On 2nd February, 2010, we learnt that Kraft Foods had sealed its takeover of Cadbury. Following a four month long hostile takeover battle, the UK chocolate manufacturer said it had received valid acceptances of the offer from investors of the firm. Positive statements about the acquisition were forthcoming from Kraft Chief Executive Irene Rosenfeld who said, “I warmly welcome Cadbury employees into the Kraft Foods family.” Ms Rosenfeld added, “This combined company has a phenomenal future, and I firmly believe it will deliver outstanding returns to our shareholders”.
However, there were some other parties that remained concerned. Most notably, Warren Buffett, Kraft’s largest shareholder, thought the $US19.6 billion acquisition was not a good deal. Buffett also questioned how Rosenfeld chose to pay for it – a reference to Kraft selling its fast-growing pizza business in a move to raise cash for the Cadbury deal. Meanwhile, analysts observed that the integration of Cadbury and meeting cost-cutting and revenue growth targets will be the key going forward.
The local unions were also concerned about the deal, anticipating that Kraft would need to cut costs to repay its debt. The unions were proved right on this score. Six days after the bid had been accepted, Kraft confirmed the closure of a factory in Somerdale, near Bristol, with a loss of 400 jobs. And it’s understood that Kraft are currently critically reviewing management structures, personnel, plant, production and workforce for further cost savings.
Like many entities, Kraft is now under pressure to cut costs, but its important to avoid the common pitfall of easy cost reduction that destroy long term organisational value. The operation of a ‘rule’ imposed from the top that is determined by the need to cut costs and the need for speed leads to a random set of actions that can have huge unanticipated consequences.
The problem with these types of cost cutting measures from the standpoint of the firm’s future viability is they are almost ‘unmanaged’ cost cuts. These measures are little better than knee-jerk responses. They will no doubt have an impact on cost flows, but the problem is they will also inflict random damage to the value creation processes within the business.
So what’s the alternative? The alternative is Intelligent Cost Reduction. This approach avoids the most severe effects of random cost cutting. To engage in intelligent cost reduction requires an insight into the value creation processes within the business.
A relatively recent development in strategic thinking, the resource-based view of the firm, can help us to approach cost reduction in an intelligent, rather than knee-jerk way. Techniques like cause mapping and asset auditing can help us uncover subtle sources of competitive advantage and differential value-creation in the business. Working with our clients, our research reveals that enduring competitive advantages often derive from complex processes and assets e.g. tacit knowledge, collective routines, relationships with key clients, personal reputations, and complex interactions between different types of know-how. These enduring sources of advantage need to be fully recognised as they form the strategic asset base of the firm.
Once we have built deep insights into the strategic asset base we can then approach cost reduction in an informed manner. A shared understanding of the core value activities and those who perform them enables us to differentiate between staff. We can distinguish critical value activities from those that are less critical. Armed with these insights we can identify areas of the business where cost reductions would be highly damaging to revenue creation, and those areas where cost reductions would have only peripheral impact.
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