Justin Ribeiro

November 09, 2001

MGMT 489
Kraft General Foods: The Merger (A)
The merger between Kraft and General Foods is a power house deal in terms of market
power and strength. The market share is fantastic, Philip Morris is happy and you would think
that you wouldnt have to do much to get it to work. Of course you would be wrong. They
seemed to face many problems, all of which they handled seemly well. But as to the issue at
hand, all the power they have now will begin to weaken, or in better terms, fall apart under the
idea of moving towards a more merged company. The idea of moving to a more integrated
distribution system is a great idea; I had not though about during my reading of the case. It could
be because of certain issues that would arise that could possibly cripple the way that the new
Kraft General Foods works. There are some main areas I identify that could be barriers to this
easier, more cost effective way doing distribution. I identify these areas as union/employee
issues, sales issues, capital reorganization, management information services, order management
and return on investment analysis of such a move. Most of the issues just mention alone do not
pose great problems, besides a few of the larger issues, such as accounting / MIS. But together,
they pose a barrier that if not correctly handled, will lead to confusion and possible distribution
problems in the time it takes to get the system running. In that time, you possibly lose
customers, which means sales are down, which just isnt good.
The first issue I think one reading this plan is the possible employee and union backlash.
Although relations were good with existing employees, the idea of restructuring operations to
suite this new distribution model could mean a fight from the unions that exist from Kraft, and
the good relations with the non-union of General Foods also might have a problem with that.

The idea of having to move operations to fit the newer model means not only the moving
existing lines, but probably some of the employees as well. From experience, it does not take a
great amount of knowledge to run everything, but that is only for certain jobs. From line
managers, and technicians who work on the usually modified equipment dealing with
mechanical and timing issues, youd have to move some of these employees, simply because to
find someone with the expertise to run that given machine would be hard to find. Im speaking
from many conversations with my father, who saw engineers from other all over the country
come in to attempt to fix a General Foods cereal machine timing problem after the tech who had
been working on it left General Foods. I feel that there could be contract issues outstanding. But
those facts are not apparent in the case. However, my recommendation would be if they plan a
gradual move over say, three to five years, you could prepare employees for the change. You
could survey possible resistance, and find ideas to better implement the change on the plant floor.
Tying in with possibly employee problems, you also run into the problem of capital
reorganization. If your going to go to a plan like this, you would expect some movement of
certain operations closer to each other, to be a better complement to the system. Now, again
through second hand experience, as well as some first hand experience, these machines typically
stop only once a year for maintenance. Thats only 7 days, and for 7 days and nights, you work
on it to repair, replace, and re-time everything. So operations that are being moved to new
locations means theres a good chance of significant down time getting these machines moved,
laid out, and up and running. The possible down time could mean a drop in the amount of
products you have to sell in a given time period, which could lead to a loss of sales. My
solution to this would be to try not to move the capital, not to move operations as much as
possible. I realize that certain operations will be moved, not only for better distribution, but also

possibly because raw materials sources are in better place. The internal sourcing that is already
going on would greatly benefit from this, cutting out the middle man who ships it, cutting your
costs more. This could have already been happening, but I get a feeling from the case that
capital (both human and machinery) would have to move, even a bit. But you could simply not
move anything, and move to central distribution warehouses. This would be beneficial since you
wouldnt have to move your plants. But at the same time, your creating another middle man,
some what like Johnson and Johnson did when they tried to move all medical products under one
banner. This is something that I think applies to the situation here. Warehousing offers it own
brand of problems, but if anything is true, the Frozen foods department going from 26 to 6 is a
good sign that it could very well be done. This would be better then having to move plants, but
doesnt necessarily make things any faster on the merchant side, depending on where you locate
you warehouses. it could lead to higher shipping costs.
Next in line, and in my eyes an important issue, is that of integrating sales forces. Both
Kraft and General Foods have large sales forces, specializing in only their given product ranges.
The case brings up several good points of the problems they possibly face within the sales forces
(which I dont believe I need to go into detail here). Integrating the sales forces is not the end
all answer to the problem, and will pose its own problems. But if done correctly, it could work.
If you gave training to the reorganized groups, you could form not groups, but sales teams.
Teams, which arent the same as groups. would have to go through the usual team forming
stages, and could help each other out on what needs to sell. Why do I think this would work?
Because the current benefit structure almost makes it will work. If you group this people into
teams, they have incentive to sell each others products, because in the training, the explanation
would have to be that major chains and grocers want these products, and are willing to make

bigger buys. the more you sell, the more you benefit as an individual, and as a team. Incentives
can work wonders. This of course, isnt the end all solution, and the different cultures inside
each of the sales groups inside each firm might be greatly different. Sales is by far one of the
most challenging of the problems faced with further merger.
Im going to group MIS / order management / accounting into one section here. The
reason is they all basically fall victim to the same problem, being that a standard across the two
companies and all the different plants and groups is currently not in place. While accounting and
MIS is going into place, it was estimated that it could take as long as five year to complete and
this is only 1990. That leaves just over three years left on the deal, which given most roll outs,
figure in plus or minus six months to a year. Now, if everything was timed just perfectly,
everything could be connected at the same time, but in all likelihood that simply would not
happen. Not to mention the development of a common order management system across the
various plants and divisions would take a fair amount of time, and without it, the idea of a new
and improved distribution system is simply in my mind out the question. It would have to start
development right now, and as that is developed, begin moving other systems into place.
Continue with getting all accounting and billing on the same track of standards, and continue to
move forward into a general MIS system. Then start to train and merge existing sales groups,
cutting the appropriate staff as needed, but not forgetting that the system will not be up for
sometime.
My last point I have in my list, is the return on investment. What kind of returns is the
company going to get from such a system in the long run? Currently, they are profitable in the
current way, and if you figure in the amount of cost having to deal with moving, training,
merging and creating these new operations, the return simply may not be worth it. The shear

amount of work and money needed to get everything into place seems quite costly. It would
definitely hurt their bottom line, unless they developed the backend systems needed first before
they begin to move, and close operations. Without doing that first, there is no reason to begin
such a shift, because it will be all for not. The current arrangement of the company is working
fine, and should be left alone for now. But, they should continue to develop the systems needed
for this, including ledger, order and invoice management. It should directly tie into the
accounting system, and it should cut costs in the long run, since the system cuts out many of the
middle men in the equation. But without this very essential item, I see no reason to pursue any
other course. That type of operation is simply too large not to have it.
What are the steps? These are the steps as I see them:

Get the numbers. Cost benefit analysis is essential.

If the numbers look good, begin the needed requirements of the system from all
standpoints. This includes the plant, sales, accounting, shipping...everything.

Processes and process layouts

Begin development of the system needed to run the new distribution system

Begin integrating and training the sales forces as teams. Team development is a must.

Begin moving needed capital and plants, as well as employees. Make cuts as necessary.

These steps are what I would take, (although its obvious more detail would be needed). The
time needed would be significant. Thats why, have to do the number first. If they dont look
right, maybe now is not the time.
But, if they expect to make major headway into this tomorrow, there simply is now easy
way to do it. By setting small stepping stones, you could do it, but it would be a long haul. Do I
think they should do it? Yes. Right now? No. Have to get everyone one the same page first, so

let accounting and everything else that is still taking time to integrate to finish. In the mean time,
plan. Planning has to be meticulous, otherwise, you end spending money that gets wasted, and
you end up with a company that starts to fall apart.