Entrepreneurial and Strategic Assignment

Case 16 Sara Lee Corp. in 2011: Has Its Retrenchment Strategy Benefitted Shareholders?

1. What is Sara Lee’s corporate strategy? How has its retrenchment strategy changed the nature of its business lineup?

2. What is your assessment of the long-term attractiveness of the industries represented in Sara Lee Corp.’s business portfolio?

3. What is your assessment of the competitive strength of Sara Lee Corp.’s different business units?

4. What does a 9-cell industry attractiveness/business strength matrix displaying Sara Lee’s business units look like?

5. Does Sara Lee’s portfolio exhibit good strategic fit? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

6. What is your assessment of Sara Lee’s financial and operating performance in fiscal years 2008-2010, the period following the divestitures that were the core of Sara Lee’s retrenchment strategy?

7. What actions do you recommend that Sara Lee management take to improve the company’s performance and boost shareholder value? Your recommended actions must be supported with convincing, analysis-based arguments.

1. What is Sara Lee’s corporate strategy? How has its retrenchment strategy changed the nature of its business lineup?

Sara Lee’s corporate strategy

 Basic approach: Related diversification

 Related businesses are all concerned with foods and beverages and share key emphasis on some of the same value chain activities: purchasing, production, branding, importance of advertising, and distribution.

 North American Retail’s lineup of businesses included meats, Senseo coffee makers and coffee pods, and frozen desserts sold in supermarkets.

 North American Fresh Bakery packaged bread and buns were marketed in supermarkets.

 Sale of meats, bakery items, coffee, and frozen desserts to institutional customers through North American Foodservice.

 International Beverage included the sale of coffee and teas outside of North America.

 InternationalHousehold & Body Care division business units were marked for divestiture in 2009, with some business units still remaining for sale in 2010.

2. What is your assessment of the long-term attractiveness of the industries represented in Sara Lee Corp.’s business portfolio?

You should have little trouble determining that the food segments in which Sara Lee competes are only moderately attractive. There is ample room for subjective judgments about industry attractiveness, but you will have difficulty pointing to evidence in the case that Sara Lee’s businesses compete in highly attractive industries. The only industry you might find more than moderately attractive is the food service industry. However, you shouldn’t characterize the industries that Sara Lee competes in as highly unattractive since most have large sizes and lack significant threats or unfavorable social, political, or environmental factors. Table 1 presents our industry attractiveness ratings for each industry that Sara Lee has diversified into.

3. What is your assessment of the competitive strength of Sara Lee Corp.’s different business units?

Even though most of the industries Sara Lee has entered are only moderately attractive, you will likely note that Sara Lee’s businesses have strong positions in their respective industries. The North American Retail (meats, Senseo, and frozen desserts) and North American Fresh Bakery businesses have strong positions in their food categories, as does North American Foodservice. Similarly, the company’s International Beverage business has built a commendable position in theindustry. Even though it was the number one brand of packaged bread in Spain, you should also rate the International Bakerybusiness unit as relatively weak. Bimbo was not strong in markets outside of Spain, packaged bread was not popular throughout Europe, and the division had recorded sales declines and operating losses every year since 2007.Table 2 presents our competitive strength calculations forSara Lee’s major business units.

4. What does a 9-cell industry attractiveness/business strength matrix displaying Sara Lee’s business units look like?

To draw a 9-cell industry attractiveness/business strength matrix for Sara LeeCorp. using rigorous methodology, you really need to do industry attractiveness ratings for each of the industries in which Sara Lee competes and do competitive strength ratings for each of Sara Lee’s business units. These ratings should then be used to plot the location of the bubbles on the 9-cell grid. Figure 1 shows a 9-cell GE-style matrix where the location of the bubbles is based on the industry attractiveness and business strength ratings shown in Tables 1 and 2.

Table 1 Industry Attractiveness Assessment for Sara Lee’s Businesses

(Scale 1 = very low attractiveness, 5 = average attractiveness, 10 = very strong attractiveness)

Attractiveness Measure	Weight	N.A. Retail Meats	N.A. Retail Bakery	N.A. Frozen Desserts	N.A. Single Serving Coffee	N.A. Food Service	Int’l Coffee	Int’l Bakery
Market size and growth rate	0.25	7/1.75	7/1.75	2/.5	2/.5	10/2.5	7/1.75	4/1.0
Industry profitability	0.15	5/.75	5/.75	5/.75	5/.75	6/.9	6/.9	5/.75
Intensity of competition	0.20	6/1.2	5/1.0	7/1.4	8/1.6	8/1.6	8/1.6	5/1.0
Emerging opportunities and threats	0.10	5/.5	5/.5	6/.6	7/.7	10/1.0	8/.8	8/.8
Product innovation	0.25	5/1.25	5/1.25	3/.75	5/1.25	9/2.25	5/1.25	5/1.25
Social, political, environmental, factors	0.05	9/.45	9/.45	9/.45	9/.45	9/.45	9/.45	9/.45
TOTALS	1.0	5.9	5.7	4.65	5.25	8.7	6.75	5.25

