Monday, 30 May 2011

Act of monumental stupidity

Gosh, now here is a real candidate for the Business Bloop Award!

Presenting the second most powerful woman in the world (shame on you Forbes magazine), the one, the only (I hope), Irene Rosenfeld, chief executive of Kraft, a food company.

Having told British MPs that talking to them would be "A waste of her time", she has been rightly pilloried in the UK Press.

That, in the long term, may return to haunt her, but it isn't the real story. The real story is the insight this provides into the way in which this woman's "ignorant or arrogant" (I quote The Times, below and title) approach is going to reduce shareholder value in the long term. If Warren Buffet has his radar switched on, and if he has Kraft holdings he should sell, NOW, or otherwise avoid. Why?
Here is a quote from The Times, Ian King, 28th May 2011 -

Two months ago, to coincide with the latest Select Committee hearing, The Times prepared a detailed investigation into Kraft’s stewardship. With the co-operation of some of Mrs Rosenfeld’s leading lieutenants, we revealed that more than 120 of Cadbury’s top 160 executives had left since the takeover.

Many of them said that Kraft was a hidebound, bureaucratic company that reminded them of Cadbury a decade earlier.

That culture, along with the management departures, is now starting to have an impact on Cadbury’s performance. Kraft’s latest figures revealed that Cadbury’s sales have shrunk in all key regions aside from some emerging markets where the business ought to be performing much better. Kraft has proved to be as lousy a custodian of Cadbury as many people feared it would.

Very simply, Kraft is exhibiting exactly the results we have long predicted in this Excellence Quartet series of blogs for any such takeover where a company with low Comparative Competitive Strength (but substantial financial mass) sets out to acquire companies with greater Competitive Strength in the naive belief that it will strengthen its own position. There are two, almost inevitable, results.

First, the Lowest Common Denominator effect - the acquirer rarely understands what has made its target outperfom its own figures, so instead of learning, it applies its own (usually lower) managerial, operational and quality standards so that performance within the newly acquired business quickly slumps to its own level of capability. Kraft have done this in record time.

Second, the Market Quality Dilution - the acquirer soon finds that profitability is not what it had expected (see the first effect), especially when the loan cost of the acquisition is loaded onto the target's balance sheet, and then does the only thing it knows how to do, it cuts delivered quality, value for money, to its customers. That has already started, and soon Cadbury's market share will start to plummet.

So, Irene, you qualify for the Business Bloop Award three times -

First, the wrong acquisition for the wrong reason - trying to conceal the really weak Comparitive Competitive Strength of Kraft by "cooking the balance sheet" through opportunistic M&A. You aren't the first "leader" to use this ploy to distract attention from the lack of internal competence within a business, but like other super arrogant CEO's, e.g. Fred Goodwin, there will be tears before bedtime

Second, you have missed an enormous opportunity to learn how to raise the Comparative Competitive Strength for the whole of Kraft, and that in the long term, will seal its eventual doom as it is slowly yet inevitably eaten alive by its competition.

Third, by behaving in such a really silly way with British MPs, you have drawn attention to yourself, rather than Kraft - and the more people look, the more they will see.

There is a famous song about "Irene" - but I won't be seeing her in my dreams, she really is a nightmare.

Business Bloop Award is brought to you by Steve Goodman and Tony Ericson partners in Achievement Coaching International where we help businesses to learn different thinking to enable different actions that deliver the different results thatMake a Big Difference.. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions to those obtained by conventional thinking and techniques. You can read the other three blogs at "Exceeding Expectations", "You're having a laugh ... seriously?" and "Capitalism or ... Common Sense".

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