Research Undertaken On Kellogg Company- Click for free Solution

Question: Describe about A research is undertaken on Kellogg Company ? Answer: Introduction A research is undertaken on Kellogg Company and the current and future potential of the strategies being pursued by it is studied. The methodology in the research analysis involves five main approaches (Kuada). First, a financial analysis is made on the financial reports of the firm. This analysis is made by comparing it with the performance of the previous year as well as through comparison with its immediate competitor- General Mills Inc.(Kieso, Weygandt and Warfield). Second, an external analysis is made on the firm using the PESTLE analysis and Porters five forces model(Weil and Francis). Third, the internal analysis of the firm is made through a value-chain analysis, resource-based analysis and SWOT analysis. Fourth, the strategies unique to Kellogg company are analyzed and recommendations given regarding future strategies that the management should take (Jiambalvo). Finally, the research is concluded with alternatives of specific strategic actions from the study undertaken History Kelloggs was started by the Kellogg brothers in 1906. It became the worlds leading manufacturer in cereal breakfast. It has manufacturing plants in Asia, UK, Australia, Canada and Latin America. Their wide cereal ranges of products include Kelloggs Corn Flakes, Special K, Rice Krispies, Fruit nFibre and Nutri-Grain cereal bars. Financial Analysis to assess a companys health Financial ratios show comparisons between specific information from the income statement and balance sheet of the company. Comparing the financial performance of Kellogg to the previous year helps to identify problems in the firm which helps management to take strategic decisions. The percentage change is calculated by finding the difference between the current year and the previous year and dividing it by the previous year (Tracy). Financial Analysis Over Time Table 1 Financial Analysis over Time Kellogg Co Current Year 2015 (In $) Prior Year 2014 (In $) % Change Income Statement Sales 13.53B 14.58B -7.23 Gross Profit 4.68B 5.06B -7.5 Selling, General and Admin Expense 3.09B 1.02B 202.9 Net Income 614M 632M -2.8 Balance Sheet Cash 251M 443M -43.3 Inventory 1.25B 1.28B -2.43 Other Current Assets 391M 342M 14.38 Total Assets 15.27B 15.15B 0.79 Current Liabilities 5.74B 4.36B 31.65 Long-term Debt 5.29B 5.94B -10.9 Total Liabilities 13.13B 12.3B 6.75 Retained Earnings 6.6B 6.69B -1.35 Shareholders Equity 2.14B 2.85B -24.9 Liquidity Ratios Current Ratio 0.56 0.77 Quick Ratio 0.35 0.47 Cash Ratio 4% 10% Profitability Ratios Gross Margin 0.35 0.35 Operating Margin 0.08 0.07 Net Profit Margin 0.06 0.06 ROE% 24.97 19.96 ROA% 4.04 4.13 EPS 1.74 1.76 Dividend per share 1.98 1.90 Source: Amigobulls(Amigiobulls) From Table 1, we analyze the financial performance of Kellogg by comparing the present year with its previous year performance In the income statement, the sales have decreased by 7.23% as competitors are capturing consumers of Kellogg. The selling, general and administrative expenses have doubled due to higher salary and high advertising expenses. Kellogg has to improve its sales and decrease costs, though the net income shows only a marginal decrease of 2.8% (Ireland, Hoskisson and Hitt). In the balance sheet, cash at hand has decreased significantly by 43.3% while inventory change is mild. However the total assets have not changed much. The current liabilities have also increased significantly while shareholders' equity has declined. The total liability has increased slightly while retaiing earnings have declined marginally(Gibson). This shows that liabilities are increasing and assets are decreasing when compared to the previous year in Kellogg The quick ratio and the current ratio below 1 shows that the ability of the firm to meet its short term obligations is decreasing, which does not speak well of the profitability of the business(Vandyck). The gross profit margin and the net profit margin are the same which show that there is no growth in the company and management inefficiency. The ROE has increased over time showing that the market value of the equity share has improved showing good performance of equity capital (Beccalli and Poli) Return on assets which show the efficiency and profitability of the business has marginally decreased. This tells that the assets available for generating income have come down to show the efficiency of management has also come down marginally(Palmer). The Earnings per share (EPS) which helps to assess the profits available per share is also marginally down and dividend per share is also down(Murthy and Gurusamy). Financial Health in comparison with competitor Table 2 Financial health of Kellogg in comparison with its closest competitor- General Mills Inc. (GIS) 2015 Case Firm Kellogg (in $) % Closest Competitor(s) GIS (in $) % Income Statement Sales 13.53B 100% 17.63B 100% Gross Profit 4.68B 34.58 5.95B 33.74 Selling, General and Administrative Expenses 3.59B 26.53 3.87B 21.95 Net Income 614M 4.53 1.53B 8.67 Balance Sheet Cash 