design of a successful strategy.”

8.1 Kraft Foods

Kraft is a holding company engaged in the business of manufacturing and marketing branded

food and beverages. Kraft is the world's second-largest food and beverage company with

operations in over 150 countries worldwide. Strong brand image with innovation gives Kraft's

products a powerful brand recall and enables the company to command a premium for its

products. However, increasing competition fuelled by industry consolidation could adversely

affect the company's revenues.

8.2 Kraft Foods SWOT Analysis is as follows:

Strengths Weaknesses1) World's second largest food company 1) Market share2) Strong brand equity 2) Competition3)Innovation 3) Debt requirements4) Distribution network 4) Geographic concentration5) Ad Hoc R&D

Opportunities Threats1) Expansion in developing 1) Cadbury purchase issues2) Explore Cadbury markets 2) Fierce competition3) Repositioning 3) Poor implementation on Cadbury division4) Offer organic product 4) Unhappy customers

8.3 Strengths

Kraft Food enjoys the position of world’s second largest food company after Nestle ( Trevis

2011). The company masters the manufacturing and marketing of confectionary, food items and

beverages. It has more than 11 brands in the markets of American, Europe and Asia. The

company has strong brand image and offers innovative products to its customer base. More

than 40 of its brands has 100 years heritage (Kraft Foods, 2011). Kraft Foods provides an

interesting portrait of a company that employs traditional distribution network as well as 2 tier

direct store delivery distribution network. With its continuous Research and development units

the company is continuously in a process of offering safe, healthy and innovative products to its

customers. The effective R&D is a key sustain its market its market position and competition in

the industry.

8.4 Weakness

The company is weak on its market performance. Kraft foods acquired Cadbury which no doubt

increased its profit ratio to many folds but it also added lot of debt pressure on the company.

Along with the debt requirements the company faces cut throat competition with Nestle and

Harshey in the markets. Despite of its operations in various markets and presence in US and

other markets, the company is weak on geographic concentration. Kraft foods has low market

share but it enjoys high margins in grocery business. Kraft has low market share but it enjoys

high margins in grocery business. Kraft has about 9% market share in the $40 billion global

grocery market. Although the grocery division’s contribution to Kraft’s revenues is lower

compared to other divisions, it has EBITDA margins of 33% which are higher than 14-15%

margins in Kraft’s other businesses. The high profit margins make grocery a lucrative business

line for Kraft.

8.5 Opportunities

Kraft Foods has long way to go. It can utilize number of options available currently to get rid of

dept requirements and other frills that are causing low market share to the company. Firstly,

Kraft Foods can engage itself in the market expansion process. This can be achieved in the

developing markets of Asia like India, China, and Japan etc. these markets show great potential

for the business. Although Kraft Foods have acquired Cadbury but lots of its resources of

revenue are still untapped to the company. Cadbury is a major player in the developing

countries and earns billions of revenue from its customers in India, China and other Asian

countries. Kraft Foods can use Cadbury’s brand equity to offer new products in these markets to

explore these markets and opportunities present there further. Secondly, Kraft Foods can

reposition itself in the existing markets with more unique and health centered products. There is

an increasing trend among the customers that they like to buy fresh, original and organic

products. The company can reposition itself in the market as a provider of farm fresh products to

gain the customer attention.

8.6 Threats

The main issue currently faced by Kraft Foods Inc. is the Cadbury purchase related issues. After

the purchase of Cadbury, there was lot of protest among the British nationals against this

acquisition. The profit margins of the company dropped subsequently during this. The

customers stopped purchasing the products offered by Kraft Foods, thus, hurting the market

position of the company badly. The acquisition brought no changes to the company as failed to

properly utilize the resources of Cadbury and failed to implement the proper positioning

structure in the markets. There are chances that this acquisition can lead to the customer walk

outs from Kraft products as a reaction to the purchase of Cadbury. This does not end here, the

company faces fierce competition with Nestle and Harshey, the two giants that Kaft is

competing with.

9.0 Porter’s Five Forces Analysis

9.1 Bargaining power of suppliers

The food and beverage industry is quite high and competitive in nature. The prices offered are

usually competitive to remain in the market. The suppliers in the industry do not hold much

power to drive the company as a hostage to extract their profits.

9.2 The bargaining power of buyers

The buyers preferences changes with the passage of time and they are likely to witch to seller

who offers good quality at less price. Wal- Mart has played a major role in this case. It offers

less priced goods to attract the buyers’ attention. There is a significant opportunity for the

buyers to extract industry and firm profits.

9.3 The threat of the entry of new competitors

There are already so many competitors present in the market that there are very less chances

for the new comers to set foot in and enjoy there share in the market. The existing companies

have already spent so much on their brands, quality and positioning that it will be difficult for the

new comers to entic switching among consumers.

9.4 Rivalry among established competitions

Intense competition lies in the food and beverage industry. The main vehicle by which firms in

the industry preserve market share is through brand loyalty and . In general, the product of

these firms are highly elastic with consumers weighing the tradeoff between price and quality

between companies and products. Consumers in the industry have minimal switching costs and

there is never the guarantee of brand loyalty. Therefore, the way these firms maintain market

share is by providing brand quality at an affordable price. Thus, there is some cooperation

among firms against the erosion of market share to private label products. With all firms

promoting brand quality, there are signals passed onto the consumer that brand name products

are superior to private label products in quality and elegance. There have been restructurings

and realignments at Kraft and at other companies in the industry in order to increase volume

and profitability despite increasing input costs, sluggish top line growth, margin contraction, and

rising pension costs.

9.5 The threat of substitute products or services

The consumers evaluate the quality of products and their prices with that of others to decide

which product to buy. The treat of substitutes is medium in this case. The private label products,

also referred to as “generic” products, pose a serious threat to industry and firm profits.

