Sara Lee’S Retrenchment Strategy Case Study

Sara Lee

Sara Lee’s Retrenchment Strategy Case Study

Vinh Tran

Strategic Management

April 28, 2013

Sara Garski

Southwestern College Professional Studies

Introduction

Sara Lee started out as a small company in wholesale distribution that gradually grew to a series of related and unrelated businesses. For the next 40 years, the company expanded to food processing, retail food, and household products to more than 40 countries. Their broad differentiation strategy and geographically spread operations has management struggling to operate efficiently. Even with the vast company’s portfolio, it did not help with building shareholder value. With the declining profits worldwide, Sara Lee’s retrenchment initiatives is divest eight of its business units to raise profitability through operating profit and sales.

Strategies

Sara Lee’s retrenchment strategy is required in order to focus its resources on more profitable industries such as the beverage, food, and household products company. Their plan on separating themselves from weak performing business units and product categories will put the company in a better financial position. Management will be able to focus their resources to boost their profitability, sales, and market shares on the remaining products. The spin-off of Hanes brands was a smart move even though the operating profit margin was still a moneymaker. The cash payment needed to eliminate the note payable to Hanes brand from Sara Lee and it did not strategically fit with their new core businesses. However, their retrenchment plan fell short for their bottom line in 2010. There is still not enough cash flow for the company to expand and grow through acquisitions of rapidly emergent of new food and beverage trends from other companies.

Attractiveness

The company’s retrenchment strategy placed it in moderately attractive industries at best. Sara Lee has developed into a well-known name within the retail industry, as a value-conscious brand with quality products. The food service industry will no doubt continue to be attractive, as consumers will turn to purchasing meats and other foods rather than eating out in this slumping economy. As for the retail meats, bakery, frozen desserts, and coffee are all just around the average attractiveness range. The growth potentials are very strong, but it does have a lot of competition following suit.

Strength

The competitive strength of Sara Lee business units is rather strong in their particular segments. Strength includes brand recognition and the ability to offer a wide range of products in the marketplace. The potential for skills transfer and cost saving in the production process due to the similarity of the products, and will be advantageous for the operating profit margin. The shipping logistics and production technology when focusing in the food industry will result in high-quality products with great value. The other strength is their aggressive approach to educating the public on the nutritional value of their products through their advertisement.

Resource fit

It does appear that Sara Lee does have adequate strategic and resource to fit contribute increase shareholder value. The product line does relate to one another and support each other that suggest substantial cost sharing opportunities. The production, distribution, and purchasing processed frozen desserts, meat, and bakery segment are other related items. The retail and bakery division is strategically in line with their growing foodservice division resulting in significant saving in operations activities and purchasing. There will be skills transfer, cost sharing, and brand sharing opportunities in store for each business units causing decent increase in shareholder value. It does appear that the company did divest the least strategically important business units such as Hanes brand. It did not fall in line with their food industry segment even though it was making a good profit for the company.

Profit

Sara Lee revenue as been on the decline since the retrenchment in 2005 and is finally showing a little bit of coming back alive in 2010. According to the company’s latest financial reports, the gross profits continue to decline from $1,239M in July 2010 to $1,197M in July 2011, and 1,113M in June 2012. The net sales on the North American Retail in 2011 were at $2,868M (increase of 1.8% from 2010). North American Foodservice increased 1.2% from 2010 to $1,566M in 2011. The International Beverage segment grew 10.2% from previous year to $3,548 in 2011. The International Bakery continued on its declining slope in losing 7.5% resulting in $726M. The concept of having fresh bread compare to package bread is still a dominating factor in the European market.

Recommendations

Brenda Barnes plan to restructure Sara Lee, refocus the company, and redevelop its core important first step in improving the company’s financial and market performance. The next stop is getting closer to the market and launching new products, technologies, processes or solutions that are aligned with the emerging market trends in their food service division. The latest trend in organic and healthy foods can bring strong growth for the corporation. Having the cash flow to acquire these growing food and beverage segment is a good investment for the company. There is really no growth in the Senseo product line and should be divested along with their matured line of International Household and Body Care business unit. With the unsuccessfully International Bakery division and the looming European economic crisis, it is best to get out of that market too.

Conclusion

Sara Lee was a company of related and unrelated businesses that have become too broad, but resulting in difficulties in profitably managing all the businesses. Deteriorating market conditions in a once-attractive industry during the economic depression certainly did not help the company’s financial performance either. The retrenchment did help with their lack of strategic or resource fit for the business but it did little to help with improving shareholder value.

They did need to get out of the business segments with questionable long-term potential with weak position in its industry. Simplifying their portfolio to transform into an excellent integrated operating company is a great start but it is still just a start for Sara Lee in this evolving industry.

References

Thompson, A.A., Peteraf, M.A., Gamble, J.E., & Strickland, A.J. III (2012). Crafting and

Executing Strategy: The Quest for Competitive Advantage (Concepts and Cases--with case

studies), 18e Edition. New York: McGraw-Hill.