Cadbury as One of the Worlds Leading Confectionery Companies - Case Study Example

A Resource-Based Analysis of Cadbury. 1.0 Aims and Objectives …………………………………………………..……….. 4 2.0 Introduction ………………………………………………………….…………. 4 3.0 Capabilities and how they contribute to competitive advantage of Cadburys ………………………………………………………… 6 4.0 Resources, competencies, core competencies, & dynamic capabilities ……………………………………………………..….. 10 5.0 Evaluating Strategic Capability ……………………………………….………. 18 6.0 Capability ………………………………………………………………….……. 28 7.0 Conclusion ……………………………………………………………………….. 29 8.0 References …………………………………………………………………….… 31 FIGURES Figure 1 – Cadbury Capabilities Results in Performance ………………..……….. 7 Figure 2 – Cadbury Sales Force Store Visits ……………………………………….. 7 Figure 3 – Cadbury Capabilities in Science & Technology, Innovation and Marketing ………………………………………………. 8 Figure 4 – Cadbury Competitive Advantage Through Market Position …………………………………………………………… 9 Figure 5 – Cadbury Global Value Chain for Chocolate ……………………….….. 11 Figure 6 – Cadbury Inbound and Outbound Supply Chain Logistics …………… 12 Figure 7 – Cadbury Value Chain Representation – Inbound Logistics ………..… 13 Figure 8 – Cadbury Value Chain Representation – Outbound Logistics ………… 14 Figure 9 – Operating Margin Comparisons / Large Cap Food Industry Peers ………………………………………… 17 Figure 10 – Cadbury |Comparison Against FTSE 100 Share Performance ……… 18 Figure 11 – Balanced Scorecard ………………………………………………….…. 19 Figure 12 – Cadbury Revenue Growth ……………………………………….…….. 20 Figure 13 – Cadbury Growth …………………………………………………….…. 22 Figure 14 – Cadbury Cash Flow …………………………………………………….. 23 Figure 15 – Cadbury Efficiency Priorities ……………………………….…..…….. 24 Figure 16 – Cadbury Internal Investments ………………………………………… 24 Figure 17 – Cadbury Product Innovations ……………….…………………..…… 25 Figure 18 – Competitive Advantage ……………………………………………..… 29 TABLES Table 1 – Cadbury SWOT Analysis ……………………………………………….. 15 Table 2 – Sum of Parts Analysis and Implied Valuation Target ………………… 17 Table 3 – Cadbury Operations Overview ………………………………………….. 21 Table 4 – Cadbury Ratio Analysis with Main Competitors ……………………… 26 Table 5 – Cadbury (MSN, 2009a) / Hershey (MSN, 2009b) Ratio Analysis Comparatives ………………… 27 1.0 Aims and Objectives This study shall look at Cadbury, one of the world’s leading confectionery companies. The Aim of this examination is to look into the operation of the company from a resource view perspective to evaluate as well as identify the manner that it obtains a sustainable competitive advantage as a result of its capabilities. To achieve the foregoing, the Objectives of this study shall seek to look at the company’s operations utilising Porter’s Value Chain, a SWOT Analysis, the Balanced Scorecard, benchmarking, and ratio analysis. Using these tools, this study will equate the importance of the capabilities of the company and how they contribute to its competitive advantage. 2.0 Introduction The highly competitive nature of today’s business world means that companies need to understand their competitors, the environment they operate in as well as their own strengths and weaknesses relative to the preceding as a means to either maintain their advantages or take stock of what they need to do to progress forward (Barney, 1991, Pp. 658-659). The foundation of the present view of the concept of resource-based theory, which is also termed as resource-based view, is founded on the precept of economic rent (Foss, 1997, P. 17). Economic rent is also termed as Economic Value Added and represents a broadly utilised tool to measure company efficiency in its use of resources (Ray, 2001, P. 231). The preceding represents one facet of the resources and capabilities of a firm that is the foundation for the development and execution of its strategy and thus returns (Peterlaf, 1993, P. 181). Resources in the context of this study represent the production process of a company that comprises equipment, capital, employee skills, finance, patents, and the expertise of its managers (Knight and Cavusgil, 2004, P. 57). The individual resources may not necessarily become larger, however, increased effectiveness and efficiency represent a paradigm that drives resource improvements in most cases thus helping to fuel competitive advantages via synergistic outcomes (Lewin and Massini, 2003, Pp. 123-124). In delving into a resource-based analysis, a number of tools as well as frameworks are utilised for identification as well as evaluative purposes. Porter’s value chain represents such a tool. It, the value chain, represents a series of activities in the chain whereby