The background to the present report, is not so unfamiliar, as to have made Heinz a global player experiencing unique problems.
During the late 1990's, Heinz began to experience sluggish growth. This was indicated by declining market share and falling sales. Worse still, the value of Heinz shares dipped. Not surprisingly, shareholders sought a strategy to turn the company's finances around. On 30 April 1998, William R Johnson replaced the exuberant Anthony O'Reilly as Company Chairman. Johnson immediately set about devising such a strategy.
As part of this plan of action, a forensic study of the company structure indicated that its malaise was caused by a combination of exogenous (external) and endogenous (internal) factors.
Exogenous factors included:
Increasing international competition from global giants such as Kellogg's, Jenny Craig, Campbell's Soups, Nabisco and Del Monte; and,
The appreciating US Dollar exchange rate
Endogenous factors included:
Setting higher prices; and,
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1.4 THE MILLENNIUM PROJECT
Under the former leadership of Dr O'Reilly, Heinz sought to improve its profitability by raising its contract prices and reducing its expenditure on advertising. This approach can be likened to the technique of skimming, whereby companies leverage a power brand name entering a new market and set a higher price for it. The ploy is calculated to skim off affluent consumers. But this strategy does not always work. And that is what stakeholders in Heinz soon realised. In the event, the new CEO, William Johnson rebutted this approach. His plan for change, the so-called Millennium Project, consisted of the following elements :
Reducing the international workforce by 2,500 employees (later, by 3,000 - 4,000)
Consolidating the number of plants, closing 25 of 101 worldwide
Reducing the number of non-core activities, such as the Weight Watcher's classroom business
Channelling savings into marketing, advertising and research
Changing the ethos of the company, in an attempt to purge it of a surfeit of 'yes' men
Link salaries and incentives of management to performance6
1.5 THE IMPLEMENTATION OF CHANGE AT HEINZ
The Millennium Project (later revised as Project Excel) incorporated a number of drastic proposals. Many of these involved plant closures in Europe, where staff might have been forgiven for regarding the company's leadership as unsympathetic with the plight of European workers7. Subsequently, Heinz has gained a reputation as a company which makes unilateral decisions. It is also a company which has an appetite for pay disputes, as the recent stand-off between management and shop-floor operatives at Wigan demonstrates8. Notwithstanding, the implementation of its corporate change programs has encountered relatively little resistance, perhaps as a result of the text book manner in which change has been promulgated. In the event, Heinz has carefully built a platform for continuous change.
1.6 THE SUCCESS OF THE MILLENNIUM (AND EXCEL) PROJECTS
Market analysts have adjudged the outcome of the Millennium and Excel projects as a success, when measured against the following indices ;
Streamlined management structure
Rising share value
Continuing dominance of market share
Soaring sales volumes9
More recently, Heinz has confronted other issues. Rising fuel costs and the impact of the global recession have buffeted this business, along with practically every other enterprise operating globally.
The threat of competition from international rivals continues to stalk the company. Such companies wield considerable advertising power, conduct their own market research, and are apt to exploit gaps in new markets. They also invest heavily in food technology; in some instances, directing their efforts at the ethnicity of an emerging market and tailoring their products to suit. To that extent, other global players constitute a threat.
1.7 FURTHER CORPORATE REFORM AT HEINZ
In the early part of 2010, Heinz trotted out a pilot program (Heinz Global Performance System), whose aim is to promulgate further strategic reform across the supply, logistics and production pipeline. At the time, the company ramped up its sales targets, an objective not readily achievable in the context of a stagnant global economy. HGPS is at present restricted to a trial phase at 25 production facilities throughout North America and Europe. At the heart of the HGPS program is a template of standardised improvement across all facets of the organization.
Always on Time
Marked to Standard
1.8 THE SMALL PRINT OF THE HGPS PROGRAM
HGPS is designed to streamline the company's entire value-added process, from research and development to marketing. It is envisaged that this can be achieved through:
Further commitment to research and development
Increased attention to forward supply planning
Diversifying the supplier network
Improving information technology applied to the supply cycle
On the production side, the company intends to:
Maintain quality assurance
Create further labour-saving efficiencies through state-of-the-art production technology; and
Further standardize product design and packaging
Maintain its commitment to core activities
Maintain its commitment to marketing10
1.9 THE AIM OF THE PRESENT REPORT
In the light of the corporate reforms inaugurated under the Millennium, Excel and HGPS projects, it is the purpose of the present report to consider whether Heinz's global trading position can be improved in the current economic environment.