251M 1.64 334.2M 1.52 Receivables 1.34B 8.77 1.39B 6.32 Inventory 1.25B 8.19 1.54B 7.01 Total Current Assets 3.24B 21.21 3.79B 17.25 Total Assets 15.27B 100 21.96B 100 Total Current Liabilities 5.74B 43.71 4.89B 29.52 Total Liabilities 13.13B 100 16.57B 100 Retained Earnings 6.6B 308 11.99B 222 Shareholders Equity 2.14B 100 5.39B 100 Source: Morning Star(MorningStar) The income statement compared to sales, shows that GIS has a bigger turnover in sales. The gross profits are almost the same, but the net income is double that of Kellogg as its expenses are less than that of Kellogg (Nasdaq). The Balance Sheet shows that GIS has a high asset figure, though its current assets and receivables are lower than Kellogg. The current liabilities of GIS are almost half of Kellogg. This shows that Kellogg is underperforming due to consumers switching brands and purchasing from its competitors. Table 3 Financial Ratios for Case firm and closest competitor for 2015 Ratio Case Firm Kellogg Co Closest Competitor(s) GIS Current Ratio 0.56 0.81 Quick Ratio 0.35 0.52 Debt-to-equity Ratio 6.17 1.44 Debt-to-total Assets Ratio 50.83 38.11 Inventory Turnover(TTM) 6.88 7.09 Total Asset Turnover 0.89 0.78 Gross Profit Margin 0.35 0.34 Net Profit Margin 0.45 0.50 Return on Assets 4.02 8.42 Return on Equity 28.85 34.88 Source: Market Watch (MarketWatch) On analysis of the ratios the profitability ratios (current and quick ratios) show better performance though both are below the required level of 1. Both firms are not able to meet financial obligations, though GIS shows better performance than Kellogg. The debt to equity is better in GIS, while debt to assets show poor performance as debts surpass assets in both firms. The gross profit and net profit margin are on the same footing while the return on equity is good in both firms. The return on assets is marginally better in GIS when compared to Kellogg. External Analysis of Kellogg The external analysis of Kellogg is studied through a general study of the environment through the PESTLE analysis and Porters Five Forces Strategies to look into the industry dynamics. General environment Kellogg Company sells its products in 180 countries. As a global food company, its main objective is to nourish families with breakfast foods, snacks and frozen meals through its array of taste preference and dietary needs(Kellogg). PESTLE Analysis The PESTEL analysis helps to identify macro-environmental forces that affect the business such as Political, Economic, Social, Technological, Legal and environmental factors to identify key factors (Baxter). Political: The U S have drawn new reforms for obese children with focus on cereal products intake(Helpisch). Economical The financial downturn has deteriorated the financial supply in the hands of the people thereby affecting the food market. The increasing unemployment rate, decreasing GDP, increasing inflation rate and low rate of the dollar has decreased sales while increasing competition. Social: With importance given to health and nutrition, intake of cereal foods is on the increase. The obesity factor -among children and adults has also improved, the demand for light food.. Technological: Increasing costs for RD as well as advertisement has decreased the profits made by firms. Recycled packaging are more in demand with environment-friendly consumers. Legal: The American Health Association has increased the number of health claims among the American citizens. Price war due to globalization (need for standardized food) and competition has its impact on the industry. Environmental: Recyclable packages and ecological packagings have increased costs. Demand has increased with demand for natural and fiber foods(Taylor)(Johnson) Porters Five Forces Michael E Porter developed a strategic approach to assess various competitive forces that affects a firm and provided a model to formulate strategies that can raise barrier forces and take advantage of these forces. He identifies these forces as (Michael): Competition: The industry has many large competitors such as General Mills Inc., Kraft. Price competition is high and intense with each firm trying to capture the market Substitution: The cereal industry has many substitutes due to private labels which are available at cheaper rates. Threat of Entry Barriers to entry is high as it involves high capital expenditure; access to distribution channels is tough and brand loyalty is high The bargaining power of buyers: The cereal industry has a low buying power and does not influence the buying market The bargaining power of suppliers: With private labels, products are available at cheaper rates from suppliers who are agricultural producers of cereals(Porter and Norton, Financial Accounting: The Impact on Decision Makers) . Internal Analysis of Kellogg1. The primary goal of managers is to identify the strength and weakness of the firm along with the external opportunities and threats. The internal analysis of Kelloggs is done by Value-chain analysis Resource-based view on the firm SWOT Analysis Fujii) Value Chain Analysis: This analysis helps to understand the cost position and