each activity adds value (Levy, 1995, P. 78). As a result, the added activities of each segment of the chain create an end product that has more value than the individual activities thus resulting in a synergistic result (Levy, 1995, P. 78). Another tool that shall be used herein is a SWOT Analysis (Bloodgood and Bauerschmidt, 2002, P. 56). It entails looking into the Strengths, Weaknesses, Opportunities as well as Threats facing a company and or project through looking at the external and internal factors that are positive and or negative aspects impacting the firm and or project (Bloodgood and Bauerschmidt, 2002, P. 56). In conducting this examination, the Balanced Scorecard shall also be used. It is a tool used by business in strategic planning as a management system that seeks to result in an alignment of its business activities to the strategy as well as the vision to gain improvements in internal as well as external communications (McLean, 2006, P. 56). In addition to the foregoing, the balanced scorecard looks to check the performance of a company with its strategic goals and objectives in a performance measurement framework that takes into account the following perspectives, financial, customer, internal process, along with innovation and learning (McLean, 2006, P. 56). Benchmarking is another tool that shall be used in this study. It takes business processes along with performance metrics as represented by costs, productivity, cycle time and in some instances quality to standards that are commonly recognized as representing the standard(s) for the industry (Ammons, 1999, P. 43). Another method by which to undertake a resource-based review of a company is through ratio analysis. It is a tool that is used to undertake a quantitative analysis of the financial statements of a company (Giacomino and Mielke, 1993, P. 32). Ratio analysis is utilised for the company in question as well as to the industry and competitors as a means to compare the performance of a firm against others in their operational sector and can differing forms (Giacomino and Mielke, 1993, P. 32). The preceding discussion of various resource-based analysis techniques and tools was undertaken to provide a look into Cadburys from varied perspectives. The foregoing shall look into how capabilities contribute to its competitive advantage as well as the company’s resources, competencies, core competencies, and dynamic capabilities. The above along with other aspects shall be conducted to understand how capabilities, managers, and employees contribute to the company’s competitive advantage and sustainability. 3.0 Capabilities and how they contribute to the competitive advantage of Cadburys In equating one of the capabilities of Cadbury Schmiedeskamp (2005, P. 1) tells us that through outsourcing a company gains from the expertise of outside experts (firms) as a result of reduced costs, enhanced speed in sales marketing and associated programs, increased execution quality, along with flexibility in meeting as well as responding to business needs that are consistently changing. In terms of other demonstrations of using capabilities to contribute to the company’s competitive advantage it implemented what is termed as Project Mercury (Cadbury, 2009, P. 8). The company focuses upon putting its “… best talent where they could create the most value” (Cadbury, 2009, P. 8) with the results revealed in operating performance: Figure 1 – Cadbury Capabilities Results in Performance (Cadbury, 2009, P. 9) By putting its staff to work in an advantageous manner, the company capitalizes on its capabilities as evidenced by it being the number one confectionery seller in Mexico and Brazil through sales force calls on stores: Figure 2 – Cadbury Sales Force Store Visits (Cadbury, 2009, P. 10) Company initiatives that focus on putting its capabilities to work where the most results are obtained have created distinct competitive advantages in terms of further entrenchment in older markets as well as definitive and aggressive strategies in emerging new markets through investment and use of core capabilities as outlined herein (Cadbury, 2009, P. 5). Figure 3 – Cadbury Capabilities in Science & Technology, Innovation and Marketing (Cadbury, 2009, P. 9) The above has created competitive advantages that are reflected by market position and dominance, providing the company with economies of scale, brand recognition as well as consumer market awareness: Figure 4 – Cadbury Competitive Advantage Through Market Position (Cadbury, 2009, P. 12) 4.0 Resources, competencies, core competencies, & dynamic capabilities In looking into