1. Why has the merger of Kraft and General Foods been such a success?o Kraft and General Foods had presence in distinctly different food categories which made the merger possible without creating major antitrust complications o Although their product portfolios were different they used same kind of distribution channels like refrigerated, frozen and dry foodso There were a series of operational synergies across the value chain that allowed the combined entity to harness economies of scope and scaleSourcing: Joint savings by consolidating media purchases and packaging materials for both companies as well as establishing internal sourcing systems for common raw materials between Kraft and General FoodsManufacturing: The excess capacity at Kraft factories were utilized to boost product for General Foods product lines.
General Food factories adopted best practices that improved operational efficiency at Kraft factoriesR&D: The merger allowed centralization of basic research and information management facilities Marketing & Sales: Given each of their strong portfolio of brands, it was possible to use each other’s brands to improve presence in other categories.
Kraft’s strong presence in international markets helped centralize international sales force and reduce costo General Foods had a high debt to equity ratio and a complementary acquisition like Kraft Foods with high stock value helped it create financial synergies as well o Lastly, the integration plan and the various task forces and functional councils installed by Richman and Miles played a big role in success of merger and ensured that the above synergies could be realized2. What does Kraft contribute to General Foods?General Foods was better off because of its merger with Kraft because of the following reasonso Presence in high potential new areas: In line with growing trend of eating out, through acquisitions Kraft was able to acquire a number 2 position in food services business for restaurants, hotels and hospitals. It had also expanded its frozen foods business which was common to General Foods we well. This was able to offset de-growth of General Foods coffee and cereals business. o Action oriented culture: Kraft was known to have a more agile working environment and was quicker to respond to market changes like a turnaround of its loaf cheese category into the cooking cheese category. In comparison General Foods was known to have a slow and overanalytical bureaucratic setup.o Marketing expertise: Kraft had successfully vitalized its core food business through developing new products, building new brands and brand extensions. It used advertising and new technology to revive traditional categories and gain brand leadership. o Operational Efficiency: General Foods factories were operating at full capacity whereas Kraft following productivity improvements by bringing in consultants to improvement throughput and efficiency. o International presence: Kraft was the largest food company with international sales amounting to 25%. The international sales and distribution facilities could be used to market and sell General Foods portfolio of productso Strong management: Kraft had a strong set of senior management across functions who had also prior experience at General Foods. They played a key role in integration and creation of the new corporate structure3. What does Philip Morris contribute to KGF, and what does KGF give Philip Morris? [Think Hard!]PM to KGFo KGF’s importance for Philip Morris: Although Philips Morris was a company with rich cash flows and leading brands like Marlboro, its cigarettes business had limited growth opportunities and Wall Street had reduced its expectations. The company was looking to diversity into a high margin high growth business in the consumer products space where it could leverage its management’s experience and commercial capabilities. The combined entity of KGF provided a diversified product line across all forms of distribution and lead to $175 million in operational synergies across the entire value chain of Kraft and General Foods. It became the largest food company with strong brands and the scale to deliver just in time to grocers and helped Philips Morris achieve a focused strategic vision for its entire food operation. o Philip Morris’s importance for KGF: Philip Morris was able to identify two valuable acquisition targets viz. General Foods and Kraft and harness operational synergies from the merger, creating value for customers, shareholders and employees. Philip Morris CEO Maxwell played a key role in outlining the integration plan for KGF and making the merger a success. 4. What should KGF do next? What challenges might it encounter?o The integration plan so far has been able to harness the smaller operational synergies across the different functions and divisions by handling macro issueso However, these changes have been made at the senior management level, going forward they will need to make changes in operating systems at middle management and lower levels which will be far more challenged given the size of employee base. For e.g. Micro issues like reconfiguration and re-training of domestic sales force teams in Canadao Even within the newly formed KGF divisions cross-cultural issues still existed given the heterogeneity of way of doing business between Kraft and General Foodso Given that the current divisional structure isn’t working well, KGF might need to identify a new governance structure. For e.g. divisions based on the 3 distribution channels: dry foods, frozen and refrigerated o As KGF has significant international operations, it will be difficult to remotely influence and enforce new governance structures