Business, There Are a Number of Issues

¶ … business, there are a number of issues that will have an impact on a firm's ability to compete and increase their profit margins. One of the most formidable is the transformations that can occur inside an industry. This means that corporations have to understand potential threats and create strategies for mitigating them. Otherwise, there is the possibility that a company could lose their market share and dominance in the sector.

A good example of this can be by looking at General Motors. From 1946 until 2008, they were considered to be the world's largest automaker. Yet, foreign manufacturers continued to erode away at their position. This is because the management failed to understand the challenges they were facing and adapt with them. The long-term effects are that the firm was forced into bankruptcy and had to receive government bailouts in order to stay in business. This is illustrating how not knowing the possible difficulties can have a negative impact on a company's financial well-being. (Crum, 2010)

In the case of Kraft, the firm must be constantly vigilant in ensuring that they are delivering to consumers the kinds of products they demand at affordable prices. To determine the issues impacting the company there will be a focus on Porter's Five Forces model and PEST analysis. Together, these elements will provide specific insights as to the underlying challenges affecting the firm and how they can be addressed. This is when Kraft will protect their market share and enhance the strategies they are utilizing.

Porters Five Forces

Porter's Five Forces model is concentrating on several areas to understand the challenges and opportunities facing a firm. These include: the threat of entry, rivalries, substitutes, the bargaining power of suppliers and customers. The threat of entry is focusing on how easy it is for competitors to enter the marketplace. Rivalries are looking at existing firms and their ability to engage in tactics that can take market share away from Kraft. Substitutes are when there is an emphasis on new products emerging (which can reduce sales for existing producers). The bargaining power of suppliers is examining the role that whole sellers and third party providers will have on profit margins. The bargaining power of customers is when there a focus on their impact in the firm's ability to produce merchandise they demand. This will influence a company's profit margins and prices they are charging. The combination of these factors is providing insights as to the possible threats and challenges impacting Kraft. ("Porter's Five Forces," 2012)

Threat of Entry (Moderate)

In the case of Kraft, new competitors could quickly enter the marketplace and begin selling similar products at a lower price. This is because there are limited restrictions for producing various goods. All that is required is the working capital to effectively manufacture and distribute it to retailers. When this happens, a firm can quickly take market share from Kraft.

For example, the company currently owns many different brands including: Capri Sun, Jell-O, Kraft related brands, LU, Maxwell House, Oscar Meyer, Philadelphia and Velveeta. This has helped them to control major segments of the consumer goods markets. ("About U.S.," 2012) The below table is illustrating the different areas.

Consumer Segments Controlled by Kraft

Category

Amount

US Beverage

16%

US Grocery

25%

US Cheese and Dairy

21%

US Convenient Meals

18%

("About U.S.," 2012)

Kraft's command of these segments could provide an opportunity for new firms to introduce competing products. They would offer the same thing only at a lower price. Over the course of time, this would slowly eat away at different areas by a few percentage points. This is when they will lose market share.

Rivalries (High)

Rivalries can have an adverse impact on the company's bottom line results. This is because competitors can introduce different products that will address the needs of customers. Moreover, they could be selling them at lower prices. This can create shifts in demand which will adversely impact Kraft's sales. ("Kraft," 2012)

For example, there are numerous firms that are competing directly against Kraft. A few of the most notable include: ConAgra, Hershey, Nestle, Mondelez, Unileaver, Tyson Foods, Mars, Smithfield Foods and Danon. Anyone of these companies could introduce a competing product and take market share away from Kraft. ("Kraft," 2012)

Substitutes (Moderate)

Substitutes could have a major impact on Kraft. This could occur with a firm introducing new products at cheaper prices or from an existing competitor. In the future, this could hurt the company's bottom line results. For example, Kraft had to undergo a major restructuring in 2004 when consumers began to buy products that were healthier. This hurt the firm's bottom line results and dominance inside the marketplace. ("Kraft," 2012) (Henry, 2008)

Bargaining Power of Suppliers (High)

Suppliers have a major impact on the prices Kraft is charging for different products. This is because any kind of increases are passed directly on to customers. For instance, when oil prices began to rise in 2007 it hurt the company's results. This is because their production costs have increased from the large amounts of fuel, electricity, water and other resources that are used to create the final product. ("Kraft," 2012) (Henry, 2008)

Bargaining Power of Consumers (Moderate)

Consumers have a certain amount of bargaining power. This is because changing tastes are effecting Kraft's financial position. Moreover, there are number of competing products in the marketplace. This makes it easier from them to begin purchasing from a rival. ("Kraft," 2012) (Henry, 2008)

PEST

A PEST analysis is focusing on political, economic, social and technological factors which could have an impact on Kraft. This provides specific insights that will help the management to understand the various challenges and opportunities. When this happens, they will begin to make adjustments in addressing these issues.

Political Environment

Politically, the company is facing negative fallout from trans-fat litigation and the Velveeta cheese recall in 2011. This has hurt the image of the firm. It has also caused many people to see Kraft as an organization that is unwilling to use innovation. This is illustrating a possible threat for the firm over the long-term. ("Kraft Recalls, "2011) (Henry, 2008)

Economic Environment

Economically, Kraft has $19 billion in annual sales and at least one of its products is in 98% of American households. This gives them the opportunity to expand upon the favorable perceptions of different brands. However, commodity prices are increasing which will result in higher costs being passed onto customers. This is a possible threat that could hurt their profit margins and production costs. ("About Us," 2012) (Henry, 2008)

Sociocultural Environment

Socially, there has been a focus on healthy eating and avoiding foods that are fattening. This is causing consumers to stop buying certain brands. When this happens, it threatens Kraft's fiscal position. (Henry, 2008)