the above areas, varied tools aid in equating them. Porter’s value chain provides a means to look into the manner in which Cadbury is able to offer value that is in excess of the cost of activities, thus representing profits (Levy, 1995, P. 78). In terms of the value chain, the activities linked to the delivery and or creation of the product represent its underpinnings (Rayport and Sviokla, 1996, P. 69). The primary activities as covered under Porter’s value chain represent inbound logistics, outbound logistics, marketing and sales, operations, and service that are linked to support activities as represented by procurement, human resource management, technology development (including R&D), and infrastructure (planning systems, quality, finance, and information management to name the more important areas) (Business for Social Responsibility, 2009, P. 8). To gain an understanding of Cadbury’s value chain, the following provides an illustration: Figure 5 – Cadbury Global Value Chain for Chocolate (Duke University, 2008) Cadbury’s inbound logistics consists of a highly sophisticated supply chain that stretches into African, the major cocoa producing region, and the company’s continued investment to enhance inflows as evidenced by its support of farmers in Ghana, the market that supplies 70% of its cocoa (Russell, 2008, P. 1). To secure this supply, the company pays the Ghana farmers a 10% premium over the global market price (Russell, 2008, P. 1). The following provides a picture of the company’s inbound and outbound supply change logistics: Figure 6 – Cadbury Inbound and Outbound Supply Chain Logistics (University of Washington, 2008, P. 5) The logistics side of the company’s operation includes supply, purchases, inbound transport, delivery, and processing, along with order processing, inventory management, warehousing, information systems, demand forecasting, materials requirements and distribution planning (Sadler, 2007, P. 5). From an illustrative standpoint, the following reveals the value chain in operation at Cadbury: Figure 7 – Cadbury Value Chain Representation – Inbound Logistics (tdtvictoria.org.au, 2008) Figure 8 – Cadbury Value Chain Representation – Outbound Logistics (tdtvictoria.org.au, 2008) In its 2008 Annual Report (Cadbury, 2008, P. 34) the company stated that it continually invests in its supply chain as well as focusing on improving its relationships with its suppliers, and customers. Specifics were offered in that the company “…Science & Technology team sets and communicates global technical priorities, establishes and coordinates the science agenda and facilitates global knowledge management and best-practice transfer. It prioritizes and funds technology developments which underpin our innovation agenda, including longer-term globally applicable development programmes …” (Cadbury, 2008, P. 36). The preceding is supported and enhanced the company’s human resources and corporate affairs departments the enhancement of “… day to day working practices …” to strengthen people capabilities and improve quality output (Cadbury, 2008, P. 36). Looking at Cadbury from a SWOT analysis to understand its strengthens and weaknesses, the following was taken from the company’s 2008 annual report (Cadbury, 2008) and other sources as identified: Table 1 – Cadbury SWOT Analysis Strengths The company is the largest supplier of confectionary products in the world as represented by a 10% share of the market Cadbury has a strong manufacturing competence as well as quality products that are known and known internationally, with a brand name that is respected The company focuses on one product segment, confectionaries, which provide it with enhanced understandings of its core business. Acquisitions have aided the company in growth, with Adams representing a stronger foothold in the important U.S. market Weaknesses The strength as represented by focusing on confectionaries also represents a weakness in that Cadbury’s is dependent on this sector without the benefit of a diverse product line in the event of market downturns. Cadbury is a relative latecomer to the U.S. market and other international locations as its base has been Europe. As a result, its larger competitors have more experience internationally as well as in emerging markets. Threats The highly competitive nature of the marketplace means that there is increasing demand for supplies. Energy costs along with transport and sugar is also increasing thus putting pressures on pricing and margins. The company’s competitors are formable as represented by Mars, Nestle, Hershey, and Wrigley in the gum segment (Paulson, 