Question

The Kraft–Heinz Merger: Pursuing the Benefits of Cross-Business Strategic Fit

The $62.6 billion merger between Kraft and Heinz that was finalized in the summer of 2015 created the third largest food and beverage company in North America and the fifth largest in the world. It was a merger predicated on the idea that the strategic fit between these two companies was such that they could create more value as a combined enterprise than they could as two separate companies. As a combined enterprise, Kraft Heinz would be able to exploit its cross-business value chain activities and resource similarities to more efficiently produce, distribute, and sell profitable processed food products.

Kraft and Heinz products share many of the same raw materials (milk, sugar, salt, wheat, etc.), which allows the new company to leverage its increased bargaining power as a larger business to get better deals with suppliers, using strategic fit in supply chain activities to achieve lower input costs and greater inbound efficiencies. Moreover, because both of these brands specialized in prepackaged foods, there is ample manufacturing-related strategic fit in production processes and packaging technologies that allow the new company to trim and streamline manufacturing operations.

Their distribution-related strategic fit will allow for the complete integration of distribution channels and transportation networks, resulting in greater outbound efficiencies and a reduction in travel time for products moving from factories to stores. The Kraft Heinz Company is currently looking to leverage Heinz’s global platform to expand Kraft’s products internationally. By utilizing Heinz’s already highly developed global distribution network and brand familiarity (key specialized resources), Kraft can more easily expand into the global market of prepackaged and processed food. Because these two brands are sold at similar types of retail stores (supermarket chains, wholesale retailers, and local grocery stores), they are now able to claim even more shelf space with the increased bargaining power of the combined company.

Strategic fit in sales and marketing activities will allow the company to develop coordinated and more effective advertising campaigns. Toward this aim, the Kraft Heinz Company is moving to consolidate its marketing capabilities under one marketing firm. Also, by combining R&D teams, the Kraft Heinz Company could come out with innovative products that may appeal more to the growing number of on-the-go and healthconscious buyers in the market. Many of these potential and predicted synergies for the Kraft Heinz Company have yet to be realized, since merger integration activities always take time.

From the case above, comment on what you learned about Kraft-Heinz's merger on the benefits of Cross-Business Strategic Fit and on Hewlett-Packard's restructuring . Is this related or unrelated diversification? Explain. Also, as chapter 8 states, the purpose of diversification is to build shareholder value: 1 + 1 = 3. Comment on whether or not you think Microsoft as a company is "better-off" as a result of this acquisition.

Comment on Kraft's Strategy of "Growth through Restructuring" at Kraft Foods. Here is a video link on Kraft Foods Management change with projections on shift in strategy as a result of the change. Will the shift in strategy (divesting Kraft's portfolio of products or selling the company to a private equity firm) increasing shareholder value? Interestingly, in the video, note what happens to the stock price once this announcement is made.

Answer 1

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Through Microsoft’s acquisition of Skype Global, it had diversified into a related business venture as the value chains of the two companies exhibit competitively important cross-business commonalities. This enabled Microsoft to build the company around those good strategic fit across corresponding value chain activities such as exploiting Skype’s well-known brand name, engaging in cross business collaboration and knowledge-sharing by skype providing Microsoft with an established visual communications platform to complement its existing services and transferring the specialized expertise of Skype CEO by making him head of Microsoft Skype Division.

I believe that Microsoft is “better off” as a result of the acquisition of skype Global as it passes the test of corporate advantage (attractiveness, cost of entry and best-off test) as it adds long-term economic value for its shareholders. Microsoft is a very experienced and profitable company which would reinvest in the internet communication industry because of it opportunity to generate new competitively valuable resources and capabilities which is a sign of the industry’s attractiveness. Also given its significant experience in acquiring other companies, it would have taken into consideration all factors that would have impacted its decision to acquire an already established company versus that of launching a new company. The acquisition does offer opportunities for synergy between the two companies by offering cross-business collaboration, value chain-supporting opportunities and immediate resources.

Kraft chose to grow the company through restructuring because of it need to better focus on creating new opportunities and to pursue profitable growth. By splitting the company to produce two distinct companies, Kraft hopes that each company would better be able to focus on its unique drivers of success and thus be more profitable. By divesting its portfolio of products or selling the company to a private equity firm it is believed that shareholders value would increase. This is evident as the announcement of this possibility saw Kraft Foods shares increasing by three times its average trading volume.

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