This task calls upon such strategic planning tools as SWOT and PEST analysis to reach its conclusions.
2.0 SWOT ANALYSIS
SWOT analysis is a tool used by strategic planning analysts to determine the viability of an enterprise's overall trading position.
SWOT analysis is largely associated with its progenitor, Albert S Humphrey, who throughout the 1960's and 1970's, assembled marketing intelligence about a large array of organizations on the Fortune 100 Companies List. SWOT is an acronym formed from the initial letters of the constituent elements of this analysis - to wit : the STRENGTHS, WEAKNESSES, OPPORTUNITIES and THREATS that both stimulate and constrict a firm's growth and development. The paradigm is widely used by analysts, though it is far from definitive in its ability to assess a company's standing in the market.
SWOT analysis consists of a series of logical steps which an analyst must take, in order to build up a composite picture or snap-shot of an enterprise as it performs in the market place. The analysis starts with the mission statement of the enterprise - its long-term targets and objectives. The four corners of the SWOT matrix then provide a framework within which the probabilistic outcome of those targets being met, is analysed at length. That outcome must take into account both internal and external factors, as they impinge upon the enterprise's performance in the market place. To clarify matters further, internal factors are those which arise from within the enterprise; they constitute the organization's STRENGTHS and WEAKNESSES. External factors are those which originate outside the enterprise ; they constitute the organization's OPPORTUNITIES and THREATS.11
2.1 THE HEINZ MISSION STATEMENT
The long-term objectives set by the H J Heinz & Co are recurrent. Broadly speaking, they include:
Consolidation of market share in established spheres of interest
Expansion of the company's presence in the emergent markets of North Africa and Asia ; and ,
Development of new power brands, especially those targeted at the emergent markets
2.2 THE HEINZ SWOT MATRIX
Well established power brands
Supply cycle cost savings
State-of-the-art production technology
Substantial research commitment
Ability to change tack quickly
Strongly Incentivised Management Structure
Industrial Relations Issues
Rapid change threatens motivation and morale levels among staff
The need to maintain an overarching global management structure
Consolidation of market share in established markets
Expansion of market share in emergent regions of North Africa and Asia
Development of new power brands, especially those targeted at the emergent markets
Acquisition of established domestic brands in emergent markets
Escalating global energy cost
Increasing competition from major global players
Rise of generic brands
2.3 CHALLENGES CONFRONTING HEINZ AS INDICATED BY SWOT ANALYSIS
Having addressed the critical internal factors eroding Heinz's competitive performance, the company recognizes that it is confronted by a cluster of external threats to its viability. To a large extent, these external threats are omnipresent. SWOT analysis suggests that they include:
Escalating energy costs
Increasing competition from both domestic and global players
In the event, Heinz must respond to these challenges by:
Concentrating production, procurement and distribution within the key economic zones, so as to reduce the impact of exchange rate volatility
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Investing in alternative energy options
Continuing to pursue cost-savings programs
Tailoring the objectives of research and development to the emergent markets.
2.4 PEST ANALYSIS
Whereas SWOT analysis is largely concerned with the performance of a company or an enterprise within its sphere of influence, PEST analysis provides analysts with a useful tool to understand the market within which that entity operates.
PEST is an acronym formed from the initial letters of the constituent elements of the analysis - to wit, those POLITICAL, ECONOMIC, SOCIAL and TECHNOLOGICAL factors that influence the economic environment in which an entity finds itself. Some analysts regard PEST analysis as an extension or elaboration of the external elements of SWOT analysis - namely, those elements subsumed under the rubrics of OPPORTUNITIES and THREATS! That much is understandable, since both deal with the external factors influencing a company's performance in the market place. In any event, external factors bear heavily on that performance. They can either promote a company's growth or constrict it. They certainly affect investment levels in a company; and they either attract or repel investors trading in company shares.12
2.5 THE MECHANICS OF PEST ANALYSIS
Some analysts find PEST analysis useful when certain factors in the economic environment stand out. These factors might positively or negatively impinge on the viability of a company. Other analysts use PEST analysis as a check-list, in much the same way as an actuary might use a risk assessment to determine a person's or company's exposure to risk. Although the check list is almost inexhaustible, most analysts take a practical view and merely focus on those variables they regard as having a critical bearing on the direction and growth of a company. Then there are those analysts who merely consider a few variables, using them as something of a catalyst to trigger a brainstorming event, in which an array of critical factors is used to evaluate a company's standing in that environment.
