Monday, September 20, 2010

CEREAL PARTNER'S STRATEGIC MOVES-- CASE STUDY

CEREAL PARTNSER’S STRATEGIC MOVES
The case we're going to look at is an important strategic battle between two of the world's largest food companies. On one side, we have the Swiss company Nestle, which was exploring how to enter the market for prepared breakfast cereals in recent years. On the other side, we have the American company Kelloggs, which has dominates the market.Kelloggs launched its first breakfast cereals many years ago and went on to establish itself as the leading branded breakfast cereal company worldwide.
Before analysing the market from prescriptive and emergent perspectives, it makes sense to begin by setting out the basic facts. That's the next two sections of this videocase - how Nestle chose to attack the breakfast cereal market. The sections that come afterwards then explore the strategic reasoning behind the facts.
To get the most out of the case, you may like to pause after you've seen the data sections and think about how you would develop a strategy to attack Kelloggs. You may want to make a note of some of the basic data and use various strategy frameworks and concepts to explore the strategic implications.
After that, you can then play the sections on the strategic reasoning behind the decisions. They look at strategy from prescriptive and emergent perspectives and apply some of the strategic principles explored in various chapters of the book. Understanding the logic underpinning strategic decision-making should help you to gain higher marks in strategy. And, just as importantly, to make better strategic decisions in the long run.
Kelloggs breakfast cereals began in the USA but they are now a truly international company. They have worldwide ingredient product sourcing and modern factories. They also have experienced marketing and selling subsidiaries in every part of the world with very good contacts with supermarkets and other food chain distributors of their products. They also have a strong brand name, good quality products and a range that is tailored for individual countries.
What this means for a company thinking of challenging Kelloggs is that the competitive advantage of Kelloggs is very substantial indeed and it's going to be tough to make headway against such a company.
For the purposes of our case, we're going to focus on the European part of the world wide breakfast cereal market. And we're starting with the late 1980s when Nestle was examining whether it would enter the market and, if so, how.
Nestle knew that the European market was large with a projected figure of 3 billion dollars for 1990. The United Kingdom within that was the largest part of the European market with sales of 1.4 billion US dollars. This was followed by Germany at 350 million US dollars and France at 250 million dollars.
From a strategy perspective, this data is already significant. The German population is the largest in Europe, yet their consumption of breakfast cereals was below that of the United Kingdom. This suggests that the UK might need to be treated differently from Germany in strategic terms.Not only was the European market large and therefore attractive, it was also growing much faster than other food products.

