Kraft foods, the giant UK based foods group and makers of the iconic Kraft brand of cheeses recently finalised a takeover of Cadbury, the well known UK based producer of chocolates, after month of negotiations, tough posturing and parleys (Wiggins & Saigol, 2010). Shareholders representing practically 75% of Cadbury owners agreed to support the takeover, despite fervent pleas by the great-great granddaughter of the company's founder, after Kraft increased its cash and shares bid to 850 Pence per share (Wiggins & Saigol, 2010).
"The furious great-great-granddaughter of Cadbury's founder yesterday said he would spin in his grave if the iconic firm was gobbled up by US cheese giant Kraft. Felicity Loudon begged shareholders to reject the 850p a share takeover offer and urged them to keep the 186-year-old company British in memory of her ancestor John Cadbury"
The takeover makes Kraft the second biggest global manufacturer of chocolates and confectionery, right after Nestle, S.A (Wiggins & Saigol, 2010).
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Whilst the Cadbury acquisition has already helped Kraft in improving its sales significantly, the company appears to be in difficulty with the promises it had made during the pre-acquisition days (Wearden, 2010). The US Company has in the first place gone back on its commitment to keep the promises it made to keep the Cadbury's Somerdale plant in Bristol open (Wearden, 2010). The company's decisions to radically revamp the pension scheme of Cadbury employees has raised disquiet and led to its portrayal in the British media as a heartless and pillaging organisation (Wearden, 2010). It is evident that whilst the merger will help Kraft and Cadbury to achieve significant market, operational and financial synergies, the post merger route is hardly likely to be free of difficult challenges (Wearden, 2010).
A study of management history reveals that whilst mergers and acquisitions are characteristic to modern day business, they are also essentially difficult and complex exercises. A significant proportion of such exercises fail to achieve their desired outcomes (Schneider & Barsoux, 2003). Whilst post merger performances of company's often suffer, some mergers end in absolute failures and in reversals to the original status quo. The Chrysler Daimler merger stands out as a merger that failed despite the tremendous synergies that were possible between the two individually brilliant and successful auto makers (Keegan, 2005). Cadbury in fact has in recent years seen its merger with mineral water manufacturer Schweppes coming apart, leaving the company to revert once more to its original status of a manufacture of chocolates and confectionary.
This short essay aims to examine the various challenges and difficulties that can arise in the progression of the Kraft Cadbury merger, with specific reference to cultural, organisational and operational issues. Scott The concluding section provides recommendations that should be of assistance in overcoming the many likely challenges that are expected to arise for Kraft in the coming days.
2. Objectives of the Cadbury Kraft Merger
The Kraft acquisition of Cadbury came with a tag of USD 19 billion (Silverman, 2010). Whilst the acquisition price is considered to be high by Warren Buffet, one of the most well regarded financial investment minds of contemporary times, the organisational management of Kraft, headed by Chief Executive Irene Rosenfeld feels that the price well justifies the benefits that Kraft is likely to obtain from the Cadbury buyout (Silverman, 2010). Analysts state that Kraft is likely to achieve a number of operational and financial synergies that will enable the organisation to improve profitability and help in significantly maximising share holder wealth (Dorfman & Jones, 2010).
Kraft, expert's state, will have recourse to several operational levers for driving efficiencies and improvements (Dorfman & Jones, 2010). The merged entity should be able to release significant funds from staff costs, both in the operational and administrative functions (Dorfman & Jones, 2010). Whilst administrative functions, especially in areas like marketing, finance, HR and administration lend themselves to significant opportunities for generation of costs savings, cost efficiencies should also be possible in areas like Information Technology and Research and Development facilities (Silverman, 2010). Apart from achieving synergies in areas of personnel, IT and R&D, Kraft should also be able to generate distribution synergies, achieve significant efficiencies in supply chain management, and leverage its marketing functions (Silverman, 2010). Such traditional approaches to enhancement of profits can definitely generate a number of short time benefits as well (Scott, 2010). A well organised and efficiently managed organisation like Kraft is more than likely to realise most of these benefits, thus the price of USD 19 billion (Scott, 2010). (Dorfman & Jones, 2010)
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Apart from achieving operational synergies and benefits, Kraft will take possession of Cadbury's brand portfolio, which is well established and comes with broad sub brands (Wiggins & Saigol, 2010). Cadbury has a pre-eminent brand portfolio and will possible be able to strengthen Kraft's brands much more than what the acquiring company is currently developing in its own portfolio (Wiggins & Saigol, 2010). The organisation now has a 14.8% share of the global confectionary market and is just ahead of Mars, which has a market share of 14.6% (Wiggins & Saigol, 2010). More than half of the company's revenues now originate from outside the United States, up from 43% before the acquisition of Cadbury (Wiggins & Saigol, 2010). Again 25% of its sales now originate from developing markets like China, India and Brazil, compared to 20% in the pre Cadbury days (Wiggins & Saigol, 2010). The company's management expects to grow at 5% in the long term, even as CEO Rosenfeld expects growth in EPS to reach 9-11%, as against 7-9% in the pre Cadbury days (Wiggins & Saigol, 2010). She has promised to achieve USD 675 million in annual cost synergies by the end of the third year after the completion of the acquisition (Wiggins & Saigol, 2010).