Notwithstanding, the following constitute some typical elements subsumed under the main rubrics of PEST analysis. A number of these variables (*), affect the external environment in which Heinz operates in the Middle East and throughout Asia.
Political stability of a region
Availability of skilled staff
Research and development sector of economy
Communication and |Information Technology
Investment in sustainable energy as opposed to fossil fuels
2.6 APPLICATION OF PEST ANALYSIS TO THE STRATEGIC GOALS OF HEINZ
Given that Heinz is targeting the emergent markets of North Africa and Asia, where it has already experienced exponential growth, the company should take the following geo-political concerns into account:
In recent months, the North African region has become something of a political cauldron. Political instability extends from Tunisia to Libya and beyond. In Egypt, the outcome of a popular uprising which resulted in the overthrow of the Mubarak regime has yet to be decided. Nevertheless, Egypt holds out the greatest promise as a consumer market. It has an increasingly well educated, English speaking work force. Though Shari law is the font from which Egyptian law is mostly drawn, very few issues, apart from lifestyle ones, are affected by the strictures of Islam in Egypt. Environmental and employment legislation are less rigorous throughout the Middle East.
While political stability is not an issue in China, political restrictions on the use of communications technology may hamper the production and supply cycle from time to time. A plethora of highly trained, English speaking workers in China, augurs well for an expansion of production facilities there. Throughout the wider South-East Asian region, per capita income is rising, especially in such tiger economies as Thailand and Vietnam. In the former, political instability looms as an issue. On the other hand, the Philippines remains a firm anchor in the region. This populous island nation is experiencing something of an economic resurgence in the fields of information and communications technology. Consumer growth is expected to rise dramatically.13
COMPETITION FROM OTHER GLOBAL PLAYERS DOES NOT PRESENT A SERIOUS OR IMMEDIATE THREAT TO HEINZ'S ASPIRATIONS IN THE EMERGENT MARKETS
2.7 PORTER'S FOUR CORNER5 AND FIVE FORCES MODELS OF STRATEGIC MARKET ANALYSIS
Apart from SWOT AND PEST analysis, some researchers prefer a less structured approach to the task of evaluating a company's outlook in the market. Porter's Four Corners model is of some assistance in this respect. It is a predictive tool which is designed to expose a competitor's strategic course of action. This approach focuses on the analyst's ability to understand the underlying motivation behind a company's behaviour, in the light of those goals which it has set itself.14
By contrast, Porter's Five Forces model is more attuned to those factors which emerge externally ; namely, those external forces which bear upon a firm's capacity to compete in the market place. Suffice to say, that three of these forces are represented by the threat of substitute products, as they originate from either new or veteran players in the industry. But the analysis also takes into account, the bargaining power of suppliers, together with the bargaining power of customers.15
The Five Forces model is of particular relevance to the findings of this report.
2.8 THE MAJOR EXTERNAL THREAT : THE RISE OF THE GENERIC BRANDS
The threat posed by the proliferation of generic brands is calculated to weaken Heinz's overall trading position. It is no less of a threat to its rivals, too. The generic brands are substitute products, which find their way onto the shelves of the large multiples and bear the imprimatur of these companies. Here in the United Kingdom, that threat is palpable, as leviathans such as Tesco and Sainsbury's, through astute product placement, are able to promote their own symbol brands to the detriment of their suppliers. These companies operate from behind the protective walls of an oligopoly. Their presence distorts the market as their purchasing power bourgeons. Worse still, oligopolies tend to both anticipate and mimic one another's behaviour.