2008). This translates into competitive pressures that also represent price and promotional activities and the potential for pricing wars in mature markets. The current healthy care concerns over obesity, over weight children and adults represents a threat to the company and industry sector. Presently, health concerns over nutrition as well as calorie counting and lifestyle choices are consumer factors impacting the demand for sweets. Opportunities There are new markets emerging that have huge populations and rising incomes that make them highly suitable for confectionary products as a result of increased disposable income. Russia, China and India fit the preceding model and offer high growth opportunities when mature market segments such as the United States, Europe, Canada and Japan are looking at health concerns and thus offer declining opportunities. Consolidation is increasing in the confectionary segment as economies of scale as well as the financial size and clout of the larger firms are moving in on smaller competitors, especially in emerging and new markets. Acquisitions also represent a means to increase market share. Cost reduction and efficiency are highly significant in an industry fraught with high competitive levels. Cadbury has sought to address the foregoing by implementing programmes that result in cost savings as evidenced by relocating production facilities to countries where labour, as well as raw materials, are less costly (Cadbury, 2007, P. 55). The preceding cost reduction programmes also include heightening efficiency in supply chain operations, human capital resources, production, and outsourcing activities (Cadbury, 2007, P. 55). Being in touch with the consumer market is paramount in this industry segment through new tastes, combinations of favour and product introductions. The move in mature markets toward healthier lifestyles represents a prime opportunity for the introduction and development of products in keeping with this trend. Benchmarking is another tool used in equating the business and process practices in an industry sector (Ammons, 199, P. 34). In a report prepared by Trian Partners (2007) benchmarking facets for Cadbury were prepared against key competitors. The analysis by Trian Partners (2007) rated Cadbury as the number one international confectionary company using market share. It added that the company is located in most of the fast growing segments of the market as well as a strong presence in emerging markets. The report rated the company as having “… a coveted platform with leading brands and strong carbonated and non-carbonated offerings …” and added that Cadbury has “… highly attractive margin, cash flow and return on investment characteristics …” (Trian Partners, 2007). In analyzing Cadbury to its competitors Trian Partners (2007) provided the following: Table 2 – Sum of Parts Analysis and Implied Valuation Target (Trian Partners, 2007) In comparing the operating margins for large cap food industry companies Cadbury stacked up well against its competitors and the industry as a whole: Figure 9 – Operating Margin Comparisons / Large Cap Food Industry Peers (Trian Partners, 2007) The company has outperformed the FTSE 100 since 2003 thus providing an indication of the expertise of management in operating the company compared to all industry sectors: Figure 10 – Cadbury Comparison Against FTSE 100 Share Performance (Cadbury Report and Accounts, 2008, P, 7) 5.0 Evaluating Strategic Capability Strategic capabilities represent an understanding of a firm’s strengthens as well as weaknesses that management utilises to its advantage, along with shoring up deficiency areas to become either strengthens or areas that provide greater contribution (Chrisman et al, 2005, P. 101). In equating strategic capabilities within the context of this study, the Balanced Scorecard offers a look at the vision and strategy of a company from four perspectives: Figure 11 – Balanced Scorecard (Balanced Scorecard Institute, 2008) Cadbury’s commitment to its employees in terms of placing them where their talents are best suited represents a highly important resource recognition facet of the company that understands the importance of human capital (Merritt, 2007, P. 87). The preceding diagram reveals that human capital is one of the four important areas in the balanced scorecard that includes customers, financial and internal business processes. Financially the company has demonstrated strong steady growth over the past five years: Figure 12 – Cadbury Revenue Growth (Cadbury, 2009, P. 5) The company’s 2008 financial performance recorded a 