Despite the senior management's enthusiasm over the acquisition, management and organisational experts feel that the future is likely to be difficult and that Irene Rosenfeld and her team will have to pull out all the stops to make the venture a success.
3. Likely Challenges
The challenges to the success of mergers between two large and individually successful organisations, where there appears to be a good fit in terms of markets, products and brands and significant potential for achievement of different types of synergies, are more likely to come from cultural causes (Galpin & Herndon, 2000). Organisational cultures are by and large unique to individual organisations (Galpin & Herndon, 2000). Whilst organisational cultures are externally represented through various totems and symbols and are manifested in various organisational policies and practices in areas of reporting, remuneration, and internal behaviours of staff, such organisational cultures are essentially defined by key attributes like (a) organisational attitudes towards innovation and risk taking, (b) outcome orientation, (c) people orientation, (d) team orientation (e) aggressiveness and (f) stability (Hitt et al, 2001). Whilst all organisations necessarily have all these features their extent, which is likely to vary in lesser or greater measure, shapes the specific cultures of particular organisations (Hitt et al, 2001). Geertz Hofstede, the well known Swedish behavioural sciences export, states that organisational culture is to a large extent shaped by the national culture of the country of origin of an organisation. Hofstede stresses that the culture of the people of a particular nation is shaped by five specific dimensions, namely individualism v collectivism, masculinity v femininity, long term orientation v short term orientation, uncertainty avoidance and power distance (Hofstede, 2001).
The organisational culture of Kraft is thus likely to be significantly different from that of Cadbury and is likely to be manifested in hundreds of ways in which the companies go about their work (Keegan, 2005). Modern day experts state that differences in organisational culture can threaten the success of company mergers, the results of which can range from under achievement of expected synergies and other desired outcomes to complete breakdown and demergers (Keegan, 2005). The merger of Chrysler Daimler, which took place between two of the most well known automobile companies in the world and ended with plummeting performance, high levels of staff attrition and a legal demerger is often cited as an example of what cultural differences can do to the fate of carefully planned and well constructed mergers (Keegan, 2005).
There is every reason for concern about the extent of differences in the organisational cultures that are likely to be there between Kraft and Cadbury (Dorfman & Jones, 2010). Whilst Cadbury has a strong international presence, its operations in the US market are restricted (Dorfman & Jones, 2010). Although Cadbury products are sold in the United States, they are manufactured by Hershey's and Cadbury managers have little experience of dealing with American executives (Dorfman & Jones, 2010). Kraft likewise has not had any manufacturing presence in the UK prior to its Cadbury acquisition (Dorfman & Jones, 2010).
The cultures of the two organisations may not just be different but may also jibe with each other (Wearden, 2010). Cadbury has historically been associated with a well known and eminent family and enjoys the characteristics of a family brand (Wearden, 2010). The company is known to be absolutely open, honest, and seriously committed to action with complete integrity and the creation of quality products (Wearden, 2010). Kraft is on the other hand guided by a far more dynamic proposition and is associated with a fast paced environment (Wearden, 2010). It gives high priority to results and to factors like decisiveness, team work and innovation (Wearden, 2010). Employees are critical to the success of all commercial organisations, more so in the case of mergers, where a significant portion of the merger fees can be taken to be the purchase price of the employees of the target firm (Wearden, 2010). Unhappy Cadbury managers could in such circumstances prove to be detrimental to the merged companies growth plans and objectives (Wearden, 2010).
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"As a recent SHRM foundation survey focused on M&A employee-related issues pointed out, 63 percent of newly merged brands are unable to sustain financial performance, 62 percent see a loss in productivity, 56 percent experience incompatibility between cultures, and 53 percent lose key talent." (Silverman, 2010, P1)
Professor Chris Bones, currently the dean of Henley Business School and previously a long term Cadbury employee states that the organisational cultures and operating ways of Cadbury and Kraft are so different that there is a far greater likelihood of the merger being a potential disaster rather than a potential success, irrespective of the price paid by Kraft (Wearden, 2010).