There can be little doubt that most consumers will avail of generic brands, at some time or other. Nevertheless, certain generic brands experience difficulty developing product loyalty, especially when those products vie for tastes and preferences. For all that, generic products are designed to behave like all other substitute products. They exhibit cross elasticity of demand. In other words, as Tesco sharpens the shelf price of its own brand ketchup, it is reasonable to assume that the demand for Heinz (Secret Ingredient) Ketchup will fall within. If Sainsbury's mimics this behaviour (which is to be expected), then sales of Heinz tomato ketchup will slide in its stores, too !16
2.9 THE REPORT'S RECOMMENDATIONS
(I) THE BACKGROUND TO THE REPORT:
H J Heinz & Co is one of the world's leading manufacturers of grocery products. The company operates on a global scale and harbours global ambitions. Its long run objectives include:
Consolidation of market share in established markets
An expanded presence in the emergent markets
For all that, Heinz is also a company confronted by global issues.
Increasing international competition from other grocery giants such as Kellogg's, Jenny Craig and Campbell's Soups, has highlighted the need for deep structural change. This priority asserted itself from the late 1990's, as Heinz began to lose market share and its sales turnover tumbled. In the event, emboldened by a new leadership, the company set about implementing corporate change. At present, Heinz continues to build on the successful outcome of the Millennium, Excel and HGPS plans for corporate reform. That reform has ensured the viability of the company. Restructuring has involved radical decision-making, bearing down heavily on excess capacity, labour costs and overheads. Heinz remains committed to the tenets of these programs.
This report concurs with this approach.
(ii) THE OUTLOOK FOR H J HEINZ & CO
The present report relies upon the conventional marketing tools of SWOT and PEST analysis to determine the company's outlook.
These analyses reveal that Heinz largely trades on its reputation and the momentum of its huge power brands. Notwithstanding, Heinz continues to be stalked by its international competitors ; they wield considerable advertising clout and are apt to exploit gaps in new markets. But Heinz is more than a match for its rivals, as it has benefitted from its leaner corporate structure. A company's ability to respond to change is an indicator of its propensity to meet challenges, especially those which arise from global competition. Accordingly, it would appear that Heinz is well positioned to meet these challenges, as it is a company whose leadership is geared to change !
However, using Porter's Five Forces model, a far more sinister threat to the company's viability is revealed. It, too, is a threat which originates externally. It is the threat posed by the rise of the generic brands - those substitute products cleverly marketed by powerful groups of oligopolies practically everywhere. To combat this threat, Heinz must continue to invest heavily in advertising which communicates the message that its products are readily differentiated from those of its competitors.
Given that Heinz intends to enlarge its presence in the emergent markets of North Africa and Asia, it would be advisable for the company to suspend further investment in these regions, until political stability is restored.
In the interim, Heinz must capitalize on its ability to compete at a relatively low cost. It also benefits from huge economies of scale. The savings generated from the reform programs, should be channelled into further investment in food technology. Much of this research should be targeted toward the increasingly sophisticated consumerism of the emergent markets.
On balance, Heinz is poised to achieve its global objectives.
Lapse, Richard and Chrystal, Alec, Economics, Oxford University Press, 11th Edition, 2007, p 641.
Ibid, pp 9-10
Hiatt, Jeff, The definition and history of change management: Change Management Learning Centre, at www.change-management.com
Albert's, Robert, The Good Provider: H.J. Heinz and his 57 Varieties, Boston Houghton, Lindsey, Miffing Co, 1973, passim, ISBN: 0-395-17125-1
Koehn, Nancy F., Henry Heinz and Brand Creation in the Late Nineteenth Century, the Business History Review, Vole 73. (autumn 1999) pp 349-393
5. Heinz: www.heinz.com/heinz-global
11. Katter, John, Schlesinger, Leonard, Choosing Strategies for Change, Harvard Business Review, 1991, passim
Katter, John, Holier, Rat Geber, Our Iceberg is Melting, St. Martins Press, 2006
Kotter, John, CBS Interactive Business Network: John Kotter on Leadership Management Change: An Interview
13. The Times, various Eds
14. Competitive Analysis Training, Society of Competitive Intelligence Professionals
Michael E. Porter, the Five Competitive Forces that Shape Strategy, Harvard Business Review, January, 2008, p 86-104
15. Michael E. Porter, the Five Competitive Forces that Shape Strategy, Harvard Business Review, January 2008, p. 86-104
16. Lipsey, Richard and Chrystal, Alec, loc cit, p. 74-5