Strategy also comments how corporate level strategy includes
Strategy can be defined as a way organisations accomplish their objectives (Grant, 2010), while Johnson and Scholes (1997) describe strategy as the direction and scope of an organisation over the long-term, which matches its resources to the changing environment and its markets. There are two different strategic identities, these are; business strategy, where the strategy is for a single business unit and corporate strategy, where the strategy is for a portfolio of business units and in which industries and countries a corporation such as Mondelez operates (Douma and Schreuder, 2008). Grant (2010) also comments how corporate level strategy includes decisions on diversification and mergers and acquisitions.
This assignment will discuss key strategic issues and challenges within the FMCG sector and how these have influenced and affected Mondelez’ performance in relation to the key strategic issue of growth.
With respect to the industry lifecycle, Mondelez are in the mature stage. Dalitz and Holman (2012) describe the lifecycle as a model that shows regularities of how industries evolve from an introduction stage of a product, before reaching a decline stage where sales begin to decrease.
The mature phase occurs when industry growth stops or slows dramatically meaning that only the most efficient and best-positioned firms survive. Mondelez, with their large portfolio and extensive geographical footprint are well positioned in many different markets, as such they can leverage a large market-share due to competitive advantage. Furthermore, in this stage barriers to entry increase meaning that it is harder for new competitors to enter the industry (McGahan and Argyres, 2004).
As the competition concentrates, most likely five to twelve large players (Deans et al, 2002), there becomes a scrutiny on the cost and the service. When products are broadly defined as being homogeneous by both buyers and suppliers they are called commodity products (Unger, 1983). This is an issue for companies in the industry as they can’t raise the price of their products significantly. If they were to do so, demand would fall because customers would most likely switch to a cheaper product. This is especially clear in the confectionary market, where price marked packs are now a customer’s choice (Cousins, 2015).
In the mature stage there is need for greater standardisation to reduce risk and the need to invest in greater efficiency and production capacity. With this, there is a shift from design to manufacture to cut costs and increase product reliability. Looking across the confectionary market, there is vast standardisation of product. Although product innovation has occurred as tastes and trends change such as Cadbury Dairy Milk popping candy or Mars protein bar, many bars are standardised such as chocolate tablets sold by Mars, Lindt and Cadbury. Grant (2010) also comments how customers now have increased knowledge about the market meaning that they have an increased position of power.
There is still an opportunity for growth within the maturity stage, McGahan and Silverman (2001) comment there is evidence that mature industries are as innovative as emerging industries. This can be attributed to wanting to have the first mover advantage (Lieberman and Montgomery, 1988). In 2017 to date, global R spend for consumer goods was 2.2%, however 22% of global spending was in healthcare (Statista, 2017), potentially showing a change in strategy towards HW food products too.
Within the FMCG sector most large organisations are publicly traded companies, meaning that there is shareholder pressure applied to the organisation. This can be seen in agency theory where an agent makes decisions on behalf of the principal (Douma and Schreuder, 2008). Furthermore, Jensen and Meckling, (1976) state that agency costs arise from the conflict of interest between a principal and an agent, for example if Nestle wanted to expand sustainable trading (Nestle, 2017) whereas shareholders wanted to maximise profit there would be a conflict of interests due to additional costs that would be incurred.
Amihud and Lev (1999) investigated the link between a corporate ownership structure and strategy, claiming there is an increase in strategy towards acquisitions compared to companies with a greater concentration of ownership. This can be seen across the market where Mondelez have a large portfolio due to a long history of growth via acquisitions. However, Lane et al (1998) commented that corporate ownership doesn’t affect strategy towards diversification and this is apparent when looking and the brands that Mars own (ranging from Pedigree to Uncle Bens (Mars, 2017)).