7% growth in revenue, its operating margin represented 11.9%, with its EPS growth hitting 16% (Cadbury Annual Report, 2008). The true test of financial position and health is if the firm is growing on an annual basis as well as its debt levels. The following reveal that on both counts Cadbury is and has demonstrated strong results: Table 3 – Cadbury Operations Overview (Cadbury, 2008) Gains in the efficiency of internal operations represent another barometer of company strength that also contributes to its financial performance and growth. Customers account for this as well, which the revenue growth reveals the company is selling more product each year: Figure 13 – Cadbury Growth (Cadbury, 2009, P. 14) The company’s free cash flow is also indicative of its financial strength as well as rising sales and customer acceptance: Figure 14 – Cadbury Cash Flow (Cadbury, 2009, P. 15) Bottom line and overall revenue gains are tied to internal business processes that represent a broad gamut of areas. Looking at the overall effect, in terms of financial, growth and use of resources, innovation in terms of efficiency as well as new products are key indicators, as are investments made in these processes. The following demonstrates the results achieved by Cadbury in these respects: Figure 15 – Cadbury Efficiency Priorities (Cadbury, 2009, P. 17) Figure 16 – Cadbury Internal Investments (Cadbury, 2009, P. 15) Products are the fuel that drives sales and are also offshoots of innovation and internal processes. Figure 17 – Cadbury Product Innovations (Cadbury, 2009, P. 17) The company’s management structure is continually being simplified and streamlined with 2008 seeing the company organised into six global functions and four regions for confectionary products to increase resource efficiencies (Cadbury, 2009, P. 23). Another method that is used in evaluating the strategic capability of a company is ratio analysis (Burns et al, 2008, P. 91). Comparison against other firms in the industry sector represents a means to gauge the standing of the company: Table 4 – Cadbury Ratio Analysis with Main Competitors Company CADBURY PLC (CBY)  NESTLE SA REG SHRS S (NSRGY)  The Hershey Company ( HSY)  Price ($) 51.11  0  35.58  Market Value ($mil) 17,505  179,836  8,113  P/S 1.80  1.77  1.60  P/B 3.70  0  12.70  Yield (%) 2  1.63  3.30  Debt to Equity (%) 34  0  473  Nestle dwarfs Cadbury in size, but not in yield. As a mid-level player in the sector (as represented by size), Cadbury has been at the centre of a number of acquisition probes as represented by Kraft Foods and PepsiCo in the United States as well as Hershey / Ferrero (Morningstar, 2009). Using information from the company’s Balance Sheet its 2008 assets totaled 14,719,000,000, with its liabilities at 8,727,000,000 (Forbes, 2009) resulting in a ratio of 1.6866. The company’s debt to equity ratio was calculated using the total debt 8,727,000,000 by the owner’s equity of 5,993,000,000 (Forbes, 2009) for a ratio of 1.4561. In comparing Cadbury, and Hershey. Other comparisons were not calculated due to different reporting systems in terms of country locale. Table 5 – Cadbury (MSN, 2009a) / Hershey (MSN, 2009b) Ratio Analysis Comparatives    Cadbury 2008 Hershey 2008  Cadbury 2007  Hershey 2007 Basic Weighted Average Shares 33.21 227.49 39.67 228.86 Basic EPS Excluding Extraordinary Items 1.85 1.37 1.52 0.94 Basic EPS Including Extraordinary Items 1.86 1.37 1.53 0.94           Diluted Weighted Average Shares 33.48 228.7 40.02 231.45 Diluted EPS Excluding Extraordinary Items 1.84 1.36 1.5 0.93 Diluted EPS Including Extraordinary Items 1.85 1.36 1.52 0.93           Dividends per Share - Common Stock Primary Issue 0.0 1.19 0.0 1.14 Gross Dividends - Common Stock 0.0 1.07 0.0 1.02 Interest Expense, Supplemental 7.42 262.95 7.13 252.26 Depreciation, Supplemental 16.19 99.68 12.9 121.07       Normalized EBITDA 121.24 934.19 115.16 1,046.62 Normalized EBIT 89.38 684.7 84.47 735.7 Normalized Income Before Tax 86.97 586.82 94.09 617.11 Normalized Income After Taxes 56.92 371.41 60.57 388.42 Normalized Income Available to Common 56.92 371.41 60.57 388.42       Basic Normalized EPS 1.71 1.63 1.53 1.7 Diluted Normalized EPS 1.7 1.62 1.51 1.68 Amortization of Intangibles 15.67 4.1 17.79 3.0 The two companies have similar ratio parameters financially. 