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Strategic Management of Quaker Oats Company

By: Matt Margulies


Introduction The Quaker Oats Company, officially formed in 1901, is currently undergoing massive reorganization, which will dramatically change its position in the industry. Over the last four years, Quaker Oats' returns have been consistently rocky. Quaker unloaded Snapple, its ice-cream toppings and condiments business, and its frozen bagel business 1997. The company has turned to an emphasis on its high performing products such as Gatorade and bagged cereals. Gatorade accounts for more than one-third of the company's total sales and claims over 80% of the US sports-drink market. Quaker is also a leading producer of granola bars, rice cakes, pancake mixes and syrups, and value-added grain products (Rice-A-Roni). Industry Setting Quaker Oats manufactures many different products from the sports drink Gatorade to Far East Cous cous. Because of the great variety in their product lines, it is difficult to find other companies that compete in all the same categories. However several large companies compete in many of the same such as Heinz, Coca-Cola, General Mills, and Bestfoods verifying the threat of rivalry is very evident and therefore requiring Quaker to remain on top of their game. The threat of substitute for Quaker's products relates directly to their rivals who have proven ineffective in producing adequate substitutes for products such as Gatorade. Coca-Cola produces Powerade, Gatorade's biggest competitor, which only holds a very small market share of the sports-drink industry. General Mills competes in the cereal, baking products, and fruit bars areas and Bestfoods is mostly a general foods competitor. Most of these companies are very well established and therefore Quaker concentrates on them more then the threat of new entrants. Financial Overview Over the last twelve months Quaker Oats has revenues totaling nearly $4.8 billion and total earnings near $470 million. Financial ratios can often tell us how well a firm is performing relative to its full potential and its competitors. Only the most critical ones need be shown here. The Return on Equity indicates the overall operating efficiency and the quality of management. The Return on Assets is a measure of how successful management is at putting its assets to work to make profits. The Basic Earning Power shows the proportion of Revenue to Total Assets and Profit Margin indicates how much profit the firm makes after which all expenses are accounted. Relative to its larger competitors Quaker performs very well. This year Quaker has a ROE of 251.3% second only to General Mills with 253.4%, but much better compared to 98.5% for Bestfoods, 35.7% for Heinz 32.5%, and for Coca-Cola. The next ratio Quaker exhibits is a 11.3% ROA, weighed against 18.5% for Coca-Cola, 12.9% for General Mills, 10.0% for Bestfoods, and 5.9% for Heinz. Quaker offers a very impressive 185% BEP while Coca-Cola shows only nearly half at 89% and General Mills, Heinz and Bestfoods have 143, 141 and 111% respectively. The final ratio is profit margin in which Quaker is very competitive with a profit margin of 9.9% exceeding General Mills 8.6, Bestfoods at 7.6%, and Heinz at 7.0%, falling short only to Coca-Cola at 15.8%. The industry average (total food producers industry) for each of these results also verifies Quaker's competitive position. ROA is 6.2%, ROE is 24.9%, Profit Margin is 5.5%, and BEP is 143%. Most of these numbers verify that Quaker is actually more successful than the rest of the industry. Competing Markets Quaker has strong brands in Europe and Latin America, and Gatorade is also growing in popularity abroad. In Latin America, they have realigned their infrastructure, and consolidated and eliminated redundant positions. Morrison, the new CEO assigned in 1997, began to heavily push to strengthen markets where opportunities for growth were high. In particular, Quaker Oats made a real effort to tap into the expanding Gatorade market by broadening the product line, improving packaging and pumping up marketing efforts. Technologies Quaker has done a great deal to update and standardize the technology within their firm by integrating all food and beverage facilities into larger, more efficient production facilities. As Quaker's competitors within the industry become more technologically advanced this drives Quaker to do the same. Structure The structure of Quaker Oats has been one of the most dramatic changes for the company. A tightening of cost controls and elimination of $65 million in expenses through restructuring actions was the result of the total overhaul of Quaker. They also reduced their overall supply chain costs. Quaker consolidated the U.S. sales organization from 14 regional offices into six fully integrated Customer Business Centers. In 1998, despite only moderate overall sales, net income rose significantly as the efficiency of new structuring paid off. Substantial economies of scale were and continue to be the result of the combined offices and producing more products all under one roof. Competencies Although Quaker Oats has been concentrating on cutting costs by becoming more efficient, they try to differentiate Gatorade as much as possible in the market. Quaker has concentrated on a cost reduction strategy since the restructuring changes began in early 1997. They would not be considered to use a cost leadership strategy because they emphasize the quality of their products more then trying to make them as cheap as possible. For Quaker to make such a strong comeback so quickly after major restructuring during 1996 through 1998 verifies that they have become very effective at managing their organization and are able to concentrate on increasing their distinctive competencies. Quaker could be thought of as a differentiator, especially when it comes to the Gatorade line. Innovations such as an ergonomically designed sport bottle, the 20-ounce wide-mouth bottle combined with the introduction of new flavors such as "Frost Riptide Rush" and "X-plosive" all contribute to the large growth numbers both nationally and internationally. Contraction In 1997 Quaker Oats addressed the issue of costs being too high and began to emphasize a very cost reduction type strategy as opposed to a cost leadership strategy. Realizing Snapple Beverages was suffering significant losses for a substantial period of time it was sold off. Snapple in addition to the other areas mentioned earlier were not making money for Quaker Oats and had inefficient production processes that were not worth reinvesting to fix. This lead to removing a layer of executive management from the Company's International and U.S. & Canadian operations, and realigning domestic and international business



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