Grant (2010) notes that the focus of strategy has been shifting away from the external environment towards a company’s internal environment. This encompasses the resources and capabilities that a firm like Mondelez has and how these can be used to gain a competitive advantage. This is the resource-based view of the firm (RBV). Peteraf and Barney (2003) comment that it is the RBV’s focus on resources and capabilities that underlie performance differences among firms. Such resources are thought to be the ultimate source for establishing and sustaining a competitive advantage (Barney, 1991). According to the capabilities view, it isn’t sufficient for firms to simply possess resources; they must be able to develop, change, and deploy internal competencies that meet the requirements of changing environments (Eisenhardt and Martin, 2000).
A way of analysing Mondelez is through a SWOT framework (Olsen, 2017) and competitive strategies can be formulated based on this to exploit Mondelez’ strengths and the opportunities within the market (Barney, 2007). However, it must be stated that there are reservations about its application (Hill and Westbrook, 1997) and Mintzberg (1994) sees SWOT as an attempt to formalise the strategy making process.
Mondelez are able to innovate. Their expansion of product lines such as Dairy Milk and Philadelphia demonstrate the ability to venture outside regular product categories to drive growth.
Mondelez have several billion-dollar brands, such as Cadbury, Milka and Tang. This allows them to use customer loyalty to drive brands and further expansion with a lower risk.
A well-segmented portfolio
Mondelez have a well-segmented product portfolio, ranging from chocolate to wheat-thins. These products operate across different pricing tiers, helping Mondelez drive sales.
Mondelez are predominantly known for their presence in confectionary and biscuits. Therefore, there is a large amount of scepticism regarding the healthiness of their products, this is a negative effect of a strong brand name.
The war on sugar/ Sugar Tax
The UK Government have implemented a Soft Drinks Levy (Gov, 2017), and although this doesn’t directly affect Mondelez, it has led to people questioning the amount of sugar that we intake.
There is a potential for growth in clean label foods (Berry, 2017) in emerging and developed markets and reduced sugar/ salt variations of core brands such as Philadelphia Light in developed markets.
New product development to develop HW portfolio
Mondelez have moved into the HW market by purchasing Enjoy Life Foods (Horovitz, 2015), providing a ‘free from’ range of products within the US. They have also developed healthy savoury snacks through Véa and Good Thins (Mondelez, 2017c), to meet demand.
There has been a diversification in the route to market in recent years, there has been a significant increase in eCommerce (Thomas, 2012) through customers such as Amazon. This route is only likely to expand further, offering exciting opportunities for growth.
Mondelez are feeling the effects of a tightening shopper budget with revenue falling in the last five years (MarketWatch, 2017), this is being driven by commoditisation and the rise in demand for price marked packs.
Growing competition in expanding markets
Mondelez have done well in emerging markets but competition is becoming more intense. Firms such as Nestle and Ferrero are targeting these markets.
Possibility of being acquired
Mondelez failed to acquire Hershey in 2016 (Whipp, 2016), compounding themselves as a relatively small company compared to their competitors. This places them as a possible acquisition target.
The RBV argues that firms with Valuable, Rare, Inimitable resources and are Organised have the potential of achieving superior performance (Barney, 1991). Mondelez has many strong resources that compound the VRIO framework.
With Mondelez, the company’s core competencies such as new product development (Cadbury Dairy Milk Mint Oreo) and their production technologies positively enhance an effective and efficient strategy (Grant, 2010). Recently Mondelez have invested $65 million in global R&D hubs so that cross-category product innovation can be increased (Mondelez, 2016).
With respect to the rarity of Mondelez’ resources and capabilities, there are over 100, 100-year-old brands (Mondelez, 2015). The brand loyalty and knowledge associated with these products is not available elsewhere in the industry. Furthermore, there are 171 manufacturing facilities in 58 countries, this global network allied with 220 distribution centres give a rare and inimitable resource, thus there are asset efficiencies within Mondelez (Grant, 2010). Additionally, Mondelez’ recipe and manufacturing processes are confidential meaning that competitors cannot imitate the exact product. If this was to occur, then trademarks preventing the replication of brands should come into force. In 2012 Mondelez launched the Cocoa Life programme, moving away from the generic Fairtrade movement (Mondelez, 2017d). Mondelez will invest $400 million by 2022 to empower 200,000 cocoa farmers in six-key cocoa growing origins (Mondelez, 2017d). While this venture was initially hit with negative press (Fearn, 2016), competing firms cannot offer this significant commitment. Overall the organisation within Mondelez is unique and irreplaceable, from the huge asset base, the depth of knowledge within the R&D area to the relationship with farmers, this is what sets Mondelez apart.