10.0 PESTEL Analysis

The PESTEL analysis contains the analysis of Political, Economic, Social, Technological,

Environmental and Legal environments of a country with reference to a particular object. The

PESTEL analysis of Kraft Foods Inc. is as follows:

10.1 Political

The political environment is suitable for the Kraft Foods. The company has a long history of

involvement in various political and community based initiatives. This includes supporting

candidates who understand and appreciate the public policies that impact their business, brands

and employees. The company has started a political action committee called Kraftpac which

makes funding to US. Federal, state political parties, committees and candidates. The company

takes reasonable steps to make corporate contributions to the political committees, parties etc.

if permitted by law (Kraft 2011). Kraft Foods and Kraftpac consider the following criteria in

determining which candidates to support:

Positions on public policy issues important to Kraft Foods

The presence of Kraft Foods employees or facilities in a candidate’s district or state

Key committee membership or leadership position

10.2 Economic

Despite the bad economic conditions of the world around, Kraft foods is making good earnings

from its market involvements via its products and brands. The company is delivering high quality

earnings to its shareholders despite the difficult economic environment. They are continuously

investing in their brands and businesses to further provide excellent product offerings to their

customers. As a result of their investment strategies, the Kraft Foods is very well positioned to

deliver sustainable top-tier performance, with or without Cadbury. In 2008, Kraft Foods was

once again named to the Dow Jones Sustainability World Index and the Dow Jones

Sustainability North America Index in recognition of the company’s economic environmental and

social performance.

10.3 Social

Since 2010, Kraft Foods is continuously working on its Corporate Social Responsibility related

activities. It issues its CSR report 2010 called creating a more delicious world. According to that

report, Kraft foods committed itself to focus on the products, policies and partnerships to drive

meaningful and lasting change around health and well-being, sustainability and food safety, as

well as other important topics of societal interest. The company took initiative to improve the

living standards of more than 1 million farmers with effective partnership with them. They

increased their cocoa and coffee purchase to further benefit their partner farmers. Kraft Foods

Reduced greenhouse gas emissions by 18 percent and water consumption by 30 percent since

2005, as measured against total production. Furthermore, the company improved the nutrional

profile of more than 5,500 products during the last five years. They removed nearly 6.5 millions

pounds (3 million kg) of salt from products in 2010 and helped to provide more than 1 billion

servings of food since 1999 in the United States alone.

10.4 Technological

The Kraft foods are successfully implementing innovative ideals and processes that create

values to their consumers or customers. They continuously strive to embed innovation in all the

ends of the company from developing innovative new products and services to doing things

innovatively, The company keeps consumer needs in their minds before designing their

strategies. They adapt and anticipate their needs in order to meet them efficiently. The company

has employed SAP Netweaver technology platform to ensure effective information and business

transformation strategy within all the business units. Kraft foods have established a hub and

spoke model where a centrally led team focuses on the overall strategies, systems, enabling

tools, networks and metrics. And, they have complemented that central team with R&D people

the open innovation “technical scouts” embedded in each of Kraft’s business units.

10.5 Economic

Kraft Foods has set an example in the global industry by determining a push to do reduce the

impact of its operations on the environment in the US and around the world. The company

released its CSR report in 2010 which stated its environmental goals agenda ro reduce the

effects of energy and the carbon dioxide emissions in food plants to the conservation of water

and minimizing excess packaging. They are creating packaging that uses less material, weighs

less and reduces impact on landfills without compromising food safety or freshness. As part of

their plan to reduce our “carbon footprint,” Kraft foods are improving their energy efficiencies,

using less energy and finding new and cleaner sources of energy. Kraft Foods look for

opportunities to reduce the use of water to minimize the impact of water discharge and even

reuse water in ways that help the environment and save money. Lastly they are not only

focusing on creating less waste in the manufacturing process, they are also finding new and

better ways to reuse, treat and even put waste to work.

10.6 Legal

The company has a long history of maintaining corporate compliance with all the local and

international legal implications. The company abides by the laws, rules, and regulations of the

national as well as international countries in order sustain its profitability and its business

operations. Almost all of the activities of the Company’s food operations outside of the United

States are subject to local and national regulations similar to those applicable to Kraft North

America Commercial’s United States businesses and, in some cases, international regulatory

provisions, such as those of the European Union relating to labeling, packaging, food content,

pricing, marketing and advertising and related areas. The European Union and certain individual

countries require that food products containing genetically modified organisms or classes of

ingredients derived from them be labeled accordingly.

11.0 Conclusion

To date the European Union faces several complicated but well-known economic policy

problems from the recent past. Estonia as the future EU member state must take this into

account. It is not enough to be able to overcome challenges on the WAY to the European

Union. We must become equal partners to other European states, be able and willing to

participate in the discussions on the monetary and fiscal policy issues, perceive Estonia in

Europe and Europe in Estonia. Today the European Economic and Monetary Union within

which 12 states have adopted the single currency, offers a historic chance to create a truly

strong, flexible and efficient economic area. I believe that potentials of the single currency will

be exploited in the best possible way. It would serve the interests of the current as well as future

member states and the whole of Europe.

12.0. Refrences

“Kraft Foods Debuts Tassimo Hot Beverage System in the U.S. Revolutionary Technology Delivers Unrivaled Variety, Convenience, and Quality” Business Wire. March 16, 2005.

_____. “Kraft History. 1980s.” [www.kraft.com/100/timeline/time_1980s.html].

“Kraft History. James Lewis Kraft.” [www.kraft.com/100/founders/JLKraft.html]. _____. “Management. Jean Spence.” [www.kraft.com/profile/biosspence.html].

“Kraft Foods.” WikiInvest. n.d. Web.