Breakfast cereals across Europe had an average market growth of around 10 per cent. This compared very favourably with other food markets like chocolate confectionery where the market growth was only around 1 to 2 per cent. For a company with the strategic purpose of growth in sales and profits, such as Nestle, breakfast cereals were much more likely to deliver its growth objectives. In BCG Matrix terms, the breakfast cereal market would probably be classified as a star.
Within the average growth across Europe of 10 per cent, the UK was growing a little more slowly around 7 per cent. This reflected the greater size and maturity of the UK market. This lower growth was then counterbalanced by growth around 14 per cent in Germany, 15 per cent in Spain and as much as 25 per cent in France.
Although much of the European market was still embryonic in strategic lifecycle terms, there were some clear market segments in the early 1990s. There were three main parts to the market - staple products, healthy products and children's products. Although the children's market was the smallest segment, some strategists considered that it had the most potential because children were more likely to try new tastes and be attracted to strong brand concepts.And within each market segment, one company - Kelloggs - was both the market leader and was highly profitable, suggesting that the market was highly attractive.From a strategy perspective, all this raises important questions of how a company tackles the European market. For example, do you treat the UK differently because it is more mature? For example, do you enter the whole of western Europe simultaneously or do you pick off individual countries or groups of countries? Do you target particular market segments or launch products for all segments?
All these considerations made Nestle very interested in breakfast cereals in the late 1980s. The market was large, but clearly still had growth potential and good profitability. The difficulty was that a dominant company, Kelloggs, would be very difficult to attack. In the late 1980s, Nestle had no manufacturing expertise in breakfast cereals, no breakfast product range and no reputation in this product area.
Clearly, one strategic option would be for Nestle to acquire a company making breakfast cereals - possibly even Kelloggs itself. But Kelloggs was a public company so the acquisition price would probably have been high - perhaps well in excess of the profit stream from Kelloggs products after acquisition by Nestle. So Nestle needed to consider other, lower cost strategic options.
So, now we have the strategic opportunity for Nestle in the late 1980s:
" A large, fast-growing market
" Strong branding with good profit margins
" Clear market segments to provide entry opportunities
But there were also some real strategic problems. In essence, Nestle had no strategic resources in the breakfast cereals market. And then the company had a bit of luck. We'll look at this in the next section. In the meantime, you might like to think about Nestle's strategy for entering the European market.
Luck is important in strategy. And in 1989, Nestle had some of it. There was another big branded company making breakfast cereals called General Mills. But GM was operating mainly in the United States of America.
During the 1980s, GM had become increasingly successful against Kelloggs in the USA. The GM market share had risen from a lowly 15 per cent to a high 22 per cent of the market over this period. And it was Kelloggs' share that was taking a beating. How had GM been so successful? By introducing new products, by selling quality products, by developing strong marketing and by delivering good value for money. All classic tools in business strategy.
Importantly, GM in the late 1980s into the early 1990s had a strategic purpose of growing internationally. It had tried to export its American range of products but without major success. And then along came Nestle looking for a way into the breakfast cereals market. In 1989, General Mills and Nestle agreed to combine forces in a new joint venture to launch prepared breakfast cereal products outside the USA. It was a fifty fifty partnership between the two parents to be called Cereal Partners.
The new company had its own staff and headquarters in Switzerland. And it brought the expertise and strategic resources of its two parents. From Nestle, it was agreed that it would use the Nestle brand name, which was much better known worldwide than the General Mills brand.
From Nestle also, it brought its extensive contacts in each country with the powerful supermarket chains like Tesco in the UK and Carrefour in France.
From General Mills, the new joint venture acquired its expertise in manufacturing high speed, quality products. It is not a simple task to pack millions of boxes of breakfast cereals every week and to undertake this at the lowest possible costs. GM also supplied a ready-made range of products that had been successful against Kelloggs in the USA.
Importantly, Cereal Partners agreed its strategic purpose with its parents: it would take 20 per cent of the European breakfast cereal market by the year 2000. What strategies did the new company then adopt for Europe?
Cereal Partners started its European strategy in the UK. In 1990, it acquired the UK breakfast cereal company Shredded Wheat for around 180 million US dollars from a UK company that was keen to withdraw from the market. This gave Cereal Partners an immediate presence in Europe's largest market. It also gave the company two large factories and a well-established brand.
In strategy, it's not only what moves you make in the market that are important but how your competitor reacts to your moves. In the case of Shredded Wheat, Kelloggs had known about the Shredded Wheat product for many years and therefore made no specific competitive response to its acquisition by Cereal Partners.
Over the next five years, Cereal Partners went on to launch a series of products into the UK market. It began in May 1991 with Golden Grahams. This was a product that had been successful for General Mills in the USA and CP hoped that it would be equally successful in Europe.
Kelloggs immediately responded with a relaunch of its own product Golden Crackles. This had a similar name but was not the same product as the Cereal Partners product. It had some success in blunting the CP launch but in the long term the Golden Grahams product is still around, rather than Golden Crackles.
