Innovation and Synergy – Kraft Foods and Cadbury

Multi corporations can improve performance and achieve competitive advantage not just by focusing on the outside environment but also by combining and exploiting internal resources and knowledge between different business units within a company (Ansari et al, 2006, p353).

A way to achieve this is through the concept of synergy, within the corporate strategy and the growth and development of organisations (Mullins, 2010, p544). The concept of synergy was developed by Ansoff (1969). Synergy is the theory that a whole is better than the sum of its component parts. This can be expressed in terms of the 2+2=5 effect (Mullins, 2010, p544). It has also been stated that synergy often occurs in situations of expansion or as a result of the mergence of two separate organisations (Mullins, 2010, p544).

Potential benefits of synergy include; scale economies sharing core competences, cross selling, and leveraging a strong brand image across a variety of product groups (Bowman, 1998, p4) and also gain of market power and internal governance, arguing that multi-business firms can outperform their single business counterparts by creating a more efficient transacting environment than exists in the market (Martin and Eisenhardt, 2001, p3). Other reasons to pursue synergy would be the likes of wanting to restructure the market, achieve a more balanced portfolio of businesses or achieving corporate growth targets at times when development through organic growth proves difficult (Bowman, 1998, p180).

However, despite these advantages, there may also be some costs of synergy. Ansari et al, state that the challenge of coordinating and integrating multiple businesses can increase the costs of coordination and reduce the benefits of synergy (2006, p355). This suggests that, in order to achieve competitive advantage, the value of the potential synergy should not be outweighed by the costs of implementing it.

Reasons that organisations may consider the concepts of synergy are; acquisitions, market entry, business reconfiguration, divestiture, and diversification (Martin and Eisenhardt, 2001, p3).

An excellent example of synergy is the Kraft Foods – Cadbury acquisition. In early 2010 Cadbury was taken over by the US food company Kraft.

Cadbury at the time has a value of about £11.5bn (news.bbc.co.uk). This merger was a tremendous success as it earned Kraft Foods Net profits of $937m, compared with $827m in the same period of the previous year. Their revenues rose 25.3 per cent to $12.3bn – with about 90 per cent of that gain reflecting Cadbury’s contributions (http://www.ft.com/).

Despite these obvious benefits of the acquisition there was some controversy surrounding the event. Despite Kraft Foods stating that the deal would create a ‘global confectionery leader’ (news.bbc.co.uk) some were concerned about the levels of debt that Kraft had and the fact that they will have to pay down that debt and when cost savings of that magnitude have to be made, you have to ask where those cost savings will come from (news.bbc.co.uk). Those fears were shared by David Bailey, professor at Coventry University Business School, he stated that ‘Serious questions need to be asked about Kraft's intentions as Kraft already has a track record of cutting production and moving production abroad. There's no guarantee that they'll keep production in the UK in the long run’ (news.bbc.co.uk). Therefore suggesting that synergy, although beneficial in many ways is not always done for wholesome reasons.

References

Ansari, S. Schouten, M. Verwaal, E. (2006) Unlocking synergies between business units: internal value creation at Royal Vopak. Strategic Change. Vol. 15, issue 7/8, pp353-360.

Ansoff, H I. (1969) Business Strategy. London: Penguin inc.

BBC (2010) BBC NEWS [online]. Accessed from: http://news.bbc.co.uk/1/hi/8467007.stm Accessed: 12 December 2011].

Bowman, C. (1998). Strategy in Practice. Hertfordshire: Pretence Hall.

Financial Times (2010) ft.com [online]. Accessed from: http://www.ft.com/cms/s/0/adc2b170-a0d2-11df-badd 00144feabdc0,dwp_uuid=da5b2be8- 9c6b-11de-ab58- 00144feabdc0.html#axzz1gM5w4yD6 [Accessed: 12 December 2011].

Martin, J A. Eisenhardt, K M. (2001) Exploring cross-business synergies. Academy of Management Proceedings and Membership Directory. Pp1-6.

Mullins, L J. (2010) Management and Organisational Behaviour. Ninth Edition. Harlow: Pretence Hall.