Table 2 Competitive Position/Business Strength Calculations for Sara Lee’s Business Units

(Scale 1 = very weak, 5 = average, 10 = very strong)

Strength Measures	Weight	N.A. Retail Meats	N.A. Fesh Bakery	Sara Lee Frozen Desserts	Senseo	N.A. Food Service	Int’l Beverage	Int’l Bakery
Relative market share	0.2	8/1.6	7/1.4	10/2.0	9/1.8	6/1.2	8/1.6	5/1.0
Marketing and promotion	0.2	10/2.0	10/2.0	8/1.6	5/1.0	7/1.4	8/1.6	6/1.2
Product innovation capabilities	0.2	6/1.2	7/1.4	6/1.2	6/1.2	6/1.2	6/1.2	6/1.2
Distribution capabilities	0.2	10/2.0	10/2.0	10/2.0	6/1.2	8/1.6	10/2.0	4/0.8
Brand name recognition/image	0.2	10/2.0	10/2.0	10/2.0	3/0.6	8/1.6	9/1.8	5/1.0
TOTALS	1.0	8.8	8.8	8.8	5.8	7.0	8.2	5.2

All of Sara Lee’s businesses in North America have relatively strong positions in their respective categories. Also, Sara Lee’s International Beverage business has a relatively strong position in the European market for coffee products.

The 9-cell GE-style matrix analysis (Figure 1) indicates that Sara Lee’s North American Retail meats, North American Fresh Bakery, International Beverages, and Sara Lee Foodservice businesses are all “grow and build” businesses that should be given a high priority for investment. You should note that even though these businesses fall into “grow and build” cells on the matrix, only Sara Lee Foodservice competes in an industry capable of delivering significant increases in shareholder value. Sara Lee’s core meat and bakery should continue to receive adequate funding to develop innovative product variations to support growth, but its unlikely new varieties of sausage and sandwich meats or package breads are capable of yielding significant revenue and earnings gains. You are likely to suggest that Senseo and International Bakery are “question marks” and should receive only medium investment priorities.

Figure 1 Sample Industry Attractiveness/Competitive Strength Matrix Of Sara Lee’s Businesses

5. Does Sara Lee’s portfolio exhibit good strategic fit? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

You may initially suggest that substantial cost sharing opportunities exist between Sara Lee’s North American businesses, but few such opportunities exist beyond cross-selling and joint promotional activities. The purchasing, production, and distribution activities of the meat, bakery, and frozen desserts businesses are very dissimilar. You should make the same assessment about the value chain activities of Senseo single serving coffee products and other North American retail businesses.

Perhaps the strongest strategic fit between businesses in Sara Lee’s business lineup is between its foodservice division and North American Retail and North American Fresh Bakery. Considerable cost sharing opportunities are captured in the purchasing and operations activities between such businesses since retail and foodservice products can be produced in the same plants. In addition, Sara Lee’s retail brand names are beneficial to the company’s food service business.

You will likely suggest strategic fit in Sara Lee’s international businesses is restricted to joint promotions, cross-selling, and distribution between brands sold in the same countries. For example, cross-selling potential exists between the sales of Bimbo bread and DouweEgberts and Maison du Café coffee products in Spain. You will also suggest that cost sharing opportunities exist in the purchasing and operations activities of Senseo’s North American and

International Beverage business. Figure 2 provides a list of cost sharing, skills transfer, and brand sharing opportunities along the value chains of Sara Lee’s business units.

Figure 2 Assessment Of Strategic Fit Potentials Between Sara Lee’s Business Units

CS = cost sharing benefits ST = skills transfer opportunities

	Value Chain Activities
Business Unit	Purchasing	Operations	Distribution	Sales & Marketing	Advertising/ Promotion
N.A. Retail (meats)	CS/ST between meat brands within division	CS/ST between meat brands within division	CS/ST between meat brands within division	Cross-selling with N.A. Fresh Bakery and Sara Lee Frozen Desserts	Joint promotions between meats and bakery items
N.A. Fresh Bakery	None	None	None	Cross-selling with N.A. Retail (meats) and Sara Lee Frozen Desserts	Joint promotions between bakery items and meats and bakery and frozen desserts
Sara Lee Frozen Desserts	None	None	None	Cross-selling with N.A. Retail and N.A. Fresh Bakery	Joint promotions between frozen desserts and bakery items
Senseo	None	None	None	Use of common sales force for all products sold in N.A. supermarkets	Possible joint promotions between Senseo coffee and frozen desserts, bakery items, breakfast meats
Sara Lee Foodservice	CS/ST with N.A. Retail (meats), N.A. Fresh Bakery, and Sara Lee Frozen Desserts	CS/ST with N.A. Retail (meats), N.A. Fresh Bakery, and Sara Lee Frozen Desserts	None	Brand sharing between North America retail businesses and food service business.	None
International Beverages	CS with Senseo products sold in North America	CS with Senseo products sold in North America	None	Cross-selling with Bimbo Breads	Joint promotions between International Beverages and Bimbo bread in countries where both are sold
International Bakery	None	None	None	Cross-selling with International Beverages	Joint promotions between Bimbo Bread and International Beverages in countries where both are sold

6. What is your assessment of Sara Lee’s financial and operating performance in fiscal years 2008-2010, the period following the divestitures that were the core of Sara Lee’s retrenchment strategy?