Wearden 2010 cites evidence to prove that the overwhelming majority of hostile takeovers failed to deliver the promised outcome and value because of the absence of adequate common culture between the two companies. He argues that Cadbury has a strong record for espousal and serious consideration of social and ethical issues, which is not so with Kraft. The decision to categorise Dairy Milk as a Fairtrade product, he states, goes further than Kraft's support for the Rainforest Alliance. Kraft is listed on a stock exchange in the US where demands for revenues and improvements in margins are far more short term than in the UK. Companies that operate under such constraints find it difficult to accept and substantiate margin rift that comes from sustainability or community investment. Critiques of the deal also point out that Cadbury's revenues have grown more than 50% faster than those of Kraft since 2004. Again whilst Cadbury has increased its share of the global confectionary market consistently since 2004, Kraft has in the same period lost share in 80% of its important categories.
4. Overcoming Organisational and Cultural Differences
An AT Kearney research study reveals that the most significant problem in mergers arises from the imposition of the wishes of the more powerful partner on the less powerful organisation (Weber & Camerer, 2003). In the case of Kraft and Cadbury the acquiring company e.g. Kraft managers would necessarily make most of the strategic and organisational decisions of the merged entity, until and unless a specific decision to the contrary is taken, either by the Kraft management or the shareholders of the company. The cultural clash that arose in the Daimler Chrysler merger also basically stemmed from the obsessive need of Daimler's CEO to impose his will upon the Chrysler senior management and run the merged entity just like Daimler was done in the pre-merger days. Such a cultural imposition is largely done without any careful assessment of the culture that was more likely to be suitable for the new organisation. Whilst such an approach can on occasion lead to successful mergers and quick integration, it can in other circumstances destroy much of the outcomes that were expected to arise from the merger (Keegan, 2005). When two partners, like Cadbury and Kraft are very different in their organisational cultures, a closer evaluation and more careful determination of the culture that will be more suitable for the organisations, as and when they work together can significantly improve performance.
Corporate culture influences organisational performance because it determines (a) the way organisations tackle challenges and issues, (b) the attitude of people to changes, (c) the ways in which people interact with each other, (d) the ways in which organisations interact with their stakeholders and (e) the commitment of organisational people to strategy (Proctor, 2000). A perfect integration comes about when organisations take the best from the cultures of the two premerger entities and construct a holistic new culture (Proctor, 2000).
Reality is however often very different and cultural integration generally occurs with the initial stage of cultural pluralism (Proctor, 2000). Whilst cultural pluralism should be ideally followed by cultural blending, such blending actually fails to work in the majority of cases (Proctor, 2000). What occurs in its place is cultural resistance, which in turn is followed by cultural takeover (Proctor, 2000). The major problem in the Cadbury Kraft merger will arise from people from two different organisational and different cultures being expected to function together, to discuss in a collaborative manner, and to resolve difficult strategic and operative issues. Cultural collision can easily lead to alienation and separation.
The use of the Johari Window, a communication tool established by Joseph Luft and Harry Ingham, can be effectively used to improve communication between employees of Cadbury and Kraft (Schneider & Barsoux, 2003). The Johari Window is based upon two premises, namely that (a) individuals can construct trust between themselves by revealing information about them and (b) they can know about themselves and reconcile to personal issues with the assistance of feedback from other people (Schneider & Barsoux, 2003). The use of the Window, with suitable help from experts can go a long way in increasing the self worth and self esteem of employees.
Conclusion and Recommendations
Modern day management experts state that such problems should ideally be overcome by a very careful assessment of cultural differences of the two organisations in a collaborative spirit by the senior managers of the two organisations, the creation of a detailed and articulated plan for the culture of the new organisation, followed by systematic plans to harmonise elements like systems for rewards and performance measurement that shape culture.
"If handled correctly, potential synergies between the two cultures could outweigh fallout or loss of trust. If handled improperly, we could see the brands face the same obstacles as Sprint/Nextel or AOL/ Time Warner. That's why Kraft will need to focus and align employees to immediate effect with a properly defined, well-managed, and communicated corporate brand." (Silverman, 2010, P1)
Organisations that wish to integrate two dissimilar cultures should take care to ensure that no single partner is specifically advantaged or disadvantaged. Regressive us versus them attitudes should be overcome through the formation of teams with individuals from both organisations. Cultural problems can also be overcome through the use of newsletters, workshops, construction of teams and realistic predictions of merger outcomes. The Kraft Foods management should analyse and detail the existing cultures of the two organisations. With the differences and common components of both cultures showing up in direct comparison, this will enable the identification of cultural hurdles, communication differences and other possible problems. Such analysis should be followed by decisions on the role of the individual cultures and the establishment of bridges between the two companies.
It goes without saying that the management of Kraft needs to play a far more proactive role in building operational and cultural bridges with Cadbury managers. It is also to their credit that the majority of the senior managers of Cadbury have agreed to stay on in the organisation despite the months of acrimony that preceded the buyout.