conducting a strategic analysis of the Kraft Foods Group

Business

Background

The Case in this course is an ongoing exercise, meaning that we will be taking an intensive look at one company over the course of our five modules.

This session, we will be conducting a strategic analysis of the Kraft Foods Group. The best preparation for doing well on the Case Assignments is to

complete the Background information reading and the SLP before writing the Case.

The outcome of this Case is to complete an internal analysis of the Kraft Foods Group. In doing so, you will partially use the RBV framework in your

assessment of the organization’s strengths and weaknesses. Your internal analysis will lead to the completion of a SWOT analysis (which you will

finalize in Module 4).

Required Reading

SWOT analysis: Lesson. (2009). Retrieved on November 6, 2012, from: http://marketingteacher.com/Lessons/lesson_swot.htm

Zahorsky, D. (2009). A business owner’s secret weapon: SWOT analysis. Retrieved on November 6, 2012, from:

http://sbinformation.about.com/cs/bestpractices/a/swot.htm

Assignment

The completion of an internal profile can be an extensive undertaking, requiring far more time and resources than we have for this course. So—as in

prior modules—limit your analysis to the identification and evaluation of one or two key items in each element of the model, as described in the

Background reading and as enumerated in the SLP for this module.

Keys to the Assignment
•Step One: Conduct a critical and thorough internal analysis of the Kraft Foods Group, assessing as many of the company’s internal strengths and

weaknesses as you can. Incorporate the results of your RBV analysis from the SLP exercise into your discussion. Also, consider the operations,

customer service, finance, human resources management, and marketing functions. See the following website, as it will help you decide which strengths

and weaknesses you might wish to evaluate: http://www.businessballs.com/swotanalysisfreetemplate.htm
•Step Two: In a 5- to 7-page paper, present the results of your internal analysis, leading to conclusions about the strengths and weaknesses facing

the Kraft Foods Group as revealed by your analysis.
•Step Three: Synthesize your internal analysis with your external environmental analysis (from Module 2) and complete an overall SWOT analysis. In

essence, you are to recommend—based on your SWOT—specifically what the company should do. Give your overall analysis—does the company have more

strengths than weaknesses? More weaknesses than strengths? Whatever you decide, you need to recommend (with explanations) a company strategy—in

response to your collective assessment of the organization’s strengths, weaknesses, opportunities, and threats.
•Step Four: Consider the Case as a formal business report that you are developing for the Board of Directors and CEO as the Kraft Foods Group’s

consultant. This is a professional document. Follow the format below: ?Executive summary: This is a synopsis of the main points, conclusions and

recommendations made in the longer report. If you would like a refresher on writing an executive summary, check this website:

http://www.highendfinance.com/CommercialLoans/Docs/07-4%20ES%20Guidelines.doc
?Introduction: State the main purpose of the paper (thesis statement), what you hope to accomplish, and how you will go about doing it.
?Main Body: The "meat" of the paper. Emphasize analysis, not just description. Delineate separate topics or sections with section headings.
?Conclusion: Summarize your paper in the light of your thesis statement.

Assignment Expectations

Your paper will be evaluated on the following seven points:
•Precision – Does the paper address the question(s) or task(s)?
•Breadth – Is the full breadth of the subject (i.e., the Keys to the Assignment) addressed?
•Depth – Does the paper address the topic in sufficient depth and include the background readings and other background resources as references?
•Critical thinking – Is the subject thought about critically, that is, accurately, logically, relevantly, and precisely?
•Clarity – Is the writing clear and are the concepts articulated properly? Are paraphrasing and synthesis of concepts the primary means of responding

to the questions or are points conveyed through excessive use of quotations?
•Organization – Is the paper well written? Are the grammar, spelling, and vocabulary appropriate for graduate-level work? Are headings included in

all papers longer than two pages?
•Referencing (citations and references) – Does the paper include citations and quotation marks where appropriate? Are the references from the

background readings and assignment present and properly cited? Are all the references listed in the bibliography present and referred to via

citation?

Tips and Suggestions

Note the following tips and suggestions:
•Business school case-study assignments are meant to offer practice opportunities for future businesspeople who are earning their MBA degrees.

Consider yourself a consultant hired by the company to make these critical assessments. There are no right or wrong answers to the Case question, as

long as your position is well defended.
•Study the theoretical concepts provided in the Background materials section of the module, and identify main strategy concepts.
•Include a cover page and reference page, in addition to the 5-7 pages of analysis described above.
•Include headings for all papers longer than two pages.
•Cite and reference all sources, including those you paraphrase. This means include citations and quotation marks for direct quotes of more than five

words, and citations for information you have "borrowed" or paraphrased from other sources.

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44.

Financial Managment

Project description
Reference lists are not required to be appended to answers however material taken from any source should be referenced in the text of your answer

using the author / date system, including pages numbers where applicable.
The word length for answers is not prescribed in detail. As a guide, answers for a question which carries 10 marks should approximate 250 words.

Answers in point form are preferred. There are 5 questions.

?

Question 1
Examine the following for Agri Enterprises Ltd.
Income statement for Agri Enterprises for the year ended 30 June.