Porters framework (1979) proposes five forces of industry competition; the power of suppliers, the power of buyers, competition from established rivals, competition from substitutes and competition from new entrants (Oraman et al, 2011). However, Grundy (2006) comments Porters five forces model tends to over stress macro-analysis, as opposed to focusing more on the micro-analysis.
With respect to Mondelez the bargaining power of suppliers is low, this is due to the dominant relationship that Mondelez has with suppliers and through initiatives such as the Cocoa Life programme, furthermore, although Mondelez cocoa comes from a select group of countries there are many cocoa farms within these areas, meaning that if required Mondelez could change their suppliers. Raw product suppliers often form cartels to improve their proportion of power (Grant, 2010). However, for Mondelez’ cocoa supply, it could be argued they have organised a cartel themselves (Cocoa life) to not only protect the suppliers but also themselves due to self-policing and organisation of the programme, moving away from the third-party owned Fairtrade agreement.
Customers carry a large amount of power concerning the demand for Mondelez’ products. The first reason for this is the buyer’s price sensitivity, Goldsmith and Newell (1997) describe this as how the consumer feels about the price of an offering. Grant (2010) comments that this is dependant on a selection of factors; the less differentiated the products are, the more likely the buyer is likely to switch. Often customers state that ‘all sweets are similar’, showing the perceived and potentially dangerous view that substituting products is of ease. Also, that when competition between buyers is high, customers are looking for price reductions, however the FMCG sector generally has low margins (KPMG, 2014), so price reduction, whist aiming to maintain such high quality and customer satisfaction is a difficult balancing act. Furthermore, the size and concentration of buyers compared to suppliers is high, a Mintel report (2014) found that nearly one in six people eat chocolate once a day. Buyers are also well informed about this market, and therefore the better they are at bargaining, hence gaining a stronger power.
With respect to the competition between established rivals, Mondelez competes fiercely in the confectionary market, while also wider within the FMCG market. The concentration is high, in an oligopoly format this form of competition tends to create a balanced price market for goods. One-way Mondelez have established competitive advantage is through building customer brand loyalty over the long term, and by product differentiation such as Belvita Soft Bake.
As previously commented, the competition from substitutes is very high, and substitute products are readily available at a lower price. Grant (2010) implies that the price elasticity should cause customers to buy the cheaper product, however due to strong brand loyalty, values and favoured tastes, shoppers still tend to purchase the more expensive Mondelez products. (Nieburg, 2015)
The threat of new entrants is relatively low due to the high barriers of entry to compete at the top level. Oramon et al (2011) comment that some of the most important barriers to entry are; economies of scale (which Mondelez have through high market share), access to efficient distribution and the high capital requirements of new manufacturing lines.
The preceding analysis of Mondelez’ resources and capabilities and the review of the external environment has enabled the formulation of a strategy that Mondelez should follow. The proposal is that Mondelez should follow a growth strategy based upon horizontal acquisitions of organisations in the HW sector.
Capron (1999) describes a horizontal acquisition as when a company takes a controlling share in a business within the same industry as themselves, for instance when Kraft Foods bought Cadbury in 2010 (BBC, 2010). This strategy is undertaken to increase the size of a business, however, Seth (1990) comments that acquisitions are a controversial issue when it comes to a firm’s performance. A study by Tichy (2001) found that half of acquisitions reduce the value of a firm. It must be noted that Kaplan (2006) comments that accounting results from pre-and-post mergers are uncorrelated and thus it is difficult to measure the actual outcomes.