identify multiple means to facilitate implementation of a chosen business-level strategy (Porter and Norton, Using Financial Accounting Information: The Alternative to Debits and Credits)(Tybout and Calder, Kellogg on Marketing). Two activities involved are: Primary Activities Inbound Logistics The quality of the product is maintained by having good suppliers who also deal with the manufacturing, packaging and transport of services. Operations As Kellogg has a global market, it has an office in each country in which it function which can transform its raw materials into finished products ready for sale Outbound Logistics The end product has to reach the consumer, and this is done through a multi-layer channel system. Marketing Sales Kellogg has achieved brand loyalty with consumers identifying its products Steps to increase brand awareness are also taken Service: Providing consumer service through good products according to customers taste and environment friendly packages are services done for the consumer Support Activities Firm Infrastructure: Kellogg has satisfied its customers by providing various services that suits it customers and the organization. Services offered are quality product that cater to taste and preference of consumers, quality control measures, good internal control, etc. Human Resource Management Performance measures are made to develop healthy competition and bring in better staff performance Merit rewards are awarded to motivate employees Kellogg Business Leaders Model has helped in the quality of staff performance and progress of the company Kelloggs recruits staff on an international basis giving preference to staff quality Training for individual career performance helps in better attitude of the staff Technology Development With consumers becoming more health conscious, RD expenditure on nutrition and health is high Special cereals for men is the new product developed Procurement As competition is high with price-wars, costs of raw-material purchase has to be economical Resource-based Analysis The resources of Kellogg Company are tangible, intangible and capabilities. Tangible resources are resources that are clearly visible. Kellogg has its outlets at strategic location and specifically trained employees as its strength, though workers are available at low salaries to competitors Intangible resources are resources that are not visible, but gained through its good reputation, high brand image, quality products and value of the company. It has built a sustainable competitive advantage which would be difficult to replicate. Capabilities such as innovative capabilities and marketing capabilities help to transform enterprises to achieve company performances. SWOT Analysis The SWOT Analysis is a simple planning tool. If used correctly, the managers can develop a smart marketing plan that serves as a catalyst for proper planning. However, it is criticized because it does not give serious consideration to the issues and is considered as a sterile academic exercise that classifies information and data(Ferrell and Hartline) . Strength It is a leading fiber brand in the market It follows a high corporate social responsibility and environment awareness It has computerized warehousing(Baran and Galka) Weakness Awareness about the brand is weakening Advertising investment is high as it has limited scale Inner health is the new concept that consumers prefer to fiber food Opportunities People are interested in healthy food There is a boom in the baby market as well as in consumers over the age of 55 Internet advertising Threats It faces competition from General Mills and Kraft Consumers prefer the taste with nutrition Private label growth(Dranove and Marciano) Strategies of Kellogg and strategies of competitors Competing Firms in the Food Processing Industry Some of the competitors of Kellogg are General Mills Inc. (GIS), Cascadian Farms, Kraft and store brand cereals. However, its biggest competitor is General Mills. Health consciousness, population growth rate, price of raw materials and grains, per capita disposable income Kellogg is a leading manufacturer of ready to eat cereal as well as convenience goods. It holds 34.2% market in cereal foods in the US. It has posted consistent net profit and sales revenue . Kraft Foods Inc. is a large beverage and food company in North America. It is also the second largest in the world. After acquiring Cadbury in 2010, Kraft has strong revenue and operating profit earnings in all snack segments. General Mills are global food manufacturers selling consumer foods through retail stores. They supply to baking industries and food services Kellogg: Firm under Study Strategic Intent The mission statement is to drive sustainable growth through the power of our people and brands by better serving the needs of our consumers, customers and communities. Its vision is to be the food company of choice. Kellogg Company is a long-time industry leader in marketing and innovation. The value statement is we build great brands and make the world a little happier by bringing our best to you It is the global leader in its production of