Cereal Partners then targeted the UK children's market with the top-selling children's product from the USA - General Mill's Lucky Charms. It launched this product into the UK in early 1992. The product was a combination of oat grain cereal and crispy marshmallow in primary colours, specially designed to appeal to young children with a sweet tooth.
Kelloggs immediately responded with its own product - a relaunch of Kelloggs Ricicles - also with marshmallow pieces. In spite of initial interest, Lucky Charms was not successful for CP and was withdrawn after about one year. But its lack of success had nothing to do with Kelloggs' perfectly proper competitive response. Lucky Charms was simply not acceptable to British tastes and customer demand.
There's an important strategic lesson here. Although much of strategy theory focuses on competitive advantage, customers also matter. It is the customer that buys the product at the end of the day, not the competitor [Ref chapter 5]. Thus, products like Lucky Charms have to appeal to customers as well as beat competitors. And in this case Cereal Partners was not successful.
In May 1992, CP then introduced a totally new product for the UK market place - Clusters. This particular product was not a copy of any product from the GM portfolio in the USA. Kelloggs struggled to find a competitive response. Initially, it responded with a revamped Kelloggs Golden Oatmeal Crisp product. This was then followed by a similar product to Clusters, Kelloggs Nut Feast.
Unfortunately for Kelloggs, the Nut Feast product was good but offered no real reason to switch for those customers buying Clusters - it had no competitive advantage in strategic terms. Thus, the Nut Feast product was quietly withdrawn after several years.
In spite of failure with Lucky Charms, Cereal Partners continued to seek products that would appeal to the children's segment of the breakfast cereal market. For example, the company considered the competitive resources of one of its parents - the Nestle company. Nestle owned the well-known, branded children's chocolate drink - Nesquik.
Cereal Partners applied the concept to a chocolate flavoured breakfast cereal. Nesquik was launched in 1995 and targeted at children. The product invited a response from Kelloggs in terms of its existing chocolate flavoured cereal and this was duly forthcoming - a relaunch of Kelloggs Coco Pops.
From the perspective of strategic theory, the launch of Nesquik cereal is important. This particular well-established brand could never be entirely matched by Kelloggs, which did not possess a chocolate drink brand. This meant that the Nesquik product had a competitive advantage over Kelloggs. Cereal Partners borrowed this resource-based strength from one of its parents and used it to launch a new product, which had significant value added. You should make sure that you understand the concepts of competitive resources and value added. And you can read more about this in the book if you are uncertain.
Although we've so far concentrated on the UK, Cereal Partners was also developing its strategy in other European countries. It did this on a phased basis:
France, Spain and Portugal were entered in 1991. Italy followed in 1992. Then came Germany in 1993 and Benelux in 1995. Other western European countries then followed with Russia and central Europe by year 2000. Importantly, it was only in the UK that Cereal Partners acquired a company. For the rest of Europe, it developed new breakfast cereals - in some cases, the same as in the UK.
An important part of the Cereal Partners strategy was to vary the product range launched in each country. There were two reasons for this. First, to meet differences in national demand for breakfast cereals - for example, children's products in one country, staple products in another. Second, to keep Kelloggs guessing as to which products and which segments would be under competitive attack during the launch. Cereal Partners never launched Shredded Wheat outside the UK and it never launched a corn flake product in Europe.
From a strategy perspective, you might like to think about why CP didn't launch corn flakes in Europe. And why, nevertheless, it went on to launch corn flakes in some Asian markets. There are useful strategic principles here that are answered in a later section of this case.
Turning to the future from a strategy perspective, there are some important considerations that apply now. They are particularly useful when considering emergent strategies.
The breakfast cereal market is changing with a demand for healthy eating from some customers. This means developing products that have lower sugar, lower fat, more fruit and perhaps products with a healthy image like yogurt.
And there is also a growing demand for products that don't require sitting down and having a meal at breakfast time. As people's lives become busier and the traditional concept of a family breakfast diminishes, some people don't want to take time for a sit-down breakfast meal. Both Kelloggs and Cereal Partners have responded to these trend by launching new breakfast bars. And there are probably also other products that they could launch into this area. This is a new approach and a new phase for breakfast cereal strategy. It probably requires experimenting with new products to find those that have the most demand. So, let's summarise the strategic issues at the end of this section on the battle for the breakfast cereal market. Each of them can be explored using chapters from the book. The relevant chapters are shown on the screen against each issue.
Issue 1 - How would you analyse the strategic environment for breakfast cereals?
Issue 2 - From the perspective of Cereal Partners, what strategic resources did it bring to the market place? What are its competitive advantages? And where was the value added?
Issue 3 - What was Cereal Partner's strategic purpose? What were its vision, mission and objectives and over what timescale?
Issue 4 - What strategic options were available to Cereal Partners to achieve its objectives? From a prescriptive and an emergent perspective? You might want to look at prescriptive options And also emergent options. And for emergent options, you might like to explore particularly the Learning-based strategic route forward.
Issue 5 - What choice did Cereal Partners make from a prescriptive perspective? And what is the strategic reasoning behind such a choice?
Issue 6 - And, finally, what was the evidence of an emergent strategic process here? What experimentation and dynamic happened in the market place?

3 comments:

Unknown said...

very interesting case

Unknown said...

how to analyse it?

Unknown said...

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