6.0 Capability Capabilities represent the capacity of resource sets to work in combination to form an activity or task (Deeds et al, 1998, P. 145). Prolonged and continued use tends to improve the strength of capabilities and as a result make it more difficult for rivals to imitate as well as to understand (Deeds et al, 1998, P. 145). The capabilities of a company lead to growth as well as performance, and are linked to its personnel and management it seeks to develop its “… focus on being a pure-play confectionary business …” that invests on an ongoing basis in its capabilities in its support of its people to deliver on its “… growth and efficiency priorities. To the aforementioned ends, Cadbury (2008) stated that its priorities in consort with the foregoing represented the strengthening of the company’s commercial categories through a simplified organisational operation that aids in providing a strengthened focus on initiatives that are category led. The company has a programme titled “Building Commercial Capabilities” that was put into place “… to deliver superior shareholder returns” (Sunderland et al, 2005, P.3). The aforementioned focus on improved decision-making processes, sales, and marketing through “… defining a common way of marketing and selling across the business” (Cadburys, 2008). In terms of other capabilities, such represent the sharpening of the company’s “… talent, diversity and inclusiveness agenda …” (Cadburys, 2008). The preceding benefits the company in that diversity provides it with a broad array of viewpoints and approaches from which to draw upon in its global business platform. The company also mentioned that it actively “… leverage(s) partnerships to streamline processes and reduce costs” (Cadbury, 2008). The preceding area is based on the recognition that the company internally focuses on those things its does best, while outsourcing areas where contracted companies have either heightened capabilities and or cost saving benefits (Cadburys, 2008). The main areas the preceding referred to represented IT, back office processing, and the management of facilities (Cadburys, 2008). The above capabilities contribute to a competitive advantage for the company as shown by the following: Figure 18 – Competitive Advantage (University of Chicago, 2006, P. 2) 7.0 Conclusion The preceding look into the operations of Cadbury have been conducted in consort with the Aims and Objectives of this study. The foregoing were identified as taking a resource view analysis to evaluate and identify how the company has obtained a competitive advantage (Aims). This was achieved in the above analysis utilising Porter’s Value Chain, a SWOT Analysis, the Balanced Scorecard, benchmarking, and ratio analysis. As brought forth by Deeds el at (1998, P. 145) capabilities of a company represent the manner in which it utilises its resources to focus on the varied tasks and or activities that comprise its operations. The preceding sections have revealed that Cadbury has demonstrated revenue, growth and new product innovations that have made it a desired acquisition target by PepsiCo, Hershey’s and Kraft, an industry endorsement of its performance. The heart of the company’s capabilities is its people, processes and products that have been illustrated by prior metrics employed in this study. Raw materials and controlling supply, as well as costs in that area, represent a strength of the company that is a core foundation. The supply chain system that secures raw material supplies form Africa or quality cocoa is a foundational capability that demonstrates the strength of the company’s capabilities in fulfilling its operation mission. Other capabilities are represented by innovative product offerings and the pulse beat the company maintains with the marketplace as evidenced by the successful introduction of new products (Beverage Daily, 2006). The preceding is a product of internal processes that orient products to the market, and the successes of its core brands Halls, Hollywood, Trident and others, as well as the manner in which the company integrated U.S. company acquisition Adams into its operations (Beverage Daily, 2006). Management vision and strategy are integral parts of Cadbury’s capabilities, with the Adams acquisition serving to provide proof. Prior to adding Adams, Cadbury had 14 number one or two positions in global confectionary markets (Beverage Daily, 2006). The wisdom of picking Adams, as well as integrating it into its operations saw Cadbury’s international leadership in the number one or two categories increase to 23and boosting its market share to 9.2% as compared to the market leader, privately held Mars, Inc. of the United States, and ahead of the 7.2% of Nestle as company that is roughly three times its size (Beverage Daily, 2006). 8.0 References Ammons, D. (1999) A Proper Mentality for Benchmarking. 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