Mondelez aims to inspire consumers to snack “mindfully” (Mondelez, 2017e), therefore there should be a focus on developing a portfolio of healthy snacks, moving away from the current sugary selection. Coupling this with the current “war on sugar” there is an increasing demand for ‘better’ snacks, and with the global wellness industry now worth $3.7 trillion (Global Wellness Institute, 2017) the time is now right for Mondelez to commit fully to a new HW strategy via acquisition.
The main reason for this strategy is not the short-term financial gain, it is to benefit from the economies of scope associated when acquiring an organisation. Bailey and Friedlander (1982) comment that economies of scope measure the cost advantage of diversified production, this is by sharing assets such as knowledge between different activities. Building on this Bruner (2005) comments that overall, acquisitions do create value from an economic perspective, mainly by transferring the assets. The acquisition of Enjoy Life Foods by Mondelez in 2015 will have provided some HW knowledge, however as this market is growing dramatically (with the health and wellness food industry expected to grow to $1.1 trillion by 2019 (Wade, 2017)), further knowledge is required to become a market leader. Furthering this, Euromonitor (2017) comment how Mondelez’ HW portfolio is weak in areas that are key to deliver growth in developed markets, especially as competition is increasing, for instance, Mars have recently acquired a stake in Kind Snacks (Yu, 2017).
As previously commented, Mondelez are a relatively small business in the FMCG sector overall, and as such they are currently subject to speculation as an acquisition target themselves (Vielma, 2016). It will be beneficial for Mondelez to expand their portfolio, in 2016 Mondelez had a bid rejected for Hershey (Whipp, 2016) and this was perceived as an effort to secure the company against future acquisition. To maintain the company’s ownership, Mondelez should focus on acquiring HW companies that will allow them to ride the health trend and drive profitable growth in this space. The brand portfolio for example is severely lacking ‘Free from’ products (Mondelez, 2017c), this is the most dynamic category in the overall HW industry (Euromonitor, 2017). There is a strong need to develop products in the HW category, and if an opportunity to purchase organisations who are already strong in this area arises then it should be taken. This will save high R and production costs (Donlon, 2017), that would otherwise be incurred. Potential HW companies to consider for acquisition would be those that have characteristics such as; gluten-free, non-GMO and low glycaemic products.
As an alternative, it is possible that Mondelez being acquired could be an appropriate strategy to generate growth. Grant (2010), amongst others comment that it is the acquired firm that benefits the most. Shareholder value normally increases by 20-30% at the time of an announcement (Jenson and Ruback, 1983), so if short-term financial growth is of key strategic importance then this should be considered. However, in the case of Mondelez, it isn’t believed that this should be thought as a valid option due to the potential HW growth via acquisitions, and the recent spin off from Kraft.
The internal development of HW products at Mondelez is another alternative strategy given the innovation resources. Mondelez currently rank 7th in the HW market (Euromonitor, 2017), proving that they are making some progress. There has previously been success in the US for example with Véa, a well-being biscuit brand, and in the UK with Belvita, could an extension of these brands be more beneficial to Mondelez? However, an issue with organic growth is that Mondelez is known for unhealthy sugary products. Although as the parent company for numerous brands, it is still relatively unknown compared to Mars or Nestle, given time the name Mondelez will be well known and connotations will be made regarding healthy eating. If the reputation of a healthy eating brand is linked to unhealthy snacks, then popularity and demand is likely to fall.
So in conclusion, Mondelez are a company displaying many internal strengths including a portfolio of power brands, a huge geographic footprint, and an efficient manufacturing network. After analysing Mondelez’ internal capabilities and resources and the external environment I believe that following a growth strategy by acquiring a number of HW organisations is the best option to pursue. This recommendation is based on the analysis and findings uncovered by undertaking a SWOT analysis, coupled with Porters five forces and the VRIO framework. This recommended strategy needs to be implemented immediately, as although other strategies focusing on the core confectionary market may be more financially motivating in the short-term, given the growth and demand in the HW market, the strategy suggested will benefit Mondelez in the long-term and allow them to achieve their goal of top tier financial performance (Mondelez, 2017a). An alternative is a possible acquisition of Mondelez itself which is the last thing that the management would want.