If you prepare calculations similar to what are shown in Tables 4 and 5 will be rather unimpressed with the performance of the company since the retrenchment strategy was launched in 2005. The company’s performance between 2005 and 2009 fell well below that achieved in 2004. The company’s performance in fiscal 2010 is improved, but still does not match 2004 the performance levels. In addition, if you examine the company’s financial performance by division (as is shown in Table 6) will be critical of the financial performance of Sara Lee’s North American Fresh Bakery, North American Foodservice, and International Bakery business units. The North American Fresh Bakery business has operated near breakeven during 2008– 2010. The operating profit margins of Sara Lee’s food service division during 2008- 2010 were also only moderately attractive.Sara Lee’s International Bakery business was particularly unprofitable, but was closer to breakeven in 2010. Students will be much more impressed with the profitability of Sara Lee’s International Beverage business and its North American Retail (meats) business. International Beverage posted double-digit operating profit margins every year between 2008 and 2010 and North American Retail (meats) operating margins exceeded 9.0% in 2009 and 2010.

If you calculate profit margins for Hanesbrands (as shown in Table 7) should note that Sara Lee’s apparel division was more profitable thanSara Lee’s continuing operations in 2010. Only International Beverages has outperformed Hanesbrands. However, case Exhibit 1 makes it clear that other divested businesses were chronic money-losers.

Table 4 Selected Financial Ratios for Sara Lee Corporation’s Continuing and Discontinued Operations, 2004-2010

	2010	2009	2008	2007	2006	2005	2004
Operating profit margin	8.5%	5.5%	2.0%	4.6%	5.7%	5.8%	8.8%
Net profit margin	4.9%	2.8%	-0.6%	4.1%	3.5%	3.7%	6.5%
Return on assets	6.0%	3.9%	-0.7%	4.1%	3.8%	5.0%	8.5%

Calculated from case Exhibit 4.

Table 5 Selected Financial Ratios for Sara Lee Corporation’s Continuing Operations, 2006-2010

	2010	2009	2008	2007	2006
Operating profit margin	8.5%	4.5%	-0.5%	3.1%	2.3%
Net profit margin	4.9%	3.5%	-0.6%	5.0%	6.1%
Return on assets	6.0%	4.0%	-0.6%	4.3%	3.9%

Calculated from case Exhibit 5.

Table 6 Operating Profit Margins Before Significant Items For Sara Lee’s Business Units, 2008 - 2010

	2010	2009	2008
North American Retail	12.3%	9.1%	5.7%
North American Fresh Bakery	2.1%	1.2%	2.7%
North American Foodservice	6.7%	1.7%	-14.8%
International Beverage	18.4%	16.1%	17.0%
International Bakery	-1.8%	-24.4%	-37.0

Calculated from case Exhibit 6.

Table 7 Operating Profit Marginsfor Hanesbrands Prior to the Spin-Off by Sara Lee, 2002 - 2006

	2006	2005	2004	2003	2002
Operating profit margin	9.7%	7.7%	9.2%	11.7%	9.5%

Calculated from case Exhibit 2.

7. What actions do you recommend that Sara Lee management take to improve the company’s performance and boost shareholder value? Your recommended actions must be supported with convincing, analysis-based arguments.

 Sara LeeFoodservice should receive a high investment priority since it has the best opportunity to deliver growth in sales and earnings among the company’North American businesses. Sara Lee should continue to support product innovation in retail meats and Fresh Bakery, but the company’s foodservice division has the opportunity to grow significantly as a greater percentage of meals are eaten away from home.

 You will also recommend a high investment priority for Sara Lee’s International Beverages business. Continued product innovations such as its planned ready-to-drink hot and cold coffee drinks could prove to boost sales and margins for the division.

 You are also likely to suggest that Sara Lee attempt to divest its poor performing International Bakery division because of the unit’s poor financial performance, the lack of popularity of packaged bread in Europe, and because of the dismal economic conditions in Spain. There is little evidence that this unit will turn around quickly.

 You will also recommend that Sara Lee continue its planned divestiture of the International Household and Body Care business unit. The three remaining brands (Endust, Ty-D-Bol, and Kiwi) compete in mature industries that offer little opportunity for growth.

 You may recommend that the company identify a buyer for its Senseo product line in North America. The product has yet to achieve any great success and has little strategic fit with the company’s core meat and bakery business units.

 It’s likely that you will suggest that Sara Lee identify small, rapidly growing food and beverage companies for acquisition. For example, organic food producers or makers of healthy foods might be able to bring faster growth to Sara Lee.