cereals, crackers, cookies, toaster pastries, fruit-flavored snacks, veggie foods and frozen waffles. Its brand includes KelloggsKeebler, Eggo, Pop-Tarts, Mini-Wheats, Nutri-Grain, Rice Krispies, Famous Amos, Austin, Sandies, Murray, Bear, Gardenburger, Monringstar Farms and Stretch Island (Johnson). Strategic Organization The board of directors has assistance from three committees: the Audit Committee, Compensation Committee and the Nominating Committee. Kellogg has a multi-divisional organization structure. It gives autonomy to its local units to function within the overall values and goals of the headquarters (Gupta, Gollakota and Srinivasan). Corporate Strategies To have sustainable growth by introducing a nutritious product, improving brand name and packaging To grow its cereal market and expand in snacks To have realistic targets(Hitt, Ireland and Hoskisson). Marketing Strategies With breakfast cereal sales sliding in the US, cereal makers are using various strategies to reclaim their business. Kellogg, which is the worlds largest cereal producer is using new tactics on its old brand such as Disney Frozen-themed cereal and Special K Protein. New product lines are also introduced that includes granola and muesli cereals. General Mills, makers of iconic cereals like Lucky Charms, Wheaties and Cheerios is taking steps to eliminate artificial color and flavor from 90% of its cereals by 2016. Products like Reeses Puffs and Cocoa Puffs and Trix will be the first to be introduced with artificial ingredients by the end of this year- 2016. Kraft also excludes preservatives and synthetic color from its cheese and macaroni(DiPierro). Competitive Advantage No threat of new entrants: As a well-established brand with cereal as an established product, Kellogg does not face threat from new entrants Employees: Kellogg Company has its employees as its competitive advantage. Mr.Kellogg realized that employees were the key to his success and hence provided the right working environment for his employees. Success came with successful employees. Farm Power: The customers of Kelloggs are wholesalers as they decide if they are going to sell Kelloggs cereals in their stores. However, the power of Kelloggs is their contact with farmers directly which provides raw-materials from the farm to the firm (Johnson). Website: Kellogg Company manages its website well to keep a watch over the external environement. 6Specific Strategic Actions Kellogg owes its success to knowledge management, which involves identifying consumer preference and taste; translating these preferences into products; linking these products to its brand equity, reinvigorating its brand equity and maintains the interest of children. Dont Change Anything Foundational functional resources and capabilities: This is founded on its link to agricultural growers and mills. By maintaining this contact, it can get its raw material (cereals) at low rates that will bring down costs. Branded servicing and operations will help to keep its competitors away. The focus can also be given to acquire organic cereals to cater to health conscious consumers and to keep up with competitors(MccGuigan, Moyer and Harris). Creative marketing and innovative R D have helped Kellogg to keep up its standard of new products that customers taste and prefer. Kellogg can improve its advertising campaigns through quality benchmarks- to bring familiarity to its product to its customers. It can also rely on cartoon spokespersons in its advertising campaign to capture demand for its brand(Iacobucci) Strategies that should be improvise upon Human resources: Maintaining highly committed employees through training and development(Henry) Supply Chain: Acquiring diverse and the very best in the supplier base RD: By following the principle of pioneer and not follower, it can lead the market Finance: High growth with high returns should be its objective Social Betterment: Focus on stockholder value, customer relations and work for societal betterment Customers: Wal-Mart is one of the top five customers of Kellogg, accounting for one-fourth of its revenue. Kellogg has to strive to get new customers and also look into providing new products to its aging customers (Tybout and Calkins, Kelloggs on Branding: The Marketing Faculty of The Kellogg School of Management). Changes Needed Kellogg has acquired a name for monopolizing the market and overpricing. By restructuring its price strategy through reduced costs, it can capture a wider market. Strategic recommendations for Kellogg To increase advertisement and attract Generation Z who have more customer loyalty To expand its snack catalogue to all age groups, especially targeting men who are becoming more health conscious Conclusion The company analysis on Kellogg has been undertaken through this research study through financial analysis, internal and external analysis through individual analysis by comparison with its competitors and with previous year performance. To an investor, the stock cannot be recommended for investment currently, though it can be kept in the watch list. 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