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Kraft Foods is a major producer of supermarket food items. There are four generic strategies that define the position of a fir within an industry. Kraft operates with a differentiation strategy; here brand recognition and higher prices illustrate the premium value that Kraft brands have for consumers. This strategy is not perfectly aligned with the company's strengths and weaknesses, however. This poor alignment can be dealt with. First, Kraft needs superior products that can help it appeal to modern shoppers. Second, Kraft needs to fight to regain its bargaining power with the discount stores -- it has the ability to attract customers but needs to break out a cycle of not being able to afford to support its brands.
Kraft Foods is a major producer of supermarket food items. The company earned revenues of $18.6 billion in its last fiscal year, and profits of $1.89 billion. Some of the brands that Kraft owns and markets are Capri Sun, Jell-O, Planters, Miracle Whip, Oscar Meyer, Kraft, Maxwell House and Kool-Aid (Kraft Foods Group, 2012). This paper will analyze the Kraft Foods Group from the perspective of corporate strategy in order to gain insight into how Kraft does business.
Porter outlined the four generic strategies that define the position of a firm within its industry. The four generic strategies are aligned on a 2x2 matrix with target scope and advantage as the axes. The target scope options are broad and narrow while the advantage options are low cost and product uniqueness. The four generic strategies that emerge from this matrix are cost leadership, differentiation, focus low-cost and focus differentiation (Quick MBA, 2010). Kraft is a diversified manufacturer and marketer of food products, with a portfolio of brands. The company's size puts is squarely along the "broad" portion of the target scope axis, as one does not generate $18.6 billion in revenues with a focused strategy (MSN Moneycentral, 2012). Kraft's products fall into the category of differentiated.
The differentiation strategy "calls for the development of a product that offers unique attributes that are valued by customers and that customers perceive to be better than or different from products offered by the competition" (QuickMBA, 2010). Two characteristics that can be drawn from this description are that differentiated products charge higher prices and that differentiated products have stronger brand recognition. One can argue about the quality of Kraft's offerings when placed against real food, but the key point about differentiation is that there is perceived value for the customer that is associated with the brand. For Kraft's products, this is the case. The other attribute of the differentiated strategy is that the company charges a premium as a reflection of the perceived value that the customer has. Kraft may not charge much money for its food -- it is all fairly low end stuff -- but it does charge more than its immediate competitors. Whether the competitors are name brands or generics, Kraft usually prices slightly higher. Combined with consumer perception that Kraft's brands are superior in quality to those of competitors, it is clear that Kraft is following a differentiation strategy.
Kraft's strengths lie in its branding, its distribution and its financial clout. All of these strengths directly support a differentiated strategy. The branding is evident -- strong brands are a key component of a differentiated strategy. The company's distribution gives it access to mainstream channels nationwide. The "broad" component of the differentiated strategy requires that the company has strong distribution, so again the network of channels provides support for the generic strategy. Kraft's has a healthy balance sheet, with a low level of debt in particular. Having money to spend on both product development and on advertising is essential to succeeding as a differentiated producer. The company spends nearly $200 million per year on R&D, and more than that on advertising, both of which support the idea that Kraft is a premium product that is worth paying more for.
One of the weaknesses that Kraft has is that many of its core brands are mature. As a result, the company is subject to relatively slow growth. The company is putting money more into brand extensions than it is into the development of truly innovative products. The company could undertake the strategic option of addressing its weaknesses, but it appears that Kraft is not truly committed to dealing with its weaknesses and simply wants to continue with its core business. There are opportunities in the market that Kraft is not truly addressing either. It does take advantage of its clout with retailers to introduce new products with preferential shelf space, but the company is not undertaking any sort of geographic expansion that might increase its market potential.
A good strategy would also see Kraft adopt an approach that leveraged the company's strengths to shore up its threats. There is significant threat that is posed by changing tastes. Companies like Whole Foods are becoming major retailers and that market is not interested in Kraft products. Wal-Mart is now the largest grocery retailer in the United States (Forbes, 2012), but it pays low prices to a producer like Kraft, and selling at Wal-Mart does nothing to emphasize the differentiated nature of the product.
Altering Strategic Choices
For the time being, Kraft seems married to its strategy, and the slow growth trajectory that has characterized its past several years. The company faces a distinct threat that it has not yet addressed in changing consumer tastes. This primarily a threat combined with shrinking margins in the core business. Last year, it earned a less gross profit on higher revenues. Being able to deal with these two problems is something that Kraft must do in order to ensure its long-term profitability. The company's current policies do not address either threat adequately.
The first strategic threat deals with changing consumer tastes. Kraft needs to funnel more of its R&D money into finding products that it can sell through its existing channels that meet the needs of shoppers seeking premium products. This is not entirely inconsistent with its generic strategy -- higher quality products are differentiated -- but it is something Kraft has done little of. The company should also focus on a rebranding effort. Kraft's products evoke a 1950s way of thinking about food and dining, and this is incongruous with the current trends. Kraft needs to begin the process of rebranding some of its products with higher quality and higher prices to match. If Kraft is concerned about the integrity of its existing brands -- some of which are in the billion-dollar class -- then it should use its financial resources to develop entirely new product lines that it can sell at a premium over its existing lineup.
In order to deal with the margins problem, Kraft needs to create bargaining power for itself. The problem for Kraft is that while consumers might be willing to pay more for its products, big discount chains are not. Wal-Mart tends to want its suppliers to deliver high volumes at a low cost, which is the cost leadership strategy rather than the differentiation strategy. However, the volume of Wal-Mart, Target and Costco makes it impossible to ignore those channels. However, Kraft needs to realize that if it is going to deal with those companies, it needs to focus on a handful of category killers because that is what those companies are interested in (Business Week, 2004). While Kraft focuses on meeting the needs of those companies with some of its flagship brands, it can work on creating more bargaining power for itself by increasing the desirability of those products in the eyes of the consumer. If Kraft wants to leverage the possibility of ceasing business with Wal-Mart as a means to improve its leverage, it needs to have brands so strong that such a move would hurt Wal-Mart more than it hurts Kraft. Strengthening the desirability of the core brands is therefore important to the restoration of historical margins.
To an extent, Kraft's mission is confirmed by these strategic adjustments. Kraft is seeing its differentiation strategy threatened by the incursion of discounters into grocery stores, bringing with them an emphasis on cost leadership. These two elements of the strategic adjustment are both oriented to the restoration and maintenance of brand perception of quality at Kraft. It should not try to be a cost leader, because it has valuable brands that should have value in the marketplace as well. The company's mission of being North America's best food and beverage company is supported through initiatives that emphasize the restoration of premium pricing and the introduction of new, innovative products.
The project of strategic analysis has confirmed Kraft's mission. It is evident that Kraft has pursued a differentiated strategy and that for the most part it has been successful in doing so. The challenges that the company faces right now are that it is not differentiated enough and is now seen as a company who should be discounting. While…[continue]
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