20132014
$$$$
Sales15 000 00016 600 000
Less Cost of goods sold10 500 00012 000 000
Gross profit4 500 0004 600 000
Less Operating expenses
Selling expenses1 500 0001 550 000
General and admin expenses900 000950 000
Lease expense100 000100 000
Depreciation500 000490 000
Less Total Operating Expenses3 000 0003 090 000
Operating profits1 500 0001 510 000
Less Interest expense500 000450 000
Net profits before taxes1 000 0001 060 000
Less Taxes (30% rate)300 000318 000
Net profits after taxes700 000742 000

Dividends paid to ordinary shareholders165 000150 000
Dividends paid to preference shareholders50 00050 000

Balance Sheet for Agri Enterprises Ltd as at June 30, 2014

Assets$Liabilities$
Cash and short term deposits500,000Accounts payable4,000,000
Marketable securities1,500,000Accrued expenses250,000
Accounts Receivable6,000,000Short term loans 4,000,000
Inventories (cost value) 3,750,000Total current liabilities8,250,000
Total current assets11,750,000
Debentures10,000,000
Total non-current liabilities10,000,000
Total liabilities18,250,000
Land and buildings (cost)5,500,000
Machinery and equipment (cost)10,250,000Shareholder’s equity
Furniture and fixtures (book value)4,000,0004% Preference shares ($1) 1,250,000
19,750,000$1 Ordinary shares fully paid2,500,000
Less accumulated depreciation-6,500,000Retained earnings / reserves3,000,000
Total non current assets13,250,000Total equity6,750,000

Total assets25,000,000Total 25,000,000

Note 1 Ordinary shares are currently trading at $3.50. The price earnings ratio for the industry sector averages 15.0 times.
Note 2 Liquidation values for assets are at book value except for: Accounts receivable (90% of book value), Inventories (80% of cost), Land and

Buildings (150% of cost), Machinery and Equipment (70% of cost), Furniture and Fixtures (75% of book value).

(a)You are advising a lender on lending money to Agricorp Enterprises.
(i)Nominate the 3 ratios you consider to be most important to a decision to lend to this company justifying your selection.
(ii)Calculate the ratios for 2014.

(b)At a recent meeting of shareholders, the Managing Director of Agri Enterprises foreshadowed introducing an ‘aggressive’ financing strategy for

working capital as opposed to the firms long-held conservative strategy.
(i)Explain the main considerations in deciding upon a working capital strategy.
(ii)Outline an appropriate working capital strategy for a specific sector of industry you are familiar with.

(c)Provide an estimate / s of value for the ordinary shares of Agri Enterprises using the information above.

(15 + 10 + 15 = 40 marks)

Question 2

Owners of organisations are likely to find that the agency problem applies to staff decisions and actions of the highest to lowest paid employees.

Agency concerns are not restricted to upper management decisions.

(i)Comment on the nature of the agency problem.
(ii)Explain how an owner in employing the manager for their small – medium enterprise might ensure that agency conflicts do not arise?

(10 marks)

Question 3

(a) Complete the table below. Assume a required rate of return of 12% per annum.

Par valueBond interest rate (per annum)Years to maturityInterest paidNo of periodsInterest payment per periodPresent value of interest

paymentsPresent value of bond at maturityTotal present value of bondIs the bond issued at a par, premium or discount
$%$
A$1,0008%12annually
B$1,0008%10annually
C$50012%5semi annual
D$50012%5quarterly
E$50014%10annually

(b) Which of the bonds would be more attractive to you? Why?

(5 + 5 = 10 marks)

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Question 4

Consider the project below. Project Crop Gro is an agribusiness processing development project which involves a $4.5m outlay at the start of the

projects life and then several additional investments along the life of the project.

It is expected that the development will be saleable at the end of Year 10. The firms discount rate is 16%.

Project Beta
Cash outflowsCash inflows

Yr 04,500,000
1500,000900,000
2500,000900,000
3900,000
4900,000
5500,000900,000
6900,000
7900,000
8500,000900,000
9900,000
105,550,000

* assume cash inflow and outflows occur at year end.

(a)Calculate the projects payback, net present value (NPV) and internal rate of return (IRR).
(b)What advice would you give regarding accepting / rejecting the project?
(c)Briefly explain, how would you estimate a discount rate for this project?
(d)How might uncertainty be addressed with this type of project?
(e)Through the life of this project, what type of review should be undertaken by the firm in terms of project continuation?

(10 + 5 + 5 + 5 + 5 = 30 marks)

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Question 5

(a)Calculate the weighted average cost of capital for Grow Fast Ltd based on the following: (show workings)

Debt
The firm has issued $1,000 at 6% per annum (coupon rate) bonds maturing in 12 years time. The current sale price for such bonds is $970.

Preference Shares
The firm has $5 preference shares (6% dividends) with selling costs of $0.60 per share.

Ordinary Shares
The firm’s $1 ordinary shares are selling at $5.80 and new issues would entail flotation costs etc of $0.60 per share.

Dividends per ordinary share for the most recent year were 60 cents and it is expected that dividends will grow by 6% per year which is their

historical growth rate.

Tax rate
The firm pays tax at a rate of 30%.

Capital sources
Long term debt50%
Preference shares10%
Ordinary shares40%

(10 marks)

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