Choosing Corporate and International Scope

Again, one of the things we had to pump out quick for strategy class almost each week. This one I like a lot, I think it is one of my better ones. It is based on our class where we discuss how to choose the appropriate scope for your company, and ask the two most important questions: "Are we better off with this change in scope?" and if so, "are we better off owning (and not contracting for) this change in scope"

H.J. Heinz – Global Scope, Integrations, and Future Potentials

Recent History and Global Scope

Founded in 1869, The H.J Heinz Company has a long history in sauces and food products, with the curious distinction of holding the 293 spot on the fortune 500 list as the world leader in Ketchup. The recent history of Heinz begins with longtime CEO Tony O’Reilly’s reorganizations of the 1990’s. While Heinz’s global operations stretch to their founding days, including significant business in the UK, Europe, and Australia, it has only been recently, however, that they expanded their scope to become truly global. In the 1980’s they were one of the first foreign investors in Zimbabwe, they established joint ventures in China and Korea, and they purchased operations in Thailand. By the mid 1990’s, domestic operations made up only about 50% of their revenues. Still, according to one account, at that point CEO “O'Reilly pinned his expectations for future growth on overseas markets.” By 2008 they had over brands in 200 countries, including 15 major brands making up about 70% of their business. Today, they consider themselves, “the most global of all U.S.-based food companies.”

Vertical and Horizontal Moves

Heinz has tended to use a “related constrained” diversification strategy to support their larger corporate goals. Recently at least, they seem to have relied more on integrating horizontally rather than vertically in order to increase focus on their “ketchup, sauces, meals, snacks, and infant/nutrition” products themselves. It can be inferred that they believe their competitive advantage comes not from controlling the means of production throughout the value chain, so much as by having a broad base of products in their chosen market segments and tapping new global markets. Three core competencies they identify, “health & wellness, taste, and convenience”, are in fact product centric. This approach has resulted in many acquisitions and divestitures, as well as joint ventures, licensing agreements (such as with Weight Watchers, which they used to own) and long term contracts to market other companies products. Large acquisitions such as Lea & Perrins from the UK, Benedicta in France, and prominent Latin American sauce companies Productos Columbia, S.A. and Distribuidora Banquete have allowed them to expand their global revenues. Through these activities, Heinz has sought to achieve greater economies of scope, trying to found their corporate growth on increased efficiencies due to activity sharing, and improved capabilities through the dissemination of their core-competencies. In growing globally, they hope to take advantage of these same types of benefits, but also achieve lower production costs through location and scale, and offer existing successful their products into new international markets.

One notable vertical integration project is their “Heinzseed” program, which develops and sells seeds to their tomato growing suppliers. These seeds are not genetically modified (possibly due to their large presence in European markets), yet have high yields, produce tomatoes that are disease and pest resistant, and stay ripe on the vine. While not quite owning the tomato farms themselves, this aspect of vertical integration allows them to control the quality and reliability of one of their most important inputs. The end result is greater market power, as the total cost of these inputs is less expensive than those of their competitors, and they have a unique component that drives the distinctive taste of their products. This has been a particularly effective strategy in some of their emerging markets, notably China and Egypt, since quality supply is difficult to acquire, and the growers are actively looking to improve their capabilities.

Future Potential

In the future, Heinz will want to secure their place in the value chain through greater IT enabled virtual integration. Their current strategy involves building globally centralized customer and supplier relationships, and right now and they are rolling out SAP into every part of their business. This will allow them to get more out of these relationships. Wal-mart, who already constitutes 10% of the company’s revenues, is an early partner in this area. This is important since the food industry is a mature market, and corporate revenues seem to have been around 9-11 billion for some time.

They seem to be well positioned to take advantage of the current market landscape in regards to acquisitions. Their credit seems strong, there are many brands they would like to acquire, and according to CFO Art Winkleblack, “the acquisition pool is deep.” These acquisitions can help them build their market power, and expand their global scope. In addition to M&A, direct investment is a large part of their 2009-2010 global strategy, where they hope to “invest for double-digit sales & profit growth” and “leverage infrastructure/expand distribution.” Their presence in many countries gives them valuable market knowledge, and suggests an ability to establish new business units, or overcome cultural factors in the integration of their acquisitions. While there may be some short term opportunism in any acquisitions, it is likely they will consider the key questions advanced by the HBS note - are we better off by diversifying into this area, and if so, are we better off owning an interest?  


Referenced Sources:
www.heinz.com
http://www.heinz.com/data/pdf/GrowthStrategy.pdf
http://www.heinz.com/data/pdf/2008HeinzAR.pdf
http://en.wikipedia.org/wiki/Heinz
http://industry.bnet.com/food/1000243/243/?tag=content;col1
http://www.fundinguniverse.com/company-histories/HJ-Heinz-Company-Company-History.html